10-Q 1 jcfeb2014_10q.htm JEWETT CAMERON FORM 10-Q FOR THE PERIOD ENDED FEBRUARY 28, 2014 Jewett Cameron Form 10-Q




UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q


(MARK ONE)


x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2014



¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________.


COMMISSION FILE NUMBER  000-19954


JEWETT-CAMERON TRADING COMPANY LTD.

(Exact Name of Registrant as Specified in its Charter)


BRITISH COLUMBIA

 

NONE

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)


32275 N.W. Hillcrest, North Plains, Oregon

 

97133

(Address Of Principal Executive Offices)

 

(Zip Code)


(503) 647-0110

(Registrant’s Telephone Number, Including Area Code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes    ¨  No


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer


Large accelerated filer  ¨

Accelerated filer  ¨

Non-accelerated filer  ¨

Smaller Reporting Company  x


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes  ¨     No  x


APPLICABLE ONLY TO CORPORATE ISSUERS:


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value – 2,821,443 common shares as of April 9, 2014.          










Jewett-Cameron Trading Company Ltd.


Index to Form 10-Q



PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

26

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 3.

Defaults Upon Senior Securities

28

 

 

 

Item 4.

Mine Safety Disclosures

28

 

 

 

Item 5.

Other Information

28

 

 

 

Item 6.

Exhibits

28


- 2 -






PART 1 – FINANCIAL INFORMATION


Item 1.

Financial Statements





JEWETT-CAMERON TRADING COMPANY LTD.



CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

(Unaudited – Prepared by Management)



FEBRUARY 28, 2014




- 3 -








JEWETT-CAMERON TRADING COMPANY LTD.

CONSOLIDATED BALANCE SHEETS

(Expressed in U.S. Dollars)

(Prepared by Management)

(Unaudited)

 

 

 

 

 

 

 

 

February 28,

2014

 

August 31,

2013

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

  Cash

$   5,816,854

 

$    8,308,445

  Accounts receivable, net of allowance  

     of $Nil (August 31, 2013 - $Nil)


4,256,286

 


3,344,777

  Inventory, net of allowance

      of $134,259 (August 31, 2013 - $134,259) (note 3)


7,528,726

 


8,520,991

  Note receivable

-

 

15,000

  Prepaid expenses

2,088,834

 

587,609

  Prepaid income taxes

492,032

 

270,423

 

 

 

 

  Total current assets

20,182,732

 

21,047,245

 

 

 

 

Property, plant and equipment, net (note 4)

2,213,436

 

2,241,950


Intangible assets, net (note 5)


332,310

 


368,662

 

 

 

 

Total assets

$  22,728,478

 

$  23,657,857

 

 

 

 


- Continued -


The accompanying notes are an integral part of these consolidated financial statements.


- 4 -






JEWETT-CAMERON TRADING COMPANY LTD.

CONSOLIDATED BALANCE SHEETS

(Expressed in U.S. Dollars)

(Prepared by Management)

(Unaudited)

 

 

 

 

 

 

 

 

February 28,

2014

 

August 31,

2013

 

 

 

 

Continued

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

  Accounts payable

$ 1,190,980

 

$  1,715,458

  Litigation reserve (note 13(a))

130,854

 

144,103

  Accrued liabilities

765,638

 

1,149,882

 

 

 

 

  Total current liabilities

2,087,472

 

3,009,443

 

 

 

 

Deferred tax liability (note 6)

42,027

 

50,393

 

 

 

 

Total liabilities

2,129,499

 

3,059,836

 

 

 

 

Contingent liabilities and commitments (note 13)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

  Capital stock (note 8)

 

 

 

     Authorized

 

 

 

      21,567,564 common shares, without par value

 

 

 

      10,000,000 preferred shares, without par value

 

 

 

    Issued

 

 

 

      3,076,756 common shares (August 31, 2013 - 3,134,936)

1,451,791

 

1,479,246

  Additional paid-in capital

600,804

 

600,804

  Retained earnings

18,546,384

 

18,517,971

  

 

 

 

  Total stockholders’ equity

20,598,979

 

20,598,021

  

 

 

 

  Total liabilities and stockholders’ equity

$  22,728,478

 

$  23,657,857

  

 

 

 


The accompanying notes are an integral part of these consolidated financial statements.


- 5 -






JEWETT-CAMERON TRADING COMPANY LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Expressed in U.S. Dollars)

(Prepared by Management)

(Unaudited)

 

 

Three Month

Period Ended

February 28,

 

Six Month

Period Ended

February 28,

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

SALES

$  9,732,649

 

$  14,227,824

 

$  17,738,930

 

$ 23,524,229

 

 

 

 

 

 

 

 

COST OF SALES

7,974,979

 

11,788,155

 

14,131,481

 

19,093,554

 

 

 

 

 

 

 

 

GROSS PROFIT

1,757,670

 

2,439,669

 

3,607,449

 

4,430,675

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

  Selling, general and administrative expenses

446,900

 

468,162

 

838,786

 

803,982

  Depreciation and amortization

69,531

 

64,202

 

139,550

 

121,696

  Wages and employee benefits

832,421

 

928,246

 

1,676,371

 

1,753,553

 

1,348,852

 

1,460,610

 

2,654,707

 

2,679,231

 

 

 

 

 

 

 

 

Income from operations

408,818

 

979,059

 

952,742

 

1,751,444

 

 

 

 

 

 

 

 

OTHER ITEMS

 

 

 

 

 

 

 

   Gain on sale of property, plant and equipment

-

 

353,852

 

4,109

 

353,852

   Interest and other income

6,612

 

6,605

 

13,273

 

23,315

   Interest expense

-

 

(400)

 

-

 

(400)

 

6,612

 

360,057

 

17,382

 

376,767

 

 

 

 

 

 

 

 

Income before income taxes

415,430

 

1,339,116

 

970,124

 

2,128,211

 

 

 

 

 

 

 

 

Income tax expense

(178,032)

 

(548,485)

 

(400,147)

 

(856,834)

 

 

 

 

 

 

 

 

Net income

$    237,398

 

$       790,631

 

$     569,977

 

$  1,271,377

 

 

 

 

 

 

 

 

Basic earnings per common share

$          0.08

 

$             0.25

 

$           0.18

 

$            0.41

 

 

 

 

 

 

 

 

Diluted earnings per common share

$          0.08

 

$             0.25

 

$           0.18

 

$            0.41

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

  Basic

3,129,764

 

3,135,860

 

3,132,365

 

3,135,902

  Diluted

3,129,764

 

3,135,860

 

3,132,365

 

3,135,902

 

 

 

 

 

 

 

 


The accompanying notes are an integral part of these consolidated financial statements.


- 6 -







JEWETT-CAMERON TRADING COMPANY LTD.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Expressed in U.S. Dollars)

(Prepared by Management)

(Unaudited)

 

 

Capital Stock

 

 

 




Number of  Shares



Amount


Additional

paid-in capital


Retained earnings



Total

 

 

 

 

 

 

August 31, 2011

3,816,914

$  1,801,043

$  600,804

$  15,086,971

$  17,488,818

 

 

 

 

 

 

Shares repurchased and cancelled (note 9)

(680,972)

(321,322)

-

(2,754,237)

(3,075,559)

Net income

-

-

-

3,059,931

3,059,931

 

 

 

 

 

 

August 31, 2012

3,135,942

1,479,721

600,804

15,392,665

17,473,190

 

 

 

 

 

 

Shares repurchased and cancelled (note 9)

(1,006)

(475)

-

(6,713)

(7,188)

Net income

-

-

-

3,132,019

3,132,019

 

 

 

 

 

 

August 31, 2013

3,134,936

1,479,246

600,804

18,517,971

20,598,021

 

 

 

 

 

 

Shares repurchased and cancelled (note 9)

(58,180)

(27,455)

 

(541,564)

(569,019)

Net income

-

-

-

569,977

569,977

 

 

 

 

 

 

February 28, 2014

3,076,756

$  1,451,791

$  600,804

$  18,546,384

$  20,598,979


The accompanying notes are an integral part of these consolidated financial statements.


- 7 -






JEWETT-CAMERON TRADING COMPANY LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in U.S. Dollars)

(Prepared by Management)

(Unaudited)

 

 

Three Month

Period Ended February 28,

 

Six Month

Period Ended February 28,

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income

$  237,398

 

$  790,631

 

$   569,977

 

$ 1,271,377

Items not involving an outlay of cash:

 

 

 

 

 

 

 

  Depreciation and amortization

69,531

 

64,202

 

139,550

 

121,696

  Gain on sale of property, plant and equipment

-

 

(353,852)

 

(4,109)

 

(353,852)

  Deferred income taxes

(3,802)

 

137,100

 

(8,366)

 

151,423

  Interest income on litigation

(6,588)

 

(6,588)

 

(13,249)

 

(13,249)

 

 

 

 

 

 

 

 

Changes in non-cash working capital items:

 

 

 

 

 

 

 

  Increase in accounts receivable

(2,018,552)

 

(4,628,402)

 

(911,509)

 

(4,202,382)

  Decrease in inventory

846,025

 

68,731

 

992,265

 

1,393,096

  Decrease in note receivable

-

 

-

 

15,000

 

20,000

  (Increase) decrease in prepaid expenses

(1,205,662)

 

537,657

 

(1,501,225)

 

(1,041,955)

  Increase in prepaid income taxes

(448,288)

 

(253,952)

 

(221,609)

 

(253,952)

  Increase (decrease) in accounts payable and

  accrued liabilities


837,196

 


675,104

 


(908,722)

 


(296,125)

  Decrease in accrued income taxes

-

 

(330,957)

 

-

 

(37,203)

 

 

 

 

 

 

 

 

Net cash used in operating activities

(1,692,742)

 

(3,300,326)

 

(1,851,997)

 

(3,241,126)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

  Purchase of property, plant and equipment

(17,457)

 

(18,657)

 

(75,375)

 

(130,790)

  Proceeds from sale of property, plant and

  equipment


-

 


410,000

 


4,800

 


410,000

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

(17,457)

 

391,343

 

(70,575)

 

279,210

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

  Redemption of common stock

(569,019)

 

(4,884)

 

(569,019)

 

(4,884)

 

 

 

 

 

 

 

 

Net cash used in financing activities

(569,019)

 

(4,884)

 

(569,019)

 

(4,884)

 

 

 

 

 

 

 

 

Net decrease in cash

(2,279,218)

 

(2,913,867)

 

(2,491,591)

 

(2,966,800)

 

 

 

 

 

 

 

 

Cash, beginning of period

8,096,072

 

7,256,455

 

8,308,445

 

7,309,388

 

 

 

 

 

 

 

 

Cash, end of period

$  5,816,854

 

$  4,342,588

 

$  5,816,854

 

$  4,342,588

 

Supplemental disclosure with respect to cash flows (note 16)


The accompanying notes are an integral part of these consolidated financial statements.


- 8 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


1.

NATURE OF OPERATIONS


Jewett-Cameron Trading Company Ltd. was incorporated in British Columbia on July 8, 1987 as a holding company for Jewett-Cameron Lumber Corporation (“JCLC”), incorporated September 1953. Jewett-Cameron Trading Company, Ltd. acquired all the shares of JCLC through a stock-for-stock exchange on July 13, 1987, and at that time JCLC became a wholly owned subsidiary. Effective September 1, 2013, the Company reorganized certain of its subsidiaries. JCLC’s name was changed to JC USA Inc. (“JC USA”), and a new subsidiary, Jewett-Cameron Company (“JCC”), was incorporated.  


JC USA has the following wholly owned subsidiaries: MSI-PRO Co. (“MSI”), incorporated April 1996, Jewett-Cameron Seed Company, (“JCSC”), incorporated October 2000, Greenwood Products, Inc. (“Greenwood”), incorporated February 2002, and Jewett-Cameron Company, incorporated September 2013. Jewett-Cameron Trading Company Ltd. and its subsidiaries (the “Company”) have no significant assets in Canada.


The Company, through its subsidiaries, operates out of facilities located in North Plains, Oregon. JCC’s business consists of the manufacturing and distribution of specialty metal products and wholesale distribution of wood products to home centers and other retailers located primarily in the United States. Greenwood is a processor and distributor of industrial wood and other specialty building products principally to customers in the marine and transportation industries in the United States. MSI is an importer and distributor of pneumatic air tools and industrial clamps in the United States. JCSC is a processor and distributor of agricultural seeds in the United States. JC USA provides professional and administrative services, including accounting and credit services, to its subsidiary companies.


These unaudited financial statements are those of the Company and its wholly owned subsidiaries. In the opinion of management, the accompanying Consolidated Financial Statements of Jewett-Cameron Trading Company Ltd., contain all adjustments, consisting only of normal recurring adjustments, necessary to fairly state its financial position as of February 28, 2014 and August 31, 2013 and its results of operations and cash flows for the three and six month periods ended February 28, 2014 and February 28, 2013 in accordance with generally accepted accounting principles of the United States of America (“U.S. GAAP”). Operating results for the three and six month periods ended February 28, 2014 are not necessarily indicative of the results that may be experienced for the fiscal year ending August 31, 2014.


2.

SIGNIFICANT ACCOUNTING POLICIES


Generally accepted accounting principles


These consolidated financial statements have been prepared in conformity with U.S. GAAP.  


Principles of consolidation


These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, JC USA, JCC, MSI, JCSC, and Greenwood, all of which are incorporated under the laws of Oregon, U.S.A.


All inter-company balances and transactions have been eliminated upon consolidation.


- 9 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


2.

SIGNIFICANT ACCOUNTING POLICIES (cont’d…)


Estimates


The preparation of consolidated financial statements in conformity with U.S. 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.  Significant estimates incorporated into the Company’s consolidated financial statements include the estimated useful lives for depreciable and amortizable assets, the estimated allowances for doubtful accounts receivable and inventory obsolescence, possible product liability and possible product returns, and litigation contingencies and claims.  Actual results could differ from those estimates.


Cash and cash equivalents


The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.  At February 28, 2014, cash was $5,816,854 compared to $8,308,445 at August 31, 2013.  At February 28, 2014 and August 31, 2013, there were no cash equivalents.


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.  


The Company extends credit to domestic customers and offers discounts for early payment.  When extension of credit is not advisable, the Company relies on either prepayment or a letter of credit.


Inventory


Inventory, which consists primarily 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. An allowance for potential non-saleable inventory due to excess stock or obsolescence is based upon a review of inventory components.


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


Intangibles


The Company’s intangible assets have a finite life and are recorded at cost.  The most significant intangible assets are two patents related to gate support systems.  Amortization is calculated using the straight-line method over the remaining lives of 48 months and 60 months, respectively, and are reviewed annually for impairment.


- 10 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


2.

SIGNIFICANT ACCOUNTING POLICIES (cont’d…)


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 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).  The Company does not have any significant asset retirement obligations.


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.


Currency and foreign exchange


These financial statements are expressed in U.S. dollars as the Company's operations are based only in the United States.


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 approximate 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 net 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.


- 11 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


2.

SIGNIFICANT ACCOUNTING POLICIES (cont’d…)


Earnings per share (cont’d…)


The earnings per share data for the three and six month period ended February 28, 2014 and February 28, 2013 are as follows:


 

 

Three Month Period

Ended February 28,

 

Six Month Period

Ended February 28,

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

Net income

$   237,398

 

$  790,631

 

$  569,977

 

$ 1,271,377

 

 

 

 

 

 

 

 

 

 

Basic weighted average number of

       common shares outstanding


3,129,764

 


3,135,860

 


3,132,365

 


3,135,902

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

Stock options

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

Diluted weighted average number

      of common shares outstanding


3,129,764

 


3,135,860

 


3,132,365

 


3,135,902



Comprehensive income


The Company has no items of other comprehensive income in any period presented.  Therefore, net income presented in the consolidated statements of operations equals comprehensive income.


Stock-based compensation


All stock-based compensation is recognized as an expense in the financial statements and such costs are measured at the fair value of the award.


No options were granted during the six month period ended February 28, 2014, and there were no options outstanding on February 28, 2014.


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 - the carrying amount approximates fair value because the amounts consist of cash held at a bank and cash held in short term investment accounts.


Accounts receivable - the carrying amounts approximate fair value due to the short-term nature and historical collectability.


Notes receivable - the carrying amounts approximate fair value due to the short-term nature of the amount.


- 12 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


2.

SIGNIFICANT ACCOUNTING POLICIES (cont’d…)


Financial instruments (cont’d…)


Accounts payable and accrued liabilities - the carrying amount approximates fair value due to the short-term nature of the obligations.


The estimated fair values of the Company's financial instruments as of February 28, 2014 and August 31, 2013 follows:


 

 

February 28,

2014

 

August 31,

2013

 

 

Carrying

Fair

 

Carrying

Fair

 

 

Amount

Value

 

Amount

Value

 

Cash

$5,816,854

$5,816,854

 

$8,308,445

$8,308,445

 

Accounts receivable, net of allowance

4,256,286

4,256,286

 

3,344,777

3,344,777

 

Note receivable

-

-

 

15,000

15,000

 

Accounts payable and accrued liabilities

1,956,618

1,956,618

 

2,865,340

2,865,340


The following table presents information about the assets that are measured at fair value on a recurring basis as of February 28, 2014, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and included situations where there is little, if any, market activity for the asset:

 

 

 

 

February 28,

2014

 

Quoted Prices
in Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

5,816,854

 

$

5,816,854

 

$

 

$


The fair values of cash are determined through market, observable and corroborated sources.


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 period 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.


- 13 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


2.

SIGNIFICANT ACCOUNTING POLICIES (cont’d…)


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 lumber, building supply products, industrial wood products, specialty metal products, 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 from 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, 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 period.  These reclassifications include adjustments to reflect the reorganization of the corporate structure and reporting segments effective September 1, 2013.


Recent Accounting Pronouncements


Management has reviewed the new accounting guidance and determined that there is not a material impact on our financial statements.


3.

INVENTORY


A summary of inventory is as follows:


 

 

February 28,

2014

 

August 31,

2013

 

 

 

 

 

 

 

 

 

 

 

Wood products and metal products

$  6,766,962

 

$  7,984,678

 

Industrial tools

529,579

 

482,949

 

Agricultural seed products

232,185

 

53,364

 

 

 

 

 

 

 

$  7,528,726

 

$  8,520,991


- 14 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


4.

PROPERTY, PLANT AND EQUIPMENT


A summary of property, plant, and equipment is as follows:


 

 

February 28,

2014

 

August 31,

2013

 

 

 

 

 

 

Office equipment

$      560,956

 

$      565,575

 

Warehouse equipment

1,468,902

 

1,431,707

 

Buildings

2,688,616

 

2,681,989

 

Land

761,924

 

761,924

 

 

5,480,398

 

5,441,195

 

 

 

 

 

 

Accumulated depreciation

(3,266,962)

 

(3,199,245)

 

 

 

 

 

 

Net book value

$   2,213,436

 

$   2,241,950


In the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable and an estimate of future discounted 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.


5.

INTANGIBLE ASSETS


A summary of intangible assets is as follows:


 

 

February 28,

2014

 

August 31,

2013

 

Patent

$  850,000

 

$  850,000

 

Other

43,655

 

43,655

 

 

893,655

 

893,655

 

Accumulated amortization

(561,345)

 

(524,993)

 

 

 

 

 

 

Net book value

$  332,310

 

$  368,662


6.

DEFERRED INCOME TAXES


Deferred income tax liability as of February 28, 2014 of $42,027 (August 31, 2013 – $50,393) 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.


7.

BANK INDEBTEDNESS


There was no bank indebtedness under the Company’s line of credit as of February 28, 2014 or August 31, 2013.


Bank indebtedness, when it exists, is secured by an assignment of accounts receivable and inventory. Interest is calculated solely on the one month LIBOR rate plus 200 basis points.


- 15 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


8.

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.


Common Stock Split


The Company declared a two for one stock split of its common stock with a record date at the close of business on April 25, 2013. Shareholders received one additional common share for each common share held as of the record date. The stock split was effective as of May 2, 2013. Share and per share data have been retroactively adjusted to reflect the effects of the stock split.


9.

CANCELLATION OF CAPITAL STOCK


Treasury stock may be kept based on an acceptable inventory method such as the average cost basis.  Upon disposition or cancellation, the treasury stock account is credited for an amount equal to the number of shares cancelled, multiplied by the cost per share and the difference is treated as additional paid-in-capital in excess of stated value.


During the 2nd quarter of fiscal 2014 ended February 28, 2014, the Company repurchased and cancelled a total of 58,180 common shares under a 10b5-1 share repurchase plan. The total cost was $569,019 at an average price of $9.78 per share. The premium paid to acquire these shares over their per share book value in the amount of $541,564 was recorded as a decrease to retained earnings.


During the 4th quarter of fiscal 2013 ended August 31, 2013, the Company repurchased and cancelled a total of 192 common shares under a 10b5-1 share repurchase plan. The total cost was $2,304 at an average price of $12.00 per share. The premium paid to acquire these shares over their per share book value in the amount of $2,213 was recorded as a decrease to retained earnings.


During the 2nd quarter of fiscal 2013 ended February 28, 2013, the Company repurchased and cancelled a total of 814 common shares common shares of its common stock under a 10b5-1 share repurchase plan. The total cost was $4,884 at an average price of $6.00 per share. The premium paid to acquire these shares over their per share book value in the amount of $4,500 was recorded as a decrease to retained earnings.


During the 3rd quarter of fiscal 2012 ended May 31, 2012, the Company repurchased and cancelled a total of 83,798 common shares of its common stock under a 10b5-1 share repurchase plan. The total cost was $382,510 at an average price of $4.56 per share. The premium paid to acquire these shares over their per share book value in the amount of $342,969 was recorded as a decrease to retained earnings.


During the 2nd quarter of fiscal 2012 ended February 29, 2012, the Company repurchased and cancelled a total of 497,174 shares of its common stock under a 10b5-1 share repurchase plan. The total cost was $2,238,929 at an average share price of $4.50 per share. The premium paid to acquire these shares over their per share book value in the amount of $2,004,334 was recorded as a decrease to retained earnings.


During the 1st quarter of fiscal 2012 ended November 30, 2011, the Company repurchased and cancelled a total of 100,000 shares of its common stock under a 10b5-1 share repurchase plan. The total cost was $454,120 at an average share price of $4.54 per share. The premium paid to acquire these shares over their per share book value in the amount of $406,934 was recorded as a decrease to retained earnings.


- 16 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


10.

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 Ontario Securities Commission and the British Columbia Securities Commission.


Under the stock option program, stock options for up to 10% of the number of issued and outstanding common shares may be granted from time to time, provided that stock options in favor 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.  Generally, no option can be for a term of more than 10 years from the date of the grant.


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.  Options vest at the discretion of the Board of Directors.


The Company had no stock options outstanding as of February 28, 2014 and August 31, 2013.


11.

EMPLOYEE STOCK OWNERSHIP PLAN (“ESOP”)


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 formerly held common shares of the Company and granted to participants in the plan certain ownership rights in, but not possession of, or voting control of, any common stock of the Company held by the Trustee of the Plan.  Shares of common stock were allocated annually to participants in the ESOP pursuant to a prescribed formula. The Company records compensation expense based on the market price of the Company's shares when they were allocated.  Any dividends on allocated ESOP shares are recorded as a reduction of retained earnings.  Beginning in fiscal 2010, the ESOP began its investment in diversified mutual funds. During fiscal 2011 and 2012, all of the Company’s shares held by the ESOP were sold, with the majority repurchased by the Company and cancelled under the 10b5-1 share repurchase plans. Effective June 30, 2012, the ESOP was terminated, subject to the approval of the Internal Revenue Service. No further contributions shall be made to the ESOP. On October 18, 2013, the Internal Revenue Service issued a favorable determination letter for the termination of the ESOP, and the Plan is in process of distributing the remaining assets to participants.


ESOP compensation expense was $Nil and $Nil for the fiscal years ended August 31, 2013 and 2012, respectively, and is included in wages and employee benefits.  No shares were owned by the ESOP at August 31, 2013 or 2012.


12.

PENSION AND PROFIT-SHARING PLANS


The Company has a deferred compensation 401(k) plan for all employees with at least 12 months of service pending a semi-annual enrolment time.  The plan allows for a non-elective discretionary contribution based on the first $60,000 of eligible compensation. For the six month periods ended February 28, 2014 and 2013, the 401(k) compensation expense was $94,392 and $109,413, respectively.


- 17 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


13.

CONTINGENT LIABILITIES AND COMMITMENTS


a)

A subsidiary was a plaintiff in a lawsuit filed in Portland, Oregon, entitled, Greenwood Products, Inc. et al v. Greenwood Forest Products, Inc. et al., Case No. 05-02553 (Multnomah County Circuit Court).  


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 Forest Products, Inc.  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 believes it overpaid the obligation by approximately $820,000.  The holder counterclaimed for approximately $2,400,000.


Litigation was completed on March 5, 2007, with the court’s general judgment and money award.  The net effect was money judgment in favor of Greenwood Forest Products, Inc. for $242,604.  The Company accrued reserves to cover the money judgment related to this dispute.  Both parties filed appeals for review of the court’s opinion.


During the 1st quarter of fiscal 2011, the Oregon Court of Appeals ruled that the judgment in favor of Jewett Cameron as plaintiffs should be reversed and the judgment in favor of the defendants should stand.  The judgment in favor of the Company was for $819,000 plus attorneys fees.  The judgment against the plaintiffs is for $1,187,137.  The Company appealed the decision to the Oregon Supreme Court. During the 1st quarter of fiscal 2011, the Company recorded a litigation loss of $962,137 and interest of $391,988 in addition to the existing litigation reserve of $225,000. Additional interest of $48,790 was recorded during the remainder of fiscal 2011. During the 1st quarter of fiscal 2012 ended November 30, 2011, additional interest of $16,204 was accrued.


In February 2012, the Company received the decision from the Oregon Supreme Court which was favorable to Jewett Cameron as plaintiff. As a result, the Company has reversed $1,459,832 of the litigation reserve and accrued interest during the 2nd quarter of fiscal 2012 ended February 29, 2012.  The reversal was treated as a one-time gain during the quarter.


During the year ended August 31, 2013, the Company recorded $26,716 of interest income due to the favorable difference in interest rates between the judgments. During the six months ended February 28, 2014, the Company recorded $13,249 of interest income.


A summary of the litigation reserve is as follows:


 

 

February 28,

2014

 

August 31,

2013

 

 

 

 

 

 

Litigation loss

$                  -

 

$                  -

 

Litigation reserve

144,103

 

170,819

 

Interest expense

-

 

-

 

Interest income

(13,249)

 

(26,716)

 

Total

$      130,854

 

$      144,103


b)

At February 28, 2014 and August 31, 2013 the Company had an un-utilized line-of-credit of $5,000,000 (note 7).  The line-of-credit has certain financial covenants. The Company is in compliance with these covenants.


- 18 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


14.

SEGMENT INFORMATION


The Company has four principal reportable segments. 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.


Effective September 1, 2013, the Company reorganized certain of its subsidiaries. The majority of fixed and intangible assets, and certain Corporate and administrative functions which were formerly contained within the “Lawn, garden, pet and other” reporting segment are now classified as “Corporate and administrative.” The segment information for the six months ended February 28, 2013 has been restated for comparability purposes.


Following is a summary of segmented information for the six month periods ended February 28:


 

 

2014

 

2013

 

 

 

 

 

 

 

 

Sales to unaffiliated customers:

 

 

 

 

 

Industrial wood products

$    3,404,951

 

$    4,072,527

 

 

Lawn, garden, pet and other

11,929,856

 

15,004,943

 

 

Seed processing and sales

1,678,862

 

3,501,011

 

 

Industrial tools and clamps

725,261

 

945,748

 

 

 

$  17,738,930

 

$  23,524,229

 

 

 

 

 

 

 

 

Income (loss) before income taxes:

 

 

 

 

 

Industrial wood products

$        (32,349)

 

$         10,326

 

 

Lawn, garden, pet and other

499,003

 

1,251,180

 

 

Seed processing and sales

108,661

 

174,894

 

 

Industrial tools and clamps

45,225

 

62,649

 

 

Corporate and administrative

349,584

 

275,310

*

 

 

$       970,124

 

$    1,774,359

 

 

 

 

 

 

 

 

Identifiable assets:

 

 

 

 

 

Industrial wood products

$    1,366,293

 

$    1,495,878

 

 

Lawn, garden, pet and other

10,989,146

 

10,637,480

 

 

Seed processing and sales

632,061

 

924,364

 

 

Industrial tools and clamps

669,639

 

685,864

 

 

Corporate and administrative

9,071,339

 

7,665,641

 

 

 

$  22,728,478

 

$  21,409,227

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

Industrial wood products

$              490

 

$              403

 

 

Lawn, garden, pet and other

21,194

 

9,767

 

 

Seed processing and sales

6,508

 

7,740

 

 

Industrial tools and clamps

2,974

 

2,853

 

 

Corporate and administrative

108,384

 

100,933

 

 

 

$       139,550

 

$       121,696

 


* For comparability purposes, the 2013 amount excludes gain on sale of property, plant and equipment of $353,852.


- 19 -







JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


14.

SEGMENT INFORMATION (cont’d…)


 

 

2014

 

2013

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

Industrial wood products

$                  -

 

$                   -

 

Lawn, garden, pet and other

-

 

-

 

Seed processing and sales

-

 

-

 

Industrial tools and clamps

1,300

 

-

 

Corporate and administrative

74,075

 

130,790

 

 

$        75,375

 

$       130,790

 

 

 

 

 

 

Interest expense:

 

 

 

 

Lawn, garden, pet and other

$                  -

 

$              400


The following table lists sales made by the Company to customers which were in excess of 10% of total sales for the six months ended February 28, 2014 and 2013:


 

 

2014

 

2013

 

 

 

 

 

 

Sales

$    7,604,958

 

$     7,338,811


The Company conducts business primarily in the United States, but also has limited amounts of sales in foreign countries. The following table lists sales by country for the six months ended February 28, 2014 and 2013:


 

 

2014

 

2013

 

 

 

 

 

 

United States

$  16,275,299

 

$  20,450,160

 

Canada

349,275

 

1,243,522

 

Mexico / Latin America

987,524

 

1,732,181

 

Europe

126,832

 

43,961

 

Asia/Pacific

-

 

54,405


All of the Company’s significant identifiable assets were located in the United States as of February 28, 2014 and 2013.


- 20 -






JEWETT-CAMERON TRADING COMPANY LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. Dollars)

February 28, 2014

(Unaudited)


15.

CONCENTRATIONS


Credit risk


Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.  The Company places its cash with a high quality financial institution.  The Company has concentrations of credit risk with respect to accounts receivable as large amounts of its accounts receivable are concentrated geographically in the United States amongst a small number of customers. At February 28, 2014, three customers accounted for accounts receivable greater than 10% of total accounts receivable at 57%. At February 28, 2013, three customers accounted for accounts receivable greater than 10% of total accounts receivable at 60%. The Company controls credit risk through credit approvals, credit limits, credit insurance 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 six months ended February 28, 2014, there were two suppliers that each accounted for greater than 10% of total purchases, and the aggregate purchases amounted to $5,871,611. For the six months ended February 28, 2013, there were two suppliers that each accounted for greater than 10% of total purchases, and the aggregate purchases amounted to $8,262,691.


16.

SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS


Certain cash payments for the six months ended February 28, 2014 and 2013 are summarized as follows:


 

 

2014

 

2013

 

 

 

 

 

 

Cash paid during the periods for:

 

 

 

 

  Interest

$                -

 

$           400

 

  Income taxes

$    630,122

 

$    984,812


There were no non-cash investing or financing activities during the periods presented.


17.

SUBSEQUENT EVENTS


During the month of March 2014, the Company re-purchased and is in the process of cancelling a total of 255,313 shares of its common stock pursuant to the Company’s 10b5-1 share re-purchase plan. The total cost was $2,486,571 at an average share price of $9.74 per share. The Company has successfully completed and terminated the current 10b5-1 repurchase plan previously announced on January 13, 2014.


- 21 -






Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations.


These unaudited financial statements are those of the Company and its wholly owned subsidiaries. In the opinion of management, the accompanying consolidated financial statements of Jewett-Cameron Trading Company Ltd., contain all adjustments, consisting only of normal recurring adjustments, necessary to fairly state its financial position as of February 28, 2014 and August 31, 2013 and its results of operations and cash flows for the three and six month periods ended February 28, 2014 and February 28, 2013 in accordance with U.S. GAAP.  Operating results for the three and six month periods ended February 28, 2014 are not necessarily indicative of the results that may be experienced for the fiscal year ending August 31, 2014.


The Company’s operations are classified into four reportable segments, which were determined based on the nature of the products offered along with the markets being served.  The segments are as follows:

·

Industrial wood products

·

Lawn, garden, pet and other

·

Seed processing and sales

·

Industrial tools


Effective September 1, 2013, the Company reorganized certain of its subsidiaries. Jewett-Cameron Lumber Corporation (JCLC) was changed to JC USA Inc. (JC USA), which has the following four wholly-owned subsidiaries.  


The industrial wood products segment reflects the business conducted by Greenwood Products, Inc. (Greenwood),  Greenwood is a processor and distributor of industrial wood products used in a variety of markets and applications, including the marine and transportation markets.


The lawn, garden, pet and other segment reflects the business of the newly incorporated Jewett-Cameron Company (JCC), which is a manufacturer and distributor of specialty metal products and a wholesaler of wood products formerly conducted by JCLC. Wood products include fencing and landscape timbers, while metal products include dog kennels, proprietary gate support systems, perimeter fencing, and greenhouses.  JCC uses contract manufacturers to make the specialty metal products.  Some of the products that JCC distributes flow through the Company’s distribution center located in North Plains, Oregon, and some are shipped direct to the customer from the manufacturer.  Primary customers are home centers and other retailers.  


The seed processing and sales segment reflects the business of Jewett-Cameron Seed Company (JCSC).  JCSC processes and distributes agricultural seed.  Most of this segment’s sales come from selling seed to distributors with a lesser amount of sales derived from cleaning seed.


The industrial tools segment reflects the business of MSI-PRO (MSI).  MSI imports and distributes products including pneumatic air tools, industrial clamps, and saw blades; that are primarily sold to retailers that in turn sell to contractors and end users.  


RESULTS OF OPERATIONS


Three Months Ended February 28, 2014 and February 28, 2013


For the three months ended February 28, 2014, sales decreased $4,495,175 to $9,732,649 from $14,227,824. This represents a decrease of 32%.


Sales at Greenwood were $1,947,704 for the three months ended February 28, 2014 compared to sales of $1,711,057 for the three months ended February 28, 2013, which was an increase of $263,647, or 15%. Demand for Greenwood’s products remained weak, as sales to boat manufactures continue to be severely affected by the downturn in the economy. Boat manufacturers continue to work down excess inventory accumulated over the several years. During the three months ended February 28, 2014, the Company sold its excess inventory related to the marine industry in an arm’s length transaction. The Company does not anticipate a significant marine industry recovery in the near future, nevertheless, the Company will maintain a readiness to participate in the marine segment when, and if, the market rebounds. Greenwood is continuing develop new customer relationships and establish additional uses for its products. For the three months ended February 28, 2014, Greenwood had an operating loss of ($20,926) compared to an operating loss of ($52,219) for the three months ended February 28, 2013. The lower operating loss for the current quarter was consistent with the level of sales for the segment.


- 22 -






Sales at JCC were $6,485,914 for the three months ended February 28, 2014 compared to sales of $10,232,004 for the three months ended February 28, 2013. This represents a decrease of $3,746,090, or 37%. Although the operating results of JCC are historically seasonal with the first two quarters of the fiscal year being slower than the final two quarters of the fiscal year, the current quarter’s results were negatively affected by a delay in orders caused by manufacturing capacity constraints at the Company’s suppliers around the Chinese New Year. These constraints led to a delay in shipments and also pushed back the targeted rollout dates of several new products. The manufacturing constraints are not expected to continue in the remainder of the fiscal year. Operating income for the current quarter was $441,859 compared to $941,076 for the quarter ended February 28, 2013. The lower income was due to the lower level of sales as well as an increase in overall market competitiveness. Raw material prices have also increased, which have resulted in lower margins.


Sales at JCSC were $938,119 for the three months ended February 28, 2014 compared to sales of $1,690,366 for the three months ended February 28, 2013, which was a decrease of 45%.  Product seed sales decreased primarily due to the departure of our lead salesman during 2013. Seed cleaning service revenue has declined as more growers have begun to clean in-house. There has also been an overall reduction in grass seed acreage as higher grain prices have encouraged growers to shift acreage to higher margin food crops. Operating income at JCSC for the quarter was $39,758, a decrease of $34,763 from the income of $74,521 in the prior year’s quarter. The decline in operating income was consistent with the decline in sales.


Sales at MSI for the three months ended February 28, 2014 were $360,912, which was a decline of $233,485, or 39%, from the sales of $594,397 for the three months ended February 28, 2013. The Company has wound down certain sales programs of its lower margin products and has concentrated on selling its more profitable products. Operating income was $14,772 for the current three month period, which was a decrease of $19,791, or 57%, compared to operating income of $34,563 for the quarter ended February 28, 2013.


Gross margin for the three months ended February 28, 2014 was 18.1% compared to 17.1% for the three months ended February 28, 2013.


Operating expenses decreased by $111,758 to $1,348,852 from $1,460,610 for the three months ended February 28, 2013. Selling, General and Administrative Expenses declined to $446,900 from $468,161, which was in-line with the lower level of sales for the current quarter. Wages and Employee Benefits declined by $95,825 to $832,421 from $928,246. Depreciation and Amortization increased to $69,531 from $64,202.


For the three months ended February 28, 2013, the Company recorded a gain on the sale of property, plant and equipment of $353,852. The one-time gain in the prior year’s quarter is a result of the sale by the Company of approximately 1.64 acres of land with a cost basis of $56,148 to the Oregon Department of Transportation for proceeds of $410,000.


Income tax expense for the three month period ended February 28, 2014 was $178,032 compared to $548,485 for the three month period ended February 28, 2013. The Company estimates income tax expense for the quarter based on combined federal and state rates that are currently in effect.  


Net income for the quarter ended February 28, 2014 was $237,398, or $0.08 per basic and diluted share, compared to $790,631, or $0.25 per basic and diluted share, for the quarter ended February 28, 2013, as adjusted for the two for one common stock split effective May 2, 2013. The net income per share in the prior year’s quarter was positively affected by the one-time gain from the sale of property.


Six Months Ended February 28, 2014 and February 28, 2013


For the six months ended February 28, 2014, sales decreased by $5,785,299, or 25%, to $17,738,930 from sales of $23,524,229 recorded in the six month period ended February 28, 2013. The decrease is primarily due to lower sales at JCC caused in part by manufacturing delays.


Sales at Greenwood were $3,404,951 for the six months ended February 28, 2014 compared to sales of $4,072,527 for the six months ended February 28, 2013. This represents a decrease of $667,576, or 16%. Demand for Greenwood’s products remained weak, as sales to boat manufactures continue to be severely affected by the downturn in the economy. Boat manufacturers continue to work down excess inventory accumulated over the several years. In February 2014, the Company sold its excess inventory related to the marine industry in an arm’s length transaction. The Company does not anticipate a significant marine industry recovery in the near future, nevertheless, the Company will maintain a readiness to participate in the marine segment when, and if, the market rebounds. Greenwood is continuing develop new customer relationships and establish additional uses for its products. The operating loss for Greenwood for the six months ended February 28, 2014 was ($32,349) compared to operating income of $10,326 for the six months ended February 28, 2013.


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Sales at JCC were $11,929,856 for the six months ended February 28, 2014 compared to sales of $15,004,943 for the six months ended February 28 2013, which was a decrease of $3,075,087 or 20%. Sales for the current period were negatively affected by manufacturing capacity constraints at the Company’s suppliers around the Chinese New Year. These product delays resulted in a delay in fulfilling customer orders and also pushed back the targeted rollout dates of several new products. The manufacturing constraints are not expected to continue in the remainder of the fiscal year. Operating income at JCC was $896,785 compared to $1,496,471 for the six months ended February 28, 2013. The decline in segment income was due to several factors, including an increase in overall market competitiveness. Raw material prices have risen, resulting in lower margins. Selling expenses have increased in efforts to obtain new business, including trade shows, travel and the addition of one salesman, as the Company has focused its attention on the addition of small and mid-sized customers. The Company has also offered new customers sales incentives including introductory pricing. Overall, the operating results of JCLC are seasonal with the first two quarters of the fiscal year being much slower than the final two quarters of the fiscal year.


Sales at JCSC for the six months ended February 28, 2014 were $1,678,862, which was a decrease of $1,822,148, or 52%, from sales of $3,501,011 for the six months ended February 28, 2013. Product seed sales decreased primarily due to the departure of our lead salesman during 2013. Seed cleaning service revenue has declined as more growers have begun to clean in-house. There has also been an overall reduction in grass seed acreage as higher grain prices have encouraged growers to shift acreage to higher margin food crops. Operating income was $117,035 for the six months ended February 28, 2014 compared to income of $192,302 for the six months ended February 28, 2013.


Sales at MSI were $725,261 for the six months ended February 28, 2014, which was a decrease of $220,487, or 23%, from sales of $945,748 for the six months ended February 28, 2013. The Company has wound down certain sales programs of its lower margin products and has concentrated on selling more profitable products. Operating income was $58,187 for the current six month period compared to operating income of $75,363 for the six months ended February 28, 2013.


Gross margin for the six month period ended February 28, 2014 was 20.3% compared to 18.8% for the six months ended February 28, 2013.


Operating expenses declined slightly by $24,524 to $2,654,707 compared to operating expenses of $2,679,231 in the six month period ended February 28, 2013. Selling, General and Administrative Expenses rose to $838,786 from $803,982. The increase of $34,804 was primarily due to the Company’s new sales initiatives and adding small and mid-sized customers at JCC. Wages and Employee Benefits declined by $77,182 to $1,676,371 from $1,753,553, and Depreciation and Amortization rose to $139,550 from $121,696, an increase of $17,854.


Other items in the current six month period ended February 28, 2014 included the gain on sale of property, plant and equipment of $4,109. During the six months ended February 28, 2013, results included the one-time gain of $353,852 from the sale of approximately 1.64 acres of land to the State of Oregon.


Income tax expense in the current six month period was $400,147 compared to $856,834 for the six months ended February 28, 2013. The Company estimates income tax expense for the period based on combined federal and state rates that are currently in effect.


Net income for the six months ended February 28, 2014 was $569,977, or $0.18 per basic and diluted share, compared to net income of $1,271,377, or $0.41 per basic and diluted share, for the six months ended February 28, 2013, as adjusted for the two for one common stock split effective May 2, 2013. The net income in the prior year period was positively affected by the one-time gain of the sale of property.


LIQUIDITY AND CAPITAL RESOURCES


As of February 28, 2014, the Company had working capital of $18,095,260 compared to working capital of $18,037,802 as of August 31, 2013, an increase of $57,458. The increase was largely due to the Company’s net income for the six month period which was offset by the repurchase of 58,180 common shares for $569,019. Cash declined to $5,816,854, a decrease of $2,491,591. Accounts receivable increased to $4,256,286 from $3,344,777 due to the seasonal cycle of sales to customers and the related timing of cash receipts. Inventory decreased by $992,265 to $7,528,726 and prepaid expenses, which are largely related to down payments for future inventory purchases, increased by $1,501,225 to $2,088,834. Note receivable declined by $15,000 as the remaining balance of the note was repaid during the period. Prepaid income taxes increased to $492,032 from $270,423. Accounts payable declined by $524,478 due to the seasonal cycle of payments to inventory suppliers. Accrued liabilities declined by $384,244. Litigation reserve declined by $13,249 as differences in interest rates resulted in a reduction in the amount reserved.


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As at February 28, 2014, accounts receivable and inventory represented 58% of current assets and 52% of total assets. For the three months ended February 28, 2014, the accounts receivable collection period, or DSO, was 39 compared to 46 for the three months ended February 28, 2013. For the six month period ended February 28, 2014, the DSO was 43 compared to 56 for the six months ended February 28, 2013. Inventory turnover for the three months ended February 28, 2014 was 90 days compared to 44 days for the three months ended February 28, 2013. For the six months ended February 28, 2014, inventory turnover was 103 compared to 61 days for the six months ended February 28, 2013.


External sources of liquidity include a line of credit from U.S. Bank of $5,000,000 of which the Company had not borrowed against at February 28, 2014. Borrowing under the line of credit is secured by an assignment of accounts receivable and inventory.  The interest rate is calculated solely on the one month LIBOR rate plus 200 basis points.  As of February 28, 2014, the one month LIBOR rate plus 200 basis points was 2.15% (0.15% + 2.00%). The line of credit has certain financial covenants.  The Company is in compliance with these covenants.


The Company has been utilizing its cash position by repurchasing common shares under 10b5-1 plans in order to increase shareholder value. During the six months ended February 28, 2014, the Company repurchased and cancelled 58,180 common shares at a total cost of $569,019, which represents an average price of $9.78. Subsequent to the end of the six month period, the Company repurchased and is in the process of cancelling a total of 255,313 additional common shares at a total cost of $2,486,571 which represents an average share price of $9.74 per share. The Company has successfully completed and terminated the 10b5-1 share repurchase plan previously announced on January 13, 2014.


Business Risks


This quarterly report includes “forward–looking statements” as that term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “anticipates,” or “hopeful,” or the negative of those terms or other comparable terminology, or by discussions of strategy, plans or intentions. For example, this section contains numerous forward-looking statements.  All forward-looking statements in this report are made based on management’s current expectations and estimates, which involve risks and uncertainties, including those described in the following paragraphs.


Risks Related to Our Common Stock


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.


Our Articles of Incorporation give our Board of Directors the right to enter into any contract without the approval of our shareholders.  Therefore, our management 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.


Future stock distributions could be structured in such a way as to be 1) diluting to our current shareholders or 2) could cause a change in control to new investors.


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.


Our shareholders could experience significant dilution if we issue our authorized 10,000,000 preferred shares.


The Company’s common shares currently trade within the NASDAQ Capital Market in the United States. The common shares also formerly traded on the Toronto Stock Exchange (“TSX”) in Canada until the Company voluntarily delisted from the TSX on October 11, 2012. The average daily trading volume of our common stock on NASDAQ was 7,663 shares for the six months ended February 28, 2014. With this limited trading volume, investors could find it difficult to purchase or sell our common stock.


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Risks Related to Our Business


We could experience a decrease in the demand for our products resulting in lower sales volumes.


In the past we have at times experienced decreasing products sales with certain customers. The reasons for this can be generally attributed to: increased competition; general economic conditions; demand for products; and consumer interest rates.  If economic conditions deteriorate or if consumer preferences change, we could experience a significant decrease in profitability.


If our top customers were lost, we could experience lower sales volumes.


For the six months ended February 28, 2014, our top ten customers represented 69% of our total sales. We would experience a significant decrease in sales and profitability and would have to cut back our operations, if these customers were lost and could not be replaced.  Our top ten customers are in the U.S., Canada and Mexico and are primarily in the home improvement, marine, and agricultural industries.  


We could experience delays in the delivery of our products to our customers causing us to lose business.


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.


We could lose our credit agreement and 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 $5,000,000, of which $5,000,000 is available.  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.


If we fail to maintain an effective system of internal controls, we may not be able to detect fraud or report our financial results accurately, which could harm our business and we could be subject to regulatory scrutiny.


We have completed a management assessment of internal controls as prescribed by Section 404 of the Sarbanes-Oxley Act, which we were required to do in connection with our year ended August 31, 2013.  Based on this process we did not identify any material weaknesses.  Although we believe our internal controls are operating effectively, we cannot guarantee that in the future we will not identify any material weaknesses in connection with this ongoing process.


Item 3.

Quantitative and Qualitative Disclosures about Market Risk


Interest Rate Risk


The Company does not have any derivative financial instruments as of February 28, 2014.  However, the Company is exposed to interest rate risk.


The Company’s interest income and expense are most sensitive to changes in the general level of U.S. interest rates.  In this regard, changes in U.S. interest rates affect the interest earned on the Company’s cash as well as interest paid on debt.


The Company has a line of credit whose interest rate 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, a relatively small amount of business is conducted in currencies other than U.S. dollars.  Also, to the extent that the Company uses contract manufacturers in China, currency exchange rates can influence the Company’s purchasing costs.


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Item 4.

Controls and Procedures


Disclosure Controls and Procedures

Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.


Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Part II – OTHER INFORMATION


Item 1.

Legal Proceedings


a)

One of our subsidiaries was a plaintiff in a lawsuit filed in Portland, Oregon, entitled, Greenwood Products, Inc. et al v. Greenwood Forest Products, Inc. et al., Case No. 05-02553 (Multnomah County Circuit Court).  


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 Forest Products, Inc.  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 believes it overpaid the obligation by approximately $820,000.  The holder counterclaimed for approximately $2,400,000.


Litigation was completed on March 5, 2007 with the court’s general judgment and money award.  The net effect was a money judgment in favor of Greenwood Forest Products, Inc. for $242,604 and an award of contested intellectual property rights to the Company.  The Company accrued reserves to cover the money judgment related to this dispute.  Both parties filed appeals for review of the court’s opinion.


During the 1st quarter of fiscal 2011, the Oregon Court of Appeals ruled that the judgment in favor of Jewett Cameron as plaintiffs should be reversed and the judgment in favor of defendants should stand.  The judgment in favor of the Company was for $819,000 plus attorneys fees.  The judgment against plaintiffs was for $1,187,137.  The Company appealed the ruling to the Oregon Supreme Court. In addition to the previously accrued litigation reserve of $225,000, the Company recorded a litigation loss of $962,137 and interest of $440,778 during the year ended August 31, 2011 related to the judgment. In the first quarter of fiscal 2012 ended November 30, 2011, the Company recorded additional interest of $16,204.


In February 2012, the Company received the decision from the Oregon Supreme Court which was favorable to Jewett Cameron as plaintiff. As a result, the Company has reversed $1,459,832 of the litigation reserve and accrued interest during the 2nd quarter of fiscal 2012 ended February 29, 2012.  The reversal was treated as a one-time gain during the quarter.


During the year ended August 31, 2013, the Company recorded $26,716 of interest income due to the favourable difference in interest rates between the judgments. During the six months ended February 28, 2014, the Company recorded $13,249 of interest income.


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b)

In January 2013, the Company's subsidiary JC USA Inc. (formerly Jewett-Cameron Lumber Corporation) reached a settlement with the State of Oregon Department of Transportation in the Circuit Court of the State of Oregon for Washington County, Case No. C122901CV.  Under the settlement agreement, the Company agreed to sell approximately 1.64 acres of land to the Department of Transportation for $410,000. The land had a cost basis of $56,148, and the Company recorded a gain on sale of property plant and equipment of $353,852 during the fiscal year ended August 31, 2013.


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 2.

Unregistered Sales of Equity Securities and Use of Proceeds

---No Disclosure Required---


Item 3.

Defaults Upon Senior Securities

---No Disclosure Required---       


Item 4.  Mine Safety Disclosures

---No Disclosure Required---       


Item 5.

Other Information

---No Disclosure Required---


Item 6.

Exhibits


31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act, Donald M. Boone

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act, Murray G. Smith.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C., 1350 (Section 906 of the Sarbanes-Oxley Act), Donald M. Boone

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C., 1350 (Section 906 of the Sarbanes-Oxley Act), Murray G. Smith


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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Jewett-Cameron Trading Company Ltd.

(Registrant)



April 9, 2014

/s/  "Donald M. Boone"

Donald M. Boone, President/CEO/Director




April 9, 2014

/s/   "Murray G. Smith"

Murray G. Smith, Chief Financial Officer





 

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