SPEAR & JACKSON INC - 10-K - 20070116 - LEGAL_PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS.
On April 15, 2004, the US Securities and Exchange Commission filed suit in the
U.S. District Court for the Southern District of Florida against the Company and
Mr. Dennis Crowley, its then current Chief Executive Officer/Chairman, among
others, alleging violations of the federal securities laws. Specifically with
regard to the Company, the SEC alleged that the Company violated the SEC's
registration, anti-fraud and reporting provisions. These allegations arise from
the alleged failure of Mr. Crowley to accurately report his ownership of the
Company's stock, and his alleged manipulation of the price of the Company's
stock through dissemination of false information, allowing him to profit from
sales of stock through nominee accounts. On May 10, 2004, the Company consented
to the entry of a preliminary injunction, without admitting or denying the
allegations of the SEC complaint. The SEC is continuing its investigation into
pension issues. The Company is offering its full cooperation.
As a further measure, the Court appointed a Corporate Monitor to oversee the
Company's operations. In addition to Mr. Crowley consenting to a preliminary
injunction the Court's order also temporarily barred Mr. Crowley from service as
an officer or director of a public company, and prohibited him from voting or
disposing of Company stock. Although Soneet Kapila has continued to serve as
Corporate Monitor for the Company, on January 10, 2007, he applied to the Court
to terminate the role of Corporate Monitor having determined that his function
was no longer necessary. The Court has not yet ruled on this application.
23
Following Mr. Crowley's suspension the Board appointed Mr. J.R. Harrington, a
member of its Board of Directors, to serve as the Company's interim Chairman.
Mr. William Fletcher, a fellow member of the Company's Board of Directors, who,
until October 27, 2004, was the Company's Chief Financial Officer, and who is a
director of Spear & Jackson plc, based in Sheffield, was elected to serve as
acting Chief Executive Officer. Following extensive settlement negotiations with
the SEC and Mr. Crowley, the Company reached a resolution with both parties. On
September 28, 2004, Mr. Crowley signed a Consent to Final Judgment of Permanent
Judgment with the SEC, without admitting or denying the allegations included in
the complaint, which required a disgorgement and payment of civil penalties by
Mr. Crowley consisting of a disgorgement payment of $3,765,777 plus prejudgment
interest in the amount of $304,014, as well as payment of a civil penalty in the
amount of $2,000,000. In May 2005, the SEC applied to the Court for the
appointment of an administrator for the distribution of these funds as well as
funds collected from co-defendants International Media Solutions, Inc., Yolanda
Velazquez and Kermit Silva who were not affiliated with the Company, to the
victims of their actions, pursuant to the Fair Funds provisions of the
Sarbanes-Oxley Act of 2002.
On November 18, 2004, the Company signed a Consent to Final Judgment of
Permanent Injunction with the SEC pursuant to which the Company, without
admitting or denying the allegations included in the Complaint filed by the
Commission, consented to a permanent injunction from violation of various
sections and rules under the Securities Act of 1933 and the Securities Exchange
Act of 1934. No disgorgement or civil penalties were sought from, or ordered to
be paid by, the Company.
Additionally, the Company entered into a Stock Purchase Agreement with PNC Tool
Holdings LLC ("PNC") and Mr. Crowley, the sole member of PNC. Under the Stock
Purchase Agreement, the Company acquired, for $100, and other good and valuable
consideration, 6,005,561 common shares of the Company held by PNC, which
represented approximately 51.1% of the outstanding common shares of the Company
at December 31, 2004, and which constituted 100% of the common stock held by
such entity. The parties also executed general releases in favor of each other
subject to the fulfillment of the conditions of the Stock Purchase Agreement.
The Stock Purchase Agreement was effected on April 8, 2005, following formal
approval by the SEC on February 10, 2005 and, on February 15, 2005 by the U.S.
District Court for the Southern District of Florida of the settlement of the
litigation captioned SEC v. Dennis Crowley, Spear & Jackson, Inc., International
Media Solutions, Inc., Yolanda Velazquez and Kermit Silva (Case No:
04-80354-civ-Middlebrooks). The Stock Purchase Agreement was further conditioned
on, among other things, the disgorgement and civil penalty funds being paid by
Mr. Crowley. These monies have now been received and are being administered for
the benefit of the victims of the alleged fraud by a court appointed
administrator pursuant to the Fair Funds provision of the Sarbanes-Oxley Act of
2002.
With the return of the Spear & Jackson shares to the Company by PNC, the
stockholders of the Company had their percentage stock interest increase
correspondingly. Jacuzzi Brands, Inc. ("Jacuzzi"), which a this time was a
beneficial owner of 3,543,281 shares of common stock had its interest in the
Company increase to approximately 61.8% of the outstanding common stock.
Subsequent to the SEC action a number of class action lawsuits were initiated in
the U.S. District Court for the Southern District of Florida by Company
stockholders against the Company, Sherb & Co. LLP, the Company's former
independent auditor, and certain of the Company's directors and officers,
including Mr. Crowley, the Company's former Chief Executive Officer/Chairman,
and Mr. Fletcher, the Company's former CFO and current acting Chief Executive
Officer. These suits allege essentially the same claims as the SEC suit
discussed above.
These various class action suits were subsequently consolidated. Thereafter, the
defendants filed certain Motions to Dismiss with regard to the Complaint and on
October 19, 2005, the U.S. District Court for the Southern District of Florida
in Re Spear & Jackson Securities Litigation entered its Order regarding these
Motions. The Order denied the Company's motion as well as that of Mr. Crowley,
the former Chief Executive Officer of Spear & Jackson. The Court granted the
Motion to Dismiss on behalf of Mr. Fletcher, the Company's interim Chief
Executive Officer, and also granted the Motion to Dismiss on behalf of the
Company's former independent auditor, Sherb & Co., LLP. The class plaintiff has
subsequently filed an appeal regarding the trial court's decision to dismiss the
case against Sherb & Co., LLP, which appeal is presently pending. No appeal was
filed with respect to the decision to dismiss the case against Mr. Fletcher.
24
On July 7, 2006 the Company, Dennis Crowley and the Class Plaintiff reached a
Memorandum of Understanding ("MOU"), which confirmed that the plaintiffs, the
Company and Crowley in the class action had reached an agreement in principle
for the settlement of this litigation, subject to Court approval. According to
the terms of the MOU, the Company deposited the sum of $650,000 into a Qualified
Settlement Fund, disbursement pending approval of the Court. Subsequent to this,
Sherb & Co. also agreed to the terms of the Settlement agreeing to contribute an
additional $125,000.
On November 9, 2006, the Stipulation of Settlement was filed with the Court for
preliminary approval. Assuming that the preliminary approval is granted, the
next step will be to notice the Class of the settlement and to set the approval
process for final hearing and final approval before the Court. The matter will
not be finally settled until the Court issues a final judgment approving the
settlement.
Following the execution of the MOU, the lead plaintiffs commenced discovery
procedures to confirm the fairness and reasonableness of the Settlement. The
plaintiffs retain the right to terminate the Settlement if such discovery
reveals that the Settlement is not fair, reasonable and adequate. Subject to
these discovery procedures confirming the adequacy of the Settlement, all
parties have agreed to use their best efforts to finalize an appropriate
Stipulation of Settlement and any other relevant documentation necessary to
obtain approval by the Court of the settlement of this action.
If the Settlement outlined in the MOU is not approved by the Court or, if
subsequently terminated, the terms of the above Settlement will be without
prejudice, any settlement amounts already paid will be returned and parties will
revert to their litigation positions immediately prior to the MOU.
Should the class action settlement be approved, to facilitate the distribution
of the funds from the class suit to the class shareholders and keep
administrative costs to a minimum, the SEC Claim's Administrator applied to the
Court on January 9, 2007 for permission to combine the class action funds with
the funds derived in the SEC litigation, and allow for the SEC's Claim's
Administrator to disburse the collective funds.
On September 6, 2005, the Company was served with a Shareholder Derivative
Complaint filed on June 1, 2005 in the Circuit Court for Palm Beach County,
Florida (Case No. CA005068). The suit named, the Company as nominal defendant.
Also named as defendants were former directors Robert Dinerman, William Fletcher
and John Harrington, in addition to Dennis Crowley and the Company's prior
independent auditors, Sherb & Co. LLP.. The suit contains essentially the same
factual allegations as the SEC suit, which was filed in April 2004 in the U. S.
District Court for the Southern District of Florida, and the series of class
actions claims initiated in the U.S. District Court, but additionally alleges
state law claims of breaches of fiduciary duty, abuse of control, gross
mismanagement, waste of corporate assets, unjust enrichment and lack of
reasonable care by various or all the defendants.
Due to ongoing settlement discussions with the plaintiff's attorney, the Company
had not responded to the Complaint. In August 2006 the Company entered into a
settlement agreement with the plaintiff by agreeing to accept certain changes to
its corporate governance procedures and the payment of up to $75,000 in legal
fees. The settlement was filed with the Court in early November 2006, and if
approved by the Court, will result in a dismissal of the suit and release the
Company and the former director defendants Messrs Robert Dinerman, William
Fletcher and John Harrington. A preliminary Approval hearing is scheduled on
February 4, 2007.Dennis Crowley and Sherb & Co. continue as defendants in this
suit.
Additionally, the Company is, from time to time, subject to legal proceedings
and claims arising from the conduct of its business operations, including
litigation related to personal injury claims, customer contract matters,
employment claims and environmental matters. While it is impossible to ascertain
the ultimate legal and financial liability with respect to contingent
liabilities including lawsuits, the Company believes that the aggregate amount
of such liabilities, if any, in excess of amounts accrued or covered by
insurance, will not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to our security holders for a vote during the final
quarter of our fiscal year ended September 30, 2006.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our shares are currently trading on the "Pink Sheets" of the Over the Counter
market under the stock symbol SJCK.PK. Our shares began trading on the OTC
Bulletin Board on November 17, 2001. The following table sets forth for the
periods indicated the range of the high and low sales price.
Fiscal 2006 - Stock Price Fiscal 2005 - Stock Price
------------------------- -------------------------
High $ Low $ High $ Low $
------ ----- ------ -----
First Quarter ...... 1.25 0.90 1.35 0.68
Second Quarter ..... 1.80 0.95 1.90 1.35
Third Quarter ..... 1.62 1.10 1.83 1.15
Fourth Quarter ..... 1.35 1.07 1.53 1.05
Year ............... 1.80 0.90 1.90 0.68
The highs and lows of our share price in the first quarter of fiscal 2007 were
as follows:
High $ 1.15
Low $ 0.95
The trades reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.
HOLDERS OF COMMON STOCK
As of September 30, 2006, there were 20 record owners of our common stock.
DIVIDENDS
We have not paid or declared any dividends on our common stock and do not intend
to do so for the foreseeable future. Any earnings will be retained by the
Company and used to expand the Company's existing operations.
Future dividend policy will depend on:
* our earnings
* capital commitments
* expansion and reorganization plans
* legal or contractual limitations
* financial conditions and
* other relevant factors
EQUITY PLAN COMPENSATION INFORMATION
Number of Securities to Weighted average Number of Securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights. warrants, and rights. equity compensation plans.
----------------------- --------------------- --------------------------
Equity compensation plans
approved by security holders...... 0 0 0
Equity compensation plans not
approved by security holders...... 0 0 0
26
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below in respect of the
Consolidated Statements of Operations for the years ended September 30, 2006,
2005, and 2004 and the consolidated financial data relating to the Consolidated
Balance Sheets as at September 30, 2006 and 2005, have been derived from the
audited consolidated financial statements of Spear & Jackson, Inc. included
herein. The selected consolidated data in respect of the Consolidated Statement
of Operations for the years ended September 30, 2003, and September 30, 2002 and
the consolidated financial data pertaining to the Consolidated Balance Sheets at
September 30, 2004, 2003 and September 30, 2002 have been derived from audited
consolidated financial statements of Spear & Jackson, Inc. that are not included
herein.
AS OF AND FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
2006 2005 2004 2003 2002
------------ ---------- ----------- ----------- -----------
CONSOLIDATED STATEMENTS OF
OPERATIONS:
Net sales........................................ $ 96,993 $ 100,698 $ 99,485 $ 90,124 $ 87,886
Cost and Expenses:
Cost of goods sold........................... 67,896 67,463 67,574 61,838 61,954
Operating costs and expenses................. 36,078 31,405 29,753 21,909 27,250
----------- ---------- ----------- ----------- ----------
Operating (loss)income....................... (6,981) 1,830 2,158 6,377 (1,318)
Other income(expenses)....................... 274 204 (116) (101) (96)
----------- ---------- ----------- ----------- ----------
(Loss) income from continuing operations
before unusual or infrequent items .......... (6,707) 2,034 2,042 6,276 (1,414)
Unusual or infrequent items
(charged) credited........................... (692) 2,168 - - -
----------- ---------- ----------- ----------- ----------
(Loss) income from continuing operations
before income taxes.......................... (7,399) 4,202 2,042 6,276 (1,414)
----------- ---------- ----------- ----------- ----------
Provision for income taxes....................... 973 (468) (1,205) (1,497) (948)
----------- ---------- ----------- ----------- ----------
Net (loss) income from continuing
operations.................................... (6,426) 3,734 837 4,779 (2,362)
----------- ---------- ----------- ----------- ----------
Loss from discontinued operations................ (101) (163) (214) (66) (1,150)
Provision for losses on disposal of
discontinued operations....................... 48 (476) (187) (97) -
----------- ---------- ----------- ----------- ----------
Net loss from discontinued operations............ (53) (639) (401) (163) (1,150)
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
Net (loss) income................................ ($ 6,479) $ 3,095 $ 436 $ 4,616 ($ 3,512)
=========== ========== =========== =========== ==========
Basic and diluted net (loss) income per share:
From continuing operations....................... ($ 1.12) $ 0.42 $ 0.07 $ 0.40 ($ 0.58)
From discontinued operations..................... ($ 0.01) ($ 0.07) ($ 0.03) ($ 0.01) ($ 0.28)
----------- ---------- ----------- ----------- ----------
($ 1.14) $ 0.35 $ 0.04 $ 0.39 ($ 0.86)
=========== ========== =========== =========== ==========
Weighted average shares outstanding.............. 5,735,561 8,845,290 11,741,122 11,988,930 4,100,071
=========== ========== =========== =========== ==========
CONSOLIDATED BALANCE SHEETS:
Working capital (note 3)......................... $ 30,251 $ 29,868 $ 28,821 $ 28,273 $ 21,789
Other assets (note 3)............................ $ 32,854 $ 33,038 $ 35,335 $ 30,628 $ 28,934
Other liabilities................................ $ 41,264 $ 36,703 $ 34,717 $ 27,049 $ 21,419
27
1. On September 6, 2002 Spear & Jackson, Inc. acquired Megapro Tools,
Inc. and its subsidiaries ("Megapro") via a reverse takeover. The results
and net assets of Megapro are included in the Consolidated Statements of
Operations and the Consolidated Balance Sheet from that date until the date
of Megapro's disposition on September 30, 2003. The results of Megapro are
presented in the Consolidated Statements of Operations as discontinued
operations.
2. The Statements of Operations for the years ended September 30,
2006, September 30, 2005, September 30, 2004, and September 30, 2003
include within discontinued operations the results of the Company's thread
gauge measuring business which the Company began marketing for sale in the
fourth quarter of fiscal 2005. To preserve conformity with previously
issued and audited consolidated financial statements the Statements of
Operations for the years ended September 30, 2003 and September 30, 2002
include the results of this business segment in continuing operations. Net
sales of the thread gauge measuring business for these two years were $1.6
million and $1.8 million, respectively, and the net losses were $0.1
million and $0.2 million respectively.
3. Working capital comprises current assets, excluding any deferred
income tax assets, less current liabilities. Other assets comprise
property, plant and machinery, deferred income tax assets, and investments.
For consistency of presentation, the current portion of deferred income tax
assets is shown within "Other assets".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
This report (including the information in this discussion) contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements involve risks and uncertainties,
including statements regarding the Company's capital needs, business strategy
and expectations, and are being made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Any statements contained
herein that are not statements of historical facts may be deemed to be
forward-looking statements. Terminology such as "may", "will", "should",
"believes", "estimates", "plans", "expects", "attempts", "intends",
"anticipates", "could", "potential" or "continue", the negative of such terms,
or other comparable terminology, are intended to identify forward-looking
statements.
In evaluating any forward-looking statements, you should consider various risk
factors, including those summarized above under ITEM 1A and those described in
other sections of this report, in the other reports the Company files with the
SEC and in the Company's press releases. Such factors may cause the Company's
actual results to differ materially from any forward-looking statement. The
Company disclaims any obligation to publicly update the statements, or disclose
any difference between its actual results and those reflected in the statements.
With respect to all such forward-looking statements, the Company seeks the
protection afforded by the Private Securities Litigation Reform Act of 1995.
SUMMARY OVERVIEW
Sales of $97.0 million for the year ended September 30, 2006, show a decrease of
$3.7 million when compared to those for the equivalent period last year, while
the operating result has fallen from a profit of $1.8 million in 2005 to a loss
of $7.0 million in 2006. In the year ended September 30, 2006 the loss before
taxes has been further increased by $0.7 million of costs relating to unusual or
infrequent items (2005: net exceptional gains of $2.2 million). The infrequent
items comprise:
* a $3.5 million gain arising on the sale of the residual element of the
Company's Wednesbury facility;
* charges of $3.5 million in respect of a UK manufacturing reorganization
program which was initiated in the year;
* $0.7 million of expenses in relation to the settlement of class and
derivative litigation.
28
The comparable 2005 figure of $2.2 million included a profit on disposal of land
and buildings of $3.3 million offset by manufacturing and other restructuring
costs of $1.1 million. After crediting taxation of $1.0 million (2005: charging
taxation of $0.5 million) and debiting losses from discontinued operations of
$0.1 million (2005: $0.6 million) the net loss for the year was $6.5 million
(2005: net income of $3.1 million)
These summary financials are presented in tabular form in the "Results of
Operations" section, below.
DISCUSSION OF OPERATING RESULTS
Sales for the year from continued activities have decreased by $3.7 million
(3.7%). This was primarily due to adverse currency exchange fluctuations in the
year of $3.1 million increased sales rebates of $0.5 million and marginal sales
volume decreases of $0.1 million. Sales volume improvements were recorded in our
Metrology, Magnetics and French divisions, but these were offset by volume
decreases in our other businesses attributable to soft domestic retail demand in
the UK, challenging business conditions in many of our end markets, increasing
pressure from cheap, Far Eastern imports and the weak US dollar.
Gross profit was 30% for the year ended September 30, 2006 compared to 33% in
the previous year. Direct costs are still being adversely affected by cost price
increases in our principal raw materials of steel, plastic, cobalt and nickel,
and increases in basic utility costs. In our Neill Tools division margins have
been further diluted by a mix switch towards factored garden power tools at the
expense of better margins on industrial hand tool product lines. Additionally,
the Company's margins have been further eroded by one-time inventory provisions
of $1.1 million in our UK Garden Tools and Magnetics divisions following the
completion of reorganization programs in those operations.
Selling, general and administrative expenses have increased by $4.7 million
(14.9%) in the year. Reasons for the increase include: increased FAS 87 pension
costs of $4.37 million, general inflationary increases and one-time costs in
setting up our new Chinese facility. These adverse effects have, however, been
mitigated by the impact of movements in the US$/Sterling cross rates in the year
and decreased head office costs.
As a result of the decrease in sales volume, lower gross margins and higher
overhead costs, the Company's operating income has decreased by $8.8 million
(482%) from an income of $1.8 million in 2005 to a loss of $7.0 million in 2006.
The Company has benefited in the year from the $3.5 million gain arising on the
sale of the residual element of its UK manufacturing facility at Wednesbury. The
overall impact on pre-tax profits of this sale has been reduced by the provision
of $3.5 million manufacturing reorganization costs. On January 25 2006, the
Company announced the closure of the remaining element of its manufacturing site
at Wednesbury. All warehouse and distribution operations were transferred to the
Company's principal UK manufacturing site, Atlas, in Sheffield. Additionally, in
the final quarter of the year, the Company performed a review of its remaining
UK manufacturing operations. Further strategies are to be implemented at the
Atlas site and in the Eclipse Magnetics division to reduce the Company's ongoing
cost base and accrual has been made for severance costs, restructuring charges
and fixed asset impairment charges relating to those initiatives.
The Company intends to continue to launch new products and to explore
initiatives to reduce its operational base costs, through improved raw materials
and product sourcing and by more efficient processes, in order to minimize
margin erosion and to retain its competitive edge over cheap foreign imports. As
noted above, the Company's management has already implemented a number of
initiatives to improve profitability and to restructure its UK manufacturing
base. These strategies will continue and further opportunities will be explored.
Such restructuring costs and other initiatives, together with planned investment
in new capital equipment in the UK, are anticipated to achieve improved
efficiencies and reduce labor costs with corresponding improvements in the
ongoing profitability of the Company in the forthcoming year.
OTHER MATTERS
On March 23, 2006, Jacuzzi Brands, Inc. ("Jacuzzi") and its subsidiary
undertaking, USI American Holdings, Inc. ("USI" and together with Jacuzzi, the
"Seller") entered into a Stock Purchase Agreement (the "Stock Purchase
Agreement") with United Pacific Industries Limited ("UPI"), a Bermuda
Corporation, to sell its entire holding of 3,543,281 shares of the common stock
(the "Shares") of Spear & Jackson, Inc. ("SJI") to UPI for $1.40 per share for
an aggregate purchase price of $4,960,593. Such shares constitute all of the
shares of SJI owned by the Seller.
29
The representations, warranties and covenants made by Jacuzzi and UPI were
typical for this type of transaction, and included a covenant that restricted
Jacuzzi from soliciting or negotiating with a third party between the signing
date of the Stock Purchase Agreement and the closing date of the transaction.
Jacuzzi also agreed that in connection with the closing of the transaction, it
would, among other things, cause UPI's designees and one designee of Jacuzzi to
be elected to the Board of Directors of Spear & Jackson, Inc. and would use
commercially reasonable best efforts so that such UPI designees are in
sufficient numbers to give UPI a majority of the Board of Directors of the Spear
& Jackson, Inc. UPI also agreed that neither it nor any of its affiliates would
purchase any additional Common Stock during the period from the signing date of
the Stock Purchase Agreement through one year following the closing at a price
less than $1.40 per share.
The purchase of the Shares by UPI contemplated by the Stock Purchase Agreement
was subject to the receipt of a number of closing conditions, including approval
by UPI's shareholders and the United Kingdom Pensions Regulator, and the receipt
of certain other regulatory approvals as well as other customary closing
conditions.
The Seller and UPI then announced that they had entered into Amendment No. 1
dated May 4, 2006, ("Amendment No. 1 to the Stock Purchase Agreement") to extend
the date by which the Seller and UPI were required to lodge the clearance
application with the UK Pensions Regulator. The Seller and UPI subsequently
received a comfort letter dated July 5, 2006, issued by the UK Pensions
Regulator (the "Comfort Letter"). The Seller and UPI agreed to waive the
condition contained in the Stock Purchase Agreement for a clearance from the UK
Pensions Regulator and to accept the Comfort Letter in satisfaction of that
condition.
The trustees of Spear & Jackson, Inc.'s UK Pension Plan confirmed by a letter
dated July 6, 2006 their acceptance of the UK Pensions Regulator's
determination. The Seller and UPI subsequently announced that they had entered
into Amendment No. 2 dated July 10, 2006, ("Amendment No. 2 to the Stock
Purchase Agreement") to waive their respective requirements for a clearance from
the UK Pensions Regulator and to accept in its place the Comfort Letter which
stated that the UK Pensions Regulator was of the view, based on the information
supplied to him in connection with the clearance application, that the change of
control as a result of the sale by the Seller of all of its shares of Spear &
Jackson, Inc. to UPI was not detrimental to the UK pension plan and that the UK
Pensions Regulator believed that a clearance was not necessary for the
transaction.
In addition, pursuant to the terms of Amendment No. 2 to the Stock Purchase
Agreement, UPI agreed, subject to the Closing having occurred, to indemnify the
Seller and JBI Holdings Limited (the "Jacuzzi Indemnified Parties") should the
UK Pensions Regulator, regardless of the Comfort Letter, require any of the
Jacuzzi Indemnified Parties to make a contribution or provide financial support
in relation to the potential pension plan liabilities of SJI or its
subsidiaries. In addition, UPI also agreed that for a period of twelve months
from the Closing Date, that it will not, (and will use its best efforts to
ensure that neither Spear & Jackson, Inc. nor any of its subsidiaries will) take
any action or omit to take any action that causes the UK Pensions Regulator, as
a result of such action or omission, to issue a contribution notice against the
Jacuzzi Indemnified Parties in relation to any UK pension plan in which Spear &
Jackson, Inc. or any subsidiary of Spear & Jackson, Inc. is an employer.
Further, UPI agreed that for a period of twelve months from the Closing Date,
that it will not (and will use its best efforts to ensure that neither Spear &
Jackson, Inc. nor any subsidiary of Spear & Jackson, Inc. will) engage in any
action or inaction which in relation to any such UK pension plan would fall
within the UK Pension Regulation clearance guidance note dated April 2005 as a
'Type A' event unless UPI procures that clearance is issued by the UK Pensions
Regulator in relation to such event in terms which confirm that no Jacuzzi
Indemnified Party shall be linked to a financial support direction or
contribution notice in respect of such event.
30
On July 28, 2006 the purchase was formally completed.
On June 22, 2006, Jacuzzi and UPI filed a preliminary Form 14C with the SEC
announcing notice of change in control and of a majority of directors pursuant
to section 14(f) of the Securities Exchange Act of 1934 and Rule 14f-1
thereunder. The 14C indicated that three new directors would be designated by
and elected to the Board of directors by UPI, to serve until the Company's next
annual meeting. The 14C became effective on August 7, 2006, and the three new
directors would replace the incumbent directors on about August 27, 2006. In the
interim, the Board by resolution, appointed the three new directors Lewis Hon
Ching Ho, Andy Yan Wai Poon and Maria Yuen Man Lam to the Board effective August
9, 2006.
Brian C. Beazer, the Chairman of UPI, is a director of Jacuzzi and holds
approximately 24.56% of the shares of UPI. David H. Clarke is a director of UPI
and holds approximately 22.88% of the shares of UPI. Until his retirement from
all positions with Jacuzzi in September 2006, Mr. Clarke was the Chairman and
Chief Executive Officer of that company. Mr. Clarke also holds approximately
28,350 shares of common stock of Spear & Jackson, Inc., representing
approximately 0.49% of the shares of Spear & Jackson, Inc. but the shares of
Spear & Jackson, Inc. owned by Mr. Clarke are not being purchased at the time of
the sale of the Shares by the Seller to UPI.
As previously reported, a number of class action lawsuits were initiated in the
US District Court for the Southern District of Florida by Company shareholders
against the Company, Sherb & Co LLP, the Company's former independent auditor,
and certain of the Company's directors and officers.
These various class action suits were subsequently consolidated. Thereafter, the
defendants filed certain Motions to Dismiss with regard to the Complaint and on
October 19, 2005, the U.S. District Court for the Southern District of Florida
in Re Spear & Jackson Securities Litigation entered its Order regarding these
Motions. The Order denied the Company's motion as well as that of Mr. Crowley,
the former Chief Executive Officer of Spear & Jackson. The Court granted the
Motion to Dismiss on behalf of Mr. Fletcher, the Company's interim Chief
Executive Officer, and also granted the Motion to Dismiss on behalf of the
Company's former independent auditor, Sherb & Co., LLP. The class plaintiff has
since filed an appeal regarding the trial court's decision to dismiss the case
against Sherb & Co., LLP, which appeal is presently pending. No appeal was filed
with respect to the decision to dismiss the case against Mr. Fletcher.
On July 7, 2006 the Company, Dennis Crowley and the Class Plaintiff reached a
Memorandum of Understanding ("MOU"), which confirmed that the plaintiffs, the
Company and Dennis Crowley had reached an agreement in principle for the
settlement of this litigation, subject to Court approval. According to the terms
of the MOU, the Company deposited $650,000 into a Qualified Settlement Fund,
disbursement pending approval of the Court. Subsequent to this Sherb & Co. also
agreed to the terms of the Settlement agreeing to contribute an additional
$125,000.
On November 9, 2006, the Stipulation of Settlement was filed with the Court for
preliminary approval. Assuming that the preliminary approval is granted, the
next step will be to notice the Class of the settlement and to set the approval
process for final hearing and final approval before the Court. The matter will
not be finally settled until the Court issues a final judgment approving the
settlement.
Following the execution of the MOU, the lead plaintiffs commenced discovery
procedures to confirm the fairness and reasonableness of the Settlement. The
plaintiffs retain the right to terminate the Settlement if such discovery
reveals that the Settlement is not fair, reasonable and adequate. Subject to
these discovery procedures confirming the adequacy of the Settlement, all
parties have agreed to use their best efforts to finalize an appropriate
Stipulation of Settlement and any other relevant documentation necessary to
obtain approval by the Court of the settlement of this action.
If the Settlement outlined in the MOU is not approved by the Court or, if
subsequently terminated, the terms of the above Settlement will be without
prejudice, any settlement amounts already paid will be returned and parties will
revert to their litigation positions immediately prior to the MOU.
31
Should the class action settlement be approved, to facilitate the distribution
of the funds from the class suit to the class shareholders and keep
administrative costs to a minimum, the SEC Claim's Administrator applied to the
Court on January 9, 2007 for permission to combine the class action funds with
the funds derived in the SEC litigation, and allow for the SEC's Claim's
Administrator to disburse the collective funds.
On September 6, 2005, the Company was served with a Shareholder Derivative
Complaint filed on June 1, 2005 in the Circuit Court for Palm Beach County,
Florida (Case No. CA005068). The suit names the Company as nominal
defendant. Also named as defendants were former directors, Robert Dinerman,
William Fletcher and John Harrington, in addition to Dennis Crowley and the
Company's prior independent auditors, Sherb & Co. LLP. The suit contains
essentially the same factual allegations as an SEC suit, which was filed in
April 2004 in the U.S. District Court for the Southern District of Florida, and
the series of class actions claims initiated in the U.S. District Court, but
additionally alleges state law claims of breaches of fiduciary duty, abuse of
control, gross mismanagement, waste of corporate assets, unjust enrichment and
lack of reasonable care by various or all the defendants.
Due to ongoing settlement discussions with the plaintiff's attorney, the Company
had not responded to the Complaint. In August 2006 the Company entered into a
settlement agreement with the plaintiff by agreeing to accept certain changes to
its corporate governance procedures and the payment of up to $75,000 in legal
fees. The settlement was filed with the Court in early November 2006 and, if
approved by the Court, will result in a dismissal of the suit and release the
Company and the former director defendants Messrs Robert Dinerman, William
Fletcher and John Harrington. A Preliminary Approval hearing is scheduled on
February 4, 2007. Dennis Crowley and Sherb & Co. continue as defendants in this
suit.
RESULTS OF OPERATIONS
GENERAL
The results discussed below compare the years and quarters ended September 30,
2006, 2005 and 2004. As explained in note 3 to the financial statements, the
acquisition of Spear & Jackson plc and Bowers Group plc (together "S&J") by
Megapro Tools, Inc. (now Spear & Jackson, Inc.) on September 6, 2002 has been
accounted for as a reverse acquisition. In these financial statements, S&J is
the operating entity for financial reporting purposes and the financial
statements for all periods represent S&J's financial position and results of
operations.
Following their sales in September 2003 and February 2006, respectively, the
operating results of the Company's Megapro screwdriver division and those of its
Coventry Gauge thread gauge measuring division are disclosed under "Discontinued
Operations".
SUMMARY
A summary of the results of operations is as follows:
Sales from continuing activities decreased by $3.7 million (3.7%) from $100.7
million in the year ended September 30, 2005 to $97.0 million for the year ended
September 30, 2006. Sales of $21.8 million for the quarter ended September 30,
2006 were $0.5 million (1.97%) lower than sales of $22.3 million recorded for
the comparable period last year.
The net decreases in sales for the year and the quarter ended September 30, 2006
over the comparable periods in the prior year are analyzed as follows:
Year Quarter
ended ended
September 30, September 30,
2006 2006
Note $m $m
Effect of exchange rate movements... (a) (3.1) 0.7
Sales volumes decreases............. (b) (0.1) (0.9)
Increased rebates................... (c) (0.5) (0.3)
---- ----
(3.7) (0.5)
==== ====
Analyzed by principal business segment, the net revenue increases and decreases
over prior periods can be summarized as follows:-
Year Quarter
ended ended
September 30, September 30,
2006 2006
Note $m $m
a) Hand and garden tools
Effect of exchange rate
movements..................... (a) (2.3) 0.5
Sales volume decreases......... (b) (2.0) (1.4)
Rebates........................ (c) (0.4) (0.2)
---- ----
(4.7) (1.1)
---- ----
b) Metrology tools
Effect of exchange rate
movements..................... (a) (0.5) 0.1
Sales volume increases......... (b) 1.4 0.4
Rebates........................ (c) (0.1) (0.1)
---- ----
0.8 0.4
---- ----
c) Magnetic products
Effect of exchange rate
movements..................... (a) (0.3) 0.1
Sales volume increases......... (b) 0.5 0.1
---- ----
0.2 0.2
---- ----
Total (3.7) (0.5)
==== ====
Notes:
(a) The functional currencies of the group's revenues are UK sterling, the
Euro, the Australian and New Zealand dollar and the Chinese Yuan. The
principal functional currency is sterling and the variation in the average
US$/L cross rate in the year to September 30, 2006 compared to the
comparable period last year has had a significant adverse impact on the US
dollar value of the group's sales. In contrast, the movement in the average
cross rate for the quarter to September 30, 2006 has had a material
favorable effect on the US dollar value of the group's sales when compared
to last year. The average US$/L cross rates in the periods under review can
be summarized as:
33
Average Cross Rates
-------------------
2006 2005 % Movement
Year ended September 30........ 1.7956 1.8511 (2.99%)
Quarter ended September 30..... 1.874 1.785 4.99%
(b) The trading environment in our principal markets was again challenging as a
result of flat consumer demand, continuing competition from rival suppliers
across a number of product ranges and the increasing practice of major
retail customers promoting own label offerings sourced from the Far East at
the expense of S & J Company product.
Within the UK, Neill Tools and Robert Sorby have witnessed increasingly
difficult trading conditions in the fourth quarter and for the year as a
whole. Likewise, trading conditions have been equally competitive in our
French and Australasian New Zealand divisions. The French market is
becoming increasingly problematic because of the steady increase in Far
Eastern imports. In New Zealand, sales have been negatively impacted by the
loss of a major retail customer but such losses were mitigated by increased
sales of air, masonry and hand tools in its sister Australian division.
Despite the less than favorable market conditions in the Metrology and
Magnetics products divisions, sales volumes increased over the prior year
by $0.95 million. This increase arose from incremental sales growth in the
Metrology division's facilities in Maastricht (first full year of trading)
and Shanghai (business start up in the year) and increases in home and
export sales in Eclipse Magnetics with both the filtration and separation
ranges featuring prominently.
(c) Sales rebates charged in the year ended September 30, 2006 amounted to $4.8
million and $1.2 million of rebates were expensed in the quarter ending on
that date. The level of rebates in the year ended September 30, 2006 has
increased by 9.6% over the comparable period last year. This is due to
increased trading volumes in Australia and the offering of increased
rebates in the Neill Tools division and in France as an additional customer
incentive in highly competitive sales markets.
2005 COMPARED TO 2004
Sales from continued activities increased by $1.2 million (1.2%) from $99.5
million in the year ended September 30, 2004 to $100.7 million for the year
ended September 30, 2005. Sales of $22.3 million for the quarter ended September
30, 2005 were $1.7 million (6.9%) lower than sales of $24.0 million recorded for
the comparable period last year.
The net increase in sales for the year and the decrease in the quarter ended
September 30, 2005 over the comparable periods in the prior year are analyzed as
follows:
Year Quarter
ended ended
September 30, September 30,
2005 2005
Note $m $m
Effect of exchange rate movements... (a) 4.0 0.3
Sales volumes decreases............. (b) (2.3) (1.6)
Increased rebates................... (c) (0.5) (0.4)
---- ----
1.2 (1.7)
==== ====
34
Analyzed by principal business segment, the net revenue increases and decreases
over prior periods can be summarized as follows:-
Year Quarter
ended ended
September 30, September 30,
2005 2005
Note $m $m
a) Hand and garden tools
Effect of exchange rate
movements..................... (a) 3.1 0.3
Sales volume decreases......... (b) (4.7) (2.0)
Rebates........................ (c) (0.5) (0.4)
---- ----
(2.1) (2.1)
---- ----
b) Metrology tools
Effect of exchange rate
movements..................... (a) 0.5 -
Sales volume increases......... (b) 1.4 0.4
---- ----
1.9 0.4
---- ----
c) Magnetic products
Effect of exchange rate
movements..................... (a) 0.4 -
Sales volume increases......... (b) 1.0 -
---- ----
1.4 0.0
---- ----
Total.......................... 1.2 (1.7)
==== ====
Notes:
(a) In both 2004 and 2005, the functional currencies of the group's revenues
were sterling, the Euro and the Australian and New Zealand dollar. The
principal functional currency was sterling and the variation in the US$/L
cross rate in the year, and to a lesser extent, the quarter ended September
30, 2005 compared to the comparable periods last year had a significant
favorable impact on the US dollar value of the group's sales. The average
US$/L cross rates in the periods under review can be summarized as:
Average Cross Rates
-------------------
2005 2004 % Movement
Year ended September 30...... 1.8511 1.787 +3.6%
Quarter ended September 30... 1.785 1.788 (0.2%)
Although in the quarter ended 30 September, 2005 the US$/L cross rate
decreased when compared to the previous year, the Company still benefited
from favorable exchange gains. This was due to the fact that there was a
significant movement in the $/Aus $ cross rate in the last quarter of 2005
when compared to the same quarter of the prior year which had a significant
effect on the translation of the Australian division's sales from
Australian dollars to $. The $0.4 million favorable variance on the $/Aus $
cross rate more than compensated for the adverse US$/L exchange variances
in the UK based operating divisions.
(b) Business conditions in many of our end markets remained challenging as a
result of continued competition from rival suppliers in a number of our
product ranges, increasing pressure from cheaper Far Eastern imports, the
weak US dollar and poor retailing conditions in the UK and Australasia.
35
Within the UK, Neill Tools witnessed increasingly difficult trading
conditions in the fourth quarter of the fiscal year where sales were 11.1%
lower than the comparable period last year. Buoyant hand tools demand from
the Middle East in previous quarters eased and UK sales of garden tools
were adversely affected by depressed order intake from major retail
outlets. Likewise, Australia and New Zealand continued to show volume
decreases ($3.0 million for the year and $0.8 million in the last quarter)
which were primarily attributable to increased levels of competition from
foreign imports and a slow down in consumer spending.
While similar market pressures were experienced over the year in the
Metrology and Magnetics products divisions, volume increases over the prior
year of $2.3 million cumulatively and $0.4 respectively were still
achieved. This was attributable to growth in the Metrology distribution
facility in Maastricht and increases in export sales in Eclipse Magnetics
following the establishment of new distribution channels.
(c) Sales rebates charged in the year ended September 30, 2005 amounted to $4.4
million and $0.9 million of rebates were expensed in the quarter ending on
that date. The level of rebates in the year ended September 30, 2005
increased by 13.6% over the comparable period last year. This was due to:
increased trading volumes in France; the offering of increased rebates in
the UK in the Company's Neill Tools division as an additional customer
incentive in a highly competitive sales market; and adverse movements in
the L/US$ cross rate.
SEGMENTAL REVIEW OF SALES
We aim to maintain and develop the sales levels of our businesses through the
launch of new products, the improvement of existing ranges and the continued
marketing of our portfolio of brands in order to retain and gain market share.
Sales and revenue details on a segment basis are as follows:
NEILL TOOLS
2006 COMPARED TO 2005
Sales for the year to September 30, 2006 of $41.2 million showed a reduction of
$2.7 million (6.2%) over last year's total of $43.9 million. The decrease was
attributable to adverse volumes of $1.3 million, unfavorable exchange rates of
$1.3 million and increased rebates of $0.1 million.
Neill Tools continued to experience particularly tough trading conditions in the
year in both its export and home markets. Last year's export demand, bolstered
by the huge construction programs that were put in place following the conflicts
in the Middle East, has now declined. Additionally, our sales into the Middle
East have been affected by parallel imports into the UAE from Kuwait and
Indonesia. This issue further highlighted the fact that within the industrial
tools business, export markets continue to be driven by demand for our hacksaw
blades. Sales of these products now represent 60% of our industrial tools'
revenues and strategies are being prepared to spread this sales concentration
risk through the development of higher margin product ranges, brand presence and
new product development.
At home, the UK retail market continued a downward trend, especially in the
multiple retail sector, which, once again, is experiencing a downturn in
consumer spending. This increasingly soft retail demand together with industrial
and retail sales erosion through increased private label penetration had a
direct impact on our Hand & Garden sales in the UK and remains a cause for
concern. Overall, annual sales losses were mitigated, however, by the securing
of a $1.8 million agreement with a major retail chain for the Spear & Jackson
power garden tools during the first half of the year.
Gross margins continued to be depressed. The main drivers behind this reduction
were a mix switch toward Garden Power products at the expense of higher margin
product lines, increases of more than 50% in gas and electricity supply costs,
and, following the implementation of various manufacturing reorganization
initiatives, one-time stock provisions against obsolete, slow moving and
discontinued inventories.
36
Improvements in manufacturing costs continue to be the focus of management to
improve competitiveness in new and existing markets. As previously reported, on
January 25, 2006, the company announced the closure of the remaining element of
its manufacturing site at Wednesbury, England. The site closure forms a key part
of the Company's UK manufacturing strategy to regenerate and modernize key areas
of the hand and garden tools businesses. All warehouse and distribution
operations previously performed at this location have now been transferred to
the Atlas site in Sheffield. The manufacturing and assembly functions formally
carried out at the Wednesbury site have been outsourced to suppliers based
outside the UK. The transfer of operations from Wednesbury to Sheffield was
completed by November 30, 2006 and, when fully integrated, will help to ensure
that the UK hand and garden business will deliver improved customer service and
satisfaction.
As a further element of its UK reorganization program, in the third quarter of
fiscal 2006 the company announced that certain manufacturing operations carried
out at its Atlas site would also cease.
Going forward, the main challenges for the business centre in the continuing
reduction of the manufacturing cost base and driving innovation and new product
development in line with our core brands and competences. In addition, the
Company is recruiting key people with the experience and skills to deliver new
product development strategy and focused product and brand management.
2005 COMPARED TO 2004
Sales for the year to September 30, 2005 of $43.9 million showed a reduction of
$0.5 million (1%) over the 2004 figure of $44.4 million. The decrease was
attributable to adverse volumes of $1.7 million and increased rebates of $0.3
million offset by favorable exchange movements of $1.5 million.
Despite a promising start in the first half of the year Neill Tools witnessed
particularly difficult trading conditions in the third and fourth quarters of
the year. The UK retail market continued a downward trend, especially in the
multiple retail sector, and market indicators recorded UK retail sales at their
lowest for over 20 years. Additionally, export sales, which in the first half of
the year had exceeded expectations, saw an easing in demand. Our strong export
sales performance at the beginning of the year was bolstered by the demand
generated by the huge construction programs that were put in place following the
conflicts in the Middle East, but this demand slowed in the latter part of the
year. In addition, Neill Tools experienced a weakening of its order book with
Middle Eastern countries during quarters three and four. The continued worldwide
terrorist activity affected the appetite for business travel and as a
consequence sales orders declined.
UK trading conditions, especially in the garden tools market, deteriorated due
to increasingly soft demand in the multiple retail sector. Despite the resultant
sales shortfalls in our gardening business, the "Predator" woodsaw range, which
was so successful in fiscal 2004, continued to sell strongly. Capital investment
of approximately $0.9 million in new woodsaw and hacksaw blade plant was
approved and implemented, ensuring that the record levels of productivity
experienced in the year could be sustained.
The threat to the business from low-cost, Far Eastern economies continued
unchanged. These competitive pressures were exacerbated by the weakness of the
US dollar, price increases imposed by our steel, plastics and utility suppliers,
and the difficulty within a competitive market place of passing on these
increases to customers. Despite this, margins were maintained when compared to
the previous year, as divisional profitability benefited from favorable sales
mixes, the sale of obsolete inventories at amounts above NRV and the successful
implementation of a number of strategic initiatives to reduce the cost of
manufacturing and distribution.
During the year the division announced a reorganization in connection with the
closure of part of one of its manufacturing facilities, and carried out a review
of its UK manufacturing operations, for which costs of $1.5 million were
provided. These initiatives were implemented to reduce the division's reliance
on own-manufactured items and to enable the division to progress the sourcing of
componentry for UK assembly to further reduce costs and improve profitability.
Given the depressed trading conditions, focus was directed towards tight
overhead cost control and reorganizations of certain sales and administrative
functions were undertaken to reduce these costs.
37
ECLIPSE MAGNETICS
2006 COMPARED TO 2005
Revenues for the year increased by $0.2 million (1.9%) from $10.7 million in
2005 to $10.9 million in 2006. This increase was explained by improved trading
volumes of $0.5 million offset by unfavorable exchange differences of $0.3
million.
Overall there has been sales volume growth in both our home and export markets.
The UK market reported a 5% improvement over last year, mainly attributable to
increased sales in the division's separation and core product ranges. Export
sales were also better than last year with lifting, separation and filtration
product ranges showing further improvements in performance. Sales into the US
continued to prosper as we continued to increase our US market share through the
introduction of new products and close key account management.
The Engineered Magnetic Solutions business saw further growth with new products
and technologies being offered for bespoke industry solutions.
Competition from the Far East remains the main threat, whether directly or
through agents, as we continue to see the emergence of more and more companies
in our trading markets offering high quality goods at low market price points.
Gross margins were lower than last year due to an adverse sales mix in the
Industrial sector, higher utility and key primary material costs and one-time
inventory provisions.
Reductions in direct costs and improvements in manufacturing efficiencies
continued therefore, to be the focus of management to improve competitiveness in
new and existing markets.
On August 11, 2006, the company announced both the cessation of certain
manufacturing activities at its site in Sheffield, England and the relocation of
its remaining business to the Atlas site, Sheffield. This site consolidation
forms another part of the Group's strategy to regenerate and modernize
operations and to reduce costs.
Looking forward, the main challenge continues to be the distancing of rival Far
East manufacturers from our key customer base. Our commodity-based business is
under continued threat. To counter this, we continue to promote the
attractiveness of our product by offering added value to our customers through,
for example, additional assembly work. At the same time, however, we are taking
positive steps to improve our manufacturing process and product sourcing. As
part of this strategy, the division enhanced its presence in China in January
2006 when it paid $0.2 million for a 25% equity participation in a recently
formed Chinese Joint Venture.
In addition to the cost control issues, management also continues to follow a
strategy of new product development as a key drive in increasing market share
within key product segments.
2005 COMPARED TO 2004
Revenues for the year increased by $1.4 million (14.8%) from $9.3 million in
2004 to $10.7 million in 2005. This increase was due, in the main, to improved
trading volumes of $1.0 million and favorable exchange differences of $0.4
million.
Sales of both the distribution range of products and the engineered products
line showed a marked improvement when compared to last year helped by new
distribution channels in Europe, and new initiatives in South America.
The higher technology area of the division, "Applied Magnetic Systems" continued
to design and develop new products, mainly driven by the material handling and
separation business. New products were designed, developed and installed within
the food and automation industries, covering liquid processing, conveying and
materials handling industry. In particular, the division was successful in
developing a new range of patented filtration products, 'Micromag', which is
designed to protect expensive pumps and valves.
In the industrial sector, reduced demand was experienced from key sales accounts
as certain customers migrated to Far Eastern manufacturers.
38
The standard low technology area of the business continued to be eroded by good
quality imports at low price points from our competitors in China and the Far
East. This directly impacted on our distribution and industrial markets where
customers switched supply sources to the Far East or redesigned systems and
applications to accommodate newer magnetic materials.
Despite sales price erosion, increases in steel prices and the cost of
utilities, 2005 gross margins were not eroded thanks to the stabilization of raw
material prices for nickel and cobalt (two major alloys used in magnet
manufacturing), an improved mix of products sold within the engineering products
division and improvements in manufacturing costs.
ROBERT SORBY
2006 COMPARED TO 2005
Robert Sorby sales for the year of $4.5 million showed a $0.5 million (9.6%)
decrease from last year's total of $5.0 million. This was attributable to
adverse sales volumes of $0.4 million and adverse exchange movements of $0.1
million.
The year to September 2006 has proved to be one of the most challenging faced by
Robert Sorby for many years. The UK home retail market sales fell by 9% compared
to last year, reflecting the challenging trading conditions and reduced consumer
demand. Two of the division's premier product groups, lathes and lathe chucks,
have felt the combined adverse effect of increased competition and a very
subdued market place.
Export markets, too, suffered softening demand, with a 10% decrease in sales to
North America, our principal export region. Here markets have been affected by
escalating living costs impacting adversely on our typical retiree customer who
lives on a fixed income. Additionally, excess stocks held by one major US
customer have had an adverse effect on the year's sales revenues.
We have continued to switch our focus from dealer selling to direct consumer
marketing, especially in-store demonstrations, woodworkers' club events and
regional exhibitions. One innovation has been the introduction of a series of
master classes in the UK and this concept is to be extended to the US in the
first quarter of the next financial year.
In the light of the sales shortfalls, emphasis has been placed on the control of
manufacturing costs, product development expenses and marketing expenditure.
Towards the end of 2005 we had suffered as a result of the dramatically
escalating price of steel, which is our prime raw material. Those prices have
now dropped significantly from their peak which has eased some of the pressure
on margins. In addition, the move from distribution through numerous UK trade
accounts to sales through our own retail arm, Turners Retreat, served to improve
gross margins as well as giving us more control of our product in the market
place.
Looking forward the business climate remains uncertain. In the UK uncertainty
over pension issues continues to have a negative impact on our typical customer.
In the USA, which, is our single biggest market, the outlook remains unclear
with pressure on personal expenditure. Against this unpromising background our
mail order business continues to flourish and the launch of a new sharpening
system in October has exceeded expectations.
2005 COMPARED TO 2004
Robert Sorby sales for the year showed no movement from last year ($5.0 million
in both years), although favorable exchange movements of $0.2 million were
offset by a volume decrease of $0.2 million.
Robert Sorby suffered from a very challenging market place, especially in the
second half of the year. UK home retail market sales fell by 7% compared to the
prior year, reflecting the challenging trading conditions and reduced consumer
demand. To resist sales dilution, the division's UK marketing effort has
centered on the attendance at national, regional and dealer shows, supported by
specialist magazine advertising. Additionally, Robert Sorby's mail order
operation has now become firmly established and continuing focus is to be placed
here in the future. As a result of strong demand in this sector an e-commerce
web site is currently under construction.
39
Overseas were also disappointing, especially in the US. We have continued to
maintain a strong overseas promotional activity, which is essential in retaining
market share and resisting the efforts of competitors to consolidate their own
market positions.
BOWERS
2006 COMPARED TO 2005
Sales for the year showed an increase of $0.8 million (5.3%) from $15.6 million
in 2005 to $16.4 million in 2006. $1.4 million of this increase is attributable
to increased sales volume offset by $0.5 million of adverse exchange rate
variances and $0.1 million of increased sales rebates.
The increase is mainly attributable to the continued expansion of the new sales
and distribution facility set up in Maastricht, Holland, that was established in
fiscal 2005 and, to a lesser extent, sales from our new Shanghai based facility
which commenced trading in the second quarter of the current year.
Growth in the UK based divisions has been rather more subdued. Here, the home UK
market remains the main concern, with the double threat of competition from low
cost imports and a shrinking industrial market place. Continuing factory
closures in the automotive market, including Rover and Peugeot, are,
unfortunately, not being offset by expansion in other UK factories such as
Honda, Nissan and Toyota. While the automotive sector has remained stagnant the
aerospace sector has performed well as has the offshore sector, where suppliers
have made significant investment in new equipment for this industry. In
particular, Bowers "Gagemaker" range of products has witnessed a 40% increase
during the year.
The core Bowers export business has been positive with the USA and German
markets performing strongly due to companies making significant investment in
machine tools, the key driver for stimulating purchase demand for metrology
equipment. We do anticipate a leveling off in expansion in these two markets in
fiscal 2007, although we expect this to be offset by expansion in Europe and
Asia.
The Shanghai facility is currently operating as a quality control and
administration centre for products being shipped to Europe. A complete range of
bench hardness testers has been introduced and a distributor network has been
established in Europe for these products with further distributors now appointed
in Asia for both the bench and portable hardness testers.
Bowers Shanghai has obtained a trading license to sell within the PRC and
preparations are now underway to commence direct selling activities in the
second quarter of Fiscal 2007. The activities in Shanghai will be further
enhanced when manufacturing operations commence in quarter 2 of Fiscal 2006/7.
Gross margins have been sustained during the year. Increased energy costs have
been offset by favorable exchange gains on imported products denominated in US
dollars and a price increase in July was successfully implemented.
Looking forward, demand for our own manufactured hand tools will continue to
face further pressure from cheap Far East imports. The company recognizes that
new products are the key drivers for growth in the business and several
significant new products are due to be launched during the 2006/7 fiscal year.
The main threats are a larger than expected slowdown in the US and any
significant adverse changes in exchange rates.
2005 COMPARED TO 2004
Sales for the year showed an increase of $1.9 million (14.3%) from $13.7 million
in 2004 to $15.6 million in 2005. $1.4 million of this increase is attributable
to increased sales volume with the remaining $0.5 million due to favorable
exchange rate variances.
Quarter 4 results were in line with forecast but a larger than normal slowdown
in sales to the USA over the summer months and manufacturing capacity issues in
the UK resulted in the division being unable to recover EBIT shortfalls in
quarters 1 and 2.
40
The new sales and distribution facility set up in Maastricht, Holland, became
fully operational during the year and continued to have a favorable impact on
trading volumes. This new facility, specializing in the distribution of portable
hardness testing equipment manufactured in China and the sale of general
engineers hand tools, has excellent connections in mainland Europe. The
division's earnings were depressed by considerable set-up costs but it is
anticipated that its profitability will be increased once these one-time charges
are eliminated. An allied manufacturing, quality control and distribution centre
is being established in Shanghai, China and this is expected to improve
divisional margins further once the business is fully functional during Q2 of
fiscal 2006. Currently the quality control operation for these hand tools is
being carried out in Maastricht but this will be transferred to Shanghai where
the division will benefit from lower labor costs.
Other successes in the year included solid performances in the USA, although the
growth experienced during the first three quarters of the year slowed down in
the last quarter. High sales levels of the new Smart Plug 2-point product were
also encouraging. Good progress was made in new markets throughout the year and
new or additional distributors were appointed in Turkey, Australia, Mexico, Hong
Kong and Russia.
Overheads were strictly controlled throughout the year which helped to
compensate for lower than expected revenues. A restructuring of the UK sales
operation was completed in quarter 4 as a means to further reduce overheads in
the 2006 financial year.
Margins showed marginal deteriorations due to efficiency problems at one of the
UK manufacturing sites but this will be addressed through a new capital
expenditure initiative which is to be implemented in Q1 of fiscal 2006.
Mitigating these adverse margin impacts was the slight strengthening of the $
which lowered the cost of factored items purchased from the Far East.
S&J FRANCE
2006 COMPARED TO 2005
Sales in the year decreased by $0.3 million (2.6%) from $10.4 million in 2005 to
$10.1 million in 2006, the decrease being attributable to adverse exchange rate
variances of 0.4 million offset by volume increases of $0.1 million.
The French economy remains subdued and business conditions in the Company's
principal markets have continued to mirror this depressed retail environment.
Competition remains intense in the French garden products market with a number
of suppliers trying to secure business with a shrinking base of retail outlets.
This competition inevitably leads to pressure on margins and the situation is
exacerbated by our sales profile where 40% of our turnover is concentrated on
two customers. This makes price negotiations difficult and can result in
additional incentives, e.g. rebates being offered, as a matter of course, in
order to gain orders. Sales rebate levels were particularly high in the period
under review.
We continue to feel the effects from the increasing flow of cheap Asian and Far
Eastern imports which puts pressure on turnover and margins. These pressures
were intensified by increases in direct costs, particularly raw materials and
payroll. This margin dilution could be further increased by the opening of
specialist cut-price garden stores in the course of the forthcoming year.
In order to relieve these margin pressures the Company continues to look for new
suppliers in China and India in order to drive down product cost. The Company
will continue to concentrate on marketing activity to promote its principal
brands and to secure new listings. Such activity will centre on the publication
of a new 2007 product catalogue, improvements to the Company web site,
advertising, newsletters, etc.
It is clear that in order to increase the success of new product ranges it is
essential that we are able to offer quality products at lower price points. We
will therefore focus on new product development as a way of both improving
margins and eliminating the seasonal peaks that are typical of the garden
products business. During 2006 the Company has extended its private ranges of
tools and introduced new snow, garden cutting and bonsai tools.
41
2005 COMPARED TO 2004
Sales in the year increased by $0.8 million (7.8%) from $9.6 million in 2004 to
$10.4 million in 2005, the increase being attributable to favorable exchange
rate variances of 0.5 million and volume increases of $0.3 million.
On a macro level the French economy remained depressed with increased
unemployment rates, lower consumer confidence and reduced spending levels.
Business conditions in the company's markets reflected the sluggish retail
environment with price competition and consolidation of competitors putting
pressure on margins. Additionally, the company suffers from a large amount of
French garden product turnover being concentrated in a small number of retail
outlets, which makes price negotiations very difficult. As a result of this, the
company forced to offer higher rebate levels to stimulate sales
Significant marketing activity was undertaken during the year to promote the
Company's principal brands and new listings continued to make an important
impact especially brass ornaments, thermometer and weather station ranges,
culture products, extensions to the garden product and hand tool range and
plastic shovels. Given the seasonal nature of garden product sales, the
marketing and promotional activity undertaken in the year (new design and
packaging for the company's principal brands; creation of new web site) together
with the impact of new ranges played an important role in the French division.
Gross margins in the year to September 30, 2005 improved by two percentage
points over the comparable period last year as a result of production
efficiencies and the negotiation of more favorable supplier terms. An overhead
reduction program was also successfully implemented.
AUSTRALASIA
2006 COMPARED TO 2005
Sales decreased from $15.0 million in 2005 to $13.8 million in 2006, the $1.2
million (7.8%) decrease being attributable to sales volume decreases of $0.35
million, increased sales rebate levels of $0.35 million and adverse exchange
variances of $0.5 million.
The sales volume decreases have all occurred within our New Zealand division
while Australia has witnessed some modest increases.
The Australian market recorded economic growth during the third and fourth
quarters despite an increase in domestic interest rates in May 2006 and
escalating fuel costs. The economy also recorded a 30-year low in its
unemployment rate giving early evidence that the increase in interest rates had
a less than anticipated impact on economic activity. Against this macro economic
backdrop, the division's sales were adversely affected by increased competition,
a rise in rival imported house brands, declining price points and the loss of
garden ranges with a major retail and agency line. Such losses were offset,
however, by increased sales in air, masonry, hand tools and metal products.
In New Zealand, sales levels were down on the previous year this being
attributable to increased levels of competition from Asian imported power and
air tool products, the loss of business with a major retail group in fiscal 2005
and a slowing of the New Zealand economy and declining consumer demand when
compared to the previous year.
In addition, the Australian and New Zealand markets continue to be extremely
price competitive with many of our retail customers sourcing their "house
brands" directly from Asia in direct competition with S&J. This practice has
placed, and will continue to place, added pressure on our sales, margins and
market share. Despite these pressures, margins in Australia were 3 points higher
than those achieved in the previous fiscal year as a result of improved product
sourcing and successful price increases. In contrast, margins in New Zealand
fell by two points as a result of adverse sales mixes and the clearance of slow
moving inventory at reduced prices.
Overall, sales to our major customers reflect the continued expansion and
domination of the market by the major corporate retailers who continue to expand
their market share at the expense of the traditional independent retail groups.
As such, our sales mix reflects this trend with sales growth continuing in the
corporate sector whilst sales within the independents continue to decline. Our
objective going forward is to spread our exposure to the corporate sector by
increasing our sales and market share in the independent and industrial markets.
42
A major focus going forward will be the promotion and marketing of Spear &
Jackson brands to gain incremental sales and profit growth. The division will
also continue to develop and introduce new and extended ranges under the S&J
brand as a further lever to generate additional revenues.
2005 COMPARED TO 2004
Sales decreased from $17.4 million in 2004 to $15.0 million in 2005, the $2.4
million (13.8%) decrease being attributable to sales volume decreases of $3.0
million and increased sales rebate levels of $0.3 million offset by favorable
exchange variances of $0.9 million.
The sales revenues of the Australian division continued to suffer in comparison
to the prior year due to the loss of business with a major Australian retailer,
increased levels of competition and a softening in retail demand spurred by
increases in domestic interest rates which negatively impacted on consumer
spending.
In New Zealand, lower than expected sales levels were attributable to increased
levels of competition from Asian imported power and air tool products and the
loss of business with a major retail group. As in Australia, increased domestic
interest rates and speculation concerning further rate hikes dented consumer
confidence and slowed demand.
Margins in both Australia and New Zealand remained under pressure given the
sluggish retail demand, the increased promotional and marketing costs necessary
to maintain sales levels, unfavorable sales mixes and reduced exchange gains
from a weakening Australian dollar. These adverse effects were mitigated, where
possible, by improved product sourcing.
Offsetting the margin dilution were overhead reductions in excess of 20%
compared to the prior year across all cost centers in the two Australasian
units.
Competition from imported Asian products and the increasing trend of the large
Australian retailers to import and develop their own home brands continued to
place pressure on the sales and margins of the business. To counter this trend,
the division instigated aggressive pricing policies to help maintain and improve
existing sales volumes and market share in all categories in which it competes.
The division also remained focused on re-establishing and consolidating its
trading relationships with retail customers and suppliers and on maximizing the
selling opportunities of Spear & Jackson branded products. In this regard,
management introduced a number of new and extended ranges and promotional
programs across the digging, garden cutting, handsaw and air tool ranges. In
addition, the division concentrated on improved product sourcing to ensure that
all S&J branded product meets customers' expectations and is positioned within
the appropriate price points. At the end of fiscal 2005, not all of these
initiatives had reached their full potential but efforts to generate incremental
sales and margin growth would continue into fiscal 2006. In addition, management
initiated a series of cost cutting measures, including the restructuring of the
workforce, in order to meet the slow down in sales demand.
COSTS OF GOODS SOLD AND GROSS PROFIT
Summary details regarding costs of goods sold as a percentage of sales and gross
profit margins in the periods under review are as follows:
Years ended September 30 Qtrs ended September 30
2006 2005 2004 2006 2004 2003
% % % % % %
Cost of goods sold..... 70.00 66.99 67.92 73.93 66.59 64.83
as a % of sales
Gross profit margin.... 30.00 33.01 32.08 26.07 33.41 35.17
Costs of goods sold increased to $67.9 million in the year to September 30, 2006
from $67.5 million in 2005. In the quarter to September 30, 2006 the cost of
goods sold was $16.1 million compared to $14.8 million in 2005, an increase of
8.78%.
43
COMPARISON OF 2006 TO 2005
Margins have continued to suffer from the adverse effects of raw material
(principally steel) and utility price hikes together with increases in the cost
of fuel used to operate our manufacturing processes. In the Neill Tools division
a main driver behind decreased margins has been the mix switch towards factored
garden power tools at the expense of better margins on industrial hand tool
product lines. Significantly, in the last quarter, margins have also been eroded
in both our Neill Tools and Eclipse divisions as a result of one-time inventory
provisioning against old and obsolete lines.
We will continue to evaluate means of maintaining and improving current sales
mixes and of further reducing costs of goods sold across all of our principal
trading operations to avoid margin erosion. Improvements in manufacturing
efficiency and the reduction of direct costs continue to be the focus of
management as a means to improve competitiveness in new and existing markets.
The UK manufacturing reorganization program, initiated in the last quarter of
2005, and continued in the second and subsequent quarters of Fiscal 2006 with
the announcement of the closure of our manufacturing site at Wednesbury in the
UK, the relocation of the UK central warehouse to the Atlas site in Sheffield
and the cessation of certain manufacturing activities in the UK magnetics
division has had, and will have, a beneficial effect on margins.
Own-manufactured product will be progressively replaced with factored items
sourced from overseas thereby reducing costs and increasing profitability.
Further pressure is exerted on our margins by the weak dollar and, to retain
competitiveness, additional discounts have been offered in certain markets where
our sales are transacted in that currency.
The Company's position is not, however, unique in this respect since the trading
issues crystallized by the weakening value of the dollar are currently faced by
many other UK companies with material export sales interests.
COMPARISON OF 2005 TO 2004
Despite continuing raw material (principally steel and plastic) and utility
price increases, together with increases in the cost of fuel used to operate our
manufacturing processes, gross margins continued to show improvements over
Fiscal 2004, as a result of:
- exchange gains realized on the purchase of factored products denominated in
US dollars from suppliers in the Far East;
- a more favorable and advantageous sales mix;
- further increase in selling directly to customers rather than via
intermediaries;
- improved product sourcing and increased factoring and production
efficiencies;
- negotiated price increases; and
- sale of slow moving inventories at amounts in excess of their net
realizable value.
EXPENSES
2006 COMPARED TO 2005
Selling, general and administrative (SG&A) expenses increased by $4.7 million
(14.9%) from $31.4 million in the year ended September 30, 2005 to $36.1 million
in the year ended September 30, 2006. SG&A expenses for the quarter ended
September 30, 2006 were $8.3 million, an increase of $1.3 million (18.6%) over
the expenses charged in the equivalent period last year.
44
The principal reasons for the movements are as follows:
Increase/(Decrease) over Prior Years
Year ended Quarter ended
September 30, September 30
2006 2006
$m $m
a) Impact of movements in average
US$/sterling cross rates in the period. (0.94) 0.2
b) Increased FAS87 pension costs.......... 4.37 1.22
c) Inflationary increases net of foreign
exchange gains and losses on trading
transactions........................... 0.80 0.20
d) Decreased head office costs relating to
reduced legal and professional fees,
monitor fees and associated costs...... (0.29) (0.02)
e) One-time costs in setting up the
Metrology facility in Shanghai......... 0.10 0.00
f) Other net increases(decreases)......... 0.66 (0.3)
---- ----
Total increase in SG&A expenses............. 4.7 1.3
==== ====
2005 COMPARED TO 2004
Selling, general and administrative (SG&A) expenses increased by $1.7 million
(5.6%) from $29.7 million in the year ended September 30, 2004 to $31.4 million
in the year ended September 30, 2005. SG&A expenses for the quarter ended
September 30, 2005 were $7.0 million, a decrease of $0.2 million (3.3%) over the
expenses charged in the equivalent period last year.
The principal reasons for the movements are as follows:
Increase/(Decrease) over Prior Years
Year ended Quarter ended
September 30, September 30
2005 2005
$m $m
a) Impact of movements in average
US$/sterling cross rates in the period. 1.10 (0.1)
b) Increased FAS87 pension costs.......... 2.69 0.63
c) Inflationary increases net of foreign
exchange gains and losses on trading
transactions........................... 0.50 0.10
d) Decreased head office costs relating to
reduced legal and professional fees,
monitor fees and associated costs...... (0.7) (0.3)
e) Increased UK warehouse and distribution
costs following the change to direct
sales.................................. 0.40 0.10
f) Release of excess provision associated
with settlement of severance
compensation payable to former Managing
Director............................... (0.75) (0.25)
g) Cost savings in Australia.............. (1.1) (0.3)
h) Other net decreases in SG&A expenses... (0.44) (0.08)
----- -----
Total increase (decrease) in SG&A expenses.. 1.70 (0.2)
===== =====
45
OTHER INCOME AND EXPENSES
Other income and expenses has moved from a charge in 2004 of $0.2 million to
credits in 2005 and 2006 of $0.2 million and $0.3 million respectively.
The increase in 2006 over 2005 is due to the inclusion of income of $0.1 million
relating to the Group's share of earnings in Ningbo Hightec Magnetic Assemblies
Co. Ltd., a joint venture company in which the company holds a 25% stake.
Interest receivable levels in 2006 were slightly lower when compared to 2005.
Although the Group has benefited in the year from the sale proceeds ($4.8
million) attributable to the disposal of the remaining element of its
manufacturing facility in Wednesbury, England, this inflow has been offset not
only by restructuring and other costs associated with the closure of the site
but also by higher UK pension contributions. This has reduced interest
receivable on the UK net bank balances.
The $0.4 improvement in net income when comparing 2005 to 2004 is attributable
to bank interest receivable in the Company's UK businesses in Fiscal 2005.
During 2004 cash balances in the UK were negatively impacted by the cash
outflows relating to the purchase of land and buildings at Wednesbury, England
for $3.2 million. This resulted in increased interest charges during 2004. The
sales of both the excess element of the Wednesbury site for $5.2 million in
January 2005 and the $3.4 million derived from the disposition of the Company's
warehouse in Boca Raton increased cash balances in fiscal 2005 and generated
higher interest income in that year.
UNUSUAL OR INFREQUENT EVENTS
Unusual or infrequent events comprise:
Note Years ended September 30,
2006 2005
Lm Lm
Gain on sale of land and buildings........... (a) 3.5 3.3
Manufacturing and other reorganization costs. (b) (3.5) (1.1)
Settlement of class and derivative action
litigation.................................. (0.7)
---- ----
Total........................................ (0.7) 2.2
==== ====
(a) Gain on sale of land and buildings
In the year to September 30, 2006 the Company recorded a net gain of $3.5
million on the sale of land and buildings. This was derived from the sale, on
July 27, 2006, of the remaining part of its industrial site at St. Paul's Road,
Wednesbury, England as follows:
$m
Sale proceeds................................................... 4.8
Less net book value............................................. (1.1)
Less deferred element of the gain relating to the future........ (0.2)
----
Market value of rentals......................................... 3.5
====
In the year to September 30, 2005 the Company recorded net gains of $3.3 million
on the sale of land and buildings. On January 28, 2005 the Company completed the
sale of part of the Wednesbury site and on February 15, 2005 the Company also
concluded the disposal of its warehouse and office facility in Boca Raton,
Florida. Details of these sales are as follows:
Wednesbury Boca Raton Total
England Florida
$m $m $m
Sale proceeds........... 5.2 3.5 8.7
Less net book value..... (2.2) (3.2) (5.4)
--- --- ---
3.0 0.3 3.3
=== === ===
(i) On January 25, 2006 the Company announced the closure of the remaining
element of its manufacturing site at Wednesbury, England. With effect from
November 30, 2006 all warehouse and distribution operations previously performed
at this location were transferred to the Company's principal UK manufacturing
site in Sheffield ("Atlas"). The costs of closure of the Wednesbury site are
anticipated to be approximately $1.2 million. These costs include employee
severance payments, site closure costs, factory reorganization expenses, plant
transfer costs and associated capita expenditure.
In addition to the above, the Company announced that certain manufacturing
operations carried out at Atlas would also cease. Provisions for employee
severance costs in respect of the closure of these manufacturing operations were
made in the quarter ended June 30, 2006.
On August 11, 2006, the Company's UK subsidiary, Eclipse Magnetics Limited,
("Eclipse"), announced the cessation of certain manufacturing activities at its
UK site in Sheffield. Eclipse also announced that it would be relocating its
remaining business to the Atlas site. The cessation of manufacturing and site
relocation were completed by November 30, 2006 and provisions were made at
September 30, 2006 in respect of severance costs, relocation expenses and future
years rental costs relating to the vacated premises.
The Wednesbury site closure, the production rationalization at Atlas and the
restructuring at Eclipse form part of the Company's UK manufacturing
reorganization program which was initiated to regenerate and modernize key areas
of the hand and garden tools business. These closures will enable the Company to
consolidate its UK hand and garden tool and magnetic products manufacturing
sites and will allow the Company to develop a modern manufacturing, warehouse
and distribution facility which will be well placed to meet the current and
future needs of its customers.
Costs provided in respect of the Wednesbury site closure and the Atlas
reorganization were $2.2 million. Costs provided in respect of the Eclipse move
were $0.6 million.
(ii) Following the announcement of the reorganizations detailed above, the
Company carried out a detailed review of the ongoing utilization and remaining
asset lives review of the plant and machinery involved in the restructured
operations. As a result of this review, impairment write-downs of $1.2 million
have been made in the year.
(iii) As explained below, a surplus element of the Wednesbury site was sold in
the first quarter of Fiscal 2005 and provision was made at March 31, 2005 for
various site reorganization costs that were to be incurred as a result of that
partial sale. Certain of those costs were not incurred following the sale and
closure of the remainder of the site. Excess provisions of $0.4 million were
therefore released in the current year in relation to those anticipated costs.
A further $0.1 million has been released in fiscal 2006 relating to sundry other
reorganization programs initiated in previous years which have now been
concluded at a cost that was less than originally anticipated or which have not
been implemented in full.
(i) As a result of the sale of the surplus element of the Wednesbury property,
the Company was contractually obliged to vacate office and warehouse
facilities located on these parts of the site that were sold. A provision
of $0.4 million was made for costs in connection with this obligation. The
provision principally related to office and factory refurbishment and
reorganization expenses together with expenditure in respect of
departmental relocations within the remainder of the site. Following the
sale, elements of the Wednesbury manufacturing operation were closed or
transferred and costs in connection with these initiatives are dealt with
in (ii) and (iii), below.
In the final quarter of the year the Company performed a review of its UK
manufacturing operations and began implementation of a number of strategies to
reduce its ongoing cost base. Costs incurred in the implementation of these
initiatives comprised:
(ii) Severance costs relating to the closure and down scaling of certain
manufacturing processes at the Company's Sheffield and Wednesbury
locations in the UK.
(iii) The ongoing usage and remaining asset lives of the plant and machinery
involved in the restructured operations were reviewed and impairment
write-downs made where necessary.
(iv) Certain provisions made in prior periods relating to manufacturing
initiatives which were no longer to be implemented following the
finalization of the Company's UK manufacturing reorganization strategy,
were released in the year.
SETTLEMENT OF CLASS AND DERIVATIVE ACTION LITIGATION
On July 7, 2006 the US District Court for the Southern District of Florida
issued a Memorandum of Understanding ("MOU"), which confirmed that the
plaintiffs and defendants in the class action had reached an agreement in
principle for the settlement of this litigation. In settlement of this action
the company paid $0.65 million into a Qualified Settlement Fund.
On September 6, 2005 the Company was served with a Shareholder Derivative
Complaint filed on June 1, 2004 in the Circuit Court for Palm Beach County,
Florida. In August 2006 the Company entered into a settlement agreement with the
plaintiff by agreeing to accept certain changes to its corporate governance
procedures and the payment of $0.07 million in legal fees. This amount has now
been paid into a Court approved fund and, if the settlement is authorized by the
Court, the suit will be dismissed and the Company and its former directors will
be released.
INCOME TAX
An income tax benefit of $1.0 million was credited in the year ended September
30, 2006 (2005: $0.5 million charge, 2004: $1.2 million charge). In the quarter
ended September 30, 2006 there was a tax benefit of $0.7 million (2005: $0.2
million credit, 2004: $0.5 million charge).
Income taxes represented 13.15% of the loss before tax in 2006 (2005: 11.1%,
2004: 59% of the profit before tax).
48
In general, differences between the Company's effective rate of income tax and
the statutory rate of 35% result from such factors as: tax charges in certain
overseas subsidiaries within the Spear & Jackson group being taxed at rates
different from the statutory rate; the utilization of tax losses which are not
recognized within the deferred tax computation and permanent differences between
accounting and taxable income as a result of non-deductible expenses and
non-taxable income.
The principal reasons for the significant fluctuations between the effective
rates of tax and the US Federal statutory rate in the periods under review are
summarized below:
a) 2006
The effective rate in the year ended September 30, 2006 was less than the
expected statutory rate for the following reasons:
i) The $3.5 million profit on the sale of the remaining element of the
Company's manufacturing site at Wednesbury, England, is not subject to
taxation due to the availability of capital tax losses brought forward
that have not been recognized in the deferred tax computation. This
has reduced the theoretical tax charge by $1.0 million.
ii) Income within certain overseas subsidiaries within the Spear & Jackson
Group is taxed at different rates from the effective rate. The typical
local taxation rate suffered by the Company's non-US overseas
subsidiaries is approximately 30% compared to a US Federal Statutory
rate of 35%. The effect of applying a rate of 30%, as opposed to 35%,
to the Company's results is a tax credit of approximately $0.4
million.
iii) The utilization of certain tax losses which are not recognized within
the deferred tax computation has further reduced the tax charge by
$0.1m.
The above were only partially offset by items which contributed to a higher than
expected statutory rate such as:
i) Permanent differences between accounting and taxable income as a
result of non-deductible expenses. (tax effect $0.1 million)
ii) In addition, the effective rate of tax has been increased as a result
of losses that have been incurred in its US operations for which no
utilization against future projects is envisaged in the short term and
to which a valuation allowance has therefore been applied. (tax impact
$0.4 million)
iii) As a result of the UK restructuring costs incurred in the year and the
benefit of a tax deduction (spread over 4 years) in respect of the
special contribution of $7.2 million that was made to the Company
Pension Plan in fiscal 2005, tax losses have been generated in certain
of the UK companies. Valuation allowances of approximately $1.3
million have been applied to these losses as a recent history of
losses and other factors has precluded the Company from demonstrating
that it is more likely than not that the benefits of these operating
loss carry forwards will be realized.
iv) During the year, previously recognized deferred tax assets relating to
overseas, non-US operations have had a valuation allowance of $0.4
million applied to them as they no longer meet the "more likely than
not" reasonableness test.
b) 2005
The effective rate in the year ended September 30, 2005 was
less than the expected statutory rate for the following reasons:
i) The $3.0 million profit on the sale of the Company's excess land at
Wednesbury, England, is not subject to taxation due to the
availability of capital tax losses brought forward not recognized in
the deferred tax computation. This reduced the theoretical tax
charge by $0.9 million.
49
ii) Income within certain overseas subsidiaries within the Spear & Jackson
Group is taxed at different rates from the effective rate. The typical
non-US taxation rate suffered by the Company's US overseas
subsidiaries is approximately 30% compared to a US Federal Statutory
rate of 35%. The effect of applying a rate of 30% as opposed to 35% to
the Company's results is a tax credit of approximately $0.1 million.
iii) Certain adjustments were made to prior year estimates resulting in a
$0.2 million credit to the taxation charge.
iv) The utilization of certain tax losses which are not recognized within
the deferred tax computation has further reduced the tax charge by
$0.1m.
The above were only partially offset by items which contributed to a higher than
expected statutory rate such as:
i) Permanent differences between accounting and taxable income as a
result of non-deductible expenses. (tax effect $0.1 million)
ii) In addition the effective rate of tax has been increased as a result
of losses that have been incurred in the United States for which no
utilization against future projects is envisaged in the short term and
to which a valuation allowance has therefore been applied. (tax impact
$0.2 million)
Because of the availability of tax net operating losses, other tax credits and
the benefit of a tax deduction (spread over four years) in respect of the
special contribution of $7.2 million that was made to the Company Pension Plan
in the year, it is not anticipated that any significant element of the taxation
provision for the year will result in the payment of income tax.
NET (LOSS)/INCOME FROM CONTINUING OPERATIONS AFTER INCOME TAXES
Our net loss after income taxes from continuing operations was $6.4 million for
the year to September 30, 2006. This compares to a profit after income taxes of
$3.7 million for the year ended September 30, 2005, and $0.8 million in 2004.
Our net income after income taxes from continuing operations was $0.1 million
for the quarter to September 30, 2006 (2005: $0.7 million, 2004: $0.7 million).
DISCONTINUED OPERATIONS
Discontinued operations relate to the Coventry Gauge thread gauge measuring
division of the Metrology Division, based in the UK, and the Megapro screwdriver
division of Spear & Jackson, Inc.
During the fourth quarter of fiscal 2005, the company began marketing for sale
its thread gauge measuring business located in the United Kingdom. The carrying
values of the assets relating to this entity were initially written down to
estimated fair value in the quarter ended March 31, 2005 and further write-downs
were made in the final quarter of fiscal 2005. On February 28, 2006, the Company
concluded the sale of these assets for a nominal consideration.
The Megapro screwdriver division was disposed with effect from September 30,
2003 when the trade and assets of the principal Megapro companies were
transferred at their net book value to a management buy-in team headed by the
managing director of the Megapro business.
In accordance with SFAS No. 144, "Accounting For the Impairment or Disposal of
Long-Lived Assets", the Company's previously issued Financial Statements have
been reclassified to present separately the net operations, cash flows, assets
and liabilities of these business segments, where material, as "Discontinued
Operations".
Total losses attributable to discontinued operations were $0.1 million in the
year ended September 30, 2006 and $0.6 million and $0.4 million in the years
ended September 30, 2005 and September 30, 2004 respectively.
50
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity, cash flows and capital resources were as follows:
September September September
30, 2006 30, 2005 30, 2004
Notes $ m $ m $ m
Liquidity and capital resources:
Cash and cash equivalents............... 9.9 7.3 5.1
Overdrafts.............................. - (0.8) (0.1)
Working capital (excluding deferred tax) 30.3 29.9 28.8
Stockholders' equity.................... 21.8 26.2 29.4
==== ==== ====
Cash Flows:
Net cash (used in) provided by
operating activities.................... (1) (0.3) (6.2) 3.2
Cash provided by (used in) investing
activities.............................. (2) 3.8 7.7 (6.9)
Cash (used in) provided by financing
activities.............................. (3) (0.8) 0.7 (0.3)
Effect of exchange rate changes......... (0.1) - (0.1)
---- ---- ----
Changes in cash and cash equivalents.... 2.6 2.2 (4.1)
==== ==== ====
DISCUSSION OF CASH FLOWS
2006 COMPARED TO 2005
(1) Net cash used in operating activities in the year ended September 30, 2006
was $0.3 million (2005: $6.2 million). This represents a year on year
favorable movement of $5.9 million (95.16%), which arose primarily from the
following:
- increase in trade working capital inflows of $5.2 million (325%)
- increase in net inflows from other assets and liabilities (including
taxation) of $13.2m (150%)
- Reduction in net income (adjusted for depreciation, gain on sale of land
and buildings and deferred income taxes, etc) of $12.5 million (299%) as
dealt with in the commentary of results above. This reduction reflects not
only the overall decline in net operating income but also includes the
one-time cash outflows associated with:-
* The $0.7 million payment, during fiscal 2006, in relation to the
manufacturing reorganization program at Wednesbury and Eclipse.
* The $0.7 million payment in relation to the settlement of the class and
derivative litigation actions in July 2006 and September 2006,
respectively.
51
The reasons for the variances in the cash flow movements associated with other
assets and liabilities are summarized below:
(a) Trade working capital variances.
The net increase in cash inflows derived from decreases in trade working
capital is as follows:
i) In the year ended September 30, 2006 inventories decreased by $2.9 million
compared to an increase of $3.6 million in the year ended September 30,
2005. Poor UK final quarter sales in fiscal 2005 resulted in higher than
normal inventory levels at the end of that year. Additionally, purchases of
stock in the Metrology Division in Holland also had an adverse effect on
inventory flows, as did strategic stock builds in those sectors of the UK
businesses which were undergoing reorganization. September 2006 stock
levels have benefited from a rigorous stock reduction program. The
manufacturing reorganization program has also meant that, with the
cessation of certain manufacturing operations and the sourcing of goods
from outside suppliers, inventory values as well as stock levels have been
reduced.
ii) The inflow from trade receivables in the year ended September 30, 2005
benefited from the receipt of cash relating to high sales levels in August
and September 2004. This has was not repeated in 2006 as sales levels in
the last quarter of 2005 were lower than those witnessed in the last
quarter of 2004 and cash receipts in fiscal 2006 were thereby reduced.
iii) Decreased trade payable inflows of $0.5 million have arisen in the year due
to increasing levels of purchases of factored goods from overseas suppliers
on reduced settlement terms.
(b) Variances in cash flows attributable to other assets and liabilities
i) The major contributory factor is an $11.1 million variance in the year on
year movements in the UK Pension Plan and the pension charge debited to the
profit and loss account in 2005 and 2006. During fiscal 2006 employer
contributions of $3.4 million were paid into the plan whereas contributions
of $10.2 million were paid in fiscal 2005. The 2005 payment included a
special contribution of $7.2 million, which was made in two equal
installments in June and September 2005. Additionally, there has been an
increase in the non-cash FAS 87 charge of $4.3 million from $4.0 million in
2005 to $8.3 million in 2006.
ii) The inclusion, at 30 September 2006, of reorganization provisions of
approximately $1.7 million relating to the UK manufacturing reorganization
program at Wednesbury, Atlas and Eclipse which will not be paid until
fiscal 2007.
The favorable effect of the above has been mitigated by:
i) The reduction in the amounts to be provided in respect of legal and
professional fees, monitor costs and related expenses payments in the US
Holding Company. During fiscal 2005 approximately $0.5 million was defrayed
but expenditure in 2006 and the level of creditors required at the year end
show a decrease compared to those at September 2005.
ii) The $0.5 million payment, during fiscal 2006, of employee severance and
Wednesbury move costs for which provision had been made in the financial
statements at September 30, 2005.
52
Other cash flow movements:
(2) Cash inflow from investing activities in the year ended September 30, 2006
was $3.8 million compared to $7.7 million in 2005. The year ended September
30, 2006 includes $4.8 million relating to the sale of the remaining
element of its industrial site at St. Paul's Road, Wednesbury, England. The
year ended September 30, 2005 includes $5.2 million relating to the sale of
land at Wednesbury, England and also $3.5 million relating to the warehouse
and office facility at Boca Raton, Florida. Purchases of plant and
equipment were $0.9 million in 2006 compared to $1.0 million in 2005. Also
included within the cash flow for the year to September 30 2006 is $0.2
million relating to the acquisition of a 25% stake in a joint venture
company, Ningbo Hitech Magnetic Assemblies Co. Ltd.
(3) Net cash used in financing activities was $0.8 million compared to an
inflow of $0.7 million in 2005. The 2006 outflow principally represents the
repayment of UK overdrafts. The 2005 inflow relates to the utilization of
the UK bank overdraft facility.
2005 COMPARED TO 2004
(1) Net cash used by operating activities in the year ended September 30, 2005
was $6.2 million (2004: $3.4 million cash generation). This represents a
year on year adverse movement of $9.3 million (295%), which arose primarily
from the following:
- increase in net outflows from other assets and liabilities of $5.7m (194%)
- decrease in trade working capital inflows of $3.3 million (196%)
- Reduction in net income (adjusted for depreciation, gain on sale of land
and buildings and deferred income taxes, etc) of $0.3 million (8.4%) as
dealt with in the commentary of results above.
The reasons for these variances in the cash flow movements associated with other
assets and liabilities and trading working capital are summarized below:
(a) Variances in cash flows attributable to other assets and liabilities
i) The major contributory factor is the payment of a special contribution of
$7.2 million to the UK Pension Plan, which was made in two equal
installments in June and September 2005. Additionally, annual employer
pension contributions increased by $0.3 million due to the increase, from
May 2005, following agreement between the company and the Trustees of the
UK Pension Plan.
ii) The $0.8 million of additional legal and professional fees, monitor costs
and related expenses accrued in the US Holding Company at September 30,
2004 were partially defrayed in the year under review thereby giving rise
to a cash outflow.
iii) Release of $0.6 million of provisions made in prior periods.
The adverse effect of the above has been mitigated by:
i) Reduced lease payments in the year payable on the UK car fleet of $0.2
million.
ii) The inclusion of UK reorganization and severance provisions at September
30, 2005, which was not paid until fiscal 2006.
iii) An increase in the non-cash FAS 87 pension charge of $2.7 million.
(b) Trade working capital variances.
The net decrease in cash inflows derived from increases in trade working
capital is as follows:
i) In the year ended September 30, 2005 inventories increased by $3.6 million
compared to a decrease of $3.1 million in the year ended September 30,
2005. During 2004 a rigorous inventory reduction program had been
initiated. In addition, stock levels at September 30, 2003 were
particularly high with one-off stock builds in the Company's Australian
subsidiary and the bulk purchase of new ranges of factored products in the
UK. These stock-builds reversed in 2004 thereby contributing to the cash
inflows in 2004. Not only were they not repeated during 2005 but inventory
levels have been adversely impacted by poor UK final quarter sales.
Additionally, purchases of stock in the new Metrology Division in Holland
also had an adverse effect on inventory flows, as did strategic stock
builds in those sectors of the UK business which were undergoing
reorganization.
ii) UK sales in August and September 2004 benefited from increased turnover of
approximately $1.8 million when compared to the equivalent period in 2003.
The inflow from trade receivables in the year ended September 30, 2005
therefore benefits from the cash received from these sales. Sales levels in
the last quarter of 2005 across the majority of divisions have been lower
than those witnessed in the last quarter of 2004. This has therefore
reduced trade receivables and further contributed to the favorable movement
in trade receivables when compared to last year.
iii) Decreased trade payable inflows of $0.6 million have arisen in the year due
to increasing levels of purchases from overseas suppliers on reduced
payment terms.
(2) Cash inflow from investing activities in the year ended September 30, 2005
was $7.7 million compared to an outflow of $6.9 million in 2004. The year
ended September 30, 2005 includes $5.2 million relating to the sale of land
at Wednesbury, England and $3.5 million relating to the warehouse and
office facility at Boca Raton, Florida. Purchases of plant and equipment
were $1.0 million. The net outflow in 2004 relates primarily to $3.2
million that was paid to purchase the land and buildings at Wednesbury,
England and $3.3 million paid in respect of the acquisition of the
warehouse and office facilities at Boca Raton, Florida.
(3) Net cash provided by financing activities was $0.7 million compared to an
outflow of $0.3 million in 2004. The 2004 outflow principally represents
the repayment of the overdrafts in the Company's French subsidiary. The
2005 inflow relates to the utilization of the United Kingdom bank overdraft
facility. Despite the receipt, in January 2005, of $5.2 million in relation
to the sale of the land and buildings at Wednesbury, the special pension
contribution of $7.2 million paid in June and September 2005 and the
payment, in quarter 4, of various UK reorganization costs, led to a
utilization of part of the UK bank overdraft facility.
BANK FACILITIES
The UK subsidiaries of Spear & Jackson plc and Bowers Group plc maintain a line
of credit of $8.4 million. This is secured by fixed and floating charges on the
assets and undertakings of these businesses. Of the total facility, $5.6 million
relates to bank overdrafts and $2.8 million is available for letters of credit.
These facilities are denominated in British pounds. The overdraft carries
interest at UK base rate plus 1%. At September 30, 2006 the company had $nil
(2005: $0.8 million) outstanding under the overdraft line and $0.1 million in
outstanding letters of credit (2005: $0.6 million).
The French and Australian subsidiaries of Spear & Jackson plc maintain
short-term credit facilities of $2.7 million denominated in Euros and Australian
dollars. The facilities comprise bank overdraft lines, with interest rates
ranging from 6.8% to 12.6%, together with facilities for letters of credit and
the discount of bills receivable. There was nothing outstanding under the
overdraft lines at both September 30, 2006 and September 30, 2005 $0.5 million
of letters of credit and bills were outstanding under these facilities at
September 30, 2006 (September 30, 2005: $0.1 million).
The UK facilities were renewed in December 2006, the Australian facilities were
renewed in October 2006 and the French facilities fall for renewal at various
dates in 2007. These lines of credit are subject to the Company's and its
subsidiaries' continued credit worthiness and compliance with the applicable
terms and conditions of the various facilities. Assuming that the Company
maintains compliance with these conditions it is anticipated that all the
facilities will continue to be renewed on comparable terms and conditions.
54
The Company's bank accounts held with the HSBC Bank plc by UK subsidiaries of
Spear & Jackson plc and Bowers Group plc form a pooled fund. As part of this
arrangement the companies involved have entered into a cross guarantee with HSBC
Bank plc to guarantee any bank overdraft of the entities in the pool. At
September 30, 2006 the extent of this guarantee relating to gross bank
overdrafts was $21.6 million (September 30, 2005 $20.4 million). The overall
pooled balance of the bank accounts within the pool at September 30, 2006 was a
net cash in hand balance of $5.4 million (September 30, 2005 $0.8 million
overdrawn).
The bank overdraft and other facilities of Spear & Jackson Australia Pty.
Limited have been guaranteed by its immediate parent, James Neill Holdings
Limited and the bank overdraft and other facilities of Spear & Jackson France SA
have been guaranteed by Spear & Jackson plc.
Our business operations have been funded from net operating income supplemented,
where necessary, by utilization of the UK, French and Australian banking
facilities described above. We believe what we have sufficient capital
resources, liquidity and available credit under our current principal banking
facilities supplemented, where necessary, by temporary increases, to sustain our
current business operations and normal operating requirements for the
foreseeable future.
As the Company continues to focus its efforts on improving the competitiveness
of its worldwide operations, additional funding may be required to finance
restructuring of the non-profitable areas of the Company's divisions and to meet
items of significant one-off expenditure. Such expenditure may include:
investment in new capital equipment; further special contribution payments to
reduce the pension plan deficit; and any expansion of the Spear & Jackson or
Bowers operations.
Funding for these initiatives may be obtained through the negotiation of
increased bank lending facilities or the sale of surplus assets.
OUTLOOK
The first two months of Quarter 1 2007 were in line with expectations and show
an operating profit of $0.5 million before consideration of FAS 87 pension
charges, interest and taxation. We anticipate that because of the seasonal
nature of our garden products businesses in the UK and France and the
traditionally low sales level in December, a trading loss (before inclusion of
pension charges) will be recorded in that month of approximately $0.1 million.
This trading pattern is consistent with the prior year and with forecast. The
base trading profit will be eliminated by the significant non-cash pension
charge calculated in accordance with FAS 87. The Company's actuaries anticipate
that the charge will be $7.9 million for fiscal 2007 compared to $8.4 million
for fiscal 2006. Base trading profits for the first quarter are currently
anticipated to be $0.6 million and after the deduction of the quarter's pension
charge of $1.9 million an operating loss (before unusual items and taxation) of
$1.3 million is forecast. As a result of the level of pension charges the
Company does not anticipate returning a net profit after tax for fiscal 2007.
Management will consider all available operational strategies to mitigate the
negative impact of trading losses which arise as a result of the high pension
costs during the forthcoming year.
During the later part of fiscal 2005 and during 2006 the Company performed a
detailed review of its UK manufacturing operations to identify initiatives to
combat declining sales performance and the increase in low price point imports
from Far Eastern markets. The implementation of a number of strategies to reduce
its ongoing cost base was carried out during the year. In January 2006, the
Company announced the closure of its Wednesbury manufacturing and distribution
facility and the relocation of the central UK warehousing facility to the Atlas
site in Sheffield, England. This was completed by the end of November 2006. In
fiscal 2005 the Company had previously sold the excess element of its site and
on July 27, 2006 the Company completed the sale of the remaining element of the
Wednesbury property. Funds realized from the disposal have been used to finance
the closure costs associated with the Wednesbury site and any excess sale
proceeds be reinvested in the business.
In addition, in the third quarter of fiscal 2006 the Company announced the
cessation of certain manufacturing operations at its Atlas site. Likewise, on
August 11, 2006 the Company's UK subsidiary, Eclipse Magnetics, announced that
the Company would cease a number of its manufacturing activities at its site in
Sheffield and that the remaining elements of the business would be transferred
to the Atlas Site.
55
The Wednesbury site closure, the Atlas reorganization and the Eclipse
restructuring and relocation form part of the Company's UK manufacturing
reorganization program which has been initiated to regenerate and modernize key
areas of the hand and garden tools and Eclipse businesses. The closures will
enable the Company to consolidate its sites and will allow the Company to
develop a modern manufacturing, warehouse and distribution facility which will
be well placed to meet the current and future needs of its customers. The
changes made to the shape and structure of the UK business are significant and
it is therefore probable that, in the short term, the cost savings that the
reorganizations will deliver will be diluted whilst new procedures and processes
are being established.
We will continue to look at further initiatives to rationalize underperforming
areas of the business and to monitor operational infrastructures in the United
Kingdom, particularly overhead costs, to ensure that these are as cost efficient
as possible and at a level appropriate to the needs of the business.
The Company's core UK hand and garden businesses continue to face challenging
trading conditions with the key considerations being soft demand in the UK
retail sector, fierce competition from cheap foreign imports and the increasing
trend for multiple retailers to buy and promote own label brands in preference
to Company products. The reorganization program referred to above was
implemented to address these issues and further strategies will be considered to
reduce the Company's cost base.
As with the Company's UK hand and garden tool businesses, our Australasian and
French subsidiaries continue to experience difficult trading conditions because
of flat retail demand, increased levels of competition from Far East imports,
reduced consumer spending and the increasing trend of some retail groups to
expand their own direct import programs.
To counteract such factors, the management of these operations has developed and
introduced a number of new and extended ranges and promotional programs. Going
forward these ranges should deliver incremental sales and margin growth.
Additionally, overhead reduction programs are ongoing as management continues to
focus on the removal of all excess costs from the businesses.
Within the Metrology division the new selling and distribution outlet in
Maastricht is now fully operational. In the future, this revenue and earnings
growth will be enhanced by the division's quality control and distribution
centre which has been established in Shanghai, China.
Looking forward, demand for our own manufactured metrology hand tools will
continue to face further pressure from low cost Far East imports. The Company
therefore recognizes the need to focus its UK manufacturing sites on producing
more high technology products and measuring solutions. New products are the key
drivers for growth and several new ranges are due to be released during fiscal
2007. In order to make the Company more competitive in the low technology
sectors, various initiatives are also being explored within our new Shanghai
facility including the set up of its own manufacturing operation.
Our businesses will again face the issues of increased costs and margin erosion
as a result of raw material, fuel and other utility price increases, interest
rate increases, the $7.9 million FAS 87 pension charge and a weak dollar. This
will again put pressure on our margins and overhead costs, and wherever
possible, these increases will be passed on though sales price increases.
Any strengthening of the US dollar would impact favorably on the business as
this would ease the pressure on margins and increase our competitiveness.
Current trends, however, suggest a continued weakening which will place
additional pressure on our sales into a number of export markets.
The level of overhead expenses, particularly legal and professional costs,
incurred by our US corporate head office has reduced following the settlement of
the SEC suit during 2005. Any future savings will be dependent upon the final
resolution of the Class and Derivative Action lawsuits and the continuing role
of the Corporate Monitor.
56
In the forthcoming year we will continue to focus on improving cash generation.
As explained above, during fiscal 2006 the Company announced the closure of its
Wednesbury site and the relocation and reorganization of its Eclipse and Atlas
sites. In addition, therefore, to normal trading cash requirements, in the first
two quarters of fiscal 2007 costs will be defrayed in the relation to the
various restructuring initiatives. These costs will be funded from existing core
UK bank facilities. Further funds will also be required to finance the next
stage of the development of the Shanghai business through the set up of its own
manufacturing facility. During the course of the forthcoming year the Company
will commence negotiations with the trustees of the pension plan to determine
the level of future employer cash contributions. The contributions will be
calculated in accordance with new UK pension legislation and it is therefore
likely that pension payments will increase by at least $2 million per annum from
July 2007.
To restrict the pressure that this expenditure will have on the Company's bank
facilities, focus will be maintained on the working capital reduction program
that has already been initiated. Emphasis will therefore continue to be placed
on strict working capital control in the forthcoming months. In conjunction with
this, the inventory reduction program that was implemented in quarters one and
two will continue, although temporary increases in inventories will occur as a
result of inventory builds that will be necessary during the closure of the
Wednesbury manufacturing site and other reorganization initiatives.
Going forward, the success factors critical to our business include sales growth
through penetration in new and existing markets; the implementation of
strategies to enable us to compete against suppliers based in low cost
manufacturing regimes; successful sourcing of new and existing products at
favorable prices, emphasis on new product development activities so that we can
exploit our brand equity and technical expertise to differentiate our product
offerings from cheap "me-too" imports; emphasis on promotional campaigns and
demonstration tours which focus on high margin product groups and on those high
added value areas of the Metrology and Magnetics businesses; continued
reorganization of our manufacturing and overhead bases so that they are as cost
efficient as possible; the successful onward development of new operations in
China and elsewhere; and the maximization of cash resources and the negotiation
of additional bank facilities, where required, so that we are able to fund new
initiatives and take advantage of market opportunities.
Much, however, will continue to depend on the level of retail demand in our UK,
French and Australasian markets. The results for fiscal 2006 were adversely
affected by softening demand and a further deterioration in consumer confidence
could significantly impact on our earnings levels in subsequent periods.
As previously reported, the formal resolution of the SEC legal action in fiscal
2005 enabled the Company to move forward with more certainty so that both short
and long term commercial strategies could be formulated and implemented. The
stability of the Company will be further enhanced by the settlement of the Class
and derivative Action litigation and by the sale of Jacuzzi Brands, Inc.'s 61.8%
majority shareholding in Spear & Jackson, Inc. to United Pacific Industries
Limited ("UPI") on July 28, 2006.
The development of detailed business strategies under our new ownership
structure is in its formative stages but potential synergies and areas of
specific market and commercial expertise have been identified which, going
forward, are hoped to be of benefit to both Spear & Jackson, Inc. and UPI. Both
UPI and Spear & Jackson, Inc. welcome this business combination which should
lead to the formation of an enterprise of sufficient size and with a range of
products that will enable it to compete effectively in the modern global trading
environment.
57
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company makes a range of contractual obligations in the ordinary course of
business. The following table summarizes the Company's principal obligations at
September 30, 2006:
Total Payments due by period ($m)
Contractual obligation Amount 1 year 1-3 4-5 5 years
Committed or less years years or more
($m)
Capital lease obligations........ 0.9 0.5 0.4 - -
Operating leases................. -
(note a)......................... 5.9 1.1 1.9 1.6 1.3
--- --- --- --- ---
6.8 1.6 2.3 1.6 1.3
--- --- --- --- ---
(a) Amounts represent the minimum rental commitments under non-cancellable
operating leases.
(b) Excluded from the above tables are the amounts payable by the Company to
the UK defined benefit pension plan as future funding obligations over the
five year term shown above cannot be accurately forecast. The annual
contribution rate is set annually by the actuary in accordance with the
applicable UK regulatory legislation. In the year ended September 30, 2006
the Company paid $3.4 million into the plan. In the year ended September
30, 2007, in the ten month period to July 31, 2007 the level of
contributions will be approximately $3.1 million. Contributions after that
date will be determined after consultation between the Company, the actuary
and the pension plan trustees. Following the introduction of new UK pension
legislation it is anticipated that post July 31, 2007 Company contributions
will increase to $5.9 per annum.
(c) As at September 30, 2006, the Company had letters of credit of $0.6 million
outstanding, which are secured by the UK and Australian credit facilities.
At September 30, 2006, the Company had no material off-balance sheet
arrangements other than the non-debt obligations described in contractual
obligations above.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States. As such, we are required to
make certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities as of the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the periods presented. Actual results could differ significantly from those
estimates under different assumptions and conditions. We believe that the
following discussion addresses our most critical accounting policies, which are
those that are most important to the portrayal of our financial condition and
results of operations and which require our most difficult and subjective
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. Note 2 to the accompanying consolidated
financial statements includes a summary of the significant accounting policies
used in the preparation of the consolidated financial statements.
Our most critical accounting policies are those relating to inventory valuation,
revenue recognition, foreign exchange risk, pension and post-retirement benefit
obligations and income taxes.
INVENTORY VALUATION
Inventories are stated at the lower of cost and net realizable value. Cost
includes all costs incurred in bringing each product to its present location and
condition, as follows:-
Raw materials, consumables and goods for resale - valued at cost determined on a
first in, first out basis.
Work in progress and finished goods - cost of direct materials and labor plus
attributable overheads based on a normal level of activity.
58
Provisions in respect of net realizable value and obsolescence are applied to
the gross value of the inventory. Net realizable value is based on estimated
selling price less any further costs expected to be incurred to completion and
disposal. Provision is made for slow moving or defective items by comparing
inventories on hand to future projected demand. Provision is made where
inventories held are in excess of 1 year's budgeted future sales as follows:
Inventory in excess of 1 to 2 years' sales: provision of 25% of cost
Inventory in excess of 2 to 3 years' sales: provision of 50% of cost
Inventory in excess of 3 to 5 years' sales: provision of 75% of cost
Inventory in excess of 5 years' sales: provision of 95% of cost
Obsolete inventories are subject to a 100% provision. This provisioning
methodology has been consistently applied by management over a number of years.
Management believes that this approach is both prudent and provides an accurate
and efficient manner for making suitable provision against slow moving and
obsolete inventory lines.
Comparable stock values are as follows:-
2006 2005
$m $m
Gross Stock
- raw materials and consumables............................ 6.2 5.3
- work in progress......................................... 4.5 6.4
- finished goods........................................... 19.3 19.8
Less
- slow moving, obsolete and net realizable value provisions (7.1) (6.5)
---- ----
Net Stock Valuation........................................... 22.9 25.0
==== ====
The overall decrease in the net value of inventory is $2.1 million which is
stated using year end US$ cross rates. The year end cross rate at September 30,
2006 was 1.8682 compared to 1.7688 at September 30, 2005. Restating the 2005
inventory at the 2006 closing cross rate would have the effect of increasing the
2005 inventories by $1.4 million. The total stock movement, excluding currency
fluctuations, is therefore a decrease of $3.5 million. This decrease is
attributable to:
(i) Rigorous stock reduction programs initiated in the year to September 30,
2006.
(ii) Higher than usual stock provisioning against old and obsolete lines.
Activity on the inventory reserve in the above years can be summarized as:
While the Company has benefited in income terms during the year from selling
inventories that had been previously written down, the inventory reserve has
increased during the year. This is primarily due to exchange rate fluctuations
and the insertion of one-time inventory provisions in the UK hand and garden and
Magnetics divisions as a result of the reorganizations carried out in those
operations.
REVENUE RECOGNITION
Revenue is recognized upon shipment of products or delivery of products to the
customer depending on the terms of the sale. Provisions are made for warranty
and return costs at the time of sale. Such provisions have not been material.
59
Most of the Company's major customers have provision for sales rebates in their
trading terms. The levels of rebates are individually negotiated with each
customer and are unique to that customer. Typically, a series of escalating
targets is set for purchases from the Company and, on reaching each target, a
rebate, usually paid in the form of credit note but occasionally in cash, is
triggered e.g.
The revenue targets are set on a twelve-month basis, however the period ends
used for these sales targets are not necessarily coterminous with the accounting
period end of Spear & Jackson, Inc. At any point in time, the rebate liability
is calculated by estimating the annual sales value for each customer (in order
to ascertain the rebate % the customer is likely to achieve), applying the
relevant % to the actual sales achieved to date, and then deducting any interim
rebates already paid.
The rebates charge is netted against gross sales in the profit and loss account.
Rebates are paid to customers per their individual agreements. Typically
payments are made semi-annually or annually, however there are agreements in
place in which rebates are paid monthly and quarterly.
Generally there is no provision for customers to return products they cannot
sell. However, a small number of customers have negotiated a return clause in
their trading agreements. There is a time limit for these returns, which vary
from customer to customer, none of which exceed 12 months from the original
invoice date. The amount of mutual returns made in the year ended September 30,
2006 was $0.9 million (September 30, 2005 $0.04 million).
FOREIGN CURRENCY TRANSLATION
The functional currency of each of the Company's foreign operations is the local
currency. The consolidated financial statements of Spear & Jackson, Inc. are
denominated in US dollars.
Changes in exchange rates between UK sterling, the Euro, the Chinese Yuan, the
New Zealand dollar, the Australian dollar and the US dollar will affect the
translation of the UK, French, Dutch, Chinese, New Zealand and Australian
subsidiaries' financial results into US dollars for the purposes of reporting
the consolidated financial results.
The process by which each foreign subsidiary's financial results are translated
into US dollars is as follows: income statement accounts are translated at
average exchange rates for the period; balance sheet asset and liability
accounts are translated at end of period exchange rates; and equity accounts are
translated at historical exchange rates.
The US$ Balance sheet and income statement financial data could therefore be
subject to material fluctuation year on year as a result of significant
movements in the cross rate between the US$ and the various source functional
rates used in the consolidation.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in the Accumulated Other Comprehensive Income
(Loss) account in Stockholders' Equity. Management has decided not to hedge
against the impact of exposures giving rise to these translation adjustments as
such hedges may impact upon the Company's cash flow compared to the translation
adjustments which do not affect cash flow in the medium term.
PENSION AND POST-RETIREMENT BENEFIT OBLIGATIONS
A. ACTUARIAL BACKGROUND
The Company operates a contributory defined benefit plan covering certain of its
employees in the United Kingdom based subsidiaries of Spear & Jackson plc.
60
The overall funding objective of the scheme is to hold assets that are
sufficient to cover the Plan's past service and ongoing liabilities. These
liabilities form the "funding target" and include an allowance for expected
future increases to the pensionable earnings of active members so that the cost
of the plan's benefits is considered over the longer term.
The last full actuarial valuation of the scheme was carried out at December 31,
2004. This showed the following:
$M
Value of past service ongoing liabilities...... (190.0)
Market value of assets......................... 150.0
-----
Past service deficit........................... (40.0)
=====
FUNDING RATIO.................................. 79%
Under the United Kingdom Pensions Act 1995, schemes were required to satisfy a
minimum funding test known as the Minimum Funding Requirement (MFR). This was
based on the benefits which would be paid if the active members had left the
plan on the valuation date. The ratio of the market value of the plan's assets
to its MFR liabilities was known as the MFR funding ratio. At the 2004 valuation
date the MFR funding ratio was 89%.
The previous full actuarial valuation was performed at April 5, 2002. The base
funding and MFR funding ratios at that date and at September 30 financial year
ends thereafter have been:-
Funding Ratios
Base % MFR %
April 5, 2002............... 94 94
September 30, 2002.......... 78 91
September 30, 2003.......... 89 96
September 30, 2004.......... 81 92
September 30, 2005.......... 85 96
At September 30, 2006 (the latest date at which information is available for the
current year annual filing), the base funding ratio and MFR funding ratio shows
little movement at 84% and 98% respectively.
Company pension contributions are determined by the Trustees of the plan with
the agreement of the principal employer and after consultation with the actuary.
Contribution levels are set with the intention of eliminating the past service
deficit in the long term.
Following the December 2004 actuarial valuation of the Plan, the rate of
employer contribution fell due for re-certification on or before May 31, 2005.
After discussion between the Plan trustees and the Company it was agreed that
the Company would make a special contribution to the Plan of L4 million
(approximately $7.2 million) payable in two installments of L2 million
(approximately $3.6 million) in June and September 2005. It was also agreed that
from June 2005 the Company's annual rate of pension contribution would increase
to L1.9 million (approximately $3.7 million).
The actuary has confirmed that this contribution rate, which will remain fixed
until July 31, 2007 providing certain funding criteria are met, is adequate for
the purpose of securing that the MFR funding ratio will be returned to 100% by
the end of 10 years. The Company believes that payments at the current level
will be adequately funded from future annual operating cash generation.
Contributions depend on the future experience of the Plan subsequent to the
valuation date, particularly the investment returns. The next valuation of the
Plan will be carried out no later than December 31, 2007. It is intended that
the contribution rate will be reviewed in 2007 and any adjustments to the rate
agreed at that time. Should such agreement not, however, be reached by August
2007, then the Company's contribution will increase to L3 million (approximately
$5.3 million). Following changes in UK pensions legislation the contribution
rate that will apply from August 2007 onwards will be determined in accordance
with the requirements of the Scheme Specific Funding regulations rather than
MFR. The Scheme Specific Funding regulations require , inter alia, that plan
deficits must be made good over an accelerated time frame and this requirement,
together with other conditions, will mean that the annual contribution level
will increase substantially from the rate of L1.9 million ($3.7 million) that is
currently being paid by the Company.
61
Contributions will therefore be subject to review, upwards or downwards, at
future actuarial valuations. Contribution rates in previous years have been as
follows:
Rate
%
Prior to June 1, 2000................ 5.0
June 1, 2000 to July 31, 2001........ 28.5
August 1, 2001 to October 30, 2002... 24.8
October 31, 2002 to May 31, 2005..... 21.2
The amounts of employer contributions paid at these rates in recent accounting
periods are:
Year Ended $ million
September 30, 2003....... 2.7
September 30, 2004....... 2.8
September 30, 2005....... 10.2
September 30, 2006....... 3.4
The contributions paid in the year ended September 30, 2005 include a special
contribution of $7.2 million.
B. PRESENTATION OF PENSION AND POST RETIREMENT BENEFITS UNDER SFAS 87
Several statistical and other factors which attempt to anticipate future events
are used in calculating the expense and liability related to the plans. These
factors include assumptions about the discount rate, expected return on plan
assets and rate of future compensation increases as determined by us, within
certain guidelines, and in conjunction with our actuarial consultants and
auditors. In addition, our actuarial consultants also use subjective factors
such as withdrawal and mortality rates to estimate the expense and liability
related to these plans. The actuarial assumptions used by us may differ
significantly, either favorably or unfavorably, from actual results due to
changing market and economic conditions, higher or lower withdrawal rates or
longer or shorter life spans of participants.
This discussion addresses the sensitivities in assumptions that could impact the
plan disclosures in the company's consolidated balance sheet and income
statement and also their effect on ongoing employer contribution payments and
the company's liquidity.
The principal assumptions used to determine Spear & Jackson plc's pension
benefit costs are the discount rate, the expected return on plan assets and the
rate of compensation increase.
The discount rate used to determine the present value of future pension payments
is based on the yields on high-quality, fixed-income investments (typically
AA-rated corporate bonds). The present values of the Company's future pension
and other post-retirement obligations were determined using discount rates of
5.05% at September 30, 2006, 5.0% at September 30, 2005, and 5.5% at September
30, 2004.
The expected rate of return on assets is set in the light of long term
expectations for returns on the assets held by the plan. The start point for the
derivation of the rate is the return on gilts of appropriate term compared to
the plan liabilities. To reflect the fact that a significant part of the plan's
assets are invested in asset classes, such as equities and corporate bonds, that
are expected to produce higher returns than gilts, the overall rate of return on
assets has then been adjusted to take account of these higher yields.
The rate of compensation increase and the expected return on plan assets were
assumed to be 3.1% and 6.6% in the year ended September 30, 2006 (2005: 2.9% and
6.5% respectively, 2004: 2.8% and 7.0% respectively).
As noted above, a number of statistical and other factors are utilized in
determining the assumptions about the discount rate, expected return on Plan
assets, rates of future compensation and inflationary increase and mortality
rates necessary for the preparation of the disclosures relating to the Company's
Pension Plan which are required in accordance with SFAS 87. The use of different
assumptions may have a significant impact on the measurement of the profit and
loss account pension expense and the balance sheet pension liability that are to
be recognized in the Company's financial statements.
62
Certain of these assumptions have judgmental aspects. There is, therefore, the
potential for a range of acceptable values to be available for several of the
assumptions at any time, all of which could be justified and considered
appropriate for the purposes of compiling the necessary disclosures under SFAS
87.
The range of possible acceptable assumptions reflects, inter alia, degrees of
optimism and caution that the actuaries can build into their assumption models
concerning certain macro and micro economic conditions and other demographic
factors. Further, because of the constantly evolving nature of such economic and
demographic factors, assumptions will not remain constant over time but will
move to reflect changes in the principal calculation drivers that underpin them.
The following sensitivity table illustrates the impact on the Company's balance
sheet and the amounts charged against the Company's earnings in respect of SFAS
87 pension expense as a result of making changes in certain of the key
assumptions used in calculating the assets and liabilities of the pension plan:
Impact on
September 30,
2006 Impact on
Impact on 2007 Projected September 30,
Pre-Tax Pension Benefit 2006 Equity
Change in Assumption Expense Obligation (Net of tax)
25 basis point
decrease in discount rate..... +$1.05 million +$0.33 million -$6.88 million
25 basis point
increase in discount rate..... -$1.01 million -$9.85 million +$6.56 million
25 basis point
decrease in expected
return on assets.............. +$0.41 million - -
25 basis point
increase in expected
return on assets.............. -$0.41 million - -
25 basis point
increase in compensation
assumption.................... +$0.15 million +$0.77 million -
25 basis point
decrease in compensation
assumption.................... -$0.15 million -$0.75 million -
Use of PA8002010
Mortality table............... -$1.56 million -$11.47 million +$7.75 million
Given below, in tabular format, is a summary of the assumptions used in the
preparation of the SFAS 87 pension calculations in the years ended September 30,
2006, 2005, 2004 and 2003.
ASSUMPTIONS SUMMARY
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
2006 2005 2004 2003
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate.................... 5.05% 5.00% 5.50% 5.50%
Rate of compensation increase.... 3.10% 2.90% 2.80% 2.50%
Expected return on assets........ 6.60% 6.50% 7.00% 7.50%
Fixed pension increase........... 5.00% 5.00% 5.00% 5.00%
LPI pension increase............. 2.80% 2.70% 2.70% 2.50%
Post 1988 GMP increase........... 2.50% 2.40% 2.40% 2.00%
Inflation........................ 3.00% 2.80% 2.80% 2.50%
Mortality table.................. - - PA80 PA90
Mortality table - current
pensioners .................... PA92C2005 PA92C2005 - -
Mortality table - future
pensioners..................... PA92C2015 PA92C2015 - -
63
Using the assumptions referred to above, the funded status of the plan under FAS
87 at September 30, 2006, 2005, 2004 and 2003 was as follows:
9/30/06 9/30/04 9/30/04 9/30/03
$'000 $'000 $'000 $'000
Projected benefit obligation.. (234,598) (213,471) (180,375) (154,105)
Fair value of plan assets..... 186,205 170,110 141,257 124,355
Projected benefit obligation
in excess of plan assets..... (48,393) (43,361) (39,118) (29,750)
Unrecognized actuarial loss 71,322 69,907 59,902 47,637
Net amount recognized......... 22,929 26,546 20,784 17,887
As at September 30, 2003, 2004 and 2005, the 2006 projected benefit obligation
is in excess of plan assets. The impact of this underfunding has not been
recognized in its entirety in the above tabulations but has, instead, been
deferred or spread over the assumed future working lifetime of 13 years for
active plan members in years 2003 and 2004 and 12 years in 2005 and 2006 based
on actuarial expectation of a substantial future increase in the value of plan
assets.
The majority of the unrecognized actuarial loss has arisen as a result of
substantial asset losses, significant liability increases due to a continuing
reduction in the discount rate and the increased longevity of Plan participants.
The impact of the reduction in the discount rate has been particularly severe
for the Plan given that the membership profile of the scheme is relatively
mature (with over 50% of the Plan members being pensioners) and that a
significant proportion of pensions increase at a fixed 5% when in payment.
Due to the lower discount rate, a decline in the fair market value of plan
assets during 2003 and the use of revised mortality tables, the accumulated
benefit obligation at September 2003, September 30, 2004 and 2005 exceeded the
fair value of plan assets by $25.3 million, $33.5 million and $36.0 million
respectively. At September 30, 2006, the ABO again exceeded the market value of
plan assets. The excess at the 2006 period end was $40.6 million and a net of
tax comprehensive loss of $6.3 million has been credited to shareholders' equity
in 2006. Cumulative amounts recognized in the consolidated balance sheet at
September 30, 2006, together with comparative disclosures for 2003, 2004 and
2005 are therefore as follows:
2006 2005 2004 2003
$'000 $'000 $'000 $'000
Accrued pension liability
(disclosed in other
liabilities)................. (40,565) (35,954) (33,545) (25,262)
Other comprehensive income
(disclosed in shareholders'
equity)...................... 63,494 62,500 54,329 43,149
Net amount recognized......... 22,929 26,546 20,784 17,887
Assuming only a modest increase in the fair market value of plan assets in 2006
and the application of a reduced discount rate it is anticipated that both the
accumulated benefit obligation and the potential benefit obligation at September
30, 2007 will exceed the fair value of plan assets. As a result of this, and
also the publication of a new US financial reporting standard relating to the
revised accounting treatment of defined benefit pension plans, it is likely that
the amount of the pension deficit recorded in the Company's balance sheet at
September 30, 2007 will increase substantially.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R) (SFAS 158). This statement requires
recognition of the overfunded or underfunded status of defined benefit pension
and other postretirement plans as an asset or liability in the statement of
financial position and changes in that funded status to be recognized in
comprehensive income in the year in which the changes occur. SFAS 158 also
requires measurement of the funded status of a plan as of the date of the
statement of financial position. The recognition provisions of SFAS 158 are
effective for fiscal 2007, while the measurement date provisions are effective
for fiscal year 2009. If SFAS 158 were applied at the end of fiscal 2006, using
the Company's September 20, 2006 actuarial valuation, we would have recorded an
additional pre-tax charge to accumulated other comprehensive income totaling
$7.8 million ($5.5 million after tax) representing the difference between the
funded status of the plans based on the projected benefit obligation and the
amounts recorded on our balance sheet at September 30, 2006.
64
Under SFAS 87, the following amounts have been charged against earnings in the
years ended September 30, 2006, 2005 and 2004.
$m
2006 8.4
2005 4.0
2004 1.3
The Company has been advised by its actuaries that the comparable SFAS87 pension
charge for the year ended September 30, 2007 will be approximately $7.9 million.
The increase in the charge over the last three years is primarily due to an
increase in the projected benefit obligation relative to the increase in the
market related value of assets. The market related value of assets, which is
used to calculate the deferred losses in the plan and the expected return on
assets, smoothes the movements in the fair value of assets over a five-year
period.
During the year ended September 30, 2006 the fair value of assets increased by
around 3.6%. This increase was broadly in line with the increase in the
projected benefit obligation over the same period. However, the impact of the
increase in the fair value of assets on the pension cost is to be spread over
five years. For illustrative purposes, if the full impact of the increase in the
fair value was to be taken into account in the SFAS 87 pension charge
calculation, the pension cost for the year ending September 30, 2006 would be
approximately $3.0 million lower. Therefore, a significant part of the increase
in the pension charge is attributable to the market related value calculation.
Recognition of the deferred gain over the next four years would, if plan
experience is broadly in line with expectations, lead to a corresponding
decrease in the pension charge over that time.
INCOME TAXES
We are required to recognize a provision for income taxes based upon the taxable
income and temporary differences for each of the tax jurisdictions in which we
operate and for all discrete reportable income streams within those
jurisdictions. This process requires a calculation of taxes payable and an
analysis of temporary differences between the book and tax bases of our assets
and liabilities, including various accruals, allowances, depreciation and
amortization. The tax effect of these temporary differences and the estimated
tax benefit from our tax net operating losses are reported as deferred tax
assets and liabilities in our consolidated balance sheet.
Spear & Jackson, Inc. has approximately twenty income streams within its
subsidiary companies for which individual income tax computations are required.
Certain of these income streams have NOLs brought forward from earlier periods
that are available for set off against current period earnings arising within
those streams. Aggregating these individual income tax calculations derives the
income tax charge or credit that appears in the Company's consolidated quarterly
and annual financial statements.
Because of the streamed approach that is applied to the Company's earnings for
the purpose of calculating its overall taxation liability, significant movements
in the Company's effective rate of income tax can arise despite consolidated pre
tax earnings remaining constant between one reporting period and the next.
Factors giving rise to such fluctuations include:
a) Periodic variations in the geographical location of earnings. For example,
losses incurred in any of our UK subsidiaries in a period may be set off
against profits arising in other UK entities in the same period. Where
individual UK profit streams are in excess of UK losses, all the losses can
be absorbed. If the UK taxable losses exceed UK taxable profits the excess
losses cannot, however, be surrendered to non-UK companies. A situation may
therefore arise whereby a reduction in the level of profitability of our UK
subsidiaries from one reporting period to the next could be matched by an
increase in earnings in, say, our French affiliate. Although the overall
total of consolidated pre tax earnings in the two periods remains
unaltered, a higher effective tax charge may result as a consequence of
excess UK tax losses arising in the second period, which cannot be offset
against the French earnings. The French earnings thus remain unsheltered
and attract taxation at the local statutory rate. The excess UK losses may
not give rise to a taxation credit if a carry forward of the losses as a
deferred tax asset cannot be justified through doubts concerning their
ultimate utilization against future profits and a higher period two tax
charge will follow.
65
b) Variations in the amount of expenses not allowed to be treated as a
deduction for income tax purposes. The level of such permanently
disallowable items can vary substantially period to period as a result, for
example, of the incidence of substantial one-off legal and professional
fees incurred on non-trading items.
c) Higher or lower levels of profit arising in entities having the benefit of
NOLs which have not been capitalized as a deferred tax asset because of
doubts concerning their short term realization against future profits.
d) Fluctuations in the level of losses incurred in consistently loss making
subsidiaries which already have significant NOLs against which valuation
allowances have been previously made.
The interaction of these factors can cause our effective tax rate to vary
significantly. Because of the complex interrelationships involved and variances
between actual and budgeted earnings on both a consolidated and an individual
income stream basis, the impact of these items on the Company's overall taxation
rate cannot always be accurately forecast for future periods.
The Company has recorded significant deferred tax assets in its current and
prior year consolidated balance sheets. SFAS 109, "Accounting for Income Taxes",
requires a valuation allowance to be established when it is "more likely than
not" that all or a portion of a deferred tax asset will not be realized. A
review of all available positive and negative evidence is undertaken by the
Company each year to determine the likelihood of realizing the deferred tax
benefits which potentially arise on its property, plant and equipment, the UK
pension benefit plan, accruals and allowances, inventories and tax loss carry
forwards.
Such reviews consider the available positive and negative evidence, and comprise
all those factors believed to be relevant, including the Company's recent
operating results and its expected future profitability, including the impact of
its manufacturing restructuring strategies. Based on these reviews, the Company
can then determine whether there is a reasonable expectation that it will
generate sufficient future taxable income such that its gross deferred tax
assets relating to property, plant and equipment, the UK pension benefit plan,
accruals and allowances and inventories are "more-likely-than-not" to be
realized under the SFAS 109 criteria.
The gross deferred tax assets in respect of tax loss carry forwards and other
tax credits currently relate to operating loss carry forwards ("NOLS") in the
Company's UK, US, French and Australian companies and to other UK tax credits.
The Company's NOLs arising in the UK, France and Australia can be carried
forward without time expiration while the US tax losses expire at various dates
between 2017 and 2021. A recent history of operating losses in the entities
concerned and other factors has precluded the Company from demonstrating that it
is more likely than not that the benefits of these domestic and foreign
operating loss carry forwards and other tax credits will be realized wholly or
in parts. Accordingly, at September 30, 2006 a valuation allowance has been
applied against all NOLS in excess of those that are anticipated to be utilized
in the UK entities in 2007 and, in prior years, a full valuation allowance has
been recorded against these items.
Spear & Jackson will continue to review the recoverability of its deferred tax
assets and, based on such periodic reviews, the Company could recognize a change
in the valuation allowance relating to its deferred tax assets in the future
should, for example, estimates of forecast taxable income be reduced or other
favorable or adverse events occur.
RECENT ACCOUNTING PRONOUNCEMENTS
See note 2 in the "Notes to the Consolidated Financial Statements in Part II of
this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The principal market risks to which the Company is exposed comprise interest and
exchange rate fluctuation, changes in commodity prices and credit risk.
66
INTEREST RATE RISK
The Company is exposed to interest rate changes primarily as a result of
interest payable on its bank borrowings and interest receivable on its cash
deposits. At September 30, 2006 the Company had no borrowings in the form of
overdrafts and had cash and cash equivalents of approximately $9.9 million.
Given the current levels of borrowings, the Company believes that a 1% change in
interest rates would not have a material impact on consolidated income or cash
flows. Holding the same variables constant, a 10% increase in interest rates
would again have a negligible effect on interest payable.
The nature and amount of our debt and cash deposits may, however, vary as a
result of future business requirements, market conditions, and other factors.
The definitive extent of our interest rate risk is not therefore quantifiable or
predictable because of the variability of future interest rates and business
financing requirements.
EXCHANGE RATE RISK
The Company has operations in the United Kingdom, France, Holland, Australia,
New Zealand and China. These operations transact business in the relevant local
currency and their financial statements are prepared in those currencies.
Translation of the balance sheets, income statements and cash flows of these
subsidiaries into US dollars is therefore impacted by changes in foreign
exchange rates.
In the year ended September 30, 2006 compared to the equivalent period in 2005,
the change in exchange rates had the effect of decreasing the Company's
consolidated sales by $3.1 million, or 3.1%. Since most of the Company's
international operating expenses are also denominated in local currencies, the
change in exchange rates had the effect decreasing operating expenses by $0.9
million for the twelve months ended September 30, 2006 compared to the
comparable prior year period. If the US dollar further weakens in the future, it
could result in the Company having to suffer reduced margins in order for its
products to remain competitive in the local market place.
Additionally, our subsidiaries bill and receive payments from some of their
foreign customers and are invoiced and pay certain of their overseas suppliers
in the functional currencies of those customers and suppliers. Accordingly, the
base currency equivalent of these sales and purchases is affected by changes in
foreign currency exchange rate.
We manage the risk and attempt to reduce such exposure by periodically entering
into short-term forward exchange contracts. At September 30, 2006 the Company
held forward contracts to sell Australian and New Zealand dollars to buy
approximately $1.2 million US dollars.
The contract values were not materially different to the period end value of the
contracts. A 10% strengthening or weakening of the US$ against its Australian
and New Zealand counterparts could, however, result in the Company suffering
losses or benefiting from gains of approximately $0.05 million had no forward
contracts been taken out.
COMMODITY PRICE RISK
The major raw materials that we purchase for production are steel, cobalt,
nickel and plastic. We currently do not have a hedging program in place to
manage fluctuations in commodity prices.
CREDIT RISK
Credit risk is the possibility of loss from a customer's failure to make
payments according to contract terms. Prior to granting credit, each customer is
evaluated, taking into consideration the borrower's financial condition, past
payment experience, credit bureau information, and other financial and
qualitative factors that may affect the borrower's ability to repay. Specific
credit reviews are used in performing this evaluation. Credit that has been
granted is typically monitored through a control process that closely monitors
past due accounts and initiates collection actions when appropriate. In
addition, credit insurance is taken out in respect of a substantial proportion
of the Company's non-UK receivables as a means of recovering outstanding debt
where the customer is unable to pay.
At September 30, 2006 the Company had made an allowance of $1.6 million in
respect of doubtful accounts which management believes is sufficient to cover
all known or expected debt non-recoveries.
67
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Page Number
Report of Independent Registered Public Accounting Firm............ F-1
Consolidated Balance Sheets as of September 30, 2006 and 2005...... F-2
Consolidated Statements of Operations for the years ended
September 30, 2006, 2005 and 2004................................ F-3
Consolidated Statements of Changes in Stockholders' Equity
for the years ended September 30, 2006, 2005 and 2004............ F-4
Consolidated Statements of Cash Flows for the years ended
September 30, 2006, 2005 and 2004................................ F-5
Notes to Consolidated Financial Statements......................... F-6
68
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Spear & Jackson, Inc.
Wellington,
Florida
We have audited the accompanying consolidated balance sheets of Spear & Jackson,
Inc. and Subsidiaries (the "Company") as of September 30, 2006 and September
30, 2005 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 2006. These 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 audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Spear & Jackson,
Inc. and its subsidiaries as of September 30, 2006, and September 30, 2005 and
the consolidated results of their operations and its cash flows for each of the
three years in the period ended September 30, 2006, in conformity with US
generally accepted accounting principles.
/s/ Chantrey Vellacott DFK LLP
Chartered Accountants,
London, England
January 15, 2007
F-1
SPEAR & JACKSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2004
------------ ------------ ------------
Net sales .................................................. $ 96,993 $ 100,698 $ 99,485
Cost of goods sold ......................................... 67,896 67,463 67,574
------------ ------------ ------------
Gross profit ............................................... 29,097 33,235 31,911
Operating costs and expenses:
Selling, general and administrative expenses ........... 36,078 31,405 29,753
------------ ------------ ------------
Operating (loss) income .................................... (6,981) 1,830 2,158
Other income (expense):
Rental and other income ................................ 148 157 184
Interest (net) ......................................... 27 47 (300)
Share of net earnings of investment in joint venture ... 99 - -
------------ ------------ ------------
(Loss) income from continuing operations before unusual or
infrequent items ......................................... (6,707) 2,034 2,042
Gain on sale of land and buildings ..................... 3,497 3,279 -
Settlement of class and derivative action litigation ... (720) - -
Manufacturing and other reorganization costs ........... (3,469) (1,111) -
------------ ------------ ------------
(Loss) income from continuing operations before income taxes (7,399) 4,202 2,042
Income tax benefit (provision) ............................. 973 (468) (1,205)
------------ ------------ ------------
Net (loss) income from continuing operations ............... (6,426) 3,734 837
------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations
(net of income taxes of $nil in 2006 and 2005 and 2004) (101) (163) (214)
Losses and adjustments to previously recorded losses on
disposal of discontinued operations ................... 48 (476) (187)
------------ ------------ ------------
Net loss from discontinued operations ...................... (53) (639) (401)
------------ ------------ ------------
Net (loss) income .......................................... $ (6,479) $ 3,095 $ 436
============ ============ ============
Basic and diluted net (loss) income per share:
From continuing operations ............................. $ (1.12) $ 0.42 $ 0.07
From discontinued operations ........................... (0.01) (0.07) (0.03)
------------ ------------ ------------
$ (1.13) $ 0.35 $ 0.04
============ ============ ============
Weighted average shares outstanding ........................ 5,735,561 8,845,290 11,741,122
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-2
SPEAR & JACKSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT NUMBER OF SHARES)
AT SEPTEMBER 30, AT SEPTEMBER 30,
2006 2005
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 9,930 $ 7,289
Trade receivables, net ...................................... 15,983 16,448
Inventories ................................................. 22,853 24,999
Assets held for sale ........................................ - -
Foreign taxes recoverable ................................... 215 -
Deferred income tax asset, current portion .................. 2,182 2,623
Other current assets ........................................ 1,425 1,316
-------- --------
Total current assets ................................... 52,588 52,675
Property, plant and equipment, net ............................. 15,594 17,568
Deferred income tax asset ...................................... 14,570 12,690
Investments .................................................... 508 157
-------- --------
Total assets ........................................... $ 83,260 $ 83,090
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................... $ - $ 752
Trade accounts payable ...................................... 7,766 8,103
Accrued expenses and other liabilities ...................... 12,234 11,241
Taxes payable ............................................... 155 88
-------- --------
Total current liabilities .............................. 20,155 20,184
Other liabilities .............................................. 699 749
Pension liability .............................................. 40,565 35,954
-------- --------
Total liabilities ...................................... 61,419 56,887
-------- --------
Stockholders' equity:
Common stock ................................................... 12 12
Additional paid in capital ..................................... 51,590 51,590
Accumulated other comprehensive income(loss):
Minimum pension liability adjustment, net of tax expressed at
year exchange rates of $19,048 in 2006 and $18,750 in 2005 (44,447) (43,751)
Foreign currency translation adjustment, net of tax $nil .... 14,581 11,765
Unrealized loss on derivative instruments ................... (10) (7)
Retained earnings .............................................. 655 7,134
Less: 6,275,561 common stock shares held in treasury, at cost .. (540) (540)
-------- --------
Total stockholders' equity ............................. $ 21,841 $ 26,203
-------- --------
Total liabilities and stockholders' equity ............. $ 83,260 $ 83,090
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SPEAR & JACKSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT NUMBER OF SHARES)
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
-------------------------------------
UNREALIZED
ADDITIONAL PENSION FOREIGN GAINS/(LOSSES) TREASURY
COMMON STOCK PAID IN MINIMUM CURRENCY ON DERIVATIVE RETAINED STOCK
NUMBER AMOUNT CAPITAL LIABILITY TRANSLATION INSTRUMENTS EARNINGS (COMMON) TOTAL
---------- ------ ---------- --------- ----------- ------------- -------- -------- --------
Balance October 1, 2003....... 12,011,122 12 51,590 (30,204) 7,406 (15) 3,603 (540) 31,852
Comprehensive income
Net income for the year...... 436 436
Other comprehensive income:
Foreign currency translation
adjustment................. (2,509) 5,023 2,514
Reclassification adjustment
for prior year unrealized
holding gains included in
net income................. 15 15
Unrealized holding losses
originating in the year.... (61) (61)
Additional minimum pension
liability adjustment
(net of tax of $2,278)..... (5,317) (5,317)
--------
Other comprehensive loss..... (2,849)
--------
Total comprehensive loss...... (2,413)
---------- ------ ---------- -------- ---------- ------------ ------- ------- --------
Balance September 30, 2004.... 12,011,122 12 $ 51,590 $(38,030) $ 12,429 $ (61) $ 4,039 $ (540) $ 29,439
========== ====== ========== ======== ========== ============ ======= ======= ========
Comprehensive income
Net income for the year...... 3,095 3,095
Other comprehensive income:
Foreign currency translation
adjustment................. 608 (664) (56)
Reclassification adjustment
for prior year unrealized
holding gains included in
net income................. 61 61
Unrealized holding losses
originating in the year.... (7) (7)
Additional minimum pension
liability adjustment
(net of tax of $2,713)..... (6,329) (6,329)
--------
Other comprehensive loss..... (6,331)
--------
Total comprehensive loss...... (3,236)
---------- ------ ---------- -------- ---------- ------------ ------- ------- --------
Balance September 30, 2005.... 12,011,122 $ 12 $ 51,590 $(43,751) $ 11,765 $ (7) $ 7,134 $ (540) $ 26,203
========== ====== ========== ======== ========== ============ ======= ======= =========
Comprehensive income
Net loss for the year........ (6,479) (6,479)
Other comprehensive income:
Foreign currency translation
adjustment................. (2,458) 2,816 358
Reclassification adjustment
for prior year unrealized
holding gains included in
net income................. 7 7
Unrealized holding losses
originating in the year.... (10) (10)
Additional minimum pension
liability adjustment
(net of tax of $756)....... 1,762 1,762
--------
Other comprehensive income... 2,117
--------
Total comprehensive loss...... (4,362)
---------- ------ ---------- -------- ---------- ------------ ------- ------- --------
Balance September 30, 2006.... 12,011,122 $ 12 $ 51,590 $(44,447) $ 14,581 $ (10) $ 655 $ (540) $ 21,841
========== ====== ========== ======== ========== ============ ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SPEAR & JACKSON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR SHE FISCAL YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2004
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income attributable to continuing and discontinued
operations ..................................................... $ (6,479) $ 3,095 $ 436
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation ................................................. 3,223 3,542 2,929
Provision for loss on disposal of discontinued operations .... (36) 503 187
Amortization of asset held for sale .......................... - 16 -
Gain on sale of land and buildings ........................... (3,497) (7,279) -
(Gain) on sale of plant, property and equipment .............. (132) 6 14
Deferred income taxes ........................................ (1,282) 294 1,092
Equity earnings in joint venture ............................. (99) - -
Changes in operating assets and liabilities, excluding the effects
of acquisitions and dispositions:
Decrease (increase) is trade receivables ..................... 1,327 2,129 (1,930)
Decrease (increase) in inventories ........................... 2,965 (3,553) 3,192
Increase in other current assets ............................. (35) (30) (437)
Contributions paid to pension plan ........................... (3,428) (10,207) (2,706)
Increase in other non-current liabilities .................... 8,357 3,991 1,295
(Decrease) increase in trade accounts payable ................ (708) (168) 392
Increase (decrease) in accrued expenses and other liabilities (278) (2,132) (521)
(Decrease) increase in taxes payable ......................... (125) 37 (56)
Decrease in other liabilities ................................ (88) (423) (722)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ................ (315) (6,179) 3,165
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ....................... (946) (986) (6,956)
Proceeds from sale of property, plant and equipment .............. 4,965 8,676 81
Purchase of equity investment .................................... (229) - -
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................ 3,790 7,690 (6,875)
-------- -------- --------
FINANCING ACTIVITIES:
Repayment of overdraft ........................................... (794) (77) (261)
Increase in overdraft ............................................ - 762 -
-------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ................ (794) 685 (261)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents ....... (40) 3 (130)
-------- -------- --------
CHANGE IN CASH AND CASH EQUIVALENTS ................................ 2,641 2,199 (4,101)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..................... 7,289 5,090 9,191
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YFAR ........................... $ 9,930 $ 7,289 $ 5,090
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash (received) paid for interest ............................... $ (27) $ (32) $ 297
======== ======== ========
Cash paid for income taxes ...................................... $ 434 $ 137 $ 169
======== ======== ========
Non-cash investing and financing activities ..................... $ 649 $ 393 $ 235
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARES)
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
These consolidated financial statements are expressed in U.S. dollars
and have been prepared in accordance with accounting principles generally
accepted in the United States. The consolidated financial statements include the
accounts of Spear & Jackson, Inc. (the Company) and its wholly owned
subsidiaries, Mega Tools Limited, Mega Tools USA, Inc., Megapro Tools, Inc., S
and J Acquisition Corp., Spear & Jackson plc and Bowers Group plc. Both Spear &
Jackson plc and Bowers Group plc are sub-holding companies and their business is
carried out by the following directly and indirectly owned subsidiaries: Bowers
Metrology Limited, Bowers Metrology (UK) Limited, Coventry Gauge Limited, CV
Instruments Limited, Eclipse Magnetics Limited, Spear & Jackson (New Zealand)
Limited, James Neill Canada Inc., James Neill Holdings Limited, James Neill
U.S.A. Inc., Spear & Jackson (Australia) Pty Ltd., Magnacut Limited, Neill Tools
Limited, Spear & Jackson Garden Products Limited, Spear & Jackson Holdings
Limited, Spear & Jackson France S.A., Societe Neill France S.A. , CV Instruments
Europe BV and Bowers Eclipse Equipment Shanghai Co. Limited.
As further explained in note 3, below, the purchase of Spear & Jackson
plc and Bowers Group plc by Megapro Tools, Inc. (now Spear & Jackson, Inc.),
which was completed on September 6, 2002, was treated as a reverse acquisition.
The results of operations of acquired companies have been included in the
consolidated statements of operations and cash flows of the Company from the
date of acquisition. The results of operations of companies sold during the
period are included in the consolidated statements of operations and cash flows
of the Company up to the date of disposal. The results and assets of
discontinued operations are presented in accordance with Statement of Financial
Accounting Standards ("SFAS") 144.
All significant intercompany accounts and transactions have been
eliminated on consolidation. Certain prior year amounts have been reclassified
in the accompanying financial statements to conform with current year
presentation.
NOTE 2 - ACCOUNTING POLICIES
FISCAL YEAR: All fiscal year data contained herein reflect results of operations
for the years ended September 30, 2006, September 30, 2005 and September 30,
2004.
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
FOREIGN CURRENCY TRANSLATION: The consolidated financial statements of Spear &
Jackson, Inc. are denominated in US dollars. Changes in exchange rates between
UK sterling, the Euro, the New Zealand dollar, the Australian dollar, the
Chinese yuan and the US dollar will affect the translation of the UK, French,
New Zealand, Chinese and Australian subsidiaries' financial results into US
dollars for the purposes of reporting the consolidated financial results. The
process by which each foreign subsidiary's financial results are translated into
US dollars is as follows: income statement accounts are translated at average
exchange rates for the period; balance sheet asset and liability accounts are
translated at end of period exchange rates; and equity accounts are translated
at historical exchange rates. Translation of the balance sheet in this manner
affects the stockholders' equity account, referred to as the accumulated other
comprehensive income account. Management has decided not to hedge against the
impact of exposures giving rise to these translation adjustments as such hedges
may impact upon the Company's cash flow compared to the translation adjustments
which do not affect cash flow in the medium term.
F-6
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 2 - ACCOUNTING POLICIES - CONTINUED
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated on the
basis of cost less accumulated depreciation provided under both the
straight-line method and the declining balance basis, depending on type and
class of asset.
Depreciation is calculated using the following estimated useful lives:
Buildings - depreciation based on lives ranging from 25 to 70 years
Equipment - depreciation based on lives ranging from 2 to 10 years
Vehicles - depreciation based on lives ranging from 3 to 4 years
Computer hardware - depreciation based on lives ranging from 3 to 5 years
Computer software - depreciation based on lives ranging from 1 to 3 years
Where assets are held under finance leases the assets are depreciated over their
estimated useful lives or the period of the lease, if shorter.
All of the Company's long lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected discounted future cash flows is less
than the carrying value of the asset, a loss is recognized based upon the fair
value of the asset and its carrying value.
INVENTORIES: Inventories are principally valued at the lower of cost, determined
under the first-in, first-out method, or net realizable value. Certain finished
goods inventories are recorded at the lower of average cost and net realizable
value. In addition, certain raw materials and work-in-progress inventories are
stated at the lower of cost and replacement cost, where cost is determined on a
weighted average basis.
COMPREHENSIVE INCOME: The Company has adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is comprised of net income and all changes to stockholders' equity except
those due to investment by stockholders, changes in paid in capital and
distributions to stockholders.
FINANCIAL INSTRUMENTS: The fair value of all short-term financial instruments
approximate their carrying value due to their short maturity.
The Company's financial instruments consist of cash, accounts receivable, bank
indebtedness, accounts payable, accrued liabilities, director's loan payable and
loans and notes payable. Unless otherwise noted, it is management's opinion that
the Company is not exposed to significant interest, or credit risks arising from
these financial instruments. Unless otherwise noted the fair values of these
financial instruments approximate their carrying values since they are
receivable or payable on demand, or the interest rates on these instruments
fluctuate with market rates.
DERIVATIVE FINANCIAL INSTRUMENTS: SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, requires that all derivative
instruments be reported on the balance sheet at fair value and establishes
criteria for designation and effectiveness of hedging relationships. The Company
uses forward contracts to hedge its exposure to volatility of currency exchange
rates. These hedges are intended to offset the effect of transaction gains and
losses, which arise when payments of collections in a foreign currency are made
or received one to three months after the asset or liability is generated. The
fair value of these instruments is reflected in other current assets on the
Company's balance sheet. Where the Company's assessment of these hedges reveals
no ineffectiveness, gains and losses on these instruments are deferred in other
comprehensive income (loss) until the underlying transaction gain or loss is
recognized in earnings.
F-7
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 2 - ACCOUNTING POLICIES - CONTINUED
INCOME TAXES: The Company follows the provisions of SFAS No. 109, "Accounting
for Income Taxes", which requires the Company to recognize deferred tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns using
the liability method. Under this method, deferred tax liabilities and assets are
determined based on the temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted rates in
effect in the years in which the differences are expected to reverse.
Deferred income tax expense or benefit is based on the changes in the asset or
liability from period to period.
EARNINGS PER SHARE: Earnings (loss) per share is computed in accordance with
SFAS 128, "Earnings Per Share". Basic earnings (loss) per share is calculated by
dividing the net income (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
(loss) per share reflects the potential dilution of securities that could share
in earnings of an entity. In loss periods, dilutive common equivalent shares are
excluded, as the effect would be anti-dilutive. Basic and diluted earnings per
share are the same for the periods presented.
STOCK BASED COMPENSATION: SFAS 123, "Accounting for Stock-Based Compensation,"
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
account for stock- based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations. Accordingly, compensation
cost for the Company's stock at the date of the grant over the amount of an
employee must pay to acquire the stock. The Company has adopted the "disclosure
only" alternative described in SFAS 123 and SFAS 148, which require pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been applied.
ADVERTISING AND MARKETING EXPENSES: The Company follows the provisions of
Statement of Position 93-7 in respect of advertising expenses and costs are
expensed as incurred. Advertising and marketing costs charged to operations were
$2,381 in the year ended September 30, 2006 and $2,252 and $2,444 in the years
ended September 30, 2005 and September 30, 2004, respectively.
GOODWILL, GOODWILL IMPAIRMENT, INTANGIBLE AND OTHER ASSETS: Goodwill represents
the excess of the cost over the fair value of net assets acquired in business
combinations. Goodwill and other "indefinite-lived" assets are not amortized and
are subject to the impairment rules of SFAS 142 which the Company adopted
effective as of October 1, 2001. Goodwill is tested for impairment on an annual
basis or upon the occurrence of certain circumstances or events. The Company
determines the fair market value of its reporting unit using quoted market rates
and cash flow techniques. The fair market value of the reporting unit is
compared to the carrying value of the reporting unit to determine if an
impairment loss should be calculated. If the book value of the reporting unit
exceeds the fair value of the reporting unit, an impairment loss is indicated.
The loss is calculated by comparing the fair value of the goodwill to the book
value of the goodwill. If the book value of the goodwill exceeds the fair value
of goodwill, an impairment loss is recorded. Fair value of goodwill is
determined by subtracting the fair value of the identifiable assets of a
reporting unit from the fair value of the reporting unit.
CASH EQUIVALENTS: Cash equivalents represent short-term, highly liquid
investments, which have maturities of ninety days or less when purchased.
REVENUE RECOGNITION: Revenue is recognized upon shipment of products or delivery
of products to the customer depending on the terms of the sale. Provisions are
made for warranty and return costs at the time of sale. Such provisions have not
been material.
Most of the company's major customers have provision for sales rebates in their
trading terms. The level of rebates is individually negotiated with each
customer and is unique to that customer. Typically, a series of escalating
F-8
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 2 - ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION - CONTINUED
targets is set for purchases from Spear & Jackson and, on reaching each target,
a rebate, usually paid in the form of credit note but occasionally in cash, is
triggered e.g.
The revenue targets are set on a twelve-month basis, however these sales targets
period ends are not necessarily coterminous with the accounting period end of
Spear & Jackson, Inc. At any point in time, the rebate liability is calculated
by estimating the annual sales value for each customer (in order to ascertain
the rebate % the customer is likely to achieve), applying the relevant % to the
actual sales achieved to date, and then deducting any interim rebates already
paid.
The rebates charge is taken as a reduction to sales in the profit and loss
account. Rebates are paid to customers per their individual agreements.
Typically payments are made half yearly or yearly, however there are agreements
in place in which rebates are paid monthly and quarterly.
Generally there is no provision for customers to return products they cannot
sell. However, a small number of customers have negotiated a return clause in
their trading agreements. There is a time limit for these returns which vary
from customer to customer, none of which exceed 12 months from the original
invoice date. The amount of mutual returns made in the year ended September 30,
2006 was $900 and $350 and $257 in the years ended September 30, 2005 and
September 30, 2004, respectively.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as
incurred. There was no material research and development expenditure in the
years ended September 30, 2006, September 30, 2005 and September 30, 2004.
SEGMENT REPORTING: Operating segments are defined as components of an enterprise
for which separate financial information is available that is evaluated
regularly by chief operating decision makers in deciding how to allocate
resources in assessing performance.
NEW ACCOUNTING PRONOUNCEMENTS:
In March 2005, the FASB issued Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations--an Interpretation of
FASB Statement No. 143." This Interpretation clarifies the timing of liability
recognition for legal obligations associated with an asset retirement when the
timing and (or) method of settling the obligation are conditional on a future
event that may or may not be within the control of the entity. FIN No. 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
We do not believe that the implementation of this statement will have a material
impact on the Company's consolidated results of operation and financial
condition.
In March 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107
regarding the Staff's interpretation of SFAS No. 123(R). This interpretation
provides the Staff's views regarding interactions between SFAS No. 123(R) and
certain SEC rules and regulations and provides interpretations of the valuation
of share-based payments for public companies. The interpretive guidance is
intended to assist companies in applying the provisions of SFAS No. 123(R) and
investors and users of the financial statements in analyzing the information
provided. We believe the adoption of this Statement will not have a material
impact on our financial position or results of operations.
F-9
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 2 - ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections". SFAS 154 replaces APB Opinion No. 20, "Accounting Changes",
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements".
SFAS 154 requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented on the new
accounting principle. SFAS 154 also requires that a change in method of
depreciating or amortizing a long-lived non-financial asset be accounted for
prospectively as a change in estimate, and correction of errors in previously
issued financial statements should be termed a restatement. SFAS 154 is
effective for accounting changes and correction of errors made in fiscal years
beginning after December 15, 2005 which is effective with our first quarter of
fiscal 2007. We intend to adopt the disclosure requirements upon the effective
date of the pronouncement. We do not believe that the adoption of this
pronouncement will have a material effect on our consolidated financial
position, results of operations or cash flows.
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining
the Amortization Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6
provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to lease
inception. The guidance in EITF 05-6 will be applied prospectively and is
effective for periods beginning after June 29, 2005. Adoption of this standard
is not expected to have a material impact on our consolidated financial position
or results of operations.
In October 2005, the FASB issued Staff Position No. 13-1, "Accounting
for Rental Costs Incurred During a Construction Period" ("FSP No. 13-1"). FSP
No. 13-1 is effective for the first reporting period beginning after December
15, 2005 and requires that rental costs associated with ground or building
operating leases that are incurred during a construction period be recognized as
rental expense. We do not believe that adoption of FSP No. 13-1 will have a
material impact on our financial statements.
In March 2005, the FASB issued Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations--an Interpretation of
FASB Statement No. 143." This Interpretation clarifies the timing of liability
recognition for legal obligations associated with an asset retirement when the
timing and (or) method of settling the obligation are conditional on a future
event that may or may not be within the control of the entity. FIN No. 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
We do not believe that adoption of FIN 47 will have a material impact on our
consolidated financial statements.
In March 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107
regarding the Staff's interpretation of SFAS No. 123(R). This interpretation
provides the Staff's views regarding interactions between SFAS No. 123(R) and
certain SEC rules and regulations and provides interpretations of the valuation
of share-based payments for public companies. The interpretive guidance is
intended to assist companies in applying the provisions of SFAS No. 123(R) and
investors and users of the financial statements in analyzing the information
provided. We believe the adoption of this Statement will not have a material
impact on our financial position or results of operations
In November 2005, FASB issued FSP No. 123(R)-3, "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards." This
pronouncement provides an alternative method of calculating the excess tax
benefits available to absorb any tax deficiencies recognized subsequent to the
adoption of SFAS No. 123(R). The company has until November 2006 to make a
one-time election to adopt the transition method. The company is currently
evaluating FSP 123(R)-3; this one-time election will not affect operating income
or net earnings.
In February 2006, FASB issued Statement No. 155, Accounting for Certain
Hybrid Financial Instruments, as an amendment to Statement No. 133, Accounting
for Derivatives Instruments and Hedging Activities, and Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. Statement No. 155 amends Statement No. 133 to narrow the scope
exception for interest-only and principal-only strips on debt instruments to
F-10
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 2 - ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
include only such strips representing rights to receive a specified portion of
the contractual interest or principle cash flows. Statement No. 155 amends
Statement No. 140 to allow qualifying special purpose entities to hold a passive
derivative financial instrument pertaining to beneficial interests that itself
is a derivative instrument. Statement No. 155 is effective for all financial
instruments acquired or issued in fiscal years beginning after September 15,
2006. The Company does not believe that the adoption of Statement No. 155 will
have a material impact on the Company's condensed consolidated financial
statements.
In March 2006, the FASB issued Statement No. 156, Accounting for
Servicing of Financial Assets as an amendment to Statement No. 140. Statement
No. 156 requires that all separately recognized servicing rights be initially
measured at fair value, if practicable. In addition, this statement permits an
entity to choose between two measurement methods (amortization method or fair
value measurement method) for each class of separately recognized servicing
assets and liabilities. This new accounting standard is effective for reporting
periods beginning after September 15, 2006. We do not expect the adoption of
SFAS 156 to have a material impact on our results of operations or financial
condition.
In June 2006, the FASB ratified the consensus reached by the EITF on
EITF Issue No. 05-01, Accounting for the Conversion of an Instrument That
Becomes Convertible Upon the Issuer's Exercise of a Call Option ("EITF 05-01").
The EITF consensus applies to the issuance of equity securities to settle a debt
instrument that was not otherwise currently convertible but became convertible
upon the issuer's exercise of call option when the issuance of equity securities
is pursuant to the instrument's original conversion terms. The adoption of EITF
05-01 is not expected to have a material impact on our results of operations or
financial condition.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for
income taxes by prescribing a minimum probability threshold that a tax position
must meet before a financial statement benefit is recognized. The minimum
threshold is defined in FIN 48 as a tax position that is more likely than not to
be sustained upon examination by the applicable taxing authority, including
resolution of any related appeals or litigation processes, based on the
technical merits of the position. The tax benefit to be recognized is measured
as the largest amount of benefit that is greater than fifty percent likely of
being realized upon ultimate settlement. FIN 48 must be applied to all existing
tax positions upon initial adoption. The cumulative effect of applying FIN 48 at
adoption, if any, is to be reported as an adjustment to opening retained
earnings for the year of adoption. FIN 48 is effective for the Company's 2008
fiscal year, although early adoption is permitted. The Company is currently
assessing the potential effect of FIN 48 on its financial statements.
In September 2006, the SEC staff issued Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 was issued
in order to eliminate the diversity in practice surrounding how public companies
quantify financial statement misstatements. SAB 108 requires that registrants
quantify errors using both a balance sheet and income statement approach and
evaluate whether either approach results in a misstated amount that, when all
relevant quantitative and qualitative factors are considered, is material. SAB
108 must be implemented by the end of the Company's fiscal 2007. The Company is
currently assessing the potential effect of SAB 108 on its financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R) (SFAS 158). This statement requires
recognition of the overfunded or underfunded status of defined benefit pension
and other postretirement plans as an asset or liability in the statement of
financial position and changes in that funded status to be recognized in
comprehensive income in the year in which the changes occur. SFAS 158 also
requires measurement of the funded status of a plan as of the date of the
statement of financial position. The recognition provisions of SFAS 158 are
effective for fiscal 2007, while the measurement date provisions are effective
F-11
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 2 - ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
for fiscal year 2009. If SFAS 158 were applied at the end of fiscal 2006, using
the Company's September 30, 2006 actuarial valuation, we would have recorded an
additional pre-tax charge to accumulated other comprehensive income totaling
$7.8 million ($5.5 million after tax) representing the difference between the
funded status of the plans based on the project benefit obligation and the
amounts recorded on our balance sheet at September 30, 2006.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides a
common definition of fair value and establishes a framework to make the
measurement of fair value in generally accepted accounting principles more
consistent and comparable. SFAS 157 also requires expanded disclosures to
provide information about the extent to which fair value is used to measure
assets and liabilities, the methods and assumptions used to measure fair value,
and the effect of fair value measures on earnings. SFAS 157 is effective for the
Company's 2009 fiscal year, although early adoption is permitted. The Company is
currently assessing the potential effect of SFAS 157 on its financial
statements.
NOTE 3 - NATURE OF BUSINESS
The Company was incorporated in the State of Nevada on December 17,
1998 and was inactive until the acquisition of Mega Tools Ltd. and Mega Tools
USA, Inc. via reverse acquisition on September 30, 1999. The Company was engaged
in the manufacture and sale of a patented multi-bit screwdriver. The Company
entered into an exclusive North American license agreement with the patent
holder of a retracting cartridge type screwdriver. This license agreement gave
the Company unrestricted use of the patent in Canada and the United States until
November 8, 2005. The Company's wholly owned subsidiaries, Mega Tools USA, Inc.
and Mega Tools Ltd. manufactured and marketed the drivers to customers in the
United States and Canada. With effect from September 30, 2003 the Company exited
its screwdriver operations following the sale of the trade and net assets of
Mega Tools USA, Inc. and Mega Tools Ltd. The historical results of operations
for this business have been reclassified to earnings (loss) from discontinued
operations on the Company's Consolidated Statements of Operations.
On September 6, 2002 the Company acquired the entire issued share
capital of Spear & Jackson plc and Bowers Group plc. These companies, through
their principal operating entities, as disclosed in note 1, manufacture and
distribute a broad line of hand tools, lawn and garden tools, industrial magnets
and metrology tools primarily in the United Kingdom, Europe, Australia, North
and South America, Asia and the Far East.
Following recommendations by the SEC, the acquisition of Spear &
Jackson plc and Bowers Group plc ("S&J") by Megapro Tools, Inc. was accounted
for as a reverse acquisition for financial reporting purposes. The reverse
acquisition is deemed a capital transaction and the net assets of S&J (the
accounting acquirer) were carried forward to Megapro Tools, Inc. (the legal
acquirer and the reporting entity) at their carrying value before the
combination. Although S&J was deemed to be the acquiring corporation for
financial accounting and reporting purposes, the legal status of Megapro Tools,
Inc. as the surviving corporation does not change. The relevant acquisition
process utilizes the capital structure of Megapro Tools, Inc. and the assets and
liabilities of S&J are recorded at historical cost.
In these financial statements, S&J is the operating entity for
financial reporting purposes and the financial statements for all periods
presented represent S&J's financial position and results of operations. The
equity of Megapro Tools Inc. is the historical equity of S&J retroactively
restated to reflect the number of shares issued in the S&J acquisition.
On 7 November 2002 the Company changed its name from Megapro Tools,
Inc. to Spear & Jackson, Inc.
F-12
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 3 - NATURE OF BUSINESS - CONTINUED
Following formal approval by the SEC and the U.S. District Court for
the Southern district of Florida of the settlement of the litigation captioned
SEC v. Dennis Crowley, Spear & Jackson, Inc., International Media Solutions,
Inc., Yolanda Velazquez and Kermit Silva (Case No: 04-80354-civ-Middlebrooks),
the Company entered into a Stock Purchase Agreement with PNC Tool Holdings LLC
("PNC") and Dennis Crowley, the sole member of PNC. The Stock Purchase Agreement
was effected on April 8, 2005.
Under the Stock Purchase Agreement, the Company acquired, for $100, and
other good and valuable consideration, 6,005,561 common shares of the Company
held by PNC which represented approximately 51.1% of the outstanding common
shares of the Company at December 31, 2004, and which constituted 100% of the
common stock held by such entity. The parties also executed general releases in
favor of each other subject to the fulfillment of the conditions of the Stock
Purchase Agreement.
As a result of the stock purchase, the stockholders of the Company had
their percentage stock interest increase correspondingly. Jacuzzi Brands, Inc.
("Jacuzzi"), which is a beneficial owner of 3,543,281 shares of common stock,
had its interest in the Company increase to approximately 61.8% of the
outstanding common stock.
On April 21, 2005, Jacuzzi adopted a plan of disposition of the
Company's common stock. On 23 March 2006, Jacuzzi Brands, Inc. ("Jacuzzi") and
its subsidiary undertaking, USI American Holdings, Inc. ("USI" and together with
Jacuzzi, the "Seller") entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement") with United Pacific Industries Limited ("UPI"), a Bermuda
Corporation, to sell its entire holding of 3,543,281 shares of the common stock
(the "Shares") of Spear & Jackson, Inc. ("SJI") to UPI for $1.40 per share for
an aggregate purchase price of $4,960,593. Such shares constitute all of the
shares of SJI owned by the Seller.
The representations, warranties and covenants made by Jacuzzi and UPI
were typical for this type of transaction, and included a covenant that
restricts Jacuzzi from soliciting or negotiating with a third party between the
signing date of the Stock Purchase Agreement and the closing date of the
transaction. Jacuzzi also agreed that in connection with the closing of the
transaction, it would, among other things, cause UPI's designees and one
designee of Jacuzzi to be elected to the Board of Directors of Spear & Jackson,
Inc. and will use commercially reasonable best efforts so that such UPI
designees are in sufficient numbers to give UPI a majority of the Board of
Directors of the Spear & Jackson, Inc. UPI also agreed that it or any of its
affiliates would not purchase any additional Common Stock during the period from
the signing date of the Stock Purchase Agreement through one year following the
closing at a price less than $1.40 per share.
The purchase of the Shares by UPI contemplated by the Stock Purchase
Agreement was subject to the receipt of a number of closing conditions,
including approval by UPI's shareholders and the United Kingdom Pensions
Regulator, and the receipt of certain other regulatory approvals as well as
other customary closing conditions.
The Seller and UPI then announced that they had entered into Amendment
No. 1 dated 4 May 2006, ("Amendment No. 1 to the Stock Purchase Agreement") to
extend the date by which the Seller and UPI were required to lodge the clearance
application with the UK Pensions Regulator. The Seller and UPI subsequently
received a comfort letter dated July 5 2006, issued by the UK Pensions Regulator
(the "Comfort Letter"). The Seller and UPI agreed to waive the condition
contained in the Stock Purchase Agreement for a clearance from the UK Pensions
Regulator and to accept the Comfort Letter in satisfaction of that condition.
F-13
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 3 - NATURE OF BUSINESS - CONTINUED
The trustees of Spear & Jackson, Inc.'s UK Pension Plan confirmed by a
letter dated 6 July 2006 their acceptance of the UK Pensions Regulator's
determination. The Seller and UPI then entered into Amendment No. 2 dated 10
July 2006, ("Amendment No. 2 to the Stock Purchase Agreement") to waive their
respective requirements for a clearance from the UK Pensions Regulator and to
accept in its place the Comfort Letter which stated that the UK Pensions
Regulator was of the view, based on the information supplied to him in
connection with the clearance application, that the change of control as a
result of the sale by the Seller of all of its shares of Spear & Jackson, Inc.
to UPI was not detrimental to the UK pension plan and that the UK Pensions
Regulator believes that a clearance is not necessary for the transaction.
In addition, the Seller and UPI subsequently announced that they had
entered into Amendment No. 2 to the Stock Purchase Agreement, pursuant to which
UPI agreed, subject to the Closing having occurred, to indemnify the Seller and
JBI Holdings Limited (the "Jacuzzi Indemnified Parties") should the UK Pensions
Regulator, regardless of the Comfort Letter, require any of the Jacuzzi
Indemnified Parties to make a contribution or provide financial support in
relation to the potential pension plan liabilities of SJI or its subsidiaries.
In addition, UPI also agreed that for a period of twelve months from the Closing
Date, UPI will not, and will use its best efforts to ensure that neither Spear &
Jackson, Inc. nor any of its subsidiaries will, take any action or omit to take
any action that causes the UK Pensions Regulator, as a result of such action or
omission, to issue a contribution notice against the Jacuzzi Indemnified Parties
in relation to any UK pension plan in which Spear & Jackson, Inc. or any
subsidiary of Spear & Jackson, Inc. is an employer. Further, UPI agreed that for
a period of twelve months from the Closing Date, that it will not (and will use
its best efforts to ensure that neither Spear & Jackson, Inc. nor any subsidiary
of Spear & Jackson, Inc. will) engage in any action or inaction which in
relation to any such UK pension plan would fall within the UK Pension Regulation
clearance guidance note dated April 2005 as a 'Type A' event unless UPI procures
that clearance is issued by the UK Pensions Regulator in relation to such event
in terms which confirm that no Jacuzzi Indemnified Party shall be linked to a
financial support direction or contribution notice in respect of such event.
On July 28, 2006 the purchase was formally completed..
Brian C. Beazer, the Chairman of UPI, is a director of Jacuzzi and
holds approximately 24.56% of the shares of UPI. David H. Clarke, the Chairman
and Chief Executive Officer of Jacuzzi, is a director of UPI and holds
approximately 22.88% of the shares of UPI. Mr. Clarke also holds approximately
28,350 shares of common stock of Spear & Jackson, Inc., representing
approximately 0.49% of the shares of Spear & Jackson, Inc. but the shares of
Spear & Jackson, Inc. owned by Mr. Clarke are not being purchased at the time of
the sale of the Shares by the Seller to UPI.
NOTE 4 - UNUSUAL OR INFREQUENT EVENTS
(a) GAIN ON SALE OF LAND AND BUILDINGS
(i) YEAR ENDED SEPTEMBER 30, 2006
On July 27, 2006 the Company completed the sale of the remaining
element of its industrial site at St. Paul's Road, Wednesbury, England. Details
of the sale are as follows:
(IN THOUSANDS)
Sale proceeds net of selling, professional and other costs .... $ 4,756
Less: net book value .......................................... (1,174)
Less: deferred element of gain relating to the future market
value of rentals ........................................... (85)
-------
Gain on sale .................................................. $ 3,497
=======
F-14
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 4 - UNUSUAL OR INFREQUENT EVENTS - CONTINUED
(a) GAIN ON SALE OF LAND AND BUILDINGS - CONTINUED
(ii) YEAR ENDED SEPTEMBER 30, 2005
On January 28, 2005 the Company completed the sale of part of its
industrial site at St. Paul's Road, Wednesbury, England and on February 15, 2005
the Company also concluded the disposal of its warehouse and office facility in
Boca Raton, Florida. Details of these sales are as follows:
WEDNESBURY BOCA RATON
ENGLAND FLORIDA TOTAL
-------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Sale of land and buildings:
Sale proceeds net of selling,
professional and other costs . $5,243 $3,433 $8,676
Less: net book value .......... 2,223 3,174 5,367
------ ------ ------
Gain on sale ............... $3,020 $ 259 $3,279
====== ====== ======
(b) MANUFACTURING REORGANIZATION COSTS
On January 25, 2006, the Company announced the closure of the remaining
element of its manufacturing site at Wednesbury, England. With effect from
November 30, 2006 all warehouse and distribution operations currently performed
at this location were transferred to the Company's principal UK manufacturing
site in Sheffield. The manufacturing and assembly functions formally carried out
at this site have now been out sourced to suppliers based outside the UK.
The costs of the closure and relocation of the Wednesbury facility are
anticipated to be approximately $2.1 million. These costs include employee
severance payments, site closure expenses, factory reorganization expenses,
plant transfer costs and associated capital expenditure. In addition to the
above, the Company announced in the quarter ended June 30, 2006 that certain
manufacturing operations carried out at its Atlas site in Sheffield ("Atlas")
will also cease. Provision for employee severance costs in respect of the
closure of these manufacturing operations were made in that quarter.
As explained above, in footnote 4 a (i), on July 27, 2006, Spear &
Jackson, Inc.'s UK subsidiary, Spear & Jackson Garden Products Limited,
completed the sale of the remaining element of the Wednesbury site for L2.6
million sterling (approximately $4.8 million), excluding disposal costs, which
resulted in a gain on disposal of approximately $3.5 million. Funds realized
from the disposal are to be used to finance the closure costs with any excess
sale proceeds being reinvested in other operational initiatives.
On August 11, 2006, the Company's UK subsidiary, Eclipse Magnetics
Limited, ("Eclipse"), announced the cessation of certain manufacturing
activities at its site in Sheffield, England. Eclipse also announced that it
would be relocating its business to the Sheffield, Atlas site. The cessation of
manufacturing and site relocation were completed by November 30, 2006 and
provisions have been made at September 30, 2006 in respect of severance,
relocation and empty property rentals.
The Wednesbury site closure, the production rationalization at Atlas
and the restructuring at Eclipse form part of the Company's UK manufacturing
reorganization program which was initiated to regenerate and modernize key areas
of the hand and garden tools business. These closures will enable the Company to
consolidate its two UK hand and garden tool manufacturing sites and will allow
the Company to develop a modern manufacturing, warehouse and distribution
facility which will be well placed to meet the current and future needs of its
customers.
F-15
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 4 - UNUSUAL OR INFREQUENT EVENTS - CONTINUED
As explained in Footnote 4b (ii), above, a surplus element of the
Wednesbury site was sold in 2005 and provision was made at March 31, 2005 for
various site reorganization costs that were to be incurred as a result of that
partial sale. Certain of these costs were not incurred following the decision to
close the remainder of the site and market the property for resale and such
excess provisions were subsequently released in the second quarter of fiscal
2006.
Costs provided in respect of the Wednesbury and Magnetics closure and
the Atlas reorganization as at September 30, 2006 and September 30, 2005 and
amounts credited in respect of the release of excess provisions from prior
periods relating to the UK manufacturing reorganization and other Group
restructuring costs are as follows:
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005
(IN THOUSANDS) (IN THOUSANDS)
Severance costs ...................... $1,666 $ 487
Fixed asset impairments .............. 1,159 819
Site closure costs and lease costs ... 1,091 437
------ ------
3,916 1,743
Release of excess provisions accrued
in prior periods .................... (447) (632)
------ ------
Net manufacturing reorganization costs 3,469 1,111
====== ======
(c) SETTLEMENT OF CLASS SETTLEMENT LITIGATION
As further explained in Footnote 20, on July 7, 2006 The US District
Court for the Southern District of Florida issued a Memorandum of Understanding
("MOU") which confirmed that the plaintiffs and defendants in the class action
had reached an agreement in principle for the settlement of this litigation. In
settlement of this action the company paid $650 into a Qualified Settlement
Fund.
On September 6, 2005 the Company was served with a Shareholder
Derivative Complaint filed on June 1, 2004 in the Circuit Court for Palm Beach
County, Florida. In August 2006 the Company entered into a settlement agreement
with the plaintiff by agreeing to accept certain changes to its corporate
governance procedures and the payment of up to $70 in legal fees. This amount
has now been paid into a Court approved fund and if the settlement is authorized
by the Court the suit will be dismissed and the Company and its former directors
will be released.
(d) SUMMARY OF PROVISIONS IN RESPECT OF THE UK MANUFACTURING AND REORGANIZATION
PROGRAM
As explained in above, provisions totaling $0.5 million were set up in
respect of a UK manufacturing reorganization program that was initiated during
the course of the year ended September 30, 2005. The provisions comprised the
following:
(i) As a result of the sale of the surplus element of the Company's
manufacturing site at Wednesbury, England, the Company became contractually
obliged to vacate office and warehouse facilities located on those parts of the
site that had been sold. A provision of $0.5 million was made for costs in
connection with this obligation. The provision principally related to office and
factory refurbishment and reorganization expenses together with expenditure in
respect of departmental relocations within the remainder of the site. Following
the sale, elements of the Wednesbury manufacturing operation were closed or
transferred and costs in connection with these initiatives are dealt with in
(ii) and (iii) below.
F-16
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 4 - UNUSUAL OR INFREQUENT EVENTS - CONTINUED
In the final quarter of the year ended September 30, 2005 the Company
performed a review of its UK manufacturing operations and began implementation
of a number of strategies to reduce its ongoing cost base. Costs provided in
connection with the implementation of these initiatives relate to:
(ii) $0.4 million of severance costs relating to the closure and down
scaling of certain manufacturing processes at the Company's Sheffield and
Wednesbury locations in the UK.
(iii) $0.8 million of impairment write-downs in respect of the plant
and machinery involved in the restructured operations.
In the year ended September 30, 2006 further provisions were made as
follows:
(iv) As discussed in (b), above, $2.1 million was provided in respect
of the Wednesbury site closure and Atlas manufacturing reorganization at June
30, 2006.
(v) $0.3 million was provided in respect of severance costs relating to
the cessation of certain manufacturing activities at Eclipse and costs in
connection with the relocation of its remaining business to the Company's Atlas
site.
(vi) $720k was provided in respect of the settlement of the main and
derivative class action litigation.
The Company also has a further provision of $2 million in respect of other UK
manufacturing reorganization and relocation costs that was set up in prior
periods.
In the year ended September, 2006, $0.5 million has been spent in
respect of employee severance costs and other reorganization expenses for which
provision was made at September 30, 2005 and as noted above, additional
provisions of $2.3 million have been made in the period relating to the closure
of the Wednesbury site, the cessation of manufacturing at Eclipse and the
reorganization of the production facilities at Atlas. The following are
summaries of the movements in the year.
F-17
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 4 - UNUSUAL OR INFREQUENT EVENTS - CONTINUED
The movements in the liability balance between October 1, 2005 and September
30, 2006 are as follows:
(a) Included in Accrued Expenses and Other Liabilities:
AT OCTOBER 1, AT SEPTEMBER 30,
-------------- EXCHANGE AMOUNTS AMOUNTS ----------------
2005 MOVEMENTS PROVIDED PAID/UTILISED 2006
-------------- -------------- -------------- -------------- ----------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Other UK reorganization costs......... 1,687 89 268 - 2,044
Wednesbury move costs................. 444 (4) (324) (116) -
Employee severance costs.............. 402 (8) (394) -
Wednesbury/Atlas costs................ - 45 2,063 (721) 1,387
Eclipse move.......................... - (4) 303 - 299
--------- ------- -------- --------- ---------
Manufacturing Reorganization costs.... 2,533 118 2,310 (1,231) 3,730
Settlement of derivative action....... - - 70 (70) -
Settlement of class litigation........ - - 650 (650) -
--------- ------- -------- --------- ---------
$ 2,533 $ 118 $ 3,030 $ (1,951) $ 3,730
========= ======= ======== ========= =========
(b) Included in Property, Plant and Equipment:
Asset impairments..................... $ 803 $ 36 $ 1,159 $ (231) $ 1,767
========= ======= ======== ========= =========
Total $ 3,336 $ 154 $ 4,189 $ (2,182) $ 5,497
========= ======= ======== ========= =========
The movements in the liability balance between October 1, 2004 and September
30, 2005 are as follows:
(a) Included in Accrued Expenses and Other Liabilities:
AT OCTOBER 1, AT SEPTEMBER 30,
-------------- EXCHANGE AMOUNTS AMOUNTS ----------------
2004 MOVEMENTS PROVIDED PAID/UTILISED 2005
-------------- -------------- -------------- -------------- ----------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Wednesbury move costs................. 7 437 444
Employee severance costs.............. (6) 487 (79) 402
Other UK reorganization costs......... 2,411 (92) (632) 1,687
Wednesbury / Atlas costs.............. - - - - -
Settlement of class litigation........ - - - - -
--------- ------- -------- --------- ---------
$ 2,411 $ (91) $ 292 $ (79) $ 2,533
========= ======= ======== ========= =========
(b) Included in Property, Plant and Equipment:
Asset impairments..................... $ - $ (16) $ 819 $ - $ 803
========= ======= ======== ========= =========
Total................................. $ 2,411 $ (107) $ 1,111 $ (79) $ 3,336
========= ======= ======== ========= =========
F-18
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 5 - DISCONTINUED OPERATIONS
The following table presents the results of the Company's operations
that have been reclassified as discontinued and the loss that has been recorded
in connection with the disposal these businesses:
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
--------------------------------------------
2006 2005 2004
-------------- -------------- --------------
Note (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Revenues reclassified to discontinued operations:
Thread gauge measuring division......................... (b) 590 1,627 $ 1,694
------- ------- ---------
$ 590 $ 1,627 $ 1,694
======= ======= =========
Loss from discontinued operations
Loss from operations of thread gauge measuring division.. (b) (101) 163 $ (214)
------- ------- ---------
$ (101) $ (163) $ (214)
======= ======= =========
Profit (loss) on disposal of discontinued operations:
Provision for profit (loss) on disposal of Megapro
screwdrivers division................................. (a) $ 12 $ 27 $ (187)
Provision for loss on disposal of thread gauge
measuring division.................................... (b) 36 (503) -
------- ------- ---------
$ 48 $ (476) $ (187)
======= ======= =========
------- ------- ---------
Total loss from discontinued operations, net of taxes.... $ (53) $ (639) $ (401)
======= ======= =========
Pursuant to SFAS No. 144," Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company's previously issued financial statements and
notes have been reclassified to reflect discontinued components detailed above.
Accordingly, the assets, liabilities, net operations, and net cash flows of
these business segments have been reported as "Discontinued Operations" in the
accompanying consolidated financial statements
(a) During the year ending September 30, 2003, the directors of Spear &
Jackson, Inc. carried out a strategic review of the Company's loss making
Megapro screwdriver division. It was determined that the division was no longer
a core activity of the group and various divestment strategies were considered.
With effect from September 30, 2003, the trade and assets of the division's
principal operating companies, Mega Tool USA, Inc. and Mega Tools Limited, were
transferred by prior subsidiary management, and without prior authorization, at
their net book value of $384 to the division's former managing director.
The net assets transferred comprised:
(IN THOUSANDS)
Inventories ............................ $ 141
Trade receivables ...................... 190
Property, plant and equipment .......... 100
Cash ................................... 17
Other assets ........................... 9
Trade payables and other liabilities ... (73)
-------
$ 384
=======
The transfer proceeds were in the form of $284 of loan notes and other
receivables and the discharge of a loan of $100 owed by the company to the
Megapro managing director.
F-19
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 5 - DISCONTINUED OPERATIONS - CONTINUED
Having considered the future financial position of the Megapro
division, the directors of Spear & Jackson, Inc. provided $97 against the
recoverability of the balance of the sales proceeds which was outstanding at
September 30, 2003. A further $187 was provided against this debt in the year
ended September 30, 2004. It has now been agreed with Megapro that it will pay
Canadian $54 (approximately $41) in settlement of those debts and this is being
repaid in monthly installments of Canadian $5 (approximately $4) of which $27
was received in the year ended September 30, 2005. A further $12 has been
received in the year ended September 30, 2006.
(b) During the fourth quarter of fiscal 2005, the Company began
marketing for sale certain assets associated with its thread gauge measuring
business that is located in the United Kingdom. On February 28, 2006, the
Company concluded the sale of these assets for a nominal consideration. The
assets sold comprised plant and equipment, inventories and goodwill. The
acquirer paid L1 and assumed certain liabilities in respect of the leased
premises from which the trade operates. The carrying value of the assets
relating to this entity were written down to the lower of depreciated cost or
estimated fair value after consideration of selling costs in the quarters ended
March 31, 2005 and September 30, 2005. These assets and liabilities of
discontinued operations held for sale were not reported separately in the
consolidated balance sheets of the Company as the amounts involved are not
considered material.
NOTE 6 - TRADE RECEIVABLES, CONCENTRATIONS OF CREDIT RISK AND ALLOWANCE FOR
DOUBTFUL ACCOUNTS
AT SEPTEMBER 30, AT SEPTEMBER 30,
2006 2005
---------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
Trade receivables...................... $ 17,618 $ 17,973
Allowance for doubtful accounts........ (1,635) (1,525)
--------------- ---------------
$ 15,983 $ 16,448
=============== ===============
Concentration of Credit Risk:
The Company's sales are principally in the United Kingdom, Europe,
Australia, North and South America, Asia and the Far East. The Company performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral. Credit losses have been within management's
estimates.
Allowance for Doubtful Accounts:
The Company establishes reserves for potential credit losses including
a specific reserve for any particular receivable when collectibility is not
probable. In addition, the Company provides a general reserve on all accounts
based on a specified range of percentages which are applied to outstanding
balances depending on their aging. Such losses have been within management's
expectations.
The following table provides a roll forward of the changes in the
allowance for doubtful accounts:
BALANCE CHARGED TO CHARGED BALANCE
AT BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- -------- ---------- ---------
Notes (1) (2)
Year ended September 30, 2006.... $ 1,525 $ 207 $ 84 $ (181) $ 1,635
======= ====== ====== ====== ========
Year ended September 30, 2005.... $ 1,703 $ 21 $ (27) $ (172) $ 1,525
======= ====== ====== ====== ========
Year ended September 30, 2004.... $ 2,101 $ (147) $ 165 $ (416) $ 1,703
======= ====== ====== ====== ========
F-20
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 6 - TRADE RECEIVABLES, CONCENTRATIONS OF CREDIT RISK AND ALLOWANCE FOR
DOUBTFUL ACCOUNTS - CONTINUED
NOTES:
(1) Items charged to other accounts comprise exchange rate fluctuations
during the year.
(2) Deductions comprise recoveries of items previously written off.
NOTE 7 - INVENTORIES
AT SEPTEMBER 30, AT SEPTEMBER 30,
2006 2005
---------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
Finished products...................... $ 19,329 $ 19,740
In-process products.................... 4,443 6,481
Raw materials.......................... 6,191 5,320
Less: allowance for slow moving and
obsolete inventories.................. (7,110) (6,542)
--------------- ---------------
$ 22,853 $ 24,999
=============== ===============
The following table provides a summary of the adjustments to the allowance for
slow moving and obsolete inventories:
BALANCE CHARGED TO CHARGED BALANCE
AT BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- -------- ---------- ---------
Notes (1) (2)
Year ended September 30, 2006.... $ 6,542 $ 1,925 $ 343 ($ 1,700) $ 7,110
======== ======= ======= ======== =======
Year ended September 30, 2005.... $ 5,946 $ 884 $ 189 ($ 477) $ 6,542
======== ======= ======= ======== =======
Year ended September 30, 2004.... $ 5,755 $ 391 $ 468 ($ 668) $ 5,946
======== ======= ======= ======== =======
Notes:
(1) Items charged to other accounts comprise exchange rate fluctuations
during the year.
(2) Deductions comprise obsolete items sold or scrapped.
F-21
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT, NET
AT SEPTEMBER 30, AT SEPTEMBER 30,
NOTE 2006 2005
---------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
Assets held and used:
Land and buildings, at cost ........................... (a) $ 15,269 $ 15,799
Machinery, equipment and vehicles, at cost............. 29,299 35,331
Furniture and fixtures, at cost........................ 867 1,256
Computer hardware, at cost............................. 1,834 1,244
Computer software, at cost............................. 361 342
Assets held under finance leases, at cost ............. (b) 2,433 2,883
------------- -------------
50,063 56,855
Accumulated Depreciation:.............................. (34,469) (39,287)
------------- -------------
Net.................................................... $ 15,594 $ 17,568
============= =============
(a) The Company completed the sale of its industrial site at Wednesbury
on July 27, 2006. Details of this disposition are provided in note 4, above.
(b) Included in property, plant and equipment at September 30, 2006 are
capital leases with a net book value of $0.86 million (September 30, 2005 $1.3
million). The cost of these assets held under capital leases was $2.43 million
(September 30, 2005 $2.9 million), and the accumulated depreciation relating to
these assets was $1.57 million (September 30, 2005 $1.6 million).
NOTE 9 - INVESTMENTS
Investments comprise the following:
AT SEPTEMBER 30, AT SEPTEMBER 30,
NOTE 2006 2005
---------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
30% investment in Bipico Industries Private Limited....... (a) $ 72 $ 67
30% investment in Bowers Metrologie SA................... (a) 71 67
Other investments in equity securities.................... (b) 24 23
25% joint venture in Ningbo Hitech Ltd.................... (c) 341 -
------------- -------------
$ 508 $ 157
============= =============
(a) With regard to the investments in Bipico Industries Private Limited
and Bowers Metrologie SA, the Company does not have the ability or right to
appoint any directors to the boards of either company. The majority ownership in
the companies is held by a small group of shareholders and Spear & Jackson, Inc.
is therefore unable to exercise significant influence over the operating and
financial decisions of these companies. Accordingly, Spear & Jackson, Inc.
accounts for these investments on the basis of historical cost less provision
for any permanent diminution in value.
(b) These investments represent equity investments classified as
available-for-sale. It is the Company's intention to hold these for longer than
one year. The investments are shown at cost which the Company's directors
estimate to be equivalent to their fair value.
(c) In January 2006 the company, through its subsidiary undertaking,
Eclipse Magnetics Limited, paid $229 to acquire a 25% stake in a joint venture
company, Ningbo Hitech Magnetic Assemblies Co. Ltd. ("Hi-tech"). At September
30, 2006 the net assets of Hitech amounted to $1.3 million of which the
Company's share is $341. The difference between this amount and the original
investment of $229, excluding the exchange impact of the retranslation
differences, represents the Company's share of High-tech's net earnings for the
period from January 2006 to September 30, 2006. This share of the net earnings
of High-tech is shown separately in the Company's Consolidated Statement of
Operations for the year ended September 30, 2006.
F-22
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 10 - INCOME TAXES
Spear & Jackson is subject to income taxes in the US and in the other
overseas tax jurisdictions where its principal trading subsidiaries operate. The
provision for US and foreign income taxes attributable to continuing operations
consists of:
FOR THE FISCAL YEARS ENDED
--------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2004
-------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Continued operations:
Current tax charge................................. $ (309) $ (174) $ (113)
Deferred tax credit (charge)....................... 1,282 (294) (1,092)
---------- --------- ---------
Total................................................. $ 973 $ (468) $ (1,205)
========== ========= =========
The current and deferred tax charges arise wholly in non US operations.
A reconciliation of the provision for income taxes from continuing operations
compared with the amounts provided at the US federal rate is as follows:
FOR THE FISCAL YEARS ENDED
--------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2004
-------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Tax at US federal statutory income tax rate at 35%.... $ 2,589 $ (1,247) $ (574)
Overseas tax at rates different to effective rate..... (370) (89) (81)
Gain on sale of UK property covered by capital
losses brought forward............................. 1,041 906 -
Permanent timing differences.......................... (127) (161) (162)
Adjustment to actual of prior year estimates.......... (2) 219 118
Valuation allowance relating to UK, US and other
current year NOLs.................................. (2,127) (143) (536)
Miscellaneous (31) 47 30
---------- --------- ---------
$ 973 $ (468) $ (1,205)
========== ========= =========
Deferred income tax assets and liabilities for 2006 and 2005 reflect the impact
of temporary differences between the book values of assets, liabilities and
equity for financial reporting purposes and the bases of such assets,
liabilities and equity as measured by applicable tax regulations, as well as tax
loss and tax credit carry-forwards.
F-23
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 10 - INCOME TAXES - CONTINUED
The temporary differences and carry forwards that give rise to deferred
assets and liabilities at September 30, 2006 and September 30, 2005 comprise:
AT SEPTEMBER 30, AT SEPTEMBER 30,
2006 2005
---------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
Deferred tax assets:
Property, plant and equipment........... $ 1,200 $ 412
Pension benefit plan.................... 12,169 10,812
Accruals and allowances................. 3,525 3,666
Inventory............................... 288 423
Tax loss carry forwards and other tax
credits................................ 24,943 21,082
------------ -------------
Total deferred tax assets............... 42,125 36,395
Valuation allowance..................... (25,373) (21,082)
------------ -------------
Net deferred tax assets................. 16,752 15,313
------------ -------------
Deferred tax asset, net................... $ 16,752 $ 15,313
============ =============
Deferred tax asset, current portion....... 2,182 2,623
Deferred tax asset, non-current portion... 14,570 12,690
============ =============
$ 16,752 $ 15,313
============ =============
SFAS No. 109, "Accounting for Income Taxes," requires a valuation
allowance to be established when it is "more likely than not" that all or a
portion of a deferred tax asset will not be realized. A review of all available
positive and negative evidence was undertaken by the Company at September 30,
2006 to determine the likelihood of realizing the deferred tax benefits relating
to property, plant and equipment, pension benefit plan, accruals and allowances,
inventories and tax loss carryforwards shown above.
The review considered the available positive and negative evidence, and
included those factors believed to be relevant, including the Company's recent
operating results and its expected future profitability, including the impact of
its manufacturing restructuring strategies. Based on this review, the Company
expects to generate sufficient future taxable income such that its gross
deferred tax assets relating to property, plant and equipment, the UK pension
benefit plan, accruals and allowances and inventories will meet the
"more-likely-than-not" realizability test.
The gross deferred tax assets in respect of tax loss carry forwards and
other tax credits relate to operating loss carry forwards in the Company's UK,
US French and Australian companies totaling approximately $9.4 million
(September 30, 2005 $6.5 million) and to other UK tax credits of approximately
$15.5 million (September 30, 2005 $14.6 million). The Company's NOLs arising in
the UK, France and Australia can be carried forward without time expiration
while the US tax losses expire at various dates between 2017 and 2020. A recent
history of operating losses and other factors has precluded the Company from
demonstrating that it is more likely than not that the benefits of these
domestic and foreign operating loss carryforwards and other tax credits will be
realized. Accordingly, at September 30, 2006 a valuation allowance of $24.9
million (September 30, 2005 $21.1 million) has been recorded against these
losses.
F-24
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 10 - INCOME TAXES - CONTINUED
Spear & Jackson will continue to review the recoverability of its
deferred tax assets and, based on such periodic reviews, the Company could
recognize a change in the valuation allowance relating to its deferred tax
assets in the future should, for example, estimates of forecast taxable income
be reduced or other favorable or adverse events occur.
NOTE 11 - BANK FACILITIES
The French and Australian subsidiaries of Spear & Jackson, Inc.
maintain short-term credit facilities of $2.7 million (2005: $2.8 million)
denominated in Euros and Australian dollars. The facilities comprise bank
overdraft lines, with interest rates ranging from 6.8% to 12.6%, together with
facilities for letters of credit and the discount of bills receivable. There was
nothing outstanding under the overdraft lines at September 30, 2006 or September
30, 2005 and $0.5 million of letters of credit and bills were outstanding under
these facilities (2005: $0.1 million).
In addition, the UK subsidiaries of Spear & Jackson, Inc. maintain a
line of credit of $8.4 million (2005: $8.0 million). This is secured by fixed
and floating charges on the assets and undertakings of these businesses. Of the
total facility, $5.6 million (2005: $5.3 million) relates to bank overdrafts and
$2.8 million (2005: $2.7 million) is available for letters of credit. These
facilities are denominated in British pounds. The overdraft carries interest at
UK base rate plus 1%. At September 30, 2006 the Company had $nil (2005: $0.8
million) borrowings outstanding under the overdraft line and $0.1 million in
outstanding letters of credit (2005: $0.6 million).
NOTE 12 - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
AT SEPTEMBER 30, AT SEPTEMBER 30,
2006 2005
---------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
Compensation related........................ $ 2,788 $ 2,746
Rebates/dealer incentives................... 1,410 1,297
Sales taxes payable......................... 199 462
Finance lease liabilities - current portion. 489 613
Audit and accountancy fees.................. 478 503
Commissions................................. 725 735
Property rentals............................ 170 224
Provisions.................................. 3,730 2,533
Other....................................... 2,245 2,128
---------- ----------
$ 12,234 $ 11,241
========== ==========
NOTE 13 - OTHER LIABILITIES
Other liabilities comprise:
AT SEPTEMBER 30, AT SEPTEMBER 30,
2006 2005
---------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
Finance lease liabilities - non current
portion.................................... $ 418 $ 337
Property rentals............................ 281 412
---------- ----------
$ 699 $ 749
========== ==========
F-25
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 14 - PENSION PLAN
The Company operates a contributory defined benefit plan covering
certain of its employees in the United Kingdom based subsidiaries of Spear &
Jackson plc. The benefits provided by the plan are based on years of service and
compensation history. Admittance to the plan is now closed. Pension plan assets
are primarily invested in equities, fixed income securities and Government
stocks.
Amounts payable by the Company to the plan are determined on the advice
of the plan's actuaries and after discussion with, and agreement by, the plan's
trustees. The Company's funding policy with respect to the plan is to make
contributions in respect of ongoing benefit accruals and the clearance of
underfunding deficits which are at least the minimum amounts required in
accordance with applicable UK law and pension regulations. In the years ended
September 30, 2006, September 30, 2005, and September 30, 2004, contributions
amounted to $3.4 million, $10.3 million and $2.7 million, respectively.
Contributions in the year ending September 30, 2005 included special
contributions of L4 million (approximately $7.2 million). The reasons for the
special contribution are explained below. Employer contributions in the year
ending September 30, 2007 are dependent on the outcome of negotiations between
the Company and the Plan trustees in the first half of 2007. The Company
anticipates that contributions in fiscal 2007 will be approximately $4.2
million.
The pension plan actuarial advisors carried out an actuarial valuation
of the Plan as at December 31, 2004. This valuation showed an increase in the
Plan's deficit compared to that calculated at April 5, 2002, the date of the
last full actuarial valuation. Following discussions between the Company and the
trustees of the plan, it was agreed that the Company would make a special
contribution to the plan of L4 million (approximately $7.2 million). L2 million
(approximately $3.6 million) was paid in June 2005 and the remainder was paid in
September 2005. Also, from May 2005, the Company's annual pension contributions
have increased from 21.2% of pensionable salaries (approximately L1.5 million or
$2.7 million) to a fixed amount of L1.9 million (approximately $3.4 million).
This rate of annual contribution will remain in place, subject to certain
conditions, until April 2007 when it will be reviewed by the plan actuary.
Expected future benefit payments, excluding future new members, are as follows:
The Company's actuary carried out valuations of the plan under SFAS 87,
"Employers Accounting for Pensions", at September 30, 2006 and at September 30,
2005. The following table, as provided by the actuary, analyzes the movement in
the pension plan liability between September 30, 2004, September 30, 2005 and
September 30, 2006 and provides a reconciliation of changes in the projected
benefit obligation, fair value of plan assets and the funded status of the
Company's defined benefit pension plan with the amounts recognized in the
Company's balance sheets at September 30, 2006 and September 30, 2005:
F-26
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 14 - PENSION PLAN - CONTINUED
2006 2005
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Projected benefit obligation at the beginning of the year..... $ 213,471 $ 180,375
Foreign currency exchange rate changes........................ 12,328 (4,530)
Service cost.................................................. 2,148 1,805
Interest cost................................................. 10,730 10,072
Employee contributions........................................ 798 947
Actuarial loss................................................ 6,036 32,229
Benefits paid................................................. (10,913) (7,427)
------------- -------------
Projected benefit obligation at the end of the year........ $ 234,598 $ 213,471
============= =============
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at the beginning of the year........ $ 170,110 $ 141,257
Foreign currency exchange rate changes........................ 9,802 (3,525)
Actual return on plan assets.................................. 12,980 28,651
Employer contributions........................................ 3,428 10,207
Employee contributions........................................ 798 947
Benefits paid (10,913) (7,427)
------------- -------------
Fair value of plan assets at the end of the year........... $ 186,205 $ 170,110
============= =============
FUNDED STATUS OF PLAN:
Projected benefit obligation in excess of plan assets......... $ (48,393) $ (43,362)
Unrecognized net actuarial loss............................... 71,322 69,907
------------- -------------
Net amount recognized...................................... $ 22,929 $ 26,545
============= =============
AMOUNTS RECOGNIZED IN THE BALANCE SHEET CONSIST OF:
Accrued benefit cost.......................................... $ (40,565) $ (35,954)
Accumulated other comprehensive income........................ 63,495 62,501
------------- -------------
Net amount recognized...................................... $ 22,930 $ 26,546
============= =============
(DECREASE) INCREASE OVER THE YEAR IN THE MINIMUM LIABILITY
INCLUDED IN OTHER COMPREHENSIVE INCOME..................... $ (994) $ 8,172
============= =============
At September 30, 2006 the projected benefit obligation, accumulated
benefit obligation, and fair value of assets for the pension plan were $234.6
million (2005: $213.5 million), $226.8 million (2005: $206.2 million), and
$186.2 million (2005: $170.1 million).
At September 30, 2006 and 2005 the Company had minimum pension plan
liabilities of $63.5 million and $62.5 million, respectively, in respect of the
plan. In accordance with the requirements of SFAS 87 the Company has recognized
this liability on its balance sheet since the accumulated benefit obligations of
the plan exceed the fair value of the plan's assets. Any increase or decrease in
the minimum liability is recorded through a direct charge or credit to
stockholders' equity and is reflected, net of tax, as a component of
comprehensive income in the consolidated statements of shareholders' equity. The
Company's minimum pension liabilities decreased by $1.0 million from fiscal 2005
to fiscal 2006.
F-27
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 14 - PENSION PLAN - CONTINUED
The assumptions used and the net periodic pension cost for the
Company's defined benefit plans are presented below:
2006 2005 2004
---- ---- ----
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate......................... 5.05% 5.00% 5.50%
Rate of compensation increase......... 3.10% 2.90% 2.80%
Expected return on assets............. 6.60% 6.50% 7.00%
Fixed pension increase................ 5.00% 5.00% 5.00%
LPI pension increase.................. 2.80% 2.70% 2.70%
Post 1988 GMP increase................ 2.50% 2.40% 2.40%
Inflation............................. 3.00% 2.80% 2.80%
2006 2005 2004
-------- -------- -------
COMPONENTS OF NET PERIODIC BENEFIT COST
Defined benefit plans:
Service cost........................ $ 2,148 $ 1,805 $ 1,518
Interest cost....................... 10,730 10,072 8,977
Expected return on plan assets...... (10,136) (10,588) (10,901)
Recognition of actuarial loss....... 5,615 2,702 1,701
-------- -------- -------
Net periodic cost....................... $ 8,357 $ 3,991 $ 1,295
======== ======== =======
The tables above set forth the historical components of net periodic
pension cost for the employees associated with the Company and is not
necessarily indicative of the amounts to be recognized by the Company on a
prospective basis. The net periodic pension cost for the year ended September
30, 2007 is estimated to be $7.9 million.
The valuation results are sensitive to the choice of key financial
assumptions. These assumptions are determined by the Company in consultation
with its actuarial advisers and are reviewed by its auditors. The major
financial assumptions have been derived as follows:
The Company sets the discount rate assumption annually for the
retirement benefit plan at its respective measurement date to reflect the yield
of high quality fixed-income corporate bonds of suitable duration
The Company's expected return on assets assumption is set in the light
of an actuarial analysis of the long term return expectations for the assets
held by the plan. The start point for the derivation of the rate is the return
on UK government stocks with maturity dates matching the crystallization of the
plan's liabilities. To reflect the fact that a significant part of the plan's
assets are invested in asset classes such as equities and corporate bonds that
are expected to produce higher returns than the government bonds, the overall
rate of return on assets has been adjusted to take account of these higher
yields. The expected return on assets assumed to determine the 2006 expense is
6.6% a year (2005: 6.5%) which is based on an equity risk premium of 3.75 a year
over the yields available on long-term government bonds at September 30, 2006 of
4.5% a year for 51% of the assets.
Price inflation is determined with reference to the difference in yield
between fixed interest and index-linked government bonds as adjusted to take
account of a higher perceived demand for index-linked bonds.
F-28
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 14 - PENSION PLAN - CONTINUED
The following table illustrates the sensitivity to a change in certain
of the key assumptions used in calculating the assets and liabilities of the
pension plan:
Impact on Impact on
Impact on 2007 September 30, September 30,
Pre-Tax Pension 2006 2006 Equity
Change in Assumption Expense PBO (Net of tax)
------------------------ --------------- --------------- --------------
25 basis point
decrease in discount
rate.................... +$1.05 million +$10.33 million -$6.88 million
25 basis point
increase in discount
rate.................... -$1.01 million -$9.85 million +$6.56 million
25 basis point
decrease in expected
return on assets........ +$0.41 million - -
25 basis point
increase in expected
return on assets........ -$0.41 million - -
25 basis point
increase in compensation
assumption.............. +$0.15 million +$0.77 million -
25 basis point
decrease in compensation
assumption.............. -$0.15 million -$0.75 million -
Use of PA80C2010
Mortality table......... -$1.56 million -$11.47 million +$7.75 million
The trustees aim to invest the assets of the plan prudently to ensure
that the benefits promised to members are provided. In setting the investment
strategy, the trustees first considered the lowest risk asset allocation that
they could adopt in relation to the plan's liabilities (100% UK Government
Bonds). The asset allocation strategy they have selected is designed to achieve
a higher return than the lowest risk strategy while maintaining a prudent
approach to meeting the plan's liabilities.
F-29
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 14 - PENSION PLAN - CONTINUED
The allocation of Plan investments to the various asset categories at September
30, 2006 and September 30, 2005 was as follows:
Target % of Assets at % of Assets at
Allocation September 30, 2006 September 30, 2005
ASSET CATEGORY:
Equities.. 50% 51% 51%
Bonds..... 50% 47% 43%
Cash...... 0% 2% 6%
--- --- ---
Total.......... 100% 100% 100%
=== === ===
The target shown above is a short-term allocation.
NOTE 15 - LEASES
Rental expense for operating leases in the year ended September 30,
2006 was $1.0 million. Operating lease costs in the years ended September 30,
2005 and September 30, 2004 were $1.1 million and $0.9 million respectively.
Future minimum rental commitments under non-cancelable operating leases as of
September 30, 2006 are as follows:
Under capital lease agreements, the Company is required to make certain
monthly, quarterly or annual lease payments through 2010. The aggregate minimum
capital lease payments for the next four years, with their present value as of
September 30, 2006, and September 30, 2005 are as follows:
2006 2005
(IN THOUSANDS) (IN THOUSANDS)
-------------- --------------
2007......................................... $ 517 $ 651
2008......................................... 317 350
2009......................................... 151 5
2010......................................... 5 -
--------- ---------
Total minimum lease payments................. 990 1,006
Less amount representing interest at 5.5%.... (83) (56)
--------- ---------
Present value of net minimum lease payments.. 907 950
Less current portion......................... (489) (613)
--------- ---------
Long-term portion............................ $ 418 $ 337
========= =========
F-30
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 16 - COMMON STOCK
2006 2005
(NUMBER) (NUMBER)
---------- ----------
Par value $.001 per share
Authorized: 25,000,000 25,000,000
========== ==========
Issued: 12,011,122 12,011,122
========== ==========
Outstanding:
At beginning of period........... 5,735,561 11,741,122
Purchase of shares (see below)... - (6,005,561)
---------- ----------
At end of period................. 5,735,561 5,735,561
========== ==========
On April 8, 2005 the Company acquired, for $100, 6,005,561 common
shares of the Company that were held by PNC Tool Holdings LLC. The agreement for
the purchase of this stock had been approved by the SEC on February 10, 2005,
and by the US District Court for the Southern District of Florida on February
15, 2005 in part settlement of the litigation captioned SEC v Dennis Crowley,
Spear & Jackson, Inc., International Media solutions, Inc., Yolanda Velazquez
and Kermit Silva (Case No. 04-80354-civ-Middlebrooks).
NOTE 17 - RELATED PARTY TRANSACTIONS AND BALANCES
Transactions for the years ended September 30, 2006, September 30,
2005, and September 30, 2004 were as follows:
FOR THE FISCAL YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- -------------
2006 2005 2004
------------- ------------- -------------
Interest on the promissory note
payable to a significant stockholder
of the company and interest on
director's loan..................... $ 0 $ 0 $ 12
==== ==== ====
These transactions are recorded at the exchange amount, being the
amount of consideration established and agreed to by the related parties.
At the year end, there were no amounts due from and to related parties
which are not disclosed elsewhere in these consolidated financial statements.
F-31
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 18 - SEGMENT DATA
The Company's principal operations relate to the manufacture and
distribution of a broad line of hand tools, lawn and garden tools, industrial
magnets and metrology tools. These operations are conducted through business
divisions located primarily in the United Kingdom, France, the Netherlands, USA,
Australasia and China.
Given below are summaries of the significant accounts and balances by
business segment and by geographical location, reconciled to the consolidated
totals. In all years, transactions and balances applicable to the Company's
distribution companies in France, Australia and New Zealand have been aggregated
with the hand and garden product businesses since these products represent the
most significant proportion of the distribution companies' trades. Those
transactions relating to the Company's distribution entities in the Netherlands
and China have been included in the Metrology division. The summaries also
provide an analysis of the accounts and balances between continuing and
discontinued operations.
The financial information of the segments is regularly evaluated by the
corporate operating executives in determining resource allocation and assessing
performance and is reviewed by the Company's Board of Directors. The Company's
senior management evaluates the performance of each business segment based on
its operating results and, other than general corporate expenses, allocates
specific corporate overhead to each segment. Accounting policies for the
segments are the same as those for the Company.
F-32
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 18 - SEGMENT DATA - CONTINUED
The following is a summary of the significant accounts and balances (in
thousands) by business segment, reconciled to the consolidated totals:
(a) Represents property, plant and equipment, net.
F-33
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 18 - SEGMENT DATA - CONTINUED
The Following Table Presents Certain Data by Geographic Areas (In Thousands):
SALES (a) LONG-LIVED ASSETS (b)
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2004 2006 2005 2004
------------ ------------ ------------ ------------ ------------ ------------
United Kingdom............. $ 42,269 $ 44,555 $ 45,417 $ 13,734 $ 15,875 $ 20,337
Europe..................... 21,829 21,778 18,817 1,130 1,163 1,231
Australasia................ 13,967 15,160 17,505 422 530 546
North America.............. 7,150 6,982 6,954 - - -
China & Rest of World...... 12,368 13,850 12,486 308 - -
------------ ------------ ------------ ------------ ------------ ------------
Total................... $ 97,583 $ 102,325 $ 101,179 $ 15,594 $ 17,568 $ 22,114
============ ============ ============ ============ ============ ============
Attributable to:
Continuing operations...... $ 96,993 $ 100,698 $ 99,485 $ 15,594 $ 17,568 $ 22,060
Discontinued operations.... $ 590 $ 1,627 $ 1,694 $ - $ - $ 54
------------ ------------ ------------ ------------ ------------ ------------
$ 97,583 $ 102,325 $ 101,179 $ 15,594 $ 17,568 $ 22,114
============ ============ ============ ============ ============ ============
DEPRECIATION CAPITAL EXPENDITURE
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2004 2006 2005 2004
------------ ------------ ------------ ------------ ------------ ------------
United Kingdom............. $ 2,872 $ 3,172 $ 2,472 $ 1,174 $ 995 $ 3,694
Europe..................... 124 109 93 56 79 3
Australasia................ 204 261 313 103 305 266
North America.............. - - 51 - - 3,228
China & Rest of World...... 23 - - 262 - -
------------ ------------ ------------ ------------ ------------ ------------
Total................... $ 3,223 $ 3,542 $ 2,929 $ 1,595 $ 1,379 $ 7,191
============ ============ ============ ============ ============ ============
Attributable to:
Continuing operations...... $ 3,223 $ 3,488 $ 2,922 $ 1,595 $ 1,379 $ 7,137
Discontinued operations.... $ - $ 54 $ 7 $ - $ - $ 54
------------ ------------ ------------ ------------ ------------ ------------
$ 3,223 $ 3,542 $ 2,929 $ 1,595 $ 1,379 $ 7,191
============ ============ ============ ============ ============ ============
OPERATING INCOME NET INTEREST
------------------------------------------- ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2004 2006 2005 2004
------------ ------------ ------------ ------------ ------------ ------------
United Kingdom............. $ (6,805) $ 1,938 $ 3,441 $ (42) $ 109 $ (186)
Europe..................... 550 355 243 (119) (185) (163)
Australasia................ (76) 183 (171) 55 60 24
North America.............. (568) (809) (1,569) 131 63 25
China & Rest of World...... (183) 2
------------ ------------ ------------ ------------ ------------ ------------
Total................... $ (7,082) $ 1,667 $ 1,944 $ 27 $ 47 $ (300)
============ ============ ============ ============ ============ ============
Attributable to:
Continuing operations...... $ (6,981) $ 1,830 $ 2,158 $ 27 $ 47 $ (300)
Discontinued operations.... $ (101) $ (163) $ (214) $ - $ - $ -
------------ ------------ ------------ ------------ ------------ ------------
$ (7,082) $ 1,667 $ 1,944 $ 27 $ 47 $ (300)
============ ============ ============ ============ ============ ============
(a) Sales are attributed to geographic areas based on the location of the
customers.
(b) Represents property, plant and equipment, net.
F-34
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 19 - FINANCIAL INSTRUMENTS
In the normal course of its business, the company invests in various
financial assets and incurs various financial liabilities. The company also
enters into agreements for derivative financial instruments to manage its
exposure to fluctuations in foreign currency exchange rates. The fair value
estimates of financial instruments presented below are not necessarily
indicative of the amounts the company might pay or receive from actual market
transactions
The company had the following financial assets and liabilities and
derivative financial instruments at September 30, 2006 and 2005:
FINANCIAL ASSETS AND LIABILITIES
The Company's financial assets and liabilities comprise cash and cash
equivalents, accounts receivable, short-term borrowings, notes and accounts
payable and long-term debt. In respect of these items fair value approximates to
the carrying amounts indicated in the balance sheets at September 30, 2006 and
2005.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company had $0.54 million and $1.0 in respect of forward exchange
contracts outstanding as of September 30, 2006 and 2005, respectively, in order
to hedge the foreign currency risk of certain accounts receivable and accounts
payable transactions. These transactions are expected to mature within four
months of the period end. The estimated fair values of the Company's forward
exchange contracts at September 30, 2006 and 2005, which equal the carrying
amounts of the related accounts receivable and accounts payable balances, were
$0.54 million and $1.0 million. Changes in the fair value of forward exchange
contracts designated and qualifying as cash flow hedges are reported in
accumulated other comprehensive income (loss). These amounts are subsequently
reclassified into earnings through other income (expenses) in the same period
that the hedged items affect earnings. Most reclassifications occur when the
products related to a hedged transaction are sold to customers or purchased from
suppliers. Substantially all unrealized losses on derivatives included in
accumulated other comprehensive income (loss) at the end of the 2006 fiscal year
are expected to be recognized in earnings within the next three months.
NOTE 20 - COMMITMENTS AND CONTINGENCIES
The Company had outstanding documentary letters of credit totaling $0.6
million at September 30, 2006 (2005: $0.7 million) relating primarily to
inventory purchases from suppliers in the Far East.
The Company's bank accounts held with the HSBC Bank plc by UK
subsidiaries of Spear & Jackson plc and Bowers Group plc form a pooled fund. As
part of this arrangement the companies involved have entered into a cross
guarantee with HSBC Bank plc to guarantee any bank overdraft of the entities in
the pool. At September 30, 2006 the extent of this guarantee relating to gross
bank overdrafts was $21.63 million (2005: $20.4 million). The overall pooled
balance of the bank accounts within the pool at September 30, 2006 was a net
balance of $5.4 million (2005: $0.8 million overdrawn).
The bank overdraft and other facilities of Spear & Jackson Australia
Pty. Limited have been guaranteed by its immediate parent, James Neill Holdings
Limited, and the bank overdraft and other facilities of Spear & Jackson France
SA have been guaranteed by Spear & Jackson plc.
Commitments under non-cancelable operating leases are disclosed in note
15.
On April 15, 2004, the US Securities and Exchange Commission filed suit
in the U.S. District Court for the Southern District of Florida against the
Company and Mr. Dennis Crowley, its then current Chief Executive
Officer/Chairman, among others, alleging violations of the federal securities
laws. Specifically with regard to the Company, the SEC alleged that the Company
violated the SEC's registration, anti-fraud and reporting provisions. These
allegations arise from the alleged failure of Mr. Crowley to accurately report
his ownership of the Company's stock, and his alleged manipulation of the price
F-35
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 20 - COMMITMENTS AND CONTINGENCIES - CONTD.
of the Company's stock through dissemination of false information, allowing him
to profit from sales of stock through nominee accounts. On May 10, 2004, the
Company consented to the entry of a preliminary injunction, without admitting or
denying the allegations of the SEC complaint. The SEC is continuing its
investigation into pension issues. The Company is offering its full cooperation.
As a further measure, the Court appointed a Corporate Monitor to
oversee the Company's operations. In addition to Mr. Crowley consenting to a
preliminary injunction the Court's order also temporarily barred Mr. Crowley
from service as an officer or director of a public company, and prohibited him
from voting or disposing of Company stock. Although Soneet Kapila has continued
to serve as Corporate Monitor for the Company, on January 10, 2007, he applied
to the Court to terminate the role of Corporate Monitor having determined that
his function was no longer necessary. The Court has not yet ruled on this
application.
Following Mr. Crowley's suspension the Board appointed Mr. J.R.
Harrington, a member of its Board of Directors, to serve as the Company's
interim Chairman. Mr. William Fletcher, a fellow member of the Company's Board
of Directors, who, until October 27, 2004, was the Company's Chief Financial
Officer, and who is a director of Spear & Jackson plc, based in Sheffield, is
serving as acting Chief Executive Officer. Following extensive settlement
negotiations with the SEC and Mr. Crowley, the Company reached a resolution with
both parties. On September 28, 2004, Mr. Crowley signed a Consent to Final
Judgment of Permanent Judgment with the SEC, without admitting or denying the
allegations included in the complaint, which required a disgorgement and payment
of civil penalties by Mr. Crowley consisting of a disgorgement payment of
$3,765,777 plus prejudgment interest in the amount of $304,014, as well as
payment of a civil penalty in the amount of $2,000,000. In May 2005, the SEC
applied to the Court for the appointment of an administrator for the
distribution of these funds as well as funds collected from co-defendants
International Media Solutions, Inc., Yolanda Velazquez and Kermit Silva who are
not affiliated with the Company, to the victims of their actions, pursuant to
the Fair Funds provisions of the Sarbanes-Oxley Act of 2002.
On November 18, 2004, the Company signed a Consent to Final Judgment of
Permanent Injunction with the SEC pursuant to which the Company, without
admitting or denying the allegations included in the Complaint filed by the
Commission, consented to a permanent injunction from violation of various
sections and rules under the Securities Act of 1933 and the Securities Exchange
Act of 1934. No disgorgement or civil penalties were sought from, or ordered to
be paid by, the Company.
Additionally, the Company entered into a Stock Purchase Agreement with
PNC Tool Holdings LLC ("PNC") and Mr. Crowley, the sole member of PNC. Under the
Stock Purchase Agreement, the Company acquired, for $100, and other good and
valuable consideration, 6,005,561 common shares of the Company held by PNC,
which represented approximately 51.1% of the outstanding common shares of the
Company at December 31, 2004, and which constituted 100% of the common stock
held by such entity. The parties also executed general releases in favor of each
other subject to the fulfillment of the conditions of the Stock Purchase
Agreement. The Stock Purchase Agreement was effected on April 8, 2005, following
formal approval by the SEC on February 10, 2005 and, on February 15, 2005 by the
U.S. District Court for the Southern District of Florida of the settlement of
the litigation captioned SEC v. Dennis Crowley, Spear & Jackson, Inc.,
International Media Solutions, Inc., Yolanda Velazquez and Kermit Silva (Case
No: 04-80354-civ-Middlebrooks). The Stock Purchase Agreement was further
conditioned on, among other things, the disgorgement and civil penalty funds
being paid by Mr. Crowley. These monies have now been received and are being
administered for the benefit of the victims of the alleged fraud by a court
appointed administrator pursuant to the Fair Funds provision of the
Sarbanes-Oxley Act of 2002.
With the return of the Spear & Jackson shares to the Company by PNC,
the stockholders of the Company have had their percentage stock interest
increase correspondingly. Jacuzzi Brands, Inc. ("Jacuzzi"), which is a
beneficial owner of 3,543,281 shares of common stock, had its interest in the
Company increased to approximately 61.8% of the outstanding common stock.
F-36
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 20 - COMMITMENTS AND CONTINGENCIES - CONTD.
Subsequent to the SEC action a number of class action lawsuits were
initiated in the U.S. District Court for the Southern District of Florida by
Company stockholders against the Company, Sherb & Co. LLP, the Company's former
independent auditor, and certain of the Company's directors and officers,
including Mr. Crowley, the Company's former Chief Executive Officer/Chairman,
and Mr. Fletcher, the Company's former CFO and current acting Chief Executive
Officer. These suits alleged essentially the same claims as the SEC suit
discussed above.
These various class action suits were subsequently consolidated.
Thereafter, the defendants filed certain Motions to Dismiss with regard to the
Complaint and on October 19, 2005, the U.S. District Court for the Southern
District of Florida in Re Spear & Jackson Securities Litigation entered its
Order regarding these Motions. The Order denied the Company's motion as well as
that of Mr. Crowley, the former Chief Executive Officer of Spear & Jackson. The
Court granted the Motion to Dismiss on behalf of Mr. Fletcher, the Company's
interim Chief Executive Officer, and also granted the Motion to Dismiss on
behalf of the Company's former independent auditor, Sherb & Co., LLP. The class
plaintiff has subsequently filed an appeal regarding the trial court's decision
to dismiss the case against Sherb & Co., LLP, which appeal is presently pending.
No appeal was filed with respect to the decision to dismiss the case against Mr.
Fletcher.
On July 7, 2006 the Company, Dennis Crowley and the Class Plaintiff
reached a Memorandum of Understanding ("MOU") which confirmed that the
plaintiffs, the Company and Dennis Crowley had reached an agreement in principle
for the settlement of this litigation, subject to Court approval. According to
the terms of the MOU, the Company deposited $650,000 into a Qualified Settlement
Fund, disbursement pending approval of the Court. Subsequent to this Sherb & Co.
also agreed to the terms of the Settlement agreeing to contribute an additional
$125,000.
On November 9, 2006, the Stipulation of Settlement was filed with the
Court for preliminary approval. Assuming that the preliminary approval is
granted, the next step will be to notice the Class of the settlement and to set
the approval process for final hearing and final approval before the Court. The
matter will not be finally settled until the Court issues a final judgment
approving the settlement.
Following the execution of the MOU, the lead plaintiffs commenced
discovery procedures to confirm the fairness and reasonableness of the
Settlement. The plaintiffs retain the right to terminate the Settlement if such
discovery reveals that the Settlement is not fair, reasonable and adequate.
Subject to these discovery procedures confirming the adequacy of the Settlement,
all parties have agreed to use their best efforts to finalize an appropriate
Stipulation of Settlement and any other relevant documentation necessary to
obtain approval by the Court of the settlement of this action.
If the Settlement outlined in the MOU is not approved by the Court or,
if subsequently terminated, the terms of the above Settlement will be without
prejudice, any settlement amounts already paid will be returned and parties will
revert to their litigation positions immediately prior to the MOU.
Should the class action settlement be approved, to facilitate the
distribution of the funds from the class suit to the class shareholders and keep
administrative costs to a minimum, the SEC Claim's Administrator applied to the
Court on January 9, 2007 for permission to combine the class action funds with
the funds derived in the SEC litigation, and allow for the SEC's Claim's
Administrator to disburse the collective funds.
On September 6, 2005, the Company was served with a Shareholder
Derivative Complaint filed on June 1, 2004 in the Circuit Court for Palm Beach
County, Florida (Case No. CA005068). The suit names the Company as nominal
defendant. Also named as defendants were former directors, Robert Dinerman,
William Fletcher and John Harrington, in addition to Dennis Crowley and the
Company's prior independent auditors, Sherb & Co. LLP. The suit contains
essentially the same factual allegations as the SEC suit, which was filed in
F-37
SPEAR & JACKSON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARES)
NOTE 20 - COMMITMENTS AND CONTINGENCIES - CONTD.
April 2004 in the U. S. District Court for the Southern District of Florida, and
the series of class actions claims initiated in the U.S. District Court, but
additionally alleges state law claims of breaches of fiduciary duty, abuse of
control, gross mismanagement, waste of corporate assets, unjust enrichment and
lack of reasonable care by various or all the defendants.
Due to ongoing settlement discussions with the plaintiff's attorney,
the Company had not responded to the Complaint. In August 2006 the Company
entered into a settlement agreement with the plaintiff by agreeing to accept
certain changes to its corporate governance procedures and the payment of up to
$75,000 in legal fees. The settlement was filed with the Court in early November
2006, and if approved by the Court, will result in a dismissal of the suit and
release the Company and the former director defendants, Messrs Robert Dinerman,
William Fletcher and John Harrington. A Preliminary Approval hearing is
scheduled on February 4, 2007. Dennis Crowley and Sherb & Co. continue as
defendants in this suit.
Additionally, the Company is, from time to time, subject to legal
proceedings and claims arising from the conduct of its business operations,
including litigation related to personal injury claims, customer contract
matters, employment claims and environmental matters. While it is impossible to
ascertain the ultimate legal and financial liability with respect to contingent
liabilities including lawsuits, the Company believes that the aggregate amount
of such liabilities, if any, in excess of amounts accrued or covered by
insurance, will not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
NOTE 21 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FISCAL 2006:
QUARTERS ENDED
DECEMBER MARCH JUNE SEPTEMBER TOTAL
-------- -------- -------- --------- ---------
Net sales .................... $ 22,926 $ 27,572 $ 24,647 $ 21,848 $ 96,993
Gross profit ................. $ 7,029 $ 8,494 $ 7,879 $ 5,695 $ 29,097
Net income (loss)
Continued operations ...... $ (1,665) $ (2,063) $ (2,765) $ 67 $ (6,426)
Discontinued operations ... $ (14) $ (64) $ (11) $ 36 $ (53)
Total ..................... $ (1,679) $ (2,127) $ (2,776) $ 103 $ (6,479)
Net income (loss) per share
(Basic and diluted)
Continued operations ...... $ (0.29) $ (0.36) $ (0.48) $ 0.01 $ (1.12)
Discontinued operations ... $ - $ (0.01) $ - $ - $ (0.01)
Total ..................... $ (0.29) $ (0.37) $ (0.48) $ 0.01 $ (1.13)
FISCAL 2005:
QUARTERS ENDED
DECEMBER MARCH JUNE SEPTEMBER TOTAL
-------- -------- -------- --------- ---------
Net sales .................... $ 24,685 $ 27,773 $ 25,954 $ 22,286 $ 100,698
Gross profit ................. $ 7,951 $ 9,416 $ 8,423 $ 7,445 $ 33,235
Net income
Continued operations ...... $ (611) $ 3,529 $ 108 $ 708 $ 3,734
Discontinued operations ... $ (37) $ (335) $ (43) $ (224) $ (639)
Total ..................... $ (648) $ 3,194 $ 65 $ 484 $ 3,095
Net income per share
(Basic and diluted)
Continued operations ...... $ (0.05) $ 0.30 $ 0.02 $ 0.15 $ 0.42
Discontinued operations ... $ (0.01) $ (0.03) $ (0.01) $ (0.02) $ (0.07)
Total ..................... $ (0.06) $ 0.27 $ 0.01 $ 0.13 $ 0.35
F-38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On August 13, 2004 the Company announced the resignation of its independent
accountant, Sherb and on November 19, 2004 the Company engaged Chantrey
Vellacott DFK ("Chantrey Vellacott") as its independent auditor. The change in
accountants was ratified and approved by the Board of Directors on the same
date.
Prior to their appointment as the Company's primary auditor, Chantrey Vellacott
performed significant auditing procedures relating to the Company's non-United
States subsidiaries. In connection with these auditing procedures, the Company
discussed a variety of matters, including the application of accounting
principles and auditing standards. However, these discussions occurred in the
normal course of the Company's professional relationship with Chantrey Vellacott
and were not a condition of retaining them as Spear & Jackson's primary auditor.
There have been no disagreements between the Company and the former certifying
accountant, Sherb, for which Chantrey Vellacott was consulted.
During the Company's year ended September 30, 2003 and the subsequent interim
period up to August 13, 2004, there were no disagreements between the Company
and Sherb on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to Sherb's satisfaction, would have caused Sherb to make reference
to the subject matter of the disagreement in connection with its reports on the
Company's financial statements for such periods.
The audit reports issued by Sherb on the consolidated financial statements of
the Company as of, and for the years ended September 30, 2003 and September 30,
2002, did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of
our "disclosure controls and procedures" (Disclosure Controls) as of the end of
the period covered by this Annual Report. The controls evaluation was done under
the supervision and with the participation of management, including the former
acting Chief Executive Officer (now Chairman and Managing Director of the
Company's principal UK operating subsidiaries), the Principal Executive Officer
and our Chief Financial Officer (CFO).
Attached as exhibits to this Annual Report are certifications of the PEO and the
CFO, which are required in accord with Rule 13a-14 of the Securities Exchange
Act of 1934. This Controls and Procedures section includes the information
concerning the controls evaluation referred to in the certifications and it
should be read in conjunction with the certifications for a more complete
understanding of the topics presented.
Definition of Disclosure Controls
Disclosure Controls are controls and other procedures of the Company designed to
ensure that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934, such as this Annual Report, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure Controls are also designed to ensure that such
information is accumulated and communicated to our management, including the
Company's principal executive and principal financial officers, as appropriate,
to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Controls
Our management, including the PEO and the CFO, does not expect that our
Disclosure Controls or our internal control over financial reporting will
prevent all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, have
been detected.
69
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.
Conclusions
Based upon the Disclosure Controls evaluation referenced above, our CAO and our
CFO have concluded that, subject to the limitations noted above, as of the end
of the period covered by this Annual Report, our Disclosure Controls were
effective in ensuring that both (a) the information required to be disclosed in
our reports filed under the Securities Exchange Act of 1934, such as this Annual
Report, is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and (b) that information to be disclosed
in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including the PEO and CFO, to allow timely
decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) of the Securities Exchange Act) that occurred during
the year ended September 30, 2006 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The executive officers of the Company as at 31 December 2006, their ages,
positions and past five years' experience are set forth below. All executive
officers of the company are appointed by the Board of Directors annually. There
are no family relationships between any director, executive officer, or person
nominated to become a director or executive officer.
Directors and Executive Officers:
NAME AGE TITLE
Lewis Hon Ching Ho 45 Chief Administrative Officer and Director
Andy Yan Wai Poon 35 Secretary and Director
Maria Yuen Man Lam 36 Corporate Controller and Director
Patrick Dyson 50 Chief Financial Officer
Mr. Ho was appointed director on August 9 2006. He joined Pantene Industrial Co.
Ltd, a wholly owned subsidiary of UPI, in 1999. Mr. Ho holds an Associate
diploma in Mechanical Engineering and an Associate's Diploma in
Electrical/Electronic Engineering. He has worked in the manufacturing field for
more than 27 years, of which 17 years has been spent in the electronics
industry, and he has a special expertise in tool and die-making. He was
appointed a director and general manager of PE HGZ, a wholly owned subsidiary of
UPI, in 2005.
Mr. Andy Poon was appointed director on August 9, 2006. He joined UPI in 2005
and is currently the Senior Financial Controller within that organization. He is
a qualified member of the Hong Kong Institute of Certified Public Accountants
and holds a Bachelor's degree in Accountancy and a Master's degree of Corporate
Finance form the Hong Kong Polytechnic University. Prior to his appointment
within UPI, Mr. Poon was, for nine years, a member of the senior financial
management of Liu Chong Hong Investment Limited, a property development and
Finance company. Following the resignation of Ms Maria Lam on January 4, 2007,
Mr. Poon was appointed Corporate Controller of the Company.
Ms. Lam was appointed director on August 9, 2006. She joined UPI in 1997 and is
responsible for the financial, treasury and information technology operations
within that organization. She is a qualified member of the Hong Kong Institute
of Certified Public Accountants and the Association of Chartered Certified
Accountants. Ms. Lam also holds a Bachelor's degree in Accountancy from the Hong
Kong Polytechnic University and a Master's Degree in Management from Macquarie
University. Prior to joining UPI she worked for Deloitte Touche Tohmatsu. Ms Lam
resigned as a director of the Company with effect from January 4, 2007.
70
Mr. Patrick Dyson was appointed Chief Financial Officer in October 2004. He
qualified as a member of the Institute of Chartered Accountants in England and
Wales in 1982 and worked in public practice with Barber Harrison & Platt in
Sheffield, England until joining Spear & Jackson plc in 1991, where he has
occupied a number of Corporate Financial roles within the Group. From April 1995
to July 2001 Mr. Dyson was Group Chief Accountant, and from August 2001 until
his appointment as Chief Financial Officer in October 2004 he was Group
Financial Controller. He holds a BA in English and an MA in Linguistics, both
from the University of Leeds, England.
Messrs. John Harrington Jnr., Interim Chairman, William Fletcher, Acting Chief
Executive Officer and Director and Robert Dinerman, Director retired and were
not re-appointed on expiration of their term of office as directors on August
27, 2006. Mr. William Fletcher continues to serve as Chairman and Manufacturing
Director of the Company's principal UK operating subsidiaries.
TERM OF OFFICE
Our Directors are appointed for terms of one year to hold office until the next
annual general meeting of the holders of our common stock, as provided by the
Nevada Revised Statutes, or until removed from office in accordance with our
bylaws. Our officers are appointed by our board of directors and hold office
until removed by the board.
MEETINGS OF THE BOARD
During fiscal 2006, in addition to actions taken by unanimous written consent,
there were 8 meetings of the Company's Board of Directors.
COMMITTEES
Following the changes in the Board of Directors and the Company's management,
the Company's audit and compensation committees have not yet been formally
reconstituted. The Board of Directors currently acts as the Audit and
Compensation Committees.
No members of our Board are independent, within the meaning of the rules of the
Securities and Exchange Commission or self-regulatory organizations. Inasmuch as
the Company does not have an audit committee, the Company does not have an
"audit committee financial expert" within the meaning of Item 401(h) of
Regulation SK.
A copy of the Audit Committee Charter, which was formally adopted by the Board
of Directors in January 2005, was filed as an exhibit to the Annual Return on
Form 10-K for the year ended September 30, 2004.
The Board of Directors also adopted in January 2005 the charter for a
Compensation Committee and this, too, was filed as an exhibit to the Company's
Annual Return on Form 10-K for the year ended September 30, 2004.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Exchange Act requires our executive officers and directors,
and persons who beneficially own more than ten percent of our equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than ten percent
shareholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file.
The Company has requested various of its division and group executives to
register under Section 16(a) of the Securities Exchange Act of 1934,
notwithstanding that the Company does not consider such individuals to be
"officers" within the meaning of that statute. Accordingly, Messrs. Gilles
Champain, Stephen White and Paul Moore registered under Section 16 and Messrs.
Peter Gill and Lee Wells are expected to complete their registration in the near
future.
CODE OF ETHICS
The Company's management had previously developed a detailed employee policy
document covering business conduct practices and processes. Subsequent to this,
the Company drafted and adopted a Code of Business Ethics and Conduct. A copy of
the code was filed as an exhibit to the Company's Annual Return on Form 10-K for
the year ended September 30, 2004.
71
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain compensation information as to each
individual who served as the Company's chief executive officer during the years
ended September 30, 2006, 2005 and 2004 and each executive officer who received
in excess of $100,000 for such fiscal period.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------- ---------------------------------
Awards Payouts
----------------------- -------
Other Securities
Annual Under-
Compen- Restricted Lying LTIP All Other
sation Stock Options/ Payouts Compen-
Year Salary Bonus ($) Award(s) SARs ($) sation
Name and Principal Position ($) ($) ($) (1) ($) (#) (2) ($)
------------------------------ ---- ------- ----- ------- ---------- ---------- ------- ---------
Dennis Crowley 2004 194,545 - - - - - -
Chief Executive Officer,
President, Secretary and
Chairman of the Board until
15 April 2004***
William Fletcher 2006 179,560 - 17,548 - - - 20,871
Acting Chief Executive Officer 2005 185,110 - 17,608 - - - 60,600
until 27 August 2006** 2004 175,265 - 15,231 - - - 54,683
Patrick J. Dyson 2006 122,102 - 14,728 - - - 30,366
Chief Financial Officer* 2005 120,321 - 14,992 - - - 26,873
2004 111,900 5,393 12,654 - - - 23,723
*** Mr. Crowley was appointed Chief Executive Officer, President and Chairman
of the Board in September 2002. He was removed from office in April 2004.
** Mr. Fletcher was appointed Chief Financial Officer in September 2002. On
Mr. Crowley's removal from office in April 2004 he was appointed acting
Chief Executive Officer. In August 2006 he retired as director on
expiration of his term of office but has continued to act as Chairman and
Managing Director of the Company's UK principal operating subsidiaries.
* Mr. Dyson was appointed Chief Financial Officer in October 2004.
(1) Other annual compensation includes payments made by the Company on behalf
of the executive officers in respect of the provision of a fully expensed
company automobile, private medical insurance and professional
subscriptions.
(2) Comprises contributions to the Company's defined benefit pension plan.
STOCK OPTION GRANTS
No stock options were granted to our directors and executive officers during our
most recent fiscal year ended September 30, 2006.
EMPLOYMENT AGREEMENTS
William Fletcher has no formal employment agreement but in a letter issued
supplementary to Mr. Fletcher's original terms of employment, the Company has
agreed that in the event of termination of employment other than for cause, Mr.
Fletcher would be entitled to severance pay equal to twelve months of his
current base salary and other benefits.
On September 1, 2000 Patrick Dyson entered into an employment agreement which
provides that, in the event of termination of employment other than for cause,
Mr. Dyson would be entitled to severance pay equal to twelve months of his
current base salary and other benefits.
72
Mr. Fletcher's and Mr. Dyson's base salaries are determined by the Board and
both are entitled to participate in an annual bonus scheme under which bonuses
are payable based on the operating profit and cash performance of the Company
measured against pre-set targets.
EXERCISES OF STOCK OPTIONS AND YEAR-END OPTION VALUES
No stock options held by our directors and executive officers were exercised
during our most recent fiscal year ended September 30, 2006. At September 30,
2006, no director or executive officer held any stock options.
COMPENSATION ARRANGEMENTS OF OTHER DIRECTORS
Mr. Dinerman received compensation of $22,500 in the year ended September 30,
2006 (2005 $12,500, 2004: $nil). Mr. Harrington received compensation of $72,500
in the year ended September 3, 2006 (2005: $12,500, 2004: $nil). Additionally,
Mr. Harrington and Mr. Dinerman were reimbursed for travel and other expenses
incurred in connection with meetings of the Board of Directors and other Company
matters.
Messrs. Poon and Ho and Ms. Lam received no compensation in the year ended
September 30, 2006.
At a meeting of the Board of Directors held in January 2005, the following
compensation arrangements were agreed for members of the Company's Board of
Directors, effective, prospectively, from January 1, 2005:
Fee Per
Meeting
Attendance at $
Formal Board Meeting .............. 3,000
Special Board Meeting ............. 500
Compensation Committee Meeting .... 500
Audit Committee Meeting ........... 750
Out of pocket costs incurred in connection with the above meetings and other
expenses incurred on other Company matters are reimbursed according to formal
policy guidelines.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth our common stock ownership information as of
December 30, 2006 with respect to (i) each person known to us to own more than
five percent (5%) of our outstanding common stock, (ii) each director of the
Company; (iii) each executive officer of the Company and (iv) all directors and
executive officers as a group. The information as to beneficial ownership was
furnished to the Company by or on behalf of the persons named. Unless otherwise
indicated, the business address of each person listed is:
12012 Southshore Boulevard
Suite 103
Wellington
Florida
33414
SHARES PERCENT
BENEFICIALLY OF SHARES
NAME AND ADDRESS OWNED OUTSTANDING
---------------- ------------ -----------
William Fletcher (1) ....................... - -
Patrick J Dyson (2) ........................ - -
Lewis Hon Ching Ho (3) ..................... - -
Andy Yan Wai Poon (4) ...................... - -
Maria Yuen Man Lam (5) ..................... - -
United Pacific Industries Limited (6) ...... 3,543,281 61.78%
199 Des Voeux Road Central,
Suite 27-05/06
Hong Kong
(1) William Fletcher was the Acting Chief Executive Officer of the Company
until 27 August 2006. He continues to serve as Chairman and Managing
Director of the Company's principal operating subsidiaries.
73
(2) Patrick Dyson is the Chief Financial Officer of the Company.
(3) Lewis Hon Ching Ho is the Chief Administrative Officer and a director of
the Company.
(4) Andy Yan Wai Poon is the Secretary and a director of the Company. Following
the resignation of Maria Yuen Man Lam on January 4, 2007, Mr. Poon was also
appointed Corporate Controller of the Company.
(5) Maria Yuen Man Lam was, until January 4, 2007, the date of her resignation,
the Corporate Controller and a director of the Company.
(6) David H Clarke, director and Executive Vice-Chairman of United Pacific
Industries Limited ("UPI") holds approximately 22.88% of the shares of UPI
and also holds approximately 28,350 shares of the common stock of Spear &
Jackson, Inc.
The Company has no securities authorized for issuance under equity compensation
plans.
CHANGE IN CONTROL
On September 6, 2002, we entered into a Stockholders' Agreement with USI Mayfair
Limited, PNC Tool Holdings LLC, and Dennis Crowley (collectively the
"Stockholders"). Pursuant to the terms of the Stockholders' Agreement the
Stockholders have agreed not to transfer any Company securities for a period of
two years following the date of the Agreement, other than certain unrestricted
transfers. An "Unrestricted Transfer" is any transfer (i) from any Stockholder
to any affiliate of such Stockholder, (ii) from any Stockholder to any other
Stockholder, (iii) from Dennis Crowley to any member of the immediate family of
Dennis Crowley or certain estate planning vehicles of Dennis Crowley, (iv) as
collateral security, by USI Mayfair Limited or its affiliates to one or more
third party banks or financial institutions, and (v) in the case of any
Stockholder that is not a natural person, transfers to non-affiliates of such
Stockholder resulting from a bona fide merger, stock sale, sale of all or
substantially all the assets of such Stockholder or other business combination
transaction involving such Stockholder, provided that clause (v) shall not apply
in the case of any such transaction effected with the intent of circumventing
the transfer restrictions of the Stockholders' Agreement.
Under the terms of the Stockholders' Agreement the Stockholders have agreed,
except in the case of an Unrestricted Transfer or a transfer of Company
securities registered under the Securities Act to a non-affiliated third person
effected through an ordinary course open market transaction, if at any time
after the two year anniversary of the date of the Stockholders' Agreement one or
more Stockholders propose to transfer any Company securities in a transaction or
series of transactions where the consideration for such Company securities is in
excess of $10,000, then the selling Stockholder shall provide written notice of
the proposed transaction to the other Stockholders and provide them with an
opportunity to participate in the proposed sale of Company securities on a pro
rata basis.
In addition, under the terms of the Stockholders' Agreement, subject to certain
exceptions set forth in the following paragraph, the Company has agreed not to
issue, sell or exchange, agree to issue, sell or exchange, or reserve or set
aside for issuance, sale or exchange, (i) any Company securities or (ii) any
option, warrant or other right to subscribe for, purchase or otherwise acquire
any Company securities, (collectively, the "Offered Securities"), unless in each
such case the Company shall have first delivered to the Stockholders a written
notice of any proposed or intended issuance, sale or exchange of Offered
Securities (the "Offer"), which Offer shall (A) identify and describe the
Offered Securities, (B) describe the price and other terms upon which the
Offered Securities are to be offered, issued, sold or exchanged, and (C) offer
to issue and sell to or exchange with the Stockholders up to their respective
pro rata portion of such Offered Securities. Each Stockholder's pro rata portion
of the Offered Securities shall be determined by multiplying seventy-five
percent (75%) of the aggregate amount of the Offered Securities by a fraction,
the numerator of which is the number of shares of voting securities then held by
such Stockholder and the denominator of which is the number of shares of voting
securities then outstanding. Each Stockholder shall have the right, for a period
of twenty (20) days following delivery of the Offer, to purchase or acquire such
74
Stockholder's pro rata portion of the Offered Securities at the price and upon
the other terms specified in the Offer. The Offer, by its terms, shall remain
open and irrevocable for such twenty (20) day period. To accept an Offer, in
whole or in part (provided, however, that the Stockholders may only elect to
purchase part of the Offered Securities if the Offer is not contingent on the
sale to the prospective purchaser of all of the Offered Securities), such
Stockholder must deliver a written notice ("Notice of Acceptance") to the
Company prior to the end of the twenty (20) day period of the Offer, setting
forth the portion (or all, if the Offer is contingent upon the sale to the
prospective purchaser of all of the Offered Securities) of such Stockholder's
pro rata portion of the Offered Securities that such Stockholder elects to
purchase. In addition, each Stockholder shall have the right to purchase (which
right shall be exercised by notice to such effect in the Notice Of Acceptance)
any Offered Securities not accepted by any other Stockholder, in which case the
Offered Securities not accepted by any such other Stockholders shall be deemed,
on the same terms and conditions, to be offered from time to time during such
twenty (20) day period to and accepted by such Stockholders who exercised their
options under this sentence ratably based on their interests in the Company or
as they may otherwise agree. Any Offered Securities that are not acquired by the
Stockholders or the offerees or purchasers described in the Offer in accordance
with this Section 6 may not be issued, sold or exchanged until they are again
offered to the Stockholders under the procedures specified in this Section 6.
Notwithstanding the foregoing, the pre-emptive rights of the Stockholders set
forth in the prior paragraph shall not apply to: (i) the issuance by the Company
of Offered Securities to employees, directors or consultants of the Company
pursuant to any Company stock option or other equity incentive plan, in
connection with an employment or consulting agreement or arrangement with the
Company, or in exchange for other securities of the Company (including, without
limitation, options granted under option plans) held by any such employees,
directors or consultants, (ii) Offered Securities issued in connection with the
acquisition of the business of another entity, whether by the purchase of equity
securities, assets or otherwise, (iii) Offered Securities issued as a stock
dividend to Stockholders or upon any subdivision or combination of Company
Securities, (iv) Offered Securities issued pursuant to or as contemplated by
that certain Stock Purchase Agreement, dated August 2001 by and between USI
Mayfair Limited and the Company, (v) Offered Securities sold by 18 the Company
in an underwritten public offering pursuant to an effective registration
statement under the Securities Act, (vi) capital stock or securities exercisable
for or convertible into such capital stock issued in connection with any
equipment leases or borrowings, direct or indirect, from third-party financial
or other institutions regularly engaged in such businesses, (vii) any warrants
issued without consideration or for nominal consideration in connection with any
third-party debt financings, or (viii) any performance-based equity issued to
third-parties in connection with strategic relationships.
The Stockholders' Agreement shall terminate upon the earliest of (i) our
dissolution, bankruptcy, or insolvency, or any assignment of all or
substantially all of our assets for the benefit of any creditor, (ii) an
agreement to terminate between us and certain of the Stockholders, and (iii) the
five year anniversary of the date of the Stockholders' Agreement.
As disclosed in ITEM 3 "LEGAL PROCEEDINGS", the Company entered into a Stock
Purchase Agreement with PNC Tool Holdings LLC ("PNC") and Dennis Crowley, the
sole member of PNC Tool Holdings. Under the Stock Purchase Agreement, the
Company acquired, for $100, and other good and valuable consideration, 6,005,561
common shares of the Company held by PNC Tool Holdings, which represented
approximately 51.1% of the outstanding common shares of the Company at December
31, 2004, and which constituted 100% of the common stock held by such entity.
The parties also executed general releases in favor of each other subject to the
fulfillment of the conditions of the Stock Purchase Agreement.
The Stock Purchase Agreement was effected on April 8, 2005, following formal
approval by the SEC on February 10, 2005 and, on February 15, 2005 by the U.S.
District Court for the Southern District of Florida of the settlement of the
litigation captioned SEC v. Dennis Crowley, Spear & Jackson, Inc., International
Media Solutions, Inc., Yolanda Velazquez and Kermit Silva (Case No:
04-80354-civ-Middlebrooks). The Stock Purchase Agreement was further conditioned
on, among other things, the disgorgement and civil penalty funds being paid by
Crowley, and these monies were subsequently received.
75
As a result of the stock purchase, the stockholders of the Company had their
percentage stock interest increase correspondingly with the return of the Spear
& Jackson shares to the Company by PNC. Jacuzzi Brands, Inc. ("Jacuzzi"), which
was a beneficial owner at the time of 3,543,281 shares of common stock, had its
interest in the Company increase to approximately 61.8% of the outstanding
common stock.
On April 21, 2005, Jacuzzi adopted a plan of disposition of the Company's common
stock. On March 23, 2006, Jacuzzi and its subsidiary undertaking, USI American
Holdings, Inc. ("USI" and, together with Jacuzzi, "the Seller") entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement" with United Pacific
Industries Limited ("UPI"), a Bermuda Corporation, whose shares are traded on
the Hong Kong Exchange, to sell its entire holding of 3,543,281 shares of the
common stock ("the Shares") of Spear & Jackson, Inc. to UPI for $1.40 per share
for an aggregate purchase price of $4,960,593.
The representations, warranties and covenants made by Jacuzzi and UPI were
typical for this type of transaction, and included a covenant that restricts
Jacuzzi from soliciting or negotiating with a third party between the signing
date of the Stock Purchase Agreement and the closing date of the transaction.
Jacuzzi also agreed that, in connection with the closing of the transaction, it
would, among other things, cause UPI's designees and one designee of Jacuzzi to
be elected to the Board of Directors of Spear & Jackson, Inc. and would use
commercially reasonable best efforts so that such UPI designees are in
sufficient numbers to give UPI a majority of the Board of Directors of the Spear
& Jackson, Inc. UPI also agreed that neither it nor any of its affiliates would
purchase any additional Common Stock during the period from the signing date of
the Stock Purchase Agreement through one year following the closing at a price
less than $1.40 per share.
The purchase of the Shares by UPI contemplated by the Stock Purchase Agreement
was subject to the satisfaction of a number of closing conditions, including
approval by UPI's shareholders and the United Kingdom Pensions Regulator, and
receipt of certain other regulatory approvals as well as other customary closing
conditions. A copy of the Stock Purchase Agreement is on file with the SEC in
connection with the filing by Jacuzzi of a Schedule 13D/A on March 27, 2006.
The Seller and UPI entered into Amendment No. 1 dated as of May 4, 2006
("Amendment No. 1 to the Stock Purchase Agreement") to extend the date by which
the Seller and UPI were required to lodge the clearance application with the UK
Pensions Regulator. The Seller and UPI subsequently received a comfort letter
dated July 5, 2006 issued by the UK Pensions Regulator (the "Comfort Letter").
The Seller and UPI agreed to waive the condition contained in the Stock Purchase
Agreement for a clearance from the UK Pensions Regulator and to accept the
Comfort Letter in satisfaction of that condition.
The trustees of Spear & Jackson, Inc.'s UK Pension Plan confirmed by a letter
dated July 6, 2006 their acceptance of the UK Pensions Regulator's
determination. The Seller and UPI then entered into Amendment No. 2 dated as of
July 10, 2006 ("Amendment No. 2 to the Stock Purchase Agreement") to waive their
respective requirements for a clearance from the UK Pensions Regulator and to
accept in its place the Comfort Letter which states the UK Pensions Regulator is
of the view, based on the information supplied to him in connection with the
clearance application, that the change of control as a result of the sale by the
Seller of all of its shares of Spear & Jackson, Inc. to UPI is not detrimental
to the UK pension plan and the UK Pensions Regulator believes that a clearance
is not necessary for the transaction.
In addition, pursuant to Amendment No. 2 to the Stock Purchase Agreement, UPI
agreed, subject to the Closing having occurred, to indemnify the Seller and JBI
Holdings Limited (the "Jacuzzi Indemnified Parties") should the UK Pensions
Regulator, regardless of the Comfort Letter, require any of the Jacuzzi
Indemnified Parties to make a contribution or provide financial support in
relation to the potential pension plan liabilities of SJI or its subsidiaries.
76
In addition, UPI has also agreed that for a period of 12-months from the Closing
Date, UPI will not, and will use its best efforts to ensure that neither Spear &
Jackson, Inc. nor any of its subsidiaries will, take any action or omit to take
any action that causes the UK Pensions Regulator, as a result of such action or
omission, to issue a contribution notice against the Jacuzzi Indemnified Parties
in relation to any UK pension plan in which Spear & Jackson, Inc. or any
subsidiary of Spear & Jackson, Inc. is an employer. Further, UPI agreed that for
a period of 12-months from the Closing Date, that it will not (and will use its
best efforts to ensure that neither Spear & Jackson, Inc. nor any subsidiary of
Spear & Jackson, Inc. will) engage in any action or inaction which in relation
to any such UK pension plan would fall within the UK Pension Regulation
clearance guidance note dated April 2005 as a 'Type A' event unless UPI procures
that clearance is issued by the UK Pensions Regulator in relation to such event
in terms which confirm that no Jacuzzi Indemnified Party shall be linked to a
financial support direction or contribution notice in respect of such event.
Closing occurred on July 28, 2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Except as disclosed in this section below, none of the following parties has,
since our date of incorporation, had any material interest, direct or indirect,
in any transaction with the Company or in any presently proposed transaction
which has or will materially affect us:
* Any of the Company's directors or officers;
* Any person proposed as a nominee for election as a director;
* Any person who beneficially owns, directly or indirectly, shares
carrying more than 10% of the voting rights attached to our
outstanding shares of common stock;
* Any relative or spouse of any of the foregoing persons who has the
same house as such person.
Mr. Neil Morgan, our former president, had advanced to the Company a total of
$100,019. The loan was unsecured, bore interest at 10.25% per annum and had no
specific repayment terms. The loan was settled at September 30, 2003 as part of
the sales consideration for the disposal of the Megapro screwdriver division.
During the 2003 fiscal year, the Company carried out a strategic review of its
Megapro screwdriver division, which was operating at a loss. It was determined
that the division was no longer a core activity of the Company and various
divestment strategies were considered. Disposition of the assets was undertaken
by Neil Morgan, who was heading up Megapro, to a separate group, which included
Mr. Morgan, and in exchange for which Spear & Jackson, Inc. received promissory
notes and other receivables from management of $284,000, as well as discharge of
a loan in the amount of approximately $100,000 owed by the Company to Neil
Morgan. The assets disposed of had a net book value of approximately $384,000.
While the Company was evaluating the disposition of this non-core activity, no
specific authorization was afforded to prior management to formally dispose of
the operations of the Megapro assets pending approval by the Board of Directors
of the Company. Management reviewed the terms of the transaction and evaluated
the receivable and the assets purportedly conveyed to consider its course of
action in this matter and accordingly provided $187,000 against the
recoverability of these receivables in the Company's financial statements for
the year ended September 30, 2004. This provision was in addition to the $97,000
already provided as potentially irrecoverable in the Company's financial
statements for the year ended September 30, 2003. It was subsequently agreed
with Megapro that it would pay Canadian $ 53,900 (approximately $41,000) in
settlement of those debts and was paid in monthly installments of Canadian
$5,000 (approximately $3,800) of which $27,000 was received in the year ended
September 30, 2005 and $12,000 in the year ended September 30, 2006.
77
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ANNUAL AUDIT AND QUARTERLY REVIEW FEES
The aggregate fees billed by Chantrey Vellacott DFK for professional services
rendered for the audit of the Company's annual financial statements for the year
ended September 30, 2006 and for professional services rendered for the
quarterly review of the financial statements was $429,000 (2005: $412,000).
TAX FEES
The aggregate fees billed by Chantrey Vellacott DFK for professional services
rendered for tax compliance, tax advice and tax planning were $164,000 for the
year ended September 30, 2006 (September 30, 2005: $178,000).
AUDIT RELATED FEES
There were no fees billed by the Company's accountants for financial information
systems design and implementation in either fiscal 2006 or 2005. There were no
fees billed for professional services related to Sarbanes-Oxley implementation,
Section 404 in particular.
PRE-APPROVAL POLICIES AND PROCEDURES
It is the policy of the Audit Committee to pre-approve all material, specific
expenditures relating to any off the matters set out above. In some cases,
projects with estimated budgets are pre-approved and monitored by the Audit
Committee, and final expenditures are ratified on completion. For fiscal 2006,
the Audit Committee approved and/or ratified all of the services detailed above.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules:
The following documents are either filed herewith or incorporated herein by
reference:
Financial Statements.
The audited consolidated financial statements of Spear & Jackson, Inc. and
subsidiaries as of September 30, 2006 and 2005 and for each of the three years
in the period ended September 30, 2006 (including the notes thereto which
contain unaudited quarterly financial data for each of the two years ended
September 30, 2006), and the Reports of Independent Registered Public Accounting
Firms thereon, are included herein as shown in the "Index to the Consolidated
Financial Statements" set forth in ITEM 8.
(b) Financial Statement Schedules
No financial statement schedules are included herein because either the amounts
are not sufficient to require submission of the schedules or because the
information is included in the Financial Statements or notes thereto.
(c) Exhibits:
78
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3-1 Articles of Incorporation(1)
3-2 Articles of Amendment changing our name to Megapro Tools
Corporation(1)
3-3 Articles of Amendment changing our name to Megapro Tools Inc.(1)
3-4 Articles of Amendment amending Article 6 (1) 3.5 Amended By-Laws(1)
3-5 Articles of Amendment changing our name to Spear & Jackson, Inc.(2)
3-6 Amended and Restated Bylaws(2)
4.1 Stock Purchase Agreement dated September 2002 between us, USI Mayfair
Limited, and PNC Tool Holdings, LLC(3)
4.2 Registration Rights Agreement dated September 2002, between us, USI
Mayfair Limited, and PNC Tool Holdings, LLC(3)
4.3 Stockholders' Agreement dated September 2002, between us, USI Mayfair
Limited, PNC Tool Holdings LLC, and Dennis Crowley(3)
4.4 Specimen Form of Common Stock Certificate.(1)
10.1 Acquisition Agreement dated September 30, 1999 between us and Ms.
Maria Morgan, Envision Worldwide Products Ltd., Mr. Robert Jeffery,
Mr. Lex Hoos and Mr. Eric Paakspuu(1)
10.2 Employment Agreement dated September 2002, between us and Neil
Morgan(2)
10.3 Employment Agreement dated September 2002, between us and Joseph
Piscitelli(2)
10.4 Sale and purchase of land at St. Paul's Road, Wednesbury, England
dated 27, July 2006, between Spear & Jackson Garden Products Limited
and Opus Land (Wednesbury Limited). (6)
10.5 Stock Purchase Agreement, dated March 23,2006 by and among United
Pacific Industries Limited, Jacuzzi Brands, Inc. and USI America
Holdings, Inc. (7)
10.6 Assignment of Interests and Claims, dated as of July 28, 2006, by and
among United Pacific Industries Limited, Jacuzzi Brands, Inc. and USI
American Holdings, Inc. (8)
10.7 Assignment Agreement, dated as of July 28, 2006, by and between United
Pacific Industries Limited and Pantene Global Holdings Limited. (8)
14 Code of Ethics (5)
16 Letters regarding concurrence of former independent public
accountants.(4)
21 List of Subsidiaries *
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbannes-Oxley Act of 2002. *
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbannes-Oxley Act of 2002. *
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbannes-Oxley Act of 2002. *
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbannes-Oxley Act of 2002. *
99.1 Audit Committee Charter (5)
99.2 Compensation Committee Charter (5)
* Filed herewith.
(1) Filed as an exhibit to the Company's Form SB-2 registration statement, as
amended, filed with the Securities and Exchange Commission originally on
July 3, 2000 and as amended through April 23, 2001.
(2) Filed as an exhibit to the Company's Annual Return on Form 10-KSB for the
year ended September 30, 2002.
(3) Filed as an Exhibit to the Company's Report on Form 8-K filed with the
Securities and Exchange Commission on September 9, 2002.
(4) Filed as an Exhibit to the Company's Report on Form 8-K/A filed with the
Securities and Exchange Commission on August 25, 2004.
(5) Filed as an Exhibit to the Company's Annual Return on Form 10-K for the
year ended September 30, 2004.
(6) Filed as an exhibit to the Company's Report on Form 8-K filed with the
Securities and Exchange Commission on August, 2, 2006.
(7) Filed as an exhibit to the Company's Form SC 13D/A filed with the
Securities and Exchange Commission originally on March 27 2006 and as
amended through July 12, 2006.
(8) Filed as exhibit to the Company's Form SC 13D filed with the Securities and
Exchange Commission on August 7, 2006.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: January 15, 2007 SPEAR & JACKSON, INC.
By: /s/ Lewis Hon Ching Ho
----------------------
Lewis Hon Ching Ho
Director and Chief Administrative Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities 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: January 15, 2007 By: /s/ Lewis Hon Ching Ho
----------------------
Lewis Hon Ching Ho
Director and Chief Administrative Officer
(Principal Executive Officer)
Dated: January 15, 2007 By: /s/ Andy Yan Wai Poon
---------------------
Andy Yan Wai Poon
Director, Corporate Controller,
and Secretary
Dated: January 15, 2007 By: /s/ Patrick J. Dyson
--------------------
Patrick J. Dyson
Chief Financial Officer
(Principal Financial
And Accounting Officer)
80
Exhibit 21
LIST OF SUBSIDIARIES
Name of Subsidiary Jurisdiction of Organization
------------------ ----------------------------
Spear & Jackson plc England
Bowers Group plc England
Offertower plc England
Magnacut Limited England
Coventry Gauge Limited England
Neill Tools Limited England
James Neill Holdings Limited England
Eclipse Magnetics Limited England
Markbalance plc England
Spear & Jackson Holdings Limited England
Societe Neill France S.A. France
Spear & Jackson Garden Products Limited England
Spear & Jackson France S.A. France
James Neill Canada, Inc. Canada
Spear & Jackson (Australia) Pty Limited Australia
Spear & Jackson (New Zealand) Limited New Zealand
James Neill USA, Inc. Illinois
Bowers Metrology Limited England
Bowers Metrology (UK) Limited England
CV Instruments Limited England
Spear & Jackson, Inc. Florida
S and J Acquisition Corp. Florida
Mega Tools Ltd Canada
Megatools USA, Inc. Washington
CV Instruments Europe BV The Netherlands
Bowers Eclipse Equipment Shanghai Co. Limited China
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) or RULE 15d-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Lewis Hon Ching Ho, director and Principal Executive Officer of Spear &
Jackson, Inc., certify that:
1. I have reviewed this Annual report on Form 10-K of Spear & Jackson, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on my
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Lewis Hon Ching Ho
Director and Principal Executive Officer
Date: January 15, 2007
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) or RULE 15d-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Patrick J. Dyson, the Chief Financial Officer of Spear & Jackson, Inc.,
certify that:
1. I have reviewed this Annual report on Form 10-K of Spear & Jackson, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on my
most recent evaluation of internal control over financial reporting, the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Patrick J. Dyson
Chief Financial Officer
Date: January 15, 2007
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Spear & Jackson, Inc. (the "Company") on
Form 10-K for the year ended September 30, 2006 (the "Report"), I, Lewis Hon
Ching Ho, director and Principal Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section. 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Lewis Hon Ching Ho
----------------------
Lewis Hon Ching Ho
Director and Principal Executive Officer
January 15, 2007
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
In connection with the Annual Report of Spear & Jackson, Inc. (the "Company") on
Form 10-K for the year ended September 30, 2006 (the "Report"), I, Patrick J.
Dyson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of my knowledge:
1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Patrick J. Dyson
--------------------
Patrick J. Dyson
Chief Financial Officer
January 15, 2007
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