U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant To Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the fiscal year ended September 30, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the transition period from N/A to N/A
COMMISSION FILE NUMBER: 0-32013
SPEAR & JACKSON, INC.
---------------------
(Exact name of registrant as specified in its charter)
Nevada 91-2037081
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(State or other jurisdiction) (I.R.S. Employer
of incorporation Identification No.)
or organization
6001 Park of Commerce Boulevard, Suite 2, Boca Raton, Florida 33487
-------------------------------------------------------------------
(Address of principal executive offices, including Zip Code)
(561) 999-9011
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE.
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE.
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act), Yes [ ] No [X]
The aggregate market value of the registrant's common stock (which is the only
common equity of the registrant, voting or non-voting) held by non-affiliates
computed by reference to the closing price of a share of the common stock on the
Over The Counter Bulletin Board on March 30, 2004 was $34,401,487.
The number of shares of registrant's common stock outstanding as of December 31,
2004 was 11,741,122.
TABLE OF CONTENTS
Page
PART I
ITEM 1 BUSINESS ....................................................... 1
ITEM 2 PROPERTIES ..................................................... 17
ITEM 3 LEGAL PROCEEDINGS .............................................. 18
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............ 20
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .............. 20
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA ........................... 22
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...................................... 24
ITEM 7A QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....... 64
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....... 66
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ....................................... 67
ITEM 9A CONTROLS AND PROCEDURES ........................................ 68
ITEM 9B OTHER INFORMATION .............................................. 69
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT ................. 70
ITEM 11 EXECUTIVE COMPENSATION ......................................... 73
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS ..................... 75
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................. 78
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES ......................... 80
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K ............................................ 80
SIGNATURES ................................................................. 83
PART I
ITEM 1. BUSINESS
CORPORATE ORGANISATION
Spear & Jackson, Inc. ("Spear & Jackson" or the "Company") currently conducts
its business operations through its wholly owned subsidiaries, Spear & Jackson
plc and Bowers Group plc, and, until September 30, 2003, Mega Tools Ltd and Mega
Tools USA, Inc. A brief summary of our corporate organizational history is as
follows:
Incorporation of Megapro Tools, Inc.
The Company was incorporated under the name Megapro Tools, Inc., on December 17,
1998 under the laws of the State of Nevada. The Company was inactive until the
acquisition of Mega Tools Ltd and Mega Tools USA, Inc., by means of a reverse
acquisition, on September 30, 1999.
Incorporation of Mega Tools Ltd and Mega Tools USA, Inc.
Mega Tools Ltd was incorporated in British Columbia, Canada, on January 7, 1994.
Mega Tools USA Inc. was incorporated under the laws of the State of Washington
on April 18, 1994. Prior to the acquisition by Megapro Tools, Inc., Mega Tools
USA Inc. was operated as a subsidiary of Mega Tools Ltd.
The acquisition of Mega Tools Ltd and Mega Tools USA, Inc. by Megapro Tools,
Inc.
On September 30, 1999 Mega Tools Ltd was acquired from Mrs. Maria Morgan,
Envision Worldwide Products Ltd, Mr. Robert Jeffrey, Mr. Lex Hoos and Mr. Eric
Paakspuu in exchange for the issue of 6,200,000 restricted shares in the common
stock of Megapro Tools, Inc. These shares were valued at $275 for accounting
purposes, representing the total paid-in-capital of the Mega Tools Ltd shares
acquired. Mega Tools USA, Inc. was acquired from Mega Tools Ltd in exchange for
the payment of $340,000 which was satisfied by the issuance of a promissory note
to Mega Tools Ltd. The acquisition of Mega Tools USA, Inc. was completed
immediately prior to the acquisition of Mega Tools Ltd. Megapro Tools, Inc. had
no business assets prior to the acquisition of the two companies.
Prior to the acquisition of Mega Tools Ltd and Mega Tools USA, Inc., each of
Mrs. Maria Morgan, Mr. Robert Jeffery, Mr. Lex Hoos and Mr. Eric Paakspuu were
shareholders of Mega Tools Ltd. Neither Mrs. Maria Morgan, Mr. Robert Jeffery,
Mr. Lex Hoos nor Mr. Eric Paakspuu was a director or officer of Mega Tools Ltd
or Mega Tools USA and neither individual had any management role with Mega Tools
Ltd or Mega Tools USA, either before or after the acquisition. Envision
Worldwide Products Ltd owned 24.8% of the shares of Mega Tools Ltd prior to the
acquisition of this interest by Megapro Tools, Inc.
1
The former stockholders of Mega Tools Ltd acquired a proportionate interest in
Megapro Tools, Inc. upon completion of the acquisition of Mega Tools Ltd and
Mega Tools USA. Mr. Neil Morgan, husband of Mrs. Maria Morgan, was sole promoter
upon inception. Other than the issue of stock to Mrs. Maria Morgan upon the
acquisition of Mega Tools Ltd, Mr. Morgan did not enter into any agreement with
the Company in which he was to receive from or to provide to the company
anything of value. Mr. Neil Morgan was the legal and beneficial owner of the
interest in Mega Tools Ltd held by Mrs. Maria Morgan. Mrs. Morgan acquired the
interest previously held by Mr. Morgan on April 16, 1999. Prior to the
acquisition of Mega Tools Ltd and Mega Tools USA, Mr. Neil Morgan was the
president and chief executive officer of Megapro Tools, Inc. and each of Mega
Tools Ltd and Mega Tools USA. Mr. Morgan continued as president and CEO of
Megapro Tools, Inc. upon completion of this acquisition.
The acquisition of Spear & Jackson plc and Bowers Group plc by Megapro Tools,
Inc.
On August 23, 2002, USI Mayfair Limited, a corporation organized under the laws
of England and a wholly owned subsidiary of USI Global Corp., Megapro Tools,
Inc. ("Megapro") and S and J Acquisitions Corp. (a company incorporated on
August 22, 2002 under the laws of the State of Florida and a wholly owned
subsidiary of Megapro Tools, Inc.) executed a Stock Purchase Agreement to
acquire all of the issued and outstanding shares of Spear & Jackson plc and its
affiliate, Bowers Group plc, owned by USI Mayfair Limited. The purchase price
comprised 3,543,281 shares of common stock of Megapro and promissory notes in
the principal amount of (pound)150,000 pounds sterling ($232,860) ("the
Transaction"). The Transaction closed on September 6, 2002.
Concurrently with the closing of the Transaction, and as a condition precedent
thereto, Megapro closed a Private Placement pursuant to which it agreed to issue
6,005,561 shares of the common stock of Megapro to PNC Tool Holdings, LLC, a
Nevada limited liability company ("PNC"), in consideration for $2,000,000 (the
"Private Placement"). Mr. Dennis Crowley ("Crowley"), who became CEO of the
company, was the sole owner of PNC.
In connection with the closing of the Transaction, certain principal
shareholders of Megapro, including Envision Worldwide Products, Ltd, Neil Morgan
and Maria Morgan contributed an aggregate of 4,742,820 shares of their common
stock of Megapro to the capital of Megapro, and agreed to a two year lock-up
with respect to their remaining 192,480 shares of common stock of Megapro. The
stockholders did not receive any consideration in connection with their
contribution of shares. As a result of the closing of the Transaction and the
Private Placement, and upon the effectuation of all post closing matters,
Megapro had 12,011,122 shares of common stock outstanding, 6,005,561 shares of
which were beneficially owned by PNC. The shares issued to PNC are subject to
the terms of a Stockholder's Agreement and a Registration Rights Agreement.
2
In the Stockholders' Agreement dated as of September 6, 2002 by and among
Megapro Tools, Inc., USI Mayfair Limited, PNC and Crowley (the "Stockholders")
it was agreed that, other than certain "unrestricted transfers", the parties
involved would not transfer any Company securities for the two years beginning
on September 6, 2002. On September 6, 2002, under an unrestricted transfer
relating to the transfer of stock from a permitted affiliate, USI Mayfair
Limited transferred all of the Company securities owned by it, along with all of
its rights under the Stockholders' Agreement, to USI Global Corp.
Since the date of the Transaction, the Company has not issued any shares of its
stock except under a limited number of options and has not engaged in any
financing using its stock.
Change of Name to Spear & Jackson, Inc.
On October 1, 2002, the Board of Directors unanimously executed a written
consent authorizing and recommending that the stockholders approve a proposal to
effect the change of name to Spear & Jackson, Inc. On October 2, 2002, company
stockholders holding a majority of the voting power of the Company executed a
written consent authorizing and approving the proposal to effect the name
change.
The Board believed that the new name, Spear & Jackson, Inc., would reflect the
change in business and would promote public recognition and more accurately
reflect the Company's intended business focus.
On November 7, 2002, the name of the Company was changed from Megapro Tools,
Inc. to Spear & Jackson, Inc. through the filing of a Certificate of Amendment
to the Company's Articles of Incorporation with the Secretary of State of the
State of Nevada.
Exit from Screwdriver Operations
With effect from September 30, 2003 the Company exited its screwdriver
operations following the disposition of the trade and assets of Mega Tools Ltd
and Mega Tools USA, Inc.
The disposition of the trade and assets of the screwdriver division was
undertaken by Neil Morgan who was then heading up the division.
The disposition followed a strategic review of the screwdriver division by the
then directors of Spear & Jackson, Inc., from which it was determined that the
screwdriver division was no longer a core activity. The Company believes that no
specific authorization was afforded to Mr. Morgan to undertake that disposition
and, following review of the terms and circumstances of the purported sale, it
is the intention of the Company to pursue claims against Mr. Morgan and the
transferee.
3
The disposition proceeds were in the form of $284,000 of loan notes and other
receivables and the discharge of a loan of $100,000 owed by the Company to the
managing director of the screwdriver division.
Recent Developments
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.
As a further measure, the Court has 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 bars Mr. Crowley from service as
an officer or director of a public company, and prohibits him from voting or
disposing of Company stock.
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.
The Company has been pursuing settlement negotiations with both the SEC and Mr.
Crowley to reach a resolution with both parties.
As part of such settlement negotiations the Company has now entered into a Stock
Purchase Agreement with PNC Tool Holdings LLC ("PNC") and Dennis Crowley, the
sole member of PNC. Under the Stock Purchase Agreement, the Company will
acquire, for $100, 6,005,561 common shares of the Company held by PNC, which
represents approximately 51.1% of the outstanding common shares of the Company
at December 31, 2004, and which constitute 100% of the common stock held by such
entity. The parties have also executed general releases in favor of each other
subject to the fulfillment of the conditions of the Stock Purchase Agreement.
Mr. Crowley has entered into a Consent to Final Judgment of Permanent Judgment
with the Securities and Exchange Commission, without admitting or denying the
allegations included in the complaint which requires 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.
4
The Company has also entered into a Consent to Final Judgment of Permanent
Injunction with the Securities and Exchange Commission 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 violations of
various sections and rules under the Securities Act of 1933 and the Securities
Exchange Act of 1934.
The Stock Purchase Agreement is not effective until formal approval of the
Consents by the Securities and Exchange Commission, as well as approval by the
U.S. District Court for the Southern District of Florida of the settlement of
that certain 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 is also conditioned
on the Company receiving the benefit of the disgorgement and civil penalty funds
paid by Crowley.
As a result of the contemplated stock purchase, the Company expects that the
stockholders of the Company will have their percentage stock interest increase
correspondingly with the return of the Spear & Jackson shares to the Company by
PNC Tool Holdings LLC. Jacuzzi Brands, Inc., which is a beneficial owner of
3,543,281 shares of common stock, will have its interest in the Company increase
to approximately 61.2% of the outstanding common stock.
Such percentage stock increases are not necessarily permanent as the Company may
subsequently reissue these shares, wholly or in part, for legitimate business
purposes.
On August 13, 2004 the Company announced the resignation of its independent
accountant, Sherb & Co LLP and on November 19, 2004 the Company engaged Chantrey
Vellacott as its independent auditor. The change in accountants was ratified and
approved by the Board of Directors on the same date. Additional disclosures
concerning the resignation and appointment are included under ITEM 9, below.
SUMMARY OF PRINCIPAL OPERATIONS
Spear & Jackson, Inc., through its principal operating entities, as disclosed in
note 1 to the financial statements, manufactures and distributes a broad line of
hand tools, lawn and garden tools, industrial magnets and metrology tools
primarily in the United Kingdom, Europe, Australasia, North and South America,
Asia and the Far East. These products are manufactured and distributed under
various brand names including:
* Spear & Jackson - garden tools;
* Neill - hand tools;
* Bowers - bore gauges and precision measuring tools;
* Coventry Gauge - air and other gauges;
* CV - precision measuring instruments;
* Robert Sorby - wood turning tools;
* Moore & Wright - precision tools;
* Eclipse - blades and magnetic equipment;
* Elliot Lucas - pincers and pliers; and
* Tyzack - builders' tools
5
Until the disposition of the screwdriver division in September 2003, the Company
also manufactured and sold a range of patented multi-bit screwdrivers under the
"Megapro" brand name.
The Company's four principal business units and their product offerings can be
summarized as:
1) NEILL TOOLS, which consists of Spear & Jackson Garden Tools and Neill
Tools, manufactures, among other products, hand hacksaws, hacksaw
blades, hacksaw frames, builder's tools, riveter guns, wood saws and
lawn, garden and agricultural tools, all non-powered. In addition,
Neill Tools has supplemented its UK manufactured products with factored
products from Far Eastern suppliers. Neill Tools product offering now
includes a full range of hand power tools.
2) ECLIPSE MAGNETICS' key products are permanent magnets (cast alloy),
magnetic tools, machine tools, magnetic chucks and turnkey magnetic
systems. Products range from very simple low-cost items to technically
complex high value added systems. In addition, Eclipse Magnetics
engages in the trading of other magnetic material sources from the Far
East both to end-customers as well as parts to UK manufacturers.
Eclipse is also involved in applied magnetics and supplies many areas
of manufacturing with products such as separators, conveyors, lifting
equipment and material handling solutions.
3) The Company's metrology division comprises:
MOORE & WRIGHT and COVENTRY GAUGE which manufacture a wide variety of
products. The core product ranges principally include low technology
measuring tools and hand held gauges for checking the threads,
diameters and tapers of machined components. This division has
supplemented its manufactured products with a range of factored items.
BOWERS METROLOGY which is a manufacturer of high specification
metrology instruments including precision bore gauges that measure the
diameter of machined components. In addition to the core range of bore
gauges, the Company also manufacturers universal gauges and hardness
testing equipment.
4) ROBERT SORBY is a manufacturer of hand held wood working tools and
complementary products. The products are handcrafted with strong
aesthetic appeal.
In addition, Spear & Jackson, Inc. has subsidiary companies in France (Spear &
Jackson France SA) and Australasia (Spear & Jackson (Australia) Pty Limited and
Spear & Jackson (New Zealand) Limited) which act as distributors for Spear &
Jackson and Bowers manufactured products and complementary products sourced from
third party suppliers.
6
BUSINESS SEGMENTS
The Company's continuing operations can be analyzed into three business
segments, hand and garden tools, magnetic products and metrology tools.
The following table sets forth external sales by segment as a percentage of
total sales:
Business segment % of Total Sales
---------------- ----------------------------
2004 2003 2002
Hand and garden tools 75.57 76.17 75.03
Magnetic products 15.19 14.78 15.57
Metrology tools 9.24 9.05 9.40
For further detailed financial information by reportable segment including
sales, profit and loss, and total asset information see Note 22 in the "Notes to
the Consolidated Financial Statements" included within this Annual Report on
Form 10-K. Also included within Note 22 is a detailed geographical analysis
including sales, profit and loss, and total asset information.
RESEARCH AND DEVELOPMENT
The Company invests in the development of new products and manufacturing
processes. Direct costs associated with new tooling for products are
capitalized, where material. All other costs, including salaries and wages of
employees involved in research and development projects, are expensed as
incurred.
SEASONALITY
Garden tool sales are seasonal by nature. Sales of such products typically peak
in the second and early part of the third quarter of the Company's financial
year when Northern Hemisphere customers increase order levels in anticipation of
the start of the spring gardening season. Garden product sales are lowest in the
first quarter of the financial year and the Company attempts to mitigate the
adverse impact of this by introducing various incentives to encourage customers
to place orders early.
7
STRATEGY
We currently sell our products to industrial, commercial and retail markets
throughout the world, with a significant concentration in the United Kingdom,
European Union, Australia, New Zealand and the Far East.
These markets chiefly comprise:
The non-powered hand tool industry in which the Company has hand tool,
engineers' hand tool and garden tool business interests. These products are
typically sold in industrial catalogs, hardware stores, garden centers and
multiple retailers. This industry is highly mature with clearly defined
traditional brand names being joined by a broad base of "house brands" typically
supplied from third world manufacturers.
The magnetic industry. This can be split into magnet manufacturers and magnetic
integrators. The magnet users and integrators utilize the magnetic materials to
produce products such as security sensors, electrical windows and magnetic
filters and lifters.
The metrology industry, which can be split into two main market segments: (i)
low tolerance tools such as tape measures, rulers and protractors and (ii)
surface roughness measuring equipment and laser measuring instruments, etc.,
used in the exact measurement of technologically precise machined components.
The Company's Bowers Metrology Group presently operates in the latter market
segment on a worldwide basis.
The hobbyist and professional wood turning industry. This industry is relatively
small and caters to individuals who have reasonable disposable income, often
retirees, or who are professional wood turners producing craft products.
Our strategy is to maintain and develop the revenues of our businesses through
such methods as:
* Maintaining and heightening the profile of our existing quality brand
names. Such activity will comprise trade, general and TV advertising,
extensive promotional work at trade shows, the development of corporate
web sites, etc.
* Continuous product improvement and innovation.
* Increasing market share by offering highly competitive product
offerings.
* The launch of new and innovative product and product ranges.
* Consideration and implementation of initiatives to increase our US
penetration.
8
PRODUCTS AND SERVICES
The Company offers a comprehensive range of tools and equipment ranging from
hacksaw blades to pliers, from secateurs to digging forks and from a simple red
magnet to a computer controlled materials handling system.
With regard to the products supplied by the company, those classes of similar
products that accounted for 10% of more of total consolidated revenue in the
last 3 years were as follows:
Product Type % of Total Revenue
------------ ---------------------------------
2004 2003 2002
Industrial Cutting Tools 19.87 15.84 17.59
(hacksaws, hacksaw blades, small saws,
saw frames, woodsaws and holesaws)
Garden, Digging and Cutting Tools 31.48 26.68 28.40
Electrical tools including power tools
and compressors N/A 11.97 N/A
Metrology products including gauges,
micrometers and precision tools 15.28 14.46 15.33
The company's product offerings comprise both own-manufactured items and
products sourced from third party suppliers. Products manufactured by the
company broadly comprise:
(a) Hand & Garden Tools Division
(i) Industrial tools comprising:
- Hacksaw Blades
- Small Saws and Woodsaws
- Saw Frames
- Holesaws
- Nutspinners and Riveters
- Builders' Tools
(ii) Garden tools comprising:
- Spades, Forks and Shovels
- Shears
- Cultivators
- Other Agricultural and Contractors' Tools
9
(b) Metrology Division
- Gauges
- Squares and Rules
- Calipers and Dividers
- Micrometers
- Hardness Testing Equipment
(c) Magnetics Division
- Popular and Industrial Magnets
- Chucks
- Magnetic Tools
- Lifters and Separators
- Workholding and Handling Systems
Of the total sales revenues arising in the year ended September 30, 2004, 37% of
the revenues were attributable to the sale of non-manufactured, factored
products sourced from external suppliers. The percentage of total revenues
generated in the years ended September 30, 2003 and September 30, 2002 which
related to such factored items was 36% and 32% respectively.
The Company's principal manufacturing sites can be summarized as:
Number of
Name/Location Products Manufactured Employees
------------- --------------------- ---------
A. UK:
Neill Tools Hand tools 330
Atlas Site, Sheffield
Spear & Jackson Garden Products Garden tools 99
Wednesbury, West Midlands
Robert Sorby Woodturning tools 35
Sheffield
Eclipse Magnetics Magnetic products 69
Vulcan Road, Sheffield
Bowers Metrology Precision measuring tools 70
Bradford
Coventry Gauge Precision measuring tools 30
Poole
10
B. France:
Spear & Jackson Assembly of garden tools 47
France
We maintain strict internal quality controls to monitor the standard of
production at the various facilities. In addition, the quality of externally
sourced finished products is checked by frequent tests and certification.
The raw materials utilized in our manufacturing processes typically comprise
steel (hot rolled, cold rolled, bright drawn, high speed, stainless) and other
alloys and castings, wood and plastics, paint and other coating materials,
packaging, bought in component parts and various abrasives, lubricants, tooling
and adhesives which are used in the manufacturing processes.
The Company regards these raw materials to be generally available and not
subject to restricted provision. Accordingly, the Company believes that there
are alternate sources for each category of raw materials that could be secured
without significant delay, if necessary.
WORKING CAPITAL
The Company principally builds inventory to known or anticipated customer
demand. In addition to normal safety stock levels, certain additional inventory
levels may be maintained for products with long purchase and manufacturing lead
times. The Company believes that it is important to carry adequate inventory
levels of raw materials and component parts to avoid production and delivery
delays that detract from its sales effort.
Sales of the Company's garden product ranges are lowest in the first quarter of
the financial year. The Company attempts to mitigate the adverse impact of this
by introducing various incentives, including extended payment terms, to
encourage customers to place orders early.
TOTAL BACKLOG ORDERS
As at November 26, 2004 there were $8.6 million backlog orders (December 31,
2003 $4.7 million). Given the nature of the business, the portion of these
orders that will not be fulfilled within the current year will be immaterial.
NEW PRODUCTS
The Company's policy is to support its core product offering with a pipeline of
new products and range extensions. In the 12 months to September 2004 new
product range launches and other significant product related business
developments have included:
11
NEILL TOOLS
* The `Predator' woodsaw which, in independent tests comparing it to its
major competitors, has been proven to be the leader in its field.
* Significant listings were secured with two major building merchants for
woodsaws and contractors' tools for deliveries beginning in September
2004.
* The `Razorsharp' range of cutting tools was launched, its unique
features include oval extending handles with an ergonomic grip to give
better handling quality.
* The premier brand for digging and cultivating tools in the UK and
Australasia, `Neverbend', was relaunched in an exciting new livery and
packaging.
* Soft feel builders' tools which feature a new ergonomically designed
handle.
ECLIPSE
* Eclipse made further inroads into mainland Europe with its `popular'
range of magnets. The product has been included in a major catalog that
is widely used throughout Europe.
* In addition, Eclipse launched the `Ultra Lift Plus', which includes the
patented safety shim. This `switch on, switch' off' magnet allows
significant weights to be lifted in complete safety.
* Eclipse Magnetics continued to develop and grow its "Specials
Division". These individually designed solutions represent a
significant opportunity since they are highly specialized and, as such,
are not subject to threat from cheap foreign imports.
BOWERS
* The previously launched Metrology `SmartPlug' range of gauges was
expanded in the year with the introduction of additional options and
accessories. Sales penetration is now being gained in the general
automotive market and with Formula 1 racing teams.
* Emphasizing our continuing focus on core competencies, we also invested
a further $165,000 in a Computer Numerically Controlled ("C.N.C.")
grinder to ensure that Bowers maintains its reputation as premier
manufacturer and supplier of precision measuring products.
12
SPEAR & JACKSON FRANCE
* Spear & Jackson France successfully launched a new range of brass
garden ornaments and brushes together with extensions to its existing
garden tools ranges. In addition, a number of new lawn and garden
products were launched, mainly sourced from the UK range.
ROBERT SORBY
* Robert Sorby continued its drive into North America and was successful
in obtaining its largest ever-single order from a US customer of $400k.
In addition, a range of electronically controlled woodturning lathes
was launched with sales exceeding all expectations.
AUSTRALASIA
* In Australia our new Managing Director continues to consolidate the
Company following recent management changes, with emphasis on the
promotion of the Spear & Jackson brand and the increased sale of more
products sourced form the UK.
* Spear & Jackson (Australia) tendered for and retained the account of
its largest customer with forecast sales of approximately $5.5 million
per annum. Spear & Jackson (New Zealand) was successful in securing a
major new customer in the third quarter from which annual sales of up
to $0.7 million are anticipated in the forthcoming year.
CUSTOMERS
The Company has a broad customer base with no single customer accounting for
greater than 10% or greater of total sales.
MARKETING AND DISTRIBUTION
Our products are distributed in the United Kingdom, European Union, Australasia
and North America.
They are sold through various distribution channels supported by in-house sales
professionals. Products are handled by mass merchants, independent sales agents,
engineering distributors, as well as sales direct to retailer and end users.
Specific marketing policies and distribution routes are adopted by the
divisions, reflecting either the value of the product being marketed or its
complexity. For the high volume, low unit value products such as garden tools,
hand tools and certain magnetic and metrology tools, the normal course of
distribution is via the merchandiser or industrial tool distributors. For low
volume, high unit value products, such as magnetic systems and precision
laboratory based measuring machines, the normal route would be direct to the end
user.
13
The garden and hand tools are primarily sold through three main channels,
retail, wholesale and industrial. The metrology and magnetics divisions sell
through industrial product distributors and directly to end users. The hobby
products are sold by hobby retailers and in their speciality catalogs.
BRANDS
A significant part of the Company's operation is branding and brands strategy.
Spear & Jackson has held leading brand names in its core business since 1760.
Neill Tools is one of the largest British based manufacturers of hand tools with
leading brand names such as Neill Tools, Eclipse, Elliott Lucas and Spear &
Jackson. In the metrology division, the Moore & Wright brand has been recognized
for over 100 years for its traditional craftsmanship while the Bowers name has
been at the forefront of international precision measuring equipment for over 50
years. Eclipse Magnetics is a recognized brand name in the UK manufacturing
industry because of its long history of supplying quality magnetic tools. Robert
Sorby is a recognized specialist in marketing its wood turning tools.
COMPETITION AND COMPETITIVE CONDITIONS
Each of the Company's divisions operates in mature sectors and under extremely
competitive market conditions. This situation has been increasingly exacerbated
by the influx of low-cost Far Eastern and third world imports ensuring that the
importance of outstanding brand recognition and superior quality and performance
is paramount.
The major competition for our hand and garden tools comes not only from the
low-cost Far Eastern imitations but also many established companies such as
Stanley in hand tools and Fiskars in garden cutting tools, while Ames/True
Temper possesses a significant share of the North American lawn and garden tools
market. The trend towards cheap Far Eastern products, the shift in customer
profile in the United Kingdom from specialized tool distributors to large DIY,
or `one-stop shops' and, in the past, a brand equity dilution due to lower
levels of marketing and advertising, has placed significant pressures upon the
maintenance of market share. Likewise in our French distribution outlet, the
ability to compete effectively with suppliers from the Far East is problematic
and there have also been significant inroads made by cheaper, lower quality
Eastern European products.
Although certain of our competitors are substantially larger than us and have
greater financial resources, we believe that we compete favorably with other
hand and garden tools companies because of the quality of our products, their
pricing and imaginative design, our ability to introduce niche products which
are clearly differentiated from competitor offerings and the level of our
customer support. Our reputation, customer service and unique brand offerings
enable us to build and maintain customer loyalty.
14
In our New Zealand and Australian distribution units, while price pressure has
been exerted through the increasing availability of tools manufactured from
within the Pacific Rim, the divisions are well placed to develop their position
as recognized and respected tool distributors marketing lines from manufacturers
all over the world who do not have, or do not wish to have their own presence in
either New Zealand or Australia.
With regard to our metrology operation, Bowers is a relatively small player
compared to its major competitors such as Mitutoyo, and, as such, is less able
to offer a complete product range. In addition, its traditionally heavy reliance
on the North American economy, the threat offered by low price Chinese imports
and the decline in availability of high-skilled engineers in the United Kingdom,
has directed the company's product ranges towards the "high technology" market
segment. Patented digital technology has staved off domination from Chinese
manufacturers while in certain areas, such as bore-gauging, the complexity and
quality of the design has meant that Chinese competition has been insignificant.
Indeed Bowers is recognized as a global leader in the precision bore gauge
market.
Eclipse Magnetics mirrors a similar picture with a great deal of competition
coming from Europe and the Far East. The launch of quality, high-standard
products at competitive prices is anticipated to maintain and increase the
Eclipse Magnetics market share.
Although one of the smaller divisions within the group, Robert Sorby is a world
leader in turning tools, competing with the likes of Henry Taylor and Pfeil. It
is a premier manufacturer of high specification tools within the niche
wood-working tools market and seeks to differentiate itself from the large
number of manufacturers producing DIY type woodworking tools through quality,
design and brand.
EMPLOYEES
The number of persons employed by the Company and its wholly owned subsidiaries
at September 30, 2004, 2003 and 2002 were 755, 764 and 843 respectively. 339 of
the Company's employees are subject to union agreements. Our Company's union
contracts with Neill Tools at the Company's Atlas and Wednesbury UK sites fall
due for negotiation in January 2005 and the agreements with the Bowers workforce
at Bradford in the UK become due in July 2005. The Company believes its
relationship with employees is good.
CAPITAL EXPENDITURE
Capital expenditure in the years ended September 30, 2004, 2003 and 2002 was
$7.1 million, $2.9k million and $1.4 million respectively. Capital expenditure
in the year ended September 30, 2004 related to the purchases of property in
Wednesbury, England ($3.2 million), and Boca Raton ($3.3 million). The remaining
$0.6 million was incurred in the updating of manufacturing plant and equipment
and the further automation of the Company's manufacturing facilities. Capital
expenditure in the forthcoming financial year is expected to be approximately
$1.4 million and will be used to improve the Company's existing facilities,
expand its manufacturing capabilities and increase productivity.
15
INTELLECTUAL PROPERTY
Our ability to compete effectively depends in part on the protection of our
license patents, designs and trademarks, which are used in the design, marketing
and sales of our many products. We can provide no assurance to investors that
the patents and trademark licensed by us will not be challenged, invalidated, or
circumvented by other manufacturers.
The Company has approval for three patents and is awaiting approval for ten
others. The filing dates for these patents range between June 1999 and January
2004, and the expiration dates will, therefore, occur 20 years after these
original dates of application. These patents are registered in Great Britain,
Canada, Hong Kong and Taiwan and relate to tools produced by the Company and to
specific mechanisms utilized in certain products manufactured by the Company.
In addition, the Company has 415 trade marks and 64 designs registered
throughout the world. The renewal dates for the trade marks range from December
2004 to December 2018. The registered designs fall due for renewal between
January 2005 and March 2009.
The designs to which the Company currently maintains rights comprise 8
registered designs issued by the United States, 1 registered design issued by
Canada, 33 registered designs issued by Great Britain, 12 registered designs
issued by Taiwan, 4 registered designs issued by China, 3 registered designs
issued by France, 1 registered design issued by New Zealand, 1 registered design
issued by Australia, and 1 registered design issued by India. The registered
designs relate to certain tools manufactured by the Company.
INFORMATION AVAILABLE ON SPEAR & JACKSON WEBSITE
We make available on our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to these
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
and Exchange Act of 1934, as amended, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. The Company's
internet address is http://www.spear-and-jackson.com.
These documents are also available in print to any shareholder who requests by
sending a letter addressed to the Secretary of the Company.
16
ITEM 2. PROPERTIES
Our principal executive office is located at 6001 Park of Commerce Boulevard,
Suite 2, Boca Raton, Florida 33487, comprising a warehouse and administration
facility of 30,000 square feet on a 7.9 acre site.
The property was purchased in March 2004. As discussed in note 8 (a) to the
Financial statements, following the removal from office of the Company's former
CEO, the current Board, in conjunction with the Corporate Monitor, has performed
a detailed review of its U.S. sales and distribution strategy. As a result, the
original initiative of setting up a central distribution unit in Florida has
been deferred. The property has now been offered for sale.
We operate from eight sites in the United Kingdom one site in France and New
Zealand and four sites in Australia. Six of such locations are plant facilities
and the remainder are office and distribution facilities. Five of the locations
are owned and the remaining nine are occupied under leases of varying lengths.
The UK owned locations comprise:
* Neill Tools, Atlas site, Sheffield, England
* Spear & Jackson Garden Products site, Wednesbury, West Midlands, England
* Robert Sorby site, Sheffield, England
* Bowers Metrology site, Bradford, England
The French manufacturing and distribution facility is located in St Chamond.
The leasehold sites and their respective lease periods, date of expiry of lease
and annual lease rentals are as follows:
Annual
Lease Lease Rental
Occupier/Location Period Expiry of Lease $'000
----------------- ------ --------------- ------------
UK
Eclipse Magnetics, Sheffield
England 25 years June 2011 320
Coventry Gauge, Poole Dorset
England 20 years June 2009 117
Robert Sorby, Doncaster
England 10 years May 2009 22
Bowers Metrology, Hampshire
England 10 years August 2012 135
AUSTRALIA
Victoria Building
Dandenong South
Australia 12 years December 2015 156
17
Welshpool, Australia 10 years January 2005 28
Wetherill Park, Australia Annually May 2005 14
West Terrace, Adelaide
Australia 3 years February 2007 7
NEW ZEALAND
Avondale
Auckland, New Zealand 12 years November 2005 34
The square footage of the above properties ranges from 3,000 to 240,000 square
feet.
We consider all of our properties as suitable and adequate to carry on our
business. We also believe that we maintain sufficient insurance coverage on all
of our real and personal property.
We do not lease or own any other real property.
ITEM 3. LEGAL PROCEEDINGS.
The Company is currently involved in a legal action with the former managing
director of Spear & Jackson plc concerning the amount of severance compensation
payable following his dismissal as part of a management reorganization program
in September 2002. The outcome of this action will not be known until the year
ended September 30, 2005 but the Company expects that the amounts provided in
respect of the dispute will be adequate to cover any amounts payable should the
Company's defence be unsuccessful.
On April 15, 2004, the US Securities and Exchange Commission filed suit in the
US District Court for the Southern District of Florida, against the Company and
Mr. Dennis Crowley, its then Chief Executive Officer/Chairman, among others,
alleging violations of the federal security laws. Specifically with regard to
the Company, the SEC alleged that the Company violated its 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
the 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.
In addition, the Court has appointed a Corporate Monitor to oversee the
Company's operations. Further to Mr. Crowley consenting to a preliminary
injunction, the Court's Order also temporarily bars Mr. Crowley from serving as
an officer or director of a public company and prohibits him from voting or
disposing of Company stock. The Company's Board of Directors has also suspended
Mr. Crowley from all positions he occupied as an officer or director. The
Company is cooperating with the Monitor and the continuing SEC investigation.
18
Subsequent to the SEC action, a number of class action lawsuits have been
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,
including Mr. Crowley and Mr. William Fletcher, the Company's CFO. These suits
allege essentially the same claims as the SEC suit, and seek unspecified
damages. The Company has not yet responded to the suits, and likely will not
until they have been consolidated and lead counsel appointed for the Class. It
is impossible at this time to ascertain the ultimate legal and financial
liability or whether these actions, as well as the SEC action, will have a
material adverse effect on the Company's financial condition and results of
operation.
The Company has been pursuing settlement negotiations with the SEC and Mr.
Crowley to reach a resolution with the SEC as well as Mr. Crowley. The Company
has now entered into a Stock Purchase Agreement with PNC Tool Holdings LLC
("PNC") and Dennis Crowley, the sole member of PNC. Mr. Crowley is the former
Chief Executive Officer, President and Chairman of the Board of the Company.
Under the Stock Purchase Agreement, the Company will acquire, for $100,
6,005,561 common shares of the Company held by PNC, which represents
approximately 51.1% of the outstanding common shares of the Company and which
constitutes 100% of the common stock held by such entity. The parties have also
executed general releases in favor of each other subject to the fulfillment of
the conditions of the Stock Purchase Agreement.
Mr. Crowley has entered into a Consent to Final Judgment of Permanent Judgment
with the Securities and Exchange Commission, without admitting or denying the
allegations included in the complaint, which requires 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.
The Company has also entered into a Consent to Final Judgment of Permanent
Injunction with the Securities and Exchange Commission 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 violations of
various sections and rules under the Securities Act of 1933 and the Securities
Exchange Act of 1934.
The Stock Purchase Agreement is not effective until formal approval of the
Consents by the Securities and Exchange Commission, as well as approval by the
U.S. District Court for the Southern District of Florida of the settlement of
that certain 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 is also conditioned
on the Company receiving the benefit of the disgorgement and civil penalty funds
paid by Crowley.
19
As a result of the contemplated stock purchase, the stockholders of the Company
will have their percentage stock interest increase correspondingly with the
return of the Spear & Jackson shares to the Company by PNC. Jacuzzi Brands,
Inc., which is a beneficial owner of 3,543,281 shares of common stock, will have
its interest in the Company increase to approximately 61.2% of the outstanding
common stock.
Such percentage stock increases are not necessarily permanent as the Company may
subsequently reissue these shares, wholly or in part, for legitimate business
purposes.
With effect from September 30, 2003 the Company exited its screwdriver
operations following the disposition of the trade and assets of Mega Tools Ltd
and Mega Tools USA, Inc. The disposition of the screwdriver division was
undertaken by Neil Morgan who was then heading up the division. The Company
believes that no specific authorization was afforded to Mr. Morgan to undertake
that disposition and, following review of the terms and circumstances of the
purported sale, it is the intention of the Company to pursue claims against Mr.
Morgan and the transferee.
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, 2004.
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 OTC Bulletin Board under the stock
symbol SJCK. 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.
20
Fiscal 2004 - Stock Price Fiscal 2003 - Stock Price
------------------------- -------------------------
High $ Low $ High $ Low $
------ ----- ------ -----
First Quarter 6.40 3.25 4.15 2.60
Second Quarter 5.53 2.58 5.89 3.37
Third Quarter 3.15 1.10 15.99 5.40
Fourth Quarter 1.85 1.10 15.75 4.30
Year 6.40 1.10 15.99 2.60
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, 2004 there were 22 record owners of our common stock and
approximately 1,152 beneficial 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 plans
* legal or contractual limitations
* financial conditions and
* other relevant factors
EQUITY PLAN COMPENSATION INFORMATION
Number of Securities
Number of Securities to Weighted average remaining available for
be issued upon exercise exercise price of future issuance under
of outstanding options, outstanding options, equity compensation
warrants and rights. warrants, and rights. plans.
----------------------- --------------------- -----------------------
Equity compensation plans approved
by security holders 0 0 0
Equity compensation plans not
approved by security holders 0 0 0
21
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, 2004,
2003, and 2002 and the consolidated financial data relating to the Consolidated
Balance Sheets as at September 30, 2004 and 2003, have been derived from the
audited consolidated financial statements of Spear & Jackson, Inc. included
elsewhere herein. The selected consolidated data in respect of the Consolidated
Statement of Operations for the year ended September 30, 2001 and the
consolidated financial data pertaining to the Consolidated Balance Sheets at
September 30, 2002 and September 30, 2001 have been derived from audited
consolidated financial statements of Spear & Jackson, Inc. that are not included
herein. Consolidated financial information in respect of the year ended
September 30, 2000 has been compiled from US GAAP consolidated financial
statements that have not been subject to audit under applicable US GAAS.
AS OF AND FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
2004 2003 2002 2001 2000
------------ ------------ ----------- ----------- -----------
UNAUDITED
CONSOLIDATED STATEMENTS OF
OPERATIONS:
Net sales $ 101,179 $ 91,845 $ 87,886 $ 95,462 $ 123,529
Cost and Expenses:
Cost of goods sold 68,685 62,947 61,954 68,049 78,113
Operating costs and expenses 30,550 22,534 27,250 27,375 38,382
Other net expense 116 101 96 13,788 410
------------ ------------ ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes 1,828 6,263 (1,414) (13,750) 6,624
Provision for income taxes (1,205) (1,497) (948) 226 (2,346)
------------ ------------ ----------- ----------- -----------
Net income (loss) from continuing
operations 623 4,766 (2,362) (13,524) 4,278
------------ ------------ ----------- ----------- -----------
Discontinued operations (187) (150) (1,150) - -
------------ ------------ ----------- ----------- -----------
Net income (loss) $ 436 $ 4,616 $ (3,512) $ (13,524) $ 4,278
============ ============ =========== =========== ===========
Basic and diluted net income (loss) per share:
From continuing operations $ 0.05 $ 0.40 $ (0.58) $ (3.82) $ 1.21
From discontinued operations $ (0.02) $ (0.01) $ (0.28) $ 0.00 $ 0.00
------------ ------------ ----------- ----------- -----------
$ 0.03 $ 0.39 $ (0.86) $ (3.82) $ 1.21
============ ============ =========== =========== ===========
Weighted average shares outstanding 11,741,122 11,988,930 4,100,071 3,543,281 3,543,281
============ ============ =========== =========== ===========
CONSOLIDATED BALANCE SHEETS:
Working capital (note 4) $ 28,821 $ 28,273 $ 21,789 $ 24,637 $ 26,003
Other assets (note 4) $ 35,335 $ 30,628 $ 28,934 $ 27,388 $ 40,063
Other liabilities $ 34,717 $ 27,049 $ 21,419 $ 11,573 $ 1,377
Stockholders' equity $ 29,439 $ 31,852 $ 29,304 $ 40,452 $ 64,689
NOTES 3 2 1
22
1. The Consolidated Statements of Operations for the years ended September
30, 2000 and 2001 contain the results of the Company's Industrial Saws
Division that was sold in March 2001. Similarly, the net assets of this
Division are included in the Consolidated Balance Sheet disclosures at
September 30, 2000.
2. 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.
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.
4. For consistency of presentation, the current portion of deferred income
tax assets is shown within "Other assets".
23
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.
RISK FACTORS
Historically, growth has been achieved by the development of new products,
strategic acquisitions and expansion of the Company's sales organization. There
can be no assurance that Spear & Jackson, Inc. will be able to continue to
develop new products, effect corporate acquisitions or expand sales to sustain
rates of revenue growth and profitability in future periods. Any future success
that the Company may achieve will depend upon many factors including factors
that may be beyond the control of the Company or which cannot be predicted at
this time. Although we believe that our expectations are based on reasonable
assumptions within the bounds of our knowledge of our business and operations,
actual results may differ materially from our expectations. Uncertainties and
factors that could cause actual results or events to differ materially from
those set forth or implied include, without limitation:
- - achieving planned revenue and profit growth in each of the Company's business
units;
- - renewal of material contracts in the Company's business units consistent with
past experience;
- - successful and timely integration of any significant businesses acquired by
the Company and realization of anticipated synergies;
- - increasing price, products and services competition;
- - emergence of new competitors or consolidation of existing competitors;
- - the timing of orders and shipments;
- - continuing availability of appropriate raw materials and factored products;
- - maintaining and improving current product mix;
- - changes in customer requirements and in the volume of sales to principal
customers;
- - changes in governmental regulations in the various geographical regions where
the Company operates;
- - the timely implementation of the Company's restructuring programs and
financial plans;
- - general economic and political conditions, including the global economic
slowdown and interest rate and currency exchange rate fluctuation;
24
- - continuing development and maintenance of appropriate business continuity
plans for the Company's processing systems;
- - absence of consolidation among key customers;
- - attracting and retaining qualified key employees;
- - no material breach of security of any of the Company's systems;
- - the ability of the Company to control manufacturing and operating costs;
- - continued availability of financing, and financial resources on the terms
required to support the Company's future business strategies; and
- - the outcome of pending and future litigation and governmental or regulatory
proceedings.
- - the potential acquisition of the Company or its principal assets.
In evaluating any forward-looking statements, you should consider various risk
factors, including those summarized above, and, those described in the 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.
OVERVIEW
Overall, although sales for the year ended September 30, 2004 show an increase
over those recorded for the equivalent period last year, there has been a
significant decrease in operating profitability.
Sales for the year ended September 30, 2004 increased by approximately $9.4
million (10.2%) over the previous year, primarily attributable to favorable
currency exchange fluctuations in the year offset by sales volume decreases.
While improvements in sales volumes were recorded in the UK trading divisions,
these were offset by the continued impact of the loss, in late 2003, of a major
Australian customer, the negative impact in certain export markets of the weak
US dollar, soft domestic demand, lack of optimism in the capital goods
manufacturing sector and fragile customer confidence following the removal from
office of the Company's former Chief Executive Officer.
Gross profit was 32.1% for the year ended September 30, 2004 compared to 31.5%
for the prior year. Margins have been adversely affected by increases in prices
for our principal raw materials of steel, plastic, cobalt and nickel, increases
in basic utility charges which form a key part of our manufacturing costs and
the movement towards factored product, which has a lower contribution, in
preference to own manufactured items. The negative impact of these factors has
been counterbalanced, however, by stronger sales mix, the flow-through benefits
of the "direct to market" sales strategy and the successful disposal of slow
moving inventories at amounts above written down value. The upward pressure on
steel prices caused by strong demand from China shows no signs of easing and is
likely, therefore, to remain an adverse influence on margins in the short term.
25
Selling, general and administrative expenses have increased by $8.0 million
(35.6%) in the year. Key factors here include: the additional costs associated
with the set up of the enhanced UK and US sales infrastructure; continuing UK
distribution cost overruns; the impact of adverse movements in the US $/sterling
cross rates in the period and general inflationary increases. As an additional
factor, certain one time savings experienced in 2003 have not been repeated in
2004. These include such items as: the settlement of senior employee termination
liabilities at amounts less than expected ($0.6 million), bad debt recoveries in
quarter 1 of 2003 ($0.1 million), one-off car leasing credits ($0.2 million) and
tax dispute settlements at amounts less than anticipated ($0.2 million).
In addition, corporate head office costs in the US have significantly increased
as a result of the legal and professional fees, monitor costs and associated
expenses incurred in connection with the US Securities and Exchange Commission's
suit against the Company and its former Chief Executive Officer. Head office
salary costs have fallen as a result of the removal of the Company's former CEO
but this reduction has not been sufficient to absorb the increases in legal fees
in the period.
The Company believes that the level of overheads incurred in the twelve months
ended September 30, 2004 will be maintained in the short term. Various
initiatives are, however, being implemented to reduce the levels of sales and
distribution costs in future periods. Additionally, on the assumption of a
prompt settlement of the Company's SEC and other related litigation issues,
decreases in administration costs should follow in future periods as a result of
decreases in legal and professional costs.
As a result of the decrease in sales volumes and higher overhead costs offset by
gross margin improvements the Company's operating income decreased by $4.42
million (69.4%) from $6.4 million in 2003 to $1.94 million in 2004.
The Company's management believes, however, that conditions are showing signs of
improvement in certain of our markets, and this is borne out by the strong
trading performance in the last quarter of the year.
The Company is addressing the decrease in operating profitability by the launch
of new products to re-establish our competitive edge over cheap imports. An
extended woodsaw range has already been introduced to the market and the launch
of a range of powered garden tools is planned for later in the year.
Additionally, the Company anticipates that it will continue to buy in finished
and semi finished components as a cost efficient alternative to own manufacture.
The Company intends to continue exploring initiatives to reduce its
manufacturing base costs, both in respect of raw materials and processes, in
order to minimize margin erosion.
The Company's management has implemented a number of initiatives to improve
profitability and further strategies are being considered. Emphasis will
continue to be placed on biasing our sales mix towards higher margin products,
restructuring of the UK manufacturing cost base, reducing warehouse and
distribution costs in the UK and the augmentation of the Company's sales and
marketing functions to ensure the Company derives maximum advantage from the new
UK direct trading route.
26
A new managing director was appointed in quarter 1 to lead our Australasian
operations. His initial responsibility was to regain market share through
increased sales to the existing customer base and the establishment of new
customer contacts so that the adverse effect on sales revenues of the loss of a
major customer can be mitigated as far as possible. Sound trading relationships
with certain major customers have been re-established with the intention that
sales opportunities can be maximized going forward. A significant new customer
has been secured in New Zealand and the Australian division's largest customer
has been retained following a successful tender process. It is now anticipated
that the Australasian companies will return to profitability in the forthcoming
year after incurring a significant operating loss in the year ended September
30, 2004.
These restructuring costs and other initiatives, together with continued
investment in new capital equipment in the UK, are anticipated to achieve
improved efficiencies and reduced labor costs with corresponding improvements in
the ongoing profitability of the Company from quarter 2 of Fiscal 2005 onwards.
In addition to the above reorganization programs, the Company has also invested
significantly in the acquisition of land and buildings in the UK in the year
ended September 30, 2004. In October 2003, through our UK subsidiary Spear &
Jackson Garden Products Limited, we acquired, for $3.2 million, the land and
buildings occupied by our garden tools division in Wednesbury, England.
Subsequent to this Spear & Jackson Garden Products Limited signed, on December
9, 2004, a conditional contract for the sale, for (pound)2.8 million
(approximately $5.3 million), of the excess element of this site. The agreement
was conditional upon the buyer entering into binding contracts for the
acquisition of the adjoining property. These conditions were satisfied early in
2005 and the contract for sale was formally completed on January 28, 2005. This
will enable us to plan future UK garden tool strategies with more certainty.
In March 2004, we also purchased through our wholly owned subsidiary, S&J
Acquisition, Corp., warehouse premises in Boca Raton, Florida for $3.3 million
(including preliminary fit out costs). Following the removal of the Company's
former CEO, the current board, in consultation with the Corporate Monitor, has
performed a detailed review of its US sales and distribution strategy. As a
result, the original initiative of setting up a central distribution unit in
Florida for the company's North American sales operations has been deferred. The
warehouse has been placed for sale and is accordingly presented as an asset held
for resale in the Company's consolidated balance sheet. The directors do not
anticipate that the sale will result in any significant loss to the Company and
the sales proceeds derived from the sale will be available for investment in
alternative US sales strategies and other key initiatives within the group.
The removal by the SEC, in April 2004, of Dennis Crowley as Company CEO and the
initiation of legal proceedings against the Company and certain of its directors
had a debilitating effect on the Company's operating focus.
The Company has been pursuing settlement negotiations with both the SEC and Mr.
Crowley to reach a resolution with both parties.
27
As part of such settlement negotiations the Company has now entered into a Stock
Purchase Agreement with PNC Tool Holdings LLC ("PNC") and Dennis Crowley, the
sole member of PNC. Under the Stock Purchase Agreement, the Company will
acquire, for $100, 6,005,561 common shares of the Company held by PNC, which
represents approximately 51.1% of the outstanding common shares of the Company
at December 31, 2004, and which constitute 100% of the common stock held by such
entity. The parties have also executed general releases in favor of each other
subject to the fulfilment of the conditions of the Stock Purchase Agreement.
Mr. Crowley has entered into a Consent to Final Judgment of Permanent Judgment
with the Securities and Exchange Commission, without admitting or denying the
allegations included in the complaint, which requires 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.
The Company has also entered into a Consent to Final Judgment of Permanent
Injunction with the Securities and Exchange Commission 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 violations of
various sections and rules under the Securities Act of 1933 and the Securities
Exchange Act of 1934.
The Stock Purchase Agreement is not effective until formal approval of the
Consents by the Securities and Exchange Commission, as well as approval by the
U.S. District Court for the Southern District of Florida of the settlement of
that certain 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 is also conditioned
on the Company receiving the benefit of the disgorgement and civil penalty funds
paid by Crowley.
The Company expects that, in the short term, resolution, of the remaining
approval issues will enable management to refocus its energies on implementing
the key strategies of the business and will allow the Company to move forward
free from the operational uncertainties associated with this legal action.
RESULTS OF OPERATIONS
GENERAL
The results discussed below compare the years and quarters ended September 30,
2004, 2003 and 2002. 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.
The operating results and net assets of Megapro Tools, Inc. and its subsidiary
companies are included in the consolidated financial statements from September
6, 2002, the date of its deemed acquisition, until September 30, 2003, the
effective date of the disposition of the Megapro screwdriver division.
28
The disposition of the Megapro companies followed a review of the screwdriver
division by the directors of Spear & Jackson, Inc. from which it was determined
that the screwdriver division was not a core activity. As a result of the sale,
the Megapro business has been disclosed in the consolidated financial statements
for the years ended September 30, 2004, September 30, 2003 and September 30,
2002 as a discontinued operation.
The disposition of the screwdriver division was undertaken by Neil Morgan, who
was then heading up the division, to a separate group, which included Mr.
Morgan, and in exchange for which the Company received promissory notes and
other receivables from management of $0.3 million as well as discharge of a loan
in the amount of approximately $0.1 million owed by the Company to Neil Morgan.
The assets disposed of had a net book value of approximately $0.4 million.
The Company believes that no specific authorization was afforded to the
Company's management at the time of the disposition to formally dispose of the
Company's screwdriver division assets pending approval by the Board of Directors
of the Company. The Company's current management has reviewed the terms of the
transaction, as well as evaluating the receivable and the assets purportedly
conveyed, to consider its course of action in this matter and has resolved that,
as at September 30, 2004, a further provision of $0.2 million should be made
against the carrying value of the amounts receivable from the acquirers in
addition to the $0.1 million already provided as potentially irrecoverable in
2003. The Company's evaluation of the circumstances of the disposition and the
potential claims against Mr. Morgan and the transferee was already underway at
the time that the SEC proceedings commenced in April 2004.
The Company plans to challenge the manner in which the screwdriver division was
disposed of by Mr. Morgan and expects to commence a legal action against Mr.
Morgan and the third party purchaser of the assets of the division.
SUMMARY
A summary of the results of operations is as follows:
Years Ended Quarters Ended
September 30 September 30
----------------------- ----------------------
2004 2003 2002 2004 2003 2002
$m $m $m $m $m $m
---- ---- ---- ---- ---- ----
Sales 101.2 91.8 87.9 24.4 19.8 21.9
----- ---- ---- ---- ---- ----
Gross profit 32.5 28.9 25.9 8.6 5.7 6.5
Operating costs 30.6 22.5 27.2 7.4 5.7 9.3
----- ---- ---- ---- ---- ----
Operating income (loss) 1.9 6.4 (1.3) 1.1 - (2.8)
Other income/(expenses) (0.1) (0.1) (0.1) - (0.1) 0.1
Provision for taxes (1.2) (1.5) (0.9) (0.4) 0.3 (0.4)
Discontinued operations (0.2) (0.2) (1.2) (0.2) (0.2) (1.2)
----- ---- ---- ---- ---- ----
Net income (loss) 0.4 4.6 (3.5) 0.5 0.0 (4.3)
===== ==== ==== ==== ==== ====
29
SALES
2004 COMPARED TO 2003
Sales from continued activities increased by $9.4 million (10.2%) from $91.8
million in the year ended September 30, 2003 to $101.2 million for the year
ended September 30, 2004. Sales of $24.4 million for the quarter ended September
30, 2004 were $4.6 million (23.2%) higher than sales of $19.8 million recorded
for the comparable period last year.
The net increase in sales for both the year and quarter ended September 30, 2004
over the comparable periods in the prior year is analyzed as follows:
Year Quarter
ended ended
September 30, September 30,
2004 2004
Note $m $m
---- ------------- -------------
Effect of exchange rate movements (a) 12.8 2.0
Sales volumes (decreases)/increases (b) (3.2) 2.4
(Increased)/decreased rebates (c) (0.2) 0.2
---- ---
9.4 4.6
==== ===
Analyzed by principal business segment, the net revenue increase over prior
periods can be summarized as follows:-
Year Quarter
ended ended
September 30, September 30,
2004 2004
Note $m $m
---- ------------- -------------
a) Hand and garden tools
Effect of exchange rate movements (a) 10.2 1.4
Sales volume (decreases)/ (b) (3.4) 2.0
increases
Rebates (c) (0.2) 0.2
---- ---
6.6 3.6
---- ---
b) Metrology tools
Effect of exchange rate movements (a) 1.6 0.4
Sales volume increases 0.2 0.2
---- ---
1.8 0.6
---- ---
c) Magnetic products
Effect of exchange rate movements (a) 1.0 0.2
Sales volume increases (b) - 0.2
---- ---
1.0 0.4
---- ---
Total 9.4 4.6
==== ===
30
Notes:
(a) The functional currency of the majority of the group's revenues is sterling
and the variation in the US$/(pound) cross rate in both the year and the
quarter ended September 30, 2004 compared to the comparable periods last
year has had a significant favorable impact on the US dollar value of the
group's sales. The average cross rates in the periods under review can be
summarized as:
Average Cross Rates
----------------------------------------
2004 2003 % Movement
---- ---- ----------
Year ended September 30 1.787 1.597 +11.9%
Quarter ended September 30 1.788 1.614 +10.8%
(b) Business conditions in most of our end markets remained challenging as a
result of depressed demand, the intense competition from competing suppliers
in a number of our product ranges and the adverse effect of weak US dollar
in a number of our export markets. Additionally, although the Company
strategy to aggressively promote our product continues, increased
expenditure in the current year on expanding and strengthening the sales and
marketing infrastructure, while now showing an improvement in the level of
sales, is still not sufficient to fully absorb the increase in overhead on
the previous year.
Within the hand and garden products segment, despite difficult trading
conditions both the Neill Tools and Robert Sorby divisions showed aggregate
sales volume increases for both the quarter ($2.3 million (26.4%)) and the
year ($4.1 million (9.9%)) ended September 30 2004 compared to the
comparable periods last year. Furthermore, the Neill Tools 2004 sales volume
increase has been achieved despite the cessation of trade with Toolbank, a
major UK wholesaler, to whom Neill Tools sold $2.8 million of product in the
year ended September 30, 2003.
However, the sales volume increases achieved in Neill Tools and Robert Sorby
were exceeded by sales volume decreases in the Australia and New Zealand
divisions (a $0.4 million (13.6%)) shortfall in quarter 4, 2004 and a $7.4
million (37.4%)) fall for the year). The Australian sales shortfall in 2004
compared to 2003 is primarily attributable to the loss of a major customer
to whom significant sales were made in the first three-quarters of 2003.
Similar market pressures were prevalent in the metrology, magnetic products
segments and in the Company's French subsidiary but volumes were largely
maintained with both divisions generating a marginal sales volume increase
by the end of the year.
31
(c) The level of rebates has increased in 2004 as a result of both increased
sales and changes in customer profile within the Neill Tools division
together with the benefits experienced in 2003 which accrued from certain
customers not triggering higher rebate levels not being repeated in the
current year.
Sales rebates charged in the year ended September 30, 2004 amounted to $3.6
million and $1.0 million of rebates were expensed in the quarter ending on
that date. Assuming similar sales volumes and customer mix, the Company
anticipates that this level of rebate will be maintained in future periods.
2003 COMPARED TO 2002
Sales from continuing activities increased by $3.9 million (4.5%) from $87.9
million in the year ended September 30, 2002 to $91.8 million in the twelve
months ended September 30, 2003. For the quarter to September 30, 2003, sales
decreased from $21.9 million in 2002 to $19.8 million in 2003, a decrease of
$2.1 million (9.6%).
The net increase/(decrease) in sales in both the year and quarter ended
September 30, 2003 is analyzed as follows:
Year ended Quarter ended
September 30, September 30,
2003 2003
Note $m $m
---- ------------- -------------
Effect of exchange rate movement (a) 9.6 1.6
Sales volume decreases (b) (5.3) (3.7)
Increased rebates (c) (0.4) -
---- ----
3.9 (2.1)
==== ====
Notes:
(a) As referred to above in the comparison of Fiscal 2004 to Fiscal 2003, the
variation in the US$/pound cross rate in the year ended and quarter ended
September 30, 2003 compared to the same periods of the prior year had a
significant favorable impact on the US dollar value of the group's sales.
The average cross rates in the periods under review can be summarized as:
Average Cross Rates
----------------------------------------
2003 2002 %Movement
---- ---- ---------
Year ended September 30 1.597 1.469 +8.71%
Quarter ended September 30 1.614 1.551 +4.06%
(b) Business conditions in most of our end markets became increasingly
challenging through 2003, as a result of a softening of demand, increased
competition from rival suppliers in a number of our product ranges and the
detrimental effect of a weakening US Dollar on our export business. More
specifically, sales were also diluted by reduced sales in the UK following
management's decision to cease trading with a major tool wholesaler,
Toolbank. Toolbank revenues from October 1, 2002 to the cessation of trade
in April 2003 were $2.8 million (year ended September 30, 2002 $6.6
million). Sales suffered while new trading relationships were being built
but despite the reduction in gross sales revenue there was no adverse effect
on margin.
32
(c) The level of rebates increased in 2003 principally as a result of changes in
the UK customer profile following the change in the route to market,
together with increased sales, especially in our Australian operations where
sales volumes increased by $1.8 million.
SEGMENTAL REVIEW OF SALES
We aim to maintain and develop the sales of our businesses through the launch of
new products, the improvement of existing items 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
2004 COMPARED TO 2003
Revenues for the year to September 30, 2004 of $44.4 million showed an
improvement of $6.9 million (18.3%) over last year's revenues of $37.5 million.
This increase was attributable to favorable exchange movements of $4.6 million,
and increased volumes of $3.4 million offset by an increase in sales rebates of
$1.1 million.
While the division has experienced another demanding year, the decision
implemented in July 2003 to cease trading with its major UK wholesale customer,
Toolbank, and to deal with its customers on a direct basis, has reaped benefits
and has enabled the division to re-establish links with its customer base. The
increased UK sales have been partially offset however, by the weakening dollar
which has continued to have a detrimental effect on sales into certain export
markets which are linked to that currency. To counteract this decline in price
competitiveness, margins have been reduced in some regions in order to achieve
substantial fixed volume orders. In other areas, such as the Middle East, for
example, the division received increased orders for metal cutting blades due to
a major competitor experiencing financial difficulties, and hand tool sales and
orders strengthened as a result of the proliferation of rebuilding projects
following the recent conflicts in Iraq.
The Company continues to invest in new product development, improved overseas
distribution and the marketing of group product through our overseas
subsidiaries.
The 'Predator' woodsaw range has been revitalized in the year and sales order
intake has exceeded all expectations with the woodsaw department operating on a
three shift basis to meet demand. Investment in new plant will be undertaken in
the forthcoming quarter to ensure that this level of output can be sustained.
Likewise, the division has successfully secured business with two major UK
builders merchants for woodsaws and contractors' tools. The introduction of hand
power tools into the UK market under the S&J brand has generated approximately
$1.8 million of sales in the year and it is hoped to expand upon this in the
forthcoming financial year by selling these products throughout continental
Europe.
33
While sales are improving, divisional management is fully appreciative of the
shrinking UK manufacturing base and the threat from low-cost, Far Eastern
economies. Manufacturing costs have remained high and, in order to compete
effectively in a global market, alternative sources of supply are being sought.
The control of costs, especially increased distribution costs associated with
the change in customer delivery requirements, has become a major priority. A
strategic plan to reduce the cost of manufacturing and distribution is well
under way to improve the division's profitability.
2003 COMPARED TO 2002
Sales for the year ended September 30, 2003 were $1.7 million (4.4%) less than
those in the year ended September 30, 2002, with volume decreases of $5.8
million (including sales reductions arising from a cessation of trade with a
major wholesaler - see below), offset by favorable exchange rate variances of
$3.2 million and a decrease in sales rebates of $0.9 million.
The division experienced a very demanding year with considerable change and
restructuring at all levels. During July 2003 Neill Tools confronted a
long-standing issue regarding its relationship with its major wholesale
customer, Toolbank. Toolbank, as Neill Tools' largest single customer, had
progressively positioned itself to become not only a customer but also a
competitor. A strategic decision was therefore taken to cease trading with
Toolbank and deal with its customers on a direct basis.
Neill Tools' management recognized that the division's sales would initially
suffer while new relationships were being built but that it would be in a
stronger position moving forward since customer relationships and contacts would
be improved and gross margins would be increased by removing the wholesaler.
Toolbank sales from October 1, 2003 to cessation of trade in April 2003 were
$2.9 million (year ended September 30, 2002 $6.6 million).
The Company was restructured to cope with the demands of its new trading route
and during the 3rd and 4th quarters of 2003 the primary focus of the business
was to establish direct trading links with its customers. The Company's decision
to trade direct was fully supported by its customer base and new business
continued to grow.
The division continued to focus on new product development and this strategy saw
the launch of new ranges of dry lining tools, hand power tools, air power tools,
leather workware, spanners, sockets, screwdrivers and pliers. To further enhance
end-user presence a team of dedicated merchandisers was recruited to go direct
to stores to ensure that our product was both available and prominently
displayed. In addition Neill Tools worked actively in the US market to secure
business with national `Big-Box' retailers.
Despite difficult trading conditions, profitability increased thanks to
preserved margins and the beneficial effects of the restructuring that took
place in the final quarter of September 2002. Significant cost savings and
earnings benefits flowed from reorganization and efficiency initiatives in
administration and production.
34
The Company did not neglect its core competencies and a capital investment
program of $0.5 million was instigated in the year in new robotic technology to
ensure our world class status in our core processes was maintained.
ECLIPSE MAGNETICS
2004 COMPARED TO 2003
Sales for the year increased by $1.0 million (12.3%) from $8.3 million in 2003
to $9.3 million in 2004. The increase is due primarily to favorable exchange
differences with sales volumes remaining static.
During this challenging year the division has suffered from the generally
depressed industrial economic conditions. Most markets have remained stagnant
and the depressed nature of the sector has been exacerbated by the continuing
weakness of the US dollar which has challenged margins and reduced
competitiveness in comparison to locally based manufacturers.
The standard low technology area of the business continued to be affected
adversely by the increased presence of good quality imports from our competitors
in China and the Far East, which directly impacted upon our distribution and
industrial markets. On top of this, Eclipse has witnessed a 60% increase in the
raw material prices of nickel and cobalt, two major alloys used in magnet
manufacturing, which has inevitably resulted in margin erosion.
The division's higher added value Applied Magnetics operation continues to
flourish, however, showing an 18% sales growth in the year. During the year the
Company has refocussed its sales activities towards these higher technology
products, particularly materials handling and product separation, to mitigate
volume reductions and product discontinuations in its traditional permanent
magnets business.
The division continues to offer a high level of quality product and after sales
service with emphasis on new products and ranges. The new Optimag standard range
launched during the year offers the automotive, automation, and materials
handling markets a high performance clamping module for all materials handling
applications. Likewise, the Automag oil filtration device, designed to remove
all ferrous contamination from oils within manufacturing process lines, was
launched and was well received by UK automotive manufacturers. The patented
"Ultralift" permanent lifting magnet has increased market share and continues to
grow at over 10% per year. During the year new industrial catalog listings were
obtained with major distributors in Germany and the USA, building solid
foundations for the future.
The main challenges to the business remain the retention of the low technology
business with its high quality brand image, to continue to develop the "added
value" side of the business with its higher margin sales and to promote the high
level of after sales service provided by the Company.
35
2003 COMPARED TO 2002
Eclipse Magnetics sales for the year ended September 2003 of $8.3 million were
little changed from those in the previous year ($8.2 million) with advantageous
exchange rate variances of $0.7 million compensating a reduction in sales
volumes of $0.6 million.
The Eclipse Magnetics markets reflected the still some-what depressed global
industrial economic conditions. During this challenging year the division
refocused its sales activities towards higher technology, value added products,
at the same time underpinning these new sales areas with its core product
offerings within its traditional low technology markets.
New product development continued with the introduction of patented lifting
magnets, specialized separation equipment and specialized magnetic materials for
industrial applications. Despite sluggish revenues, gross margins improved due
to greater emphasis on higher-margin products, changes in manufacturing methods
and efficiency improvements. The restructuring exercise carried out in 2002
reaped significant benefits with regard to margin improvement and a 20% decrease
in fixed costs.
ROBERT SORBY
2004 COMPARED TO 2003
Sales for the year have increased by $1.2 million (29.8%), rising from $3.9
million in 2003 to $5.1 million in 2004. The increase is due to increased volume
growth of $0.7 million and favorable exchange rates of $0.5 million.
The division has had a successful year with substantial sales volume growth.
Despite the weak US dollar, sales into North America have remained buoyant in
the year. This strong overseas sales performance has been able to compensate for
a flat UK market where demand has been depressed.
In the soft UK market, the main thrust has continued to be the promotion of
lathes, lathe chisels and lathe chucks where the division occupies an
increasingly strong position. The introduction of the new DVR lathe in the first
quarter impacted very strongly on subsequent periods' results and we anticipate
this trend will continue. This introduction was supported by heavy promotional
activity including consumer advertising, consumer literature and in-store
demonstrations. Other product sales have flowed through as a result of this
activity.
As with other divisions, Robert Sorby has suffered through the weakness of the
US dollar as a high percentage of business is generated in North America. This
position was exacerbated by the closure of a major customer in November 2003.
However the loss of the customer and the negative impact of a weak dollar have
been compensated by an increase in business with other dealers and the Company
anticipates that, in the long term, this broadening of the customer base will
prove to be a major benefit.
36
2003 COMPARED TO 2002
Robert Sorby sales in the year ended September 30, 2003 showed an increase of
$0.3 million (6.9%) compared to revenues in the twelve months ended September
30, 2002, comprising favorable exchange variances of $0.3 million and minimal
adverse volume variances.
The UK market performed strongly with growth in business through an improved
distribution network and through our own retail outlet where mail order business
improved markedly. By contrast, the US market was generally weak reflecting a
softness in the economic climate.
Considerable focus was placed on building our overseas presence in key markets
such as the US, Canada and Australia, especially through consumer shows and
demonstration tours. One of the most encouraging developments during the year
was the introduction of a new range of woodworking lathes and there was
considerable success at marketing products through international consumer
exhibitions, in-store demonstrations and increased consumer advertising and
editorials.
The core woodturning tool business remained strong despite an increasing number
of competitors. This was backed by strong consumer advertising in which we
switched our strategy from brand advertising to more focused product
advertising. The `Sandmaster', which was introduced during 2003, is now listed
by almost every dealer network worldwide.
BOWERS
2004 COMPARED TO 2003
Sales for the year have increased by $1.8 million (13.3%), rising from $13.6
million in 2003 to $15.4 million in 2004. The increase is due primarily to
favorable exchange fluctuations with only modest sales volume growth.
The trend for the year continued into quarter 4 where a steadily improving US
market was offset by difficult trading conditions in Europe. In particular sales
to France and Italy witnessed significant reductions from the previous year
while sales into Germany saw improvements, although part of this increase can be
attributed to goods being re-exported to expanding Eastern European markets.
Far Eastern markets were targeted throughout the year with additional
distribution channels opened up in China, Thailand and Malaysia. The weakness of
the US dollar has made Bowers products less competitive in these regions and
margins have therefore been affected. As many Western manufacturers relocate to
China there is an ever-increasing demand for gauges to improve product quality
and the division sees this as a major advantage over local Chinese competition.
Plans are now in place to have a local presence to tap this burgeoning market.
With regard to UK sales, the final quarter saw some improvements although the
year finished well behind expectations. The main successes have been in the
Aerospace sector, with several projects signed with blue-chip manufacturers.
Likewise the systems side of the business continues to expand and the new Moore
& Wright brand of digital products has achieved important listings in several of
the large UK catalog distribution companies.
37
The capital products within the range continue to disappoint, due to the
hesitancy of key customers to invest, but some signs of recovery are now being
experienced, led mainly by demand from UK based aerospace manufacturers. Finance
options for customers are being considered to alleviate the upfront cost of such
products.
The fixed limit products sold under the Coventry Gauge brand continue to face
fierce price competition. The business is under increasing pressure from low
cost foreign imports and a strategic review to concentrate on the higher margin
non-standard business is now being implemented.
The successful launch of the new Smart Plug 2-point range has far exceeded
expectations and the focus going forward is to open up the lucrative German and
US markets for this product as it is ideally suited to the automotive sector.
2003 COMPARED TO 2002
Sales in the twelve months ended September 2003 decreased by 0.8% from $13.7
million to $13.6 million. Unfavorable sales volume variances of $1.2 million
were mitigated by favorable exchange variances of $1.1 million.
Despite difficult trading conditions, especially in Europe and Asia, the upturn
in both the US and the UK continued to gain momentum. Initiatives in China grew
at a rapid pace, in particular as western manufacturers relocated in large
numbers and required high precision measuring equipment to maintain quality
standards.
A series of new product and marketing initiatives introduced in 2003 including
the Smart Plug 2-point gauging system and the new range of Moore & Wright
digital hand tools, further extended our product range.
A focus on the large industrial catalogs brought some excellent results during
the year, particularly with the Hoffmann Group, one of the largest catalogs in
Europe. Additional listings were obtained in the new issue of their catalog that
was launched in July 2003.
The positive effect of restructuring carried out in the last quarter of 2002
such as closing the loss making calibration business and consolidating two sites
in the south of England, was reflected in the increased profitability of the
division.
S&J FRANCE
2004 COMPARED TO 2003
Sales have increased by $0.9 million (10.7%) from $8.7 million in 2003 to $9.6
million in 2004, the increase being attributable to favorable exchange rate
variances of $1.1 million offset by increased sales rebates ($0.1 million) and
volume decreases ($0.1 million).
The French economy has remained depressed during the year and the poor weather
in March and April resulted in reduced garden tool sales activity in the key
selling months for the garden season from which full year sales never fully
recovered.
38
Despite the flat trading conditions several new listings have been achieved for
new products including brass ornaments and the stainless steel range extensions.
In addition the division was successful in gaining the business of two new
private labels and the increased sales orders arising from these new outlets are
now crystallizing as additional sales revenues.
Production improvements have been introduced in the year in the assembly and
paint area with the involvement of UK manufacturing management. The results of
this should enable us to improve rates of productivity and ensure a better
control over product flow.
It has been long recognized that the French operation is a highly seasonal
business since most of its product offering relates to lawn and garden tools. In
the coming months we plan to introduce non-garden products (electronic weather
stations, snow shovels, etc) with the assistance of a recently recruited
manager. This will substantially broaden our product portfolio, reduce
seasonality, and keep the business profitable throughout the year.
2003 COMPARED TO 2002
Sales in the year ended September 30, 2003 increased by $1.7 million (24.3%) in
the year, of which $0.5 million was attributable to increased sales volume and
the remainder being advantageous exchange rate movements offset by higher sales
rebates.
S&J France launched, with success, new garden ranges including cottage garden
tools, aimed at the female market, or those working in restricted garden areas
like rockeries. These new ranges enjoyed penetration into new markets including
a listing with Castorama, the largest `Big Box' retailer in France.
AUSTRALASIA
2004 COMPARED TO 2003
Sales decreased from $19.8 million in 2003 to $17.4 million in 2004, the $2.4
million (12.5%) decrease being attributable to sales volume decreases of $7.4
million compensated by favorable exchange variances of $4.1 million and reduced
sales rebates of $0.8 million.
Despite the Australian and New Zealand economies performing strongly, retail
trading slowed down in the second half of the year with the increase in domestic
interest rates driving a slow down in consumer spending.
The considerable fall in sales from last year is principally due to the poor
performance of hand tools, masonry products and garden tools arising from:-
(a) The interruptions to the operations of the business, particularly the
enforced reduction of promotional sales programs, resulting from the resignation
of the division's Managing Director and the restructuring of the sales and
marketing functions.
39
(b) The prolonged Australian drought severely affected rural trade and farm
income resulting in sales of digging and garden products failing to reach
expectations. A decline in power tool sales due to falling price points and
competition from cheap foreign imports further compounded the situation. The
adverse impact of these shortfalls was partially offset, however, by strong air
tool sales.
(c) The loss of significant power tool business with a major retailer and
changes to legislation regarding the specification of electrical goods which saw
a substantial reduction of power tools inventories at lower than budgeted
margins to avoid significant stock obsolescence provisions.
Our Australasian division remains focused on rebuilding its sales and marketing
infrastructure and to maximize the selling opportunities of the Spear & Jackson
branded products. The current management team have re-established and
consolidated the business, completed major product reviews and established
ongoing promotional programs with major retail customers. With customer
confidence returning we will continue to focus on expanding our market share of
the air tool market.
2003 COMPARED TO 2002
S&J Australia and S&J New Zealand 2003 sales were over $3.8 million (23.8%) more
than those in the year ended September 30, 2002. This increase comprised sales
volume increases of $1.8 million, favorable exchange rate movements of $2.9
million, offset by increased rebates of $0.9 million.
The increased sales and profitability of the division was largely due to the
introduction of new ranges of products being sold to national retail chains
under specific branding arrangements. Continued efficiencies in the areas of
administration, warehousing and distribution also contributed to the improved
profitability.
COSTS OF GOODS SOLD AND GROSS PROFIT
Information concerning 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,
------------------------- --------------------------
2004 2003 2002 2004 2003 2002
% % % % % %
---- ---- ---- ---- ---- ----
Cost of goods sold 67.88 68.54 70.49 64.84 72.49 70.30
as a % of sales
Gross profit margin 32.12 31.46 29.51 35.16 27.51 29.70
Costs of goods sold increased by 9.1% to $68.7 million in the year to September
30, 2004 from $62.9 million in 2003. In the quarter to September 30, 2004 the
cost of goods sold was $15.8 million compared to $14.1 million in 2002, an
increase of 12.1%.
40
COMPARISON OF 2004 TO 2003
Margins have been negatively impacted in the year by a number of raw material
price increases (principally rises in cost of nickel and cobalt, major raw
materials of our magnetic products, and steel), together with increases in the
costs of fuel used to operate our manufacturing processes and higher utility
charges. These adverse variances have, however, been mitigated by the following,
which has meant that overall gross profit margins have improved over the last
year, and especially in the last quarter of the year:
- - exchange gains realized on the purchase of factored products denominated in
US dollars from suppliers located in the Far East
- - more favorable and advantageous sales mix, especially in the last quarter of
the year
- - the full year effect of selling directly to customers as a result of the
decision of Neill Tools to cease trading with its major UK wholesaler,
Toolbank
- - Sales, at amounts greater than net written down value, of inventories of
certain obsolete and slow-moving products
- - the release in September 2004 of the excess element of UK stock loss
provisions. These provisions had been accrued in the first three quarters of
the year based on management's estimates, as in previous years, of the
expected ongoing level of stock losses. The excess portion was identified
following the completion of the year-end inventory counts.
We continue to monitor and evaluate means of maintaining and