ITEM 1. BUSINESS
Introduction
Jewett-Cameron Trading Company Ltd. (hereinafter is also referred to as the “Company” and/or the “Registrant”) has four principal reportable segments, all in the United States: the processing/sale of industrial products to original equipment manufacturers; the sale of lumber/building materials to home improvement centers; the processing/sale of agricultural seeds/grains; and the sale of pneumatic air tools and industrial clamps
The Company's principal office is located at:
32275 NW Hillcrest Street, North Plains, Oregon, USA 97133
Telephone: 503-647-0110
Facsimile: 503-647-2272
Website: www.jewettcameron.com
E-mail: don@jewettcameron.com
The contact person is Donald M. Boone, President/CEO/Treasurer and Director.
The Company’s authorized capital includes 20,000,000 common shares without par value; and 10,000,000 preferred shares without par value. As of 8/31/200 5 there were 1,479,859 common shares outstanding. As of 11/10/2005 there were 1,532,359 common shares outstanding.
The Company's common shares are listed on the Toronto Stock Exchange in Canada with the symbol “JCT”. The Company's common shares are listed on the Nasdaq Small Cap Stock Exchange in the United States with the symbol “JCTCF”.
The Company's fiscal year ends on the last day of August.
General Development of Business
Incorporation
The Company was incorporated in British Columbia, Canada, on 7/8/87, as a holding company for Jewett-Cameron Lumber Company (“JCLC”).
Subsidiaries
Jewett-Cameron Lumber Company (100%-owned)
Incorporated in Oregon, USA, in September 1953
Acquired on 7/13/1987
a. MSI-PRO Co. (100%-owned)
Incorporated in Oregon, USA, in April 1996
b. Jewett-Cameron Seed Company (100%-owned)
Incorporated in Oregon, USA, in October 2000
c. Greenwood Products Inc. (100%-owned)
Incorporated in Oregon, USA, in February 2002
Corporate Development
Incorporated in 1953, JCLC operated as a small lumber wholesaler based in Portland, Oregon. In September 1984, the original stockholders sold their interest in the corporation to a new group of investors. Two members of that group remain active in the company:
Donald Boone, the President/CEO/Treasurer/Director of the Company; and
Michael Nasser, the Corporate Secretary of the Company.
In July 1987, the Company acquired JCLC (not an arms-length transaction).
In early 1986, prior to JCLC being acquired by the Company, JCLC acquired Material Supply International (“Material Supply”). Material Supply was engaged in the importation and distribution of pneumatic air tools and industrial clamps. The product line was re-branded as “MSI-PRO” and MSI-PRO Co. was incorporated to carry-on the business of Material Supply.
In October 2000, Jewett-Cameron Seed Company (“JCSC”) was incorporated in anticipation of JCLC acquiring the business/certain assets of a firm called Agrobiotech Inc. JCSC operates as a seed/grain processing, storage, and brokerage business in the acquired facility.
In February 2002, Greenwood Products Inc. (“GPI”) was incorporated in anticipation of JCLC acquiring the business/certain assets of Greenwood Forest Products Inc. GPI is involved the processing/distribution of industrial wood and other specialty building products, principally to original equipment manufacturers.
Narrative Description of Business
The Company’s operations are classified into four principle industry segments:
a) the processing/sale of industrial products to OEM’s;
b) the sale of lumber/building materials to home improvement centers;
c) the processing and sale of agricultural seeds; and
d) the sale of pneumatic air tools and industrial clamps.
The top ten customers are responsible for 37% (FY2004 = 39%) of total sales. Management believes that the Company is in no danger of losing any of its major customers.
Industrial Wood Products
Greenwood Products Inc. (“GPI”)
Th is business i nvolves the processing and distribution of industrial wood and other specialty building products, principally to original equipment manufacturers , primarily in the transportation and recreational boating industries in the United States. Approximately half of GPI’s sales are attributable to the recreational boating industry and are generally stronger during the winter months. The value -added-nature of our wood components are that they will resist rust, rot and flame. They also reduce sound and have a high degree of structural strength per pound.
Lumber and Buillding Materials
Jewett-Cameron Lumber Company (“JCLC”)
JCLC operates out of facilities located in North Plains, Oregon, and Ogden, Utah. We compete in the following business segments: warehouse distribution and direct sales of building materials to home improvement centers which are located primarily on the West Coast from California to Alaska and the Rocky Mountain region; the export of finished building materials to customers who are located primarily in Mexico; and we sell specialty wood products for industrial use.
We have concentrated on building a customer base in the residential repair and remodeling segment of the home improvement industry. Management believes this is a growth market fueled by professional re-modelers and do-it-yourself homeowners. We believe that this market is less sensitive to downturns in the U.S. economy than is the market for new home construction.
JCLC products are seldom unique and with few exceptions are available from multiple suppliers. We compete by offering increased customer service, including bar coding of all products, shrink wrapping of all individual orders, and, just-in-time-delivery to most customers.
Our “wood” products are grouped into fencing, dimension lumber, plywood and garden timbers.
Non-wood items include dog kennels, greenhouses, multi-purpose storage buildings, outdoor gate systems and metal fencing panels.
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Our distribution center and headquarters office facility in North Plains, Oregon gives us the ability to provide a broad range of products and services to our customer base located between Northern California and Alaska.
We also own a distribution complex in Ogden, Utah. This facility services customers in the Rocky Mountain Region including the states of Utah, Colorado, Wyoming, Montana, Idaho, and northern Nevada.
Inventories are maintained at both of these facilities and are shipped from them to home improvement center customers. During the season’s peak, some products is also shipped directly from the producing mill to the customer.
No material portions of our business are subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government.
We have no patents, trademarks, franchises, or concessions relating to any of our products and as a result they are not factors in our business.
Seed Processing and Sales
Jewett-Cameron Seed Company (“JCSC”)
J CSC brings raw, unmarketable seeds to its facility and processes them so that they become marketable products . Processing means removing imperfect, lightweight, hollow seeds that cannot germinate normally, as well as removing field impurities, weeds, and noxious weed seed. J CSC also bags, palletizes, shrink - wraps, stores , and subsequently ships the product. J CSC performs the foregoing services for growers and/or for themselves in the case where JSCS buys the “ raw product ” and subsequently sells to third parties. The business is concentrated in the US Northwest where harvest months are June through September; consequently, a greater portion of the revenues attributable to JCSC occur during this time of year.
Industrial Tools/Clamps
MSI-PRO Co.
This business operates from the same facilities as JCLC, importing and distributing both pneumatic air tools and industrial clamps. We sell these products throughout the United States and Canada to distributors and original equipment manufacturer customers. These sales are made through a network of agents and representatives, each of whom is an independent contractor representing between 10-to-15 other manufacturers who sell to similar customers but are not selling competing lines. Through MSI-PRO Co. we have agents and representatives that cover major industry groupings including industrial suppliers, automotive suppliers, and woodworking suppliers.
The pneumatic air tools, manufactured and sold under the name MSI-PRO, are of a light industrial application and are moderately priced. The line of industrial jig and fixture clamps are high quality and moderately priced and covers a wide variety of potential customers.
The market for pneumatic air tools is very competitive. In this industry, we face competition from better-financed companies with more sophisticated sales forces and more sophisticated distribution networks. The U.S. market for pneumatic air tools is currently approximately $1 billion in annual sales, of which 30% are manufactured in the United States and 70% are imported. The best-known US manufactured lines are Chicago Pneumatic and Ingersoll-Rand, which rank #1 and #2 in overall size in the industry; a smaller line, Sioux, is also manufactured in the United States. The two largest imported lines today are Florida Pneumatic and Astro Tools; others include Sunnex, Ames, and Eagle. Our sales in this industry represent a very small fraction of the market.
The U.S. sales volume in industrial clamps is approximately $400 million annually. There are fewer competitive lines available and we expect to gain a larger share of the market in industrial clamps than in pneumatic air tools.
Our current market strategy that allows us to compete in the pneumatic air tool and industrial clamp markets includes brand name and company recognition, moderate-to-low price, and continued development of a manufacturer representative organization that covers all of the major users of the tools.
Our products have been manufactured for us by several suppliers in Taiwan and South Korea. More than one supplier is able to manufacture all of our products.
Sales of pneumatic air tools and industrial clamps are not seasonal.
MSI-PRO Co. is a registered trademark in the United States and Canada.
Risk Factors
Investors should carefully consider the following risk factors and all other information contained in this Annual Report. There is a great deal of risk involved. Any of the following risks could affect our business, its financial condition, its potential profits or losses, and could result in you losing your entire investment if our business became insolvent. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties, including those not presently known to us or that we currently deem immaterial, also may result in decreased revenues, increased expenses or other events which could result in a decline in the price of our common stock.
a. We may decide to acquire assets or enter into business combinations, which could be paid for, either wholly or partially with our common stock and if we decide to do this our current shareholders would experience dilution in their percentage of ownership.
b. Our bylaws give our Board of Directors the right to enter into any contract without the approval of our shareholders. Therefore, our Executive Officers could decide to make an investment (buy shares, loan money, etc.) without shareholder approval. If we acquire an asset or enter into a business combination, this could include exchanging a large amount of our common stock, which could dilute the ownership interest of present stockholders.
c. Future stock distributions could be structured in such a way as to be diluting to our current shareholders.
d. If we raise additional funds by selling more of our stock, the new stock may have rights, preferences or privileges senior to those of the rights of our existing stock. If common stock is issued in return for additional funds, the price per share could be lower than that paid by our current stockholders. The result of this would be a lessening of each present stockholder’s relative percentage interest in our company. This condition is often referred to as “dilution”.
e. We could experience a decrease in the demand for our products resulting in lower sales volumes, which would give us less capital with which to operate.
f. In the past we have experienced decreasing annual sales in the areas of home-improvement products (sold through JCLC) and industrial tools. The reasons for this can be generally attributed to: increased competition; worldwide economic conditions, specifically those pertaining to lumber prices; demand for industrial tools; and consumer interest rates. If economic conditions continue to worsen or if consumer preferences change, we could experience a significant decrease in profitability.
g. Production time and the overall cost of our products could increase resulting in lower profit margins for our products if any of our primary suppliers are lost or if any of them increased their prices of raw materials.
h. Our manufacturing operation, which includes cutting lumber to specific sizes and shapes, depends upon obtaining adequate supplies of lumber on a timely basis. If these supplies of lumber were not received on a timely basis, we could experience lower profit margins and possibly lose sales of these products.
i. Our shareholders could experience significant dilution if we issue our authorized preferred shares.
j. Future stock distributions could cause a change of control to new investor(s).
k. We are currently working on a large common share offering; this could result in a substantial proportion of the voting power being transferred to new investor(s). The result would be that the new shareholder(s) could control our company and persons unknown could replace current management.
l. Our top ten customers represent 39% of our business. If these customers were lost and could not be replaced, we would experience a significant decrease in sales and would have to cut back our operations.
m. We could experience delays in the delivery of our products to our customers causing us to lose business.
n. We purchase our products from other vendors and a delay in shipment from these vendors to us could cause significant delays in our delivery to our customers. This could result in a decrease in sales orders to us and we would experience a loss in profitability.
o. We could lose our bank credit agreement and this could result in our not being able to pay our creditors. We have a line of credit with U.S. Bank in the amount of $8 million. We are currently in compliance with the requirements of our existing line of credit. If we lost this credit it could become impossible to pay some of our creditors on a timely basis.
p. The Company’s common shares currently trade within the Nasdaq Small Cap Stock Exchange in the United States and on the Toronto Stock Exchange in Canada. The average daily trading volume of our common stock is 15,500 shares in the United States and significantly less in Canada. With this limited trading volume, investors could find it difficult to purchase or sell our common stock.
q. We are a Canadian company. Some of our directors live outside the United States, and all or a substantial portion of their assets and our assets are, or may be located outside the United States. Therefore, it will be difficult for you to serve us or our directors with a lawsuit in the United States. You probably cannot recover any money if you get a judgment, including judgments based on violations of U.S. federal securities laws. Further, you cannot sue us or our non-U.S. Directors in Canada for violation of U.S. federal securities laws since those laws do not have force of law in Canada.
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ITEM 2.
ITEM 2. PROPERTIES
The Company’s executive offices are located at 32775 NW Hillcrest Street, North Plains, Oregon 97133. The Company purchased the five acres of land for $350,000 in January 1995 and finished construction for $850,000 of the 40,000 square foot facility (6,000 sq.ft. of office space, 10,000 sq.ft. of manufacturing space, and 24,000 sq.ft. of warehouse space) in October 1995. The facility provides office space for all of the Company’s executive offices and is used as a distribution center to service the Company’s customer base from northern California to Alaska. There are currently twenty-eight people employed here. The Company considers the facility adequate for current needs.
In July 1994, the Company purchased, for $295,000, a distribution complex in Utah. This 30-acre, 28,500 sq.ft. facility is used to service the Company’s customer base in the Rocky Mountain region. It is located at 9501 West 900 South, Ogden, Utah. There is currently one-full time employee and part-employees as needed seasonally. The Company considers the facility adequate for current needs.
In October 2000, the Company purchased all of the assets, including land, buildings and equipment of Agrobiotech Inc. for $1,530,762. Jewett-Cameron Seed Company, incorporated to operate this business, functions out of this facility. This facility consists of: thirteen plus acres of land; 105,000 square feet of buildings; rolling stock; and, equipment. It is currently used exclusively for seed processing, seed storage and seed brokerage. It is located at 31345 N.W. Beach Road, Hillsboro, Oregon. There are currently sixteen people employed here; during the summer the number doubles. The Company considers the facility adequate for current needs.
Effective 3/1/2002, the Company purchased the business and certain assets (including inventory) of Greenwood Forest Products Inc. Furniture/equipment and a license were recorded at $261,000 and the Company agreed to purchase approximately $7 million in inventory over the next two years. Greenwood Products Inc., incorporated to operate this business, functions out of a 8,000 sq.ft. leased facility. The lease expires at the end of February 2006. The Company pays a $14,000 monthly lease payment. It is located at 15895 S.W. 72nd Avenue, Suite 200, Tigard, Oregon. There are currently twenty-two people employed here. The Company began occupying this facility in February 2002 and considers the facility adequate for current needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
During Fiscal 2002, the Company entered into a purchase agreement to acquire inventory over a fifteen-month period with an initial estimated value of $7,000,000 from Greenwood Forest Products Inc (“GFP”). During the year ended 8/31/2003, the Company completed the final phase of the inventory acquisition. As partial consideration for the purchase of the inventory the Company issued two promissory notes, based on its understanding of the value of the inventory purchased. During the fourth quarter of fiscal 2005, these notes were paid off by making a deposit to the former shareholders of GFP for the full balance of the notes payable as computed by the Company. The Company believes that these notes have been repaid; however the Company is currently in dispute with the holders of the notes as to the final amounts owing and believes that there are no further amounts owing. In the event that resolution of the dispute results in a change to the promissory notes, any gain or loss will be recognized in the period that the final determination of the amount is made. However, any potential change is currently not determinable at this time.
The Company does not know of any other material, active or pending legal proceedings against them; nor is the Company involved as a plaintiff in any other material proceeding or pending litigation. The Company knows of no other active or pending proceedings against anyone that might materially adversely affect an interest of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
--- No Disclosure Necessary ---
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common shares trade on the Nasdaq Small Cap Stock Exchange in the United States. The trading symbol on the OTCBB for our common stock is “JCTCF” and the CUSIP number for our common stock is 47733C-20-7. Our common stock began trading on the Nasdaq Small Cap Stock Exchange in April 1996.
Table No. 1 lists the volume of trading and high, low and closing sales prices on the Nasdaq Small Cap Stock Exchange for the Company's common shares for: the last five fiscal years, the last eight fiscal quarters, and the last six months. Prices are adjusted for a three-for-two stock split which was reflected in trading effective 2/27/2003.
Table No. 1
Nasdaq Small Cap Stock Exchange
Common Shares Trading Activity
US Dollars
_____________________________________________________________________________
_____________________________________________________________________________
Period
Ended
Volume
High
Low
Closing
Monthly
10/31/2005
262,924
$11.07
$8.02
$9.04
9/30/2005
3,129,950
$14.19
$8.30
$10.80
8/31/2005
105,264
$9.75
$7.81
$8.98
7/31/2005
100,870
$9.65
$7.60
$8.60
6/30/2005
238,661
$10.95
$6.50
$8.38
5/31/2005
16,740
$6.90
$5.12
$6.65
Quarterly
8/31/2005
444,795
$10.95
$6.50
$8.98
5/31/2005
322,460
$10.96
$5.12
$6.65
2/28/2005
99.741
$7.50
$5.08
$7.27
11/30/2004
17.203
$7.71
$5.00
$6.06
8/31/2004
61,300
$6.20
$4.60
$5.99
5/31/2004
50,500
6.08
4.30
4.88
2/29/2004
27,400
5.20
4.10
4.35
11/30/2003
45,700
5.39
4.59
4.90
Yearly
8/31/2005
884,199
$10.96
$5.00
$8.98
8/31/2004
184,900
$6.20
$4.10
$5.99
8/31/2003
311,650
$5.80
$4.96
$5.26
8/31/2002
167,250
$6.49
$4.20
$5.89
8/31/2001
150,150
$4.46
$3.00
$4.20
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The Company’s common shares also trade on the Toronto Stock Exchange in Canada, under the trading symbol (“JCT”). The common stock commenced public trading on the Toronto Stock Exchange in February 1994, following over six years of trading on the Vancouver Stock Exchange.
Table No. 2 lists the volume of trading and high, low and closing sales prices on the Toronto Stock Exchange for the Company's common shares for: the last five fiscal years, the last eight fiscal quarters, and the last six months. Prices are adjusted for a three-for-two stock split which was reflected in trading effective 2/27/2003.
Table No. 2
Toronto Stock Exchange
Common Shares Trading Activity
(Share Prices Expressed in Canadian Dollars)
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Holders
The Company's common shares are issued in registered form and the following information is taken from the records of Compushare Investor Services Inc. (located in Vancouver, British Columbia, Canada), the registrar and transfer agent for the common shares.
On 11/10/2005, the shareholders' list for the Company's common shares showed 21 registered shareholders and 1,532,360 common shares outstanding. Five of these shareholders were Canadian residents, holding 9,850 shares representing about 1% of the issued and outstanding common shares; 15 of these shareholders were U.S. residents, holding 1,522,410 shares representing about 99% of the issued and outstanding common shares; and one of these shareholders was a resident of another country, holding 300 shares representing less than 1% of the issued and outstanding common shares.
The Company has researched the indirect holding by depository institutions and the indirect holdings of other financial institutions and estimates that there are 300 "holders of record" and beneficial owners of its common stock.
Dividends
The Company has not declared any dividends since incorporation and does not anticipate that it will do so in the foreseeable future. The present policy of the Company is to retain earnings for use in its operations and expansion of its business. There are no restrictions that limit the ability of the Company to pay dividends on common equity or that are likely to do so in the future.
Recent Sales of Unregistered Securities;
Use of Proceeds from Registered Securities
Effective 9/23/2005, the Company issued 52,500 common shares pursuant to the exercise of 52,500 stock options for cash proceeds of $117,500.
During Fiscal 2005/2004/2003, the Company issued 14,000, 31,337, and 7,083 shares pursuant to its funding of the ESOP. The Company relied on the exemption under Regulation 4.2.
Purchases of equity securities by the issuer and affiliated purchasers
The Company has traditionally purchased its common stock in the open market (“normal course issuer bid”) with the intent of subsequently canceling the shares. Canadian regulations limit such purchases to 10% of the public float as of the date of Toronto Stock Exchange approval. During Fiscal 2005/2004/2003, respectively, nil, nil and 11,500 (post-split) common shares were re-purchased; cost was $nil, $nil and $66,359.
On 2/17/2004, the Toronto Stock Exchange accepted a notice of intention from the Company to make a normal course issuer bid to purchase up to 59,515 of its common shares. The amount represents 10% of the public float the common shares issued/outstanding as of 2/17/2004. Purchases will be made on the open market through the facilities of the Toronto Stock Exchange. Purchases pursuant to the bid may begin 2/19/2004 and the authorization expired no later than 2/18/2005. Through 11/10/2005, no common shares had been acquired under the normal course bid.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as shown in Table No. 3 for the Company for Fiscal 2005/2004/2003 Ended August 31st was derived from the financial statements of the Company that have been audited by Davidson & Company, Chartered Accountants LLP, as indicated in their auditor’s report included elsewhere in this Annual Report. The selected financial data set forth for the Fiscal 2002/2001 are derived from the Company's audited Fiscal 2002/2001 financial statements, not included herein.
The selected financial data should be read in conjunction with the financial statements and other financial data included elsewhere in this Annual Report, including ITEM #7, “Management's Discussion and Analysis of Financial Condition and Results of Operations”.
Effective 2/27/2003, the Company completed a three-for-two stock split. All references to number of shares and to per-share data reflect post-split basis unless otherwise indicated.
The Company has not declared any dividends since incorporation and does not anticipate that it will do so in the near future.
Table No. 3
Selected Financial Data
($ in 000, except per share data)
_______________________________________________________________________________
_______________________________________________________________________________
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The Company’s operations are classified into four principle industry segments: a) the sale of building materials/dog kennels/greenhouses/multi purpose shelters to home improvement centers;
b) the processing/sale of industrial products to OEM’s;
c) the sale of pneumatic air tools and industrial clamps; and
d) the processing and sale of agricultural seeds.
Quarterly Results
RESULTS OF OPERATIONS
Fiscal 2005 Ended August 31, 2005 versus Fiscal 2004
Sales increased 5% to $74.6 million during Fiscal 2005 as compared to $71.3 million in Fiscal 2004. The majority of the increase in sales was attributable to Greenwood Products. Sales of industrial wood products by Greenwood increased $2.7 million. This was due to an enlarged customer base and fluctuations in the price of raw materials that were passed on to the customers.
Sales of building materials and components of the home improvement business by Jewett Cameron Lumber increased $564 thousand. The increased sales of lumber and building materials resulted from the introduction of new products, which occurred two years ago. These products include dog kennels, greenhouses and outdoor patio accessories. The market awareness of these products has increased since their introduction, because of the increased use of manufacturer’s representatives, which resulted in a greater number of sales personnel covering the market.
Gross profit for Fiscal 2005 increased 13% to $9.29 million as compared to $8.24 million for the fiscal year ended August 31, 2004. The gross margins increased because the Company has been able to charge its wholesale customers higher prices. (The introductory pricing utilized during the introduction of the newer products was increased during the past two years and accepted by the customers.)
Operating expenses increased by $742 thousand comparing Fiscal 2005 with Fiscal 2004. Both general and administrative expenses and depreciation expense increased slightly. The more substantial increased occurred in the category of wages and employee benefits, which increased, by $694 thousand comparing Fiscal 2005 with Fiscal 2004. The primary reasons for the increase in this category were medical insurance increases and additional performance bonuses.
Interest and other income increased by $177 thousand. The bulk of this was a rebate from an earlier investment in China that had not been expensed.
Because of reduced inventory levels, financing and interest expense decreased by $46 thousand comparing Fiscal 2005 with Fiscal 2004.
Net Income increased to $931,088 in Fiscal 2005 from $567,140 in Fiscal 2004. Basic Earnings Per Share were $0.63 for Fiscal 2005 compared to $0.39 for the prior fiscal year; Diluted Earnings Per Share were $0.60 in Fiscal 2005 compared to $0.37 for the prior fiscal year.
Industrial Wood Products (Greenwood Products Inc.)
This division’s sales increased 5% to $55.4 million in Fiscal 2005 (FY2004 = $52.7 million). Revenue was again enhanced by strong sales to the boat building and transportation industries (bus, subway, specialized truck carriers, etc.). Before the end of the fiscal year, the Company had broadened its supplier contacts. The Company has a practice of providing short-term fixed-price supply agreements and fixed price sales agreements up to three months. Divisional profitability decreased by 3% for the Fiscal Year ended August 31, 2005 as compared to the Fiscal Year ended August 31, 2004. This decrease occurred because of normal fluctuations in the price of raw materials and the use of introductory pricing for new customers.
Revenue:
Divisional Income (Loss)
FY2005: $55.4 million
$1.62 million
FY2004: $52.7 million
$1.67 million
FY2003: $44.2 million
$731 thousand
Lumber and Building Materials (Jewett-Cameron Lumber Company)
This division’s sales rebounded again in Fiscal 2005 in response to new products introduced in mid-2003, reversing the declines in recent years. Jewett-Cameron Lumber Company again recorded a loss in the amount of ($156,902) for the fiscal year ended August 31, 2005 as compared to a loss in the amount of ($581,070) for the fiscal year ended August 31, 2004. Losses within this division have occurred during the last three fiscal years because of the continued restructuring costs associated with the manufacturing facility and the new product lines. Management believes that profitability within this division will begin to occur during fiscal 2006 when all the previous restructuring becomes finalized.
Revenue:
Divisional Income (Loss)
FY2005: $13.3 million
($157 thousand)
FY2004: $12.8 million
($581 thousand)
FY2003: $ 7.1 million
($125 thousand)
Management attributes the revenue improvement to the successful introduction of new “non-wood” products, including kennels, greenhouses, portable storage buildings, outdoor seating, metal gates and metal fencing. Such products represented nearly three-fourths of sales, which is consistent with FY2004. This broader product line continues to allow the Company to utilize its strong marketing contacts at the big-box home improvement retailers and to gain entry into a more diversified mix of retailers. In recent years, in an attempt to strengthen their profitability, the big-box retailers (Lowe’s, Home Depot, Fred Meyer, etc.) have decreased inventory purchases from “middlemen” like the Company in favor of manufacturers, such as Georgia-Pacific and Weyerhaeuser. The Company manufactures these new products, through supply contracts in Asia, and is again a favored supplier to these potentially large customers, buoyed by its strong customer service capabilities.
Seed Processing and Sales (Jewett-Cameron Seed Company)
Sales and profitability attributable to Jewett-Cameron Seed Company were virtually the same during FY2005 as they were in FY2004.
Revenue:
Divisional Income (Loss)
FY2005: $4.8 million
($ 10 thousand)
FY2004: $4.8 million
$ 92 thousand
FY2003: $3.2 million
$ 46 thousand
Industrial Tools
Sales grew 8.3% to $1,083,180 and profits grew 34% to $120,238. Management attributes the increase in profitability to wholesale pricing differences, and corporate re-structuring.
Revenue:
Divisional Income (Loss)
FY2005: $1.08 million
$120 thousand
FY2004: $1.00 million
$ 90 thousand
FY2003: $879 thousand
$103 thousand
Fiscal 2004 Ended August 31, 2004 versus Fiscal 2003
Sales increased 29% to $71.4 million during Fiscal 2004 as compared to $55.4 million in Fiscal 2003. The increase in sales was across the board, with particular strong growth at Greenwood Products Inc. and the turn-around of business at Jewett-Cameron Lumber Company.
Gross profit for Fiscal 2004 only increased 7% to $8,240,362, despite the 29% increase in sales because of a 32% increase in cost of goods sold. Shifting product mix and higher costs led to the increased costs. As a percent of revenue, cost of goods sold has risen consistently for the last four years: Fiscal 2004 = 88%; Fiscal 2003 = 86%, Fiscal 2002 84%, and Fiscal 2001 = 81%.
Operating expenses were substantially unchanged at $7.0 million in Fiscal 2004 and Fiscal 2003. General/Administrative expenses increased 40% ($714,158) during Fiscal 2004; Depreciation/Amortization increased 6% ($19,810); and Wages/Employee Benefits decreased 14% ($681,741).
General and administrative expenses as a percent of revenue rose to 3.5% after several years of decline: Fiscal 2003 = 3.2%; Fiscal 2002 = 3.4%; and Fiscal 2001 = 5.1%. Management attributes higher professional fees (accounting/legal/etc.) related to the Greenwood Products Inc. acquisition, the proposed stock offering, and corporate changes for the increase in G&A expenses. Lower Wages/Employee Benefits are materially attributable to efforts at all divisions to control costs, with the shifting product mix at Jewett-Cameron Lumber Company resulting in less labor-intensive operations.
Interest expense increased 13% in Fiscal 2004 to $391,246. The primary reason for the increase was the higher level of borrowing resulting from the increased level of inventory required to support the elevated sales level of Fiscal 2004.
Net Income increased to $567,140 in Fiscal 2004 from $294,144 in Fiscal 2003. Basic Earnings Per Share were $0.39 for Fiscal 2004 compared to $0.20 for last year; Diluted Earnings Per Share were $0.37 in Fiscal 2004 compared to $0.19 for last year.
Industrial Wood Products (Greenwood Products Inc.)
This division’s sales increased 19% to $52.7 million in Fiscal 2004 (FY2003 = $44.2 million). Revenue was enhanced by strong sales to the boat building and transportation industries (bus, subway, specialized truck carriers, etc.). Before the end of the fiscal year, the Company had broadened its supplier contacts. The Company, once again, is able to obtain fixed-price supply agreements and fixed price sales agreements on a forward three-month basis; reversing this year’s situation mid-year when suppliers’ price increases were outside such agreements. Divisional profitability more than doubled to $1,668,685 for Fiscal 2004 (FY2003 = $730,781). Divisional profitability was 3.2% of revenue (FY2003 was 1.7%).
Lumber and Building Materials (Jewett-Cameron Lumber Company)
This division’s sales rebounded in response to new products introduced in mid-2003, reversing the declines in recent years. Divisional profitability was weak because restructuring costs associated with the manufacturing facility and the new product lines; turning into a “manufacturer” rather than a distributor.
#
Revenue:
Divisional Income (Loss):
FY2004: $12.8 million
($581 thousand)
FY2003: $ 7.1 million
($125 thousand)
FY2002: $14.7 million
($427 thousand)
Management attributes the revenue improvement to the successful introduction of new “non-wood” products, including kennels, greenhouses, portable storage buildings, outdoor searing, metal gates and metal fencing. Such products represented nearly three-fourths of sales, versus less than 10% in FY2002. This broader product line allowed the Company to utilize its strong marketing contacts at the big-box home improvement retailers and to gain entry into a more diversified mix of retailers. In recent years, in an attempt to strengthen their profitability, the big-box retailers (Lowe’s, Home Depot, Fred Meyer, etc.) have decreased inventory purchases from “middlemen” like the Company in favor of “manufacturers”, such as Georgia-Pacific and Weyerhaeuser. The Company manufactures these new products, through supply contracts in Asia, and is again a favored supplier to these potentially large customers, buoyed by its strong customer service capabilities.
Seed Processing and Sales (Jewett-Cameron Seed Company)
Sales grew 50% this year and profitability nearly doubled. Management attributes this growth to successful marketing efforts and a new price structure for product/services.
Revenue:
Divisional Income (Loss):
FY2004: $4.8 million
$ 92 thousand
FY2003: $3.2 million
$ 46 thousand
FY2002: $2.6 million
$250 thousand
Seed inventory levels fell materially because a change from “holding” inventory for sale to collecting “storage fees” for future sale.
Industrial Tools
Sales grew 13% to $1,000,135 and profits fell 13% to $89,941. Management attributes the decline in profitability to personnel changes and wholesale pricing differences, and corporate re-structuring.
Revenue:
Divisional Income (Loss):
FY2004: $1 million
$ 90 thousand
FY2003: $879 thousand
$103 thousand
FY2002: $777 thousand
$ 89 thousand
Fiscal 2003 Ended August 31, 2003 versus Fiscal 2002
Sales increased 27% to $55.4 million during Fiscal 2003 as compared to $43.6 million in Fiscal 2002. The increase in sales predominately was due to the full-year contribution of the business of Greenwood Products Inc., acquired in February 2002 ($44.2 million vs. $25.6 million). Jewett-Cameron Seed Company also contributed with a 23.5% increase in sales. Jewett-Cameron Lumber Company’s sales of lumber/building materials continued to decline precipitously: $7.1 million vs. $14.7 million. Management’s focus on shifting product mix away from traditional lumber/building materials continues and has been the reason for increased sales in recent years.
We continued to experience a decrease in sales in the area of lumber and building materials that management believes is due to recessionary conditions in the economy, causing customers to scale back their purchases of these discretionary items. The loss of revenue from these products has been offset by the sales increases in our other business segments; however, we believe that once consumer confidence strengthens, lumber and building material sales will again trend upward. We have also introduced new products for retailers, which, in the past, concentrated on more expensive items.
Gross profit for Fiscal 2003 only increased 8% to $7,708,287, despite the 27% increase in sales because of a 31% increase in cost of goods sold. Shifting product mix and higher costs led to the increased costs. As a percent of revenue, Cost of goods sold has risen modestly: Fiscal 2003 (86%), Fiscal 2002 (84%), and Fiscal 2001 (81%).
Operating expenses increased 21% to $7.0 million in Fiscal 2003 as compared to $5.8 million in Fiscal 2002. The $1.2 million increase in operating expense was Fiscal 2003 was due materially to the first full year of operations for Greenwood Products Inc.
General/Administrative expenses increased 21% ($307,528) during Fiscal 2003; Depreciation/Amortization increased 16% ($46,021); and Wages/Employee Benefits increased 21% ($839,067).
General and administrative expenses as a percent of revenue continued to decline for Fiscal 2003 (3.2%), Fiscal 2002 (3.4%), and Fiscal 2001 (5.1%). Management attributes improved efficiency at Jewett-Cameron Seed Company and the full-year operations of Greenwood Products Inc. The increased Wages/Employee Benefits is materially attributable to staff associated with Greenwood Products Inc.
General/Administrative expenses began to decrease during the second half of Fiscal 2003, resulting from successful restructuring of the activities at Greenwood Products Inc. during the first half of the year. This restructuring included reductions in salaries resulting from the elimination of some clerical positions and wage cuts resulting from the sales decreases.
Interest expense increased over six-fold during Fiscal 2003 to $346,030. The primary reason for the increase was the higher level of borrowing resulting from the increased level of inventory required to support the elevated sales level of Fiscal 2003.
Net Income decreased to $294,144 in Fiscal 2003 from $837,024 in Fiscal 2002. Basic Earnings Per Share were $0.20 for Fiscal 2003 compared to $0.56 for last year; Diluted Earnings Per Share were $0.19 in Fiscal 2003 compared to $0.53 for last year.
Industrial Wood Products (Greenwood Products Inc.)
This largest division’s sales increased 73% to $44.2 million in Fiscal 2003 (FY2002 = $25.6 million), reflecting the first full year of operations after the February 2002 acquisition of this business. Divisional profitability only increased 17% to $730,781 for Fiscal 2003 (FY2002 = $625,937) because increased raw material costs that could not be passed on to customers.
Lumber and Building Materials (Jewett-Cameron Lumber Company)
This division’s sales have decreased in each of the last three fiscal years:
Divisional profitability has fallen with the decreased sales:
Revenue:
Divisional Income:
FY2003: $ 7.1 million
($125 thousand)
FY2002: $14.7 million
$427 thousand
FY2001: $19.4 million
$841 thousand
FY2000: $23.4 million
$1.1 million
FY1999: $28.0 million
$1.2 million
Management attributes this chronic decline to economic conditions, internal procedures at major customers that discouraged purchasing product from the Company, and increased concentration among retailers of the Company’s products (Lowe’s, Home Depot, Fred Meyer, etc.) where these firms have increasingly shifted their purchasing toward larger, better-financed suppliers that have a more national marketing capability. The Company has broadened its product line and introduced newer less-expensive products and, in the latter part of Fiscal 2003, sales began to increase.
Seed Processing and Sales (Jewett-Cameron Seed Company)
Fiscal 2003 was the third year of operations for Jewett-Cameron Seed Company. The spike in profitability in Fiscal 2002 results inter-company transfers.
Revenue:
Divisional Income:
FY2003: $3.2 million
$ 46 thousand
FY2002: $2.6 million
$250 thousand
FY2001: $1.8 million
$ 36 thousand
Industrial Tools
The Fiscal 1997 renaming of the industrial tools under the “MSI-PRO” label has continued to provide a better product identity and a more efficient use of marketing dollars. Management’s re-organization of this business segment, including the hiring of a new sales manager two years ago, has resulted in the increased sales and profitability.
Revenue:
Divisional Income:
FY2003: $879 thousand
$103 thousand
FY2002: $777 thousand
$ 89 thousand
FY2001: $919 thousand
($ 24 thousand)
LIQUIDITY AND CAPITAL RESOURCES
Pending $5.0 Million Underwriting
The Company has filed a preliminary prospectus with the US Securities & Exchange Commission regarding the offering of 500,000 common shares at $10.00 per share. This offering is self-underwritten on a best-efforts basis. The Company has not established a minimum amount of proceeds that it must receive in the offering before any proceeds may be accepted. Management anticipates beginning the offering in December 2005 with completion in early 2006.
The Company is under no legal or business requirement to take these actions. Based on the Company’s current working capital position, its policy of retaining earnings, and the line of credit available, we have adequate working capital to meet our needs in the foreseeable future.
Rather, management is undertaking this for strategic purposes. Management anticipates using the proceeds of the offering to pay down corporate indebtedness, including notes payable. Management believes that the Company does not need to retire its long-term debt to continue to grow at its current rate. By retiring this debt, the Company will have the option to purchase other businesses in its industry, thus allowing the Company to accelerate its growth rate.
The Company’s bank debt was $2,077,063 at 8/31/2005. The bank indebtedness is secured by an assignment of accounts receivable and inventory. Interest is calculated at either prime or the LIBOR rate plus 190 basis points. The weighted average interest rate for the fiscal year was 5.99% (2004 - 3.52%).
Credit Risks
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 8/31/2005 and 8/31/2004, no customers 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.
Critical Accounting Policies
Management is required to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On a regular basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
During the year ended 8/31/2005, the Company did not adopt any new accounting policy that would have a material impact on the consolidated financial statements, nor did it make changes to existing accounting policies. Senior Management has discussed with the Audit Committee the development, selection and disclosure of accounting estimates used in the preparation of the consolidated financial statements.
Recent Accounting Pronouncements
In December 2004, Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29” (“SFAS 153”) which amends Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions” to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.
In December 2004, FASB issued Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (“SFAS 123R”). SFAS 123R supersedes APB 25 and its related implementation guidance by requiring entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions) and revises SFAS 123 as follows:
i)
Public entities are required to measure liabilities incurred to employees in share-based payment transactions at fair value and nonpublic entities may elect to measure their liabilities to employees incurred in share-based payment transactions at their intrinsic value whereas under SFAS 123, all share-based payment liabilities were measured at their intrinsic value.
ii)
Nonpublic entities are required to calculate fair value using an appropriate industry sector index for the expected volatility of its share price if it is not practicable to estimate the expected volatility of the entity’s share price.
iii)
Entities are required to estimate the number of instruments for which the requisite service is expected to be rendered as opposed to accounting for forfeitures as they occur.
(iv)
Incremental compensation cost for a modification of the terms or conditions of an award is measured by comparing the fair value of the modified award with the fair value of the award immediately before the modification whereas SFAS 123 required that the effects of a modification be measured as the difference between the fair value of the modified award at the date it is granted and the award’s value immediately before the modification determined based on the shorter of (1) its remaining initially estimated expected life or (2) the expected life of the modified award.
SFAS 123R also clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123 as originally issued and Emerging Issues Task Force No. 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods and Services” (“EITF 96-18”). SFAS 123R also does not address the accounting for employee share ownership plans which are subject to Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans”. Public entities (other than those filing as small business issuers) will be required to apply SFAS 123R as of the first annual reporting period that begins after June 15, 2005. Public entities that file as small business issuers will be required to apply SFAS 123R in the first annual reporting period that begins after December 15, 2005. For nonpublic entities, SFAS 123R must be applied as of the beginning of the first annual reporting period beginning after December 15, 2005.
In May 2005, FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”) which is effective for fiscal years ending after December 15, 2005. SFAS 154 requires that changes in accounting policy be accounted for on a retroactive basis.
Fiscal 2005 Ended August 31, 2005
Working capital was $9 million at 8/31/2005, up from $5.5 million at 8/31/2004. Major working capital changes during Fiscal 2005 were:
a.
An increase in the amount of cash of $319,462. This was a result of uncollected funds at year-end. (Deposits received and credited to the checking account but not yet collected by the Bank.)
b.
A decrease in the amount of inventory in the amount of $2,295,788. This was the result of management’s decision to reduce inventory levels.
c.
A decrease in the amount of prepaid expenses in the amount of $69,199. This was the result of a change in the billing cycle for insurance premiums.
d.
A decrease in a note receivable in the amount of $51,509. This was the result of a simple collection of the obligation.
e.
A decrease in bank indebtedness in the amount of $4,172,489. This was the result of the Company paying down the credit line with the funds made available by the real estate mortgage, the increased turnaround of receivables and the reduction in inventory.
f.
A decrease in notes payable in the amount of $1,899,292. This was the result of the payment of the note payable to Greenwood Products per the terms of the original purchase agreement.
Accounts payable, accrued liabilities and accrued income taxes all increased because of the higher level of sales activity, which occurred during the fiscal year.
Notes payable, in the amount of $1,899,292, were paid off during Fiscal 2005.
Management elected to mortgage its property located in North Plains, Oregon in the amount of $2,197,079 because of the favorable interest rates and these funds were used to pay off the notes payable and for general working capital purposes.
The daily cash needs of the Company are met throughout the year through the bank line-of-credit of Jewett-Cameron Lumber Company (“JCLC”) and from the daily operations associated with the normal course of business. The bank line-of-credit along with the working capital surplus is considered adequate to support the Company's sales level anticipated for the coming year.
Cash flows from Fiscal 2005 Operating Activities totaled $4,082,325, including the $931,088 Net Income. Material adjustments included $377,298 of amortization/depreciation; gain on sale of property/plant/equipment of ($8,827), deferred income taxes ($131,000); and a net change in non-cash working capital items of $2,834,826.
Cash Flows from Fiscal 2005 Investing Activities totaled ($7,661), consisting predominately of the purchase of property, plant and equipment. Such capital investment related to JCLC facility remodeling to enable production of new products.
Cash Flows Used by 2005 Financing Activities totaled $3,757,202. The Company elected to repay bank indebtedness and notes payable in the aggregate amount of $6,071,781. The funds to accomplish this were received from mortgage debt in the amount of $2,197,079 and subscriptions received in advance in the amount of $117,500. (The subscriptions received in advance resulted from Donald M. Boone, the President of the Company, exercising his stock options) and the reduction of inventory levels.
Fiscal 2004 Ended August 31, 2004
Working capital was $5.5 million at 8/31/2004, down from $7.4 million last year. Major working capital changes during Fiscal 2004 were:
a.
Increased inventory at $10,070,201 (up $1,409,720);
b.
Increased accounts payable/accrued liabilities of $3,392,947 (up
$939,944); and,
c.
A shift of notes payable from long-term debt to current liability.
These changes primarily resulted from increased operations.
The Company’s two notes payable were paid down by $362,663. The $1.9 million notes payable bear interest at US prime rate plus 2% and were due March 2005 (extended from November 2004) or on demand thereafter. Management anticipated repaying these notes during FY2005, perhaps with the proposed proceeds from the planned equity offering.
The daily cash needs of the Company are met throughout the year through the bank line-of-credit of Jewett-Cameron Lumber Company (“JCLC”) and from the daily operations associated with the normal course of business. The bank line-of-credit along with the working capital surplus is considered adequate to support the Company's sales level anticipated for the coming year.
Cash flows from Fiscal 2004 Operating Activities totaled $642,130, including the $567,140 Net Income. Material adjustments included $352,933 of amortization/depreciation; gain on sale of property/plant/equipment of ($10,667), deferred income taxes $50,000; and a net change in non-cash working capital items of ($317,276).
Cash Flows from Fiscal 2004 Investing Activities totaled ($494,793), consisting predominately of the purchase of property, plant and equipment. Such capital investment related to JCLC facility remodeling to enable production of new products.
Cash Flows Used by 2004 Financing Activities totaled ($93,275) including proceeds from bank indebtedness in the amount of $242,464; proceeds from the sale of capital stock in the amount of $26,473 (exercise of stock options); and the aforementioned repayment of notes payable of ($362,663).
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company did not have any derivative financial instruments as of 8/31/2005.
The Company’s interest income and expense are most sensitive to changes in the general level of U.S. interest rates. Therefore, 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 lines of credit and other debt whose interest rates are based on various published prime 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
The Company operates primarily in the United States; however, some business is transacted with Canadian firms. The Company’s business and financial condition is, therefore, sensitive to currency exchange rates or any other restrictions imposed on its currency.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and notes thereto as required are attached hereto and found immediately following the text of this Annual Report. The audit report of Davidson & Company, LLP is included herein immediately preceding the audited financial statements.
Audited Financial Statements: Fiscal 2004/2003/2002
Report of Independent Registered Accounting Firm, dated 10/28/2005
Balance Sheets at 8/31/2005 and 8/31/2004
Consolidated Statements of Operations
For the years ended 8/31/2005, 8/31/2004, and 8/31/2003
Consolidated Statements of Stockholders’ Equity
For the years ended 8/31/2005, 8/31/2004, and 8/31/2003
Consolidated Statements of Cash Flows
For the years ended 8/31/2005, 8/31/2004, and 8/31/2003
Notes to Financial Statements
Report of Independent Registered Accounting Firm, dated 10/28/2005
Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
#
DAVIDSON & COMPANY LLP Chartered AccountantsA Partnership of Incorporated Professionals
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Jewett-Cameron Trading Company Ltd. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Jewett-Cameron Trading Company Ltd. and Subsidiaries as at August 31, 2005 and 2004 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended August 31, 2005, 2004 and 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at August 31, 2005 and 2004 and the results of their operations and their cash flows for the years ended August 31, 2005, 2004 and 2003 in conformity with accounting principles generally accepted in the United States of America.
"DAVIDSON & COMPANY LLP"
Vancouver, Canada
Chartered Accountants
October 28, 2005
A Member of SC INTERNATIONAL
1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre, Vancouver, BC, Canada, V7Y 1G6
Telephone (604) 687-0947 Fax (604) 687-6172
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
AS AT AUGUST 31
ASSETS
Current assets
Cash and cash equivalents
$ 609,944
$ 290,482
Accounts receivable, net of allowance of $Nil (2004 - $Nil)
6,401,765
6,514,455
Inventory (Note 3)
7,774,413
10,070,201
Prepaid expenses
54,691
123,890
Note receivable (Note 4)
38,238
89,747
Total current assets
14,879,051
17,088,775
Property, plant and equipment (Note 5)
2,482,207
2,791,508
Deferred income taxes (Note 6)
177,100
45,700
Total assets
$ 17,538,358
$ 19,925,983
- continued -
The accompanying notes are an integral part of these consolidated financial statements.
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
AS AT AUGUST 31
Continued
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Bank indebtedness (Note 7)
$ 2,077,063
$ 6,249,552
Accounts payable
2,433,687
2,375,785
Accrued liabilities
965,412
825,712
Accrued income taxes
350,997
191,450
Current portion of promissory note
56,000
-
Notes payable (Note 8)
-
1,899,292
Total current liabilities
5,883,159
11,541,791
Long term liabilities
Promissory note (Note 9)
2,141,079
-
Total Long term liabilities
2,141,079
-
Total Liabilities
8,024,238
11,541,791
Contingent liabilities and commitments (Note 14)
Stockholders’ equity
Capital stock (Note 10)
Authorized
20,000,000 Common shares, without par value
10,000,000 Preferred shares, without par value
Issued
1,479,859 Common shares (2004 - 1,465,859)
1,883,604
1,802,264
Additional paid-in capital
583,211
583,211
Subscriptions received in advance (Note 10)
117,500
-
Retained earnings
6,929,805
5,998,717
9,514,120
8,384,192
Less: Treasury stock - Nil common shares (2004 - Nil)
-
-
Total stockholders’ equity
9,514,120
8,384,192
Total liabilities and stockholders’ equity
$ 17,538,358
$ 19,925,983
Nature of operations (Note 1)
The accompanying notes are an integral part of these consolidated financial statements.
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
YEAR ENDED AUGUST 31
SALES
$ 74,617,461
$ 71,335,127
$ 55,368,587
COST OF SALES
65,328,359
63,094,765
47,660,300
GROSS PROFIT
9,289,102
8,240,362
7,708,287
OPERATING EXPENSES
Selling, general and administrative expenses
2,535,858
2,512,166
1,798,008
Depreciation
377,298
352,933
333,123
Wages and employee benefits
4,850,064
4,156,089
4,837,830
7,763,220
7,021,188
6,968,961
Income from operations
1,525,882
1,219,174
739,326
OTHER ITEMS
Interest and other income
215,797
38,712
2,048
Interest expense
(345,591)
(391,246)
(346,030)
(129,794)
(352,534)
(343,982)
Income before income taxes
1,396,088
866,640
395,344
Income taxes (Note 6)
Current
596,400
249,500
25,000
Deferred
(131,400)
50,000
76,200
465,000
299,500
101,200
Net income for the year
$ 931,088
$ 567,140
$ 294,144
Basic earnings per common share
$ 0.63
$ 0.39
$ 0.20
Diluted earnings per common share
$ 0.60
$ 0.37
$ 0.19
Weighted average number of common shares outstanding:
Basic
1,478,747
1,463,859
1,467,992
Diluted
1,548,845
1,526,687
1,536,807
The accompanying notes are an integral part of these consolidated financial statements.
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Expressed in U.S. Dollars)
YEAR ENDED AUGUST 31
Balance, August 31, 2002
1,508,493
$1,706,451
67,050
$
(257,272)
$
602,587
$ -
$
5,365,515
$
7,417,281
Net income for the year
-
-
-
-
-
-
294,144
294,144
Private placement
12,860
106,100
-
-
-
-
-
106,100
Stock issued under employee
ownership plan (“ESOP”)
7,083
58,789
-
-
-
-
-
58,789
Stock cancelled
(78,550)
(95,549)
-
-
-
-
-
(95,549)
Stock based compensation
recovery
-
-
-
-
(19,376)
-
-
(19,376)
Treasury stock acquired
-
-
8,800
(66,359)
-
-
-
(66,359)
Treasury stock cancelled
-
-
(78,550)
323,631
-
-
-
323,631
Premium relating to
cancellation of capital stock
-
-
-
-
-
-
(228,082)
(228,082)
Adjustment for 3:2 stock split
9,973
-
2,700
-
-
-
-
-
Balance, August 31, 2003
1,459,859
1,775,791
-
-
583,211
-
5,431,577
7,790,579
Net income for the year
-
-
-
-
-
-
567,140
567,140
Stock options exercised
6,000
26,473
-
-
-
-
-
26,473
Balance, August 31, 2004
1,465,859
$ 1,883,604
-
$ -
$ 583,211
-
$ 5,998,717
$ 8,384,192
Net income for the year
931,088
931,088
Stock issued under employee
ownership plan (“ESOP”)
14,000
81,340
-
-
-
-
-
81,340
Subscriptions received
-
-
-
-
-
117,500
-
117,500
Balance, August 31, 2005
1,479,859
$ 1,883,604
-
$ -
$ 583,211
$ 117,500
$ 6,929,805
$ 9,514,120
The accompanying notes are an integral part of these consolidated financial statements.
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
YEAR ENDED AUGUST 31
Supplemental disclosure with respect to cash flows (Note 17)
The accompanying notes are an integral part of these consolidated financial statements.
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
1.
NATURE OF OPERATIONS
Jewett-Cameron Trading Company Ltd. and subsidiaries (the “Company” or “Jewett”) 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 and Portland, 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 a processor and distributor of industrial wood and other specialty building products principally to original equipment manufacturers in the United States; as an importer and distributor of pneumatic air tools and industrial clamps in 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 conformity with generally accepted accounting principles of the United States of America (“US GAAP”). These consolidated financial statements also comply, in all material respects, with Canadian generally accepted accounting principles (“Canadian GAAP”) with respect to recognition, measurement and presentation.
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., Greenwood Products, Inc. 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 consolidated financial statements in conformity with US GAAP 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.
Currency
These financial statements are expressed in U.S. dollars as the Company's operations are based only in the United States. Any amounts expressed in Canadian dollars are indicated as such.
Cash and cash equivalents
The Company considers Cash and cash equivalents to be highly liquid investments with original maturities of three months or less. At August 31, 2005 and 2004, cash and cash equivalents consisted of cash held at financial institutions.
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
2.
SIGNIFICANT ACCOUNTING POLICIES (cont'd...)
Accounts receivable
Trade and other accounts receivable are reported at face value less any provisions for uncollectible accounts considered necessary. Accounts receivable primarily includes trade receivables from customers. The Company estimates doubtful accounts on an item-by-item basis and includes over aged accounts as part of allowance for doubtful accounts, which are generally ones that are ninety days or greater overdue.
Inventory
Inventory, which consists of finished goods, is recorded at the lower of cost, based on the average cost method, and market. Market is defined as net realizable value.
Property, plant and equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. 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
Asset retirement obligations
The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the long-lived assets. The Company also records a corresponding asset which is amortized over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time (accretion expense) and changes in the estimated future cash flows underlying the obligation (asset retirement cost).
Impairment of long-lived assets and long-lived assets to be disposed of
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount and the fair value less costs to sell.
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
2.
SIGNIFICANT ACCOUNTING POLICIES (cont'd...)
Foreign exchange
The Company's functional currency for all operations is the U.S. dollar. The Company does not have non-monetary or monetary assets and liabilities that are in a currency other than the U.S. dollar. Any income statement transactions in a foreign currency are translated at rates that approximates those in effect at the time of translation. Gains and losses from translation of foreign currency transactions into U.S. dollars are included in current results of operations.
Earnings per share
Basic earnings per common 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 common share takes into consideration common shares outstanding (computed under basic earnings per share) and potentially dilutive common shares.
The earnings per share data for the years ended August 31 is summarized as follows:
Net income for the year
$ 931,088
$ 567,140
$ 294,144
Basic earnings per share weighted average number
of common shares outstanding (1)
1,478,747
1,463,859
1,467,992
Effect of dilutive securities
Stock options (1)
70,098
62,829
68,815
Diluted earnings per share weighted average number
of common shares outstanding (1)
1,548,845
1,526,687
1,536,807
Stock option plan
Statements of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”) 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” (“APB 25”) 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 No. 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.
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
2.
SIGNIFICANT ACCOUNTING POLICIES (cont'd...)
Stock option plan (cont’d)
The Company accounts for stock based compensation associated with the repricing of employee stock options in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation” (“FIN 44”). For accounting purposes, the repricing of existing stock options requires variable accounting for the new options granted from the date of modification. Variable accounting requires that the intrinsic value, being the excess of the current market price at the end of each reporting period in excess of the exercise price of the repriced options, be expensed as non-cash stock based compensation expense until such time as the repriced options are exercised, expire or are otherwise forfeited. Any increase in the intrinsic value of the repriced options will decrease reported earnings and any subsequent decreases in value will increase reported earnings.
If under SFAS No. 123 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 changed to the following pro-forma amounts:
Net income
As reported
$ 931,088
$ 567,140
$
294,144
Add:
Total stock-based employee compensation expense included in income, as reported determined under APB 25, net of related tax effects
-
-
(19,376)
Deduct:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
-
-
-
Pro forma
$ 931,088
$ 567,140
$
274,768
Basic earnings per share
As reported
$ .63
$
0.39
$
0.20
Pro forma
$ .63
$
0.39
$
0.19
Diluted earnings per share
As reported
$ .60
$
0.37
$
0.19
Pro forma
$ .60
$
0.37
$
0.18
Under Canadian GAAP, stock options granted are accounted for under the fair value method. There were no options granted for the years ended August 31, 2005, 2004 and 2003, and therefore there are no differences between Canadian GAAP and US GAAP.
Comprehensive income
The Company has no items of other comprehensive income in any year presented. Therefore, net income presented in the consolidated statements of operations equals comprehensive income.
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
2.
SIGNIFICANT ACCOUNTING POLICIES (cont'd...)
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:
Cash and cash equivalents
The carrying amount approximates fair value because the amounts consist of cash held at financial institutions.
Accounts receivable / Note receivable
The carrying amounts approximate fair value due to the short-term nature and historical collectability.
Bank indebtedness
The carry amount approximates fair value due to the short-term nature of the obligation.
Accounts payable / Accrued liabilities/ Accrued income taxes
The carrying amount approximates fair value due to the short-term nature of the obligations.
Promissory note
The fair value of the promissory note is determined by discounting the future contractual cash flows under current financing arrangements at discount rates which represent borrowing rates presently available to the Company for loans with similar terms and maturity.
The estimated fair values of the Company's financial instruments are as follows:
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
2.
SIGNIFICANT ACCOUNTING POLICIES (cont'd...)
Income taxes
Income taxes are provided in accordance with Statement of Financial Accounting Standards 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.
Shipping and handling costs
The Company incurs certain expenses related to preparing, packaging and shipping its products to its customers, mainly third-party transportation fees. All costs related to these activities are included as a component of cost of goods sold in the consolidated statement of operations. All costs billed to the customer are included as revenue in the consolidated statement of operations.
Revenue recognition
The Company recognizes revenue from the sales of building supply products, industrial wood and other specialty products and tools, when the products are shipped, title passes, 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.
Reclassifications
Certain reclassifications have been made to prior years’ financial statements to conform to the classifications used in the current year.
Recent Accounting Pronouncements
In December 2004, Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29” (“SFAS 153”) which amends Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions” to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
2.
SIGNIFICANT ACCOUNTING POLICIES (cont'd...)
In December 2004, FASB issued Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (“SFAS 123R”). SFAS 123R supersedes APB 25 and its related implementation guidance by requiring entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions) and revises SFAS 123 as follows:
i)
Public entities are required to measure liabilities incurred to employees in share-based payment transactions at fair value and nonpublic entities may elect to measure their liabilities to employees incurred in share-based payment transactions at their intrinsic value whereas under SFAS 123, all share-based payment liabilities were measured at their intrinsic value.
ii)
Nonpublic entities are required to calculate fair value using an appropriate industry sector index for the expected volatility of its share price if it is not practicable to estimate the expected volatility of the entity’s share price.
iii)
Entities are required to estimate the number of instruments for which the requisite service is expected to be rendered as opposed to accounting for forfeitures as they occur.
iv)
Incremental compensation cost for a modification of the terms or conditions of an award is measured by comparing the fair value of the modified award with the fair value of the award immediately before the modification whereas SFAS 123 required that the effects of a modification be measured as the difference between the fair value of the modified award at the date it is granted and the award’s value immediately before the modification determined based on the shorter of (1) its remaining initially estimated expected life or (2) the expected life of the modified award.
SFAS 123R also clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123 as originally issued and Emerging Issues Task Force No. 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods and Services” (“EITF 96-18”). SFAS 123R also does not address the accounting for employee share ownership plans which are subject to Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans”. Public entities (other than those filing as small business issuers) will be required to apply SFAS 123R as of the first annual reporting period that begins after June 15, 2005. Public entities that file as small business issuers will be required to apply SFAS 123R in the first annual reporting period that begins after December 15, 2005. For nonpublic entities, SFAS 123R must be applied as of the beginning of the first annual reporting period beginning after December 15, 2005.
In May 2005, FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”) which is effective for fiscal years ending after December 15, 2005. SFAS 154 requires that changes in accounting policy be accounted for on a retroactive basis.
The adoption of these new pronouncements is not expected to have a material effect on the Company's consolidated financial position or results of operations.
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
. 3.
INVENTORY
Home improvement and wood products
$ 6,735,260
$
9,306,682
Air tools and industrial clamps
345,693
256,176
Agricultural seed products
693,460
507,343
$ 7,774,413
$
10,070,201
4.
NOTE RECEIVABLE
The note receivable is due on demand and bears interest at prime plus 1%.
5.
PROPERTY, PLANT AND EQUIPMENT
Office equipment
$
614,367
$
571,635
Warehouse equipment
1,161,617
1,154,108
Buildings
2,345,034
2,345,034
Land
608,066
608,066
4,729,084
4,678,843
Accumulated depreciation
(2,246,877)
(1,887,335)
Net book value
$
2,482,207
$
2,791,508
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 in its assets. 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.
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
6.
INCOME TAXES
A reconciliation of the provision (benefit) for income taxes with amounts determined by applying the statutory US federal income tax rate to income before income taxes is as follows:
Computed tax at the federal statutory rate of 34%
$ 474,670
$ 294,658
$
134,417
State taxes, net of federal benefit
57,420
31,020
15,180
Stock based compensation
-
-
(6,588)
Depreciation
24,246
(25,444)
(21,233)
Operating loss carryforwards
( 97,615)
-
(38,265)
Inventory reserve
-
(11,960)
(3,541)
Maintenance reserve
14,379
-
-
Bad debt reserve
-
-
11,316
Other
(8,100)
11,226
9,914
Provision for income taxes
$ 465,000
$
299,500
$
101,200
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:
Deferred tax assets:
Allowance for inventory
$ 15,800
$
15,130
Allowance maintenance
15,900
-
ESOP expense difference book and tax
20,300
-
Difference between book and tax depreciation
58,700
30,570
Net operating loss carryforwards - Canada
66,400
54,632
Total deferred tax assets
177,100
100,332
Valuation allowance
-
(54,632)
Net deferred tax assets
$ 177,100
$
45,700
The Company had provided a full allowance on the deferred tax asset relating to its Canadian net operating loss carryforwards due to the uncertainty of these being realized through 2004. This uncertainty has been removed and the allowance has been reversed.
At August 31, 2005, the Company has available unused Canadian net operating losses of approximately $189,000 that may be applied against future taxable income. These losses, if unutilized, will expire between 2006 and 2009.
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
7.
BANK INDEBTEDNESS
Demand loan
$ 2,077,063
$ 6,249,552
The bank indebtedness is secured by an assignment of accounts receivable and inventory. Interest is calculated at either prime or the LIBOR rate plus 190 basis points. The weighted average interest rate for the year was 5.99% (2004 - 3.52%).
8.
NOTES PAYABLE
Note payable bore interest at the U.S. prime rate plus 2% per annum and was due on March 15, 2005 or on demand thereafter
$ -
$
1,499,291
Note payable bore interest at the U.S. prime rate plus 2% per annum and was due on March 15, 2005 or on demand thereafter
-
400,000
$
-
$
1,899,291
The notes were due to the former shareholders of Greenwood for the inventory purchases completed during fiscal 2003. During the fourth quarter of fiscal 2005 these notes were paid off by making a deposit to the former shareholders of Greenwood for the full balance of the loans payable, as computed by the Company (Note 14).
9.
PROMISSORY NOTE
Due June 15, 2010, bearing interest at 6.52% per annum,
blended monthly payments of $16,601
$
2,197,079
$
-
Less current portion
(56,000)
-
Long term portion
$
2,141,079
$ -
The promissory note is secured by the property located in North Plains, Oregon.
The aggregate principal repayments required in each of the next five years, assuming the note is renewed under similar terms and conditions, will be as follows:
$
56,000
60,000
64,000
68,000
73,000
At June 15, 2010, the amount of principal at renewal will be approximately $1,876,000.
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
10.
CAPITAL STOCK
Common 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.
On August 25, 2005, the Company received $117,500 for a subscription in advance for 52,500 common shares that were issued subsequent to year end upon the exercise of stock options.
On September 30, 2004, the Company issued 14,000 common shares for the ESOP with a fair value of $81,340.
On December 31, 2003, the Company issued 6,000 common shares upon the exercise of stock options for cash proceeds of $26,473.
On February 28, 2003, the Company implemented a 3:2 stock split on its common shares. At that date, the number of common shares outstanding increased from 1,025,605 common shares to 1,538,408 common shares. All share and per share amounts have been restated to give retroactive recognition to the stock split for all periods presented.
On November 20, 2002, the Company issued 7,083 common shares (10,625 post 3:2 stock split) upon the exercise of ESOP stock options for cash proceeds of $58,789.
Treasury stock
Treasury stock is recorded at cost. There were no transactions with respect to treasury stock during the years ended August 31, 2005 and August 31, 2004. During the year ended August 31, 2003, the Company repurchased 8,800 (11,500 post 3:2 stock split) shares at an aggregate cost of $66,359.
During the fiscal year 2003, the Company cancelled 78,550 common shares with an average cost of $323,631. The premium paid to acquire these shares over their book value in the amount of $228,082 was recorded as a decrease to retained earnings.
11.
STOCK OPTIONS
The Company has a stock option program under which stock options to purchase securities from the Company can be granted to directors and employees of the Company on terms and conditions acceptable to the regulatory authorities of Canada, notably the Toronto Stock Exchange ("TSX"), the Ontario Securities Commission and the British Columbia Securities Commission.
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
11.
STOCK OPTIONS (cont’d)
Under the stock option program, stock options for up to 10% of the number of issued and outstanding common shares may be granted from time to time, provided that stock options in favour of any one individual may not exceed 5% of the issued and outstanding common shares. No stock option granted under the stock option program is transferable by the optionee other than by will or the laws of descent and distribution, and each stock option is exercisable during the lifetime of the optionee only by such optionee.
The exercise price of all stock options, granted under the stock option program, must be at least equal to the fair market value (subject to regulated discounts) of such common shares on the date of grant. Proceeds received by the Company from exercise of stock options are credited to capital stock.
At August 31, 2005, employee incentive stock options were outstanding enabling the holders to acquire the following number of shares:
Number
of Shares
Exercise
Price
Expiry Date
105,000
Cdn$ 2.83
August 6, 2006 (52,500 exercised subsequent to year end)
Following is a summary of the status of the plan during the years ended August 31, 2005, 2004 and 2003:
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
11.
STOCK OPTIONS (cont’d)
Following is a summary of the status of options outstanding at August 31, 2005:
No stock based compensation was recorded during fiscal 2005 or 2004. During the year ended August 31, 2003, a recovery of stock-based compensation of $19,376 was recorded as a result of the annual recalculation of the options that were repriced during the year ended August 31, 2002.
The weighted average estimated fair value of stock options granted or repriced during the years ended August 31, 2005, 2004 and 2003 were Cdn$Nil, Cdn$Nil, and Cdn$Nil per share, respectively, as there were no options granted or repriced during those years.
12.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an 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 Statement of Position 93-6 “Employers' Accounting for Employee Stock Ownership Plans”. The Company records compensation expense based on the market price of the Company shares when they are allocated. Any dividends on allocated ESOP shares are recorded as a reduction of retained earnings. ESOP compensation expense was $ 182,141, $143,220 and $143,050 for the years ended August 31, 2005, 2004 and 2003, respectively, and is included in wages and employee benefits. The ESOP shares as of August 31 were as follows:
Allocated shares
267,323
272,089
245,375
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
13.
PENSION AND PROFIT-SHARING PLANS
The Company has a deferred compensation 401(k) plan for all employees with at least six months of service. The Company matches all 401(k) contributions for eligible employees. For the years ended August 31, 2005, 2004 and 2003, the contributions to the pension and profit sharing plan were $64,863, $68,142 and $69,754, respectively. The Company contributes 3% of the first $100,000 of eligible compensation.
14.
CONTINGENT LIABILITIES AND COMMITMENTS
a)
During fiscal 2002, the Company entered into a purchase agreement to acquire inventory over a 15 month period with an initial estimated value of $7,000,000 from Greenwood. During the year ended August 31, 2003, the Company completed the final phase of the inventory acquisition. As partial consideration for the purchase of the inventory the Company issued two promissory notes, based on its understanding of the value of the inventory purchased. The Company is currently in dispute with the holders of the note as to the final amounts owing, and believes that there are no further amounts owing. In the event that resolution of the dispute results in a change to the promissory notes, any gain or loss will be recognized in the period that the final determination of the amount is made. However, any potential change is currently not determinable at this time.
b)
The Company leases office premises pursuant to an operating lease which expires in January 2006. For the years ended August 31, 2005, 2004 and 2003, rental expense was $188,627, $181,796, and $180,812 respectively.
Future minimum annual lease payments are as follows:
Fiscal 2006
$
71,500
c)
At August 31, 2005 and 2004, the Company had an un-utilized line-of-credit of approximately $5,720,000 and $1,550,000, respectively (Note 8). The line-of-credit has certain financial covenants. The Company is in compliance with these covenants.
15.
SEGMENT INFORMATION
The Company has four principal reportable segments: the sale of lumber and building materials to home improvements centres in the United States; the processing and sale of industrial products to original equipment manufacturers in the United States; the sale of pneumatic air tools and industrial clamps in the United States; and the processing and sale of agricultural seeds in the United States.
These reportable segments were determined based on the nature of the products offered. Reportable segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker 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. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
15.
SEGMENT INFORMATION (cont’d...)
Following is a summary of segmented information for the years ended August 31:
Sales to unaffiliated customers:
Lumber and building materials
$ 13,328,794
$
12,764,651
$
7,063,507
Industrial tools
1,083,180
1,000,135
878,966
Industrial wood products
55,381,407
52,724,000
44,195,963
Seed processing and sales
4,824,080
4,846,341
3,230,151
$ 74,617,461
$
71,335,127
$
55,368,587
Income (loss) from operations:
Lumber and building materials
$ (156,902)
$ (581,070)
$
(124,928)
Industrial tools
120,238
89,941
103,362
Industrial wood products
1,625,143
1,668,685
730,781
Seed processing and sales
(9,629)
91,741
46,114
General corporate
(52,968)
(50,123)
(16,003)
$ 1,525,882
$
1,219,174
$
739,326
Identifiable assets:
Lumber and building materials
$ 6,136,133
$
5,571,313
$
7,027,843
Industrial tools
98,806
92,541
95,885
Industrial wood products
9,634,991
12,997,448
9,177,682
Seed processing and sales
1,467,309
1,255,379
2,201,094
General corporate
201,119
9,302
10,121
$ 17,538,358
$
19,925,983
$
18,512,625
Depreciation:
Lumber and building materials
$ 166,149
$
134,393
$
126,254
Industrial wood products
73,288
81,540
75,882
Seed processing and sales
137,861
137,000
130,987
$ 377,298
$
352,933
$
333,123
Capital expenditures:
Lumber and building materials
$ 48,474
$
470,166
$
23,990
Industrial wood products
18,526
54,867
3,942
Seed processing and sales
6,170
33,863
29,620
$ 73,170
$
558,896
$
57,552
Interest expense:
Lumber and building materials
$ 345,591
$
391,246
$
346,030
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
15.
SEGMENTED INFORMATION (cont'd)
During the year ended August 31, 2005 the Company made sales of $9,834,561 to a customer of the industrial wood products segment which was in excess of 10% of total sales for the year.
During the year ended August 31, 2004 the Company made sales of $9,272,248 to a customer of the industrial wood products segment which was in excess of 10% of total sales for the year.
During the year ended August 31, 2003, the Company made sales of $6,030,350 to a customer of the industrial wood products segment which was in excess of 10% of total sales for the year.
16.
CONCENTRATIONS
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 August 31, 2005 and 2004, no customers 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.
Volume of business
The Company has concentrations in the volume of purchases it conducts with its suppliers. For the year ended August 31, 2005 there were two suppliers that accounted for greater than 10% of total purchases with the aggregate purchases amounted to $13,654,592. For the year ended August 31, 2004, there were no suppliers that accounted for purchases greater than 10% of total purchases. For the year ended August 31, 2003, the Company had one supplier totalling $6,486,756 that accounted for purchases greater than 10% of total purchases in the industrial wood products segment.
17.
SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
Cash paid during the year for:
Interest
$ 345,591
$ 391,246
$ 346,030
Income taxes
$ 467,610
$ 411
$ 510,446
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
AUGUST 31, 2005
17.
SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS (cont’d)
The significant non-cash transaction during the year ended August 31, 2005 was the issuance of 14,000 common shares for the ESOP with a fair value of $81,340.
There were no significant non-cash transactions during the year ended August 31, 2004.
Significant non-cash transactions during the year ended August 31, 2003:
i)
The Company acquired inventory in the amount of $2,119,506 and a note receivable in the amount of $142,449 by issuing notes payable in the amount of $2,261,955.
ii)
The Company cancelled 78,550 treasury shares. The difference between the original cost and purchase price of $228,082 was applied against retained earnings as a premium relating to cancellation of share capital.
18.
SUBSEQUENT EVENT
The Company has filed a registration statement whereby it proposes to raise up to $5,000,000 by issuing 500,000 common shares at $10.00 a share. The offering is subject to approval of the registration statement with the Securities and Exchange Commission.
The Company issued 52,500 common shares pursuant to the exercise of stock options of which the proceeds of $117,500 were received prior to August 31, 2005.
#
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Stockholders and Directors of
Jewett-Cameron Trading Company Ltd. and Subsidiaries
Our report on the consolidated financial statements of Jewett-Cameron Trading Company Ltd. and Subsidiaries is included in this Form 10-K. In connection with our audits of such consolidated financial statements, we have also audited the related consolidated financial statement schedule listed in the index of this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly the information required to be included therein.
Vancouver, Canada
Chartered Accountants
October 28, 2005
#
JEWETT-CAMERON TRADING COMPANY LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AUGUST 31, 2005
Balance at
Beginning
of Year
Additions
Charged to
Costs and
Expenses
Deductions
Credited to
Costs and
Expenses
Deductions
from
Reserves
Balance at
End of Year
August 31, 2003
Allowance deducted from related
balance sheet account:
Accounts receivable
$ 310,000
$
-
$
-
$
310,000
$
-
Deferred tax valuation account
186,719
-
-
101,392
85,327
August 31, 2004
Allowance deducted from related
balance sheet account:
Inventory
$
-
$ 41,971
$
-
$
-
$ 41,971
Deferred tax valuation account
85,327
-
30,735
-
54,592
August 31, 2005
Allowance deducted from related
balance sheet account:
Inventory
$ 41,971
$
-
$
-
$
-
$ 41,971
Deferred tax valuation account
54,592
11,801
-
66,393
-
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--- No Disclosure Necessary ---
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (“Internal Control”) as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). A material weakness is a significant deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of August 31, 2005. Based on this assessment, management concluded the Company did maintain effective control over financial reporting as of August 31, 2005.
We maintain disclosure controls and procedures (“Disclosure Controls”), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports, including the Company’s Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Treasurer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating the Disclosure Controls, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) and 15d-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The Company’s Chief Executive Officer and Treasurer have concluded that the Company’s disclosure controls and procedures, as of August 31, 2005 were effective.
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
--- No Disclosure Necessary ---
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Table No. 4 lists, as of 11/10/2005, the names of the Directors of the Registrant. The Directors have served in their respective capacities since their election at the 2005 Annual Meeting of Shareholders or appointment, and will serve until the next Annual Shareholders’ Meeting or until a successor is duly elected, unless the office is vacated in accordance with the Articles/By-Laws of the Registrant.
Table No. 4
Directors
______________________________________________________________________________
______________________________________________________________________________
(1) Member of Audit Committee.
(2) Resident of Oregon, USA and citizen of the United States.
(3) Resident of British Columbia, Canada, and citizen of Canada.
(4) Resident of Washington, USA and citizen of the United States.
______________________________________________________________________________
______________________________________________________________________________
Table No. 5 lists, as of 11/10/2005, the names of the Executive Officers and certain significant employees (none) of the Company. The Executive Officers serve at the pleasure of the Board of Directors. All Executive Officers are residents/citizens of the United States and spend full-time on the affairs of the Registrant.
Table No. 5
Executive Officers
______________________________________________________________________________
______________________________________________________________________________
Name
Position
Age
Date of
Board Approval
Donald M. Boone (1)
President/CEO/Treasurer
July 1987
Michael C. Nasser (2)
Corporate Secretary
July 1987
___________ __________________________________________________________________
______________________________________________________________________________
Family Relationships/Other Relationships/Arrangements
There are no arrangements or understandings between any two or more Directors or Executive Officers, pursuant to which he/she was selected as a Director or Executive Officer. There are no family relationships, material arrangements or understandings between any two or more Directors or Executive Officers.
Written Management Agreements
--- No Disclosure Necessary ---
Business Experience
Donald M. Boone has over thirty-eight years in sales and corporate management, including twenty-seven years affiliated with companies in the forest products industry. In his capacity as the President/CEO of our Company during the past five years, Mr. Boone has supervised the strategic planning and business development functions of our company. In this regard, he was responsible for our purchase of certain assets of AgriBioTech in Fall 2000 and, more recently, the purchase of the assets of Greenwood Forest Products in early 2002. Once these acquisitions were completed, Mr. Boone oversaw the incorporation of Jewett-Cameron Seed Company and Greenwood Products into the affairs of the Company.
Michael C. Nasser has over thirty-three years experience in sales and corporate management, including twenty-eight years affiliated with companies in the forest products industry. He oversees the sales operations for Jewett-Cameron Lumber Company and in that capacity supervises the direct sales staff and the independent contractors who are involved in selling the product line.
James R. Schjelderup was a computer consultant in the areas of both hardware and software in Canada until two years ago when he became the sales manager of Acme Computers. In that capacity he is responsible for the sales operation of this retail outlet.
Ted Sharp has been a Certified Public Accountant since March 1978. He is a graduate of the University of Oregon with a Bachelor of Science Degree in Economics; he also attended Portland State University where he did post graduate studies in accounting and finance. From 1990 to 1992, he was VP Finance/Administration for Eastern Oregon Fast Freight; from 1992 to 1998, he as a self-employed CPA through Sharp Consulting; from 1998 to 2002, he was Corporate Controller/Regional Controller/Operations Analyst for SpectraSite Communications/Cord Communications; and since 2002, he has been Corporate Controller for Cherry City Electric, a $50 million revenue per year electrical contractor.
Alexander B. Korelin is the founder and president of A.B. Korelin and Associates, Inc. - a company that provides consulting services to public companies. He is also the founder and co-host of The Korelin Economics Report which is a weekly radio program which deals with business topics. He received his Bachelor of Arts Degree (Economics) from the University of Washington in 1967 and his Master of Business Administration Degree (Finance) from the University of Puget Sound.
Involvement in Certain Legal Proceedings
There have been no events during the last five years that are material to an evaluation of the ability or integrity of any director, person nominated to become a director, executive officer, promoter or control person including:
1) Any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
2) Any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations/other minor offenses);
3) Being subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
enjoining, barring, suspending or otherwise limiting his/her involvement in
any type of business, securities or banking activities; and
4) Being found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not
been reversed, suspended, or vacated.
Audit Committee Financial Expert
Our Board of Directors has determined that Ted Sharp is the “audit committee financial expert”, as defined in Item 401(h) of Regulation S-K. Mr. Sharp is independent as that term is used in Section 240.14a-101 under the Exchange Act.
Audit Committees
The Company has an Audit Committee, which recommends to the Board of Directors the engagement of the independent auditors of the Company and reviews with the independent auditors the scope and results of the Company’s audits, the Company’s internal accounting controls, and the professional services furnished by the independent auditors to the Company. The Board of Directors, in light of the increased responsibilities placed on the Audit Committee during 2002 by the Sarbanes-Oxley Act and the SEC, adopted an Amended and Restated Charter in late 2002.
The Audit Committee is directly responsible for the appointment, compensation and oversight of auditors; the audit committee has in place procedures for receiving complaints and concerns about accounting and auditing matters; and has the authority and the funding to engage independent counsel and other outside advisors.
The Audit Committee may delegate to one or more designated members of the Audit Committee the authority to grant pre-approvals required by this policy / procedure. The decisions of any Audit Committee member to whom authority is delegated to pre-approve a service shall be presented to the full Audit Committee at its next scheduled meeting.
In accordance with the requirements of the US Sarbanes-Oxley Act of 2002 and rules issued by the Securities and Exchange Commission, we introduced a procedure for the review and pre-approval of any services performed by Davidson & Company, LLP, including audit services, audit related services, tax services and other services. The procedure requires that all proposed engagements of Davidson & Company, LLP for audit and permitted non-audit services are submitted to the finance and audit committee for approval prior to the beginning of any such services.
The current members of the Audit Committee include the entire Board of Directors: Donald Boone, Alexander B. Korelin, James Schjelderup, and Ted Sharp. With the exception of our President, all other current members of the Audit Committee are “independent” within the meaning of the new regulations from the SEC regarding audit committee membership.
The Audit Committee met twice during Fiscal 2004 and has met six times during Fiscal 2005-to-date.
Compliance with Section 16(a) of the Exchange Act.
All of the officers and directors filed the required paperwork during Fiscal 2005.
Code of Ethics
The Company has not adopted a written “code of ethics” that meets the new United States' Sarbanes-Oxley standards; the Board of Directors believes that existing Canadian standards and procedures have been adequate for its purposes. Historically, the Company has not seen any need to adopt a written code of ethics on the basis that its corporate culture effectively deters wrongdoing and promotes honest and ethical conduct, ethical handling of actual or apparent conflicts of interest between personal and professional relationships, full, fair and accurate, timely, and understandable disclosure in reports and documents, the compliance with applicable governmental laws, rules and regulations; the prompt internal reporting of violations of the code; and accountability for adherence to the code. However, the Company is developing a written code of ethics and anticipates that such code of ethics will be implemented in Fiscal 2006.
Limitation of Liability and Indemnification
Our certificate of incorporation limits the personal liability of our board members for breaches by them of their fiduciary duties. Our bylaws also require us to indemnify our directors and officers to the fullest extent permitted by British Columbia law. British Columbia law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following acts:
a. any breach of their duty of loyalty to us or our stockholders;
b. acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law;
c. unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; and
d. any transaction from which the director derived an improper personal benefit.
Such limitation of liability may not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. In addition, British Columbia laws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether indemnification would be permitted under British Columbia law. We currently maintain liability insurance for our directors and Executive Officers.
We intend to enter into agreements to indemnify our directors and executive officers, in addition to the indemnification provided for in our certificate of incorporation and bylaws. These agreements, among other things, will provide for indemnification of our directors and executive officers for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person’s services as a director or Executive Officer of ours, any subsidiary of ours or any other company or enterprise to which the person provided services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Table No. 6 details compensation paid/accrued for Fiscal 2005/2004/2003 for the Company’s chief executive officer, each of the Company’s each of the Company’s four most highly compensated executive officers who were serving as executive officers at the end of the most recently completed financial year and whose total salary and bonus exceeds US$100,000 per year; and any additional individuals for whom disclosure would have been provided under but for the fact that the individual was not serving as an executive officer of the Company at the end of the most recently completed fiscal year.
Table No. 6
Summary Compensation Table
Executive Officers
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
The Company grants stock options to Directors, Executive Officers and employees; refer to ITEM #11, “Executive Compensation, Stock Option Program”. The Company established an Employee Stock Ownership Plan (“ESOP”) that covers all employees of the Company; refer to ITEM #11, “Executive Compensation, Employee Stock Ownership Plan”. We have a 401K Plan; the terms of which call for us to contribute 3% of the first $100,000 of each of our employee’s income to the 401K Plan; refer to ITEM #11, “Executive Compensation, 401K Plan”.
Other than participation in our stock option plan and/or ESOP and/or 401K, no funds were set aside or accrued by us during Fiscal 2005 to provide pension, retirement or similar benefits for Directors or Executive Officers.
We have no plans or arrangements in respect of remuneration received or that may be received by Executive Officers of the Company in Fiscal 2005 to compensate such Executive Officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control, where the value of such compensation exceeds $100,000 per Executive Officer.
No Executive Officer/Director received other compensation in excess of the lesser of $25,000 or 10% of such officer's cash compensation, and all Executive Officers/Directors as a group did not receive other compensation, which exceeded $25,000 times the number of persons in the group or 10% of the compensation.
Except for our stock option program, ESOP, and 401K Plan we have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our Directors or Executive Officers. However, Michael C. Nasser and Donald M. Boone receive a discretionary bonus, as determined by the Board of Directors.
Stock Options
The Company may grant stock options to purchase securities to Directors and Employees on terms and conditions acceptable to the regulatory authorities in Canada, notably the Toronto Stock Exchange, the Ontario Securities Commission and British Columbia Securities Commission. We have no formal written stock option plan.
Under our stock option program, stock options for up to 10% of the number of our issued and outstanding common shares may be granted from time to time, provided that stock options in favor of any one individual may not exceed 5% of our 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, and the maximum term of each stock option may not exceed ten years and are determined in accordance with Toronto Stock Exchange (“TSX”) guidelines.
During Fiscal 2005, no stock options or SARs (stock appreciation rights) were granted to Executive Officers, Directors and/or employees/consultants.
Table No. 7 gives certain information concerning stock option exercises during Fiscal 2005 by our Executive Officers and Directors (none). It also gives information concerning stock option values.
Table No. 7
Aggregated Stock Options Exercises in Fiscal 2005 Ended 8/31/2005
Fiscal Yearend Unexercised Stock Options / Stock Option Values
Executive Officers/Directors/Employees/Consultants
______________________________________________________________________________
______________________________________________________________________________
Name
Number of
Shares
Acquired
on
Exercise
Value
Realized
Number of
Unexercised Options
at Fiscal Yearend
Exercisable/
Unexercisable
Value of
Unexercised
In-The Money
Options at
Fiscal Yearend
Exercisable/
Unexercisable
Donald Boone (1)
nil
$nil
52,500/nil
CDN $471,450/nil
Michael Nasser
nil
$nil
52,500/nil
CDN $471,450/nil
______________________________________________________________________________
______________________________________________________________________________
(1) On September 23, 2005, Mr. Boone exercised 52,500 stock options at a cost of $2.42 (U.S. Dollars). The value realized from this transaction was $117,500. Mr. Boone has not sold these shares to date.
Table No. 8 gives certain information concerning stock option re-pricings during the last ten fiscal years by our Executive Officers and Directors. The Company has no compensation committee; 0n 12/31/2001, the entire Board of Directors re-priced 18,000 stock options granted to the independent directors to the then current market price (CDN$5.70 from CDN$3.11) and extended the expiration date (12/31/2003 from 4/30/2003) because concern that the options would have expired unexercised otherwise.
Table No. 8
Ten-Year Option/SAR Re-pricings
______________________________________________________________________________
______________________________________________________________________________
Securities
Underlying
Options/SAR
Repriced or
Amended
Name
Market Prices
of Stock at
Time of
Repricing or
Amendment
Exercise
Price at
Time of
Repricing
or
Amendment
New
Exercise
Price
Length of
Original
Option Term
Remaining at
Date of
Repricing or
Amendment
Jeffrey Lowe
CDN$5.70
CDN$3.11
CDN$5.70
28 months
James Schjelderup
CDN$5.70
CDN$3.11
CDN$5.70
28 months
______________________________________________________________________________
______________________________________________________________________________
The names of the Directors/Senior Management of the Company to whom outstanding stock options have been granted and the number of common shares subject to such options are set forth in Table No. 9 as of 11/10/2005, as well as the total number of options outstanding.
Table No. 9
Stock Options Outstanding
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
401K Plan
The Company has a 401K Plan, the terms of which call for us to contribute 3% of the first $100,000 of each of our employee’s income to the Plan. The Company’s aggregate contribution to the 401K Plan was $64,863, $68,142 and $69,754 for Fiscal 2005/2004/2003, respectively. The contributions for Donald Boone were $1,080, $990, and $1,080 for Fiscal 2005/2004/2003, respectively; the contributions for the Michael Nasser were $3,000, $3,000, and $3,000 for Fiscal 2005/2004/2003, respectively. There are no un-funded liabilities.
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 31st 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 Statement of Position 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. ESOP compensation expense was $182,141, $143,220, $143,050 and $155,051 for Fiscal 2005/2004/2003/2002, respectively. The ESOP shares allocated as of August 31, 2005/2004/2003/2002 were 267,323, 272,089, 245,375 and 221,561, respectively. The contributions for Donald Boone were $1,800, $2,268, $1,980, and $2,520 for Fiscal 2005/2004/2003/2002, respectively; the contributions for the Michael Nasser were $5,000, $6,300, $6,000, and $7,000 for Fiscal 2005/2004/2003/2002, respectively. There are no un-funded liabilities.
Long-Term Incentive Plan / Defined Benefit or Actuarial Plan
During Fiscal 2005, the Company had no Long-Term Incentive Plan (“LTIP”) and no LTIP awards were made. During Fiscal 2005, the Company had no Defined Benefit or Actuarial Plan.
Compensation Committee Interlocks and Insider Participation
The Company has no Compensation Committee and the entire Board of Directors performs equivalent functions. The Company’s two Executive Officers [Donald Boone, President/CEO/Treasurer of the Company and a member of the Board of Directors; and Michael Nasser, Corporate Secretary of the Company and a member of the Board of Directors], during the last fiscal year, participated in Board of Director’s deliberations concerning Executive Officer compensation.
No Board of Director member and none of our Executive Officers have a relationship that would constitute an interlocking relationship with executive officers and directors of another entity.
Employment Contracts
Termination of Employment and Change-in-Control Arrangements
--- No Disclosure Necessary ---
Director Compensation
The Company has no formal plan for compensating its Directors for their service in their capacity as Directors. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors. The Board of Directors may award special remuneration to any Director undertaking any special services on behalf of the Company other than services ordinarily required of a Director. During Fiscal 2005, no Director received and/or accrued any compensation for his services as a Director, including committee participation and/or special assignments.
Board Compensation Committee Report on Executive Compensation
The Company has no Compensation Committee and the entire Board of Directors performs equivalent functions.
As in prior years, all of our judgments regarding executive compensation for Fiscal 2005 were based primarily upon our assessment of each executive officer’s leadership performance and potential to enhance long-term shareowner value. We rely upon judgment and not upon rigid guidelines or formulas or short-term changes in our stock price in determining the amount and mix of compensation elements for each executive officer.
Key factors affecting our judgments included the nature and scope of the executive officers’ responsibilities, their effectiveness in leading our initiatives to increase customer value, productivity and growth, and their success in creating a culture of unyielding integrity and compliance with applicable law and our ethics policies. We also considered the compensation levels and performances of a comparison group of comparable companies that are most likely to compete with us for the services of executive officers.
Based upon all the factors we considered relevant, and in light of our strong financial and operating performance in a challenging economic environment, we believe it was in our shareholders’ best long-term interest for the Company to ensure that the overall level of our salary, bonus and other incentive compensation awards was competitive with companies in the comparison group. Quite simply, we continue to believe that the quality, skills and dedication of our executive leaders are critical factors affecting the long-term value of our company. Therefore, we continue to try to maintain an executive compensation program that will attract, motivate and retain the highest level of executive leadership possible.
Our decisions concerning the specific 2005 compensation elements for individual executive officers, including the chief executive officer, were made within this framework. We also considered each executive officer’s level of responsibility, performance, current salary, prior-year bonus and other compensation awards. As noted above, in all cases our specific decisions involving 2005 executive officer compensation were ultimately based upon our judgment about the individual executive officer’s performance and potential future contributions; and about whether each particular payment or award would provide an appropriate incentive and reward for performance that sustains and enhances long-term shareowner value.
The Board of Director’s bases for Donald Boone’s compensation (President/CEO/Treasurer) included the following factors and criteria, both qualitative and quantitative: his base salary was set many years ago when the Company was much smaller and less profitable and modest compensation was deemed appropriate. Despite, Mr. Boone’s strong leadership in developing and executing new corporate strategies for many years, his compensation has remained unchanged at his request.
The Board of Director’s bases for Michael Nasser’s compensation (Corporate Secretary) included the following factors and criteria, both qualitative and quantitative. We considered his level of pay and bonus appropriate for the following reasons: his execution of our strategy to change our portfolio of businesses to enhance long-term investor value through better profit margins and higher returns on equity; his actions to ensure that the Company has a strong capital structure and cash flow; his role in leading us to solid financial results in a challenging economic environment; his actions in making the company a leader in integrity, transparency and corporate governance; and his leadership in driving growth initiatives and reorganizing our businesses around markets to simplify our operations and strengthen our relationships with our customers. His compensation has remained unchanged because sales/profitability at JCLC, his primary responsibility, have been under significant economic and competitive pressure in recent years.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is a publicly owned corporation, the shares of which are owned by residents of the United States, Canada, and other countries. The Company is not controlled directly/indirectly by another corporation/any foreign government.
Table No. 10 lists, as of 11/10/2005, Directors and Senior Management who beneficially own the Company's voting securities and the amount of the Company's voting securities owned by the Directors and Senior Management as a group. Table No. 4 includes all other persons/companies where the Company is aware that they have 5% or greater beneficial interest in the Company’s securities.
Table No. 10
Shareholdings of Directors and Executive Officers
Shareholdings of 5% Shareholders
______________________________________________________________________________
______________________________________________________________________________
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(1) 52,500 represent currently exercisable stock options.
(2) U.S. National Bank is the Trustee for the Jewett-Cameron Trading Co. Ltd.
Employee Stock Option Plan and Trust.
# Based on 1,532,359 shares outstanding as of 11/10/2005 and stock options
held by each beneficial holder exercisable within sixty days.
______________________________________________________________________________
______________________________________________________________________________
Table No. 11
Equity Compensation Plan Information
______________________________________________________________________________
______________________________________________________________________________
Plan category
Number of
securities
to be issued
upon exercise
of outstanding
options,
warrants
and rights
Weighted
average
exercise price
of
outstanding
options,
warrants,
and rights
Number of
securities
remaining
available
for future
issuance
Stock Option Program
105,000
CDN$2.83
40,985
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Not approved by security holders
---No Disclosure Necessary---
______________________________________________________________________________
______________________________________________________________________________
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no transactions since 8/31/2001, or proposed transactions, which have materially affected or will materially affect the Company in which any Director, Executive Officer, or beneficial holder of more than 5% of the outstanding common stock, or any of their respective relatives, spouses, associates or affiliates has had or will have any direct or material indirect interest.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTIING FEES AND SERVICES
The Audit Committee is directly responsible for the appointment, compensation and oversight of auditors; the audit committee has in place procedures for receiving complaints and concerns about accounting and auditing matters; and has the authority and the funding to engage independent counsel and other outside advisors.
The Audit Committee may delegate to one or more designated members of the Audit Committee the authority to grant pre-approvals required by this policy and procedure. The decisions of any Audit Committee member to whom authority is delegated to pre-approve a service shall be presented to the full Audit Committee at its next scheduled meeting.
In accordance with the requirements of the US Sarbanes-Oxley Act of 2002 and rules issued by the Securities and Exchange Commission, we introduced a procedure for the review and pre-approval of any services performed by Davidson & Company, LLP, including audit services, audit related services, tax services and other services. The procedure requires that all proposed engagements of Davidson & Company, LLP for audit and permitted non-audit services are submitted to the finance and audit committee for approval prior to the beginning of any such services.
Fees, including reimbursements for expenses and for professional services rendered by Davidson & Company, LLP to the Company were:
______________________________________________________________________________
Fiscal Year ended August 31, 2005 and 2004
Principal Accountant Fees and Services
Fiscal Year
Fiscal Year
Audit Fees
$72,200
$62,200
Audit Related Fees
$0
$0
Tax Fees (1)
$0
$0
All Other Fees (1)
$16,300
$23,200
Total
$88,700
$85,400
(1) FY2005:
$5,000 to review the 1QFY Form 10Q
$5,200 to review the 2QFY Form 10Q
$5,200 to review the 3QFY Form 10Q
$ 900 for general consultations regarding foreign entities
conducting business in Canada
(2) FY2004:
$7,600 to review the Company’s Form S-1
$5,200 to review the 1QFY2004 Form 10Q
$5,200 to review the 2QFY2003 Form 10Q
$5,200 to review the 1QFY2003 Form 10Q
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A) Financial Statements and Schedules:
(B) Exhibits:
2. Plan of acquisition, reorganization, arrangement, liquidation or succession:
No Disclosure Necessary
3. Articles of Incorporation/By-Laws:
Incorporated by reference to Form 10 Registration Statement, as amended.
4. Instruments defining the rights of holders, including indentures
--- Refer to Exhibit #3 ---
9. Voting Trust Agreements: No Disclosure Necessary.
10. Material Contracts:
Incorporated by reference to Form 10 Registration Statement, as amended.
11. Statement re Computation of Per Share Earnings: No Disclosure Necessary
12. Statements re computation of ratios: No Disclosure Necessary
13. Annual Report to security holders, Form 10-Q or
quarterly report to security holders: No Disclosure Necessary
14. Code of Ethics: No Disclosure Necessary
16. Letter on Change of Certifying Accountant: No Disclosure Necessary
18. Letter on change in accounting principles: No Disclosure Necessary
21. Subsidiaries of the Registrant: Refer to page #4 of this Form 10-K
22. Published report regarding matters submitted to vote
No Disclosure Necessary
23. Consent of Experts and Counsel: No Disclosure Necessary
24. Power of Attorney: No Disclosure Necessary
31. Rule 13a-14a/15d-14(a) Certifications
32. Section 1350 Certifications
99. Additional Exhibits: No Disclosure Necessary
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) 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: November 25, 2005
By: /s/ Donald M. Boone____________
Donald M. Boone,
President/CEO/Treasurer/Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: November 25, 2005
By /s/ Donald M. Boone__________
Donald M. Boone,
President/CEO/Treasurer/Director
Dated: November 25, 2005
By /s/ Michael Nasser___________
Michael Nasser,
Corporate Secretary
Dated: November 25, 2005
By /s/ Alexander Korelin________
Alexander Korelin,
Director
Dated: November 25, 2005
By /s/ James Schjelderup________
James Schjelderup,
Director
Dated: November 25, 2005
By /s/_Ted Sharp________________
Ted Sharp,
Director
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