10-Q 1 jc_202q.txt FORM 10-Q, 2-28-2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________to______________________ Commission file number: 0-19954 JEWETT-CAMERON TRADING COMPANY, LTD. ------------------------------------ (Exact name of registrant as specified in its charter) BRITISH COLUMBIA NONE ---------------- ---- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 32275 NW Hillcrest, North Plains, Oregon 97133 ---------------------------------------------- (Address of Principal Executive Offices) Registrant's telephone number, including area code: (503) 647-0110 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 since May 16, 1992 and (2) has been subject to the above filing requirements for the past 90 days. Yes X No ___ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ___ No ___ APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of February 28, 2002. Common Stock, no par value 1,082,162 Shares. PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS. Attached hereto and incorporated herein by reference. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information contains certain forward-looking statements that anticipate future trends or events. These statements are based on certain assumptions that may prove to be erroneous and are subject to certain risks including but not limited to the risks of increased competition in the Company's industry and other risks detailed in the Company's Securities and Exchange Commission filings. Accordingly, actual results may differ, possibly materially, from the predictions contained herein. Company operations were down during the second quarter of Fiscal 2002, ended February 28, 2002, as sales decreased over the first quarter of Fiscal 2002. Gross sales decreased $1,130,634 during the second quarter of Fiscal 2002 as compared to the second quarter of Fiscal 2001. During the second quarter of Fiscal 2002, the Company experienced an increase in net income of $24,143 as compared to the second quarter of Fiscal 2001. As was the case last year, management believes that the buying patterns in the area of building materials have shifted and that sales which previously occurred in the Company's second fiscal quarter of operations will now occur in the third and, in some instances, the fourth fiscal quarters. The overall result was net income of $71,639 for the second quarter of Fiscal 2001 and net income for the first six months of Fiscal 2002 of $165,131. RESULTS OF OPERATIONS: Jewett Cameron's operations are classified into three principle industry segments: sales of building materials, sales of industrial tools and sales of processed agricultural seeds and grain. Sales of building materials consists of wholesale sales of lumber and building materials in the United States. Sales of industrial tools consists of distribution of pneumatic air tools and industrial clamps in the United States. Sales of seeds consists of distribution of processed agricultural seeds and grain in the United States. The Company's major distribution centers are located in North Plains, Oregon and Ogden, Utah. Three Months Ended February 28, 2002 and February 28, 2001: For the second quarter of the current fiscal year, ending February 28, 2002, sales decreased 24.9% to $3,414,881 compared to $4,545,515 for the same quarter of the previous year. General and administrative expenses for the Company were $776,327 for the second quarter up from $742,631 for the second quarter of last year. With the exception of a recovery in bad debt recorded during the three month period ended February 28, 2001 in the amount of $39,993, general and administrative expenses decreased approximately $7,000 for the second quarter of fiscal 2002 as compared to the second quarter of fiscal 2001. Reductions were experienced in the categories of insurance; office and miscellaneous; professional fees; and, repairs and maintenance. Slight increases occurred in the categories of telephone and utilities; travel, entertainment and advertising; warehouse expenses and supplies; and, wages and employee benefits. Net income for the quarter was $71,639 which represents a 51% increase over the second quarter of last year when net income was $47,496. The increase in net income was due primarily to a decrease in the cost of sales of $1,190,033 and an income tax recovery of $62,000 recorded during the second quarter of fiscal 2002. Earnings per share (fully diluted) were $0.07 for the second quarter of Fiscal 2002 compared to $0.05 for the second quarter of fiscal 2001, an increase of 40%. On February 25, 2002, the Company entered into an agreement with Greenwood Forest Products, Inc., of Portland, Oregon, to acquire the business and certain assets of Greenwood Forest Products on or about March 1, 2002. The assets being acquired consisted of approximately $7 million of inventory (at year end) which will be purchased in eight installments over the next two years for a price equal to the seller's cost plus 2%; furnishings, equipment and supplies are being purchased for $260 thousand, payable at closing; and, a license to use all of the intangible assets of the seller for a five year term, with an option to purchase for a nominal amount at the end of the term, is being acquired for $2 thousand, payable at closing. The initial acquisition price is being paid from working capital and working capital loans. Six Months Ended February 28, 2002 and February 28, 2001: Sales in the first six months of Fiscal 2002 decreased 9% to $7,520,983 compared to $8,265,315 for the same period last year. Sales for Jewett-Cameron Lumber were $5,660,571 for the six-month period, down 18% compared to sales of $6,885,023 for the same period of last year. Sales for MSI-PRO (pneumatic tools and industrial clamps) were $363,338 for the six-month period compared to $453,636 for the same period of last year, down 20% Sales for Jewett-Cameron Seed Company were $1,497,074 for the six-month period compared to $926,656 for the same period of last year, an increase of 62%. General and administrative expenses for the Company were $1,627,989 for the six-month period, up from $1,380,054 for the same period of last year. The primary reasons for the increase of $247,935 are increases of $29,453 in depreciation and amortization; $11,890 in travel, entertainment and advertising; $154,209in wages and employee benefits; $5,279 in insurance; $11,807 in telephone; and, $30,044 in warehouse expenses and supplies. Decreases did occur in the categories of office and miscellaneous of $15,520; professional fees in the amount of $6,495; and, repairs and maintenance of $3,096. Net income for the first six months of Fiscal 2002 was $165,131 which represents a 26% increase over the first six months of last year when net income was $131,459. The increase in net income was due primarily to a decrease in the cost of sales of $1,059,021. Earnings per share (fully diluted) were $0.16 for the first six months of Fiscal 2002 compared to $0.13 for the same period of fiscal 2001. This is an increase of 23%. LIQUIDITY AND CAPITAL RESOURCES As of February 28, 2002 the Company had working capital of $3,869,991 which represented an increase of $755,057 as compared to the working capital position of $3,114,934 on February 28, 2001. The increase in working capital was due to an increase in cash and cash equivalents of $50,438. ; an increase in inventory of $1,050,522; and an increase in prepaid expenses of $134,848. Accounts Receivable and Inventory represented 89% of current assets and both continue to turn over at acceptable rates. External sources of liquidity include a bank line from the United States National Bank of Oregon. The total line of credit available is $6.5 million of which there was an outstanding balance as of February 28, 2002 of $941,276. As of the end of Fiscal 2001 (August 31st) the Company had an outstanding balance of $297,960. Based on the Company's current working capital position, its policy of retaining earnings, and the line of credit available, the Company has adequate working capital to meet its needs during the current fiscal year. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS: The Company did not have any derivative financial instruments as of February 28, 2002. However, the Company is exposed to interest rate risk. The Company's interest income and expense are most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash equivalents as well as interest paid on debt. The Company has a line of credit whose interest rate is based on various published rates that may fluctuate over time based on economic changes in the environment. The Company is subject to interest rate risk and could be subject to increased interest payments if market interest rates fluctuate. The Company does not expect any change in the interest rates to have a material adverse effect on the Company's results from operations. FOREIGN CURRENCY RISK N/A Part II - OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Default Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Securities Holders: The Company conducted an Annual Meeting on January 18, 2002. The matters voted upon, together with the results of voting were as follows: 1. The following persons were elected to fill the vacancies on the Board of Directors to serve until the year 2003 Annual Meeting of the Shareholders and until their successors shall be duly elected: Director: Shares Voted Shares Voted in Favor Against Donald M. Boone 305,744 0 Jeffrey Lowe 305,744 0 James Schjelderup 305,744 0 Stephanie Rink 305,744 0 2. To appoint Davidson and Company as auditors and to authorize the Directors 305,744 0 to fix the remuneration. 3.To approve issuance of share purchase 305,544 200 options to Directors Item 5. Other Information - None Item 6. a) Exhibits - Asset Purchase Agreement, dated February 25, 2002, By and Between Greenwood Forest Products, Inc. and Jewett-Cameron Lumber Corporation Item 6.(b) Reports on Form 8-K - Current Report dated February 25, 2002 Reporting Acquisition of Assets SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Jewett-Cameron Trading Company Ltd. (Registrant) Dated: April 10, 2002 /s/ Donald M. Boone -------------------- ------------------- Donald M. Boone, President/CEO/Director JEWETT-CAMERON TRADING COMPANY LTD. CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 JEWETT-CAMERON TRADING COMPANY LTD. CONSOLIDATED BALANCE SHEETS (Expressed in U.S. dollars) (Unaudited - Prepared by Management) ================================================================================ February 28, August 31, 2002 2001 -------------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents $ 373,060 $ 322,622 Accounts receivable 1,261,689 1,864,991 Inventory (Note 4) 3,450,549 2,400,027 Prepaid expenses 195,957 61,109 -------------- -------------- Total current assets 5,281,255 4,648,749 Capital assets (Note 5) 2,726,555 2,820,676 Deferred income taxes (Note 6) 184,300 207,300 -------------- -------------- Total assets $ 8,192,110 $ 7,676,725 ================================================================================ - Continued - The accompanying notes are an integral part of these consolidated financial statements. JEWETT-CAMERON TRADING COMPANY LTD. CONSOLIDATED BALANCE SHEETS (Expressed in U.S. dollars) (Unaudited - Prepared by Management)
=========================================================================================================================== February 28, August 31, 2002 2001 --------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Bank indebtedness (Note 7) $ 941,276 $ 297,960 Accounts payable and accrued liabilities 469,988 684,891 -------------- -------------- Total current liabilities 1,411,264 982,851 -------------- -------------- Stockholders' equity Capital stock (Note 8) Authorized 20,000,000 common shares, without par value 10,000,000 preferred shares, without par value Issued 1,082,162 common shares (August 31, 2001 - 1,074,162) 1,836,259 1,795,157 Additional paid-in capital 602,587 582,247 Retained earnings 4,982,797 4,817,666 -------------- -------------- 7,421,643 7,195,070 Less: Treasury stock - 117,000 common shares (August 31, 2001 - 97,000) (640,797) (501,196) -------------- -------------- 6,780,846 6,693,874 -------------- -------------- Total liabilities and stockholders' equity $ 8,192,110 $ 7,676,725 ==============================================================================================================================
Contingent liabilities and commitments (Note 11) The accompanying notes are an integral part of these consolidated financial statements. JEWETT-CAMERON TRADING COMPANY LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (Expressed in U.S. dollars) (Unaudited - Prepared by Management)
============================================================================================================================== Three month Three month Six month Six month period ended period ended period ended period ended February 28, February 28, February 28, February 28, 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------------------ Net Sales $ 3,414,881 $ 4,545,515 $ 7,520,983 $ 8,265,315 Cost of sales 2,504,557 3,694,590 5,600,455 6,659,476 -------------- -------------- -------------- -------------- Gross profit 910,324 850,925 1,920,528 1,605,839 -------------- -------------- -------------- -------------- Operating expenses General And Administrative - Schedule 776,327 742,631 1,627,989 1,380,054 Foreign exchange (gain) loss (1,072) 30,507 (815) 33,883 -------------- -------------- -------------- -------------- 775,255 773,138 1,627,174 1,413,937 -------------- -------------- -------------- -------------- Income from operations 135,069 77,787 293,354 191,902 -------------- -------------- -------------- -------------- Other items Interest and other income 821 723 2,066 5,420 Interest expense (2,251) (43,014) (3,289) (52,863) -------------- -------------- -------------- -------------- (1,430) (42,291) (1,223) (47,443) -------------- -------------- -------------- -------------- Income before income taxes 133,639 35,496 292,131 144,459 Income tax (expense) recovery (62,000) 12,000 (127,000) (13,000) -------------- -------------- -------------- -------------- Net income for the period $ 71,639 $ 47,496 $ 165,131 $ 131,459 ============================================================================================================================== Basic earnings per share $ 0.07 $ 0.05 $ 0.17 $ 0.13 ============================================================================================================================== Diluted earnings per share $ 0.07 $ 0.05 $ 0.16 $ 0.13 ============================================================================================================================== Weighted average number of common shares outstanding Basic 964,419 1,000,050 967,601 1,000,050 Diluted 1,013,649 1,031,642 1,014,218 1,031,642 ==============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. JEWETT-CAMERON TRADING COMPANY LTD. CONSOLIDATED SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES (Expressed in U.S. dollars) (Unaudited - Prepared by Management)
============================================================================================================================== Three month Three month Six month Six month period ended period ended period ended period ended February 28, February 28, February 28, February 28, 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------------------ Bad debt recovery $ - $ (39,993) $ (2,949) $ (33,313) Depreciation and amortization 55,655 55,056 123,462 94,009 Insurance 30,651 33,352 57,541 52,262 Office and miscellaneous 49,049 70,701 105,594 121,114 Professional fees 40,024 43,480 48,254 54,749 Repairs and maintenance 8,885 11,032 17,134 20,230 Telephone and utilities 30,200 25,281 57,739 45,932 Travel, entertainment and advertising 50,297 46,408 92,959 81,069 Warehouse expenses and supplies 47,224 38,326 117,691 87,647 Wages and employee benefits 464,342 458,988 1,010,564 856,355 ------------ ------------ ------------ ------------- $ 776,327 $ 742,631 $ 1,627,989 $ 1,380,054 ==============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. JEWETT-CAMERON TRADING COMPANY LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in U.S. dollars) (Unaudited - Prepared by Management)
============================================================================================================================= Three month Three month Six month Six month period ended period ended period ended period ended February 28, February 28, February 28, February 28, 2002 2001 2002 2001 ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income for the period $ 71,639 $ 47,496 $ 165,131 $ 131,459 Items not involving an outlay of cash: Depreciation and amortization 55,655 55,056 123,462 94,009 Deferred income taxes 23,000 - 23,000 - Stock based compensation - - 20,340 - Changes in non-cash working capital items: (Increase) decrease in accounts receivable 275,816 (1,605,226) 603,302 (61,410) Increase in inventory ( 1,026,194) (1,406,999) (1,050,522) (2,091,287) Increase in prepaid expenses (65,351) (46,939) (134,848) (122,681) Increase in bank indebtedness 941,276 2,262,426 643,316 3,171,724 Increase (decrease) in accounts payable and accrued liabilities (143,221) 694,970 (214,903) 580,938 ------------ ------------ ------------ ------------- Net cash provided by operating activities 132,620 784 178,278 1,702,752 ------------ ------------ ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES Treasury shares acquired (36,037) (39,029) (139,601) (125,177) Issuance of capital stock for cash 41,102 - 41,102 - ------------ ------------ ------------ ------------- Net cash provided by (used in) financing activities 5,065 (39,029) (98,499) (125,177) ------------ ------------ ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of capital assets (14,875) (9,179) (29,341) (1,594,715) ------------ ------------ ------------ ------------- Net cash used in investing activities (14,875) (9,179) (29,341) (1,594,715) ------------ ------------ ------------ ------------- Increase (decrease) in cash and cash equivalents 122,810 (47,424) 50,438 (17,140) Cash and cash equivalents, beginning of period 250,250 238,561 322,622 208,277 ------------ ------------ ------------ ------------- Cash and cash equivalents, end of period $ 373,060 $ 191,137 $ 373,060 $ 191,137 ==============================================================================================================================
Supplemental disclosures with respect to cash flows (Note 14) The accompanying notes are an integral part of these consolidated financial statements. JEWETT-CAMERON TRADING COMPANY LTD. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Expressed in U.S. Dollars) (Unaudited - Prepared by Management)
============================================================================================================================== Common Stock Treasury Shares ------------ --------------- Additional Number Number Paid-In Retained of Shares Amount of Shares Amount Capital Earnings Total ------------------------------------------------------------------------------------------------------------------------------ Balance, August 31, 2000 1,074,162 $ 1,795,157 65,500 $ 332,642 $ 582,247 $ 4,105,470 $ 6,150,232 Net income for the year - - - - - 712,196 712,196 Treasury shares acquired - - 31,500 168,554 - - (168,554) ----------- ----------- ----------- ----------- ---------- ----------- ----------- Balance, August 31, 2001 1,074,162 1,795,157 97,000 501,196 582,247 4,817,666 6,693,874 Net income for the period - - - - - 165,131 165,131 Treasury shares acquired - - 20,000 139,601 - - (139,601) Stock based compensation for options issued to employees - - - - 20,340 - 20,340 Share options exercised 8,000 41,102 - - - - 41,102 ----------- ----------- ----------- ----------- ---------- ----------- ----------- Balance, February 28, 2002 1,082,162 $ 1,836,259 117,000 $ 640,797 $ 602,587 $ 4,982,797 $ 6,780,846 =================================== ============ ============ ============ ============= =========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements. JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 1. NATURE OF OPERATIONS The Company was incorporated under the Company Act of British Columbia on July 8, 1987. The Company through its subsidiaries operates out of facilities located in North Plains, Oregon and Ogden, Utah. The Company operates as a wholesaler of lumber and building materials to home improvement centres located primarily in the Pacific and Rocky Mountain regions of the United States, as an importer and distributor of pneumatic air tools and industrial clamps throughout the United States, and as a processor and distributor of agricultural seeds in the United States. 2. SIGNIFICANT ACCOUNTING POLICIES Generally accepted accounting principles These consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America, which are not materially different from generally accepted accounting principles utilized in Canada. In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary (consisting only of normal recurring accruals) to present fairly the financial information contained therein. These statements do not include all disclosures required by generally accepted accounting principles and should be read in conjunction with the audited financial statements of the Company for the year ended August 31, 2001. The results of operations for the period ended February 28, 2002 are not necessarily indicative of the results to be expected for the year ending August 31, 2002. Principles of consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, The Jewett-Cameron Lumber Corporation, Jewett-Cameron Seed Co. and MSI-PRO Co., all of which are incorporated under the laws of Oregon, U.S.A. Significant inter-company balances and transactions have been eliminated upon consolidation. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition The Company recognizes revenue from the sales of building supply products and tools, when the products are shipped and the ultimate collection is reasonably assured. Revenue from the Company's seed operations is generated by the provision of seed processing, handling and storage services provided to seed growers, and by the sales of seed products. Revenue from the provision of these services and products is recognized when the services have been performed and products sold and collection of the amounts is reasonably assured. JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Currency These financial statements are expressed in U.S. dollars as the Company's operations are based predominately in the United States. Any amounts expressed in Canadian dollars are indicated as such. Cash and cash equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less. Inventory Inventory is recorded at the lower of cost, using the average cost method and net realizable value. Capital assets and depreciation Capital assets are recorded at cost and the Company provides for depreciation over the estimated life of each asset on a straight-line basis over the following periods: Office equipment 5-7 years Warehouse equipment 2-10 years Buildings 5-30 years Foreign exchange The Company's functional currency for all operations worldwide is the U.S. dollar. Nonmonetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at exchange rates in effect at the end of the year. Income statement accounts are translated at average rates for the year. Gains and losses from translation of foreign currency financial statements into U.S. dollars are included in current results of operations. Gains and losses resulting from foreign currency translations are also included in current results of operations. Earnings per share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128, basic and diluted earnings per share are to be presented. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding in the period. Diluted earnings per share takes into consideration common shares outstanding (computed under basic earnings per share) and potentially dilutive common shares. JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Earnings per share (cont'd...) The earnings per share data for the periods ended February 28 is summarized as follows:
================================================ ================ ================ ================ ================= Three Month Three Month Six Month Six Month Period Ended Period Ended Period Ended Period Ended February 28, February 28, February 28, February 28, 2002 2001 2002 2001 ------------------------------------------------ ---------------- ---------------- ---------------- ----------------- Net income $ 71,639 $ 47,496 $ 165,131 $ 131,459 =============== =============== =============== =============== Basic earnings per share weighted average number of shares outstanding 964,419 1,000,050 967,601 1,000,050 Effect of dilutive securities Stock options 49,230 31,592 46,617 31,592 --------------- --------------- --------------- --------------- Diluted earnings per share weighted average number of shares outstanding 1,013,649 1,031,642 1,014,218 1,031,642 ================================================ ================ ================ ================ =================
Employee stock option plan Financial Accounting Standards Board statement No. 123 (Accounting for Stock-Based Compensation) encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (Accounting for Stock Issued to Employees) and related interpretations and to provide additional disclosures with respect to the pro-forma effects of adoption had the Company recorded compensation expense as provided in SFAS 123. In accordance with APB-25, compensation costs for stock options is recognized in income based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. Generally, the exercise price for stock options granted to employees equals or exceeds the fair market value of the Company's common stock at the date of grant, thereby resulting in no recognition of compensation expense by the Company. Post retirement benefits Post retirement benefits are accounted for on an accrual basis. Any difference between net periodic post retirement benefit cost charged against income and the amount actually funded is recorded as an accrued or prepaid cost. This policy is consistent with Financial Accounting Standards No. 106, "Employers Accounting for Post Retirement Benefits Other than Pensions". Financial instruments The Company uses the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate such values: JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Financial instruments (cont'd...) Cash and short-term investments The carrying amount approximates fair value because of the short-term maturity of those instruments. Accounts receivable The carrying value of accounts receivable approximates fair value due to the short-term nature and historical collectability. Bank indebtedness The carrying amount approximates fair value due to the short-term nature of the obligation. Accounts payable The carrying value of accounts payable approximates fair value due to the short-term nature of the obligations. The estimated fair values of the Company's financial instruments are as follows:
===================================================================================================================== February 28, 2002 August 31, 2001 ------------------------------- ------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 373,060 $ 373,060 $ 322,622 $ 322,622 Accounts receivable 1,261,689 1,261,689 1,864,991 1,864,991 Bank indebtedness 941,276 941,276 297,960 297,960 Accounts payable and accrued liabilities 469,988 469,988 684,891 684,891 ====================================================================================================================
Comparative figures Certain comparative figures have been reclassified to conform with the presentation adopted for the current period. Accounting for derivative instruments and hedging activities Effective August 31, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This statement requires companies to record derivatives on the balance sheet as assets or liabilities at their fair value. In certain circumstances, changes in the value of such derivatives may be required to be recorded as gains or losses. The impact of this statement did not have a material effect on the Company's consolidated financial statements. JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Income taxes Income taxes are provided in accordance with SFAS No. 109, "Accounting for Income Taxes". A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Recent accounting pronouncements Effective June 1, 2001, the Company adopted the SEC's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101"). SAB 101 provides guidance related to revenue recognition. In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all future business combinations and specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives, and reviewed for impairment in accordance with SFAS No. 121. The Company has adopted the provisions of SFAS 141 and SFAS 142 as of July 1, 2001. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("SFAS 143") "Accounting for Asset Retirement Obligations" that records the fair value of the liability for closure and removal costs associated with the legal obligations upon retirement or removal of any tangible long-lived assets. The initial recognition of the liability will be capitalized as part of the asset cost and depreciated over its estimated useful life. SFAS 143 is required to be adopted effective January 1, 2003. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets" that supersedes Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 is required to be adopted effective January 1, 2002. The adoption of these new pronouncements is not expected to have a material effect on the Company's financial position or results of operations. 3. BUSINESS COMBINATION AND ACQUISITION During the year ended August 31, 2001, the Company acquired all of the assets, including land, buildings and equipment of Agrobiotech Inc. (Hillsboro) for total proceeds of $1,530,762. JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 3. BUSINESS COMBINATION AND ACQUISITION (cont'd...) The cost of the acquisition was allocated as follows: Land $ 456,713 Buildings 782,781 Warehouse equipment 285,768 Office equipment 5,500 --------------- $ 1,530,762 =============== Following the acquisition, the Company incorporated Jewett-Cameron Seed Co. under the laws of Oregon, U.S.A. This subsidiary operates as a processor and distributor of agricultural seed products. 4. INVENTORY ============================================================================== February 28, August 31, 2002 2001 ------------------------------------------------------------------------------ Home improvement products $ 2,789,826 $ 1,936,706 Air tools and industrial clamps 310,112 280,449 Seeds 350,611 182,872 --------------- --------------- $ 3,450,549 $ 2,400,027 ============================================================================== 5. CAPITAL ASSETS ============================================================================== February 28, August 31, 2002 2001 ------------------------------------------------------------------------------ Office equipment $ 204,258 $ 199,348 Warehouse equipment 659,282 651,581 Buildings 2,083,585 2,072,155 Land 851,568 845,632 --------------- ---------------- 3,798,693 3,768,716 Accumulated depreciation (1,072,138) (948,040) --------------- ---------------- Net book value $ 2,726,555 $ 2,820,676 ============================================================================== JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 5. CAPITAL ASSETS (cont'd...) In the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss will be recognized. Management's estimates of revenues, operating expenses, and operating capital are subject to certain risks and uncertainties which may affect the recoverability of the Company's investments. Although management has made its best estimate of these factors based on current conditions, it is possible that changes could occur which could adversely affect management's estimate of the net cash flow expected to be generated from its operations. 6. DEFERRED INCOME TAXES Deferred income taxes of $184,300 (August 31, 2001 - $207,300) relate principally to timing differences between the accounting and tax treatment of income, expenses, reserves and depreciation. 7. BANK INDEBTEDNESS ============================================================================== February 28, August 31, 2002 2001 ------------------------------------------------------------------------------ Demand loan $ 941,276 $ 297,960 ============================================================================== Bank indebtedness is secured by an assignment of accounts receivable and inventory. Interest is calculated at either prime or the libor rate plus 225 basis points. 8. CAPITAL STOCK Holders of common stock are entitled to one vote for each share held. There are no restrictions that limit the Company's ability to pay dividends on its common stock. The Company has not declared any dividends since incorporation. Treasury stock Treasury stock is recorded at cost. During the periods ended February 28, 2002 and 2001, the Company repurchased 20,000 and 28,500 shares, respectively, at an aggregate cost of $139,601 and $125,177, respectively. 9. EMPLOYEE STOCK OWNERSHIP PLAN The Company sponsors an employee stock ownership plan ("ESOP") that covers all U.S. employees who are employed by the Company on August 31 of each year and who have at least one thousand hours with the Company in the twelve months preceding that date. The ESOP grants to participants in the plan certain ownership rights in, but not possession of, the common stock of the Company held by the Trustee of the Plan. Shares of common stock are allocated annually to participants in the ESOP pursuant to a prescribed formula. The Company accounts for its ESOP in accordance with SOP-93-6 (Employers' Accounting for Employee Stock Ownership Plans). The Company records compensation expense equal to the market price of the shares acquired on the open market. Any dividends on allocated ESOP shares are recorded as a reduction of retained earnings. JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 10. STOCK OPTIONS Stock options The Company has a stock option plan under which stock options to purchase securities from the Company can be granted to directors and employees of the Company on terms and conditions acceptable to the regulatory authorities of Canada, notably the Toronto Stock Exchange ("TSE"), the Ontario Securities Commission and the British Columbia Securities Commission. Under the stock option program, stock options for up to 10% of the number of issued and outstanding common shares may be granted from time to time, provided that stock options in favour of any one individual may not exceed 5% of the issued and outstanding common shares. No stock option granted under the stock option program is transferable by the optionee other than by will or the laws of descent and distribution, and each stock option is exercisable during the lifetime of the optionee only by such optionee. The exercise price of all stock options, granted under the stock option program, must be at least equal to the fair market value (subject to regulated discounts) of such common shares on the date of grant. Proceeds received by the Company from exercise of stock options are credited to capital stock. At February 28, 2002, employee incentive stock options were outstanding enabling the holders to acquire the following number of shares: ======================================================================= Number Exercise of Shares Price Expiry Date ----------------------------------------------------------------------- 70,000 Cdn$ 4.25 August 6, 2006 12,000 Cdn$ 7.50 April 30, 2003 ======================================================================= Following is a summary of the status of the plan during 2002 and 2001: ===================================================================== Weighted Average Number Exercise of Shares Price --------------------------------------------------------------------- Outstanding at August 31, 2000 90,000 Cdn$ 5.14 Granted - - Forfeited - - Exercised (12,000) 8.25 -------------- Outstanding at August 31, 2001 78,000 4.66 Granted/repriced 12,000 8.55 Forfeited - - Exercised (8,000) 8.25 -------------- Outstanding at February 28, 2002 82,000 Cdn$ 4.73 ===================================================================== JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 10. STOCK OPTIONS (cont'd...) Following is a summary of the status of options outstanding at February 28, 2002:
=================================================================================================== Outstanding Options Exercisable Options ---------------------------------------- ------------------------------- Weighted Average Weighted Weighted Remaining Average Average Contractual Exercise Exercise Exercise Price Number Life Price Number Price ---------------------------------------------------------------------------------------------------- Cdn$ 4.25 70,000 4.44 Cdn$ 4.25 70,000 Cdn$ 4.25 Cdn$ 8.55 12,000 1.17 Cdn$ 7.50 12,000 Cdn$ 8.55 ====================================================================================================
The Company has elected to follow APB Opinion No. 25 (Accounting for Stock Issued to Employees) in accounting for its employee stock options. Accordingly, compensation cost for stock options is measured as the excess, if any, of quoted market price of the Company's stock at the date of grant over the option price. Stock based compensation recognized during the period ended February 28, 2002 was $20,340 (2001 - $Nil). This amount was allocated to wages and employee benefits in the accompanying statement of operations. If under Financial Accounting Standards Board Statement No. 123 (Accounting for Stock-Based Compensation) the Company determined compensation costs based on the fair value at the grant date for its stock options, net earnings and earnings per share would have been reduced to the following pro-forma amounts: ====================================================================== February 28, February 28, 2002 2001 ---------------------------------------------------------------------- Net income As reported $ 165,131 $ 131,459 ================ ================ Pro forma $ 155,159 $ 131,459 ================ ================ Basic earnings per share As reported $ 0.17 $ 0.13 ================ ================ Pro forma $ 0.16 $ 0.13 ================ ================ Diluted earnings per share As reported $ 0.16 $ 0.13 ================ ================ Pro forma $ 0.15 $ 0.13 ====================================================================== JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 10. STOCK OPTIONS (cont'd...) The weighted average estimated fair value of stock options granted during the periods ended February 28, 2002 and 2001 were Cdn$3.98 and $Nil per share, respectively. These amounts were determined using the Black-Scholes option pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the option. The assumptions used in the Black-Scholes model were as follows for stock options granted: =========================================================================== February 28, February 28, 2002 2001 --------------------------------------------------------------------------- Risk-free interest rate 3% - Expected life of the options 2 years - Expected volatility 41.62% - Expected dividend yield - - =========================================================================== The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options, and the Company's options do not have the characteristics of traded options, so the option valuation models do not necessarily provide a reliable measure of the fair value of its options. 11. CONTINGENT LIABILITIES AND COMMITMENTS a) The Company established an Employee Stock Ownership Plan, whereby the employees may earn up to 90,000 shares of the Company using a formula based on years of service. The establishment of the plan resulted in the Company forming a trust, which acquired from the Company 90,000 shares at a deemed price of Cdn$5.00 per share. As at February 28, 2002 and 2001 and August 31, 2001, 90,000 of these shares were earned by the employees under this plan but remain in the trust (Note 9). b) At February 28, 2002 and 2001, the Company had an un-utilized line-of-credit of approximately $3,700,000 and $1,900,000, respectively. 12. SEGMENTED INFORMATION The Company has three principal operating segments: the sales of lumber and building materials to home improvement centres in the United States; the sale of pneumatic air tools and industrial clamps in the United States; and the processing and sales of agricultural seeds in the United States. These operating segments were determined based on the nature of the products offered. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly in deciding how to allocate resources and in assessing performance. The Company evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. The following tables show the operations of the Company's reportable segments. JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 12. SEGMENTED INFORMATION (cont'd...) The Company has three principal operating segments: the sales of lumber and building materials to home improvements centres in the United States; the sale of pneumatic air tools and industrial clamps in the United States; and the processing and sales of agricultural seeds in the United States. These operating segments were determined based on the nature of the products offered. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly in deciding how to allocate resources and in assessing performance. The Company evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. The following tables show the operations of the Company's reportable segments. In computing income from operations by industry segment, unallocable general and administrative expenses have been excluded from each segment's pre-tax operating earnings before interest expense and have been included in general corporate and other operations. Following is a summary of segmented information for the six month periods: ========================================================================== February 28, February 28, 2002 2001 -------------------------------------------------------------------------- Sales to unaffiliated customers: Building materials $ 5,660,571 $ 6,885,023 Industrial tools 363,338 453,636 Seed processing services and sales 1,497,074 926,656 --------------- --------------- $ 7,520,983 $ 8,265,315 ================ ================ Income from operations: Building materials $ 96,213 $ 172,675 Industrial tools 41,346 36,804 Seed processing services and sales 193,702 37,885 General corporate (37,907) (55,462) --------------- --------------- $ 293,354 $ 191,902 ================ ================ Identifiable assets: Building materials $ 7,053,439 $ 9,894,578 Industrial tools 112,299 117,608 Seed processing services and sales 1,010,414 566,059 General corporate 15,958 118,059 --------------- --------------- $ 8,192,110 $ 10,696,304 ================ ================ - continued - JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 12. SEGMENTED INFORMATION (cont'd...) =============================================================================== February 28, February 28, 2002 2001 ------------------------------------------------------------------------------- Cont'd... Depreciation and amortization: Building materials $ 123,462 $ 93,460 Industrial tools - 549 Seed processing services and sales - - --------------- -------------- $ 123,462 $ 94,009 ================ =============== Capital expenditures: Building materials $ 8,758 $ 63,953 Seed processing services and sales 20,583 1,530,762 --------------- --------------- $ 29,341 $ 1,594,715 ================ =============== Interest expense: Building materials $ 3,289 $ 52,863 Industrial tools - - Seed processing services and sales - - --------------- --------------- $ 3,289 $ 52,863 =============================================================================== For the six month periods ended February 28, 2002 and 2001 the Company made sales of $3,317,473 (2001 - $2,189,199) and $1,544,073 (2001 - $3,118,008) to customers of the building material segments which were in excess of 10% of total sales for the six month periods. 13. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high quality financial institutions and limits the amount of credit exposure with any one institution. The Company has concentrations of credit risk with respect to accounts receivable as large amounts of its accounts receivable are concentrated geographically in the United States amongst a small number of customers. At February 28, 2002, two customers totalling $573,340 and $143,928 and at February 28, 2001, four customers totalling $501,379, $1,372,537, $243,010 and $231,733, respectively, accounted for accounts receivable greater than 10% of total accounts receivable. The Company controls credit risk through credit approvals, credit limits, and monitoring procedures. The Company performs credit evaluations of its commercial customers but generally does not require collateral to support accounts receivable. JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) (Unaudited - Prepared by Management) FEBRUARY 28, 2002 ================================================================================ 14. SUPPLEMENTAL DISCLOSURES WITH RESPECT TO CASH FLOWS ============================================================================== February 28, February 28, 2002 2001 ------------------------------------------------------------------------------ Cash paid during the period for: Interest $ 2,251 $ 3,289 Income taxes - - ============================================================================== There were no significant non-cash transactions for the six month periods ended February 28, 2002 and 2001. 15. SUBSEQUENT EVENT On March 1, 2002 the Company entered into an agreement with Greenwood Forest Products, Inc. ("Greenwood") to acquire certain assets of Greenwood. The assets being acquired consist of nearly $7 million of inventory, purchased in seven installments over the next two years for a price equal to the seller's cost plus 2%; furnishings, equipment and supplies for $260,000 payable at closing; and a license to use all of the intangible assets of the seller for a five year term, with an option to purchase the intangible assets for a nominal amount of $1,000, payable at closing. Greenwood is in the business of processing and distribution of industrial wood and other specialty building products, principally to original equipment manufacturers.