UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of
the Securities Exchange Act of 1934
Check the appropriate box:
(X) Preliminary Information Statement
( ) Confidential, for Use of the Commission Only
(as permitted by Rule 14c-5(d)(2))
( ) Definitive Information Statement
LINCOLN LOGS LTD.
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
(X) No fee required.
( ) Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies.
--------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies.
--------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined).
--------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction.
--------------------------------------------------------------------------
5) Total fee paid.
--------------------------------------------------------------------------
( ) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration number, or the Form or
Schedule and the date of its filing.
1) Amount Previously Paid:
--------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------------
3) Filing Party:
--------------------------------------------------------------------------
4) Date Filed:
--------------------------------------------------------------------------
LINCOLN LOGS LTD.
5 Riverside Drive
Chestertown, New York 12817
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be Held on July 27, 2005
You are cordially invited to attend the Special Meeting (the "Meeting") of
Shareholders of Lincoln Logs Ltd. (the "Company"), a New York corporation, that
will be held at the offices of Whiteman Osterman & Hanna, LLP, One Commerce
Plaza, Albany, New York, at 10:30 a.m. on July 27, 2005.
At the Meeting, the Company's shareholders will be considering and taking
action on the following proposals:
1. To approve an amendment to the Company's Certificate of Incorporation that
will effect a 1-for-500 reverse stock split of the Company's common stock.
2. The transaction of such other business as may properly come before the
Meeting or any adjournments or postponements thereof.
These proposals are more fully described in the enclosed Information Statement.
The holders of approximately 82% of the Company's outstanding shares of common
stock have indicated their intention to vote in favor of the proposals
summarized above. Therefore, we are not asking you for a proxy and you are
requested not to send us a proxy. Further, you will not be asked to vote at the
Meeting with respect to the foregoing proposals, although we welcome your
attendance.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
By Order of the Board of Directors
/s/ Benjamin A. Shepherd
------------------------
Benjamin A. Shepherd
Secretary
July 7, 2005
- 1 -
LINCOLN LOGS LTD.
5 Riverside Drive
Chestertown, New York 12817
INFORMATION STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
July 27, 2005
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
GENERAL
This Information Statement is furnished in connection with the Special Meeting
(the "Meeting") of Shareholders of Lincoln Logs Ltd. (the "Company"), a New York
corporation, to be held on July 27, 2005, at 10:30 a.m., at the offices of
Whiteman Osterman & Hanna, LLP, One Commerce Plaza, Albany, New York, and at any
adjournment. This Information Statement is being first sent to the Company's
shareholders on or about July 7, 2005.
At the Meeting, the Company's shareholders will be asked to consider the
proposal to amend the Company's Restated Certificate of Incorporation to effect
a 1-for-500 reverse stock split (the "Reverse Split"). A form of the
Certificate of Amendment to the Company's Restated Certificate of Incorporation
is attached hereto as Appendix A. As a result of the Reverse Split, each
shareholder of the Company owning fewer than 500 shares immediately prior to the
Reverse Split will own only a fractional share of stock and accordingly, will no
longer be a shareholder of the Company. Such shareholders will, therefore,
receive cash, in lieu of such fractional share, in an amount equal to the result
obtained by multiplying $245.00 by a fraction having as the numerator the number
of shares owned and having as the denominator the number 500 (which is equal to
$0.49 per share of stock). Each shareholder owning 500 or more shares prior to
the Reverse Split will own 1 share for every 500 shares previously owned by such
shareholder and will receive cash for any fractional shares resulting from the
Reverse Split.
After the Reverse Split has occurred, the Company anticipates that it will have
132 shareholders of record. In the event that there are fewer than 300
shareholders of record following the Reverse Split, the Company intends to file
a Form 15 with the Securities and Exchange Commission (the "SEC") to terminate
registration of its common stock under the federal securities laws (together
with the Reverse Split, the "Reverse Split Transaction"). As a result, the
Company would no longer be subject to, among other things, the annual and
periodic reporting requirements under the federal securities laws that are
applicable to SEC reporting companies. In addition, the Company's common stock
would cease to be traded on the Nasdaq OTC Bulletin Board. The Company has
contacted its market makers to request that they continue to make a market in
the Company's common stock in an effort to maximize the potential for outlets
for the trading of the Company's common stock and at least two (2) of such
market makers have agreed to do so. It is likely, however, that any trading in
the Company's common stock after the Reverse Split Transaction will generally
only occur in privately negotiated sales.
- 2 -
The Company's Board of Directors unanimously authorized the Reverse Split. The
Reverse Split will be approved if a majority of all outstanding shares of common
stock entitled to vote thereon vote in favor of its approval. John D. Shepherd,
Chief Executive Officer and owner of approximately 57% of the outstanding shares
of the Company's common stock, and the other members of the Company's management
team, who, together with Mr. Shepherd, own approximately 82% of the outstanding
shares of the Company's common stock, have indicated their intention to vote in
favor of the Reverse Split. If they do so, the Reverse Split will be approved,
and effected, without considering the vote of the Company's unaffiliated
shareholders.
PLEASE NOTE THAT THIS IS NOT A REQUEST FOR YOUR VOTE OR A PROXY STATEMENT, BUT
RATHER AN INFORMATION STATEMENT DESIGNED TO INFORM YOU OF THE ACTION TO BE TAKEN
AT THE SPECIAL MEETING OF SHAREHOLDERS.
RECORD DATE AND VOTING
The proposal to be voted on at the Meeting is described in detail in this
Information Statement. Shareholders of record at the close of business on June
24, 2005, are entitled to notice of, and to vote at, the Meeting. At the close
of business on that date, there were outstanding and entitled to vote 9,040,059
shares of common stock, par value $0.01 per share ("Common Stock"), which is
the only outstanding class of voting securities of the Company. As of the same
date, the Company had 3,100 shareholders of record. Each holder of Common Stock
is entitled to one vote for each share of Common Stock held by that shareholder
on the record date.
OTHER MATTERS
The Board of Directors does not intend to present at the Meeting any matters
other than those set forth in this Information Statement, nor does the Board of
Directors know of any other matters which may come before the Meeting.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE TRANSACTION, PASSED UPON THE
MERITS OR FAIRNESS OF THE TRANSACTION, OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THE DISCLOSURE IN THE DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- 3 -
TABLE OF CONTENTS
SUMMARY TERM SHEET 1
SPECIAL FACTORS RELATING TO APPROVAL OF AMENDMENT TO CERTIFICATE OF
INCORPORATION TO EFFECT REVERSE SPLIT 6
Introduction 6
How The Reverse Split Transaction Will Be Effected 7
Purposes and Reasons For the Proposed Reverse Split 8
Potential Advantages to Going Private 8
Potential Disadvantages to Going Private 10
Deliberations Regarding the Reverse Split Transaction 11
Initial Review and Consideration 11
March 17, 2005 Meeting 17
Opinion of Value 18
March 22, 2005 Meeting 23
Final Deliberations 25
Conclusion Reached As A Result of the Deliberations 25
Summary of the General Effects of the Reverse Split 25
Rights, Preferences And Limitations 25
Effect on Number of Shareholders and Number of Outstanding Shares 26
Financial Effect 26
Effect on Market for Shares 28
Termination of Exchange Act Registration of New Common Stock 28
Beneficial Owners of Company Stock 29
Directors and Officers and the Affiliated Shareholders 29
Effect of the Reverse Split on Optionholders 29
Effect of the Reverse Split Transaction on the Conduct of the Company
Business 30
Effect on the Aggregate Number of Shares of the Company's Common Stock 30
PROPOSAL ONE-APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO
EFFECT REVERSE STOCK SPLIT 30
Source and Amount of Funds for and Expenses of the Reverse Split 31
Exchange of Shares and Payment in Lieu of Issuance of Fractional Shares 31
Shareholder Approval 31
Conflicts of Interest 32
Reservation of Right to Abandon the Reverse Split 33
Recommendations of the Board of Directors and Mr. Shepherd 34
INFORMATION REGARDING THE COMPANY AND CERTAIN TRANSACTIONS 34
Summary Historical Financial Information 35
Condensed Statements of Operations Data 35
Condensed Balance Sheet Data 35
Summary Unaudited Pro-Forma Financial Information 36
Pro-Forma Condensed Statements of Operations Data 36
Pro-Forma Condensed Balance Sheet Data 37
Directors and Executive Officers 37
Directors 37
Executive Officers 40
Security Ownership of Certain Beneficial Owners 41
- i -
Security Ownership of Management 42
Legal Proceedings 44
Certain Transactions 44
Stock Purchases 45
Public Offerings 45
FEDERAL INCOME TAX CONSEQUENCES 45
The Reverse Split Transaction 46
Federal Income Tax Consequences to Shareholders, Including Affiliates,
Who Are Not Cashed-Out in the Reverse Split Transaction 47
Federal Income Tax Consequences to Shareholders, Including Affiliates,
Who Both Receive Cash and Own, or Are Considered to Own for Federal
Income Tax Purposes, The Company's Common Stock After the Reverse
Split Transaction 47
Federal Income Tax Consequences to Cashed-out Shareholders, including
Affiliates, Who do not Own, and Are Not Deemed to Own, the Company's
Common Stock After the Reverse Split Transaction 48
DISSENTERS' APPRAISAL RIGHTS 48
How To Exercise Dissenters' Rights 49
Procedure For Appraisal Proceeding 50
DOCUMENTS INCORPORATED BY REFERENCE 51
OTHER MATTERS 52
- ii -
SUMMARY TERM SHEET
We have highlighted selected information from this Information Statement in
the summary below. This section does not contain all of the information that is
important to you. For a more complete description of the proposed Reverse Split
Transaction, you should carefully read this entire document, its attachments and
the other documents to which we refer.
The following are certain key features of the Reverse Split Transaction:
- How Will I Be Effected by the Reverse Split Transaction If I Currently Own
Less Than 500 Shares of the Company's Common Stock? If you are a shareholder
of the Company owning fewer than 500 shares of the Company's Common Stock (the
"Existing Common Stock") immediately prior to the Reverse Split, you will own
only a fractional share of stock as a result of the Reverse Split and,
accordingly, you will no longer be a shareholder of the Company. As such, you
will no longer have any voting or ownership rights in the Company and you will
not be able to participate in any future growth of the Company. In lieu of
your fractional share, you will receive cash in an amount equal to the result
obtained by multiplying $245.00 by a fraction having as the numerator the number
of shares owned and the denominator as the number 500 (which is equal to $0.49
per share of Existing Common Stock). For example, if you are the holder of 250
shares of Existing Common Stock at the effective time of the Reverse Split, you
woould receive $122.50 in cash rather than fractional shares. This transaction
will not involve commissions or other transaction fees that would be charged if
you sold shares on the open market. See "SPECIAL FACTORS RELATING TO APPROVAL
OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO EFFECT REVERSE SPLIT -- How the
Reverse Split Transaction Will be Effected."
- How Will I Be Effected by the Reverse Split Transaction If I Currently Own
More Than 500 Shares of the Company's Common Stock? If you are a shareholder
of the Company owning 500 or more shares of the Company's Existing Common Stock
at the effective time of the Reverse Split, you will continue to be a
shareholder of the Company. Each holder of 500 shares of Existing Common Stock
will automatically become the holder of one post-Reverse Split share of common
stock (the "New Common Stock"). See "SPECIAL FACTORS RELATING TO APPROVAL OF
AMENDMENT TO CERTIFICATE OF INCORPORATION TO EFFECT REVERSE SPLIT -- How the
Reverse Split Transaction Will be Effected."
- How Will the Reverse Split Transaction Effect the Current Management of the
Company? The current directors and officers of the Company will continue to
serve as the directors and officers of the Company immediately after the Reverse
Split Transaction and the percentage ownership of the Company's common stock
beneficially owned by the directors and officers of the Company as a group will
increase from approximately 82% to approximately 85%, based on the shares
outstanding as of May 18, 2005. Accordingly, the Reverse Split will not
result in any changes in the control of the Company. See "SPECIAL FACTORS
RELATING TO APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO EFFECT
REVERSE SPLIT -- Summary of the General Effects of the Reverse Split."
- 1 -
- Why is the Reverse Split Transaction Being Proposed? The purpose of the
Reverse Split is to relieve the Company of the substantial costs and liability
exposure associated with complying with the public document filing requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
particular, the extensive new requirements of the Sarbanes-Oxley Act of 2002.
If the Company has fewer than 300 shareholders of record of Common Stock after
the completion of the Reverse Split Transaction, the Company will be eligible
and intends to "go private" by terminating the registration of its Common Stock
with the Securities and Exchange Commission (the "SEC"). Accordingly, it will
no longer be obligated to file periodic reports (e.g. annual and quarterly
reports) and proxy statements pursuant to the Exchange Act. Moreover, the
reporting and restrictions of the Exchange Act, including without limitation,
the reporting and short swing profit provisions of Section 16 will no longer
apply to the Company's executive officers, directors and 10% shareholders. The
Company would also no longer be subject to the Sarbanes-Oxley Act of 2002 or
the liability provisions of the Exchange Act. Accordingly, there would be no
affirmative regulatory requirement imposed on the Company to, among other
things, adopt and maintain internal controls and procedures to ensure that
material information, both financial and non-financial, is identified and
communicated on a timely basis. See "SPECIAL FACTORS RELATING TO APPROVAL OF
AMENDMENT TO CERTIFICATE OF INCORPORATION TO EFFECT REVERSE SPLIT -- Purposes
and Reasons for the Proposed Reverse Split."
- What are the Principal Advantages of the Reverse Split Transaction? The
principal advantages of the Reverse Split Transaction are the direct and
indirect savings of expenses that are expected to be realized by the termination
of the Company's reporting company status. The Company believes, based upon
historical information, that the Reverse Split Transaction may save it
approximately $300,000 per year in costs associated with being a public
reporting company. The Company also believes that a substantial number of
employee hours will be saved and be able to be more profitably redeployed by
not having to file Exchange Act reports. However, these direct and indirect
cost savings are estimates and the actual savings may be higher or lower. Also,
affiliated and unaffiliated shareholders holding a number of shares not evenly
divisable by 500 will receive a cash payment for the portion of their interest
that would otherwise be represented by a fractional share, without incurring
brokerage or other transaction costs. See "SPECIAL FACTORS RELATING TO
APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO EFFECT REVERSE SPLIT
-- Purposes and Reasons for the Proposed Reverse Split."
- What are the Principal Disadvantages of the Reverse Split Transaction? The
principal disadvantages of the Reverse Split Transaction include the facts
that (i) shareholders will no longer have an organized trading market in which
to purchase and sell shares of the Company's Common Stock because the Company's
Common Stock will no longer be quoted on the Nasdaq Over-the-Counter Bulletin
Board, (ii) there will be limited information available publicly regarding the
Company unless the Company voluntarily elects to disseminate information
publicly or it re-registers under the Exchange Act in the future, and (iii)
many of the Company's shareholders (those who own less than 500 shares) will
cease to be shareholders of the Company and will not be able to participate in
any future growth or profits the Company may thereafter experience. See
"SPECIAL FACTORS RELATING TO APPROVAL OF AMENDMENT TO CERTIFICATE OF
- 2 -
INCORPORATION TO EFFECT REVERSE SPLIT -- Purposes and Reasons for the Proposed
Reverse Split."
- What Effect Will the Reverse Split Transaction Have on the Company's
Outstanding Shares? The number of the Company's shareholders of record will
be reduced from approximately 3,100 to 132, and the number of the outstanding
shares of the Company's Common Stock will be reduced. As of May 18, 2005,
there were approximately 9,040,059 shares of the Company's Common Stock out-
standing. As a result of the Reverse Split, and the related purchase of all
fractional interests, the number of the Company's outstanding shares of Common
Stock will be reduced to approximately 17,608. See "SPECIAL FACTORS RELATING
TO APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO EFFECT REVERSE
SPLIT -- Summary of the General Effects of the Reverse Split."
- What Are the Costs Associated With the Reverse Split Transaction? The Company
will pay cash of approximately $115,669 in the aggregate out of its working
capital to repurchase fractional shares and approximately $63,800 to pay the
costs of the Reverse Split Transaction. See "PROPOSAL ONE -- APPROVAL OF
AMENDMENT TO CERTIFICATE OF INCORPORATION TO EFFECT REVERSE STOCK SPLIT --
Source and Amount of Funds for and Expenses of the Reverse Split."
- Are There Any Conflicts of Interest Implicated by the Reverse Split
Transaction? While the Company's board of directors (the "Board," or the
"Board of Directors") and John D. Shepherd, as a control person of the Company
by virtue of his serving as Chairman of the Board and Chief Executive Officer
of the Company and his ownership of approximately 57% of the outstanding shares
of the Company's Common Stock, have concluded that the Reverse Split
Transaction is fair to the Company and its shareholders, from both a procedural
and a financial point of view, the Board and Mr. Shepherd have interests in the
Reverse Split Transaction that are different from your interests as shareholders
and have relationships that may present conflicts of interest. For example, (i)
each member of the Board and each executive officer (collectively the
"Affiliated Shareholders"), including Mr. Shepherd, owns more than 500 shares of
the Company's Existing Common Stock and thus, will remain shareholders of the
Company after the Reverse Split Transaction, (ii) certain of the Company's
directors and senior executive officers hold options to purchase more than 500
shares of the Company's Existing Common Stock, which will remain outstanding
after the Reverse Split Transaction, and (iii) as a result of the Reverse Split
Transaction, shareholders owning of record 500 or more shares of Common Stock,
including Mr. Shepherd and the rest of the Company's directors and executive
officers, will increase their percentage of ownership in the Company (e.g., the
current directors and executive officers, as a group, will increase their
collective ownership percentage from approximately 82% to approximately 85% as
a result in the reduction in the number of outstanding shares). See "SPECIAL
FACTORS RELATING TO APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO
EFFECT REVERSE SPLIT - Summary of the General Effects of the Reverse Split."
- How Did The Board of Directors and Mr. Shepherd Determine the Fairness of the
Reverse Split Transaction? The Board and Mr. Shepherd considered many factors
- 3 -
in their determination to approve the Reverse Split Transaction. Most
importantly, the Board and Mr. Shepherd considered whether the Reverse Split
Transaction was in the best interests of the Company's shareholders. In
connection with that decision, the Board and Mr. Shepherd considered advantages
and disadvantages to the Company's going private, as well as the methods and
types of transactions available to allow the Company to go private. In
connection with that analysis, the Board and Mr. Shepherd also were required to
determine the fair value of the Company's Common Stock and, depending on the
type of transaction chosen to go private, to determine whether the Board and Mr.
Shepherd were permitted to or thought it advisable to recommend the Company pay
any premium over the fair value of the Company's Common Stock. The Board and
Mr. Shepherd determined that the pre-Reverse Split fair value of the Common
Stock was $0.49 per share. They made this determination based on an opinion of
value the Company received from Empire Valuation Consultants, LLC, an
independent valuation consultant, and certain other considerations, such as
general lack of liquidity of the Common Stock, recent trading volumes, Company
projections and recent market trends, that the Board and Mr. Shepherd deemed
relevant to their evaluation. See "SPECIAL FACTORS RELATING TO APPROVAL OF
AMENDMENT TO CERTIFICATE OF INCORPORATION TO EFFECT REVERSE STOCK SPLIT -
Deliberations Regarding the Reverse Split Transaction below.
- What Are the Federal Income Tax Consequences of the Reverse Split Transaction
for Shareholders? The receipt of cash in the Reverse Split Transaction will be
taxable for federal income tax purposes. Shareholders who only receive shares
of New Common Stock should not be subject to taxation as a result of the Reverse
Split Transaction. Shareholders who receive cash in lieu of fractional shares
of New Common Stock will recognize capital gain or loss in an amount equal to
the difference between the amount of cash received and the adjusted basis of the
fractional shares surrendered for cash. To review the material tax consequences
in greater detail, please read the discussion under "FEDERAL INCOME TAX
CONSEQUENCES" below.
- If I Own Fewer than 500 Shares of Existing Common Stock, is There Any Way I
Can Continue to be a Shareholder of the Company After the Reverse Split
Transaction? If you own fewer than 500 shares before the Reverse Split, the
only way you can continue to be a shareholder of the Company after the Reverse
Split, is to purchase, prior to the effective date of the Reverse Split, which
is expected to be July 27, 2005, (the "Effective Date") sufficient shares to
cause you to own a minimum of 500 shares on the Effective Date. We cannot
assure you, however, that any shares will be available for such purchase.
- Is There Anything I Can Do if I Own 500 or More Shares of Existing Common
Stock, but Would Like to Take Advantage of the Opportunity to Receive Cash for
My Shares as a Result of the Reverse Split Transaction? If you own 500 or more
shares before the Reverse Split Transaction, you can receive cash for all of
your shares if, prior to the Effective Date, you reduce your stock ownership to
fewer than 500 shares by selling or otherwise transferring your shares. We
cannot assure you, however, that any purchaser for your shares will be
available. Alternatively, before the Effective Date, you could divide your
shares among different recordholders so that fewer than 500 shares are held in
- 4 -
each account. For example, you could divide your shares between your own name
and a brokerage account so that fewer than 500 shares are held in each account.
- What Happens if I Own a Total of 500 or More Shares Beneficially, but I Hold
Fewer than 500 Shares of Existing Common Stock of Record in my Name and Fewer
than 500 Shares with my Broker in "Street Name?" If you, for example, have 200
shares registered in your own name with the Company's transfer agent, and you
have 300 shares held through your broker in street name, you would receive cash
for the 200 shares of Existing Common Stock you hold of record and you would
also receive cash for the 300 shares held in street name if your broker or other
nominee accepts the Company's offer for each beneficial owner of fewer than 500
shares of Existing Common Stock held in the broker's or nominee's name to
receive cash for fractional shares.
- If I Own at Least 500 Shares, but the Shares Are Split Among Record Holders as
Described Above so That No Record Holder Owns 500 or More Shares, But I Wish to
Continue to Own Common Stock After the Reverse Split Transaction, What Should I
Do? Before the Effective Date, you could put all of the shares you own
beneficially in the name of one recordholder, either in your name or in street
name, so that the total shares you own that are held of record in the same name
is at least 500 shares, and then you would continue to be a shareholder after
the Effective Date.
- What Percentage of Shareholders Must Vote in Favor of the Reverse Split
Transaction for it to be Approved? The Reverse Split Transaction will be
approved if a majority of the all outstanding shares of Common Stock entitled to
vote thereon vote in favor of its approval. John D. Shepherd, Chief Executive
Officer and owner of approximately 57% of the outstanding shares of the
Company's Existing Common Stock, and the rest of the Affiliated Shareholders,
who, together with Mr. Shepherd, own approximately 82% of the Company's Existing
Common Stock, have indicated their intention to vote in favor of the Reverse
Split Transaction. If they do so, the Reverse Split Transaction will be
approved, and effected, without considering the vote of the Company's
unaffiliated shareholders. Accordingly, you are not being asked to deliver a
proxy, and you will not be asked to vote at the Meeting, with respect to this
proposal. You are, however, welcome to attend the Meeting.
- Do I Have Appraisal or Dissenters' Rights? Under New York law, those
shareholders who wish to exercise their right to dissent and elect not to
receive the cash value in an amount equal to the result obtained by multiplying
$245.00 by a fraction having as the numerator the number of shares owned and the
denominator as the number 500 (which is equal to $0.49 per share of Existing
Common Stock) must meet all of the specific requirements stated in Section 623
of the New York State Business Corporation Law (See Appendix B). This means that
only holders of shares in increments of less than 500 shares of the Company's
Existing Common Stock that would result in receiving a cash payment in lieu of a
fractional share are entitled to dissenters' rights. The dissenters' rights
statute provides that shareholders who dissent from the Reverse Split
Transaction are entitled to payment in cash for the fair value of their
fractional share (if any) resulting from the Reverse Split. See "DISSENTERS'
APPRAISAL RIGHTS" below for important details regarding the procedure and
specific rights.
- 5 -
SPECIAL FACTORS RELATING TO APPROVAL OF
AMENDMENT TO CERTIFICATE OF INCORPORATION TO
EFFECT REVERSE SPLIT
Introduction
On February 19, 2005 and March 17, 2005, the Company's Board of
Directors unanimously adopted a resolution approving, and decided to
recommend to the Company's shareholders, a 1-for-500 reverse stock split
(previously defined as the "Reverse Split") of the Company's Existing Common
Stock, the preparation of the corresponding amendment of the Company's
Certificate of Incorporation, and the payment of the fair value for any
fractional shares resulting from the Reverse Split (previously defined as,
together with the Reverse Split, the "Reverse Split Transaction"). Mr.
Shepherd, as a control person of the Company, also separately approved the
Reverse Split Transaction. The Reverse Split Transaction is proposed to
reduce the number of shareholders of record to less than 300, thereby allowing
the Company to terminate its registration under the Exchange Act and relieving
the Company of the costs of filing public documents and allowing the Company to
continue its long-term business plans without the burdens of public reporting.
As a private company, the Company would no longer be required to file annual and
quarterly reports with the SEC.
The Company's Board of Directors and Mr. Shepherd considered many factors in
their determination to approve the Reverse Split Transaction and submit the
proposal to the shareholders for approval. Most importantly, the Board of
Directors and Mr. Shepherd had to determine if the Reverse Split Transaction was
in the best interests of the Company's shareholders. In connection with that
decision, the Board of Directors and Mr. Shepherd considered advantages and
disadvantages to the Company of going private, as well as the methods and types
of transactions available to allow the Company to go private. In connection with
that analysis, the Board of Directors and Mr. Shepherd also were required to
determine the fair value of the Company's Common Stock and, depending on the
type of transaction chosen to go private, to determine whether it was permitted
or advisable to recommend the Company pay any premium over the fair value of the
Company's Common Stock.
The Board of Directors and Mr. Shepherd, after extensive discussions with
representatives from Company management and outside legal counsel to the
Company, made a preliminary determination that a reverse stock split would be
the best transaction structure to achieve, in the most cost effective manner,
the Company's going private goal.
The Reverse Split is subject to approval by a majority of all outstanding
shares of Common Stock entitled to vote thereon. The Company's officers and
directors, who own approximately 82% of the Company's Existing Common Stock
(previously defined as the "Affiliated Shareholders"), have indicated their
intention to vote in favor of the Reverse Split. Accordingly, the Company is
not soliciting the vote of its unaffiliated shareholders with respect to this
proposal.
- 6 -
How The Reverse Split Transaction Will Be Effected
The Reverse Split of the Company's outstanding Common Stock will
automatically occur upon the filing of the Reverse Split amendment to the
Company's Certificate of Incorporation ("Reverse Split Amendment"), after such
filing has been approved by the Company's Affiliated Shareholders at the
Meeting. The "Effective Date," referred to throughout this Information Statement
of the Reverse Split will be the date indicated as such in the Reverse Split
Amendment, which date is currently expected to be July 27, 2005, the date on
which the Reverse Split Amendment is filed with the State of New York. A form
of the Reverse Split Amendment is attached hereto as Appendix A.
Following shareholder approval of the Reverse Split Amendment, each holder of
at least 500 shares of Existing Common Stock will automatically become the
holder of at least one post-Reverse Split share of Common Stock, also referred
to herein as "New Common Stock". No fractional shares will be issued in
onnection with the Reverse Split, and any fractional shares that may result will
be redeemed in cash based on the fair value of the Existing Common Stock as
required by New York Law. The fair value of the Existing Common Stock was
determined (for purposes of the payment for fractional shares) based upon an
opinion of value received by the Company by Empire Valuation Consultants, LLC
("Empire") as well as certain other factors that the Board and Mr. Shepherd
deemed relevant to their evaluation, including the general lack of liquidity of
the Common Stock, historically low trading volumes, Company projections and
recent market trends. The Board of Directors and Mr. Shepherd believe that the
cash payment in lieu of fractional shares in an amount equal to the result
obtained by multiplying $245.00 by a fraction having as the numerator the number
of shares owned and having as the denominator the number 500 (which is equal to
$0.49 per share of Existing Common Stock), accurately reflects the fair value of
the Existing Common Stock.
Each current certificate representing issued and outstanding shares of
Existing Common Stock prior to the Reverse Split will automatically be deemed
to represent the correct number of post-split shares of New Common Stock after
the Effective Date. Following the Reverse Split Transaction, the Company or its
transfer agent will send an instruction letter to each shareholder. Upon
receipt of the stock certificates and properly completed instruction letters,
the Company or its transfer agent will issue the appropriate new stock
certificates and/or make the appropriate cash payments. Do not send any stock
certificates to the Company or its transfer agent until you receive an
instruction letter. After the Reverse Split, shareholders being cashed-out will
have no rights as shareholders with respect to the pre-Reverse Split Existing
Common Stock or the fractional shares that would have resulted from the Reverse
Split, whether or not those shareholders have been paid cash consideration.
The Company anticipates that it will pay out approximately $115,669 to holders
of Existing Common Stock that will be holders of fractional shares following the
Reverse Split Transaction.
If the Reverse Split is approved and implemented, the number of shareholders
of record of the Company's Common Stock will be fewer than 300. The Company
intends to terminate the registration of its Common Stock under the Exchange Act
pursuant to Section l2(g)(4) of the Exchange Act as soon as possible after the
Effective Date. Following the Reverse Split Transaction, the decision by the
Company to terminate Exchange Act registration will not require shareholder
approval and will not be voted on at this Meeting. After the Company has
- 7 -
de-registered its Common Stock, the Company's duty to file periodic reports
with the SEC, such as current quarterly and annual reports, will be suspended.
Purposes and Reasons For the Proposed Reverse Split
Potential Advantages to Going Private
The Company's Board of Directors and Mr. Shepherd considered a number of
important advantages to going private which are summarized as follows and
discussed in greater detail below:
Cost savings with respect to public reporting and shareholder account
servicing;
Increased operating freedom focused on long-term growth rather than
quarterly results;
No practical reduction in liquidity for continuing shareholders; and
Elimination of the applicability of the Sarbanes-Oxley Act of 2002 and the
attendant liabilities to which the members of the Company's Board of
Directors would otherwise be subject.
Elimination of Costs Associated with Being an Exchange Act Reporting Company.
The principal reason for engaging in a going private transaction is to relieve
the Company of the costs and burdens of remaining a public company and allow the
Company's management team to focus on long-term growth. Because of the Company's
relatively small size, limited profitability and limited dividend distributions,
the Company's status as a public company has provided little liquidity for the
Company's shareholders. The Company's management expects no change in this
situation for the foreseeable future. For these reasons, the costs and expenses
of remaining a public reporting company are not warranted because the Company
has not been and expects that it will not be able to realize one of the
principal benefits of public ownership.
There are considerable costs and burdens to the Company that result from it
being a public reporting company. To comply with its obligations under the
Exchange Act, the Company incurs direct and indirect costs associated with
compliance with the filing and reporting requirements imposed on public
companies. Examples of direct cost savings from termination of registration of
common shares include: lower printing and mailing costs; reduced reporting and
disclosure requirements due to the Company's private status; and reduction in
direct expenses such as word processing and preparing electronic filings in the
EDGAR format prescribed by the SEC. The Company also believes that there will be
a reduction in audit and legal fees once the Company is no longer subject to the
reporting requirements of the Exchange Act. The Company also incurs substantial
indirect costs as a result of executive time expended to prepare and review such
Exchange Act filings and to otherwise comply with Exchange Act and
Sarbanes-Oxley Act of 2002 requirements applicable to public companies.
Termination of registration under the Exchange Act of the Common Stock is
expected to substantially reduce many of these costs.
The Company also expects the Reverse Split Transaction to substantially reduce
the cost of servicing shareholder accounts. The costs of printing and mailing
- 8 -
materials to shareholders (and dividend checks if and when declared and paid)
increases for each shareholder account, regardless of the number of shares held
by the shareholder. Many of the Company's shareholders hold a relatively small
number of shares, and the cost of servicing such accounts is disproportionate to
the size of the holdings. After the Reverse Split Transaction, the Company
expects that it will have approximately 132 shareholders, compared to
approximately 3,100 shareholders prior to the Reverse Split.
Based on its experience in prior years, the Company believes that annual
savings of approximately $300,000 per year following the Reverse Split
Transaction may be realized by going private. This amount, however, is just an
estimate based on past experience, and the actual savings to be realized may
vary from such estimate, especially in view of the additional requirements of
the Sarbanes-Oxley Act of 2002 and related SEC rules if the Company continues to
be subject to the Exchange Act. However, the Company cannot guarantee that the
benefits of going private will be accomplished as expected or as scheduled. The
estimated savings will accrue from the elimination of the following expenses:
Expense Estimated Dollars
Independent Accountants $84,000
Legal $22,000
Transfer Agent $27,000
Printing and Postage $12,000
Directors' Fees $65,000
Salaries $90,000
--------
Total Annual Estimated Savings $300,000
It is anticipated that the Company will also save considerable time by no
longer having to comply with the federal securities laws. As previously noted,
the Company is legally permitted (and intends to promptly) terminate its
registration under the Exchange Act if the Company's New Common Stock is held
by less than 300 shareholders of record after the Reverse Split Transaction.
Termination of the Company's Exchange Act registration would make certain
provisions of the Exchange Act, such as the quarterly (Form 10-QSB) and annual
(Form 10-KSB) reporting and proxy statement filing obligations, no longer
applicable to the Company. The Company would also no longer be subject to any
regulatory legal requirement to adopt and maintain Sarbanes-Oxley internal
controls and procedures to insure the timely and appropriate identification and
disclosure of material financial and nonfinancial information. The Company
believes that a substantial number of employee hours will be saved and be able
to be more profitably redeployed by not having to file Exchange Act reports.
The Board of Directors and Mr. Shepherd also believe that the Company, because
of its being a public reporting company, has not been able to concentrate to its
potential on the long-term growth of the Company's businesses. Rather, the
Company has been required to place undue emphasis on quarter-to-quarter
earnings. By becoming a private company, the Board of Directors and Mr. Shepherd
feel that management can direct its efforts to long-term growth in ways that
better reflect the Company's historical business seasonality. Management will
gain greater flexibility in operating the Company and planning for its future.
- 9 -
Direct Advantages to Shareholders
The Reverse Split Transaction also provides for a cash payment to holders in
lieu of the issuance of fractional shares. Unaffiliated and affiliated
shareholders will benefit from the Reverse Split Transaction in that they will
receive a cash payment for all or a portion of their existing holdings. All
holders of less than 500 shares of Existing Common Stock will receive a cash
payment for their entire interest in the Company, without having to pay
brokerage or other transaction costs, which the Company believes provides a
substantial benefit since the current market for the shares is very limited.
Those shareholders who hold 500 or more shares of Existing Common Stock will
receive New Common Stock and will continue to have voting and ownership rights
in the Company, as well as payments in cash for any fractional shares resulting
from the Reverse Split Transaction for such holders. The holders of New Common
Stock will have the opportunity to participate in the increased opportunities
for future growth that the Company will experience due to the reduced reporting
and administrative costs associated with the Company no longer being public.
Potential Disadvantages to Going Private
While the Company believes the Reverse Split Transaction will result in the
benefits described, several disadvantages should also be noted.
Inability to Participate in any Future Increase in the Value of the Company's
Common Stock
The ownership interest of shareholders holding less than 500 shares will be
terminated, and such shareholders will not participate in any future growth of
the company. Additionally, these shareholders will be forced to relinquish
their shares of the Company's Common Stock upon the effective date of the
Reverse Split Transaction, rather than choosing on their own the time and price
for disposing of their holdings of Common Stock of the Company.
Cessation of Public Market of Company's Common Stock
Following the Reverse Split, the Company will apply for the termination of its
Exchange Act registration and periodic reporting obligations. Once the Company
terminates such obligations, the Company's Common Stock will no longer be
eligible to be quoted on the Nasdaq OTCBB. As a result, there will be no
effective trading market for the Company's Common Stock. However, the current
public market is highly illiquid, as many days go by without any trading
whatsoever. Because, as a practical matter, there currently exists very little
liquidity for the Common Stock, the Board and Mr. Shepherd determined that any
further loss of liquidity would have little effect on remaining shareholders
and that any loss of liquidity will be outweighed by the benefits of
terminating the Company's Exchange Act registration and periodic reporting
obligations.
Cessation of Publicly Available Information
After the Reverse Split Transaction, the Company will terminate the
registration of its Common Stock under the Exchange Act and the Company will no
longer be subject to the reporting requirements under the Exchange Act. As a
result of the termination of the Company's reporting obligations under the
Exchange Act:
- 10 -
Less information will be required to be furnished to shareholders or to be
made publicly available by the Company;
Various provisions of the Exchange Act, such as quarterly operating
statements and proxy statement disclosure in connection with shareholder
meetings, will no longer apply to the Company; and
The reporting requirements and restrictions of the Exchange Act, including
without limitation the reporting and short-swing profit provisions of
Section 16, will no longer apply to executive officers, directors and 10%
shareholders of the Company.
The Company will also no longer be subject to the provisions of the
Sarbanes-Oxley Act or the liability provisions of the Exchange Act. Therefore,
the chief executive officer and chief financial officer would no longer be
required to certify as to the accuracy of the Company's financial statements.
Moreover, there would be no affirmative regulatory requirement imposed on the
Company to adopt and maintain internal controls and procedures to ensure that
material information, both financial and non-financial, is identified and
communicated on a timely basis.
Federal Income Tax Consequences
Both affiliated and unaffiliated shareholders of the Company receiving cash as
a result of the Reverse Split Transaction will be subject to federal income
taxes and possibly state taxes, as if they had sold their shares. As a result,
both affiliated and unaffiliated shareholders who receive cash due to the
Reverse Split Transaction may be required to pay taxes (or may recognize a
capital loss) on their respective shares of Common Stock which are converted
into the right to receive cash from the Company. See "FEDERAL INCOME TAX
CONSEQUENCES."
As discussed below, after evaluating potential advantages and disadvantages of
the Reverse Split Transaction, the Company's Board of Directors and Mr. Shepherd
concluded that the advantages of conducting a going private transaction
substantially outweighed the disadvantages associated with "going private".
Deliberations Regarding the Reverse Split Transaction
In approving the Reverse Split Transaction, the Board of Directors and Mr.
Shepherd took a number of factors into consideration, including the historical
and present condition of the Company, the advantages and disadvantages of going
private and the fairness of the Reverse Split Transaction to the Company's
unaffiliated shareholders.
Initial Review and Consideration
During January 2005, because of the high costs associated with being a public
company and the fact that the Company enjoys few benefits from being public,
management discussed with the Company's outside legal counsel options for
terminating the Company's reporting obligations, including a reverse stock
split. After discussions with legal counsel and preparation of preliminary cost
savings and recent trading analyses, management decided to present these options
to the Board of Directors and Mr. Shepherd for further discussion.
- 11 -
At the February 19, 2005, meeting of the Board of Directors, the Board and Mr.
Shepherd considered whether it would be appropriate for the Company to conduct a
going private transaction. They then considered the advantages and disadvantages
of being a private company. At that time, they considered the following specific
advantages and disadvantages to taking the Company private:
Advantages of Going Private Disadvantages of Going Private
Annual expense savings of up to Shareholders with fractional shares
$300,000 following reverse split would no longer
remain shareholders and would be unable to
participate in future potential growth of
the Company
Management could focus on limited opportunities for a public market
managing the Company, rather than in the Company's securities may reduce the
increasing stock price to maximize Company's opportunities to raise equity
shareholder value. financing and would result in further
losses in liquidity of the shares of the
Company's Common Stock.
Certain shareholders would receive Limited public information regarding the
cash payment for their fractional Company (unless the Company voluntarily
holdings in the Company, without elects to disseminate information publicly
incurring brokerage fees and gain or re-registers under the Exchange Act in
the ability to liquidate their the future.
Shareholders receiving cash payment in lieu
of their fractional share following the
reverse split will be forced to recognize
income and pay income tax on any gain
realized.
The Board and Mr. Shepherd concluded that the advantages of conducting a going
private transaction substantially outweighed the disadvantages associated with
going private. The Board and Mr. Shepherd determined this to be true because
(i) the outstanding shares of Existing Common Stock were already illiquid, given
the typical low or non-existent daily trading volume, and (ii) the Company
intends to voluntarily distribute annual financial and certain other information
about the Company to its shareholders after the Reverse Split Transaction.
Form of Going Private Transaction.
The Board and Mr. Shepherd next discussed the options available to the Company
to accomplish its going private goals, principally a reverse split and an issuer
self-tender offer. They determined, comparing such available options, that a
reverse stock split was the most feasible and cost-effective option. The Board
and Mr. Shepherd considered the following options:
- 12 -
Issuer Tender Offer. The Board and Mr. Shepherd considered, in concept, an
issuer tender offer by which the Company would offer to repurchase shares of
the Company's outstanding Common Stock. The results of an issuer tender offer
would be unpredictable, however, due to its voluntary nature. Neither the Board
nor Mr. Shepherd was certain as to whether this alternative would result in
shares being tendered by a sufficient number of record holders so as to permit
the Company to reduce the number of shareholders below 300, to reduce its
administrative costs related to servicing shareholders who own a relatively
small number of shares and to terminate its SEC reporting requirements. They
were also uncertain as to whether many holders of a small number of shares would
make the effort to tender their shares. In addition, they considered that the
estimated transaction cost of completing a tender offer would be similar to or
greater than the costs of the Reverse Split Transaction, and these costs could
be significant in relation to the value of the shares purchased since there
could be no certainty that a significant number of shares would be tendered.
Since an issuer tender offer would not necessarily meet the Company's objective
of reducing the number of shareholders below 300, neither the Board nor Mr.
Shepherd addressed or considered potential purchase prices to be offered in an
issuer tender offer.
Purchase of Shares on the Open Market. The Board and Mr. Shepherd also
considered purchasing shares of the Company in the open market in order to
reduce the number of shareholders to fewer than 300. Given the lack the daily
trading volume of the Common Stock, however, there was no assurance that
purchasing stock in isolated transactions would result, in a reasonable period
of time, in enough shareholders selling their shares to reduce the number of
shareholders enough to permit the Company to deregister.
Third Party Acquirer. The Board and Mr. Shepherd also considered seeking a
third party acquirer. They noted that no offers were currently outstanding and
third-party interest had not been solicited.
Continuing as is. The Board and Mr. Shepherd also considered taking no
action at all. However, due to the Company's significant and increasing costs
of compliance under the Exchange Act, especially in relation to the Company's
overall expenses and cash flow, they decided that taking no action at this time
was not in the best interests of the Company. The Company, based on past
experience, estimates $300,000 per year in expenses may continue to be incurred
if the Company continues to be a reporting company under the Exchange Act. This
estimate is substantially based on past experience, and may not necessarily be
indicative of actual future expenses in view of the additional requirements of
the Sarbanes-Oxley Act of 2002 and related SEC rules.
Reverse Split. Because the results of a reverse stock split are more
predictable and automatic, each of the Board and Mr. Shepherd believes that the
Reverse Split is the most expeditious and economical way of reducing the number
of holders of record to fewer than 300 and effecting the termination of the
Company's Exchange Act registration and periodic reporting obligations. Upon
deciding that the Reverse Split was the most effective way to accomplish the
Company's going private goals, the Board asked management to prepare materials
for its review relating to the possible split ratios that could be used, such as
1-for-300, 1-for-500, 1-for-1000 and 1-for-2000, and the costs to the Company
associated with each of such ratios.
- 13 -
Fairness of Reverse Split Transaction.
The Board and Mr. Shepherd next reviewed the fairness of the Reverse Split
Transaction to the Company's affiliated and unaffiliated shareholders. Each of
the Board and Mr. Shepherd considered whether the Reverse Split Transaction
would be both substantively and procedurally fair to the Company's unaffiliated
shareholders.
Fairness of Price. After determining that going private was in the Company's
best interest, the Board and Mr. Shepherd next considered the methods that could
be used to determine a fair purchase price with respect to the repurchase by the
Company of the fractional shares resulting from the Reverse Split, including:
Historical and Current Market Price: The Board and Mr. Shepherd reviewed
the current market price of the Existing Common Stock. The Board also
considered that (i) only approximately 12% of the Company's issued and
outstanding shares of Common Stock was legally allowed to trade without
restriction, (ii) the Company's Common Stock was extremely illiquid with low
trading volume and price volatility occurring from nominal trading volume,
(iii) in the past months, other than swings in price due to infrequent
larger purchases or sale, the price has been trading in a very narrow
trading range, and (iv) with increased future profitability uncertain, and
over 9 million shares outstanding, earnings per share growth that would have
a beneficial affect upon the stock price is highly improbable.
Net Book Value: The Board and Mr. Shepherd next reviewed with management
the net book value of the Existing Common Stock. It considered that for
the nine months ended as of October 31, 2004, the Company had a net book
value of $2,269,140. As of the same date, there were 9,544,299 common stock
shares outstanding, which includes 504,240 shares of Common Stock that were
being held in the Company's treasury at that time, which treasury shares
have since been cancelled. The net book value as a result of these numbers
on October 31, 2004, was approximately $0.25 per share (net of the treasury
shares). At that time, the per share book value as of the Company's fiscal
year ended January 31, 2005 was also expected to be approximately $0.21 per
share.
Other Valuation Methods Considered. The Board and Mr. Shepherd also
discussed using a liquidation valuation method to determine a fair price for
the fractional interests, but rejected that method (as well as any other
method that did not value the Company as a going concern) as the Company's
experience and annual audit process and the Company's knowledge of the
markets in which its assets are located clearly show the per share
liquidation value of the Company's assets to be less than the per share
value of the Company as a going concern. Moreover, the Board and Mr.
Shepherd considered using a going concern method to determine a fair price
for the fractional interests and concluded, as discussed below, that it
would be in the Company's best interests for it to engage an independent
valuation consultant to evaluate the Company on a going concern basis.
They further determined that they would adopt and rely on the findings of
the independent valuation consultant in this regard.
- 14 -
Other Valuation Methods Not Considered: Neither the Board nor Mr. Shepherd
considered the following valuation methods because such information was not
available, or did not apply, to the Company for reasons stated below:
Prices paid in previous purchases by the Company of the Company's
securities during the past two years. The Company has not purchased the
Company's securities in the past two years.
Firm offers of which the Company or any affiliate is aware made by an
unaffiliated person during the past two years. The Company is unaware of any
such offer.
Opinion of Value. As noted above, the Board and Mr. Shepherd then discussed
engaging an independent valuation consultant to provide it with an opinion of
value (the "Opinion of Value") of the Common Stock. Each of the Board and Mr.
Shepherd considered this option to be in the best interests of the Company and
its shareholders because it would ensure that the price would be determined by
an independent valuation expert and therefore would be fair to the Company's
shareholders. Accordingly, the Board asked management to recommend an
independent valuation consultant to the Board at its next meeting.
Substantive Fairness. In considering the substantive fairness of Reverse
Split Transaction, the Board and Mr. Shepherd also determined the following to
be significant:
The fact that those shareholders being paid cash for their fractional share
interest will no longer participate in the future growth of the Company, if
any;
The fact that the potential loss of liquidity in shares of the Company's
Common Stock does not appear to be a significant loss given the
historically small trading volume of the Company's Common Stock;
Any detriment associated with the reduction in public information available
regarding the Company's business, financial condition and results of
operations will be offset by the savings in costs and management time
expected to result from termination of the Company's registration and
periodic reporting obligations with the SEC; and
The increasing costs associated with remaining a public-reporting company.
Procedural Fairness. In considering the procedural fairness of the Reverse
Split Transaction, each of the Board and Mr. Shepherd found to be particularly
significant the fact that the Company intended to engage an independent
valuation consultant to prepare the Opinion of Value to ensure the fairness of
the price to be paid. At this initial meeting, the Board also considered
forming an independent Special Committee of the Board to evaluate the fairness
of the proposed transaction. As discussed below, however, at its March 17, 2005
meeting, the Board concluded that there was not a sufficient number of truly
independent directors to serve on a multi-member independent Special Committee
and, therefore, that the expense associated with the creation of a Special
Committee was an unnecessary disbursement of shareholder value, as it would not
add significant value to the Board's deliberative process.
- 15 -
Additionally, the Board and Mr. Shepherd considered other issues related to
the procedural fairness of the going private transaction, including those set
forth below:
The fact that the transaction was structured so as to require the approval
of a majority of the Company's outstanding shares and does not require
approval of a majority of the unaffiliated shareholders of the Company;
The unaffiliated shareholders do not have an independent representative
because the cost of such representative outweighs its potential benefits in
a transaction of this size;
The Board of Directors approving the Reverse Split Transaction consists of
9 members, three (3) of whom (John D. Shepherd, Benjamin Shepherd and Jeffry
LaPell) are officers of the Company, one (1) of whom (William Thyne) is a
former officer of the Company, one (1) of whom (Leslie M. Apple) is a
partner with the law firm engaged to provide counsel with respect to the
Reverse Split Transaction, and two (2) of whom (Richard Farr and Steven
Patlin) are otherwise employed by or serve as independent contractors to
the Company;
The Board approving the Reverse Split Transaction also owns, as a group,
approximately 80% of the Company's outstanding shares of Existing Common
Stock;
Shareholders being cashed-out as a result of the Reverse Split Transaction
will be liquidating their historically illiquid holdings at a fair price
and without brokerage fees; and
Shareholders that may be cashed out pursuant to the Reverse Split
Transaction may decide to remain shareholders of the Company after the
Reverse Split Transaction by simply acquiring sufficient shares so that
they hold at least 500 shares in their account immediately prior to the
Reverse Split Transaction.
After carefully evaluating all of these factors and the economic realities of
the total current market value of the shares of Common Stock that will be
eliminated by the Reverse Split Transaction, the Board and Mr. Shepherd
concluded that the actual facts and circumstances of the Company, its current
ownership and the Company's finances clearly supported proceeding with approval
of the Reverse Split Transaction without independent evaluation beyond that of
an independent valuation consultant. The Board and Mr. Shepherd also concluded
there was no financial prejudice to shareholders whose ownership interest will
be eliminated by the Reverse Split Transaction.
Funding the Reverse Split Transaction.
The Board and Mr. Shepherd next discussed how the Reverse Split Transaction
would be funded. Upon consultation with management, the Board and Mr. Shepherd
determined that, subject to the receipt of the Opinion of Value, it was not
likely that the repurchase price of the fractional interests upon completion of
the Reverse Split Transaction would be very significant. Therefore, they
anticipated that total amount paid to shareholders to repurchase the fractional
interests could be paid from the working capital of the Company.
- 16 -
Review of the Going Private Process
At their initial meeting, the Board of Directors and Mr. Shepherd also
reviewed with legal counsel the duties of directors under the federal securities
laws and New York State corporate laws in evaluating a going private
transaction. It then discussed the preparation of documents to be filed with
the SEC in connection with the Reverse Split Transaction. The costs associated
with going private were generally discussed as well as the potential timeline
for achieving private company status.
The Company engaged Whiteman Osterman & Hanna, LLP, a law firm of which Leslie
M. Apple, a Company director, is a partner, to provide advice and counsel with
respect to the proposed going private transaction. Counsel outlined the
procedure for conducting a going private transaction, including the (i)
preparation by counsel of Schedule 14C and Schedule 13e-3, (ii) review of such
documents by the SEC, (iii) printing and distributing of the Information
Statement to shareholders, (iv) the conducting of the Special Shareholders
Meeting, and (v) the effectuation the proposed transaction.
Conclusion
At the initial meeting of the Board and Mr. Shepherd on February 19, 2005,
each of the Board and Mr. Shepherd concluded that a going private transaction
was in the best interests of the Company and its shareholders and unanimously
approved the Reverse Split Transaction in concept. So that the Board could
further review the fairness of the Reverse Split Transaction, however, it
directed management to prepare certain materials for its review, including
materials relating to split ratios, and to interview potential independent
valuation consultant candidates. The Board also instructed management and the
Company's legal counsel to proceed with the preparation of the documents
necessary to effect the proposed transaction in an expedited manner.
March 17, 2005 Meeting
The Company's Board of Directors and Mr. Shepherd convened again on March 17,
2005, to discuss the progress of the Reverse Split Transaction. Management had
previously provided the Board and Mr. Shepherd with materials previously
requested by the Board and Mr. Shepherd relating to various split ratios. At
management's recommendation, each of the Board and Mr. Shepherd approved the
split ratio of 1-for-500. This split ratio would reduce the number of the
Company's shareholders to 132, a number well below 300, which is the number
necessary for the Company to deregister its securities. Accordingly, the Board
and Mr. Shepherd concluded that it was very likely that the split ratio would
accomplish the Company's going private goals. The Board therefore approved
proceeding subject to receipt of the Opinion of Value, and fixing the repurchase
price pursuant thereto.
The Board also re-considered at this meeting the value of forming a Special
Committee of the Board of Directors to evaluate the fairness of the Reverse
Split Transaction. After deliberation, the Board concluded that there were not
a sufficient number of truly independent directors to serve on a multi-member
independent Special Committee and, therefore, that the formation of a Special
Committee would not add significant value to the Board's deliberative process.
- 17 -
Management also proposed for the Board's and Mr. Shepherd's consideration, the
ratification of the selection and engagement of Empire Valuation Consultants,
LLC (previously defined as "Empire") to serve as independent valuation
consultant to the Company in connection with the Reverse Split Transaction and
the preparation of the Opinion of Value. The Board and Mr. Shepherd were
provided with Empire's qualifications and were informed that Empire had an
excellent reputation within its field. Based on management's recommendation and
because of Empire's experience and credentials in the valuation area, the Board
ratified management's selection and engagement of Empire.
Opinion of Value
General
Pursuant to the Company's engagement of Empire to prepare the Opinion of Value
for the Company in connection with the Reverse Split Transaction, Empire
delivered the Opinion of Value to the Company as of March 20, 2005, which was
subsequently revised to provide more detail on the methods used by Empire to
determine the value of the Company (the "Opinion of Value"). The Opinion of
Value states that, for purposes of the Reverse Split Transaction, the aggregate
fair value of the Company is reasonably stated as $4,000,000 as of March 18,
2005. This total value equates to approximately $0.44 per share of Existing
Common Stock. A copy of the Opinion of Value is attached hereto as Appendix C.
Empire is under no obligation to update the Opinion of Value.
In consideration for its delivery to the Company of the Opinion of Value,
Empire received approximately $10,000 from the Company. Empire has also
received fees in the aggregate amount of $30,000 in connection with
valuation services rendered by Empire to the Company during 2003 and 2004.
Empire's Qualifications
Empire was founded in 1988 and is a highly respected independent valuation
consulting firm. Empire's experience includes thousands of valuations involving
businesses and intangible assets worldwide. Empire's principals and staff
include long-time, active members of major professional societies such as the
American Society of Appraisers, Institute of Chartered Financial Analysts,
AICPA, and the Institute of Business Appraisers, among others. All of Empire's
professionals hold MBA degrees. The credentials of the representatives of
Empire assigned to this engagement are attached as an addendum to the Opinion
of Value, a copy of which is attached hereto as Appendix C.
Empire provides objective, third-party conclusions of value. As a valuations-
only firm, it seeks to reduce the potential for conflicts of interest that
occur when auditing, banking or brokerage services are offered by the same
firm. Empire maintains a strict internal code of conduct and adheres to the
ethical and professional valuation standards, including the Uniform Standards
of Professional Appraisal Practices, set forth by various professional
organizations.
- 18 -
Summary of the Opinion of Value
In preparing the Opinion of Value, Empire's professionals examined the
Company, in-depth. It gathered information on those aspects of the Company's
past, present and future that impact the value of the Company. For purposes of
its engagement, "fair value" was defined as "the price at which ownership
interests would change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having reasonable
knowledge of relevant facts."
According to the Opinion of Value, Empire valued the Company based on the
assumption that the Company is a going concern. The appraisal was conducted in
accordance with guidelines established by the Internal Revenue Service ("IRS")
and appraisal practices promulgated by the American Society of Appraisers in
the Principles of Appraisal Practice and Code of Ethics, together with such
standards as Empire deemed relevant to the engagement. Since the Company is a
thinly traded publicly held company, Empire, following valuation industry
protocol, valued the Company in the same manner as a privately held company.
In this regard, Empire's definition of "fair value" was virtually identical to
the definition of "fair market value" as defined by the Internal Revenue Code.
Accordingly, in determining the "fair value" of the Company, Empire reviewed
the factors considered by the Internal Revenue Service to be relevant in
determining "fair market value" for a privately held company including, without
limitation, (i) the nature of the business and the history of the enterprise
from its inception; (ii) the general economic outlook and condition of, and
outlook for, the subject industry; (iii) the book value of the equity and the
Company's financial condition; (iv) the earning capacity of the Company; (v)
the Company's dividend paying capacity; (vi) whether or not goodwill or other
intangible value exists; (vii) past sales of the equity and the size of the
block under consideration; and (viii) the market price of actively traded
interests of public corporations engaged in the same or similar lines of
business.
Empire reviewed the following in determining the fair value of the Company:
(i) the Company's filings with the SEC for its fiscal years ended January 31,
2001 through 2005 and various interim periods, (ii) the Company's pro-forma
results for 2006, including a balance sheet, income statement and statement of
cash flow as well as a projected income statement for the Company's fiscal year
ending January 31, 2006, provided by management of the Company, (iii) an on-site
visit to one of the Company's divisions during 2002; (iv) Hoover's Online,
Edgarscan, Multex and Yahoo!Finance databases, (v) economic and industry
information from Value Line, the Wall Street Journal, and Standard & Poor's
Industry Surveys and Log Home Council, among others, (vi) conversations with
certain members of the Company's management, legal counsel and its primary
lender, and (vii) other reviews, analyses and research as Empire deemed
necessary.
After consideration of a number of generally accepted valuation methodologies,
Empire employed a capitalization of income analysis and an adjusted book value
calculation and reviewed the market price of the Company's Common Stock in
arriving at its opinion, each of which are described in further detail below.
Empire also conducted a sensitivity analysis by employing a small company rule
of thumb based on earnings before interest, taxes, depreciation and amortization
("EBITDA") and a small company multiple of 5.0 to gauge the reasonableness of
the Empire's conclusions.
- 19 -
Rule of Thumb. Generally, rules of thumb are secondary valuation techniques
used to test a formal valuation. In order to determine the applicable rule of
thumb in any given case, an appraiser will review the valuations of similar
companies that have recently been sold in terms of, for example, a multiple of
sales, EBITDA or net profit. The appraiser will then use that formula to gauge
the reasonableness of the valuation at issue.
After consulting a number of well-known sources among appraisers, such as the
Handbook of Small Business Valuation Formulas and Rules of Thumb by Glenn
Desmond and Pratt's Stats, a database of transactions involving small companies,
Empire concluded that the Company was most closely analogous to micro-cap
companies, which typically use EBITDA multipliers as valuation measures. Empire
also consulted Pratt's Stats for a range of multiples used to value similar
sized companies and noted that unless a company is in a "hot" market, EBITDA
multiples generally range between 4 times to 7 times, with the multiples more
commonly ranging between 4.5 times and 5.5 times. Accordingly, Empire concluded
that it was reasonable to conduct its sensitivity analysis using a conservative
rule of thumb based on EBITDA multiples of 5.0 times to 6.0 times.
Empire then determined that all of the values Empire derived using the above-
mentioned methodologies, except for adjusted book value, fell well within the
appropriate range based on this rule of thumb. The sensitivity analysis was
conducted as follows: (a) the adjusted pre-tax income and the weightings used
to create a normalized earnings base for use with the rule of thumb were
identical to those used in the two capitalization of income calculations
discussed below; (b) since the selected multipliers used by Empire were EBITDA
multipliers, (i) the Company's depreciation and amortization for each year were
added to the base, and (ii) no income tax was imputed; and (c) the small
company multiple was applied to each potential EBITDA base and the Company's
debt was subtracted. The resulting equity values ranged from $1,455,901 to
$4,115,595, with a median of $ 2,634,293 and an average of $2,829,386. As
noted below, using capitalization of income, capitalization of debt-free income,
trading history and adjusted book value calculations to determine the Company's
valuation yielded valuations of $4,030,000, $4,080,000, $3,977,626 and $600,000,
respectively. The first three calculations fell within the upper end of the
sensitivity analysis range. Empire's adjusted book value calculation fell
below the low end of the range, which was not surprising to Empire, as it felt
that, in this case, adjusted book value was a worst case value here.
Capitalization of Income Analysis. Empire first reviewed the Company's
historical net income for the years 2000 through 2005 and its projected results
for 2006 and made adjustments for certain non-recurring items and the
anticipated improvement in the Company's operating income. The adjustments for
non-recurring items included (i) adding back to the Company's pre-tax income
$240,000 per year, which was, at that time, the Company's estimate of SEC
filing related expenses; and (ii) adding back the amount of selling, general
and administrative expenses reported by the Company in 2004 ($4,666,927), as it
was unusually high as a percentage of sales due to non-recurring acquisition
activities, and deducting a more normalized percentage (26.7% of sales or
$4,217,348, based on 2005 numbers, instead.
The adjusted results were then weighted in several ways and results reviewed
on a pre-tax and a post-tax basis. The adjusted results were weighted in
several ways. First, the adjusted figure for 2001 was excluded from
- 20 -
computations because it was unusually low and not considered to be indicative
of the Company's ongoing earning power. Secondly, the Company's 2005 loss was
given a weight of 1.0 times in all scenarios. The results for 2005 represented
the Company's worst financial performance over the review period. Empire did
not feel that it should be disregarded since (i) it captured some of the
difficulties involved in assimilating the Company's acquisitions and (ii) it
was, in fact, the latest actual reported year. However, the Company had been
profitable and Empire believed there was a reasonable expectation that it will
be profitable again. Accordingly, after reviewing the results of the various
scenarios, Empire selected $850,000 as a reasonable predicate for the Company's
ongoing pre-tax earning power, which was its normalized earnings base.
The Company's pre-tax earnings base was then tax-affected using a marginal
tax rate of 39%. The Company's after-tax earnings base then became $518,925,
which assumed that the Company's capital expenditures and depreciation expense
would offset one another over the long-term and, thus, the earnings base was
equivalent to the Company's cash flow.
The normalized net income figure was then capitalized using the following
formula: base net income x (1+ growth rate)/ capitalization rate). For
purposes of this calculation, Empire used a growth rate of 4% and a
capitalization rate of 17.38%. Empire determined the 4% rate to be a reasonable
long-term growth expectation for the Company based on Empire's analysis and
Value Line's forecasts for inflation. The capitalization rate represented the
required rate of return that an investor would demand at a point in time in
order to hold equity in a company under study and accounts for the risks
inherent in a company's capital. In order to determine the Company's
capitalization rate, Empire reviewed certain of Ibbotson Associates' annual
studies of marketable minority interests in publicly traded securities.
According to such studies, the expected rate of return of the market (i.e., the
S&P 500) in excess of the risk-free rate (i.e., arithmetic mean) had been 7.0%,
based on a study of actual returns from January 1926 to December 2003.
Ibbotson further identified a small-company premium of 6.6% based on a market
value-weighted index of micro capitalization stocks traded on the New York
Stock Exchange, the American Stock Exchange and NASDAQ. This premium
recognized that equity holders generally demand higher returns from companies
that are riskier by virtue of their smaller revenue base and capitalization.
Empire then added 4.78%, which represents the risk-free rate (using twenty year
Treasuries as a guide) to arrive at a capitalization rate of 18.38%. Finally,
Empire adjusted this capitalization rate (by 1.0%) to reflect the Company's
industry and company specific risk. Empire believed this to be appropriate
given (i) the highly competitive nature of the Company's industry and its high
leverage, (ii) the Company's small capitalization relative to those of the
companies included in the Ibbotson study, and (iii) the Company's historical
profitability, its projected improvement and the taxable outlook for its
industry. Accordingly, Empire used a capitalization rate of 17.38% in its
analysis.
Based on this analysis, Empire concluded that the fair value of the Company
was $4,030,000.
Capitalization of Debt-Free Income. Empire then conducted a similar analysis
using a debt-free approach whereby interest expense was added back for each year
within the review period ($56,658, $99,756, $57,966, $55,284, and $171,591 for
each of the years ended January 31, 2001 through 2005, respectively, and a
projected $251,103 for the year ending January 31, 2006. The result of this
calculation was a value for the total invested capital available to equity
- 21 -
holders and debt holders. Then, in order to determine the value of the
Company's equity, the Company's outstanding debt ($4,323,633) was subtracted.
As a result of this analysis, Empire concluded that the Company's fair value was
$4,080,000.
Adjusted Book Value. Empire then reviewed the adjusted book value (i.e.
generally the value of a company's bundle of assets, less its liabilities) of
the Company, using the Company's balance sheet for January 31, 2005, as the
starting point. Empire then adjusted the Company's assets and liabilities to
reflect their fair market values. The following adjustments were made by Empire
(i) the cost-basis book value of the Company's land, buildings and improvements
($3,926,347) was reduced by $1,456,347 to $2,470,000 to reflect the fair market
value of such assets, which was provided by the Company's primary lender and
was based on an appraisal for lending purposes; (ii) the cost-basis book value
of the Company's machinery and equipment was conservatively reduced by 10% to
$1,862,594 based on Empire's discussions with management; (iii) the cost-basis
book value of the Company's furniture and fixtures was reduced by 50% based on
discussions with management; Empire felt this estimate was conservative since
nearly all of the items were typical office furnishings that would sell for
considerably less; (iv) the cost-basis book value of transportation equipment,
which are typical of that for the industry in general, was reduced by 30% to
$436,503; and (v) the book value of goodwill and other intangible assets was
eliminated because they cannot be transferred or sold and, thus, have no
realizable book value. Based on this analysis, Empire concluded that the fair
value of the Company was $600,000.
Market Price. Finally, Empire reviewed the Company's trading history for the
twelve month period ended on March 18, 2005. Empire noted that, during this
time, (i) there were only 59 reported trades for a total of 149,753 shares; (ii)
the maximum price was $1.01 per share; (iii) the minimum was $0.40 per share;
(iv) the most recent price was $0.44 per share, and (v) that, within the
thirty (30) day period ending on March 18, 2005, there were only six (6) trades.
The weighted average price per share during the thrity (30) day period ending
on March 18, 2005 was $0.67, but Empire noted that the price was skewed by a
larger than average trade of 10,000 shares on February 23, 2005. Empire noted
that it was unable to locate any rationale for the spike, but further noted the
price declined again quickly. Based on this analysis, Empire concluded that the
Company's value based on this method was $3,977,626 ($0.44 per share times
9,040,059 shares outstanding), but that the Company's limited trading history
implied that this was not a true reflection of fair value.
Conclusion. Despite the range of values from $600,000 to $4,080,000, after
weighing and evaluating the results achieved by the foregoing valuation
methods, Empire concluded that the aggregate fair value of the Company as of
March 18, 2005, was $4,000,000. In reaching this conclusion, Empire noted that
the valuation of privately-held or thinly traded companies is more of an art
than a science and is dependent upon the judgment of the expert, which is, in
this case, Empire. It noted that it selected the final valuation figure of
$4,000,000 from within the reasonable range of value of $600,000 to $4,080,000,
taking into consideration all of the factors that were relevant to its
valuation calculations.
The Opinion of Value states that its reported analyses, opinions and
conclusions represented the personal, unbiased professional analyses, opinions
and conclusions of Empire and that the professional fee paid to Empire in
- 22 -
connection with the preparation of the Opinion of Value was not contingent upon
the opinion of value stated therein. Moreover, it states that neither Empire
nor any of its employees has a present or intended financial interest in the
Company or in any of its affiliates and that, except as specifically mentioned
in the Opinion of Value, no one provided significant professional assistance to
Empire in connection with the preparation of the Opinion of Value.
Limitations on the Opinion of Value
The opinion expressed in the Opinion of Value assumes the continuation of
prudent management policies over whatever time period is deemed reasonable and
necessary to maintain the character and integrity of the Company as a going
concern. Moreover, while Empire believes that the information supplied to it
by others and that was considered in its valuation is from sources that are
reliable, Empire has expressly disclaimed any responsibility for its accuracy.
Furthermore, the information used by Empire was limited to what was available
on or before March 18, 2005, or which could be reasonably ascertained as of
that date. Empire reserves the right to make such adjustments to the valuation
discussed in the Opinion of Value as may be required by consideration of
additional or more reliable data that may become available subsequent to the
issuance of the Opinion of Value.
For purposes of the Opinion of Value, Empire assumed that there were no hidden
or unexpected conditions of the Company's assets that would adversely affect
value and did not give consideration to liability resulting from hazardous
substances or its impact on value. Any such actual or potential liability could
adversely affect the marketability and value of the Company's business or its
underlying assets. Moreover, Empire stated that no opinion was intended to be
expressed requiring legal or specialized expertise, investigation or knowledge,
beyond that customarily employed by appraisers.
The Opinion of Value further states that all opinions of market value
contained in the Opinion of Value are presented as Empire's considered opinion
based on the facts and data obtained during the course of the appraisal
investigation. Empire assumes no responsibility for changes in market
conditions that might require a change in appraised value. Moreover, the value
conclusion derived in the Opinion of Value was for the specific purpose and
date set forth in the Opinion of Value and may not be used for any other
purpose.
As noted above, Empire's fee established for formulation and reporting of the
conclusions contained in the Opinion of Value is not contingent upon the value
or other opinions presented. Additionally, neither Empire nor any of its
officers or employees has any interest in the Company or its properties.
The Opinion of Value states that depositions, expert testimony, attendance in
court and all preparations/ support for same, arising from the appraisal are
required, unless arrangements for such services have been previously made.
March 22, 2005 Meeting
The Company's Board of Directors and Mr. Shepherd met again on March 22, 2005,
to consider the recommendation of Empire that the aggregate fair value of the
Company is $4,000,000 (or $0.44 per share of Existing Common Stock) and to
- 23 -
determine the purchase price of the fractional interests to be repurchased in
connection with the Reverse Split Transaction. All directors were present
during this meeting, other than Benjamin Shepherd.
The Board and Mr. Shepherd first considered Empire's recommendation of an
aggregate fair value of $4,000,000, by examining the values reached by employing
other valuation methods. In particular, the Board and Mr. Shepherd once again
considered using historical and current market price as the basis for
determining the Company's value. In this regard, the Board and Mr. Shepherd
reviewed Company's recent trading history. They noted that within the past six
(6) months the maximum price was $1.01 per share and the minimum was $0.40 per
share. The weighted average price per share during such period was $0.67, but
they concluded that, as Empire had noted, the price was not representative of
true value because it reflected a larger than average trade of 10,000 shares on
February 23, 2005. The Board and Mr. Shepherd also considered that (i) only
approximately 12% of the Company's issued and outstanding shares of Common Stock
was legally allowed to trade without restriction, (ii) the Company's Common
Stock was extremely illiquid with low trading volume and price volatility
occurring from nominal trading volume, (iii) in the past months, other than
swings in price due to infrequent larger purchases or sale, the price has been
trading in a very narrow trading range, and (iv) with increased future
profitability uncertain, and over 9 million shares outstanding, earnings per
share growth that would have a beneficial affect upon the stock price is highly
improbable. Based on this analysis, each of the Board and Mr. Shepherd, like
Empire, concluded that the market price of the Company's Common Stock was not a
true reflection of fair value.
Since, as indicated by the Opinion of Value, the book value of the Company is
significantly lower than the Company's value as calculated using other methods,
neither the Board nor Mr. Shepherd considered again using net book value as a
method to calculate the Company's value for purposes of the Reverse Split
Transaction. Neither did they consider the following valuation methods because
such information was not available, or did not apply, to the Company for reasons
stated below:
Prices paid in previous purchases by the Company of the Company's securities
during the past two years. The Company has not purchased the Company's
securities in the past two years.
Firm offers of which the Company or any affiliate is aware made by an
unaffiliated person during the past two years. The Company is unaware of any
such offer.
The Board and Mr. Shepherd next discussed using the value of the Company set
forth in the Opinion of Value as the basis for calculating the purchase price
for the fractional interests, but adding a premium to such purchase price to
account for reasonable differences of opinion. In this regard, they considered
the overall substantive and procedural fairness of the Reverse Split Transaction
to the Company's shareholders. After discussion, each of the Board and Mr.
Shepherd concluded that it would be appropriate to establish the purchase price
of the Company's fractional interests based on a fair value of $0.49 per share
of Existing Common Stock. Each of the Board and Mr. Shepherd unanimously
concluded that this value was fair and reasonable to the Company's shareholders
because it reflected a ten percent (10%) premium over Empire's recommended
value.
The Board and Mr. Shepherd then considered other aspects of the substantive
- 24 -
fairness of the Reverse Split Transaction to the Company's shareholders. In
particular, they considered again the fact that, upon completion of the Reverse
Split Transaction, those remaining shareholders of the Company will not have an
organized trading market in which to purchase and sell shares of the Company's
Common Stock because the Common Stock will no longer be quoted on the Nasdaq OTC
Bulletin Board. They considered whether it would be possible for the Company to
maintain relationships with certain of its market makers, so that their market
making activities would continue after the Reverse Split Transaction. Counsel
then advised the Board and Mr. Shepherd that the Company could not guarantee
that there would be any organized trading market for the Company's Common Stock
after the Reverse Split Transaction. The Board and Mr. Shepherd considered
this, and then directed the Company to contact the Company's market makers to
determine whether it would be possible for them to continue to make a market in
the Company's Common Stock after the Reverse Split Transaction. As previously
noted, at lease two (2) of the Company's market makers have agreed to do so.
Finally, each of the Board and Mr. Shepherd approved the filing with the SEC
of a preliminary information statement and a Schedule 13E-3 in connection with
the Reverse Split Transaction, drafts of which had been prepared in advance of
the meeting and were circulated after the meeting for review and approval.
Final Deliberations
The Board and Mr. Shepherd convened again to discuss the Reverse Split
Transaction on June 22, 2005. All directors were present during this meeting,
other than Reginald W. Ray, Jr. During this meeting, the Board and Mr.
Shepherd, among other things, reviewed the revised Opinion of Value that had
been prepared by Empire, a copy of which is attached hereto as Appendix C.
After reviewing the revised Opinion of Value, the Board and Mr. Shepherd
reaffirmed their previous decision to establish the purchase price of the
Company's fractional interests based on a fair value of $0.49 per share of
Existing Common Stock. Each of the Board and Mr. Shepherd concluded that this
value was fair and reasonable to the Company's shareholders because it reflected
a ten percent (10%) premium over Empire's recommended value.
Each of the Board and Mr. Shepherd then approved the filing, subject to such
changes as may be approved by the duly authorized officers of the Company, with
the SEC of a revised preliminary information statement and an amendment to the
Company's Schedule 13E-3 transaction statement in connection with the Reverse
Split Transaction.
Conclusion Reached As A Result of the Deliberations
Based on all of the foregoing, each of the Board and Mr. Shepherd concluded
that the Reverse Split Transaction was both substantively and procedurally fair
to the Company and its shareholders.
Summary of the General Effects of the Reverse Split
- 25 -
Rights, Preferences And Limitations:
There are no differences between the respective rights, preferences or
limitations of the Existing Common Stock and the New Common Stock. If the
Reverse Split Transaction is approved and implemented, each remaining
shareholder's percentage interest will be the same as it was prior to the
approval of the proposal, except for the effect of the elimination of fractional
shares. There will be no differences with respect to dividend, voting,
liquidation or other rights associated with the Company's Common Stock before
and after the Reverse Split Transaction.
HOLDERS OF FEWER THAN 500 SHARES OF EXISTING COMMON STOCK WILL NO LONGER HAVE
ANY VOTING OR OWNERSHIP RIGHTS IN THE COMPANY AFTER THE REVERSE SPLIT
TRANSACTION IS EFFECTED. AS A RESULT, SUCH HOLDERS WILL NO LONGER BE ABLE TO
PARTICIPATE IN ANY FUTURE GROWTH OF THE COMPANY.
Effect on Number of Shareholders and Number of Outstanding Shares:
The Company believes that the Reverse Split Transaction will reduce the number
of record shareholders from approximately [3,100] to approximately 132. As
noted earlier, approximately 236,059 shares held by shareholders with fewer than
500 shares in their account will receive cash for their shares in the Reverse
Split Transaction. The number of outstanding shares of Common Stock as of May
18, 2005 is 9,040,059. As a result of the Reverse Split and the related
purchase of fractional interests, there will be approximately 17,608 shares of
Common Stock outstanding. The fractional interests repurchased in connection
with the Reverse Split Transaction will be retired.
All shareholders owning fewer than 500 shares of Existing Common Stock and who
are cashed out will receive a cash payment in an amount equal to the result
obtained by multiplying $245.00 by a fraction having as the numerator the number
of shares owned and having as the denominator the number 500 (which is equal to
$0.49 per share of Existing Common Stock), without interest. Such shareholders
will no longer have any equity interest in the Company and, therefore, will not
participate in its future potential earnings or growth. They will also be
required to pay federal and, if applicable, state and local income taxes on the
cash amount received in the Reverse Split Transaction or recognize loss for tax
purposes depending on the purchase price of their stock.
Financial Effect:
The total number of fractional shares to be purchased is estimated to be
approximately 236,059 at a repurchase cost of approximately $115,669. The total
cost of the Reverse Split Transaction will come from the Company's available
cash balances, and, accordingly, will reduce the Company's cash balance. The
Company is financing the Reverse Split Transaction with its available cash
balance and has not arranged for any alternative financing to consummate the
transaction in the event its available cash balance is insufficient. As a result
of the reduction in the number of shares outstanding, the Company's earnings per
share and book value per share will proportionately, approximately increase by a
factor of 500. The proposed Reverse Split Transaction will not affect the par
- 26 -
value of the Company's Common Stock. As a result, on the Effective Date of the
Reverse Split Transaction, the stated capital on the Company's balance sheet
attributable to common stock will be reduced in proportion to the Reverse Split
ratio, and the additional paid-in capital account will be credited with the
amount by which the stated capital is reduced. No other material impact on the
Company's financial statements is expected other than the expenses related to
the Reverse Split as indicated below and the payment of approximately $115,669
for the purchase of fractional shares. Pro-forma financial statements
illustrating the effect of the Reverse Split Transaction on the Company's
balance sheet, income statement and book value per share are summarized below
in "INFORMATION REGARDING THE COMPANY AND CERTAIN TRANSACTIONS."
The Company will pay all of the expenses related to the Reverse Split
Transaction. In addition to the cash-out of fractional shares, the Company
estimates that the expenses of the Reverse Split Transaction will be as
follows:
Legal Fees $40,000.00
Preparation of Opinion of Value $10,000.00
Transfer Agent Fees $ 8,200.00
Filing Fees $ 100.00
Printing and Mailing Expenses $ 3,500.00
Miscellaneous Expenses $ 2,000.00
----------
Total $63,800.00
The Company will not make any payments to its officers and directors other
than payments for fractional interests cancelled as a result of the Reverse
Split Transaction. It is estimated that the officers and directors listed below
will receive the following for their fractional interests:
Name and Title Fractional Interest Payment
-------------------------------------------- ---------------------------
John D. Shepherd, Chairman, President and
Chief Executive Officer $226.00
Richard Farr, Director and Independent
Contractor $148.00
Samuel Padula, Director $99.00
Reginald W. Ray, Director $247.00
William Thyne, Director $42.00
Steven Patlin, Director and Independent
Contractor $49.00
- 27 -
Mr. Shepherd does not anticipate that he will experience a significant
financial effect with respect to his ownership of the Company's Common Stock as
a result of the Reverse Split Transaction. The following is a summary of the
pro-forma effect of the Reverse Split Transaction on Mr. Shepherd's interest in
the net book value or net earnings of the Company as of January 31, 2005:
Before Reverse After Reverse
Split Transaction Split Transaction
----------------- -----------------
Net Book Value in Dollars $1,010,571 $1,037,579
Net Book Value as a Percentage 59.84% 61.44%
Before Reverse After Reverse
Split Transaction Split Transaction
----------------- -----------------
Net Loss in Dollars $(469,314) $(481,857)
Net Loss as a Percentage 59.84% 61.44%
Effect on Market For Shares:
The Company estimates that the number of shares of New Common Stock
outstanding after the Reverse Split Transaction is affected will be
approximately 17,608 shares in the hands of approximately 132 shareholders.
There will be no organized market for the Company's shares. Even though the
Company's Common Stock is currently very thinly traded, this will have a further
adverse effect on the liquidity of the Common Stock. While certain of the
Company's market makers have agreed to continue to make a market in the
Company's securities, any trading in the Company's Common Stock after the
Reverse Split Transaction will generally only occur in privately negotiated
sales.
The Company has no current plans to issue additional shares of stock, but the
Company reserves the right to do so at any time and from time to time at such
price and on such terms as the Board of Directors determines to be in the best
interests of the Company and its then shareholders. Persons who continue as
shareholders following implementation of the Reverse Split Transaction will not
have any preemptive or other preferential rights to purchase any of the
Company's stock that may be issued by the Company in the future, unless such
rights are currently specifically granted to such shareholder.
Termination of Exchange Act Registration of New Common Stock:
The Reverse Split proposal will affect the public registration of the New
- 28 -
Common Stock with the SEC under the Exchange Act, as the Company intends to
terminate this registration as soon as practicable after approval of the
Reverse Split proposal by the Affiliated Shareholders. The Company may terminate
registration under the Exchange Act if the New Common Stock is no longer held by
300 or more shareholders of record. Termination of registration of the New
Common Stock under the Exchange Act would substantially reduce the information
required to be furnished by the Company to its shareholders and to the SEC and
would make certain provisions of the Exchange Act, such as the periodic report
and proxy statement filing obligations, no longer applicable to the Company.
Moreover, the Company would no longer be subject to any regulatory legal
requirement to adopt and maintain internal controls and procedures to insure the
timely and appropriate identification and disclosure of material financial and
nonfinancial information.
With respect to the executive officers and directors of the Company, upon
termination of registration of the Common Stock under the Exchange Act,
executive officers, directors and other affiliates would no longer be subject
to many of the reporting requirements and restrictions of the Exchange Act,
including, without limitation, the reporting and short-swing profit provisions
of Section 16 thereof.
Upon termination of Exchange Act registration, the Company will continue to be
subject to the general anti-fraud provisions of federal and applicable state
securities laws.
Beneficial Owners of Company Stock:
The Reverse Split Transaction will affect shareholders holding Company stock
in street name through a nominee (such as a bank or broker). Nominees may have
different procedures, and shareholders holding Company stock in street name
should contact their nominees to determine how they are affected by the Reverse
Split Transaction.
Directors, Officers and the Affiliated Shareholders:
The Company intends that the current directors and officers of the Company
will be the directors and officers of the Company immediately following the
effectiveness of the Reverse Split Transaction. In anticipation of the
termination of the Company's registration and reporting obligations under the
Exchange Act, and the associated reduction in directors responsibility and
liability exposure, the Company has reduced directors' fees by half as follows:
(i) annual retainers have been reduced from $8,000 to $4,000; (ii) board "per
meeting" fees have been reduced from $1,500 to $750; and (iii) committee "per
meeting" fees have been reduced from $500 to $250. Since the Company typically
holds four (4) board meetings per year and eighteen (18) committee meetings per
year, the Company estimates that it will realize annual savings of approximately
$67,500 by reducing the fees.
As a result of the Reverse Split Transaction, the percentage of Common Stock
beneficially owned by the current executive officers and directors of the
Company, as a group, will increase from approximately 82% to 85%. All officers
and directors of the Company will retain beneficial ownership of the Company's
shares following completion of the Reverse Split Transaction.
Effect of the Reverse Split on Optionholders:
- 29 -
Upon the effectiveness of the Reverse Split, any outstanding options under the
Company's Amended and Restated Stock Option Plan will have their number of
shares and exercise prices adjusted to give effect to the 1-for-500 Reverse
Split, with any fractional shares resulting from such adjustment converting to a
right to receive cash in an amount equal to the result obtained by multiplying
$245.00 by a fraction having as the numerator the number of shares owned and the
denominator as the number 500 (which is equal to $0.49 per share of Existing
Common Stock) less the exercise price of the shares subject to exercise of the
option. The vesting schedule will remain unchanged. Any authorized but un-
issued options under the Company's Amended and Restated Stock Option Plan will
have the number of shares adjusted to give effect to the 1-for-500 Reverse
Split.
Effect of the Reverse Split Transaction on the Conduct of the Company
Business:
Following the Reverse Split, the Company will no longer be a public-reporting
company, but rather will operate as a private company. The Company expects its
business and operations to continue as they are currently being conducted and
except as disclosed in this Information Statement, the Reverse Split is not
anticipated to materially affect the conduct of the Company's business. The
Company expects to be subject to substantially the same risks and uncertainties
after the Reverse Split.
The Company has no current plans or proposals to effect any extraordinary
corporate transactions, such as a merger, reorganization sale or liquidation; to
materially change the Company's Board of Directors or senior management; to
change materially the Company's capitalization; or otherwise to effect any
material change in the Company's corporate business structure. Other than
actions discussed in this Information Statement, the Affiliated Shareholders
have no further plans, proposals or arrangements to acquire more shares or
otherwise reduce or eliminate the shareholdings of the Company's minority
shareholders. The Company may, however, from time to time explore various
methods to provide liquidity to shareholders, including a sale or merger of the
Company or its assets.
The Company is not aware of any existing voting agreements that would have an
impact on the Company's future business plans.
Effect on the Aggregate Number of Shares of the Company's Common Stock:
Number of Shares as of Pro Forma for the
May 18, 2005 Reverse Split
Common Stock:
Authorized 12,000,000 12,000,000
Outstanding 9,040,059 17,608
Available for issuance 2,959,941 11,982,392
Per share par value $0.01 $0.01
- 30 -
PROPOSAL ONE-APPROVAL OF AMENDMENT TO CERTIFICATE OF
INCORPORATION TO EFFECT REVERSE STOCK SPLIT
The Board of Directors has unanimously adopted a resolution approving the
preparation and filing of a Certificate of Amendment to the Company's
Certificate of Incorporation (previously defined as the "Reverse Split
Amendment") providing for (a) a 1-for-500 reverse stock split of the Company's
Common Stock, and (b) a cash payment in an amount equal to the result obtained
by multiplying $245.00 by a fraction having as the numerator the number of
shares owned and having as the denominator the number 500 (which is equal to
$0.49 per share of Existing Common Stock) ("Cash Consideration"), in lieu of the
issuance of any resulting fractional shares of Common Stock to any shareholders
who, after the Reverse Split, own a fractional share of Common Stock. A form of
the Reverse Split Amendment is attached hereto as Appendix A. The purpose,
effects and fairness of the Reverse Split are described above under "SPECIAL
FACTORS RELATING TO APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO
EFFECT REVERSE SPLIT."
Source and Amount of Funds for and Expenses of the Reverse Split
Estimated fees and expenses incurred or to be incurred by the Company in
connection with the Reverse Split are as follows:
Item Approximate Amount
Payment of Cash Consideration $115,669.00
Legal Fees $ 40,000.00
Preparation of Opinion of Value $ 10,000.00
Transfer Agent Fees $ 8,200.00
Filing Fees $ 100.00
Printing and Mailing Expenses $ 3,500.00
Miscellaneous Expenses $ 2,000.00
-----------
Total $179,469.00
===========
The Company has paid or will be responsible for paying all of such expenses.
It will pay such expenses from its available cash resources.
Exchange of Shares and Payment in Lieu of Issuance of Fractional Shares
Each current certificate representing issued and outstanding shares of
Existing Common Stock prior to the Reverse Split will automatically be deemed
to represent the correct number of post Reverse Split shares of New Common
Stock after the Effective Date. Promptly after the Reverse Split Transaction,
the Company or its transfer agent will send an instruction letter to each
shareholder The letter will describe the procedures for surrendering stock
certificates in exchange for new certificates and/or cash consideration. Upon
receipt of the stock certificates and properly completed instruction letters,
the Company or its transfer agent will issue the new certificates and/or make
the appropriate cash payments. Do not send any stock certificates to the
Company or its transfer agent until you receive an instruction letter. After
- 31 -
the Reverse Split, shareholders being cashed-out will have no rights as
shareholders with respect to the pre-Reverse Split Existing Common Stock or
the fractional shares that would have resulted from the Reverse Split, whether
or not those shareholders have been paid cash consideration.
The Company anticipates that it will pay out approximately $115,669 to holders
of Existing Common Stock that will be holders of fractional shares following the
Reverse Split Transaction.
Shareholder Approval
The Reverse Split will be approved if a majority of all outstanding shares of
Common Stock entitled to vote thereon. The Affiliated Shareholders who own
approximately 82% of the Company's Existing Common Stock have indicated their
intention to vote in favor of the Reverse Split. If they do so, the Reverse
Split will be approved, and affected, without considering the vote of the
Company's unaffiliated shareholders. Accordingly, you are not being asked to
deliver a proxy, and you will not be asked to vote at the Meeting, with respect
to this Proposal.
Conflicts of Interest
The Company's directors and executive officers may have interests in the
Reverse Split Transaction that are different from your interests as a
shareholder, and have relationships that may present conflicts of interest,
including the following: (i) each member of the Board of Directors and each
executive officer of the Company holds more than 500 shares of the Company's
Existing Common Stock and thus, will remain shareholders of the Company after
the Reverse Split Transaction, and as a result of the Reverse Split Transaction,
the shareholders who own of record 500 or more shares of Existing Common Stock,
including the Company's directors and executive officers, will increase their
percentage of ownership in the Company. For example, the beneficial ownership
percentage of the current directors and executive officers as a group (taking
into account shares received by such individuals upon the exercise of options
that are vested and exercisable within 60 days, as discussed below) will
increase from approximately 82% to approximately 85% as a result of the
reduction of the number of shares of Common Stock outstanding.
Each of the Company's directors and senior executive officers holds options to
purchase more than 500 shares of Common Stock, which options will remain
outstanding. After completion of the Reverse Split Transaction, the Company's
directors and senior executive officers will, as a group, hold options to
purchase 490,000 shares of the Company's Existing Common Stock, as adjusted to
give effect to the Reverse Split. Of that amount, 410,000 of such options are
fully vested and exercisable within 60 days. If all of such options are
exercised, the directors and senior executive officers, as a group, will own
approximately 85% of the then outstanding shares.
The Company will not make any payments to its officers and directors other
than payments for fractional interests cancelled as a result of the Reverse
Split Transaction. It is estimated that the officers and directors listed
below will receive the following for their fractional interests:
- 32 -
Name and Title Fractional Interest Payment
------------------------------------------ ---------------------------
John D. Shepherd, Chairman, President and
Chief Executive Officer $226.00
Richard Farr, Director and Independent
Contractor $148.00
Samuel Padula, Director $99.00
Reginald W. Ray, Director $247.00
William Thyne, Director $42.00
Steven Patlin, Director and Independent
Contractor $49.00
Mr. Shepherd does not anticipate that he will experience a significant
financial effect with respect to his ownership of the Company's Common Stock
as a result of the Reverse Split Transaction. The following is a summary of
the pro-forma effect of the Reverse Split Transaction on Mr. Shepherd's
interest in the net book value or net earnings of the Company as of January
31, 2005:
Before Reverse After Reverse
Split Transaction Split Transaction
----------------- -----------------
Net Book Value in Dollars $1,010,571 $1,037,579
Net Book Value as a Percentage 59.84% 61.44%
Before Reverse After Reverse
Split Transaction Split Transaction
----------------- -----------------
Net Loss in Dollars $(469,314) $(481,857)
Net Loss as a Percentage 59.84% 61.44%
Reservation of Right to Abandon the Reverse Split
Each of the Board of Directors and Mr. Shepherd retains the right to abandon
- 33 -
the Reverse Split, even though approved by the Affiliated Shareholders, if it
determines prior to the Effective Date that the Reverse Split is not then in the
Company's best interest or the best interest of the Company's shareholders.
Among the circumstances that might cause the Board or Mr. Shepherd to abandon
the Reverse Split is the development of a significant risk of the Reverse Split
failing to achieve the overall goal of reducing the number of its recordholders
to fewer than 300, or where the expense of cashing out shareholders with fewer
than 500 shares of Existing Common Stock becomes so high that the Reverse Split
Transaction becomes cost prohibitive. If the Reverse Split is not implemented,
then the Company will be unable to terminate its public reporting obligations
until it has fewer than 300 shareholders of record and satisfies certain other
SEC requirements.
Recommendations of the Board of Directors and Mr. Shepherd
Each of Mr. Shepherd and the Board of Directors unanimously concluded that, on
the basis of the factors discussed above in the section captioned "SPECIAL
FACTORS RELATING TO APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO
EFFECT REVERSE SPLIT," the Reverse Split, both from a procedural and financial
point of view, is fair to the Company and its shareholders.
INFORMATION REGARDING THE COMPANY AND CERTAIN TRANSACTIONS
Lincoln Logs Ltd. is a corporation organized under the laws of New York with
its principal place of business at 5 Riverside Drive Chestertown, New York
12817. The telephone number at its principal place of business is (518)
494-5500.
As of May 18, 2005, the Company had 12,000,000 authorized shares of Common
Stock, par value $0.01, of which 9,040,059 were issued and outstanding.
The Company's securities are currently traded on the Nasdaq OTC Bulletin Board
under the symbol LLOG. The high and low trading prices for the previous three
fiscal years are as follows:
PERIOD HIGH LOW
Year ended January 31, 2003
First Quarter $0.21 $0.21
Second Quarter $0.33 $0.20
Third Quarter $0.50 $0.14
Fourth Quarter $0.40 $0.14
Year ended January 31, 2004
First Quarter $0.48 $0.27
Second Quarter $0.80 $0.40
Third Quarter $0.85 $0.45
Fourth Quarter $1.60 $0.65
Year ended January 31, 2005
First Quarter $1.01 $0.55
Second Quarter $0.90 $0.54
- 34 -
PERIOD HIGH LOW
Third Quarter $1.01 $0.30
Fourth Quarter $1.01 $0.42
The Company has not paid any dividends on its shares of common stock since
1999. Any future payment of cash dividends will depend upon the Company's
earnings, financial condition, capital requirements and other factors deemed
relevant by the Board of Directors. The Company is also subject to certain
contractual restrictions with respect to the payment of dividends, including,
without limitation, restrictions imposed by the Company's primary lender.
Summary Historical Financial Information
The following summary of historical consolidated financial data was derived
from the Company's audited consolidated financial statements as of and for each
of the fiscal years ended January 31, 2005 and January 31, 2004 and unaudited
consolidated financial statements for the fiscal quarter ended April 30, 2005.
This financial information is only a summary and should be read in conjunction
with the financial statements of the Company and other financial information,
including the notes thereto, contained in the Company's Annual Report on Form
10-KSB for the fiscal year ended January 31, 2005 and the Company's Quarterly
Report for the quarter ended April 30, 2005, which information is incorporated
by reference in this Information Statement. See "DOCUMENTS INCORPORATED BY
REFERENCE".
Condensed Statements of Operations Data
For the 3 For the 3 For the For the
Months Ended Months Ended Year Ended Year Ended
April 30, April 30, January 31, January 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net Sales $4,788,386 $2,597,840 $21,549,755 $15,795,309
Cost of Sales 3,014,272 2,003,262 14,300,449 9,539,655
------------ ------------ ------------ ------------
Gross Profit 1,774,114 594,578 7,249,306 6,255,654
Operating Expenses 2,118,848 1,694,293 8,039,610 6,463,628
------------ ------------ ------------ ------------
Loss from Operations (344,734) (1,099,715) (790,304) (207,974)
Other Income (Net) (54,841) (8,683) 6,006 20,669
------------ ------------ ------------ ------------
Loss before Income Taxes (399,575) (1,108,398) (784,298) (187,305)
Income Taxes (130,000) (300,000) --- (9,914)
------------ ------------ ------------ ------------
Net Loss $(269,575) $(808,398) $(784,298) $(177,391)
============ ============ ============ ============
Net Loss per Share:
Basic $(0.03) $(0.09) $(0.09) $(0.02)
Diluted $(0.03) $(0.09) $(0.09) $(0.02)
- 35 -
Condensed Balance Sheet Data
For the 3 For the For the
Months Ended Year Ended Year Ended
April 30, January 31, January 31,
2005 2005 2004
------------ ------------ ------------
Total Current Assets $5,789,316 $4,279,438 $4,261,746
Total Property, Plant & Equipment (Net) 4,216,289 4,327,343 4,579,527
Total Other Assets 2,833,822 2,883,202 2,996,797
------------ ------------ ------------
Total Assets $12,839,427 $11,489,983 $11,838,070
============ ============ ============
Total Current Liabilities 8,637,438 6,859,677 6,066,610
Total Long-Term Debt 2,810,568 2,933,984 3,332,372
Other Long-Term Obligations 7,500 7,500 15,000
Shareholders Equity 1,383,921 1,688,822 2,424,088
------------ ------------ ------------
Total Liabilities and Stockholders'
Equity $12,839,427 $11,489,983 $11,838,070
============ ============ ============
Book Value Per Share $0.15 $0.19 $0.25
Summary Unaudited Pro-Forma Financial Information
The following pro-forma condensed statements of operations and pro-forma
balance sheet are based on historical data, adjusted to give effect to the cash
payment for fractional shares resulting from the Reverse Split Transaction. The
pro-forma condensed statements of operations and pro-forma balance sheet are
based on the assumption that an aggregate of approximately [236,059] shares of
Existing Common Stock will result in fractional shares and will be purchased by
the Company for approximately $115,669.00, with approximately $63,800.00 in
costs incurred.
The following unaudited pro-forma condensed statement of operations data for
the year ended January 31, 2005 and the quarter ended April 30, 2005, and the
pro-forma condensed balance sheet data of the Company at January 31, 2005 and
April 30, 2005, give effect to the Reverse Split Transaction as if it had
occurred during the relevent periods. The pro-forma information set forth below
is not necessarily indicative of what the Company's actual financial position
would have been had the Reverse Split Transaction been consummated as of January
31, 2005 or April 30, 2005, as the case may be, or of the financial position
that may be reported by the Company in the future.
- 36 -
Pro-Forma Condensed Statements of Operations Data
For the Three For the Fiscal
Months Ended Year Ended
April 30, 2005 January 31, 2005
-------------- ----------------
Total Net Sales $ 4,788,386 $ 21,549,755
Total Cost of Sales 3,014,272 14,300,449
-------------- ----------------
Gross Profit 1,774,114 7,249,306
Operating Expenses(1) 2,107,648 7,803,410
-------------- ----------------
Loss From Operations ( 333,534) ( 554,104)
Other Income ( 54,841) 6,006
-------------- ----------------
Loss Before Income Taxes ( 388,375) ( 548,098)
Income Taxes ( 130,000) ---
-------------- ----------------
Net Loss $ ( 258,375) $ ( 548,098)
============== ================
Net Loss Per Share(2):
Basic $ ( 14.67) $ ( 31.13)
Diluted $ ( 14.67) $ ( 31.13)
(1) Reduction in operating expenses reflects the savings that the Company
expects to realize as a result of its no longer being a public reporting
company, as well as the payment of the estimated expenses associated with
conducting the Reverse Split Transaction ($63,800). For purposes of this
pro-forma financial information, the Company has assumed that it will realize
savings of $75,000 on a quarterly basis and $300,000 on an annual basis as a
result of its not being a public reporting company. There is, of course, no
guarantee that the Company will realize costs savings as set forth above.
(2) Assumes that there will be 17,608 shares of the Company's New Common Stock
outstanding after the Reverse Split Transaction.
Pro-Forma Condensed Balance Sheet Data
For the Three For the Fiscal
Months Ended Year Ended
April 30, 2005 January 31, 2005
-------------- ----------------
Total Current Assets(1) $ 5,684,847 $ 4,399,969
Total Property, Plant & Equipment (Net) 4,216,289 4,327,343
Total Other Assets 2,833,822 2,883,202
-------------- ----------------
Total Assets 12,734,958 11,610,514
============== ================
Total Current Liabilities 8,637,438 6,859,677
Total Long-Term Debt 2,810,568 2,933,984
Other Long-Term Obligations 7,500 7,500
Shareholders Equity 1,279,452 1,809,353
-------------- ----------------
Total Liabilities and Stockholders'
Equity 12,734,958 11,610,514
============== ================
Book Value Per Share(2) $ 72.66 $ 102.75
(1) Reflects the savings that the Company expects to realize as a result of its
no longer being a public reporting company, which the Company has assumed to be
$300,000 annually and $75,000 quarterly. This also reflects the Company's
payment of the estimated expenses associated with conducting the Reverse Split
Transaction ($63,800) and the amount payable by the Company in connection with
its purchase of fractional interests ($115,669).
(2) Assumes that there will be 17,608 shares of the Company's New Common Stock
outstanding after the Reverse Split Transaction.
Directors and Executive Officers
The directors of the Company, each of whom was elected by the Company's
shareholders at the 2004 Annual Meeting of Shareholders and are, except as
- 37 -
otherwise noted, currently serving a one-year term to expire on the date of the
2005 Annual Meeting of Shareholders, are as follows:
Name of Director Age Position with the Company
(other than as a Director)
Leslie M. Apple 55 Partner of Whiteman Osterman & Hanna, LLP,
special counsel to the Company
Samuel J. Padula 81
Steven Patlin 64 Dealer of Company products
Reginald W. Ray, Jr. 75
Richard C. Farr 76 Director of Corporate Strategy
John D. Shepherd 59 Chairman of the Board; President and Chief
Executive Officer
William J. Thyne 55
Jeffry J. LaPell 45 Vice President and Chief Operating Officer
Benjamin A. Shepherd 51 Vice President - Finance and Chief Financial
Officer; Vice President-Corporate Development;
Secretary
Leslie M. Apple has been a Partner and practicing attorney in the Albany, New
York law firm of Whiteman Osterman & Hanna LLP ("WOH") for more than the past
five years. From 1982 through December 1997 Mr. Apple was a Director of the
Company. From January 1987 through December 1997, Mr. Apple had been a Special
Administrative Assistant to the President, and from May 1997 until December
1997, Mr. Apple was a member of the Company's Office of the Chief Executive. Mr.
Apple resigned from all positions with the Company in December 1997 and had no
affiliation with the Company from that date until he was appointed to a vacant
seat on the Board of Directors on November 30, 2000 and resumed his role as a
Special Administrative Assistant to the President. Mr. Apple resigned his
position as Special Administrative Assistant to the President on January 31,
2003 and no longer holds any position with the Company other than as a Director,
except that WOH is currently serving as special counsel to the Company in
connection with the Reverse Split Transaction. Mr. Apple was elected a Director
of the Company by shareholders on January 8, 2001.
- 38 -
Samuel J. Padula has been President and Chief Executive Officer of Padula
Construction Corp., a real estate development and construction firm in Toms
River, New Jersey, and Samuel J. Padula Real Estate Company in Toms River, N.J.
for more than the past five years. Since January 1987, Mr. Padula had been a
Special Administrative Assistant to the President. Mr. Padula was, until his
resignation from that office in December 1997, a member of the Company's Office
of the Chief Executive since May 1997. Mr. Padula resigned his position as
Special Administrative Assistant to the President on January 31, 2003, and no
longer holds any position with the Company other than as a Director.
Steven Patlin has been, and continues to be, an independent dealer of the
Company since June 1985. Mr. Patlin served as an independent consultant to the
Company on sales and marketing matters from January 1998 through February 1999.
From March 1999 through February 2000 Mr. Patlin served as Vice President of
Sales for the Company at which time he resigned that position. From February
2000 to January 2003, Mr. Patlin served as Special Administrative Assistant to
the President of the Company. Mr. Patlin has been Vice President and Treasurer
of Patlin Enterprises Inc., a distributor of home maintenance products and home
building kits, for more than the past five years. Mr. Patlin no longer holds
any position with the Company other than as a Director and independent dealer.
Reginald W. Ray, Jr. had been President of The Hunter Corporation, a holding
company in Sherborn, Massachusetts, for more than the past five years, a
position from which he retired in September 2003. Since January 1987, Mr. Ray
had been a Special Administrative Assistant to the President. Mr. Ray resigned
his position as Special Administrative Assistant to the President on January 31,
2003 and no longer holds any position with the Company other than as a Director.
Richard C. Farr was, until his resignation from those offices on July 8, 1997,
Chairman of the Board of the Company since January 1990 and President and
Treasurer of the Company since December 1991. Mr. Farr served as the Company's
Chief Executive Officer from December 1991 to May 1997, at which time he became
a Member of the Office of Chief Executive, a position that he resigned on July
8, 1997. Mr. Farr has also been Chairman and Chief Executive Officer of Farr
Investment Company, a private investment firm in West Hartford, Connecticut, for
more than the past five years. Mr. Farr is a Director of H. L. Bouton Co., Inc.
and several privately owned companies. From January 1987 to December 1991, Mr.
Farr was a Special Administrative Assistant to the President, a position he has
resumed since his resignation in July 1997.
John D. Shepherd has been Chairman of the Board, President and Chief Executive
Officer of the Company since December 1997. From December 1997 through January
2001 Mr. Shepherd also served as Treasurer of the Company. Mr. Shepherd has
been President of Sweetbrier Ltd., an equestrian facility, since June 1992 and a
private investor since May 1991. Mr. Shepherd was Co-Chairman and Treasurer of
Aquatherm Products Corporation, a manufacturer and distributor of health care
products for home and institutional use, in Rahway, New Jersey, from January
1986 to May 1991. From January 1987 until December 1997, Mr. Shepherd had been
a Special Administrative Assistant to the President, and from May 1997 until
December 1997, Mr. Shepherd was a member of the Company's Office of the Chief
Executive. Mr. Shepherd is the brother of Benjamin A. Shepherd, Vice President
- Finance and Corporate Development and Chief Financial Officer, and a Director
of the Company.
- 39 -
William J. Thyne, CPA, currently serves as Director of Finance and Chief
Financial Officer of Finch, Pruyn & Company, Incorporated, a privately owned
manufacturer of paper. Until his resignation in April 2005, Mr. Thyne was Vice
President, Secretary and Treasurer of the Company and has served in such
positions for more than the past five years. Mr. Thyne had also served as
Chief Financial Officer from January 1998 until March 2004. Mr. Thyne
continues to serve as a director of the Company.
Jeffry J. LaPell has served as Chief Operating Officer of the Company since
his appointment to that position in August 2001. During the period from
December 1999 to February 2002, Mr. LaPell also served as Vice President -
Sales of the Company. Prior to re-joining the Company, Mr. LaPell was Director
of Sales for Asperline Log Homes, Inc., a wholly owned subsidiary of
Imagineering Services, Inc., in Lock Haven, Pennsylvania from December 1998 to
December 1999. Prior to that position, and for more than five years, Mr. LaPell
was employed by the Company in various sales positions the most recent of which
was National Sales Manager.
Benjamin A. Shepherd joined the Company in March 2003 as Vice President of
Corporate Development. In March 2004, Mr. Shepherd was appointed to the
additional position of Vice President - Finance and Chief Financial Officer.
In June 2005, Mr. Shepherd was elected as Secretary of the Company. Prior to
joining the Company, Mr. Shepherd had been President of Armstrong
Pharmaceuticals, Inc., a manufacturer of inhalation pharmaceutical products in
Boston, Massachusetts, since February 1991. Prior to that, Mr. Shepherd held a
number of positions at Armstrong Pharmaceuticals, Inc. including Treasurer,
Chief Financial Officer and Executive Vice President. Mr. Shepherd is the
brother of John D. Shepherd, Chairman of the Board of Directors, President and
Chief Executive Officer of the Company.
Executive Officers
The executive officers of the Company, each of whom was elected by the Board
of Directors of the Company to serve in the capacities set forth below opposite
their names, and, except as otherwise noted, are currently serving a one-year
term to expire on the date of the 2005 Annual Meeting of Shareholders, are as
follows:
Name Age Office(s)
John D. Shepherd 59 President and Chief Executive Officer
Jeffry J. LaPell 45 Vice President and Chief Operating Officer
Benjamin A. Shepherd 51 Vice President - Finance and Chief Financial
Officer; Vice President - Corporate Development
Charles A. Clark 57 Vice President - Western Region
Richard H. Berry 44 Vice President; President - Snake River Logs
Homes, LLC (a wholly owned subsidiary of the
Company)
- 40 -
John D. Shepherd has been Chairman of the Board, President and Chief Executive
Officer of the Company since December 1997. From December 1997 through January
2001, Mr. Shepherd also served as Treasurer of the Company. Mr. Shepherd has
been President of Sweetbrier Ltd., an equestrian facility, since June 1992 and a
private investor since May 1991. Mr. Shepherd was Co-Chairman and Treasurer of
Aquatherm Products Corporation, a manufacturer and distributor of health care
products for home and institutional use, in Rahway, New Jersey, from January
1986 to May 1991. From January 1987 until December 1997, Mr. Shepherd had been
a Special Administrative Assistant to the President, and from May 1997 until
December 1997, Mr. Shepherd was a member of the Company's Office of the Chief
Executive. Mr. Shepherd is the brother of Benjamin A. Shepherd, Vice President
- Finance and Corporate Development and Chief Financial Officer, and a Director
of the Company.
Jeffry J. LaPell has served as Chief Operating Officer of the Company since
his appointment to that position in August 2001. During the period from
December 1999 to February 2002, Mr. LaPell also served as Vice President -
Sales of the Company. Prior to re-joining the Company, Mr. LaPell was Director
of Sales for Asperline Log Homes, Inc., a wholly owned subsidiary of
Imagineering Services, Inc., in Lock Haven, Pennsylvania from December 1998 to
December 1999. Prior to that position, and for more than five years, Mr. LaPell
was employed by the Company in various sales positions the most recent of which
was National Sales Manager.
Benjamin A. Shepherd joined the Company in March 2003 as Vice President of
Corporate Development. In March 2004, Mr. Shepherd was appointed to the
additional position of Vice President - Finance and Chief Financial Officer.
Prior to joining the Company, Mr. Shepherd had been President of Armstrong
Pharmaceuticals, Inc., a manufacturer of inhalation pharmaceutical products in
Boston, Massachusetts, since February 1991. Prior to that, Mr. Shepherd held a
number of positions at Armstrong Pharmaceuticals, Inc. including Treasurer,
Chief Financial Officer and Executive Vice President. Mr. Shepherd is the
brother of John D. Shepherd, Chairman of the Board of Directors, President and
Chief Executive Officer of the Company.
Charles A. Clark joined in Company July 1999 as a sales representative in the
Company's Auburn, California office, and was promoted to the position of Manager
of the Auburn, CA sales office in October 1999. In February 2001, Mr. Clark was
promoted to the additional position of Western Regional Manager until his recent
promotion to Vice President - Western Region in April 2003. Prior to joining
the Company and for more than the past five years, Mr. Clark was President of
Clark and Associates, an import company of consumer related products. Prior to
that position, Mr. Clark held several positions as senior sales manager of
companies whose primary business was the import and distribution of electronics.
Richard H. Berry joined the Company upon the Company's acquisition of Snake
River Log Homes, LLC on November 17, 2003. Mr. Berry was one of two principals
- 41 -
who owned Snake River Log Homes, LLC and had served as President of that company
for three years. In November 2003, Mr. Berry was retained as President of Snake
River Log Homes, LLC and appointed to the additional position of Vice President
- Marketing of the Company. Prior to that position, and for more than five
years, Mr. Berry was Vice President of Sales and Marketing as well as a partner
in the firm Cape Athletic, LLC.
Security Ownership of Certain Beneficial Owners
The following table identifies each person known to the Company to be the
beneficial owner of more than five percent of the Company's Common Stock and
sets forth the number of shares of the Company's Common Stock beneficially
owned by each such person and the percentage of the shares of the Company's
outstanding Common Stock beneficially owned by each such person.
Number of Shares of Commmon Percent of Outstanding
Stock of the Company Common Stock of the
Name and Address Of Beneficially Owned as of Company Beneficially Owned
Beneficial Owner May 18, 2005 as of May 18, 2005
John D. Shepherd
1020 Sport Hill Road
Easton, CT 06612 5,409,461(1) 57.7%
Herman R. Shepherd and
Carol R. Shepherd
704B Weed Street
New Canaan, CT 06840 574,500(2) 6.14%
Richard C. Farr
40 Colony Road
W. Hartford, CT 06117 1,110,802(3)(4) 11.86%
Marcille M. Farr
1028 Farmington Avenue
W. Hartford, CT 06107 520,401(3) 5.56%
(1) Includes (i) 250,000 owned by Mrs. Susan Shepherd, Mr. Shepherd's wife, as
to which Mr. Shepherd disclaims beneficial ownership, and (ii) 50,000 shares
owned Mr. Jason Tunick, Mr. Shepherd's son, as to which Mr. Shepherd disclaims
beneficial ownership.
(2) Includes 132,000 shares owned individually by Mrs. Carol R. Shepherd.
(3) Pursuant to an agreement between Richard C. Farr and Mr. Farr's wife,
Marcille M. Farr, Mr. Farr and Mrs. Farr each beneficially own 520,401 shares.
Mr. Farr maintains legal title to all of the shares that he and Mrs. Farr own.
Mr. Farr disclaims beneficial ownership with respect to the 520,401 shares
beneficially owned by Mrs. Farr.
(4) Includes 70,000 shares subject to options which are exercisable within 60
days.
Security Ownership of Management
- 42 -
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned by the following executive officers and directors of
the Company and all directors and officers of the Company as a group as of May
18, 2005. Except as otherwise noted, the named individual has sole voting power
and sole investment power over the securities.
Number of Shares of Common Percent of Outstanding
Stock of the Company Common Stock of the
Name and Address Beneficially Owned as of Company Beneficially Owned
Of Beneficial Owner May 18, 2005 May 18, 2005
John D. Shepherd 5,409,461(6) 57.77%
Richard C. Farr 1,110,802(4)(5) 11.86%
Samuel J. Padula 298,743(1)(2) 3.19%
Reginald W. Ray, Jr. 221,504(1)(3) 2.37%
William J. Thyne 96,085(7) 1.03%
Benjamin A. Shepherd 191,000(8) 2.04%
Steven Patlin 60,100(9) 0.64%
Jeffry LaPell 25,000(10) 0.27%
Leslie M. Apple 75,000(1) 0.80%
Richard H. Berry 160,000(11) 1.71%
All officers and directors
as a group (10 persons) 7,647,695(12) 81.68%
(1) Includes 25,000 shares subject to options which are exercisable within 60
days.
(2) Includes (i) 2,100 shares owned jointly by Mr. Padula with his wife, Mrs.
Eleanor Padula, with whom Mr. Padula shares voting and investment power, and
(ii) 263,603 shares held by Mrs. Padula, as to which Mr. Padula disclaims
beneficial ownership.
(3) Includes 12,702 shares owned by Mr. Ray's wife, as to which Mr. Ray
disclaims beneficial ownership.
(4) Includes 520,401 shares to which Mr. Farr disclaims beneficial ownership.
Pursuant to an agreement between Mr. Farr and his wife, Marcille M. Farr, Mr.
Farr and Mrs. Farr each beneficially own 520,401 shares. Mr. Farr maintains
legal title to all of the shares that he and Mrs. Farr own.
(5) Includes 70,000 shares subject to options which are exercisable within 60
days.
(6) Includes (i) 250,000 shares owned by Mrs. Susan Shepherd, Mr. Shepherd's
wife, as to which Mr. Shepherd disclaims beneficial ownership, and (ii) 50,000
shares owned Mr. Jason Tunick, Mr. Shepherd's son, as to which Mr. Shepherd
disclaims beneficial ownership.
(7) Includes 61,085 shares owned jointly by Mr. Thyne with his wife with whom
Mr. Thyne shares voting and investment power.
(8) Includes (i) 50,000 shares subject to options, which are exercisable within
60 days, (ii) 20,000 shares owned by Mr. Shepherd's children, as to which Mr.
Shepherd disclaims beneficial ownership, and (iii) 111,000 shares owned jointly
by Mr. Shepherd with his wife with whom Mr. Shepherd shares voting and
investment power.
(9) Includes 50,000 shares of common stock owned jointly by Mr. Patlin with his
- 43 -
wife with whom Mr. Patlin shares voting and investment power.
(10) Includes 25,000 shares of common stock owned jointly by Mr. LaPell with his
wife with whom Mr. LaPell shares voting and investment power.
(11) Includes 10,000 shares subject to options, which are presently exercisable.
(12) Includes 245,000 shares subject to options of which 195,000 are exercisable
within 60 days and 50,000 that become exercisable over the next five years
commencing with 10,000 that became exercisable on November 17, 2004.
There are no arrangements known to the Company the operation of which may at a
subsequent date result in a change in control of the Company.
Legal Proceedings
On January 12, 2005, the Company filed a Demand for Arbitration with the
American Arbitration Association (the "Arbitration") pursuant to which the
Company is seeking monetary damages against Robert Gordon Hart and Judith Anne
Hart (collectively, the "Harts"). The Arbitration asserts the Company has
suffered monetary damages in a minimum amount of $1,225,720 as a result of the
Harts' breaches of various representations and warranties made by them in the
Stock Purchase Agreement dated June 27, 2003, between the Company, 666764 B.C.
Ltd., True-Craft Log Structures Ltd., Hart & Son Industries Ltd., Robert Gordon
Hart, Judith Anne Hart, Matthew Joseph Mellof and Shelly L. Mellof, pursuant to
which the Company acquired its Canadian operations, which are owned and operated
through the Company's wholly-owned subsidiary, True-Craft Log Structures Co.
Certain Transactions
Description of certain transactions and agreements to which the Company and
certain of the officers and directors of the Company are parties are set forth
below.
The Company received legal services from the law firm of Whiteman, Osterman &
Hanna LLP ("WOH"), of which Leslie M. Apple, a director of the Company, is a
partner, and paid and accrued fees of approximately $41,300 for such legal
services rendered to the Company during the fiscal year ended January 31, 2005.
The Company has also retained WOH to provide legal services to it in connection
with the Reverse Split Transaction. The Company believes that the legal fees
charged, and anticipated to be charged, in connection with WOH's services are
fair and reasonable to the Company in light of the services performed and that
the terms of the Company's relationship with WOH are no less favorable to the
Company than those that could be obtained from an independent third party.
On November 17, 2003, the Company completed the acquisition of all of the
outstanding limited liability company membership interests of Snake River Log
Homes, LLC ("Snake River"), a privately-held limited liability company for
consideration of approximately $1,260,000, subject to certain adjustments.
Snake River is a company organized under the laws of Idaho. The acquisition of
membership interests was effected pursuant to a Membership Interests Purchase
Agreement, dated November 17, 2003, (the "Purchase Agreement") by and among the
Company and the membership interest holders of Snake River (the "Members"),
including Richard Berry, who, after consummation of the acquisition, became an
officer of the Company. The consideration paid by the Company to the Members
- 44 -
consisted of the following: cash payment, promissory notes issued by the Company
to the Members, and common shares of the Company conveyed to select Members.
The primary business of Snake River is the designing, manufacturing, and
marketing of a line of log homes targeted for purchase and assembly by custom
builders and "do-it-yourself" consumers. Any plant assets, equipment or other
physical property acquired as part of this transaction continues to be used for
those purposes. The Purchase Agreement and the purchase prices referenced
therein were negotiated at arm's length between representatives of the
respective parties. Except for the transactions described in the Agreements or
as set forth herein, there are no material relationships between the Company,
the respective selling parties, their respective directors, officers,
affiliates, or associates thereof.
The Company is party to employment contracts with Jeffry J. LaPell, Vice
President and Chief Operating Officer, and Richard Berry, Vice President -
Marketing and President of Snake River Log Homes LLC. The contract with Mr.
LaPell is for a term of two years, calls for a certain base salary (adjusted
annually for the change in the Consumer Price Index), and includes incentives
for an annual bonus based on the achievement of defined goals related to sales
revenues and the Company's backlog of contracts. It also contains non-
competition clauses that would be effective upon conclusion of employment with
the Company, and severance provisions whereby Mr. LaPell would be paid an
amount equal to three months' base salary. As of January 31, 2005, the base
salary for Mr. LaPell is $120,000. The contract of Mr. LaPell expires on May
31, 2006. The Company believes that the terms of this contract are fair and
reasonable to the Company.
Mr. Berry's contract is for a term of five years and automatically extends
for successive one year periods unless either Mr. Berry or the Company has
given thirty days prior written notice of its intention not to renew the
contract for an additional one year term. The contract calls for a certain base
salary and includes incentives for an annual bonus based on the achievement of
defined goals related to delivery of products from Snake River Log Homes LLC
and sales revenue goals related to Snake River and the Company, and contains a
non-competition clause that would be effective upon conclusion of employment
with the Company. The contract also contains a severance provision that under
certain conditions would continue the payment of Mr. Berry's annual base salary
until the end of the initial five-year employment term, and the payment of an
amount equal to three months base salary if the termination occurs during any
of the one-year extension periods. As of January 31, 2005, the base salary for
Mr. Berry is $85,000. Mr. Berry's employment contract expires on November 17,
2008. The Company believes that the terms of this contract are fair and
reasonable to the Company.
Steven Patlin, a director of the Company, is a dealer in the Company's
products. Accordingly, he is paid commissions with respect to each of his
sales of the Company's products. The Company's arrangement with Mr. Patlin is
subject to the same terms and conditions as those applicable to other dealers
with similar sales volumes.
Stock Purchases
The Company has not repurchased any of its shares of Common Stock during the
past two years.
Public Offerings
- 45 -
The Company has not made an underwritten public offering of its securities for
cash that was registered under the Securities Act of 1933 or exempt from
registration under Regulation A during the past three years.
FEDERAL INCOME TAX CONSEQUENCES
Summarized below are the material federal income tax consequences to the
Company and its shareholders resulting from the Reverse Split Transaction. This
summary is based on existing federal income tax law, which may change, even
retroactively. This summary does not discuss all aspects of federal income
taxation that may be important to you in light of your individual circumstances.
Many types of shareholders (such as financial institutions, insurance companies,
broker-dealers, tax-exempt organizations, and foreign persons) may be subject to
special tax rules. Other shareholders may also be subject to special tax rules
including, but not limited to, shareholders who received the Company's Common
Stock as compensation for services or pursuant to the exercise of an employee
stock option, or shareholders who have held, or will hold, stock as part of a
straddle, hedging, or conversion transaction for federal income tax purposes.
In addition, this summary does not discuss any state, local, foreign, or other
tax considerations.
This summary assumes that you are one of the following:
- a citizen or resident of the United States;
- a corporation or an entity taxable as a corporation created or organized
under U.S. law (federal or state);
- an estate the income of which is subject to federal income taxation
regardless of its sources;
- a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have authority to
control all substantial decisions of the trust; or
- any other person whose worldwide income and gain is otherwise subject to
federal income taxation on a net basis.
This summary also assumes that you have held and will continue to hold your
shares as capital assets.
NO RULING FROM THE INTERNAL REVENUE SERVICE OR OPINION OF COUNSEL WILL BE
OBTAINED REGARDING THE FEDERAL INCOME TAX CONSEQUENCES TO THE SHAREHOLDERS OF
THE COMPANY IN CONNECTION WITH THE REVERSE SPLIT TRANSACTION. ACCORDINGLY, EACH
SHAREHOLDER IS ENCOURAGED TO CONSULT THEIR OWN TAX ADVISOR AS TO THE PARTICULAR
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES, IN LIGHT OF THEIR
INDIVIDUAL CIRCUMSTANCES.
The Reverse Split Transaction
- 46 -
We believe that the Reverse Split Transaction will be treated as a tax-free
"recapitalization" for federal income tax purposes. This will result in no
material federal income tax consequences to the Company.
Federal Income Tax Consequences to Shareholders, Including Affiliates, Who Are
Not Cashed-Out in the Reverse Split Transaction
If you continue to hold the Company's Common Stock immediately after the
Reverse Split Transaction, and you receive no cash as a result of the Reverse
Split Transaction, you will not recognize any gain or loss in the Reverse Split
Transaction and will have the same adjusted tax basis and holding period in the
Company's Common Stock as you had in such stock immediately prior to the Reverse
Split Transaction.
Federal Income Tax Consequences to Shareholders, Including Affiliates, Who Both
Receive Cash and Own, or Are Considered to Own for Federal Income Tax Purposes,
The Company's Common Stock After the Reverse Split Transaction
In some instances you may be entitled to receive cash in the Reverse Split
Transaction for shares you hold in one capacity, but continue to hold shares in
another capacity. For example, you may own less than 500 shares in your own
name (for which you will receive cash) and own more than 500 shares that are
held in your brokerage account in street name. Alternatively, for federal
income tax purposes you may be deemed to own shares held by others. For
instance, if you own less than 500 shares in your own name (for which you will
receive cash) and your spouse owns more than 500 shares (which will continue to
be held following the completion of the Reverse Split Transaction), the shares
owned by your spouse will be attributable to you. As a result, in some
instances the shares you own in another capacity, or which are attributed to
you, may remain outstanding. In determining whether you are deemed to continue
to hold stock immediately after the Reverse Split Transaction, you will be
treated as owning shares actually or constructively owned by certain family
members and entities in which you have an interest (such as trusts and estates
of which you are a beneficiary and corporations and partnerships of which you
are an owner, and shares you have an option to acquire).
If you both receive cash as a result of the Reverse Split Transaction and
continue to hold the Company's Common Stock either directly or through
attribution, you will recognize gain, if any, in an amount not to exceed the
amount of cash received. Generally no loss will be recognized. The receipt of
cash will be characterized as either a dividend or as a payment received in
exchange for the stock. The Reverse Split Transaction will be taxed as a
dividend unless the payment:
- is not essentially equivalent to a dividend with respect to you as
determined under Section 302(b)(1) of the Internal Revenue Code of 1986, as
amended (the "Code");
- is a substantially disproportionate redemption of stock with respect to you
as determined under Section 302(b)(2) of the Code; or
- results in the complete termination of your interest in the Company under
Section 302(b)(3) of the Code (which would be possible if you ceased to own
- 47 -
any shares directly and if the only shares attributed to you were from a
family member and you properly waive family attribution).
If you satisfy one of these tests, you will recognize income in an amount
equal to the excess of the cash received for your shares over your adjusted
basis in those shares, and this income will be characterized as capital gain.
If you fail to satisfy one of these tests, then the cash received will be
treated as a dividend to you to the extent of your ratable share of the
Company's undistributed earnings and profits, then as a tax-free return of
capital to the extent of your aggregate adjusted tax basis in your shares,
and any remaining amount will be treated as capital gain.
If you, or a person or entity whose ownership of the Company's shares would
be attributed to you, will continue to hold the Company's Common Stock
immediately after the Reverse Split Transaction, you are urged to consult with
your tax advisor as to the particular federal, state, local, foreign, and other
tax consequences of the Reverse Split Transaction, in light of your specific
circumstances.
Federal Income Tax Consequences to Cashed-out Shareholders, including
Affiliates, Who do not Own, and Are Not Deemed to Own, the Company's Common
Stock After the Reverse Split Transaction
If you receive cash as a result of the Reverse Split Transaction and do not
own, and are not deemed to own the Company's Common Stock immediately after the
Reverse Split Transaction, you will recognize capital gain or loss. The amount
of capital gain or loss you recognize will equal the difference between the
cash you receive for your cashed-out stock and your adjusted tax basis in such
stock.
DISSENTERS' APPRAISAL RIGHTS
Lincoln Logs Ltd. shareholders have rights under New York law to dissent from
the Reverse Split Transaction and to demand appraisal of, and to receive payment
in cash of the fair value of their shares of Common Stock. The following is a
brief summary of the statutory procedures to be followed by a holder of shares
of Common Stock who does not wish to accept the per share cash consideration
pursuant to the Reverse Split Transaction in order to dissent from the Reverse
Split Transaction and perfect dissenters' rights under New York law.
THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SECTIONS 623 AND 910 OF THE NEW YORK BUSINESS CORPORATION LAW, THE
TEXT OF WHICH IS SET FORTH IN APPENDIX B TO THIS PROXY STATEMENT. ANY
SHAREHOLDER CONSIDERING DEMANDING APPRAISAL IS ADVISED TO CONSULT LEGAL COUNSEL.
DISSENTERS' RIGHTS WILL NOT BE AVAILABLE UNLESS AND UNTIL THE REVERSE SPLIT
TRANSACTION IS CONSUMMATED.
A holder of shares of Common Stock who desires to exercise his dissenters'
- 48 -
rights must fully satisfy the following conditions. Dissenters' rights of
appraisal will be lost and waived if the procedural requirements of Section 623
are not fully and precisely satisfied. If dissenters' rights are lost and
waived, the shareholder will be entitled to receive the consideration provided
for in the Reverse Split Transaction agreement.
How To Exercise Dissenters' Rights
Any holder of Common Stock who elects to exercise dissenters' rights with
respect to the Reverse Split Transaction must file with the Company, before the
Meeting, or at the Meeting but before the vote, written objection to the Reverse
Split Transaction. The objection must include a notice of his election to
dissent, his name and residence address, the number of shares of Common Stock as
to which he dissents and a demand for payment of the fair value of his shares of
Common Stock if the Reverse Split Transaction is completed. Such objection is
not required from any shareholder to whom the Company did not give notice of the
meeting in accordance with the New York Business Corporation Law. A vote against
the Reverse Split Transaction will not itself constitute an objection. Within 10
days after the shareholders' authorization date, which term as used in Section
623 would mean in this context July 27, 2005, the date on which the
shareholders' vote authorizing the Reverse Split Transaction is taken, the
Company must give written notice of such authorization by registered mail to
each shareholder who filed written objection or from whom written objection was
not required. However, written notice of such authorization will not be sent to
any shareholder who votes for the Reverse Split Transaction because that
shareholder will be deemed to have elected not to enforce his rights to receive
payment for his shares. The failure to vote against the Reverse Split
Transaction will not itself constitute a waiver of a shareholder's dissenters'
rights.
Within 20 days after the giving of notice to him, any shareholder from whom
written objection was not required and who elects to dissent must file with the
corporation a written notice of such election, stating his name and residence
address, the number of shares of Common Stock as to which he dissents and a
demand for payment of the fair value of his such shares.
A shareholder may not dissent as to less than all the shares of Common Stock
as to which he has a right of dissent, held by him of record and that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all the shares of Common Stock of such owner, as to which
such nominee or fiduciary has a right to dissent, held of record by such nominee
or fiduciary. Furthermore, if the shares of Common Stock are owned of record in
a fiduciary capacity, such as by a trustee, guardian or custodian, the demand
should be made in that capacity, and if the shares of Common Stock are owned of
record by more than one person, as in a joint tenancy or tenancy in common, the
demand should be made by or for all owners of record.
All demands for appraisal should be delivered before the vote on the Reverse
Split Transaction is taken at the special meeting. All demands for appraisal and
notices of election to dissent should be addressed to the:
Corporate Secretary
Lincoln Logs Ltd.
5 Riverside Drive
Chestertown, New York 12817
- 49 -
At the time of filing a notice of election to dissent or within one month
thereafter, a dissenting shareholder must submit all of his certificates
representing shares of Common Stock to the Company or its transfer agent for
notation thereon of the election to dissent, after which such certificates will
be returned to the shareholder. Failure to submit such certificates may result
in the loss of dissenters' rights.
Procedure For Appraisal Proceeding
Within 15 days after the expiration of the period within which shareholders
may file their notices of election to dissent, or within 15 days after the
effective date of the Reverse Split Transaction, whichever is later, the Company
is required to make a written offer, by registered mail, to each shareholder who
has filed a notice of election to dissent, to pay for such holder's shares of
Common Stock at a specified price which the Company considers to be their fair
value. Such offer will be accompanied by a statement setting forth the aggregate
number of shares of common stock with respect to which such notices of election
to dissent from the Reverse Split Transaction have been received and the
aggregate number of holders of such shares of Common Stock.
If the Reverse Split Transaction has been completed at the time such offer is
made, such offer will also be accompanied by (a) advance payment to each
dissenting shareholder who has submitted his certificates for notation thereon
of the election to dissent of an amount equal to 80% of the amount of such offer
or (b) as to each dissenting shareholder who has not yet submitted his
certificates for notation thereon, a statement that advance payment to such
shareholder of an amount equal to 80% of the amount of such offer will be made
promptly upon submission of his certificates. Acceptance of such advance
payment by a dissenting shareholder will not constitute a waiver of his
dissenter's rights.
If within 30 days after the making of such written offer, the surviving
corporation and any dissenting shareholder agree upon the price to be paid for
such holder's shares of Common Stock, payment therefore will be made within 60
days after the making of such offer or the effective date of the Reverse Split
Transaction, whichever is later, upon the surrender of the certificates
representing such shares of Common Stock. If the Company fails to make such an
offer within the 15-day period described above, or if it makes an offer but the
Company and a dissenting shareholder do not agree within 30 days of its making
of the offer upon the price to be paid for such shareholder's shares of Common
Stock, the Company must, within 20 days of such 15-or 30-day period, as the
case may be, institute a special proceeding in the Supreme Court of New York
to determine the rights of dissenting shareholders and fix the fair value of
their shares of Common Stock.
The fair value of the shares of common stock shall be the fair value as of the
close of business on the day before the shareholders' authorization date. In
fixing the fair value of the shares, the court will consider the nature of the
Reverse Split Transaction and its effects on the Company and its shareholders,
the concepts and methods then customary in the relevant securities and
financial markets for determining fair value of shares of a corporation engaging
in a similar transaction under comparable circumstances and all other relevant
factors. The court shall determine the fair value without a jury and without
referral to an appraiser. If the Company does not institute such a proceeding
within the 20-day period, any dissenting shareholder may, within 30 days after
- 50 -
such 20-day period, institute a proceeding for the same. If such proceeding is
not instituted within such 30-day period, any dissenting shareholders who have
not agreed with the Company as to the price to be paid for their shares of
Common Stock will lose their dissenters' rights, unless the court, for good
cause shown, otherwise directs.
Within 60 days after the completion of any such court proceeding, the Company
must pay to each dissenting shareholder the amount found to be due him, with
interest thereon at such rate as the court finds to be equitable, from the
effective date of the Reverse Split Transaction to the date of payment, upon
surrender by such shareholder of the certificates representing such shares of
Common Stock. If the court finds that the refusal of any dissenting shareholder
to accept the Company's offer was arbitrary, vexatious or otherwise not in good
faith, no interest will be allowed to such shareholder.
The parties to such court proceeding will bear their own costs and expenses,
including the fees and expenses of their counsel and any experts employed by
them, except that the court, in its discretion and under certain conditions,
may apportion and assess all or any part of the costs, expenses and fees
incurred by dissenting shareholders against the surviving corporation or may
apportion and assess all or any part of the costs, expenses and fees incurred
by the surviving corporation against any dissenting shareholders, including any
dissenting shareholders who have withdrawn their notices of election to dissent
from the Reverse Split Transaction, who the court finds were arbitrary,
vexatious or otherwise not acting in good faith in refusing the Company's offer
of payment. Any shareholder who has filed a notice of election to dissent will
not, after the effective date of the Reverse Split Transaction, have any of the
rights of a shareholder with respect to his shares of Common Stock other than
the right to be paid the fair value of such shares of Common Stock under the New
York Business Corporation Law.
Any notice of election to dissent may be withdrawn by a dissenting shareholder
at any time before the acceptance in writing of an offer by the Company, but in
no case later than 60 days after the effective date of the Reverse Split
Transaction unless the Company consents in writing. However, if the Company
fails to make a timely offer to pay such shareholder the fair value of his
shares of Common Stock as provided above, the dissenting shareholder may
withdraw his election to dissent at any time within 60 days after any date such
an offer is made.
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows the Company to "incorporate by reference" information into this
document. This means that the Company can disclose important information to you
by referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be part of this document,
except for any information that is superseded by information that is included
directly in this document or in any other subsequently filed document that is
also incorporated herein by reference.
This document incorporates by reference the documents listed below that the
Company has filed previously with the SEC. They contain important information
about the Company and its financial condition.
The Company's Annual Report on Form 10-KSB for the fiscal year ended January
31, 2005 (File No. 0-12172).
- 51 -
The Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended
April 30, 2005 (File No. 0-12172).
The Company will amend this Information Statement and its Schedule 13E-3 to
incorporate by reference any additional documents that we may file with the SEC
under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of
this document and before the date of the Meeting to the extent required to
fulfill our obligations under the Exchange Act.
The Company will provide, without charge, to each person to whom this
Information Statement is delivered, upon written or oral request of such person
and by first class mail or other equally prompt means within one business day
of receipt of such request, a copy of any and all information that has been
incorporated by reference in this Information Statement. You may obtain a copy
of these documents and any amendments thereto by writing to Benjamin Shepherd,
Chief Financial Officer, at the following address: Lincoln Logs Ltd., 5
Riverside Drive, Chestertown, New York 12817.
These documents is also included in the Company's SEC filings, which you can
access electronically at the SEC's website at http://www.sec.gov.
OTHER MATTERS
The directors do not know of any matters to be presented at the Meeting other
than as described in this Information Statement.
The Board has not authorized anyone to give any information or make any
representation about the Reverse Split Transaction or the Company that differs
from, or adds to, the information in this Information Statement or in the
Company's documents that are publicly filed with the SEC. If anyone gives you
different or additional information, you should not rely on it.
By Order Of The Board Of Directors
/s/ Benjamin A. Shepherd
------------------------
Benjamin A. Shepherd
Secretary
Chestertown, New York
July 7, 2005
- 52 -
Appendix A
Certificate of Amendment of the Company's Restated Certificate of Incorporation
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION OF
LINCOLN LOGS LTD.
Under Section 805 Of The Business Corporation Law
The undersigned, being the President and the Secretary of LINCOLN LOGS LTD.,
pursuant to Section 805 of the Business Corporation Law of the State of New
York, do hereby restate, certify and set forth:
1. The name of the corporation is LINCOLN LOGS LTD. (the "Corporation")
2. The certificate of incorporation of the Corporation was filed by the
Department of State on the 25th day of February 1977.
3. Immediately upon the effectiveness of this Amendment to the Corporation's
Certificate of Incorporation pursuant to the New York Business Corporation Law
(the "Effective Date"), each five hundred (500) issued and outstanding shares
of the Corporation's Common Stock, par value $0.01 per share (the "Old Common
Stock"), shall automatically, without further action on the part of the
Corporation or any holder of such Old Common Stock, be converted into one (1)
new share of the Corporation's Common Stock, $0.01 par value per share ("New
Common Stock"), as constituted following the Effective Date. The conversion of
the Old Common Stock into New Common Stock, will be deemed to occur on the
Effective Date, regardless of when the certificates representing such Old Common
Stock are physically surrendered to the Corporation for exchange into
certificates representing New Common Stock. After the Effective Date,
certificates representing the Old Common Stock will, until such shares are
surrendered to the Corporation for exchange into New Common Stock, represent the
number and class of New Common Stock into which such Old Common Stock shall have
been converted pursuant to this amendment.
In cases in which the conversion of the Old Common Stock into New Common Stock
results in any shareholder holding a fraction of a share, the Company will pay
in lieu of such fractional share, an amount in cash (the "Cash Consideration")
equal to the product of $245.00 and a fraction, the numerator of which is the
number of shares owned by the shareholder and the denominator of which is the
number 500. No interest shall be payable on the Cash Consideration.
Following the Effective Date, the total number of authorized shares of common
stock of the Corporation (including all shares of New Common Stock and all
shares of treasury stock of the Corporation) shall remain 12,000,000, and the
par value of the New Common Stock shall remain $0.01 per share.
- 1 -
4. The Amendment of the Certificate of Incorporation was authorized by vote of
the Board of Directors of the Corporation followed by the affirmative vote of
the holders of a majority of all outstanding shares entitled to vote thereon at
a special meeting of the Corporation's shareholders duly called and held on
, 2005.
IN WITNESS WHEREOF, we have signed this certificate as of the th day of
2005, and we affirm the statements contained herein as true under
penalties of perjury.
/s/ John D. Shepherd
--------------------
John D. Shepherd
President and Chief Executive Officer
/s/ Benjamin A. Shepherd
------------------------
Benjamin A. Shepherd
Secretary
- 2 -
Appendix B
Business Corporation Law of the State of New York
Section 623. Procedure to enforce shareholder's right to receive payment for
shares
(a) A shareholder intending to enforce his right under a section of this chapter
to receive payment for his shares if the proposed corporate action referred to
therein is taken shall file with the corporation, before the meeting of
shareholders at which the action is submitted to a vote, or at such meeting but
before the vote, written objection to the action. The objection shall include a
notice of his election to dissent, his name and residence address, the number
and classes of shares as to which he dissents and a demand for payment of the
fair value of his shares if the action is taken. Such objection is not required
from any shareholder to whom the corporation did not give notice of such meeting
in accordance with this chapter or where the proposed action is authorized by
written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term as
used in this section means the date on which the shareholders' vote authorizing
such action was taken, or the date on which such consent without a meeting was
obtained from the requisite shareholders, the corporation shall give written
notice of such authorization or consent by registered mail to each shareholder
who filed written objection or from whom written objection was not required,
excepting any shareholder who voted for or consented in writing to the proposed
action and who thereby is deemed to have elected not to enforce his right to
receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder from
whom written objection was not required and who elects to dissent shall file
with the corporation a written notice of such election, stating his name and
residence address, the number and classes of shares as to which he dissents and
a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to which
he has a right to dissent, held by him of record, that he owns beneficially. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner, as to which such nominee or fiduciary
has a right to dissent, held of record by such nominee or fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease to
have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
- 1 -
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of
election must be accompanied by the return to the corporation of any advance
payment made to the shareholder as provided in paragraph (g). If a notice of
election is withdrawn, or the corporate action is rescinded, or a court shall
determine that the shareholder is not entitled to receive payment for his
shares, or the shareholder shall otherwise lose his dissenters' rights, he shall
not have the right to receive payment for his shares and he shall be reinstated
to all his rights as a shareholder as of the consummation of the corporate
action, including any intervening preemptive rights and the right to payment of
any intervening dividend or other distribution or, if any such rights have
expired or any such dividend or distribution other than in cash has been
completed, in lieu thereof, at the election of the corporation, the fair value
thereof in cash as determined by the board as of the time of such expiration or
completion, but without prejudice otherwise to any corporate proceedings that
may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within one month
thereafter the shareholder of shares represented by certificates shall submit
the certificates representing his shares to the corporation, or to its transfer
agent, which shall forthwith note conspicuously thereon that a notice of
election has been filed and shall return the certificates to the shareholder or
other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate
bearing such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
- 2 -
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than
a twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the
foregoing, the corporation shall not be required to furnish a balance sheet or
profit and loss statement or statements to any shareholder to whom such balance
sheet or profit and loss statement or statements were previously furnished, nor
if in connection with obtaining the shareholders' authorization for or consent
to the proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make such
offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a special
proceeding in the supreme court in the judicial district in which the office of
the corporation is located to determine the rights of dissenting shareholders
and to fix the fair value of their shares. If, in the case of merger or
consolidation, the surviving or new corporation is a foreign corporation without
an office in this state, such proceeding shall be brought in the county where
the office of the domestic corporation, whose shares are to be valued, was
located.
(2) If the corporation fails to institute such proceeding within such period
of twenty days, any dissenting shareholder may institute such proceeding for
the same purpose not later than thirty days after the expiration of such twenty
day period. If such proceeding is not instituted within such thirty day period,
all dissenter's rights shall be lost unless the supreme court, for good cause
shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in paragraph
(g), have agreed with the corporation upon the price to be paid for their
shares, shall be made parties to such proceeding, which shall have the effect
of an action quasi in rem against their shares. The corporation shall serve a
copy of the petition in such proceeding upon each dissenting shareholder who is
a resident of this state in the manner provided by law for the service of a
summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as to whom
the corporation requests the court to make such determination, is entitled to
- 3 -
receive payment for his shares. If the corporation does not request any such
determination or if the court finds that any dissenting shareholder is so
entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business
on the day prior to the shareholders' authorization date. In fixing the fair
value of the shares, the court shall consider the nature of the transaction
giving rise to the shareholder's right to receive payment for shares and its
effects on the corporation and its shareholders, the concepts and methods then
customary in the relevant securities and financial markets for determining fair
value of shares of a corporation engaging in a similar transaction under
comparable circumstances and all other relevant factors. The court shall
determine the fair value of the shares without a jury and without referral to
an appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its discretion,
permit pretrial disclosure, including, but not limited to, disclosure of any
expert's reports relating to the fair value of the shares whether or not
intended for use at the trial in the proceeding and notwithstanding subdivision
(d) of section 3101 of the civil practice law and rules.
(5) The final order in the proceeding shall be entered against the corporation
in favor of each dissenting shareholder who is a party to the proceeding and is
entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at such rate as
the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept
the corporate offer of payment for his shares was arbitrary, vexatious or
otherwise not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and expenses,
including the fees and expenses of its counsel and of any experts employed by
it. Notwithstanding the foregoing, the court may, in its discretion, apportion
and assess all or any part of the costs, expenses and fees incurred by the
corporation against any or all of the dissenting shareholders who are parties
to the proceeding, including any who have withdrawn their notices of election
as provided in paragraph (e), if the court finds that their refusal to accept
the corporate offer was arbitrary, vexatious or otherwise not in good faith. The
court may, in its discretion, apportion and assess all or any part of the costs,
expenses and fees incurred by any or all of the dissenting shareholders who are
parties to the proceeding against the corporation if the court finds any of the
following: (A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay; (B) that no offer or
required advance payment was made by the corporation; (C) that the corporation
failed to institute the special proceeding within the period specified therefor;
or (D) that the action of the corporation in complying with its obligations as
provided in this section was arbitrary, vexatious or otherwise not in good
faith. In making any determination as provided in clause (A), the court may
consider the dollar amount or the percentage, or both, by which the fair value
of the shares as determined exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be due
him, upon surrender of the certificates for any such shares represented by
certificates.
- 4 -
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section
515 (Reacquired shares), except that, in the case of a merger or consolidation,
they may be held and disposed of as the plan of merger or consolidation may
otherwise provide.
(j) No payment shall be made to a dissenting shareholder under this section at
a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be deemed
withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it is
liquidated, be subordinated to the rights of creditors of the corporation, but
have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this paragraph
do not apply.
(3) The dissenting shareholder shall exercise such option under subparagraph
(1) or (2) by written notice filed with the corporation within thirty days after
the corporation has given him written notice that payment for his shares cannot
be made because of the restrictions of this paragraph. If the dissenting
shareholder fails to exercise such option as provided, the corporation shall
exercise the option by written notice given to him within twenty days after the
expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment for his
shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to be
given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided in
subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations).
- 5 -
Section 910. Right of shareholder to receive payment for shares upon merger or
consolidation, or sale, lease, exchange or other disposition of assets, or share
exchange
(a) A shareholder of a domestic corporation shall, subject to and by complying
with section 623 (Procedure to enforce shareholder's right to receive payment
for shares), have the right to receive payment of the fair value of his shares
and the other rights and benefits provided by such section, in the following
cases:
(1) Any shareholder entitled to vote who does not assent to the taking of an
action specified in clauses (A), (B) and (C).
(A) Any plan of merger or consolidation to which the corporation is a party;
except that the right to receive payment of the fair value of his shares shall
not be available:
(i) To a shareholder of the parent corporation in a merger authorized by
section 905 (Merger of parent and subsidiary corporations), or paragraph (c)
of section 907 (Merger or consolidation of domestic and foreign
corporations); or
(ii) To a shareholder of the surviving corporation in a merger authorized
by this article, other than a merger specified in subclause (i), unless such
merger effects one or more of the changes specified in subparagraph (b) (6)
of section 806 (Provisions as to certain proceedings) in the rights of the
shares held by such shareholder; or
(iii) Notwithstanding subclause (ii) of this clause, to a shareholder for
the shares of any class or series of stock, which shares or depository
receipts in respect thereof, at the record date fixed to determine the
shareholders entitled to receive notice of the meeting of shareholders to
vote upon the plan of merger or consolidation, were listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc.
(B) Any sale, lease, exchange or other disposition of all or substantially
all of the assets of a corporation which requires shareholder approval under
section 909 (Sale, lease, exchange or other disposition of assets) other than
a transaction wholly for cash where the shareholders' approval thereof is
conditioned upon the dissolution of the corporation and the distribution of
substantially all of its net assets to the shareholders in accordance with
their respective interests within one year after the date of such transaction.
(C) Any share exchange authorized by section 913 in which the corporation is
participating as a subject corporation; except that the right to receive
payment of the fair value of his shares shall not be available to a
shareholder whose shares have not been acquired in the exchange or to a
shareholder for the shares of any class or series of stock, which shares or
depository receipt in respect thereof, at the record date fixed to determine
the shareholders entitled to receive notice of the meeting of shareholders to
- 6 -
vote upon the plan of exchange, were listed on a national securities exchange
or designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.
(2) Any shareholder of the subsidiary corporation in a merger authorized by
section 905 or paragraph (c) of section 907, or in a share exchange authorized
by paragraph (g) of section 913, who files with the corporation a written notice
of election to dissent as provided in paragraph (c) of section 623.
(3) Any shareholder, not entitled to vote with respect to a plan of merger or
consolidation to which the corporation is a party, whose shares will be
cancelled or exchanged in the merger or consolidation for cash or other
consideration other than shares of the surviving or consolidated corporation or
another corporation.
- 7 -
Appendix C
Opinion of Value
EMPIRE VALUATION CONSULTANTS, LLC
3255 Brighton Henrietta Town Line Road
Rochester, NY 14623
PRIVATE & CONFIDENTIAL
March 20, 2005
Mr. Benjamin A. Shepherd
Vice President - Finance, CFO
Lincoln Logs, Ltd.
5 Riverside Drive
Chestertown, NY 12817
Dear Mr. Shepherd:
You have requested Empire Valuation Consultants, LLC ("Empire") to render its
opinion as to the fair value of Lincoln Logs Ltd. ("LLOG" or the "Company") as
of March 18, 2005 (the "Valuation Date"). It is our understanding that this
valuation will be used for a proposed reverse stock split and the resultant
deregistration of the Company's common stock under the Securities Exchange Act
of 1934. Empire's conclusion of the aggregate fair value of LLOG is $4,000,000.
Methodology
LLOG has been valued under the assumption that the Company is a going concern.
This appraisal was conducted according to guidelines established by the Internal
Revenue Service ("IRS") and in conformity with appraisal practices promulgated
by the American Society of Appraisers in the Principles of Appraisal Practice
and Code of Ethics, and the Uniform Standards of Professional Appraisal Practice
("USPAP"), together with such standards as were deemed relevent to this
engagement.
For the purpose of this engagement, fair value is defined as the price at
which ownership interests would change hands between a willing buyer and a
willing seller, neither being under any conpulsion to buy or sell and both
having reasonable knowledge of relevant facts.
Fair value is essentially identicle to fair market value as defined by the
Internal Revenue Code. Revenue Ruling 59-60 lists factors which are useful in
- 1 -
determining fair market value for a privately-held company (footnote 1), and
these are appropriate in establishing fair value as well. In this analysis, all
pertinent factors listed in Revenue Ruling 59-60 were considered, including, but
not limited to, the following:
- The nature of the business and the history of the enterprise from its
inception;
- The general economic outlook and condition of, and outlook for, the subject
industry;
- The book value of the equity and the Company's financial condition;
- The earning capacity of LLOG;
- Its dividend-paying capacity;
- Whether or not goodwill or other intangible value exists;
- Past sales of the equity and the size of the block under consideration; and
- The market price of actively traded interests of public corporations engaged
in the same or similar lines of business.
Sources of Information
Information used in determining the fair market value of LLOG was provided by
the documents and sources listed below:
- The Company's filings with the Securities and Exchange Commission ("SEC"), for
its fiscal years ended January 31, 2000 through 2004 (footnote 2) and for
various interim periods;
- LLOG's pro forma results for 2005, including a balance sheet, income statement
and statement of cash flow, all provided by management of the Company, as well
(Footnotes)
1. Thinly traded public companies are ferquently valued by third-party
appraisers in the same manner, i.e., as if they were privately held.
2. Unless otherwise indicates, all further references to the Company's year end
are for fiscal year ended January 31.
- 2 -
as a projected income statement for LLOG's fiscal year ending January 31, 2006;
- An on-site visit to one of LLOG's divisions in 2002;
- Hoover's Online ("Hoover's"), Edgarscan, Multex, and Yahoo!Finance databases;
- Economic and industry information from Value Line, the Wall Street Journal,
Standard & Poor's Industry Surveys, and the Log Home Council, among others;
- Conversations and correspondence with: yourself; John S. Shepherd, CEO;
William Thyne, Vice President, Treasurer; Richard Waters, LLOG's Controller,
regarding the Company's history, operations, finances, and outlook as of the
Valuation Date;
- Correspondence and a conversation with Christopher Truso, Vice President, of
First Pioneer Credit, ACA, concerning appraisals of the Company's fixed assets;
- Conversations and correspondence with Leslie M. Apple, Esq. and Patricia
Franchini, Esq. of the firm Whiteman Osterman and Hanna, counsel to the Company;
and
- Other reviews, analyses, and research as were deemed necessary.
Business Profile
LLOG is primarily engaged in the business of designing, manufacturing and
marketing a broad line of log and panelized homes to be erected by custom
builders and "do-it-yourself" buyers. The Company planes cants (logs milled on
four sides) at its own manufacturing facilities in Chestertown, New York ("NY")
and Maple Ridge, British Columbia ("BC") and delivers to its customers by truck
trailer a weather-tight log home or panelized shell package. While the Company
historically did not provide construction services to customers (including the
sale and installation of foundations, plumbing, electrical wiring and fixtures,
cabinets, and other amenities), its newly acquired subsidiary, Snake River Log
Homes LLC ("Snake River"), does provide this service from time to time. The
Company also provides its customers with services related to the sale of its
housing packages, such as the preparation of customized blueprints and ongoing
- 3 -
customer service through its organization of independent representatives
located throughout the United States ("U.S."). Approximately 89% of the
Company's total sales were derrived from log home and panalized home sales in
the fiscal year ended January 31, 2005.
The Company was incorporated in New York in 1977 and has the following
wholly-owned subsidiaries:
- Thermo-Home Inc., a NY corporation through which the Company's panelized homes
were previously manufactured and marketed (the manufacture and marketing
operations of the Company's panelized homes were integrated into the operation
of LLOG during its fiscal year ended January 31, 1988);
- Snake River, a sole-member limited liability company organized under the laws
of the State of Idaho whose principal activity is the marketing and sale of log
homes constructed of rustic logs in the Swedish-cope style;
- AFI Acquisitions Company, LLC ("AFI"), a sole-member limited liability company
organized under the laws of NY whose principal activity is the manufacture of
dimensional wood products for consumption by LLOG;
- Lincoln Logs Canada Ltd. ("LL-Canada"), a holding company incorporated under
the laws of BC, Canada through which the Company acquired two affiliated
companies with common ownership;
- True Craft Log Structures Ltd., a company organized under the laws of BC,
Canada whose principal activity is the marketing and sale of log homes;
- Hart and Son Industries Ltd., a company organized under the laws of BC,
Canada whose principal activity is the manufacture of log homes for Hart and
Son Industries Ltd. and the Company (footnote 3).
During the fiscal year ended January 31, 2004, the Company made several
acquisitions. On August 29, 2003, the Company completed the acquisition of
TCHSI. On October 7, 2003, the Company, through AFI, purchased certain assets
of Adirondack Forest Industries, Inc. On November 17, 2003, the Company
completed the acquisition of all of the outstanding limited liability company
interests of Snake River. True CRaft Log Structures Co., a Nova Scotia
Unlimited Liability Corporation organized under the laws of Nova Scotia, Canada,
was formed in November 2004 as a holding company into which the Company's
(Footnotes)
3. True Craft Log Structures, Ltd. and Hart and Son Industries Ltd. are together
referred to as TCHSI.
- 4 -
Canadian subsidiaries, TCHSI and LL-Canada, were amalgamated and whose principal
activiuty is the manufacture, marketing and sales of log homes principally to
the Canadian, European and Pacific Rim markets.
A. Products
The Company's products include over 125 standard models of log homes ranging
in size from 560 to 4,000 square feet, and in price from approximately $27,000
to $208,000, as well as custom-designed homes with prices and sizes ranging up
to approximately $750,000 and 10,000 square feet, respectively. A majority of
the Company's sales are of log homes to be occupied as primary residences by
the buyers.
The Company has a product line for the general housing market utilizing a pre-
engineered structural wall system, which when assembled with other standard
building components, facilitates the construction of non-log traditional homes,
as well as log-like structures. These product lines are marketed as the Thermo-
Home(R) system and the Lincoln-Panel(R) system. Sales of this product line were
approximately 13% of total sales in fiscal year 2005.
The Company also has a product line for the solarium/sunspace market utilizing
architectural arches which, when assembled with other standard building
components, will permit the construction of room additions for log and
traditional homes. The product line is referred to as Lincoln Solarium(TM).
Sales of this product line as a stand-alone product were approximately 1% of
total sales in fiscal year 2005, which does not include those solariums that are
built into and are an integral part of the design of the Company's log home
products.
B. Marketing & Customers
Fifty percent (50%) of the purchase price of the building package is usually
received prior to the manufacture by the Company of any of the solid timber
components or the pre-engineered structural wall panels. The complete log home
shell package or panelized home package is shipped via truck trailers and
delivered to a customer upon payment of the balance of the purchase price.
International sales are completed with the use of letters of credit, or are
conditioned upon receipt of full payment prior to shipment.
The Company markets its products in the U.S. through a network of
approximately 61 independent sales representatives in approximately 31 states,
and through four Company-owned and operated sales centers, one in northern NY,
one in northern California, one in southeastern Idaho and one in northwestern
- 5 -
Canada. All Company-operated sales centers are staffed by Company-employee
salespersons. Each of the Company's independent sales representatives has a
written agreement with the Company that specifies the representative's sales
territory and provides for the payment of a commission ranging from 13% to
17.5% of the purchase price for the log home shell package. A majority of the
Company's independent sales representatives have purchased and erected one of
the Company's log homes for use as a sales model. The Company maintains a
cooperative advertising program for independent sales representatives pursuant
to which the Company shares in the cost of advertising undertaken by qualified
sales representatives.
Substantially all of the Company's sales have been to customers in the U.S.,
with the remainder to customers in Japan (less than 5% in each fiscal year).
C. Raw Materials
The Company manufactures log components from rough-sawn eastern white pine
cants, western red cedar cants and western spruce cants. The cants are milled
to various dimensions to produce the Company's finished product. The pine cants
are purchased from several mills in the region of the Company's facilities in
Chestertown, NY; Maple Ridge, British Columbia, Canada; and Rigby, Idaho. Cedar
cants are purchased from several mills in northern California, Oregon and
western Canada. Finished logs of lodge pole pine for delivery to some of the
Company's customers are purchased from an unaffiliated company on a subcontract
basis. Logs constitute approximately 24% of the cost of a typical log home
shell package.
Other components of the Company's log home shell package are purchased from
several suppliers. These components include prefabricated roof trusses,
windows, doors, nails, sheathing, dimensional lumber, shingles, caulking, and
between-log sealant. The Company has not recently experienced any significant
supply shortages, and does not anticipate any such shortages in the near future
based upon currently available information. Alternative sources of raw
materials are readily available to the Company.
D. Competition
The Company believes that there are approximately 350 firms engaged in the
sale of log home materials, of which approximately 125 firms sell log home
packages or kits and are in direct competition with the Company.
According to management, the Company's principal competitors are: Tennessee
Log Homes, Real Log Homes, Northeastern Log Homes, Inc. ("NLH"), Kuhns Bros.,
- 6 -
and Jim Barna Log Systems. The Company believes that its competitive position
with respect to those firms is favorable, especially in the areas of quality and
range of product, price, appearance, and energy efficiency.
Hoover's listed LLOG's top competitors as Anthony Forest Products Co.
("Anthony"), Home Depot, and NLH. While Home Depot is publicly traded, it is
more commonly recognized as the largest U.S. retailer of myriad building
products than as a log home supplier. Anthony and NLH are both privately held
with estimated annual revenues of $130 million and $8 million, respectively.
In all, Hoover's listed 31 competitors. As with Home Depot, they all have some
connection to the building products industry, but none of them are directly
comparable to LLOG. A company fact sheet from Hoover's for each of the 31 is
attached as Appendix A to this report.
E. Facilities
The Company owns several parcels of real estate located in NY, California, and
Vermont.
New York:
1. An approximately 8.5-acre parcel of land on Riverside Drive, Chestertown, NY,
on which are located (1) the Company's executive offices, consisting of a 6,000-
square-foot log building and a 2,000-square-foot log building, (2) the Company's
production facilities, consisting of two milling machines located in a 10,200-
square-foot metal building; a 10,440-square-foot metal-framed, open storage
structure; a 4,800-square-foot, log-sided pole shed, and (3) a 14,000-square-
foot Thermo-Home(R) and log building containing corporate offices, storage and
fabricating facilities for the Company's Thermo-Home(R) product line. The
remainder of the 8.5-acre parcel is utilized by the Company for outside storage
of cants, logs and building materials used in the Company's log home and
panelized home packages.
2. An approximately 19-acre parcel of undeveloped land on Route 8, Chestertown,
NY, which is utilized by the Company for storage of cants and logs.
3. An approximately one-acre parcel of land on Pine Street, Chestertown, NY, on
which is located a 7,680-square-foot building which was previously used as a
manufacturing facility for the Company's Thermo-Home(R) product line and is
- 7 -
currently used for additional storage of building materials for this product
line.
4. An approximately 1.4-acre parcel of land in Lake George, NY on which is
located the Company's new Northern Regional Sales Office in a 3,050-square-foot
log home erected by the Company.
5. Approximately 15 acres of land comprised of three contiguous parcels of land
on Fish House Road, Galway, NY, on which is located the Company's saw mill
operation, consisting of a 13,520-square-foot metal building that houses log
sawing production equipment, a 1,752-square-foot wood-frame office building, a
900-square-foot building that contains a drying kiln, and eight additional
storage buildings and drying sheds ranging in size from 667 square feet to 3,528
square feet. The remainder of the 15 acres is utilized by the Company for
outside storage of logs, cants, timbers and other dimensional lumber products.
6. In addition, the Company owns a parcel of approximately 1 acre of undeveloped
land in Northeastern NY acquired by the Company for potential future use.
California:
1. The Company owns an approximately one-acre parcel of land in Auburn,
California, on which is located the Company's Western Regional Sales Office in
a 4,000-square-foot western cedar Ranch-style log home, and a 2,500-square-foot
western cedar Cape-style log home planed in the Weatherbloc(R) clapboard style.
Vermont:
1. The Company owns a parcel of land of approximately 1.4 acres in Southwest
Vermont, acquired by the Company for potential future use.
The Company considers these facilities to be in good condition and suitable
for their respective purposes. As collateral for its Revolving Credit and Loan
Agreement, dated October 7, 2003, the Company has granted mortgages on all of
the real estate described above.
F. Employees
As of January 31, 2005, the Company employed 109 persons, 104 of whom are
full-time employees and 5 individuals who are part-time employees. The Company
- 8 -
has never had a work stoppage and regards its employee relations as
satisfactory. Employees are not covered by collective bargaining agreements.
G. Capital Stock
The Company's Common Stock is traded over-the-counter on the OTC Bulletin
Board(R) under the ticker symbol LLOG.OB. LLOG has one class of capital stock
issued and outstanding, voting common stock. There were 9,040,059 registered
shares as of the Valuation Date. The last reported price for the Company's
shares according to Yahoo!Finance was $0.44 per share as of March 18, 2004.
Closing bid prices for the Company's common stock represent inter-dealer
quotations. They do not represent actual transactions, and they do not include
retail mark-ups, mark-downs or commissions. Prices are determined from
information provided by a majority of the market makers for the Company's
common stock, including the underwriter for such securities of the Company.
No cash dividends were declared by the Company during the fiscal years ended
January 31, 2005 and 2004. While the payment of dividends rests within the
discretion of the Board of Directors, it was not anticipated that cash dividends
would be paid in the foreseeable future, as the Company intended to retain
earnings, if any, for use in the development of its business. The payment of
dividends is contingent upon the Company's future earnings, if any, the
Company's financial condition and its capital requirements, general business
conditions and other factors. Further, the Company's Credit Agreement with its
primary lender prohibits the Company's ability to make distributions without the
lender's prior written consent.
On August 29, 2003, the Company completed the acquisition of two companies,
i.e., TCHSI, affiliated through common ownership for approximately $1,895,400.
In connection with this transaction and as part of the consideration paid for
these entities the Company issued a total of 287,500 unregistered shares of the
Company's common stock to two individual owners of the companies. On the date
of the transaction, the shares conveyed to such individuals were valued at
approximately $76,300. Empire prepared the independent valuation for these
shares. The shares issued to such individuals were issued by the Company
pursuant to an exemption from registration set forth in Section 4(2) of the
Securities Act of 1933, as amended.
On November 17, 2003, the Company completed the acquisition of a limited
liability company, i.e., Snake River, for approximately $1,209,800. In
connection with this transaction and as part of the consideration paid for this
- 9 -
entity the Company issued a total of 300,000 unregistered shares of the
Company's common stock to the two individual owners of the company. On the date
of the transaction, the shares conveyed to such individuals were valued at
approximately $141,600. The shares issued to such individuals were issued by
the Company pursuant to an exemption from registration set forth in Section 4(2)
of the Securities Act of 1933, as amended.
Economic, Industry & Company Outlook
In the appraisal of any company, the general economic factors prevailing at
the valuation date, as well as those foreseen then, must be considered.
Assimilation of these facts and forecasts provides insight into the economic
climate in which investors are dealing. Although individual factors may or may
not have a direct impact upon a particular industry, the overall economy and its
outlook have a strong influence on how investors perceive investment
opportunities.
A. General Economy
For this analysis, the general economic climate that prevailed through the
first quarter of 2005 was considered, as was the outlook for the domestic
economy. This section of the report contains an overview of selected economic
factors, such as gross domestic product ("GDP"), inflation, and U.S. monetary
and fiscal policy.
The Value Line forecast closest to the Valuation Date was utilized, as it was
considered to be most reasonable. In its Quarterly Economic Review, dated
February 25, 2005, Value Line remained optimistic about the continued recovery
in the U.S. economy, and stated that the economy continued to grow at a steady
pace in the first quarter of 2005. Factors supporting the reserved outlook
included (1) a strong housing market, (2) fairly healthy levels of retail
spending, (3) continued growth in manufacturing, and (4) steady gains in the
service sector. In addition, the economy should be supported by a steadier
recovery in employment, further growth in personal income, additional increases
in export volume, and continued strength in capital spending. GDP increased by
3.3%, 4.0%, and 3.1% in the second, third, and fourth quarters of 2004,
respectively. Longer-term projections called for GDP growth to average only
3.4% from 2005 through 2008.
In addition to the factors listed above, Value Line's forecast incorporates
assumptions that the Bush administration's efforts to reduce the record federal
budget deficit will meet with moderate success, the recent elections in Iraq
will help reduce tensions currently being experienced in that nation, and that
oil prices will remain in a $40 to $45 barrel range in 2005 rather than surge to
new highs. Such growth should be accompanied by benign levels of inflation, and
- 10 -
a reasonable monetary policy on the part of the Federal Reserve that should help
extend the maturing economic expansion through 2006.
According to Value Line, inflation will continue to remain benign, with the
exception of energy and food. In 2004, producer prices rose by 3.6% versus a
gain of 3.2% in 2003, while consumer price rose 2.7%, up from 2.3% in 2003.
Growth in the consumer price index was estimated at 2.0% and 2.2% for the first
and second quarters of 2005, respectively. The change in industrial production
was estimated to be 4.3% during the first quarter of 2005, and was expected to
average 3.5% from 2005 through 2009. Increases in the producer price index were
forecast to range between 1.5% and 2.0% over the same period.
Value Line expected both short-term and long-term borrowing costs to remain
comparatively stable. The three-month Treasury bill rate was 2.7% at the
publication date and was expected to increase to 2.8% by the second quarter of
2005. The Prime Lending Rate was 5.5% at the publication date and was forecast
to slowly grow, reaching 7.5% by 2009. Value Line believed the Fed's
accommodative monetary policy had achieved its goals, resulting in only a half
point growth in Prime over the third and fourth quarters of 2004.
Corporate earnings remained in a recovery mode in 2004, supported by
increasing productivity, corporate cost cutting, recovering demand, low bond
yields, and generally low inflation. Value Line believes this trend will
continue in 2005, with after-tax profits increasing by more than 13%. Earnings
growth is anticipated to improve thereafter, averaging 8% from 2006 to 2009.
In sum, Value Line was forecasting real, inflation-adjusted GDP to rise at a
rate of 3.5% for all of 2005. Longer-term projections continued to call for
between 3.3% and 3.5% in real year-over-year GDP growth. In the absence of any
severe problems (i.e., an increase in oil prices from current levels, more
worldwide terrorist attacks, or other exogenous shocks), Value Line believed
that the long-term economic recovery would continue.
B. Pacific Rim Economic Outlook
TCHSI is one of LLOG's newer acquisitions and is expected to be a source of
increasing revenue. Therefore, Empire reviewed the economic outlook for the
subsidiary's market territory. TCHSI's management indicated that nearly 70% of
its business was generated in the Pacific Rim countries of Japan, South Korea,
and Taiwan. As such, TCHSI's outlook was partly dependent upon general economic
conditions in these three countries. Each is discussed in further detail below.
- 11 -
Publications from Scotiabank and PricewaterhouseCoopers ("PWC") provided most of
the information.
Japan: PWC's European Economic Outlook for October 2004 and February 2005
("EEO") included some information that was global as well. The data available
in October indicated that the Japanese economy expanded by only 0.4% in the
second quarter of 2004, which represented a significant decline from 1.6% the
previous quarter. Business investment also stagnated while consumer spending
growth slowed to 0.6%. Unemployment fell moderately to 4.6% in June 2004 from
5.3% a year earlier, although it peaked at 4.9% in July 2004. However, it was
considered premature to predict an economic recovery for the Japanese economy
given concerns regarding deflation, a strong yen, over-reliance on exports to
China, and a troubled banking sector and high debt. GDP growth was expected to
average 4.3% in 2004 and then moderate to 1.8% in 2005. By the end of 2004,
however, increases in oil prices contributed to noticeable deceleration in the
Japanese economy. It expanded by just 0.1% in the third quarter of 2004.
Consumer spending proved weaker than expected while exports also slowed. This
reflected, in part, weaker demand from China. Private investment growth,
however, remained relatively stable. The full year forecast for 2004 GDP growth
was lowered to 2.9% and 2005 GDP growth was expected to reach only 1.1%.
However, the slowdown was expected to be temporary with renewed momentum in
2006.
South Korea: Scotiabank indicated that South Korea's economic growth might
average less than 4% in 2005/2006. Since economic expansion is heavily
dependent on exports, South Korea will probably still do well compared to the
overall international community. Around the Valuation Date, manufacturing
output was rising at a near double-digit annual pace. Nevertheless, more
vigorous economic growth was not likely to occur without a recovery in
household spending, which had declined for two consecutive years. Consumer
confidence was low due to a jobless rate which hovered around a three-year high
of 3.6%. Although unemployment colored attitudes toward spending, employment
was actually up about 2% year-over-year by the end of 2004. A rise in
household incomes was expected to increase consumer outlays, along with an
accommodative monetary policy stance by the central bank. Policymakers were
concerned about overheating in the housing market, but they continued to prefer
to address this problem through administrative measures and selective tax
increases rather than through higher interest rates. South Korea's biggest
advantage remains its position between the high-cost, high-productivity of
Japanese competitors and the low-cost but (on average) lower valued-added of
Chinese competitors.
Taiwan: Scotiabank was predicting solid, somewhat reduced, economic growth
for Taiwan. Political uncertainties regarding relations with mainland China
- 12 -
continued to be a concern, but the pro-independence party still did not gain a
majority in December 2004 elections, which helped to lower the anxiety level to
some degree. The Taiwanese economy was forecast to grow about 4.5% in 2005 and
2006 following a near-6% rise in output in 2004. Orders were at record highs.
Labor market conditions were improving, as the jobless rate had fallen back to
a three and half year low of just over 4%. Commercial relations between China
and Taiwan continued to strengthen in spite of political tensions. China
accounts for more than one-third of Taiwan's total exports.
C. Industry Outlook (U.S.)
General U.S. Homebuilding Outlook: In its January 6, 2005 Industry Survey for
Homebuilding, Standard & Poor's ("S&P") was forecasting a fourth consecutive
record year for U.S. homebuilding in 2004 based on information through the first
ten months.
S&P indicated that mortgage rates typically had the largest influence of any
factor driving home sales, due to their impact on expected mortgage payments and
the level of income required to secure a mortgage. U.S. mortgage rates remained
near historical lows at the Valuation Date, but were beginning to rise
marginally. With the economy showing relatively solid strength since the middle
of 2003, even the modest upturn in mortgage rates was not slowing the buying
trend. Consumers who had put off buying a home were now acting before interest
rates got any higher.
Over the first eleven months of 2004, total housing start rose 6.3% year-over-
year, to 1.81 million. Thus, for the full year, S&P was expecting the total to
top 1.5 million single-family starts. With all the feverish activity, builders
continued to acquire other builders. The top 100 companies in the industry made
more than a dozen acquisitions in 2003.
Overall for 2005, S&P was expecting some moderation in the market. As of
December 2004, S&P was projecting that rates for 30-year conventional mortgages
would average 5.9% for all of 2004, and then move up to an average of 6.5% in
2006, 6.9% in 2006, 7.1% in 2007, and 7.3% in 2008. In the short-term, these
anticipated increases will spur buying, but home affordability would start to
slow the pace. Home prices reached their highest level in some thirty years in
the first quarter of 2004.
Finally, S&P believed that the present housing cycle was mature. With new
single-family homes on an upswing since 1992, there is simply less pent-up
- 13 -
demand. This could be offset by immigrant buyers as well as baby boomers
trading up. An ongoing revival in labor markets also boded well for this
market.
U.S. Log Home Outlook: A November 29, 2004 article in Times reported that,
according to the Log Home Council ("LHC") of the National Association of Home
Builders, more than 25,000 log homes are built each year, up from about 7,000
in the mid-1980s. Sales in the U.S. and Canada have more than doubled since
1998, to $1.37 billion. Log homes now account for 7% of the custom-home-
building market.
The LHC website also reported that a typical log home built during the 1990s
had over 2,000 square feet of living space compared to about 1,100 square feet
fifteen years earlier. The pool of mortgage bankers for log home buyers has
increased over the last fifteen years as well, although financing for a log
home is still more complex than for a conventional site-built one.
One of LHC's goals is to educate consumers about the difference between a log
home and a log cabin: "The phrase 'log home' refers to a method of construction,
not a style of house." Costs to build a log home range from $125 per square
foot to more than $1,000 per square foot. Where once 75% of all log homes were
owner-built, today less than 25% of them are. Almost 90% of log homes are their
owners' primary residences, and 84% are built in or near metropolitan areas.
LLOG is one of the approximately 50 members of LHC. On LHC's website, the
Company is listed alphabetically under "T" as "The Original Lincoln Logs, Ltd."
D. Company Outlook
For its fiscal year ended January 31, 2002, LLOG reported net income of $1.2
million on revenues of about $14 million. This was followed by two years of
losses as sales rose to nearly $22 million. LLOG's improved revenues were
largely due to its acquisitions, and it did experience some growing pains.
Management for the TCHSI division was replaced, the Western Regional Manager's
involvement with that division was increased, and a more experienced financial
director was hired. Management provided Empire with projections for the
Company's fiscal year ending January 31, 2006, showing revenues growing by
another $6 million to $27.7 million. Operating income is forecast at $1.5
million and net income, at $1 million. In Empire's view, the outlook for the
housing industry in general and the outlook for log home manufacturers in
particular help support management's optimism. Steps have been taken to
enhance management and control costs. Overall, Empire believes that the
- 14 -
prospects for LLOG are fair to good. One concern is the Company's financial
condition which is discussed in the next section of this report.
Financial Review
LLOG's balance sheets, income statements and statements of cash flow for the
last five years are presented in a comparative format in Exhibits A through D
attached to this report. In conducting its analysis, Empire studied this
financial information as well the audited financial statements included in the
Company's SEC filings. Empire was assured by management that the financial
condition of the Company and its outlook did not changed materially between
January 31, 2005 and the Valuation Date.
For this review, financial ratios for companies similar to LLOG were sought.
In doing so, its financial performance was compared with composite statements
published in the RMA's 2004-2005 Annual Statement Studies using the closest
SIC(footnote 4)/NAICS(footnote 5) available: 2452/321992 (Prefabricated Wood
Buildings & Components)(footnote 6). The RMA study provided comparative
industry statistical data for companies with year-ends between April 1, 2003
and March 31, 2004. The subgroups selected for this comparison had sales
between $10 million and $25 million (25 companies) and total assets between
$10 million and $50 million (17 companies). Please see Exhibit E.
In discussing these statements, trends have been noted and various ratios and
indications of financial condition have been calculated. The purpose of this
analysis is to identify underlying business phenomena through LLOG's accounting
variables and to determine its ability to generate future earnings. Many
variables were considered before commenting, but only trends and ratios
important to LLOG's earnings capacity are discussed below.
A. Income Statement Analysis
From approximately $10.3 million in 2001, LLOG's annual revenues more than
doubled to $21.7 million in 2005. The most significant growth occurred in the
(Footnotes)
4. Standard Industrial Classification.
5. North American Industrial Classification System.
6. SIC 2452/NAICS 321992 includes establishments primarily engaged in
manufacturing prefabricated wood buildings, sections, and panels. It includes
manufacturers of components for prefabricted log cabins.
- 15 -
2004/2005 time frame as the result of various acquisitions which were noted
above. Average annual compound increases in LLOG's revenues were 20.4% over
the review period.
Apparently due to line item accounting differences in cost of goods sold,
LLOG's gross profit margin tended to be higher than those reported by the RMA
subsets. Its operating expenses as a percentage of annual sales, on the other
hand, were nearly double those of the two industry samples. For 2004 and 2005,
LLOG posted operating losses of (1.3%) and (2.4%) of sales, respectively. The
median operating margins for the RMA samples were 4.6% and 5.4%.
Other income/(expense) were negligible amounts for LLOG in 2004 and 2005.
Therefore, its profit before taxes ("PBT") was negative in each of those years.
The RMA groups reported PBTs of 3.7% and 4.5%. Overall, on an unadjusted basis,
LLOG's operations were less profitable than was typical of other companies in
the same industry classification.
B. Ratio Analysis
Financial ratios may be classified into three types: liquidity and efficiency;
leverage and coverage; and profitability and operating. Each of these
categories was reviewed to determine how LLOG compared to companies that operate
in its industry.
Liquidity & Efficiency Ratios: Liquidity is a measure of the quality and
adequacy of a company's current assets to meet its current obligations as they
come due. Efficiency ratios measure a company's ability to turn its receivables
and inventory into cash.
As can be seen in Exhibit D, LLOG's working capital was negative during the
entire review period. Its 2004 and 2005 current ratios were 0.7 times and 0.6
times, respectively, as compared to 1.2 times for both of the RMA subsets. The
Company's quick ratios were 0.2 times in 2004 and 2005. The RMA medians were
0.6 times.
LLOG's days' receivable were a surprisingly low 8 days in 2004 and 5 days in
2005 versus the RMA's 25-day median. The Company's inventory, in contrast,
turned much slower in 2004 than those of the RMA samples. LLOG's 2005 ratio
showed a considerable improvement to 61 days, more in-line with the 56 days
for the asset-based sample's median.
- 16 -
Even at 60 days for payables turnover in 2004, LLOG's working capital was
negative, as noted. The Company shortened payables to 34 days in 2005, but this
was still higher than the 26-day and 23-day medians for the RMA.
Clearly, LLOG's balance sheet demonstrated weaker, if not outright inadequate,
liquidity than that of the typical company in its industry as measured by the
RMA. On the other hand, the Company has historically operated in this fashion,
has not received a going concern opinion from its accountants, has been
profitable in some years, and expects to be profitable again.
Leverage & Coverage Ratios: Because highly leveraged companies are more
vulnerable to business downturns than are those with lower debt-to-equity
positions, leverage ratios are an indication of financial risk. Coverage ratios
measure a company's ability to service debt.
None of LLOG's 2004 and 2005 leverage and coverage ratios measured up to the
RMA medians. First Pioneer is LLOG's primary lender. Total interest-bearing
debt at January 31, 2005 represented 37% of total assets for LLOG. For the RMA
groups, the averages were 33% and 26%. The following item is quoted directly
from LLOG's January 31, 2005 10KSB:
At January 31, 2005, we were required to achieve a fixed charge coverage
ratio of not less that 2.0 to 1.0; achieve a current ratio of not less than 1.0
to 1.0; and to maintain a minimum tangible net worth of $3,606,298. During
Fiscal 2005, the Company failed to meet the financial covenants. Failing to
meet these financial covenant constitutes an "event of default" under the terms
of the First Pioneer Credit Facility. The Company applied for and received a
waiver from First Pioneer with regard to these financial covenants for the
fiscal year ended January 31, 2005. There were no other events of default with
respect to the First Pioneer Credit Facility at January 31, 2005.
Most of LLOG's debt pays interest at prime and all debt funded by First
Pioneer is collateralized with Company assets.
Profitability & Operating Ratios: Profitability and operating ratios help to
evaluate a company's use of the resources available to it.
Neither the 2004 nor the 2005 profitability and operating ratios were
favorable for LLOG on an unadjusted basis. Return on equity (as measured by
PBT divided by tangible net worth) was 15.6% for the RMA's sales-based sample
- 17 -
and 7.9% for the asset-based sample. Return on assets (as measured by PBT
divided by total assets) was 6.7% and 2.4% for the two samples, respectively.
C. Financial Summary
LLOG was not profitable in 2005, but is has been so and it is reasonable to
expect that it will be again. On the other hand, as of the Valuation Date, it
was highly leveraged relative to its industry's norm and its working capital
was negative. These factors point to a higher-than-average amount of financial
risk, and this has been taken into account in the subsequent valuation analysis.
Valuation of Lincoln Logs Ltd.
The purpose of the valuation section is to incorporate the information
considered and/or presented previously into a quantitative representation, thus
assigning a value to the ownership privileges of the closely-held entity. The
valuation methodology reflects the analyst's expectation of how free and open
capital markets would assign value to the economic activities of the business
asset under analysis.
A. Valuation Methodologies
There are a number of generally accepted methods in use for valuing a closely-
held business asset, none of which is necessarily superior to the others. It is
more a question as to which of the methods or combination of methods is best
suited to the business, industry, and economic circumstances of the particular
company being appraised at a specific valuation date. The purpose of the
engagement and the percentage of equity being valued are additional factors to
be considered when selecting a valuation method.
The following discussion summarizes the most generally accepted valuation
methods.
Discounted Future Income Method: The discounted future income method can use
cash flows ("DCF") or earnings ("DFE") as a basis to forecast the income which
the business will generate. Thereafter, an aggregate present value is
calculated for the future cash flows using a required rate of return known as
the discount rate. The strength of this method is that it facilitates the
analysis of operational practices and their impact upon the business' value.
Its weakness, however, is that it relies heavily upon projections of cash flows
or net income which, for some firms, are difficult to make with any accuracy.
- 18 -
This methodology was not applied in valuing LLOG. Management was only able to
provide Empire with projections for 2006. This one-year forecast was used in
conjunction with an adjusted historical valuation treatment.
Capitalization of Income Method: The capitalization of income method utilizes
historical results to determine the value of a company's owners' capital. An
income base is first derived, and then divided (i.e., capitalized) by a
separately computed required rate of return, or capitalization ("cap") rate.
The income base can be defined variously as a company's adjusted earnings, cash
flows, or dividends. For the cap rate to be appropriate, it must correspond to
the specific inputs used in developing the income base.
Generally, this method is considered a reasonable one to use in valuing a
going concern. However, its application weakens when a company's historical
income, even when adjusted, is not considered to be a good proxy for that
expected in the future.
This methodology was applied in valuing LLOG. On an adjusted basis, the
Company's historical performance was deemed indicative of its prospects going
forward.
In addition, the capitalization of debt-free income, which is a variant of the
capitalization of income, was also explored. A debt-free method assumes that a
company's historical income before interest expense provides an adequate base
from which to project the income streams that will be available to its total
invested capital (i.e., both interest-bearing debt and equity).
A debt-free approach is often applied in situations when: (1) the company has
had a significant change in its total invested capital; (2) there is a planned
transaction where there will be a significant change in its total invested
capital; and/or (3) the company is either highly leveraged or has a relatively
low amount of leverage. In applying the debt-free approach, the company's
earnings capacity is derived at a level of earnings (i.e., income) that is
available to both debt holders and equity holders. The debt-free income base is
capitalized with a cap rate that uses the company's weighted average cost of
capital ("WACC"). The company's WACC is a blended cost of debt and equity.
When the debt-free income base is capitalized, the result is the marketable
value of the company's total invested capital. Its aggregate marketable equity
value is derived by subtracting the market value of its debt from the value of
its total invested capital.
Our valuation of LLOG's total invested capital employed the Company's adjusted
debt-free operating income. After so doing, the Company's equity value basis
- 19 -
was calculated by subtracting the value of its debt from the value derived for
its total invested capital.
Guideline Company Method: The objective of the guideline company valuation
technique is to identify business entities that have publicly traded securities,
and business and financial risks which are comparable to those of the entity
being valued. The pricing multiples of the selected public companies are then
used to derive a market value for the owners' capital of the company under
analysis.
This methodology was not applied in valuing LLOG. Using various databases,
including Hoover's and Compustat, Empire was unable to identify any publicly
traded companies similar enough to LLOG such that they could be used in valuing
the Company. LLOG is unique in that it is a publicly traded log home
manufacturer.
Adjusted Net Asset Value Method: Adjusted NAV is a method that focuses
primarily on the balance sheet. It requires restatement of the company's
assets and liabilities in order to reflect their market values. Application of
this method is most useful in determining a fully marketable controlling
interest (i.e., enterprise) value. However, the method's relevance generally
weakens when valuing a minority or other ownership interest in a going concern
which lacks the right to liquidate assets or sell the business. Exceptions are
when liquidation of the business is considered highly probable, when the
realizable value of its assets equals, or exceeds, the value of its
distributions to its owners, or when the company's value is tied directly to the
value of its underlying investments.
Adjusted book value ("ABV") is a variant of NAV. It is usually used in the
valuation of holding companies whose main assets are publicly traded securities
or other investments such as real estate, notes receivable, partnership
interests, or equity investments in other business enterprises. ABV is
distinguished from the traditional NAV method in that it does not consider the
transaction or liquidation costs necessary to realize the cash value of the
holding company's underlying assets.
This methodology was applied in valuing LLOG. Log home manufacturing is a
capital intensive industry. Therefore, consideration was given to the market
value of its assets less the market value of its liabilities. In this instance,
Empire regarded it as a worst case scenario for the Company's shareholders and,
as such, it provides a floor value.
- 20 -
B. Outline of Valuation Process
After consideration of a number of generally accepted valuation methodologies,
Empire elected to use a capitalization of income analysis, and an adjusted book
value calculation. A small company rule of thumb based on earnings before
interest, taxes, depreciation and amortization ("EBITDA") served to create a
sensitivity analysis to gauge the reasonableness of Empire's conclusions. In
addition, recent trading prices for the Company's stock were taken into account.
Exhibits F, G, H, and J present the results of Empire's analyses which are
discussed in detail below.
C. Capitalization of Income
Modern financial theory holds the value of any asset to be a function of
several interrelated factors:
- The stream of benefits the owner of the assets expects to receive;
- The timing of the receipt of these benefits; and
- The risk borne by the owner.
Thus, appraisal methodologies rely on the premise that the value of a business
enterprise is equal to the present value of the income which it can expect to
generate going forward. From an investor's standpoint, these future income
streams represent the dividend-paying (i.e., distribution-paying) capacity of
the company or, in the case of a leveraged company, monies available for all
invested capital (i.e., interest-bearing debt plus owners' capital).
To value LLOG's income, it is necessary to determine both the income base and
the yield which an investor would require in order to purchase an interest in
its future distributions. Thereafter, it is simply a matter of dividing the
income base by the yield. As noted, this process is referred to as
capitalizing.
Derivation of Income Base: Exhibit F contains a capitalization of adjusted
historical net income starting from the Company's historical results for 2001
through 2005 and its projected results for 2006. Historical pre-tax income was
used as the starting point in each year. Next, the following adjustments were
made, including certain non-recurring items and the anticipated improvement in
LLOG's operating income:
- 21 -
- Management estimated that the Company disbursed at least $240,000 per year in
fees related to SEC filings. Therefore, this figure was added back to pre-tax
income.
- In 2004, S,G&A expenses (excluding commission expense) were unusually high as
a percentage of sales primarily due to non-recurring acquisition activities.
Therefore, the actual figure reported for S,G&A was added back and a more
normalized percentage, based on 2005 numbers, was deducted.
The adjusted results were weighted in several ways. First, the adjusted
figure for 2001 was excluded from the computations because it was unusually low
and not considered as indicative of the Company's ongoing earning power.
Secondly, the 2005 loss was given a weight of 1.0 times in all the scenarios.
The results for 2005 represented the Company's worst over the review period.
Empire did not feel that it should be disregarded since (1) it captures some of
the difficulties involved in assimilating LLOG's acquisitions and (2) it is, in
fact, the latest actual reported year. However, the Company has been profitable
and there is a reasonable expectation that it will be so again. After reviewing
the results of the various scenarios, $850,000 was selected as a reasonable
proxy for LLOG's ongoing pre-tax earning power, its normalized earnings base.
LLOG's pre-tax earnings base was tax-affected using a marginal tax rate of
39%. The Company's after-tax earnings base thus becomes $518,925. Again, see
Exhibit F. It assumed that the Company's capital expenditures and depreciation
expense will offset one another over the long-term, and therefore, the earnings
base is equivalent to LLOG's cash flow.
Derivation of Capitalization Rate: The cap rate represents the required rate
of return which an investor would demand at a point in time in order to hold
equity in a company under study. This rate accounts for the risks inherent in a
company's capital. The build-up method was utilized, described below, to derive
a cap rate for LLOG's equity.
One source for equity rates of return is the firm Ibbotson Associates
("Ibbotson"); it performs annual studies of marketable minority interests in
publicly traded equity securities. According to Ibbotson's studies, the
expected return of the market (specifically the S&P 500) in excess of the risk-
free rate (arithmetic mean) has been 7.0%, based on a study of actual returns
from January 1926 to December 2003. Ibbotson also identifies a small-company
- 22 -
premium based on a market value-weighted index of micro capitalization stocks
(non-beta adjusted) which trade on the NYSE, the AMEX and the NASDAQ. This
latter 6.6% premium recognizes that equity holders demand higher returns from
companies which are riskier by virtue of their smaller revenue base and
capitalization. Since the risk-free rate (using twenty-year Treasuries as a
proxy) was 4.78% at the Valuation Date, the total required return for small
capitalization companies was 18.38%.
In our opinion, an addition must be considered for application to this 18.38%
rate of return for small public companies, so as to reflect LLOG's industry and
company-specific risk. This risk premium adjustment recognizes the highly
competitive nature of the Company's industry and its high leverage, as well as
LLOG's small capitalization relative to those of the companies included in the
Ibbotson study. Offsetting these factors are the Company's historical
profitability, its projected improvement, and the favorable outlook for its
industry. For LLOG, it is our opinion that a net risk premium of (1.0%) is
warranted to reflect its industry and company-specific risk at the Valuation
Date.
Taking all of these factors into account, the required rate for LLOG's equity
may be built-up as follows:
Table I
Equity Discount Rate
Investment Return Component Rate of Return
------------------------------------------------- ---------------
Add: Risk-Free Rate (LT U.S. Treasuries at 2/28/2005) 4.78%
Generic Equity Premium 7.00
Small Stock Risk Premium 6.60
Industry & Company-Specific Risk Premium (1.00)
---------------
Equity Discount Rate 17.38%
Conclusion of Value: To calculate the value for LLOG, the Company's income
base was capitalized (i.e., divided) using the Gordon Growth Model. The Gordon
Growth Model can be expressed by the formula presented below:
I x (1 + g)
V = -----------
(r - g)
Where:
V = Value of equity
I = Adjusted income base
g = Expected growth rate
r = Required rate of return (discount rate)
- 23 -
Based upon this analysis and Value Line's long-term forecasts for inflation,
4% was selected as a reasonable long-term growth expectation for LLOG.
Inserting the various rates and adjusted cash flows into this formula results in
the following:
$850,000 X (1 + .04)
-------------------
(.1738 - .04)
This calculation yielded a value for LLOG of $4,030,000. Again, see Exhibit F.
D. Capitalization of Debt-Free Income
As noted earlier, the capitalization of debt-free income is a variant of the
capitalization of income, a method which assumes that a company's historical
income before interest expense provides an adequate base from which to project
the income streams that will be available to its total invested capital (i.e.,
both interest-bearing debt and equity).
Derivation of Debt-Free Income Base: Exhibit G contains a capitalization of
adjusted historical debt-free net income starting from the Company's historical
results for 2001 through 2005 and its projected results for 2006. Historical
pre-tax income was used as the starting point in each year. The same income
adjustments were made as in the capitalization of income analysis above. In
addition, however, the Company's interest expense was added back as well.
Next, the same weightings for the various scenarios were used as previously
and for the same reasons. From these results, $900,000 was selected as a
reasonable pre-tax debt-free income base. This figure was also tax-affected at
39%. The adjusted, debt-free, normalized net income base becomes $549,450.
See Exhibit G.
Derivation of Required Rate of Return: The appropriate required rate of
return on all invested capital is the WACC. Development of a WACC requires that
the cost of debt and the cost of equity for the company be derived separately.
Cost of Equity: The cost of equity was built up in the manner described above.
Thus, the equity discount rate is 17.38%.
Cost of Debt: Having derived the discount rate that would be demanded by an
equity holder, the Company's cost of debt was estimated. As noted, most of
LLOG's debt carries interest at prime, although it does have some debt at
higher rates, up to 7.9%. Based on Empire's analysis of LLOG, Value Line's
long-term estimate of prime at 7.0% was selected as the Company's cost of debt.
After tax, LLOG's effective cost of debt becomes 4.27%. (7.0% x (1 - .39))
- 24 -
Weighted Average Cost of Capital: The WACC for LLOG was calculated by using
the required rates of return derived from the entity's equity and debt, and an
assumed market value for its capital structure of 50% equity to 50% debt. Given
17.38% and 4.27% as the respective costs of equity and debt, the WACC is
calculated to be 10.83% as shown below:
Table II
Weighted Average Cost of Capital
Assumed
Required
Rate Weighting Average
---------- --------- ----------
Equity 17.83% 50% 8.69%
Debt 4.27% 50% 2.14%
----------
WACC 10.83%
Conclusion of Value: The normalized debt-free net income figure was
capitalized using the Gordon Growth Model. See Exhibit G. The result of this
calculation is a value of $8,403,353 for total invested capital available to
equity holders and debt holders. Therefore, in order to determine the value of
the Company's equity, the debt outstanding, $4,323,633, is subtracted. The
concluded fair value was $4,080,000.
E. Adjusted Book Value
As discussed above, a willing buyer would typically assess the value of
LLOG's capital on the basis of its underlying assets. Thus, it is reasonable to
utilize ABV as a valuation method. By definition, this methodology should be
based on going concern value, not on the assumption of business liquidation. In
reality, though, holders of non-controlling ownership interests can only receive
their pro rata share of Company's assets if it is liquidated.
Adjusted Book Value: Book value, unadjusted, is another name for the
shareholders' equity account as it appears on the balance sheet. Again, ABV as
a willing buyer would assess it involves determining the value of a company's
bundle of assets, less its liabilities, but before transaction costs.
This analysis began by using the Company's January 31, 2005 balance sheet. In
doing so, each asset and liability was assessed to determine its estimated
market value as of the Valuation Date. The following adjustments were made:
- The fair market value of the Company's land, buildings and improvements were
provided by Mr. Christopher Truso of First Pioneer. He stated that the figures
were based on appraisals conducted for lending purposes. The cost-basis book
value of these assets, $3,926,347, was reduced by $1,456,347 to $2,470,000.
- 25 -
- The cost-basis book value of the Company's machinery and equipment was
conservatively reduced by 10% to $1,862,594 based on Empire's discussions with
management.
- The cost-basis book value of LLOG's furniture and fixtures was reduced by 50%,
again, based on discussions with management. This estimate is felt to be
conservative since nearly all of these items are typical office furnishings
which would fetch considerably less in a sale. Empire specifically inquired
about the existence of any luxury, antique or art furnishings and was told
there were none.
- Based on discussions with management, the cost-basis book value of
transportation equipment was reduced by 30% to $436,503. The transportation
equipment is typical of that for the industry in general. There are no luxury,
personal, or collector's vehicles in the mix.
- The book value of goodwill and other intangible assets was eliminated as they
can not actually be transferred or sold.
After all adjustments, the Company's ABV can be stated at $600,000. See
Exhibit H.
F. Rule of Thumb
Rules of thumb are popular as a valuation tool primarily because they are easy
to use. Empire consulted the Handbook of Small Business Valuation Formulas and
Rules of Thumb by Glenn Desmond; this is a well-known source among business
appraisers. There were, unfortunately, no examples for companies like LLOG.
Nevertheless, appraisers frequently will refer to a rule of thumb, if it appears
to be an industry standard, to gauge the reasonableness of valuation opinions
obtained through more rigorous methods(footnote 8). EBITDA multipliers are some
of the most often cited measures. Although Empire could not explicitly locate a
(Footnotes)
8. A rule of thumb is usually, in practice, a guideline company method since it
relies on transaction knowledge specific to small businesses. There do,
nevertheless, exist rules of thumb for large businesses as well. E.g. when the
cellular telephone business was a newcomer, transactions were often based on a
POP (price per population in a subscriber area), and it remains a popular yard-
stick in that industry. In fact, deviations from a broadly accepted rule of
thumb usually require a valuation expert to explain, in detail, why the
particular case does not fall within an "expected range."
- 26 -
rule of thumb for LLOG's industry, we did consider some statistics from Pratt's
Stats, a database of transactions, generally of small companies. (Mergerstat
by FactSet was also consulted but yielded no usable information.) LLOG would at
best be considered a micro cap company; its market capitalization is smaller
than that of the smallest companies used in the Ibbotson studies.
Exhibit J presents some of the data from Pratt's Stats for SIC 2452/NAICS
321992. The MVIC to EBITDA multiples span a broad range, but there is a cluster
around 4.5 times to 5.5 times. It therefore seemed reasonable to at least
conduct a sensitivity analysis using a small company rule of thumb based on
EBITDA multiples of 5.0 times to 6.0 times. Since the multiples selected by
Empire are slightly above the cluster, these calculations represent a
conservative viewpoint. This means that, if the values derived via other
methodologies fall within the range, it will help mitigate concerns that LLOG's
stock has been either overvalued or undervalued. It is Empire's experience
that, unless the subject company is in a "hot" industry or market, its EBITDA
multiple will tend to fall within a range of 4 times to 7 times.
Exhibit I presents the sensitivity analysis. The adjusted pre-tax income and
the weightings used to create a normalized earnings base for use with the rule
of thumb are identical to those used in the two capitalization of income
calculations. Since the selected multiples are for EBITDA, (1) LLOG's
depreciation and amortization for each year were added to the base and (2) no
income tax calculation was imputed. The small company multiple was applied to
each potential EBITDA base and LLOG's debt was subtracted. The resulting
equity values ranged from a low of $1,455,901 to a high of $4,115,595, with a
median of $2,634,293 and an average of $2,829,386. The $4,030,000 value from
the capitalization of income calculations was at the upper end of the
sensitivity analysis range, as was the $4,080,000 from the capitalization of
debt-free income. The Company's trading history (discussed below) also arrived
at a value toward the upper end of the range. Not surprisingly, the $600,000
ABV was below the low end of the range; it is, as noted, considered by Empire
to be a worst case value.
The values derived for LLOG using other methodologies fall well within the
range shown and moreover, toward the upper end of it, based on Empire's rule of
thumb computations. The exception is the ABV which, as noted, is a worst case
scenario.
G. Historical Trading Data
One of the guidelines included in Revenue Ruling 59-60 is actual trading
history. For the trailing 12 months ended with the Valuation Date,
Yahoo!Finance reported only 59 trades of a total of 149,753 shares.
- 27 -
See Exhibit K. The maximum price during this time was $1.01 per share and the
minimum was $0.40 per share. The most recent price was $0.44 per share. There
were only 6 reported trades within the last 30 days. The weighted average price
per share in the last 30 days was $0.67, but it was skewed by a larger-than-
average trade of 10,000 shares on February 23, 2005. Empire was unable to
locate any rationale for this spike in LLOG's share price, but the price
declined again quickly. In sum, the scant trading history of LLOG implies that
it is not a true reflection of fair value. Nevertheless, it was considered in
arriving at a conclusion of fair value for LLOG.
The Company's issued and outstanding shares totaled 9,040,059 as of the
Valuation Date. Based on the most recent share price of $0.44 per share, the
value of 9,040,059 shares equals $3,977,626.
H. Summary of Values
The table below summarizes the range of values derived for LLOG.
Table III
Summary of Value Range
Method Value
---------------------------------- -----------
Capitalization of Income $4,030,000
Capitalization of Debt-Free Income $4,080,000
Adjusted Book Value $600,000
Trading History $3,977,626
In the final analysis, valuation of privately held or thinly traded companies
is as much art as science; it relies on the expert's judgment. From within a
reasonable range of values and considering all factors that went into the
valuation, the valuation expert selects a final figure. Based on all factors
considered in this valuation, it is Empire's opinion that the aggregate fair
value of LLOG is found to be reasonably stated at $4,000,000 as of the
Valuation Date.
- 28 -
Valuation Summary
Given the foregoing review and analysis, and subject to the attached Statement
of Limiting Conditions, it is our opinion that the aggregate fair value of
Lincoln Logs Ltd. is reasonably stated as $4,000,000 as of March 18, 2005, for
a proposed reverse stock split and the resultant deregistration of the Company's
common stock under the Securities Exchange Act of 1934.
Respectfully submitted,
Empire Valuation Consultants, LLC
/s/ Andrea E. Hock
------------------
Andrea E. Hock, ASA
Managing Director
/s/ Terence L. Griswold
-----------------------
Terence L. Griswold, ASA
Managing Director
- 29 -
Addendum 1
STATEMENT OF LIMITING CONDITIONS
Litigation Support: Depositions, expert testimony, attendance in court, and
all preparations/support for same, arising from this appraisal shall not be
required unless arrangements for such services have been previously made.
Management: The opinion of value expressed herein assumes the continuation
of prudent management policies over whatever period of time is deemed reasonable
and necessary to maintain the character and integrity of the appraised business
entity as a going concern.
Information and Data: Information supplied by others that was considered in
this valuation is from sources believed to be reliable, and no further
responsibility is assumed for its accuracy. Information used was limited to
that available on or before the Valuation Date, or which could be reasonably
ascertained as of that date. We reserve the right to make such adjustments to
the valuation herein reported as may be required by consideration of additional
or more reliable data that may become available subsequent to the issuance of
this report.
Purpose: All opinions of market value are presented as Empire Valuation
Consultants, LLC's considered opinion based on the facts and data obtained
during the course of the appraisal investigation. We assume no responsibility
for changes in market conditions which might require a change in appraised
value. The value conclusion derived in this appraisal was for the specific
purpose and date set forth in this appraisal and may not be used for any other
purpose.
Fee: The fee established for the formulation and reporting of these
conclusions is not contingent upon the value or other opinions presented.
Interest: Neither the appraiser nor any officer or employee of Empire
Valuation Consultants, LLC has any interest in the property appraised.
Unexpected Conditions: We assume that there are no hidden or unexpected
conditions of the assets valued that would adversely affect value.
Non Appraisal Expertise: No opinion is intended for matters which require
legal or specialized expertise, investigation or knowledge, beyond that
customarily employed by appraisers.
Hazardous Substances: Hazardous substances, if present within the facilities
of a business, can introduce an actual or potential liability that will
adversely affect the marketability and value of the business or its underlying
assets. In the development of our opinion of value, no consideration has been
given to such liability or its impact on value unless otherwise indicated in
the report.
- 30 -
Addendum 2
CERTIFICATION OF APPRAISERS
We the appraisers certify that, to the best of our knowledge and belief:
1. Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice.
2. All statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal, unbiased
professional analysis, opinions, and conclusions.
4. The professional fee paid to Empire for the preparation of this report is not
contingent upon the opinion of value stated herein.
5. Neither Empire nor any of its employees has, to the best of our knowledge, a
present or intended financial interest in either the entity being valued or in
any affiliates that may exist.
6. No one provided significant professional assistance to the persons signing
this report, unless specifically stated herein.
The American Society of Appraisers has a mandatory recertification program for
all of its Accredited Senior Appraisers. The senior members signing below,
designated by the "ASA," are in compliance with that program.
/s/ Andrea E. Hock
------------------
Andrea E. Hock, ASA
/s/ Terence L. Griswold
-----------------------
Terence L. Griswold, ASA
March 20, 2005
- 31 -
Addendum 3-1
EMPIRE VALUATION CONSULTANTS, LLC
www.empireval.com
3255 Brighton Henrietta TownLine Road 350 5th Avenue, Suite 5513
Rochester, New York 14623 New York, New York 10118-5513
Tel: (585) 475-9260 Fax: (585) 475-9380 Tel: (212) 714-0122 Fax: (212) 714-0124
3340 Peachtree Rd., NE, Suite 1800 61 South Main Street, Suite 201
Atlanta, GA 30326 West Hartford, CT 06107
Tel: (404) 814-5245 Fax: (404) 814-5246 Tel: (860) 233-6552 Fax: (860) 521-7575
Valuation Services
Empire Valuation Consultants, LLC provides valuations to business owners,
attorneys, accountants, commercial bankers, investment bankers, trust
departments, insurance agents, and financial planners, among others. Empire's
consultants have prepared or managed the preparation of over 7,500 appraisals
for the following reasons:
- Buy/Sell Agreements - Redemptions
- Gifting Programs - Recapitalizations
- Estate Taxes - Going Private Transactions
- Mergers & Acquisitions - Stock Option Plans
- Blocks of Publicly - Dissenting Shareholder Suits
- Traded Securities - Fairness Opinions
- Employee Stock Ownership - Intellectual Property
Plans (ESOPs) - Purchase Price Allocation
Other Financial Services
Litigation Support & Expert Testimony
Empire can assist you with research and litigation support and its
professionals are available to provide expert testimony in matters involving
questions of valuation.
ESOP Feasibility Studies & Preliminary Valuations
Empire is available to work with our client's team of financial advisors or
participate in independent feasibility studies and preliminary valuation
reviews in connection with ESOP formation planning.
- 32 -
Addendum 3-2
ANDREA E. HOCK, ASA
Academic Degrees
M.B.A. Rochester Institute of Technology, Finance, 1985
M.A. University of Florida, French Literature, 1974
B.A. Mercer University, summa cum laude, French, 1972
Employment
Managing Director, Empire Valuation Consultants, Rochester, New York, 2000-
present
Senior Valuation Associate, Empire Valuation Consultants, Rochester, New
York, 1993-2000
Valuation Analyst, Empire Valuation Consultants, Rochester, New York,
1989-1993
Financial Manager, Joan Hantz Graphic Design, Rochester, New York, 1987-1988
Claims Representative, Social Security Administration, Rochester, New York,
1978-1989
Experience
Ms. Hock is an Accredited Senior Appraiser (ASA) of the American Society of
Appraisers, Business Valuations. She is currently a Vice President, and former
Chapter President and Chapter Secretary, for the Western New York Chapter of the
ASA. Ms. Hock has over fourteen years of business valuation experience. She
has been involved in the valuation of a wide variety of corporations,
partnerships, and business assets for employee stock ownership plans, fairness
opinions, solvency opinions, recapitalizations, estate and gift taxes, and other
purposes.
As financial manager of a graphics design firm, Ms. Hock became familiar with
proposal writing, financial planning, bookkeeping and tax accounting. Her
experience with the government provided her with a background in a wide variety
of federal and state services and regulations.
- 33 -
Addendum 3-3
TERENCE L. GRISWOLD, ASA
(a) Academic Degrees
M.B.A. University of Rochester, William E. Simon Graduate School of Business
Administration, Finance, 1983
B.S. Alfred University, Business Administration, 1976
(b) Employment
Managing Director, Empire Valuation Consultants, Rochester, New York, 1988-
Present
Partner, Chase Lincoln Capital Advisors; Manager, Business Valuation Group,
Investment Banking Department; Vice President, Chase Lincoln First Bank, N.A.,
Rochester, New York, 1983-1988
Senior Accountant, Seidman & Seidman, Philadelphia, Pennsylvania, 1980-1981
Senior Accountant, Harry Ness & Co., Hanover, Pennsylvania, 1978-1980
Partner and Office Manager, Pappalardo Accounting and Tax Service, Hornell,
New York, 1976-1978
(c) Experience
Mr. Griswold is an Accredited Senior Appraiser (ASA) of the American Society
of Appraisers, served as Vice-Chairman of its International Board of Examiners
for Business Valuation for seven and a half years and is a past member of its
National Business Valuation Committee. He is also a non-practicing Certified
Public Accountant and a member of the American Institute of Certified Public
Accountants ("AICPA"). He has over twenty-four years of accounting, corporate
finance and business valuation experience. He has been involved in the
valuation of a widely diverse base of companies for estate and gift taxes,
recapitalizations, buy-sell agreements, equitable distributions, mergers &
acquisitions, employee stock ownership plans (ESOPs), and other purposes. Mr.
Griswold has also testified as an expert witness in New York, Vermont and
Nevada, and before the NYS Public Service Commission.
Mr. Griswold is currently Vice President for the Western New York Chapter of
the American Society of Appraisers and is a Member Consultant of the National
Center for Employee Ownership and the ESOP Association. He is also a member of
the ESOP Association's National Valuation Advisory Committee. In addition, he
has lectured to numerous business and professional groups on a broad range of
valuation topics.
- 34 -
EXHIBIT A-1
LINCOLN LOGS LTD. CONSOLIDATED
COMPARATIVE INCOME STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
HISTORY HISTORY HISTORY HISTORY HISTORY PROJECT
2001 2002 2003 2004 2005 2006
---------- ---------- ---------- ---------- ---------- ----------
TOTAL REVENUES 10,355,914 11,092,457 13,991,284 15,795,309 21,747,486 27,719,813
Less Cost of Goods
Sold 6,178,747 6,389,561 7,385,771 9,539,655 14,281,653 17,534,172
---------- ---------- ---------- ---------- ---------- ----------
GROSS PROFIT 4,177,167 4,702,896 6,605,513 6,255,654 7,465,833 10,185,641
Commissions 1,348,025 1,377,243 1,747,763 1,796,701 2,197,842 2,717,384
Selling, General
& Administrative 2,974,136 3,224,798 3,670,473 4,666,927 5,796,588 5,933,335
Other 36,000 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ----------
Total Operating
Expenses 4,358,161 4,602,041 5,418,236 6,463,628 7,994,430 8,650,719
---------- ---------- ---------- ---------- ---------- ----------
NET OPERATING INCOME ( 180,994) 100,855 1,187,277 ( 207,974) ( 528,597) 1,534,922
Interest Income 27,473 17,448 24,941 31,443 8,107 8,000
Interest Expense ( 56,658) ( 99,756) ( 57,966) ( 55,284) ( 171,591) ( 251,103)
Other 55,037 222,349 69,901 44,510 121,365 88,759
---------- ---------- ---------- ---------- ---------- ----------
Total Other Income
(Expense) 25,852 140,041 36,876 20,669 ( 42,119) ( 154,344)
---------- ---------- ---------- ---------- ---------- ----------
PRE-TAX INCOME ( 155,142) 240,896 1,224,153 ( 187,305) ( 570,716) 1,380,578
Provision (benefit)
for Taxes 12,409 4,525 24,000 ( 9,914) 0 350,000
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME ( 167,551) 236,371 1,200,153 ( 177,391) ( 570,716) 1,030,578
========== ========== ========== ========== ========== ==========
- 35 -
EXHIBIT A-2
LINCOLN LOGS LTD. CONSOLIDATED
COMMON-SIZED INCOME STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
HISTORY HISTORY HISTORY HISTORY HISTORY PROJECT
2001 2002 2003 2004 2005 2006
------- ------- ------- ------- ------- -------
TOTAL REVENUES 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Less Cost of Goods
Sold 59.7% 57.6% 52.8% 60.4% 65.7% 63.3%
------- ------- ------- ------- ------- -------
GROSS PROFIT 40.3% 42.4% 47.2% 39.6% 34.3% 36.7%
Commissions 13.0% 12.4% 12.5% 11.4% 10.1% 9.8%
Selling, General
& Administrative 28.7% 29.1% 26.2% 29.5% 26.7% 21.4%
Other 0.3% 0.0% 0.0% 0.0% 0.0% 0.0%
------- ------- ------- ------- ------- -------
Total Operating
Expenses 42.1% 41.5% 38.7% 40.9% 36.8% 31.2%
------- ------- ------- ------- ------- -------
NET OPERATING INCOME -1.7% 0.9% 8.5% -1.3% -2.4% 5.5%
Interest Income 0.3% 0.2% 0.2% 0.2% 0.0% 0.0%
Interest Expense -0.5% -0.9% -0.4% -0.4% -0.8% -0.9%
Other 0.5% 2.0% 0.5% 0.3% 0.6% 0.3%
------- ------- ------- ------- ------- -------
Total Other Income
(Expense) 0.2% 1.3% 0.3% 0.1% -0.2% -0.6%
------- ------- ------- ------- ------- -------
PRE-TAX INCOME -1.5% 2.2% 8.7% -1.2% -2.6% 5.0%
Provision (benefit)
for Taxes 0.1% 0.0% 0.2% -0.1% 0.0% 1.3%
------- ------- ------- ------- ------- -------
NET INCOME -1.6% 2.1% 8.6% -1.1% -2.6% 3.7%
======= ======= ======= ======= ======= =======
- 36 -
EXHIBIT A-3
LINCOLN LOGS LTD. CONSOLIDATED
INCOME STATEMENT TREND ANALYSIS
FOR THE YEARS ENDED JANUARY 31,
HISTORY HISTORY HISTORY HISTORY PROJECT
2002 2003 2004 2005 2006
------- ------- ------- ------- -------
TOTAL REVENUES 7.1% 26.1% 12.9% 37.7% 27.5%
Less Cost of Goods
Sold 3.4% 15.6% 29.2% 49.7% 22.8%
------- ------- ------- ------- -------
GROSS PROFIT 12.6% 40.5% -5.3% 19.3% 36.4%
Commissions 2.2% 26.9% 2.8% 22.3% 23.6%
Selling, General
& Administrative 8.4% 13.8% 27.1% 24.2% 2.4%
Other -100.0% N/A N/A N/A N/A
------- ------- ------- ------- -------
Total Operating
Expenses 5.6% 17.7% 19.3% 23.7% 8.2%
------- ------- ------- ------- -------
NET OPERATING INCOME 155.7% 1077.2% -117.5% -154.2% 390.4%
Interest Income -36.5% 42.9% 26.1% -74.2% -1.3%
Interest Expense -76.1% 41.9% 4.6% -210.4% -46.3%
Other 304.0% -68.6% -36.3% 172.7% -26.9%
------- ------- ------- ------- -------
Total Other Income
(Expense) 441.7% -73.7% -43.9% -303.8% -266.4%
------- ------- ------- ------- -------
PRE-TAX INCOME 255.3% 408.2% -115.3% -204.7% 341.9%
Provision (benefit)
for Taxes -63.5% 430.4% -141.3% 100.0% N/A
------- ------- ------- ------- -------
NET INCOME 241.1% 407.7% -114.8% -221.7% 280.6%
======= ======= ======= ======= =======
- 37 -
EXHIBIT B-1
LINCOLN LOGS LTD. CONSOLIDATED
COMPARATIVE BALANCE SHEETS
FOR THE YEARS ENDED JANUARY 31,
HISTORY HISTORY HISTORY HISTORY HISTORY PROJECT
2001 2002 2003 2004 2005 2006
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Cash & Equivalents 286,226 502,397 1,885,931 750,239 800,000 2,473,912
Accounts Receivable 140,440 122,654 207,692 337,166 300,000 379,723
Inventory 1,148,453 863,665 1,277,804 2,032,050 2,000,000 2,930,368
Work-In-Process 0 219,650 228,076 477,389 400,000 0
Prepaid expenses and other
current assets 548,952 322,753 416,404 564,883 750,000 813,168
Income taxes receivable 0 0 0 97,427 30,000 30,000
Due from related parties 0 0 10,141 0 0 0
Mortgage and notes receivable 18,758 3,423 2,592 2,592 5,623 5,623
---------- ---------- ---------- ---------- ---------- ----------
Total Current Assets 2,142,829 2,034,542 4,028,640 4,261,746 4,285,623 6,632,795
Land 835,241 1,020,347 1,012,348
Building and improvements 2,479,802 3,047,979 2,913,999
Machinery and equipment 881,674 1,926,152 2,069,949
Furniture and fixtures 1,683,445 2,096,515 2,106,351
Transportation equipment 262,216 472,350 623,575
---------- ---------- ---------- ---------- ---------- ----------
Total 5,498,322 5,913,057 6,142,378 8,563,343 8,726,222 9,026,222
Less: Accumulated Depreciation (3,422,714) (3,487,139) (3,667,143) (3,983,816) (4,354,065) (4,654,065)
---------- ---------- ---------- ---------- ---------- ----------
Net Fixed Assets 2,075,608 2,425,918 2,475,235 4,579,527 4,372,157 4,372,157
Mortgages receivable 70,409 64,779 63,304 60,053 71,000 71,000
Deposits and other assets 249,687 17,221 70,696 70,742 56,500 56,500
Goodwill 0 0 0 1,319,970 1,355,600 1,355,600
Intangible assets, net 0 4,679 4,159 1,546,032 1,411,286 1,276,540
Other Assets 98,348 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ----------
Total Other Assets 418,444 86,679 138,159 2,996,797 2,894,386 2,759,640
---------- ---------- ---------- ---------- ---------- ----------
TOTAL ASSETS 4,636,881 4,547,139 6,642,034 11,838,070 11,552,166 13,764,592
========== ========== ========== ========== ========== ==========
LIABILITIES & EQUITY
Borrowings on line of credit 0 0 0 503,000 753,000 753,000
Current installments of bank loans 26,046 110,471 22,500 118,980 171,520 171,520
Current installments of notes payable,
related parties 0 0 0 93,458 93,458 93,458
Current installments of notes payable 0 0 65,559 407,109 294,550 294,550
Convertible subordinated debentures 0 0 220,000 0 0
Current installments of capital leases 0 0 23,619 22,211 13,000 13,000
Trade accounts payable 1,003,098 413,809 347,520 1,578,912 1,321,424 1,578,075
Accrued salaries and wages 103,659 82,695 129,607 196,243 180,000 180,000
Accrued income taxes 1,374 3,490 23,100 1,000 1,000 1,000
Accrued expenses 783,646 502,992 662,906 569,850 700,000 761,263
Customer deposits 1,511,860 1,979,323 2,817,188 2,575,847 3,100,000 3,963,933
---------- ---------- ---------- ---------- ---------- ----------
Total Current Liabilities 3,429,683 3,092,780 4,311,999 6,066,610 6,627,952 7,809,800
Notes payable, related parties 383,349 210,000 0 316,563 223,105 223,105
Bank loans 0 181,875 159,375 1,960,687 1,975,000 1,975,000
Notes payable 10,000 10,000 24,716 1,037,541 800,000 800,000
Capital lease obligations 0 0 39,646 17,581 0 0
Other long-term obligations 144,084 146,339 0 15,000 7,500 7,500
---------- ---------- ---------- ---------- ---------- ----------
Total Other Liabilities 537,433 548,214 223,737 3,347,372 3,005,605 3,005,605
---------- ---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES 3,967,116 3,640,994 4,535,736 9,413,982 9,633,557 10,815,405
Preferred stock 0 0 0 0 0 0
Common stock 77,593 77,593 77,593 95,443 95,443 95,443
Additional paid-in-capital 5,681,554 5,681,554 5,681,554 6,107,648 6,107,648 6,107,648
Accumulated deficit (4,204,947) (3,968,567) (2,768,414) (2,945,805) (3,516,521) (2,485,943)
Accumulated other comprehensive
income 0 0 0 51,237 116,474 116,474
Less: Treasury stock ( 884,435) ( 884,435) ( 884,435) ( 884,435) ( 884,435) ( 884,435)
---------- ---------- ---------- ---------- ---------- ----------
Total Equity 669,765 906,145 2,106,298 2,424,088 1,918,609 2,949,187
---------- ---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES & EQUITY 4,636,881 4,547,139 6,642,034 11,838,070 11,552,166 13,764,592
========== ========== ========== ========== ========== ==========
- 38 -
EXHIBIT B-2
LINCOLN LOGS LTD. CONSOLIDATED
COMMON-SIZED BALANCE SHEETS
FOR THE YEARS ENDED JANUARY 31,
HISTORY HISTORY HISTORY HISTORY HISTORY PROJECT
2001 2002 2003 2004 2005 2006
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Cash & Equivalents 6.2% 11.0% 28.4% 6.3% 6.9% 18.0%
Accounts Receivable 3.0% 2.7% 3.1% 2.8% 2.6% 2.8%
Inventory 24.8% 19.0% 19.2% 17.2% 17.3% 21.3%
Work-In-Process 0.0% 4.8% 3.4% 4.0% 3.5% 0.0%
Prepaid expenses and other
current assets 11.8% 7.1% 6.3% 4.8% 6.5% 5.9%
Income taxes receivable 0.0% 0.0% 0.0% 0.8% 0.3% 0.2%
Due from related parties 0.0% 0.0% 0.2% 0.0% 0.0% 0.0%
Mortgage and notes receivable 0.4% 0.1% 0.0% 0.0% 0.0% 0.0%
---------- ---------- ---------- ---------- ---------- ----------
Total Current Assets 46.2% 44.7% 60.7% 36.0% 37.1% 48.2%
Land 0.0% 0.0% 12.6% 8.6% 8.8% 0.0%
Building and improvements 0.0% 0.0% 37.3% 25.7% 25.2% 0.0%
Machinery and equipment 0.0% 0.0% 13.3% 16.3% 17.9% 0.0%
Furniture and fixtures 0.0% 0.0% 25.3% 17.7% 18.2% 0.0%
Transportation equipment 0.0% 0.0% 3.9% 4.0% 5.4% 0.0%
---------- ---------- ---------- ---------- ---------- ----------
Total 118.6% 130.0% 92.5% 72.3% 75.5% 65.6%
Less: Accumulated Depreciation -73.8% -76.7% -55.2% -33.7% -37.7% -33.8%
---------- ---------- ---------- ---------- ---------- ----------
Net Fixed Assets 44.8% 53.4% 37.3% 38.7% 37.8% 31.8%
Mortgages receivable 1.5% 1.4% 1.0% 0.5% 0.6% 0.5%
Deposits and other assets 5.4% 0.4% 1.1% 0.6% 0.5% 0.4%
Goodwill 0.0% 0.0% 0.0% 11.2% 11.7% 9.8%
Intangible assets, net 0.0% 0.1% 0.1% 13.1% 12.2% 9.3%
Other Assets 2.1% 0.0% 0.0% 0.0% 0.0% 0.0%
---------- ---------- ---------- ---------- ---------- ----------
Total Other Assets 9.0% 1.9% 2.1% 25.3% 25.1% 20.0%
---------- ---------- ---------- ---------- ---------- ----------
TOTAL ASSETS 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ========== ==========
LIABILITIES & EQUITY
Borrowings on line of credit 0.0% 0.0% 0.0% 4.2% 6.5% 5.5%
Current installments of bank loans 0.6% 2.4% 0.3% 1.0% 1.5% 1.2%
Current installments of notes payable,
related parties 0.0% 0.0% 0.0% 0.8% 0.8% 0.7%
Current installments of notes payable 0.0% 0.0% 1.0% 3.4% 2.5% 2.1%
Convertible subordinated debentures 0.0% 0.0% 3.3% 0.0% 0.0% 0.0%
Current installments of capital leases 0.0% 0.0% 0.4% 0.2% 0.1% 0.1%
Trade accounts payable 21.6% 9.1% 5.2% 13.3% 11.4% 11.5%
Accrued salaries and wages 2.2% 1.8% 2.0% 1.7% 1.6% 1.3%
Accrued income taxes 0.0% 0.1% 0.3% 0.0% 0.0% 0.0%
Accrued expenses 16.9% 11.1% 10.0% 4.8% 6.1% 5.5%
Customer deposits 32.6% 43.5% 42.4% 21.8% 26.8% 28.8%
---------- ---------- ---------- ---------- ---------- ----------
Total Current Liabilities 74.0% 68.0% 64.9% 51.2% 57.4% 56.7%
Notes payable, related parties 8.3% 4.6% 0.0% 2.7% 1.9% 1.6%
Bank loans 0.0% 4.0% 2.4% 16.6% 17.1% 14.3%
Notes payable 0.2% 0.2% 0.4% 8.8% 6.9% 5.8%
Capital lease obligations 0.0% 0.0% 0.6% 0.1% 0.0% 0.0%
Other long-term obligations 3.1% 3.2% 0.0% 0.1% 0.1% 0.1%
---------- ---------- ---------- ---------- ---------- ----------
Total Other Liabilities 11.6% 12.1% 3.4% 28.3% 26.0% 21.8%
---------- ---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES 85.6% 80.1% 68.3% 79.5% 83.4% 78.6%
Preferred stock 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Common stock 1.7% 1.7% 1.2% 0.8% 0.8% 0.7%
Additional paid-in-capital 122.5% 124.9% 85.5% 51.6% 52.9% 44.4%
Accumulated deficit -90.7% -87.3% -41.7% -24.9% -30.4% -18.1%
Accumulated other comprehensive
income 0.0% 0.0% 0.0% 0.4% 1.0% 0.8%
Less: Treasury stock -19.1% -19.5% -13.3% -7.5% -7.7% -6.4%
---------- ---------- ---------- ---------- ---------- ----------
Total Equity 14.4% 19.9% 31.7% 20.5% 16.6% 21.4%
---------- ---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES & EQUITY 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ========== ==========
- 39 -
EXHIBIT C
LINCOLN LOGS LTD. CONSOLIDATED
COMPARATIVE CASH FLOW STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
HISTORY HISTORY HISTORY HISTORY HISTORY PROJECT
2001 2002 2003 2004 2005 2006
---------- ---------- ---------- ---------- ---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ( 167,551) 236,371 1,200,153 ( 177,391) ( 570,716) 1,030,578
Adjustments to reconcile Net Income to Net Cash
Provided from Operating Activities:
Depreciation & Amortization 116,449 138,573 180,524 316,673 519,096 300,000
Amortization 0 0 0 47,863 143,920
(Gain) on sale of property held for resale ( 9,714) ( 66,499) ( 14,980) ( 4,664) 0
(Gain) on sale of real property 0 0 0 0 ( 36,656)
(Gain) on disposition of real property 0 0 0 0 ( 10,059)
(Inc.)Dec. in Accounts Receivable 9,958 17,786 ( 85,038) ( 129,474) 37,166 ( 79,723)
(Inc.)Dec. in Work in Process 0 0 ( 8,426) ( 249,313) 77,389 400,000
(Inc.)Dec. in Inventory ( 303,279) 222,415 ( 414,139) ( 754,246) 32,050 ( 930,368)
(Inc.)Dec. in Prepaid expenses and other
current assets ( 120,602) 68,922 ( 93,651) ( 148,479) ( 185,117) ( 63,168)
(Inc.)Dec. in Income taxes receivable 0 0 0 ( 97,427) 67,427 0
(Inc.)Dec. in Due from related parties 0 0 ( 15,092) 10,141 0 0
(Inc.)Dec. in Other assets ( 52,107) 130,465 ( 53,475) ( 5,382) 14,242 134,746
Inc.(Dec.) in Trade accounts payable 444,298 ( 589,289) ( 66,289) 1,231,392 ( 257,488) 256,651
Inc.(Dec.) in Accrued salaries and wages 0 ( 20,964) 0 0 0 0
Inc.(Dec.) in Accrued income taxes 0 2,116 19,610 ( 22,100) 0 0
Inc.(Dec.) in Accrued expenses & Other 56,756 ( 280,645) 211,777 ( 26,421) 106,407 61,263
Inc.(Dec.) in Customer deposits 234,897 467,463 837,865 ( 241,341) 524,153 863,933
---------- ---------- ---------- ---------- ---------- ----------
Net Cash Provided By (Used In) Operating
Activities 209,105 326,714 1,698,839 ( 250,169) 461,814 1,973,912
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures ( 261,992) ( 254,659) ( 229,841) ( 468,398) ( 365,858) ( 300,000)
Acquisition of Businesses 0 0 0 (1,798,830) ( 35,630) 0
Proceeds from the sale of assets held for resale 10,000 168,000 14,500 10,000 0 0
Proceeds from the sale of real property 0 500 1,000 0 67,916 0
Proceeds from disposition of real property 0 0 0 0 32.931 0
Issuance of notes receivable ( 19,454) 19,453 0 0 ( 17,400) 0
Payments on mortgage receivable 1,762 1,512 2,306 3,251 3.422 0
---------- ---------- ---------- ---------- ---------- ----------
Net Cash Provided By (Used In) Investing
Activities ( 269,684) ( 65,194) ( 212,035) (2,253,977) ( 314,619) ( 300,000)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 0 225,000 11,080 1,222,390 210,161 0
Proceeds from borrowings on line of credit 0 0 0 503,000 900,000 0
Repayment of line of credit 0 0 0 0 ( 650,000) 0
Loan origination fees 0 ( 5,199) 0 ( 43,544) ( 9,174) 0
Capital received on incentive options 0 0 0 6,013 0 0
Repayments of capital leases 0 0 ( 60,358) ( 61,616) ( 26,792) 0
Repayment of bank loans ( 9,501) ( 265,150) ( 22,500) ( 190,208) ( 143,308) 0
Repayments of notes payable 0 0 ( 31,492) ( 118,818) ( 443,558) 0
---------- ---------- ---------- ---------- ---------- ----------
Net cash Provide By (Used In)Financing
Activities ( 9,501) ( 45,349) ( 103,270) 1,317,217 ( 162,671) 0
Effect of foreign currency translation 0 0 0 51,237 65,237 0
---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH ( 70,080) 216,171 1,383,534 (1,135,692) 49,761 1,673,912
Beginning Cash 356,306 286,226 502,397 1,885,931 750,239 800,000
---------- ---------- ---------- ---------- ---------- ----------
Ending Cash 286,226 502,397 1,885,931 750,239 800,000 2,473,912
========== ========== ========== ========== ========== ==========
- 40 -
EXHIBIT D
LINCOLN LOGS LTD. CONSOLIDATED
SELECTED FINANCIAL RATIOS
FOR THE YEARS ENDED JANUARY 31,
HISTORY HISTORY HISTORY HISTORY HISTORY PROJECT
2001 2002 2003 2004 2005 2006
---------- ---------- ---------- ---------- ---------- ----------
Liquidity Ratios
Current Ratio 0.6 0.7 0.9 0.7 0.6 0.8
Quick Ratio 0.1 0.2 0.5 0.2 0.2 0.4
Days' Receivable 5 4 5 8 5 5
Days' Inventory 68 62 74 96 61 61
---------- ---------- ---------- ---------- ---------- ----------
Operating Cycle 73 66 80 104 66 66
Working Capital (1,286,854) (1,058,238) ( 283,359) (1,804,864) (2,342,329) (1,177,005)
Sales/Working Capital ( 8.0) (10.5) (49.4) ( 8.8) ( 9.3) (23.6)
Coverage Ratios
EBIT/Interest ( 1.7) 3.4 22.1 ( 2.4) ( 2.3) 6.5
Leverage Ratios
Net Fixed Assets/Tangible Net Worth 3.1 2.7 1.2 (10.4) ( 5.2) 13.8
Total Liabilities(Debt)/Tangible Net Worth 5.9 4.0 2.2 (21.3) (11.4) 34.1
Profitability Ratios
% Profit Before Taxes/Tangible Net Worth -25.9% 28.6% 59.9% -7.9% -30.9% 48.0%
% Profit Before Taxes/Total Assets -3.3% 5.3% 18.4% -1.6% -4.9% 10.0%
Other Ratios
Sales/Net Fixed Assets 5.0 4.6 5.7 3.4 5.0 6.3
Sales/Total Assets 2.2 2.4 2.1 1.3 1.9 2.0
% Depreciation & Amortization/Sales 1.1% 1.2% 1.3% 2.3% 3.0% 1.1%
- 41 -
EXHIBIT E
LINCOLN LOGS LTD. CONSOLIDATED
PERFORMANCE VS. RMA
SIC 2452/NAICS 321992: PREFABRICATED WOOD BUILDING MANUFACTURING
FOR THE YEARS ENDED JANUARY 31,
RMA RMA
HISTORY SALES $10MM-$25MM ASSETS $10MM-$50MM HISTORY
2004 4/1/03-3/31/04 4/1/03-3/31/04 2005
---------- ----------------- ------------------ ----------
ASSETS:
Cash & Equivalents 6.3% 6.8% 11.2% 6.9%
Trade Rec., Net 2.8% 23.2% 16.1% 2.6%
Inventory 17.2% 22.8% 25.1% 17.3%
All Other Current Assets 9.6% 3.8% 2.8% 10.3%
---------- ----------------- ------------------ ----------
Total Current Assets 36.0% 56.5% 55.2% 37.1%
Fixed Assets, Net 38.7% 31.2% 27.6% 37.8%
Ingangibles 24.8% 8.8% 12.3% 24.4%
All Other Non-Current 0.5% 3.5% 4.9% 0.6%
---------- ----------------- ------------------ ----------
Total Assets 100.0% 100.0% 100.0% 100.0%
LIABILITIES:
Notes Payable 4.2% 11.5% 12.4% 6.5%
Current Maturity - LTD 5.0% 3.9% 1.5% 4.2%
Trade Payables 13.3% 14.0% 8.4% 11.4%
Income Taxes Payable 0.0% 0.2% 0.0% 0.0%
All Other Current Liabilities 28.7% 15.4% 18.1% 35.2%
---------- ----------------- ------------------ ----------
Total Current Liabilities 51.2% 45.0% 40.4% 57.4%
LTD 28.1% 17.2% 12.3% 26.0%
Deferred Taxes 0.0% 0.2% 0.2% 0.0%
All Other Non-Current 0.1% 2.6% 5.3% 0.0%
Net Worth 20.5% 34.9% 41.8% 16.6%
---------- ----------------- ------------------ ----------
Total Liabilities & Net Worth 100.0% 100.0% 100.0% 100.0%
INCOME:
Net Sales 100.0% 100.0% 100.0% 100.0%
Gross Sales 39.6% 24.8% 26.7% 34.3%
Operating Expenses 40.9% 20.2% 21.4% 36.8%
Operating Profit -1.3% 4.6% 5.4% -2.4%
All Other Expenses, Net -0.1% 0.9% 0.9% 0.2%
Profit Before Taxes -1.2% 3.7% 4.5% -2.6%
RATIOS:
Current Ratio 0.7 1.2 1.2 0.6
Quick Ratio 0.2 0.6 0.6 0.2
Days' Receivable 8 26 25 5
Days' Inventory 96 37 56 61
Operating Cycle 104 63 81 66
Days' Payables 60 26 23 34
Sales/Working Capital ( 8.8) 31.4 20.8 ( 9.3)
EBIT/Interest ( 2.4) 3.6 3.2 ( 2.3)
Net Fixed Assets/Tangible Net Worth (10.4) 1.2 0.8 ( 5.2)
Total Liabilities(Debt)/Tangible Net Worth (21.3) 1.9 1.6 (11.4)
% Profit Before Taxes/Tangible Net Worth -7.9% 15.6% 7.9% -30.9%
% Profit Before Taxes/Total Assets -1.6% 6.7% 2.4% -4.9%
Net Sales/Net Fixed Assets 3.4 8.4 8.7 5.0
Net Sales/Total Assets 1.3 2.7 1.8 1.9
% Depreciation & Amortization/Sales 2.3% 1.5% 1.5% 3.0%
Sample Size 1 25 17 1
Average Sales (,000s) $15,795 $16,606 $38,533 $21,747
Average Assets (,000s) $11,838 $8,471 $18,608 $11,552
Source: RMA 2004/2005
- 42 -
EXHIBIT F
LINCOLN LOGS LTD. CONSOLIDATED
CAPITALIZATION OF ADJUSTED EARNINGS
AS OF MARCH 18, 2005
HISTORY HISTORY HISTORY HISTORY HISTORY PROJECT
2001 2002 2003 2004 2005 2006
---------- ---------- ---------- ---------- ---------- ----------
Pre-tax Income ( 155,142) 240,896 1,224,153 ( 187,305) ( 570,716) 1,380,578
Actual SG&A (excluding commissions) 4,666,927
Less: SG&A at 26.7% of sales (4,217,348)
SEC Filing Expenses 240,000 240,000 240,000 240,000 240,000
---------- ---------- ---------- ---------- ---------- ----------
Adjusted Pre-tax Income 84,858 480,896 1,464,153 502,274 ( 330,716) 1,380,578
Adjusted Pre-tax
Earnings
----------------
Weightings: 1 1 1 1 1 1 699,437
1 2 3 1 4 918,875
1 1 1 1 754,072
1 2 1 3 897,103
Selected Adjusted Pre-tax Income $ 850,000
Less: City, State & Fed. Taxes, Calculated 39.0% (331,075)
---------
Average Adjusted Net Income $ 518,925
Capitalization Rate 13.4%
Aggregate Fair Value, rounded $4,030,000
Gordon Growth Model * ==========
Cost of Equity Build-up
-----------------------
20 Year Treasuries as of 2/28/05 4.78%
Generic Stock Premium 7.00% (1)
Small Stock Premium 6.60% (1)
Industry/Company Specific Risk, fair value basis -1.00%
------
Discount Rate 17.38%
Less: Long Term Growth Rate 4.00%
------
Capitalization Rate, rounded 13.40%
* Gordon Growth Model (Base Net Income x (1+growth rate)/(capitalization rate)
(1) Ibbotson Associates
- 43 -
EXHIBIT G
LINCOLN LOGS LTD. CONSOLIDATED
CAPITALIZATION OF ADJUSTED DEBT-FREE EARNINGS
AS OF MARCH 18, 2005
HISTORY HISTORY HISTORY HISTORY HISTORY PROJECT
2001 2002 2003 2004 2005 2006
---------- ---------- ---------- ---------- ---------- ----------
Pre-tax Income ( 155,142) 240,896 1,224,153 ( 187,305) ( 570,716) 1,380,578
Plus: Interest Expense 56,658 99,756 57,966 55,284 171,591 251,103
Actual SG&A (excluding commissions) 4,666,927
Less: SG&A at 26.7% of sales (4,217,348)
SEC Filing Expenses 240,000 240,000 240,000 240,000 240,000 0
---------- ---------- ---------- ---------- ---------- ----------
Adjusted Pre-tax Income 141,516 580,652 1,522,119 557,558 ( 159,125) 1,631,681
Adjusted Pre-tax
Earnings
----------------
Weightings: 1 1 1 1 1 1 826,577
1 2 3 1 4 1,060,469
1 1 1 1 888,058
1 2 1 3 1,053,308
Selected Adjusted Pre-tax Debt-Free Income $ 900,000
Less: City, State & Fed. Taxes, Calculated 39.0% (350,550)
----------
Average Debt-Free Net Income $ 549,450
Capitalization Rate 6.8%
Aggregate Total Invested Capital (Gordon Growth Model)* $8,403,353 100.0%
Less: Interest-Bearing Debt on Valuation Date ($4,323,633) 51.5%
----------
Aggregate Equity Value, rounded $4,080,000 48.6%
==========
Cost of Equity Build-up
-----------------------
20 Year Treasuries as of 2/28/05 4.78%
Generic Stock Premium 7.00% (1)
Small Stock Premium 6.60% (1)
Industry/Company Specific Risk, fair value basis -1.00%
------
Discount Rate 17.38%
Cost of Debt
------------
Company's Cost of Debt 7.0%
Tax Rate 39.0%
After-tax Cost of Debt 4.27%
Weighted Average Cost of Capital (WACC) Weighted
--------------------------------------
Debt 4.27% 50% 2.14%
Equity 17.38% 50% 8.69%
------
WACC 10.83%
Less: Long Term Growth Rate 4.0%
------
Debt-free Capitalization Rate, rounded 6.8%
* Gordon Growth Model (Base Net Income x (1+growth rate)/(capitalization rate)
- 44 -
EXHIBIT H
LINCOLN LOGS LTD. CONSOLIDATED
CALCULATION OF ADJUSTED BOOK VALUE
HISTORY MARKET ADJUSTED BOOK
2005 ADJUSTMENTS VALUE
---------- ----------- -------------
ASSETS
Cash & Equivalents 800,000 800,000
Accounts Receivable 300,000 300,000
Inventory 2,000,000 2,000,000
Work-In-Process 400,000 400,000
Prepaid expenses and other
current assets 750,000 750,000
Income taxes receivable 30,000 30,000
Due from related parties 0 0
Mortgage and notes receivable 5,623 5,623
---------- ----------- -------------
Total Current Assets 4,285,623 0 4,285,623
Land (1) 1,012,348 ( 1,456,347) 2,470,000
Building and improvements (1) 2,913,999 ---
Machinery and equipment 2,069,949 ( 206,995) 1,862,954
Furniture and fixtures 2,106,351 ( 1,053,176) 1,053,175
Transportation equipment 623,575 ( 187,073) 436,503
---------- ----------- -------------
Total 8,726,222 ( 2,903,590) 5,822,632
Less: Accumulated Depreciation (4,354,065) 4,354,065 0
---------- ----------- -------------
Net Fixed Assets 4,372,157 1,450,475 5,822,632
Mortgages receivable 71,000 71,000
Deposits and other assets 56,500 56,500
Goodwill 1,355,600 ( 1,355,600) 0
Intangible assets, net 1,411,286 ( 1,276,540) 0
Other Assets 0 0 0
---------- ----------- -------------
Total Other Assets 2,894,386 ( 2,766,886) 127,500
---------- ----------- -------------
TOTAL ASSETS 11,552,166 ( 1,316,411) 10,235,755
========== =========== =============
LIABILITIES
Borrowings on line of credit 753,000 753,000
Current installments of bank loans 171,520 171,520
Current installments of notes payable,
related parties 93,458 93,458
Current installments of notes payable 294,550 294,550
Convertible subordinated debentures 0 0
Current installments of capital leases 13,000 13,000
Trade accounts payable 1,321,424 1,578,075
Accrued salaries and wages 180,000 180,000
Accrued income taxes 1,000 1,000
Accrued expenses 700,000 761,263
Customer deposits 3,100,000 3,963,933
---------- ----------- -------------
Total Current Liabilities 6,627,952 6,627,952
Notes payable, related parties 223,105 223,105
Bank loans 1,975,000 1,975,000
Notes payable 800,000 800,000
Capital lease obligations 0 0
Other long-term obligations 7,500 7,500
---------- ----------- -------------
Total Other Liabilities 3,005,605 3,005,605
---------- ----------- -------------
TOTAL LIABILITIES 9,633,557 9,633,557
Preferred stock 0 0
Common stock 95,443 95,443
Additional paid-in-capital 6,107,648 ( 1,316,411) 4,791,237
Accumulated deficit (3,516,521) ( 3,516,521)
Accumulated other comprehensive
income 116,474 116,474
Less: Treasury stock ( 884,435) ( 884,435)
---------- ----------- -------------
Total Equity 1,918,609 ( 1,316,411) 602,198
---------- ----------- -------------
TOTAL LIABILITIES & EQUITY 11,552,166 ( 1,316,411) 10,235,755
========== =========== =============
Adjusted Book Value, rounded 600,000
=============
(1) Fair market values supplied by Christopher Truso of First Pioneer,
from appraisals performed for lending purposes.
- 45 -
EXHIBIT I
LINCOLN LOGS LTD. CONSOLIDATED
CAPITALIZATION OF ADJUSTED EBITDA
AS OF MARCH 18, 2005
HISTORY HISTORY HISTORY HISTORY HISTORY PROJECT
2001 2002 2003 2004 2005 2006
---------- ---------- ---------- ---------- ---------- ----------
Adjusted Pre-tax Income 84,858 480,896 1,464,153 502,274 ( 330,716) 1,380,578
Plus: Depreciation & Amortization 116,449 138,573 180,524 364,536 663,016 300,000
Plus: Interest Expense 56,658 99,756 57,966 55,284 171,591 251,103
---------- ---------- ---------- ---------- ---------- ----------
Adjusted EBITDA (a) 257,965 719,225 1,702,643 922,094 503,891 1,931,681
EBITDA Bases (b)
from Weightings as
Weightings of Adjusted EBITDA (a) shown:
1 1 1 1 1 1,155,907
1 2 3 1 4 1,374,674
1 1 1 1 1,265,077
1 2 1 3 1,406,538
SENSITIVITY ANALYSIS - AGGREGATE VALUES
EBITDA Bases Small Company Total Invested Fair Value of
(b) Multiple Capital Debt Equity
------------ ------------- -------------- ------------- -------------
1,155,907 5.0 5,779,534 ( 4,323,633) 1,455,901
1,374,674 5.0 6,873,368 ( 4,323,633) 2,549,735
1,265,077 5.0 6,325,387 ( 4,323,633) 2,001,754
1,406,538 5.0 7,032,690 ( 4,323,633) 2,709,057
1,155,907 5.5 6,357,488 ( 4,323,633) 2,033,855
1,374,674 5.5 7,560,705 ( 4,323,633) 3,237,072
1,265,077 5.5 6,957,926 ( 4,323,633) 2,634,293
1,406,538 5.5 7,735,959 ( 4,323,633) 3,412,326
1,155,907 6.0 6,935,441 ( 4,323,633) 2,611,808
1,374,674 6.0 8,248,042 ( 4,323,633) 3,924,409
1,265,077 6.0 7,590,464 ( 4,323,633) 3,266,831
1,406,538 6.0 8,439,228 ( 4,323,633) 4,115,595
From data above:
MAXIMUM 4,115,595
MINIMUM 1,455,901
MEDIAN 2,634,293
AVERAGE 2,829,386
AGGREGATE VALUES DERIVED FOR LLOG
Variance within
Sensitivity
Methodology Concluded Value Analysis
-------------------------------- --------------- ------------------
Capitalization of Income 4,030,000 upper end of range
Capitalization of Debt-Free Income 4,080,000 upper end of range
Trading History 3,977,626 upper end of range
Adjusted Book Value 600,000 below entire range
- 46 -
EXHIBIT J
LINCOLN LOGS LTD.
INDUSTRY MULTIPLES
(,000) MVIC To
(,000) Liab- (,000) Trans- (,000) MVIC To Book
Sale (,000) Equity ilities Amount action Company MVIC MVIC To Gross MVIC To MVIC To Value
No. Company Name Date Ask Price Price Assumed Down Type Type Price Sales Profit EBITDA EBIT Inv Cap
--- ----------------- -------- --------- ------- ------- ------- ------ ------- ------- ------ ------- ------- ------- -------
1 Snake River Log
Homes, LLC 11/17/03 1,260 Stock LLC 1,260 0.85 3.59 49.25 129.47 3.41
2 Not Available 1/01/02 1,500 1,458 458 300 Stock S Corp 1,916 1.13 3.83 34.21 45.62
3 Not Available 4/26/00 3,500 2,650 10 Asset LLC 2,650 0.74 1.67 5.46 7.12
4 Chandeleur Homes,
Inc. 2/03/95 32,500 32,500 Asset S Corp 32,500 0.52 3.15 4.66 4.76 10.48
5 Crest Ridge
Homes, Inc. 2/03/95 14,400 14,400 Asset S Corp 14,400 0.48 3.12 4.64 4.73 11.00
6 Shedmaster of
Tucson, Inc. 6/30/00 85 75 75 Asset S Corp 75 0.31 0.71 4.35
7 B&B Manufacturing 12/31/99 260 200 75 Asset S Corp 200 0.47 1.96 5.71
Source: Pratt's Stats
- 47 -
EXHIBIT K
LLOG.OB
Date Open High Low Close Volume Adj. Close*
--------- ------ ------ ------ ------ --------- -----------
18-Mar-05 0.44 0.44 0.44 0.44 0.44
17-Mar-05 0.44 0.44 0.44 0.44 0.44
16-Mar-05 0.44 0.44 0.44 0.44 0.44
15-Mar-05 0.44 0.44 0.44 0.44 0.44
14-Mar-05 0.44 0.44 0.44 0.44 0.44
11-Mar-05 0.44 0.44 0.44 0.44 616 0.44
10-Mar-05 0.51 0.51 0.44 0.44 4,100 0.44
9-Mar-05 0.75 0.75 0.75 0.75 0.75
8-Mar-05 0.75 0.75 0.75 0.75 0.75
7-Mar-05 0.75 0.75 0.75 0.75 0.75
4-Mar-05 0.75 0.75 0.75 0.75 0.75
3-Mar-05 0.51 0.75 0.51 0.75 400 0.75
2-Mar-05 0.51 0.51 0.51 0.51 211 0.51
1-Mar-05 0.84 0.84 0.84 0.84 0.84
28-Feb-05 0.84 0.84 0.84 0.84 0.84
25-Feb-05 0.84 0.84 0.84 0.84 0.84
24-Feb-05 0.84 0.84 0.84 0.84 0.84
23-Feb-05 0.70 0.84 0.70 0.84 10,000 0.84
22-Feb-05 0.42 0.42 0.42 0.42 2,200 0.42
18-Feb-05 0.52 0.52 0.52 0.52 0.52
17-Feb-05 0.52 0.52 0.52 0.52 0.52
16-Feb-05 0.52 0.52 0.52 0.52 2,500 0.52
15-Feb-05 0.50 0.50 0.50 0.50 0.50
14-Feb-05 0.50 0.50 0.50 0.50 0.50
11-Feb-05 0.50 0.50 0.50 0.50 0.50
10-Feb-05 0.50 0.50 0.50 0.50 0.50
9-Feb-05 0.51 0.51 0.50 0.50 2,800 0.50
8-Feb-05 0.45 0.45 0.45 0.45 2,700 0.45
7-Feb-05 0.51 0.51 0.51 0.51 0.51
4-Feb-05 0.51 0.51 0.51 0.51 2,500 0.51
3-Feb-05 0.59 0.59 0.59 0.59 0.59
2-Feb-05 0.59 0.59 0.59 0.59 0.59
1-Feb-05 0.59 0.59 0.59 0.59 0.59
31-Jan-05 0.59 0.59 0.59 0.59 0.59
28-Jan-05 0.59 0.59 0.59 0.59 0.59
27-Jan-05 0.59 0.59 0.59 0.59 0.59
26-Jan-05 0.59 0.59 0.59 0.59 0.59
25-Jan-05 0.60 0.60 0.60 0.60 2,900 0.59
24-Jan-05 0.51 0.51 0.51 0.51 109 0.51
21-Jan-05 0.59 0.59 0.59 0.59 0.59
20-Jan-05 0.59 0.59 0.59 0.59 0.59
19-Jan-05 0.60 0.60 0.59 0.59 1,503 0.59
18-Jan-05 0.59 0.59 0.59 0.59 0.59
14-Jan-05 0.59 0.59 0.59 0.59 2,700 0.59
13-Jan-05 0.51 0.51 0.51 0.51 0.51
12-Jan-05 0.51 0.51 0.51 0.51 176 0.51
11-Jan-05 0.60 0.60 0.60 0.60 0.60
7-Jan-05 0.60 0.60 0.60 0.60 2,500 0.60
6-Jan-05 0.60 0.60 0.60 0.60 0.60
5-Jan-05 0.60 0.60 0.60 0.60 0.60
- 48 -
EXHIBIT K
LLOG.OB
Date Open High Low Close Volume Adj. Close*
--------- ------ ------ ------ ------ --------- -----------
4-Jan-05 0.60 0.60 0.60 0.60 0.60
3-Jan-05 0.60 0.60 0.60 0.60 0.60
30-Dec-04 0.60 0.75 0.60 0.60 2,406 0.60
29-Dec-04 0.75 0.75 0.75 0.75 4,500 0.75
28-Dec-04 0.84 0.84 0.84 0.84 0.84
27-Dec-04 0.82 0.85 0.82 0.84 3,212 0.84
23-Dec-04 0.85 0.85 0.85 0.85 0.85
22-Dec-04 0.82 0.85 0.82 0.85 400 0.85
21-Dec-04 0.42 0.42 0.42 0.42 0.42
20-Dec-04 0.42 0.42 0.42 0.42 0.42
17-Dec-04 0.42 0.42 0.42 0.42 100 0.42
16-Dec-04 0.80 0.80 0.80 0.80 0.80
15-Dec-04 0.80 0.80 0.80 0.80 0.80
14-Dec-04 0.80 0.80 0.80 0.80 0.80
13-Dec-04 0.85 0.85 0.80 0.80 200 0.80
10-Dec-04 0.90 0.90 0.90 0.90 0.90
9-Dec-04 0.90 0.90 0.90 0.90 0.90
8-Dec-04 0.90 0.90 0.90 0.90 0.90
7-Dec-04 0.90 0.90 0.90 0.90 1,000 0.90
6-Dec-04 1.01 1.01 1.00 1.00 2,900 1.00
3-Dec-04 1.01 1.01 1.01 1.01 1.01
2-Dec-04 1.01 1.01 0.85 1.01 5,600 1.01
1-Dec-04 1.01 1.01 0.85 1.01 100 1.01
30-Nov-04 1.01 1.01 1.01 1.01 200 1.01
29-Nov-04 0.51 0.51 0.51 0.51 0.51
26-Nov-04 0.51 0.51 0.51 0.51 0.51
24-Nov-04 0.51 0.51 0.51 0.51 0.51
23-Nov-04 0.51 0.51 0.51 0.51 0.51
22-Nov-04 0.51 0.51 0.51 0.51 0.51
19-Nov-04 0.51 0.51 0.51 0.51 0.51
18-Nov-04 0.51 0.51 0.51 0.51 0.51
17-Nov-04 0.51 0.51 0.51 0.51 0.51
16-Nov-04 0.51 0.51 0.51 0.51 0.51
15-Nov-04 0.51 0.51 0.51 0.51 0.51
12-Nov-04 0.51 0.51 0.51 0.51 721 0.51
11-Nov-04 0.51 0.51 0.51 0.51 0.51
10-Nov-04 0.51 0.51 0.51 0.51 0.51
9-Nov-04 0.51 0.51 0.51 0.51 0.51
8-Nov-04 0.51 0.51 0.51 0.51 0.51
5-Nov-04 0.51 0.51 0.51 0.51 2,000 0.51
4-Nov-04 1.01 1.01 1.01 1.01 1.01
3-Nov-04 1.01 1.01 1.01 1.01 1.01
2-Nov-04 1.01 1.01 1.01 1.01 1.01
1-Nov-04 1.01 1.01 1.01 1.01 1.01
29-Oct-04 1.01 1.01 1.01 1.01 1.01
28-Oct-04 1.01 1.01 1.01 1.01 1.01
27-Oct-04 1.01 1.01 1.01 1.01 1.01
26-Oct-04 1.01 1.01 1.01 1.01 1.01
25-Oct-04 1.01 1.01 1.01 1.01 1.01
22-Oct-04 1.01 1.01 1.01 1.01 1.01
21-Oct-04 1.01 1.01 1.01 1.01 200 1.01
- 49 -
EXHIBIT K
LLOG.OB
Date Open High Low Close Volume Adj. Close*
--------- ------ ------ ------ ------ --------- -----------
20-Oct-04 0.60 0.60 0.60 0.60 0.60
19-Oct-04 0.60 0.60 0.60 0.60 0.60
18-Oct-04 0.60 0.60 0.60 0.60 0.60
15-Oct-04 0.60 0.60 0.60 0.60 0.60
14-Oct-04 0.60 0.60 0.60 0.60 0.60
13-Oct-04 0.60 0.60 0.60 0.60 0.60
12-Oct-04 0.60 0.60 0.60 0.60 0.60
11-Oct-04 0.60 0.60 0.60 0.60 0.60
8-Oct-04 0.56 0.60 0.56 0.60 5,000 0.60
7-Oct-04 0.80 0.80 0.80 0.80 2,500 0.80
6-Oct-04 0.80 0.80 0.80 0.80 0.80
5-Oct-04 0.80 0.80 0.80 0.80 0.80
4-Oct-04 0.80 0.80 0.80 0.80 0.80
1-Oct-04 0.80 0.80 0.80 0.80 0.80
30-Sep-04 0.80 0.80 0.80 0.80 0.80
29-Sep-04 0.80 0.80 0.80 0.80 0.80
28-Sep-04 0.80 0.80 0.80 0.80 0.80
27-Sep-04 0.36 0.80 0.36 0.80 1,776 0.80
24-Sep-04 0.60 0.60 0.60 0.60 1,000 0.60
23-Sep-04 0.60 0.60 0.60 0.60 0.60
22-Sep-04 0.60 0.60 0.60 0.60 0.60
21-Sep-04 0.35 0.60 0.35 0.60 2,800 0.60
20-Sep-04 0.40 0.40 0.40 0.40 0.40
17-Sep-04 0.40 0.40 0.40 0.40 0.40
16-Sep-04 0.40 0.40 0.40 0.40 0.40
15-Sep-04 0.40 0.40 0.40 0.40 0.40
14-Sep-04 0.40 0.40 0.40 0.40 0.40
13-Sep-04 0.35 0.40 0.35 0.40 210 0.40
10-Sep-04 0.60 0.60 0.60 0.60 0.60
9-Sep-04 0.60 0.60 0.60 0.60 0.60
8-Sep-04 0.60 0.60 0.60 0.60 0.60
7-Sep-04 0.60 0.60 0.60 0.60 1,000 0.60
6-Sep-04 0.60 0.60 0.60 0.60 0.60
3-Sep-04 0.60 0.60 0.60 0.60 0.60
2-Sep-04 0.60 0.60 0.60 0.60 0.60
1-Sep-04 0.30 0.60 0.30 0.60 16,311 0.60
31-Aug-04 0.70 0.70 0.60 0.60 1,900 0.60
30-Aug-04 0.59 0.59 0.59 0.59 0.59
27-Aug-04 0.70 0.70 0.59 0.59 600 0.59
26-Aug-04 0.59 0.59 0.59 0.59 0.59
25-Aug-04 0.59 0.59 0.59 0.59 0.59
24-Aug-04 0.59 0.59 0.59 0.59 0.59
23-Aug-04 0.59 0.59 0.59 0.59 0.59
20-Aug-04 0.59 0.59 0.59 0.59 0.59
19-Aug-04 0.59 0.59 0.59 0.59 0.59
18-Aug-04 0.59 0.59 0.59 0.59 0.59
17-Aug-04 0.59 0.59 0.59 0.59 0.59
16-Aug-04 0.59 0.59 0.59 0.59 0.59
13-Aug-04 0.59 0.59 0.59 0.59 0.59
12-Aug-04 0.59 0.59 0.59 0.59 0.59
11-Aug-04 0.59 0.59 0.59 0.59 1,000 0.59
- 50 -
EXHIBIT K
LLOG.OB
Date Open High Low Close Volume Adj. Close*
--------- ------ ------ ------ ------ --------- -----------
10-Aug-04 0.60 0.60 0.60 0.60 0.60
9-Aug-04 0.60 0.60 0.60 0.60 0.60
6-Aug-04 0.60 0.60 0.60 0.60 0.60
5-Aug-04 0.60 0.60 0.60 0.60 0.60
4-Aug-04 0.60 0.60 0.60 0.60 0.60
3-Aug-04 0.60 0.60 0.60 0.60 0.60
2-Aug-04 0.60 0.60 0.60 0.60 0.60
30-Jul-04 0.60 0.60 0.60 0.60 0.60
29-Jul-04 0.60 0.60 0.60 0.60 0.60
28-Jul-04 0.60 0.60 0.60 0.60 0.60
27-Jul-04 0.54 0.60 0.54 0.60 200 0.60
26-Jul-04 0.60 0.60 0.60 0.60 0.60
23-Jul-04 0.60 0.60 0.60 0.60 0.60
22-Jul-04 0.60 0.60 0.60 0.60 0.60
21-Jul-04 0.60 0.60 0.60 0.60 0.60
20-Jul-04 0.54 0.60 0.54 0.60 544 0.60
19-Jul-04 0.60 0.60 0.60 0.60 0.60
16-Jul-04 0.60 0.60 0.60 0.60 0.60
15-Jul-04 0.60 0.60 0.60 0.60 0.60
14-Jul-04 0.56 0.60 0.55 0.60 11,300 0.60
13-Jul-04 0.60 0.60 0.60 0.60 0.60
12-Jul-04 0.60 0.60 0.60 0.60 220 0.60
9-Jul-04 0.60 0.60 0.60 0.60 0.60
8-Jul-04 0.60 0.60 0.60 0.60 0.60
7-Jul-04 0.60 0.60 0.60 0.60 0.60
6-Jul-04 0.56 0.60 0.56 0.60 210 0.60
2-Jul-04 0.56 0.56 0.56 0.56 0.56
1-Jul-04 0.56 0.56 0.56 0.56 0.56
30-Jun-04 0.56 0.56 0.56 0.56 0.56
29-Jun-04 0.56 0.56 0.56 0.56 0.56
28-Jun-04 0.56 0.56 0.56 0.56 0.56
25-Jun-04 0.56 0.56 0.56 0.56 0.56
24-Jun-04 0.56 0.56 0.56 0.56 0.56
23-Jun-04 0.56 0.56 0.56 0.56 0.56
22-Jun-04 0.56 0.56 0.56 0.56 0.56
21-Jun-04 0.56 0.56 0.56 0.56 0.56
18-Jun-04 0.56 0.56 0.56 0.56 0.56
17-Jun-04 0.56 0.56 0.56 0.56 0.56
16-Jun-04 0.56 0.56 0.56 0.56 1,000 0.56
15-Jun-04 0.56 0.56 0.56 0.56 0.56
14-Jun-04 0.56 0.56 0.56 0.56 0.56
10-Jun-04 0.56 0.56 0.56 0.56 0.56
9-Jun-04 0.56 0.56 0.56 0.56 0.56
8-Jun-04 0.56 0.56 0.56 0.56 0.56
7-Jun-04 0.56 0.56 0.56 0.56 528 0.56
4-Jun-04 0.90 0.90 0.90 0.90 0.90
3-Jun-04 0.90 0.90 0.90 0.90 100 0.90
2-Jun-04 0.56 0.56 0.56 0.56 0.56
1-Jun-04 0.56 0.56 0.56 0.56 0.56
28-May-04 0.56 0.56 0.56 0.56 0.56
- 51 -
EXHIBIT K
LLOG.OB
Date Open High Low Close Volume Adj. Close*
--------- ------ ------ ------ ------ --------- -----------
27-May-04 0.56 0.56 0.56 0.56 0.56
26-May-04 0.56 0.56 0.56 0.56 0.56
25-May-04 0.56 0.56 0.56 0.56 0.56
24-May-04 0.56 0.56 0.56 0.56 0.56
21-May-04 0.56 0.56 0.56 0.56 500 0.56
20-May-04 0.56 0.56 0.56 0.56 0.56
19-May-04 0.56 0.56 0.56 0.56 0.56
18-May-04 0.56 0.56 0.56 0.56 0.56
17-May-04 0.56 0.56 0.56 0.56 0.56
14-May-04 0.56 0.56 0.56 0.56 0.56
13-May-04 0.56 0.56 0.56 0.56 0.56
12-May-04 0.56 0.56 0.56 0.56 1,000 0.56
11-May-04 0.56 0.56 0.56 0.56 0.56
10-May-04 0.56 0.56 0.56 0.56 0.56
7-May-04 0.56 0.56 0.56 0.56 0.56
6-May-04 0.56 0.56 0.56 0.56 0.56
5-May-04 0.56 0.56 0.56 0.56 0.56
4-May-04 0.56 0.56 0.56 0.56 0.56
3-May-04 0.56 0.56 0.56 0.56 0.56
30-Apr-04 0.56 0.56 0.56 0.56 0.56
29-Apr-04 0.56 0.56 0.56 0.56 0.56
28-Apr-04 0.56 0.56 0.56 0.56 0.56
27-Apr-04 0.56 0.56 0.56 0.56 0.56
26-Apr-04 0.56 0.56 0.56 0.56 0.56
23-Apr-04 0.56 0.56 0.56 0.56 0.56
22-Apr-04 0.56 0.56 0.56 0.56 1,000 0.56
21-Apr-04 0.56 0.56 0.56 0.56 600 0.56
20-Apr-04 0.65 0.69 0.55 0.69 16,200 0.69
19-Apr-04 0.80 0.80 0.65 0.65 15,000 0.65
16-Apr-04 0.75 0.75 0.75 0.75 0.75
15-Apr-04 0.75 0.75 0.75 0.75 0.75
14-Apr-04 0.75 0.75 0.75 0.75 1,000 0.75
13-Apr-04 1.01 1.01 1.01 1.01 1.01
12-Apr-04 1.01 1.01 1.01 1.01 1.01
8-Apr-04 1.01 1.01 1.01 1.01 1.01
7-Apr-04 1.01 1.01 1.01 1.01 1.01
6-Apr-04 1.01 1.01 1.01 1.01 1.01
5-Apr-04 1.01 1.01 1.01 1.01 2,000 1.01
2-Apr-04 0.90 0.90 0.90 0.90 0.90
1-Apr-04 0.90 0.90 0.90 0.90 0.90
31-Mar-04 0.90 0.90 0.90 0.90 0.90
30-Mar-04 0.90 0.90 0.90 0.90 0.90
29-Mar-04 0.90 0.90 0.90 0.90 0.90
26-Mar-04 0.90 0.90 0.90 0.90 2,500 0.90
25-Mar-04 0.75 0.75 0.75 0.75 300 0.75
24-Mar-04 0.75 0.75 0.75 0.75 0.75
23-Mar-04 0.75 0.75 0.75 0.75 0.75
22-Mar-04 0.75 0.75 0.75 0.75 0.75
19-Mar-04 0.75 0.75 0.75 0.75 0.75
18-Mar-04 0.75 0.75 0.75 0.75 0.75
- 52 -