Whiteman Osterman & Hanna, LLP
One Commerce Plaza
Albany, New York 12260
June 24, 2005
VIA EDGAR AND FEDERAL EXPRESS
United States Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jennifer R. Hardy, Legal Branch Chief
Edward M. Kelly, Senior Counsel
Re: Lincoln Logs Ltd. (the "Company")
Preliminary Information Statement on Schedule 14C (the "Information
Statement")
Rule 13E-3 Transaction Statement on Schedule 13E-3 (the "Transaction
Statement")
File Nos. 0-12172 and 5-37488
Dear Ms. Hardy and Mr. Kelly:
This letter is in response to Ms. Hardy's letter of April 25, 2005 to Mr.
Benjamin A. Shepherd commenting on the above-referenced filings, which were
initially filed on March 24, 2005 in connection with (i) a proposed reverse
stock split in the Company's outstanding shares of common stock (the "Reverse
Split"), (ii) a corresponding repurchase of all fractional interests created by
the Reverse Split, and (iii) the subsequent deregistration of the Company's
shares if the Company has less than 300 shareholders of record after the
Reverse Split (collectively, the "Reverse Split Transaction"). Amendments to
each of the Information Statement and the Transaction Statement, which reflect,
among other things, changes made in response to your comments are being filed
concurrently herewith. Three clean and three marked courtesy copies of each of
the revised filings are also enclosed for your review.
For your ease of review, the following is a summary of our responses to your
comments. Our responses are keyed to the numbered comments in your letter.
Pre14C
1. You asked whether the Company's unaffiliated shareholders will be executing
a ballot or otherwise giving an authorization within the meaning of "proxy" as
defined in Rule 14a-1(f) of Regulation 14A at the Company's proposed upcoming
special meeting of its shareholders (the "Meeting"). The unaffiliated
shareholders of the Company will not be asked to execute a ballot or otherwise
give authorization within the meaning of "proxy" at the Meeting. We have
revised the existing disclosure contained in the Information Statement to
further emphasize the fact that it is anticipated that the Company's affiliated
shareholders, who collectively own approximately 82% of the Company's
outstanding voting securities, will approve the amendment to the Company's
Restated Certificate of Incorporation to effect the Reverse Split Transaction
and, accordingly, the Company's unaffiliated shareholders are not being, and
will not be, solicited to vote at, or submit a proxy in connection with, the
Meeting. See, e.g., the Notice to Shareholders, the cover pages to the
Information Statement, and pages 5, 6 and 32 of the Information Statement.
2. You asked for an explanation as to why John D. Shepherd is not an affiliate
"engaging in a Rule 13e-3 transaction" as it appeared to you that Mr. Shepherd
was engaging in a Rule 13e-3 transaction and was thus required to jointly file
and sign the Schedule 13E-3. We have revised the Information Statement and the
Transaction Statement to reflect that John D. Shepherd is an affiliate "engaging
in a Rule 13e-3 transaction". Further, he has signed and is filing the revised
Transaction Statement jointly with the Company.
3. You asked for the information required by Schedule 13E-3 and its instructions
for any filing persons added in response to your comment discussed in #2 above.
As noted above, the Information Statement and the Transaction Statement have
been revised to reflect that Mr. Shepherd is engaging in the Rule 13e-3
transaction jointly with the Company. Accordingly, disclosure has been added to
the Information Statement and the Schedule 13E-3 with respect to Mr. Shepherd,
including, without limitation, a statement to the effect that Mr. Shepherd also
believes that the proposed Reverse Split Transaction is substantively and
procedurally fair to the Company's unaffiliated shareholders (see, e.g., pages
4-5, 6, 25, 28 and 33 of the Information Statement).
4. You directed our attention to Rule 10b-17 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which requires an issuer proposing to
engage in certain activities, including, without limitation, reverse stock
splits, to notify the NASD or the exchange on which such issuer's shares are
traded of the proposed transaction at least ten (10) days' prior to the record
date of the proposed transaction. When the Company anticipated holding its
special meeting with respect to the Reverse Split Transaction on April 28, 2005,
we had notified the OTC Bulletin Board by letter dated March 25, 2005, of the
Company's intention to conduct the Reverse Split Transaction. We will file
another notice with the OTC Bulletin Board at least 10 days' prior to the new
record date with respect to the Reverse Split Transaction.
Notice to Shareholders
5. You asked for an explanation as to how the Company would arrange outlets for
trading in its common stock following the Reverse Split Transaction. The
Company has contacted its market makers and at least two of the Company's
current, active market makers have stated they will continue to make a market
in the Company's securities after the Reverse Split Transaction. We have added
disclosure to the Information Statement (see the cover page to the Information
Statement and pages 25 and 28) to that effect.
Summary Term Sheet
6. You have asked that the summary term sheet be revised to summarize all
conflicts of interest of the board and the filing persons. You also asked us to
consider combining the summary term sheet and the question and answer sections
to avoid unnecessary repetition. Per your request, we have revised the summary
term sheet to summarize any such conflicts of interest (see page 3 of the
Information Statement) and have combined the summary term sheet and the question
and answer section (see pages 1 through 5 of the Information Statement).
7. You noted our disclosure that following the Reverse Split, the Company would
have 8,804,000 shares of its common stock outstanding and noted that it appeared
that the actual number of outstanding shares at that time would be significantly
lower than 8,804,000 shares. We have made revisions throughout the Information
Statement to reflect that the number of shares that will be outstanding after
the Reverse Split Transaction will actually be 17,608 shares, rather than
8,804,000 shares. See pages 3, 26, 28, 30 and 37 of the Information Statement.
Special Factors, Elimination of Costs
8. You asked us to explain how we estimated the cost savings associated with the
Company's no longer being a reporting company would rise from $210,000 in the
first year to $300,000 per year in subsequent years. At the time of the
initial filing of the Information Statement, the Company anticipated it would,
after the first year following the Reverse Split Transaction, eliminate certain
salaried positions due to the fact that the Company would no longer be subject
to the periodic reporting and other requirements of the Exchange Act. Thus, in
the first year, the Company anticipated that it would realize savings of
approximately $210,000, but, once certain salaried positions were eliminated in
subsequent years, it would realize savings of approximately $300,000.
In April 2005, William Thyne, the Company's former vice president, secretary and
treasurer who was responsible for overseeing many of the Company's Exchange Act
reporting obligations, resigned his positions to pursue other opportunities.
The Company does not anticipate hiring any new personnel to replace Mr. Thyne.
Accordingly, the Information Statement has been revised to reflect that the
Company will realize savings of approximately $300,000 in each of the years
following the Reverse Split Transaction. See pages 2, 9, 12, 13, 35 and 37 of
the Information Statement.
9. You noted our statement that following the suspension of its reporting
obligations, the Company would no longer have to comply with the federal
securities laws. You asked us to revise the Information Statement to identify
the federal securities laws to which the Company will no longer be subject. We
have revised the Information Statement to specifically describe that the
termination of the Company's Exchange Act registration would make certain
provisions of the Exchange Act, such as the periodic reporting and proxy
statement filing obligations, no longer applicable to the Company. We further
revised the Information Statement to clarify that 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. See page 9 of the Information Statement.
Other Valuation Methods Considered
10. You noted that the substantive fairness determination produced by all filing
parties must address specifically the Company's going concern and liquidation
value and identify any reason why the values were considered irrelevant if
dismissed in the fairness analysis. We have revised the Information Statement
to note that the Company's board of directors and Mr. Shepherd also duly
considered 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.
With respect to the going concern value of the Company, the Information
Statement currently notes that the board and Mr. Shepherd relied almost
exclusively on the findings of its independent valuation expert, Empire
Valuation Consultants, LLC. See page 14 of the Information Statement.
Procedural Fairness
11. You asked us to expand the disclosure to identify the seven members of the
Company's board of directors who are (1) officers of the Company, (2) a partner
with the law firm engaged to provide the Company counsel with respect to the
Reverse Split Transaction, and (3) employed by or serve as independent
contractors to the Company. We have expanded this disclosure per your request
on page 16 of the Information Statement.
12. You asked us how, in light of the negative factors concerning procedural
fairness, the Company's board of directors decided to approve the Reverse
Split Transaction. We have revised the disclosure to note that the board and
Mr. Shepherd concluded that 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, after carefully evaluating all of
the relevant factors and the economic realities of the total current market
value of the shares of the Company's common stock that will be eliminated by
the Reverse Split Transaction. We further noted that the board and Mr.
Shepherd concluded that the Reverse Split Transaction was procedurally fair to
the Company's unaffiliated shareholders because there was no financial prejudice
to shareholders whose ownership interest would be eliminated by the Reverse
Split Transaction. See page 16 of the Information Statement.
March 17, 2005 Meeting of the Board of Directors
13. You have asked us to specify the "wide range of possible repurchase prices"
provided by management for the board to consider. We have removed the reference
to the "wide range of possible repurchase prices" because the repurchase prices
considered by the board at this meeting were randomly and arbitrarily evaluated
by management (i.e., they were not based on true valuation methods) prior to
engaging an independent valuation expert and therefore, if included, could be
misleading to the Company's shareholders. These prices were reviewed by the
board and Mr. Shepherd to evaluate whether the repurchase of the fractional
interests could be funded by the Company's working capital.
Opinion of Value
14. You asked us to disclose (i) the compensation of Empire Valuation
Consultants, LLC ("Empire") for its service as independent valuation consultant
and (ii) Empire's compensation for any other services to the Company in the
most recent two years. We have revised the disclosure to note that (i) in
consideration for its delivery to the Company of the Opinion of Value, Empire
received approximately $10,000 from the Company, and (ii) Empire has received
fees in the aggregate amount of $30,000 in connection with valuation services
rendered by Empire to the Company during 2003 and 2004. See page 18 of the
Information Statement.
15. You asked us to disclose whether Empire is under any obligation to update
its opinion. We have revised the Information Statement to reflect that Empire
is not under any obligation to update its opinion. See page 18 of the
Information Statement.
Summary of the Opinion of Value
16. You have asked us to describe briefly Empire's "exacting review process".
We have deleted the reference to Empire's "exacting review process" because
Empire's process and its evaluation of the Company is fully and more
accurately described in other sections of the Information Statement and,
therefore, it was duplicative and unnecessary to include that language in this
paragraph.
17. You asked us to describe the guidelines established by the IRS with respect
to Empire's appraisal of the Company. We have included this disclosure at page
19 of the Information Statement.
18. You asked us to explain why Empire prepared only a "Limited Report". In the
interest of conserving its resources, the Company initially engaged Empire to
provide only a Limited Report, which would set forth Empire's conclusions,
without providing a significant amount of detail with respect to the process
used by Empire in arriving at such conclusions. In response to your comments,
the Company modified the Empire engagement and Empire has provided a full report
to the Company. A copy of the entire report is attached to the Information
Statement as Appendix C.
19. You asked us to disclose the fiscal year 2006 projections provided to
Empire. These projections are included in exhibits to Empire's valuation
report, which is attached to the Information Statement as Appendix C.
20. You asked us to expand the Company's explanation of the "rule of thumb" used
by Empire in its analysis and how it applied specifically to Lincoln Logs. We
have included this disclosure at page 20 of the Information Statement.
21. You noted that the disclosure indicates that Empire determined all of the
values, except adjusted book value, derived for the Company "fell well within
the appropriate range" and asked us to specify, for each methodology used by
Empire, where within the range the value derived for the Company fell or, in
the case of adjusted book value, did not fall. We have included such
disclosure at page 20 of the Information Statement.
22. You noted that for its capitalization of income analysis, disclosure
indicated that Empire made adjustments for "certain non-recurring items" and
asked us to identify the items, and specify the amount of each adjustment. You
also asked us to explain how the adjusted results were weighted and what the
results reviewed on a pre-tax and post-tax basis were. We have included such
disclosure at pages 20-21 of the Information Statement.
23. You asked that, for its capitalization of income analysis, disclosure of
the growth rate and capitalization rate used by Empire be included and asked us
to explain why Empire selected the specific growth rate and capitalization rate.
We have included such disclosure at page 21 of the Information Statement.
24. You noted that for its capitalization of income analysis using a debt free
approach, disclosure indicates that Empire added back the Company's interest
expense and subtracted the Company's outstanding debt and you asked us to state
the amounts of the Company's interest expense and outstanding debt used in the
analysis. We have included such disclosure at pages 21-22 of the Information
Statement.
25. With respect to Empire's adjusted book value calculation, you noted that
the disclosure indicates that Empire adjusted the Company's assets and
liabilities to reflect their fair market values and asked that (i) for each
asset and liability adjusted, each adjustment amount be specified, and (ii) an
explanation of how Empire determined the fair market values of the adjusted
asset and liability be included. We have included such disclosure at page 22 of
the Information Statement.
26. You noted that the disclosure indicates that Empire reviewed the Company's
trading history from June 2, 2004 through March 18, 2005 and asked us to
explain why June 2, 2004 was selected as the starting date for Empire's review.
On page 22 of the Information Statement, we have noted that Empire has now
reviewed the Company's market price for the twelve (12) month period ending on
March 18, 2005 (Empire's valuation date), which is consistent with their normal
practice.
27. You noted that the disclosure indicates that Empire concluded that the
Company's limited trading history implies that it was "not a true reflection"
of fair value and asked the Company to clarify how Empire considered the
Company's trading history in reaching its conclusion of the Company's fair
value. We have included such disclosure on page 22 of the Information
Statement.
28. You noted that disclosure indicates that Empire concluded the aggregate
fair value of the Company as of March 18, 2005 is $4 million, but that, absent
additional disclosure, it was unclear why Empire reached that conclusion since
the $4 million is $30,000 and $60,000 below the values derived by Empire in
its capitalization of income analyses. You asked us to revise the Information
Statement to explain. We have included such explanation on page 22 of the
Information Statement.
Directors, Officers and the Affiliated Shareholders
29. You asked us to specify the amount of the reduction in the directors' fees.
We have included such information on page 29 of the Information Statement.
Conflicts of Interest
30. You stated that if members of the Company's board and its executive
officers have interests in the Reverse Split Transaction that are in addition
to those of other shareholders' interests, such additional interests should be
described and quantified. We have included such information on pages 32-33 of
the Information Statement.
31. You asked us to include (i) the information required by instruction 3 to
Item 1013 of Regulation M-A (i.e., the effect of the Reverse Split Transaction
on Mr. Shepherd's interest in net book value and net earnings of the Company
in terms of dollar amounts and percentages) and (ii) disclosure regarding the
payments to be received by each director and officer as a result of the Reverse
Split Transaction. We have included such disclosure on pages 32-33 of the
Information Statement.
Documents Incorporated by Reference
32. You asked that the Commission's filing number for filings by the Company
under the Exchange Act be included. We have included such disclosure on page
51 of the Information Statement.
33. You noted that since the Company had a loss in one of its two most recent
fiscal years and it did not anticipate that it would finish the fiscal year
ended January 31, 2005 without a loss, the Company must have updated audited
financial information included in the filings within 45 days from the end of
the fiscal year ended January 31, 2005 and asked us to revise, as appropriate,
references throughout the Information Statement to the Company's filing of its
annual report on Form 10-KSB. Since its initial filing of the Information
Statement and Transaction Statement, the Company has filed its Annual Report
on Form 10-KSB for the year ended January 31, 2005, and its Quarterly Report
on Form 10-QSB for the quarter ended April 30, 2005, both of which are now
incorporated by reference into the Information Statement. We have also
removed all references in the Information Statement to the Company's
attempting to deregister its common stock prior to the time it was required
to file its Annual Report on Form 10-KSB for the fiscal year ended January
31, 2005 (see, e.g., page 17 of the Information Statement).
34. You asked the Company to revise this section's third paragraph to indicate
that amendments to the Transaction Statement will be filed to incorporate by
reference any Exchange Act documents filed after the date of the Information
Statement and before the date of the Meeting. Per your request, we have
revised the third paragraph. See pages 51-52 of the Information Statement.
35. You asked that the Company include pro-forma financial statements required
by Item 1010(b) of Regulation M-A. We have included such unaudited pro-forma
financial information on pages 36-37 of the Information Statement.
36. You noted that we had incorporated by reference the financial statements
for the year ended January 31, 2004 and the nine months ended October 31, 2004
and explained that, companies that incorporate by reference financial
statements found in other documents filed with the SEC, are required to
include summary financial statements by Item 1010(c) of Regulation M-A in the
documents disseminated to investors. The Company is currently incorporating
by reference into the Information Statement and the Transaction Statement,
the Company's Annual Report on Form 10-KSB for the year ended January 31,
2005 and the Company's Quarterly Report on Form 10-QSB for the quarter ended
April 30, 2005. We have included the required summarized financial
information, including as noted above, pro forma financial information, on
pages 35-37 of the Information Statement.
Appendix C
37. You asked the Company to revise the last sentence under "Methodology" on
page 1 as disclaimers of responsibility that in any way state or imply that
investors are not entitled to rely on the opinion or other limitations on whom
may rely on the opinion are unacceptable. Such sentence has been removed from
the opinion.
38. You asked that the Company file exhibits A through H to the opinion. Such
exhibits are now included with the opinion, which is filed as Appendix C to the
Information Statement.
Pursuant to your request, also enclosed with this letter is a written statement
from the Company acknowledging that (i) the Company is responsible for the
adequacy and accuracy of the disclosures in the filings, (ii) your comments or
changes to disclosures in response to your comments do not foreclose the
Securities and Exchange Commission (the "Commission") from taking any action
on the filings, and (iii) the Company may not assert your comments as a
defense in any proceedings initiated by the Commission or any person under
the United States' federal securities laws.
If you have any questions, please feel free to contact me at 518.487.7673.
Very truly yours,
/s/ Patricia A. Franchini
-------------------------
Patricia A. Franchini
Enclosures
cc: John D. Shepherd
Benjamin A. Shepherd
Leslie M. Apple, Esq.