<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 000-26889
JORE CORPORATION
(Exact Name as Registrant as Specified in Its Order)
Montana 81-0465233
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45000 Highway 93 South
Ronan, Montana 59864
(Address of principal executive offices and zip code)
Registrant's telephone number: (406) 676-4900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--- ---
As of October 31, 1999, 13,622,800 shares of the Registrant's Common Stock,
without par value, were outstanding.
<PAGE>
JORE CORPORATION
FORM 10-Q
INDEX
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<TABLE>
<CAPTION>
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PAGE NUMBER
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<S> <C>
Part I: Financial Information
Item 1 Financial Statements
- ------------------------------------------------------- -----------------------
Consolidated Balance
Sheet as of December 31, 1998 and
September 30, 1999 2
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Consolidated Statements
of Operations for the Three and
Nine Months Ended September 30,
1999 and 1998 3
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Consolidated Statements
of Cash Flows for the
Nine Months Ended September
30, 1999 and 1998 4
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Notes to Consolidated
Financial Statements 6
- ---------------------------------------------------------------- --------------
Item 2 Management's Discussion and
Analysis of Financial Condition and
Results of Operations 9
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Item 3 Qualitative And Quantitative
Disclosures About Market Risk 27
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PART II. OTHER INFORMATION
- ---------------------------------------------------------------- --------------
Item 1 Legal Proceedings 27
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Item 2 Changes in Securities 29
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Item 4 Submission of Matters to a Vote
of Security Holders 30
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Item 6 Exhibits and Reports on Form 8-K 31
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Signatures 31
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</TABLE>
<PAGE>
2
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
JORE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------------------------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,143,260 $ 34,736
Securities 1,500,545 -
Accounts receivable net allowance for doubtful accounts of $15,845 and $0 12,855,561 14,672,275
Allowances - -
Notes receivable 25,000 53,576
Shareholder notes receivable 2,876,128 1,350,788
Notes receivable from affiliates - 83,917
Other receivables 72,807 38,461
Inventory 22,148,025 8,182,542
Deferred tax asset 271,274
Prepaid expense and other current assets 567,196 695,076
--------------------------------------------
Current assets 50,459,796 25,111,371
Property, plant and equipment, net 42,706,472 19,815,544
Intangibles & other long-term assets, net 1,457,889 1,035,667
--------------------------------------------
Total Assets $94,624,157 $45,962,582
--------------------------------------------
--------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,286,216 $ 7,106,060
Accrued expenses 7,269,914 2,073,702
Operating line of credit 11,733,392 13,524,805
Notes payable 1,252,745 -
Other current liabilities 401,946 125,026
Shareholder note payable 119,052 256,061
Income taxes payable 9,742
Current portion of long-term debt 2,645,553 1,998,192
--------------------------------------------
Total current liabilities 38,718,560 25,083,846
Long-term debt, net of current portion 16,791,607 14,589,346
Deferred income tax liabilities 1,853,162 -
--------------------------------------------
Total liabilities 57,363,329 39,673,192
Shareholders' equity:
Preferred stock, no par value
Authorized, 30,000,000 shares; issued and
outstanding, 0 shares -
Common stock, no par value
Authorized, 100,000,000 shares; issued and
outstanding, 13,222,800 and 9,508,544 respectively 35,147,714 1,694,931
Deferred compensation -stock options (3,893) (4,868)
Retained earings 2,117,007 4,599,327
--------------------------------------------
Total shareholders' equity 37,260,828 6,289,390
--------------------------------------------
Total $94,624,157 $45,962,582
--------------------------------------------
--------------------------------------------
- -
</TABLE>
See notes to consolidated financial statements.
<PAGE>
JORE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
(unaudited) (unaudited) (unaudited) (unaudited)
Net revenues $ 14,378,247 $ 10,548,442 $ 32,435,432 $ 25,429,898
Cost of goods sold 9,281,937 7,410,950 22,026,458 17,231,384
--------------------------------------------------------------------
Gross profit 5,096,310 3,137,492 10,408,974 8,198,514
Operating expenses:
Product development 267,688 102,368 492,955 206,568
Sales & marketing 821,839 596,639 1,580,662 1,307,388
General & administrative 1,618,305 630,035 3,935,340 1,774,496
--------------------------------------------------------------------
Total operating expenses 2,707,832 1,329,042 6,008,957 3,288,452
--------------------------------------------------------------------
Other expense:
Interest Expense 1,087,917 367,535 2,135,422 887,130
Other Expense (18,646) 19,911 (11,236) 117,531
--------------------------------------------------------------------
Net Other Expenses 1,069,271 387,446 2,124,186 1,004,661
--------------------------------------------------------------------
Income before extraordinary item and income taxes 1,319,207 1,421,004 2,275,831 3,905,401
Extraordinary item:
Loss related to early retirement of debt, net of taxes 1,017,026 -- 1,010,319 --
--------------------------------------------------------------------
Income before taxes 302,181 1,421,004 1,265,512 3,905,401
Provision for income taxes 25,239 -- 31,947 --
--------------------------------------------------------------------
Net income (loss) $ 276,942 $ 1,421,004 $ 1,233,565 $ 3,905,401
--------------------------------------------------------------------
--------------------------------------------------------------------
Income before extraordinary item and income taxes
per common share:
Basic $ 0.13 $ 0.15 $ 0.24 $ 0.42
Diluted $ 0.13 $ 0.15 $ 0.23 $ 0.42
Net income (loss) per common share:
Basic $ 0.03 $ 0.15 $ 0.13 $ 0.42
Diluted $ 0.03 $ 0.15 $ 0.13 $ 0.42
Shares used in calculation of net income per share
Basic 9,844,539 9,398,087 9,631,173 9,394,240
Diluted 10,130,204 9,398,087 9,817,036 9,394,240
Pro forma data (unaudited):
Net income (loss) $ 302,181 $ 1,421,004 $ 1,265,512 $ 3,905,401
Proforma provision (benefit) for income taxes 120,562 533,480 493,400 1,466,605
Pro forma net income (loss) $ 181,619 $ 887,524 $ 772,112 $ 2,438,796
Pro forma net income per common share:
Basic $ 0.02 $ 0.09 $ 0.08 $ 0.26
Diluted $ 0.02 $ 0.09 $ 0.08 $ 0.26
</TABLE>
See notes to consolidated financial statements.
<PAGE>
JORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months Ended September 30,
1999 1998
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net income/(loss) 1,233,565 3,905,401
Adjustments to reconcile net income (loss) to net
cash used by operating activites:
Depreciation 1,651,833 610,850
Amortization 216,120 155,485
Compensation expense - Stock options 975 --
Bad debt expense 15,845 --
Provision for inventory obsolescence -- 24,552
(Gain) loss on disposal of fixed assets (13,359) 1,244
Cash provided (used) by changes in operating
assets and liabilities:
Accounts receivable 1,800,869 (1,839,574)
Other receivables (34,346) 103,434
Inventory (13,965,483) (5,152,118)
Prepaid expenses and other current assets 127,880 (188,740)
Deferred income taxes 12,144 --
Intangibles and other long-term assets (907,234) (1,871,438)
Accounts payable 8,180,156 1,609,988
Accrued expenses 5,196,212 1,012,209
Other current liabilities -- 126,252
Income taxes payable 9,742 --
------------ ------------
Net cash provided (used) by operating activities 3,524,919 (1,502,455)
Investing Activities:
Advances on notes receivable (1,412,847) (1,133,859)
Payments on notes receivable -- 305,305
Payment of patent costs -- (24,941)
Purchase of investments (1,500,545) --
Purchase of property and equipment (24,478,600) (8,448,799)
Proceeds from sale of fixed assets 31,500 701,729
------------ ------------
Net cash provided/(used) by investing activities (27,360,492) (8,600,565)
Financing Activities:
Distributions paid to shareholders (2,146,141) (2,601,513)
Proceeds from IPO (net) 33,058,852 --
Capital contributions -- 315,000
Proceeds from long-term debt 11,386,199 12,174,352
Payments on long-term debt (8,536,577) (5,061,255)
Proceeds from short-term debt 14,885,628 229,999
Payments on short-term debt (13,181,344) --
Proceeds/(payments) from operating line (net) (2,542,900) 5,095,605
Extraordinary item, early retirement of debt, before tax 1,020,380 --
------------ ------------
Net cash provided/(used) by financing activities 33,944,097 10,152,188
------------ ------------
Net increase (decrease ) in cash 10,108,524 49,168
Cash and cash equivalents:
Beginning of period 34,736 113,471
------------ ------------
End of period $ 10,143,260 $ 162,639
------------ ------------
------------ ------------
Supplemental disclosures:
Cash paid:
Interest paid $ 2,135,422 $ 887,130
Noncash financing and investing activities:
Warrants issued with debt $ 311,629 $ --
Common stock issued for land $ 82,302 $ --
</TABLE>
See notes to consolidated financial statements.
<PAGE>
JORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The consolidated balance sheet of Jore Corporation as of September
30, 1999, the related consolidated statements of operations for the three and
nine month periods ended September, 30, 1999 and 1998, and the consolidated
statements of cash flows for the nine months ended September 30, 1999 and 1998
are unaudited. In the opinion of management, these unaudited financial
statements include all adjustments, consisting only of normal recurring items,
that are necessary for a fair presentation of the financial information set
forth therein. Interim results are not necessarily indicative of results for a
full year.
The consolidated financial statements and notes are presented as
required by the rules and regulations of the Securities and Exchange Commission
and do not contain certain information included in our annual financial
statements and notes. You should read these financial statements in conjunction
with our audited financial statements and the notes thereto for the year ended
December 31, 1998 included in our Form S-1, Registration No. 333-78357, filed
with the Securities and Exchange Commission.
(2) Public Offering
On September 23, 1999, we completed an initial public offering in
which we raised net proceeds of $33.1 million. A portion of the net proceeds was
used to repay debt, fund a distribution to our shareholders representing our
previously taxed but undistributed S corporation earnings (see note 6), acquire
capital equipment and invest in short-term assets.
(3) Cash, Cash Equivalents and Short-Term Investments
Cash equivalents include high quality money market instruments. We
consider all highly liquid investments with an original maturity of three months
or less when purchased to be cash equivalents. Uncleared
<PAGE>
checks of $1,180,162 and $8,930,561 are included in accounts payable at December
31, 1998 and September 30, 1999, respectively.
Our short-term investments consist of FNMA Notes and Certificates of
Deposit, which mature in one year or less, and are classified as
held-to-maturity. In accordance with SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities", investments classified as
held-to-maturity are reported at amortized cost. The short-term investment
balance at September 30, 1999 was $1,500,545.
(4) Significant customers:
Our sales are concentrated among a few major customers. Sales to
customers who individually accounted for 10% of total sales for the nine months
ended September 30, 1998 and 1999, and receivables from customers who
individually accounted for 10% of total receivables at September 30, are as
follows:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1998 September 30, 1999
<S> <C> <C>
Sales to:
Customer A 52.0% 46.9%
Customer B 24.8% 26.6%
Customer C 20.8% 13.2%
All other customers 2.4% 13.3%
100% 100%
Receivables from:
Customer A 66.6% 60.3%
Customer B 18.6% 13.1%
Customer C 9.8% 10.9%
All other customers 5.0% 15.7%
100% 100%
</TABLE>
(5) Balance Sheet Components
<TABLE>
<CAPTION>
Dec 31 Sept 30
1998 1999
<S> <C> <C>
Inventory
Component parts/raw materials $ 5,770,617 $ 11,174,534
Work in progress* $ 1,257,704 $ 8,227,327
Finished goods $ 1,043,179 $ 2,023,324
Supplies inventory $ 111,042 $ 722,840
Totals $ 8,182,542 $ 22,148,025
------------ ------------
</TABLE>
*Work in progress includes finished sub-assemblies, which can be sold in bulk or
added to a packaged set
<TABLE>
<S> <C> <C>
Property, Plant and Equipment
Buildings and leasehold improvements $ 4,438,668 $ 5,541,846
Land and land improvements $ 595,329 $ 928,901
Plant, tooling, packaging equipment $ 10,140,083 $ 17,241,853
Office equipment and furniture $ 1,340,603 $ 2,133,277
<PAGE>
Accumulated depreciation $ (2,349,407) $ (3,967,917)
Construction in progress $ 0 $ 4,901,170
Machinery in progress $ 5,650,268 $ 15,927,342
Totals $ 19,815,544 $ 42,706,472
------------ ------------
</TABLE>
(6) S CORPORATION DIVIDEND
The Board of Directors declared a dividend to shareholders of record on
September 22, 1999 equal to the amount of accumulated but undistributed S
corporation earnings. The amount to be distributed to such shareholders cannot
be determined until December 31, 1999 because it will be based upon our net
profit for the entire year. We currently estimate that our net profit will allow
for aggregate dividends for fiscal year 1999 of approximately $4.0 million to
shareholders of record on September 22, 1999. These dividends will be
distributed to such shareholders on a pro rata basis depending on the number of
days in 1999 that each of them held shares of our common stock. The amount
recorded as a distribution on September 30, 1999 was based on the amount of
accumulated but undistributed S corporation earnings as of September 30, 1999.
We also paid such shareholders the amount that we estimated that they would be
entitled to receive as of December 31, 1999.
(7) PRO FORMA INCOME TAXES
In connection with the completion of our public offering (see Note 2),
our S corporation status terminated and we became subject to federal and state
income taxes applicable to corporations subject to income taxes under Subchapter
C of the Internal Revenue Code. The accompanying consolidated statements of
operations reflect a pro forma provision (benefit) for all periods for federal
and state taxes (as if the consolidated group had been subject to tax as a C
corporation) at effective tax rates of 35.70%, 35.43%, and 37.56% for 1996,
1997, and 1998, respectively.
In conjunction with the conversion to a C corporation as of
September 30, 1999 we recorded net deferred tax assets and liabilities at C
corporation rates as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Basis differential in property, plant and equipment ...... $(1,853,162)
Total deferred tax liabilities ............ .............. $(1,853,162)
Deferred tax assets:
Inventory obsolescence reserve $167,415
Accrued vacation and wages 73,949
Deferred compensation 13,167
<PAGE>
Allowance for bad debt 8,409
Tax Credit carry forward 2,307
Net operating loss 6,027
-------
Total deferred tax assets $271,274
</TABLE>
(8) Subsequent Events
On October 5, 1999 we purchased 275 acres of land across the highway
from our facility that we may develop in the future. The total purchase price is
$1,405,000. The payments include a deposit of $50,000, two principal payments of
$475,000 and accrued interest at 8% due in October and December of 1999, and one
final principal payment of $405,000 and accrued interest due June 1, 2000.
3
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with Jore
Corporation's unaudited consolidated financial statements and notes thereto
included elsewhere in this Quarterly Report on Form 10-Q. Certain statements
contained in this Report, including, without limitation, statements
containing the words "believes", "anticipates", "estimates", "expects", and
words of similar import, constitute "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
You should not place undue reliance on these forward-looking statements. Our
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks faced by us
described below and elsewhere in this Quarterly Report, and in other
documents we file with the SEC.
OVERVIEW
Jore Corporation was founded to develop and produce innovative power
tool accessories to meet the increasing demand resulting from the growth in the
cordless power tool market. Our revenues have grown substantially through the
addition of new customers, increased sales to established customers and expanded
product offerings. Our business commenced in 1987, when we began selling a
limited number of drilling and driving accessories to independent local and
regional hardware stores and building supply centers. In 1990, Makita became our
first national customer and we devoted significant resources to servicing its
demand for our products. By 1996, we had expanded our product portfolio to
include our reversible drill and drivers and contractor versions of our
products. We also began to diversify our customer base by selling products to
Black & Decker/DeWalt, as well as to retail customers. In 1997 and 1998 we
continued to expand our customer base by selling to Sears, Home Depot, Canadian
Tire and TruServ and further expanded our product line by introducing our quick
change system and new drilling and driving accessories such as wood boring and
masonry bits. We expect to increase our revenues and margins by pursuing direct
relationships with major retailers through sales of private
<PAGE>
label and STANLEY-Registered Trademark- branded products, increasing sales to
existing customers, and augmenting our existing product portfolio.
In 1999, we have incurred several significant non-recurring costs in order to
position us for future growth. These include the direct and indirect costs to:
- Construct and reorganize our manufacturing, engineering and administrative
facilities;
- Purchase, install and test our new drill bit manufacturing equipment;
- Install our new management information system and train our personnel to
use it;
- Assess our Year 2000 readiness and implement our compliance program;
- Perform a comprehensive three-year audit of our financial statements; and
- Consolidate and combine our operations, incurring additional professional
fees.
Direct costs included the tangible, out-of-pocket costs incurred by us that
related to each activity. Indirect costs resulted from the diversion of time and
resources away from our normal operations while we administered these
activities.
In addition, we have undertaken several initiatives to increase production. In
the third and fourth quarters of 1998, for example, we more than doubled our
work force from 410 to 839 people. Although necessary at the time to meet
production schedules, this rapid increase in personnel resulted in significant
inefficiencies as we trained and integrated these employees into our operations.
We retained a significant number of employees from the year ended December 31,
1998, to assist us in maintaining quality personnel and to increase our
productivity during the second half of the year when the majority of our sales
occur. Furthermore, to ensure an adequate supply of drill bits while we began
our internal production, we purchased an excess amount of drill bit inventory
from our existing supplier.
Revenues are recognized at the time of shipment and sales terms are typically
net 60 or 90 days. Historically, we have experienced negligible write-offs. Cost
of goods sold consists primarily of raw materials, labor, shipping and other
manufacturing expenses associated with the production and packaging of products.
Our operating expenses include product development costs, sales and marketing
expenses and general and administrative expenses. Product development expenses
consist principally of personnel costs and material associated with the
development of new products and changes to existing products, which are charged
to operations as incurred.
Sales and marketing expenses consist of salaries and employee benefits for
internal sales personnel, selling commissions paid to Manufacturers' Sales
Associates, our sales representative, and costs of promotional events. General
and administrative expenses consist primarily of salaries and employee benefits
for executive, managerial
<PAGE>
and administrative personnel, license fees, facility leases, a portion of
depreciation and amortization of fixed asset costs, travel and business
development costs.
Other expense consists primarily of interest expense associated with our
borrowings and interest income on cash and cash equivalents.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET REVENUES. Net revenues increased from $25.4 million for the nine months
ended September 30, 1998 to $32.4 million for the nine months ended September
30, 1999, representing a 27.5% increase. Most of the $7.0 million increase
resulted from additional sales to Black & Decker, Sears, and Techtronics. We
added several smaller customers which individually do not account for a
significant portion of sales, but collectively accounted for $1.3 million in
additional sales.
COST OF GOODS SOLD. Cost of goods sold increased from $17.2 million for the nine
months ended September 30, 1998 to $22.0 million for the nine months ended
September 30, 1999, representing a 27.8% increase. Cost of goods sold as a
percentage of revenues increased slightly from 67.8% for the nine months ended
September 30, 1998 to 67.9% for the nine months ended September 30, 1999. We
have achieved significant cost savings from our internal manufacturing
capabilities. However, this savings has been offset by sales of a low margin set
to Sears. Sears has featured this set as a promotional item and sales have been
greater than forecasted. This relatively lower margin set accounted for 12.4% of
our total sales through September 30, 1999, and while we have begun to identify
ways to reduce the costs of several components of the set, we expect it to
account for approximately 35% of total sales in the fourth quarter. Sales of
this set will continue to have a negative impact on gross margin through the
fourth quarter.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased from
$207,000 for the nine months ended September 30, 1998 to $493,000 for the nine
months ended September 30, 1999, representing a 138.2% increase. One development
project relating to a licensing agreement with a third party accounted for
$100,000 of the increase. Professional and technical labor accounted for the
remaining increase as we hired additional engineers and machinists to develop
our proprietary products and corresponding manufacturing processes. In
addition to the labor expensed for the nine months ended September 30, 1998
and for the nine months ended September 30, 1999, we capitalized $136,000 and
$965,000, respectively, of labor related to equipment constructed in-house.
These amounts are included in property, plant and equipment on the balance
sheet and depreciated over the life of the equipment.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from $1.3
million for the nine months ended September 30, 1998 to $1.6 million for the
nine months ended September 30, 1999, representing a 20.9% increase. Advertising
and promotion expenses increased by $403,000 due to increased retail
advertising, but this increase was partially offset by a decrease in the sales
commission percentage paid to our sales representative. Trade show expenses
increased in the nine
<PAGE>
months ended September 30, 1999, over the comparable period in 1998 as we
launched our Stanley-Registered Trademark- -branded products at the
National Hardware Show in August. In addition, we have continued to increase our
internal marketing and graphics staff to accommodate increased sales and
customer support activities as our customer diversification efforts required us
to produce more packaging and merchandising materials.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $1.8 million for the nine months ended September 30, 1998 to $3.9
million for the nine months ended September 30, 1999, representing a 121.8%
increase. The increase was a result of our initiatives to expand our operating
capacity and administrative infrastructure. Several non-recurring expenses were
incurred such as professional fees related to the three year audit of our
financial statements and the consolidation and combination of our operations,
training and bonuses related to the implementation of our new software system,
and travel expenses related to the introduction of our Stanley-Registered
Trademark- branded products. Further, salary expense increased due to the
addition of administrative personnel that we have added to manage our growth. We
increased our finance and administrative staff from 54 at September 30, 1998 to
119 at September 30, 1999.
OTHER EXPENSE. Other expense increased from $1.0 million for the nine months
ended September 30, 1998 to $2.1 million for the nine months ended September 30,
1999 as a result of greater borrowings and a corresponding increase in interest
expense. Also included in other expense in 1999 was additional cost of $615,000
for interest, warrants, and financing costs related to our bridge financing.
EXTRAORDINARY ITEM. We incurred an extraordinary expense of $1.0 million in the
nine months ended September 30, 1999 related to the termination of our operating
line of credit. We expensed the prepayment penalty and the unamortized financing
costs associated with the credit line. A new credit line is in place which
provides lower fees and greater flexibility and collateral for our inventory.
NET INCOME. As a result of all these factors, our net income decreased from $3.9
million for the nine months ended September 30, 1998 to $1.2 million for the
nine months ended September 30, 1999. There was no provision for income tax in
1998 as we retained our status as an S corporation. Through September 30, 1999,
because we were a C corporation for only eight days, the income tax provision
was minimal.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
NET REVENUES. Net revenues increased from $10.5 million for the three months
ended September 30, 1998 to $14.4 million for the three months ended September
30, 1999, representing a 36.3% increase. Most of the $3.8 million increase
resulted from additional sales to Sears, Makita, and the introduction of
products under the STANLEY-Registered Trademark- JORETECH-TM- brand.
COST OF GOODS SOLD. Cost of goods sold increased from $7.4 million for the three
months ended September 30, 1998 to $9.3 million for the three months ended
September 30, 1999, representing a 25.2% increase. Cost
<PAGE>
of goods sold as a percentage of revenues decreased from 70.3% for the three
months ended September 30, 1998 to 64.6% for the three months ended September
30, 1999. This decrease is primarily attributable to volume-related
manufacturing efficiencies, vertical integration and a greater mix of
direct-to-retail sales under the STANLEY-Registered Trademark- JORETECH-TM-
brand on which we receive a higher gross margin.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased from
$102,000 for the three months ended September 30, 1998 to $268,000 the three
months ended September 30, 1999, representing a 162.7% increase. One development
project with a third party accounted for $100,000 of the increase. Professional
and technical labor accounted for the remaining increase as we hired additional
engineers and machinists to develop our proprietary products and corresponding
processes. In addition to the labor expensed for the three months ended
September 30, 1998 and for the three months ended September 30, 1999, we
capitalized $69,768 and $318,621, respectively, of labor related to equipment
constructed in-house. These amounts are included in property, plant and
equipment on the balance sheet and depreciated over the life of the equipment.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from
$597,000 for the three months ended September 30, 1998 to $822,000 for the three
months ended September 30, 1999, representing a 37.7% increase. Advertising and
promotion expenses increased by $126,000 due to increased retail advertising,
but this increase was partially offset by a decrease in the sales commission
percentage paid to our sales representative. Trade show expenses increased in
the three months ended September 30, 1999, over the comparable period in 1998 as
we had a major launch of our Stanley-Registered Trademark- -branded products at
the National Hardware Show in August. In addition, we have continued to increase
our internal marketing and graphics staff to accommodate increased sales and
customer support activities as our customer diversification efforts required us
to produce more packaging and merchandising materials.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $630,000 for the three months ended September 30, 1998 to $1.6
million for the three months ended September 30, 1999, representing a 156.8%
increase. The increase is primarily a result of preparation for our initial
public offering, including hiring key senior management, implementation of a
comprehensive enterprise resource planning information system, and increased
travel costs related to trade show participation and roll-out of new products.
The increase was also a result of our initiatives to expand our operating
capacity and administrative infrastructure, as well as an increase in
professional fees related to being a publicly held company. Further, we
increased our finance and administrative staff from 54 at September 30, 1998
to 119 at September 30, 1999.
OTHER EXPENSE. Other expense increased from $387,000 for the three months ended
September 30, 1998 to $1.1 million for the three months ended September 30,
1999. This increase in other expense is primarily attributable to greater of
borrowings and a corresponding increase in interest expense. Also included in
other expense in the three months
<PAGE>
ended September 30, 1999 were additional costs of interest, warrants, and
financing costs related to our bridge financing.
EXTRAORDINARY ITEM. We incurred an extraordinary expense of $1.0 million in the
three months ended September 30, 1999 related to the termination of our
operating line of credit. We expensed the prepayment penalty and the unamortized
financing costs associated with the credit line. A new credit line is in place
which provides lower fees and greater flexibility and collateral for our
inventory.
NET INCOME. As a result of all these factors, our net income decreased from $1.4
million for the three months ended September 30, 1998 to $277,000 for the three
months ended September 30, 1999, representing a 80.5% decrease. There was no
provision for income tax in 1998 as we retained our status as an S corporation
status. Through September 30, 1999, because we were a C corporation for only
eight days, the income tax provision was minimal.
PRO FORMA PROVISION FOR INCOME TAXES. Prior to the closing of our initial public
offering in September 1999 we were treated as an S corporation for tax purposes.
As an S corporation, we were not subject to federal and certain state income
taxes. Upon the closing of our initial public offering on September 23, 1999,
our status as an S corporation was terminated and we became subject to taxes as
a C corporation. The pro forma provision for income taxes reflects the estimated
tax expense that we would have incurred had we been subject to federal and state
income taxes as a C corporation during the period. The pro forma provision
reflects a pro forma tax rate of 38%, which differs from the federal statutory
rate due primarily to the effects of state and foreign taxes and certain tax
credits.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded operations with short-term lines of credit and term
loans for equipment purchases and, to a lesser extent, net income from
operations. On September 23, 1999, we sold 3.7 million shares of our common
stock to the public for approximately $33.1 million, net of expenses. The
initial public offering resulted in gross proceeds of $37 million, $2.6 million
of which was applied toward the underwriting discount. Expenses related to the
offering totaled approximately $1.3 million, paid to unaffiliated parties. On
September 23, we estimated distributions would be $4.0 million for our
undistributed S corporation earnings. Our estimated undistributed earnings at
September 30, 1999 were approximately $2.1 million. This amount we showed as
distributions and we recorded the balance of $1.9 million as shareholder
advances.
Operations provided net cash of $3.5 million for the nine months ended September
30, 1999. The net cash provided consisted primarily of increases in accounts
payable, accrued expenses and a decrease in accounts receivable which were
partially offset by increased inventory.
Net cash used by investing activities for the nine month period was $27.3
million. Cash used in investing activities consists primarily of property and
equipment purchases.
<PAGE>
Net cash provided by financing activities was $33.9 million for the nine month
period. Cash provided from financing activities was primarily from the net
proceeds of the public offering and from term debt and net borrowings on the
line of credit. This was offset by the repayment of private placement debt and
payments on the operating line.
In August 1999 we obtained a revolving line of credit with First Security
Bank, N.A., with a maximum borrowing limit of $25.0 million. Advances on the
line are limited to 85% of eligible accounts receivable and 65% of eligible
inventory. Trade accounts receivable and inventory are assigned as
collateral. The revolving line of credit provides that we must repay these
advances within 180 days. Interest on the revolving credit line is at the
prime rate plus 1% or, at our option, LIBOR plus 3%. The applicable interest
rate was reduced by one-half percent with the closing of the public offering.
The term of the agreement is through August 2001. This line is secured by
receivables, inventory, real estate, equipment and general intangibles.
Capital expenditures and financing associated with those expenditures have been
primary factors affecting our financial condition over the last three years.
Total capital expenditures net of dispositions were $24.5 million in the nine
months ended September 30, 1999 which includes capitalized interest of $750,000,
compared to capital expenditures of $14.5 million in year ended December 31,
1998. Significant portions of these expenditures have been related to the
acquisition of manufacturing equipment to increase production. We anticipate
1999 capital expenditures of approximately $31.0 million. A significant portion
of our 1999 capital expenditures has been and will continue to be for additional
investment in manufacturing equipment for anticipated increases in production
levels. We anticipate spending approximately $7.8 million in 1999 to purchase
specialized drill bit production equipment. In order to maintain an exclusive
relationship with the manufacturer of this equipment we must continue to
purchase approximately $5.3 million of equipment per year over the next five
years.
We believe that existing cash balances, new borrowings and cash generated from
operations, together with the remaining proceeds from our public offering, will
be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for approximately the next 12 months. There can be no assurance
that the underlying assumed levels of revenues and expenses will prove to be
accurate. We may seek additional funding through public or private financings or
other arrangements prior to such time. Adequate funds may not be available when
needed or may not be available on terms favorable to us. If additional funds are
raised by issuing equity securities, dilution to existing shareholders will
result. If funding is insufficient at any time in the future, we may be unable
to develop or enhance our products, take advantage of business opportunities or
respond to competitive pressures, any of which could have a material adverse
effect on our business, financial condition and results of operations.
IMPACT OF THE YEAR 2000 COMPUTER PROBLEM
<PAGE>
In the beginning of July 1999, we completed the installation of new billing,
accounting and administrative information systems that are fully operational and
that have been represented to be fully Year 2000 compliant. Failures of our
internal systems could temporarily prevent us from processing orders, issuing
invoices, manufacturing and developing products and could require us to devote
significant resources to correcting such problems. We have tested all of our PCs
and laptop computers for Year 2000 compliance with Year 2000 compliance testing
software. All of our PCs and laptop units are Year 2000 compliant. Because of
our inability to undertake testing of certain of our third party equipment, we
addressed processors embedded in our manufacturing systems on a prioritized
piece-by-piece basis. We have received written assurances from the manufacturers
of the PCs and embedded processors used in our manufacturing facility that all
are Year 2000 compliant. In order to determine Year 2000 compliance of our
vendors, we ranked our vendors according to the lead times that we believed they
needed to correct Year 2000 problems and contacted them to request their Year
2000 compliance status. All of the vendors that we have identified as critical
vendors have informed us that they are Year 2000 compliant and that they have
contingency plans in place. We have also received Year 2000 compliance
statements from all of our major suppliers.
Approximately 95% of our customer base has provided us with statements of
compliance, and all of our customers have stated they will be or plan to be
compliant by the end of December 1999. If our customers are not Year 2000
compliant, they may experience material costs to remedy problems, may face
litigation costs and may delay purchases of our products. As a result, our
business, financial condition and results of operations could be seriously
harmed.
We have funded our Year 2000 plan from cash balances. As of September 30, 1999,
we have spent approximately $363,900 to address the Year 2000 problem and expect
to spend approximately $5,800 more toward that objective. We will incur
additional costs related to the Year 2000 plan for administrative personnel to
manage the project, outside contractor assistance and software. In addition, we
may experience material problems and costs with Year 2000 compliance that could
seriously harm our business, financial condition and results of operations.
Finally, we are also subject to external forces that might generally affect
industry and commerce, interruptions caused by Year 2000 compliance failures.
We have completed a Year 2000 contingency plan. It designates employees from
five information systems divisions to respond to any unexpected failure of any
of our systems due to a Year 2000 compliance problem. The five divisions are
hardware, software, production equipment, utilities and financials. We have
identified each of these five divisions as critical to our continued production
and operations. In the event of any Year 2000 compliance problem, one of our
designated employees will contact the responsible vendor and work with that
vendor towards a solution. We will also identify alternate vendors and make
appropriate scheduling changes to assure uninterrupted production in the event
that the designated employee and responsible vendor cannot reach a solution.
RECENT ACCOUNTING PRONOUNCEMENTS
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Effective January 1, 1998, we adopted the provision of SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes the standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from income, include foreign currency translation
adjustments and unrealized gains/losses on available-for-sale securities.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required upon adoption. SFAS No. 130 does not address
issues of recognition or measurement for comprehensive income and its
components, and therefore, it had no impact on our financial condition or
results of operation upon adoption. Currently, there are no transactions that
would give rise to reporting or disclosure differences between reported income
and comprehensive income.
Effective January 1, 1998, we adopted the provisions of SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The
statement requires, among other things, that we provide financial and
descriptive information about our reportable operating segments. Operating
segments are defined as components of an enterprise about which separate
financial information is available and is regularly evaluated by the
enterprise's chief operating decision-maker in deciding how to allocate
resources and in assessing performance. Currently, we believe that we operate in
only one reportable segment.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be used specifically as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, or the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after July 1, 2000. Historically, we have not entered
into derivative contracts either to hedge existing risks or for speculative
purposes.
INFLATION AND INTEREST RATE RISK
Our operating results may be affected by changes in rates of inflation and
market interest rates. In particular, increases in market interest rates will
adversely affect our net income, as most of our indebtedness bears interest at
floating rates tied to the prime rate or other interest rate benchmarks.
Inflation does not currently affect our operating results materially, and we do
not expect inflation to materially affect our operations in the foreseeable
future.
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED IN EVALUATING OUR BUSINESS,
OPERATIONS AND PROSPECTS AND MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL
CONDITION.
OUR RAPID GROWTH MAY MAKE IT DIFFICULT TO EFFECTIVELY ALLOCATE OUR RESOURCES AND
MANAGE OUR BUSINESS:
We are experiencing significant growth in the sales of our products, the number
of employees and the amount of our production and cannot assure that we will be
able to manage any future growth effectively. We recently expanded our
operations by hiring additional personnel, increasing production capacity and
upgrading our information systems. Continued growth could strain our management,
production, engineering, financial and other resources. To manage our growth
effectively, we must add manufacturing capacity while maintaining high levels of
quality, manufacturing efficiency and customer service. We also must continue to
enhance our operational, financial and management systems and successfully
attract, train, retain and manage our employees. Any failure to manage our
growth effectively could have a material adverse effect on our business,
financial condition and results of operations, such as declines in revenues and
profit margins.
THE LOSS OF A LARGE CUSTOMER COULD RESULT IN A SUBSTANTIAL DECREASE IN REVENUES:
Historically, most of our sales have been derived from a small number of
customers and, due to the continuing consolidation of the industry's
distribution channels, we expect a significant portion of our future sales to
remain concentrated among a limited number of customers. In 1997, sales to
Sears, Black & Decker/DeWalt, Makita and Home Depot accounted for 31.9%, 21.5%,
25.6% and 17.0%, respectively, of our net revenues. In 1998, sales to Sears,
Black & Decker/DeWalt and Makita accounted for 60.2%, 17.2% and 14.5%,
respectively, of our net revenues. For the nine months ended September 30, 1999,
Sears, Black & Decker/DeWalt and Makita accounted for 46.9%, 26.6% and 13.2%
respectively, of our net revenues. A significant decrease in sales to, or the
loss of, any of our major customers would have a material adverse effect on our
business, prospects, operating results and financial condition, such as a
substantial decline in revenues.
THE MARKETING OF OUR PRODUCTS UNDER THE STANLEY-Registered Trademark- BRAND MAY
BE UNSUCCESSFUL AND MAY ADVERSELY AFFECT Our RELATIONSHIPS WITH EXISTING
CUSTOMERS:
In April 1999, we signed an agreement with The Stanley Works that grants us the
exclusive license to sell power tool accessories under the STANLEY-Registered
Trademark- brand and indemnifies us for damages and costs incurred in connection
with any infringement claims arising out of our use of Stanley-Registered
Trademark- trademarks and trade dress. Some of our existing customers may view
our license arrangement with Stanley unfavorably, and therefore reduce or stop
purchases of our products. For example, in June 1999, Black & Decker advised us
that our proposed introduction of STANLEY-Registered Trademark- branded power
tool accessories in yellow and black packaging would violate Black & Decker's
trademark rights under its DEWALTs brand. In response to Black & Decker's
assertions, Stanley filed a lawsuit, which we joined as a co-plaintiff, seeking
a judgment that,
<PAGE>
among other things, the use of the colors yellow and black with the
STANLEY-Registered Trademark- name or trademark on power tool accessories does
not infringe or dilute Black & Decker's trademark rights. On July 7, Black &
Decker asserted counterclaims against Stanley and Jore for unfair competition
and trademark and trade dress infringement. This lawsuit poses the risks that we
may be required to modify the colors of the packaging and promotional materials
for our STANLEY-Registered Trademark- branded products which could diminish the
value of, and limit our sales and growth prospects associated with, the
STANLEY-Registered Trademark- brand. We could incur significant expenses and be
required to pay damages if Stanley fails to fulfill its indemnification
obligations to us; and Black & Decker could limit or terminate its business
relationship with us. The occurrence of any of these events could have a
material adverse effect on our business, operating results and financial
condition by increasing our costs, reducing our sales and diverting management
resources.
In addition, retailers may choose not to offer our products under the
STANLEY-Registered Trademark- brand. We cannot be certain that the time and
resources we will spend marketing our products under the STANLEY-Registered
Trademark- brand will lead to increased sales and profitability. Other potential
risks in connection with this licensing agreement include:
- The failure by Stanley to maintain the integrity and quality of its brand
image in the minds of its consumers; and,
- Our inability to meet the performance requirements of the licensing
agreement may cause Stanley to terminate our agreement.
OUR FAILURE TO DEVELOP NEW DISTRIBUTION CHANNELS COULD DIMINISH OUR REVENUE
GROWTH:
We cannot assure that we will be able to develop new distribution channels or
penetrate the industrial market or that this growth strategy can be implemented
profitably. Our growth depends, in part, on our ability to develop new
distribution channels, including penetration of the industrial market for our
products. Challenges that we face in developing new distribution channels
include:
- Obtaining customer acceptance of our products;
- Managing existing customer relationships;
- Establishing relationships with new customers;
- Displacing incumbent vendor relationships; and
- Successfully introducing new products under the STANLEY-Registered
Trademark- brand.
Our failure to develop new distribution channels could have a material adverse
effect on our business, operating results, and financial condition, particularly
future revenue levels.
THE LOSS OF ANY OF OUR KEY PERSONNEL COULD ADVERSELY AFFECT OUR ABILITY TO
MANAGE OUR BUSINESS:
Our performance and future success depends to a significant extent on our senior
management and technical personnel, and in particular on the skills, experience,
and continued efforts of Matthew Jore, Jore Corporation's founder, President and
Chief Executive Officer. The loss of Matthew Jore or any of our other key
personnel could have a material
<PAGE>
adverse effect on our business and prospects. We have an employment agreement
with Matthew Jore and one of our vice presidents, but do not have employment
agreements with any of our other employees.
OUR PRODUCTION PROCESSES COULD BE DISRUPTED AND OUR COST OF PRODUCTION COULD
INCREASE SIGNIFICANTLY IF OUR MANUFACTURING EQUIPMENT DOES NOT MEET PERFORMANCE
EXPECTATIONS OR IS NOT AVAILABLE FOR FUTURE PURCHASE:
The failure of our manufacturing equipment to perform reliably and as designed,
our inability to source such equipment from present suppliers, or the
obsolescence of our equipment could disrupt our production processes, reduce our
sales and increase production costs. Our business is dependent on the successful
implementation and operation of advanced manufacturing technologies. Our
manufacturing equipment may fail to meet our performance requirements or
continue to operate reliably because of unexpected design flaws or manufacturing
defects. Moreover, we may be unable to continue to obtain equipment and supplies
from our present suppliers if they cease producing or selling such equipment or
supplies or opt not to sell to us. In addition, we cannot be certain that our
manufacturing processes will remain competitive with new and evolving
technologies.
OUR INABILITY TO INTRODUCE NEW PRODUCTS THAT ARE ACCEPTED BY THE MARKET COULD
ADVERSELY AFFECT OUR SALES, OUR REPUTATION AS AN INNOVATIVE MANUFACTURER AND OUR
ABILITY TO OBTAIN NEW CUSTOMERS:
Our future success will depend in part on our continuous and timely development
and introduction of new products that address evolving market requirements. We
cannot assure that our new products will be introduced on a timely basis or will
achieve market acceptance. We may be unable to successfully develop and produce
new products because of a lack of market demand, production capacity constraints
or the lack of relevant technical and engineering expertise. Factors affecting
the market acceptance of our new products include:
- Functionality, quality and pricing;
- Demand from end-users;
- Favorable reviews in trade publications;
- Adequate marketing support;
- The introduction of competitive products; and
- General trends in the power and hand tool industries and the home
improvement market.
OUR GROWTH STRATEGY DEPENDS IN PART ON OUR EXPANSION INTO FOREIGN MARKETS, WHICH
MAY BE DIFFICULT OR UNPROFITABLE:
We intend to expand distribution of our products in foreign markets. Because of
the size and continued growth of the power tools accessories market outside
North America, the failure to successfully enter foreign markets could limit our
growth prospects. In our attempt to enter foreign markets, we may expend
financial and human resources without a corresponding increase in revenues and
profitability. We cannot assure that we will be able to penetrate foreign
markets or that this growth strategy can be implemented profitably. Penetrating
and conducting business in foreign markets involves challenges, including:
<PAGE>
- Local acceptance of our products;
- Currency controls and fluctuations in foreign exchange rates;
- Regulatory requirements such as tariffs and trade barriers;
- Longer payment cycles and increased difficulty in collecting accounts
receivable;
- Unfavorable tax consequences; and
- Transportation and logistics.
WE FACE COMPETITION IN THE POWER TOOL ACCESSORIES AND HAND TOOLS MARKETS:
The power tool accessories and hand tools markets are mature and highly
competitive. We cannot assure that we will be able to compete in our target
markets. In the power tool accessory market competitors include Vermont American
Corporation, Black & Decker Corporation, Greenfield Industries, Inc., a
wholly-owned subsidiary of Kennametal Inc., American Tool Companies, Inc.,
Snap-On Incorporated and others, as well as a number of other companies that
supply products under private labels to OEM and retail customers. Some of these
competitors offer products similar to ours or different products with similar
functionalities. In particular, Black & Decker has developed a product line with
similar characteristics to our quick-change system. In the hand tool market,
competitors include American Tool Companies, Inc., Cooper Industries, Inc., The
Stanley Works and others, including foreign manufacturers such as Sandvik AB.
Many of our competitors are established companies that have significantly
greater financial, technical, manufacturing, sales and marketing, and support
resources than Jore Corporation. In addition, many of our competitors own
well-known brands, enjoy large end-user bases, and benefit from long-standing
customer relationships. We believe that consumers in our markets generally are
loyal to a particular brand. Therefore, it may be difficult to generate sales to
consumers who have purchased products from competitors. Our failure to compete
successfully against current or future competitors would have material adverse
effects on our business, operating results, and financial condition including
loss of customers, declining revenues and loss of market share.
OUR DEPENDENCE ON CUSTOMER FORECASTS TO MANAGE OUR BUSINESS MAY CAUSE US TO
MISALLOCATE OUR PRODUCTION, INVENTORY OR OTHER RESOURCES:
Significant or numerous cancellations, reductions or delays in orders by a
principal customer or a group of customers could have a material adverse effect
on our revenues, inventory levels and profit margins. We rely on our customers'
forecasts to anticipate their future volume of orders, which typically do not
become contractual obligations until approximately 30 days prior to shipment. We
rely on these forecasts when making commitments regarding the level of business
that we will seek and accept, the mix of products that we intend to manufacture,
the timing of production schedules, and our use of equipment and personnel. The
size and timing of orders placed by our customers varies due to a number of
factors, including consumer demand, inventory management by customers, our
customers' manufacturing or marketing strategies, and fluctuations in demand for
competing and complementary products. In addition, a variety of economic
conditions, both specific to individual
<PAGE>
customers and generally affecting the markets for our products, may cause
customers to cancel, reduce or delay orders that were previously made or
anticipated.
OUR BUSINESS IS SEASONAL AND OUR OPERATING RESULTS ARE SUBJECT TO QUARTERLY
FLUCTUATIONS:
Seasonality and unanticipated changes in customer demand could cause our
revenue, expenses, inventory levels and operating results to fluctuate.
Currently, the majority of our sales occur during the third and fourth fiscal
quarters and our operating results depend significantly on the holiday selling
season. In 1997 and 1998, approximately 69% and 67%, respectively, of our net
revenues were generated during the third and fourth quarters. To support this
sales peak, we anticipate demand and build inventories of finished goods
throughout the first two fiscal quarters. In addition, our customers may reduce
or delay their orders during the first two fiscal quarters to balance their
inventory between the holiday selling seasons. As a result, our levels of raw
materials and finished goods inventories tend to be at their highest, relative
to sales, during the first half of the year. These factors can cause variations
in our quarterly operating results and potentially expose us to greater adverse
effects of changes in economic and industry trends.
In addition, a substantial portion of our sales depends upon receiving purchase
orders for products to be manufactured and shipped in the same quarter in which
these orders are received. While we monitor our customers' needs, we typically
have a small backlog relative to net revenues, and a significant portion of our
orders are placed for production and delivery within a few weeks from receipt of
the order. As a result, the timing of revenue may be affected by changes in
production volume in response to fluctuations in customer and end-user demand,
introduction of new products by customers, and balancing of customers' inventory
to their sales estimates.
UNSATISFACTORY PERFORMANCE OF OUR NEW INFORMATION TECHNOLOGY SYSTEM COULD SLOW
OUR GROWTH:
The satisfactory performance and reliability of our information systems are
essential to our operations and continued growth. We have implemented a new
information technology system that became operational during July of 1999. If
the system fails to perform reliably or otherwise does not meet our
expectations, we could experience design, manufacturing, and shipping delays
which, in turn, could increase our costs and result in deferred or lost sales.
Failure to maintain our new information system, or unsatisfactory performance of
the system, could disrupt manufacturing operations and reporting systems, cause
delays in production and shipping of product, and adversely affect our
responsiveness to customers.
THE LOSS OR NON-PERFORMANCE OF OUR SALES REPRESENTATIVE COULD DISRUPT OUR SALES
EFFORTS:
We coordinate our sales and marketing activities with a sales representative,
Manufacturers' Sales Associates, LLC. In 1998, Manufacturers' Sales Associates
and its affiliate received a commission on all of our sales. The failure or
inability of Manufacturers' Sales
<PAGE>
Associates to represent us effectively, maintain relationships with our
customers, attract new customers, or satisfactorily perform marketing activities
could adversely affect our business, customer relationships, reputation and
prospects for growth. Moreover, Manufacturers' Sales Associates can terminate
its relationship with us at any time without penalty. Termination of this
relationship would require us either to conduct all of our sales and marketing
activities internally or retain another sales and marketing representative. Any
such change could disrupt our sales efforts and damage our customer
relationships.
EXISTING AND POTENTIAL LITIGATION MAY DIVERT MANAGEMENT RESOURCES AND COULD
ADVERSELY AFFECT OUR OPERATING RESULTS:
From time to time we have been, and expect to continue to be, subject to legal
proceedings and claims in the ordinary course of our business. Such claims, even
if not meritorious, could require the expenditure of significant financial and
managerial resources. On August 16, 1999, Pete K. Block and Paul K. Block
instituted separate actions in Montana District Court against us, Matthew Jore
individually and d.b.a. Jore Enterprises, Michael Jore and Merle Jore. In their
complaints, the Blocks alleged, among other things, that they are collectively
entitled to a 25% interest in the capital stock of Jore Enterprises and any
successor corporation. Their lawsuits are based in part upon an agreement, dated
October 10, 1989, between the Blocks and Matthew, Michael and Merle Jore. The
Blocks seek as remedies dissolution of Jore Corporation and a preliminary
injunction preventing us from proceeding with an offering. In addition, the
Blocks have alleged that they have suffered damages of not less than $10 million
and are seeking compensatory and punitive damages, attorneys' fees and costs,
and injunctive relief preventing any reorganization or sale that would cause
them to collectively own less than 25% of the equity of Jore Enterprises and any
successor corporation.
Litigation is inherently uncertain, and we cannot assure that we and/or the
Jores will prevail in the suit. To the extent that the Blocks become entitled to
shares of our common stock as a result of the suit, we may be required to
recognize an expense equal to the number of shares issued multiplied by the fair
value of the common stock on the date of issuance. Satisfaction of such
liabilities through the issuance of shares could result in the recognition of
future expenses, which could have a material adverse effect on our results of
operations.
WE SUBSTANTIALLY RELY ON CONTRACTS WITH AFFILIATES WHOSE INTERESTS MAY NOT
ALWAYS COINCIDE WITH THOSE OF OUR PUBLIC SHAREHOLDERS:
The existence of, or potential for, conflicts-of-interest between two of our
directors and us could adversely influence decisions relating to sales and
marketing and printing and packaging of our products. We rely substantially on
our sales representative, Manufacturers' Sales Associates, for sales and
marketing assistance and on Printing Press Incorporated for printing and
packaging materials. Our director William M. Steele is the managing member and
owns 50% of Manufacturers' Sales Associates, and our director Bruce Romfo owns
30% of Printing Press Incorporated. In 1998, Manufacturers' Sales Associates and
its affiliate earned an aggregate of $1.8 million in sales commissions and we
purchased $2.0 million printing and packaging materials from
<PAGE>
Printing Press. Because of their significant ownership stakes in these two
entities, the interests of Messrs. Steele and Romfo may diverge from those of
Jore Corporation and its public shareholders.
UNFAVORABLE CHANGES IN COSTS AND AVAILABILITY OF RAW MATERIALS MAY ADVERSELY
AFFECT OUR MANUFACTURING OPERATIONS AND ABILITY TO SATISFY OUR CUSTOMERS'
ORDERS:
We purchase raw materials, key components and certain products from third party
vendors. Although there are alternative sources for these raw materials,
components, and products, we could experience manufacturing and shipping delays
if it became necessary to change or replace current suppliers, or to produce
certain components or products internally. In addition, the prices of raw
materials supplied by certain vendors are influenced by a number of factors,
including general economic conditions, competition, labor costs, and general
supply levels. Our inability to obtain reliable and timely supplies of
out-sourced products and components and raw materials on a cost effective basis,
or any unanticipated change in suppliers, could have a material adverse effect
on our manufacturing operations, revenues and profitability.
WE DEPEND ON PATENT, TRADEMARK AND TRADE SECRET PROTECTION TO MAINTAIN OUR
MARKET POSITION:
Our success depends in part on our ability to obtain patent protection for our
products, maintain trade secret protection for our proprietary processes, and
operate without infringing on the proprietary rights of others. Our existing
U.S. and foreign patents expire between 2002 and 2012. We have filed, and intend
to file, applications for additional patents covering our products. We cannot be
certain that any of these patent applications will be granted, that any future
inventions that we develop will be patentable or will not infringe the patents
of others, or that any patents issued to or licensed by us will provide us with
a competitive advantage or adequate protection for our technology. In addition,
we cannot assure that any patents issued to or licensed by us will not be
challenged, invalidated or circumvented by others.
We believe that trademarks owned or licensed by us enhance our position in the
marketplace and are important to our business. Our inability to use any of our
trademarks could adversely affect our customer relationships and revenues. We
cannot be certain that we will retain full rights to use our trademarks in the
future.
THE COST OF PROTECTING AND DEFENDING OUR PATENTS, TRADEMARKS AND TRADE SECRETS
MAY BE SIGNIFICANT:
The defense and prosecution of patent claims, and litigation involving
intellectual property rights generally, is both costly and time consuming. If
any of our products are found to have infringed any patent or other third party
proprietary right, we may be unable to obtain licenses to continue to
manufacture and sell such products or may have to pay damages as a result of
such infringement. We endeavor to protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants and
generally control access to our facilities and distribution of our proprietary
documentation and other materials. Confidentiality and non-disclosure
<PAGE>
obligations are difficult to enforce, however, and we may lack an adequate
remedy for breach of a confidentiality agreement. Moreover, a third party could
gain access to our trade secrets through means other than by breach of a
confidentiality agreement, or could develop independently a process
substantially similar to our trade secrets. In addition, the laws of other
countries in which we market or may market our products may afford little or no
effective protection of our intellectual property.
WE COULD BECOME SUBJECT TO PRODUCT LIABILITY LAWSUITS:
We face a potential risk of product liability claims because our products may be
used in activities where injury may occur such as the building and construction
industries. Although we have product liability insurance coverage, we cannot be
certain that this insurance will adequately protect us against product liability
claims or that we will be able to maintain this insurance at reasonable cost and
on reasonable terms. To the extent that we are found liable for damages with
respect to a product liability claim and lack adequate insurance coverage to
satisfy such claim, our business, operating results, and financial condition
could be materially and adversely affected.
THE JORE FAMILY CONTROLS ALL MATTERS REQUIRING SHAREHOLDER APPROVAL POSSIBLY IN
CONFLICT WITH YOUR INTERESTS:
Matthew Jore, acting alone, or the Jore family, acting together, are able to
control all matters requiring shareholder approval. Matthew Jore, President and
Chief Executive Officer, his brother Michael Jore, Executive Vice President,
trusts controlled by Matthew and Michael Jore, and other members of the Jore
family beneficially own approximately 64.3% of our outstanding common stock. Our
Articles of Incorporation and Bylaws do not provide for cumulative voting;
therefore, the Jore family has the ability to elect all of our directors. The
Jore family also has the ability to approve or disapprove significant corporate
transactions without further vote by the investors who purchase common stock in
this offering. This ability to exercise control over all matters requiring
shareholder approval could prevent or significantly delay another company or
person from acquiring or merging with us.
WE MAY NEED ADDITIONAL CAPITAL WHICH COULD DILUTE YOUR INTEREST IN THE COMPANY
AND WHICH MAY NOT BE AVAILABLE WHEN NEEDED:
We believe that our cash resources, including borrowings under our credit
facilities and cash from operations, and the net proceeds from our public
offering will be sufficient to finance our anticipated growth for approximately
the next 12 months. However, we may be required to raise additional equity or
debt capital to continue our current levels of operations and to enhance our
financial position for future operations. Financings may be unavailable to us
when needed or, if available, may be on unfavorable terms or may be dilutive to
our shareholders. If financing is unavailable to us or is available only on a
limited basis, we may be unable to develop or enhance our products, take
advantage of business opportunities or respond to competitive pressures, any of
which could have a material adverse effect on our business, operating results,
and financial condition.
<PAGE>
WE USE DEBT, WHICH CREATES FINANCIAL AND OPERATING RISK:
We have relied on debt and may seek additional debt funding in the future. As of
September 30, 1999, we had approximately $16.8 million of outstanding long-term
debt, net of current portion, which accounted for 31.2% of our total
capitalization. Our leverage poses the risks that:
- We may be unable to repay our debt due to a decline in revenues or
disruption in cash flow;
- We may be unable to obtain additional financing;
- We must dedicate a substantial portion of our cash flow from operations to
servicing the interest and principal payments on our debt, and any
remaining cash flow may be inadequate to fund our planned operations;
- We have pledged substantially all of our inventory and accounts receivable
as collateral; and
- We may be more vulnerable during economic downturns, less able to
withstand competitive pressures and less flexible in responding to
changing business and economic conditions.
ANY FAILURE OF OUR INFORMATION TECHNOLOGY AND COMPUTER CONTROLLED SYSTEMS TO BE
YEAR 2000 COMPLIANT COULD SUBJECT US TO UNFORESEEN EXPENSES:
We may not accurately identify all potential Year 2000 problems within our
business, and the corrective measures that we implement may be ineffective or
incomplete. Any such problems could interrupt our ability to manufacture our
products, process orders, accurately report operating and financial data or
service our customers. Similar problems and consequences could result if any of
our key suppliers or customers experience Year 2000 problems. Our failure or the
failure of our significant suppliers and customers to adequately address the
Year 2000 issue could adversely affect our business, operating results and
financial condition.
OUR LOCATION ON PRIVATE PROPERTY WITHIN A NATIVE AMERICAN RESERVATION COULD
SUBJECT US TO UNFORESEEN REGULATION:
Our corporate offices and manufacturing facilities are located on private
property within the Flathead Indian Reservation. We may be or become subject to
the jurisdiction of the tribal government or court in any disputes involving any
of the three tribes located on the reservation or their members. In particular,
the tribal government may seek to assert civil regulatory authority over the
conduct of our business under federal laws and treaties under which any of the
tribes, their members, or non-member successors to ownership of land formerly
owned by members of any of the tribes have senior priority. In addition, the
tribal government may have the ability to regulate certain of our activities if
those activities are shown to directly affect any of the tribes, if we enter
into contracts with a tribe or its members, or if a tribe implements laws
governing our business conduct. Currently, the tribal government does not
regulate any of our business activities, however, any regulations that it may
seek to impose could have a material adverse effect on our business, operating
results and financial condition.
<PAGE>
FUTURE SALES OF CURRENTLY OUTSTANDING SHARES COULD NEGATIVELY AFFECT OUR STOCK
PRICE:
The market price of our common stock could decrease as a result of sales of a
large number of shares in the market or in response to the perception that such
sales could occur. Approximately 9.0 million of our shares are subject to
lock-up agreements that prohibit the sale of these shares until March 23, 2000.
After expiration of the lock-up period, these shares will be eligible for
immediate sale, in certain instances subject to the volume limitations of Rule
144. D.A. Davidson & Co. can release shares from one or more of the lock-up
agreements without our approval.
CERTAIN PROVISIONS UNDER STATE CORPORATE LAW AND OUR CORPORATE CHARTER COULD
HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE:
Certain provisions of our Articles of Incorporation, Bylaws and Montana
corporate law could be used by our incumbent management to make it substantially
more difficult for a third party to acquire control of Jore Corporation. These
provisions could discourage potential takeover attempts and could adversely
affect the market price of our common stock.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our cash equivalents and marketable securities are at fixed
interest rates, and, as such, the fair value of these instruments is affected by
changes in market interest rates. However, all of our cash equivalents and
marketable securities mature within one year. As a result, we believe that the
market risk arising from our holding of these financial instruments is minimal.
In addition, all of our current customers pay in U.S. dollars and, consequently,
our foreign currency exchange rate risk is immaterial. We do not have any
derivative instruments and do not engage in hedging transactions.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we have been, and expect to continue to be, subject to legal
proceedings and claims in the ordinary course of our business, including claims
of alleged infringement of third-party trademarks and other intellectual
property rights. Such claims, even if not meritorious, could require the
expenditure of significant financial and managerial resources.
BLACK & DECKER LITIGATION. On June 9, 1999, Stanley filed a lawsuit against
Black & Decker in the United States District Court for the District of
Connecticut. The lawsuit arises out of claims made by Black & Decker that our
proposed introduction of STANLEY-Registered Trademark- branded power tool
accessories in yellow and black packaging would violate Black & Decker's
trademark rights associated with its DEWALT brand.
<PAGE>
Stanley is seeking a declaratory judgment that the use or license by Stanley or
Jore of yellow and black on power tools or their accessories does not infringe
or dilute any of Black & Decker's federal or state trademark rights, or
constitute an unfair trade practice under federal or state law. We have joined
Stanley as a co-plaintiff in this suit. Stanley has advised us that:
- It has used yellow and black on its products since at least 1899;
- It has marketed products under its "Stanley in a notched rectangle"
trademark since at least 1902;
- It has sold power tool accessories since at least 1939;
- It has packaged its power tool accessories utilizing yellow and black
trade dress since at least 1957.
In contrast, we believe that Black & Decker first introduced the DeWalt line of
power tools dressed in yellow and black in 1992. Jore began shipping product
under the Stanley-Registered Trademark- brand on June 14, 1999. On July 7, 1999
Black & Decker filed an Amended Answer, Affirmative Defenses, and Counterclaims
to Amended Complaint, in which Black & Decker denied most of the allegations
asserted against it and raised counterclaims against Stanley and Jore alleging,
among other things, unfair competition and trademark and trade dress
infringement. In its filing Black & Decker seeks:
- Dismissal of Stanley's action;
- An injunction against Stanley and Jore that would prevent Stanley and us
from using the yellow and black color combination for marketing and
selling power tools and power tool accessories; and,
- Damages for our use of the yellow and black color combinations; and
attorneys' fees and costs.
Under the license agreement, Stanley has agreed to indemnify and hold us
harmless with respect to any alleged copyright or trademark infringement action
arising out of the approved use of Stanley's trademarks, and has the sole
responsibility for undertaking and conducting the defense of any such action.
Discovery in this case is ongoing.
BLOCK BROTHERS LITIGATION. On August 16, 1999, Pete K. Block and Paul K. Block
instituted separate actions in the Montana Fourth Judicial District Court of
Missoula County, Montana against us, Matthew Jore individually and d.b.a. Jore
Enterprises, Michael Jore, individually, and Merle Jore, individually. In their
complaints, the Blocks alleged, among other things, that they are collectively
entitled to a 25% interest in the capital stock of Jore Enterprises and any
successor corporation. Their lawsuits are based in part upon an agreement, dated
October 10, 1989, between the Blocks and Matthew, Michael and Merle Jore
pursuant to which the Blocks contend that Matthew, Michael and Merle Jore agreed
to issue them shares of stock of Jore Enterprises and any successor corporation
and to grant them a collective 25% interest in all patent rights, profits and
real and personal property. The Blocks seek as remedies dissolution of Jore
Corporation and a preliminary injunction preventing Jore Corporation from
proceeding with this offering. In addition, the Blocks have alleged that they
have
<PAGE>
suffered damages of not less than $10 million and are seeking compensatory
damages, plus interest, punitive damages, attorneys' fees and costs and
injunctive relief preventing any capital reorganization or sale that would cause
them to collectively own less than 25% of the equity of Jore Enterprises and any
successor corporation.
We answered the complaint on October 20, 1999, and asserted various affirmative
defenses. While we believe that we have meritorious defenses to the Blocks'
claims, litigation is inherently uncertain, and we cannot assure that we and/or
the Jores will prevail in the suit. To the extent that the Blocks become
entitled to shares of our common stock as a result of the suit, we may be
required to recognize an expense equal to the number of shares issued multiplied
by the fair value of the common stock on the date of issuance. This could have a
material adverse effect on our results of operations. Discovery in this case is
ongoing.
In order to protect Jore Corporation and its shareholders from any adverse
outcome in this or any future proceeding involving the Blocks, Matthew, Michael
and Merle Jore have entered into an indemnification agreement with Jore
Corporation pursuant to which they will indemnify and hold Jore Corporation
harmless against these and any other future claims, including any damages and
costs resulting therefrom, that the Blocks may assert against us. In addition,
the agreement provides that if the Blocks become entitled to any shares of our
common stock pursuant to a definitive judicial or arbitral determination or a
settlement agreement with us, then the Jores will deliver to us such shares from
their own shareholdings for re-issuance by Jore Corporation to the Blocks. We
cannot be certain, however, that the Jores will be able to perform their
indemnification obligations or that such performance will not adversely affect
the market for our stock. Satisfaction of such liabilities through the issuance
of shares could result in the recognition of future expenses, which could have a
material adverse effect on our results of operations.
ITEM 2. CHANGES IN SECURITIES
During the three months ended September 30, 1999, we granted stock options to
purchase 181,081 shares of common stock at exercise prices ranging from $9.10 to
$11.625 per share to employees, directors and consultants pursuant to our 1997
Stock Plan. We believe that the issuance of the options were exempt from
registration under the Securities Act by virtue of Rule 701.
In July and August 1999, we issued to 19 accredited investors approximately $7.4
million aggregate principal amount of subordinate debt bearing interest at 6.5%
to 7% per annum. In connection with the issuance of these notes, we also issued
warrants to purchase, on a pro-rata basis, an aggregate of 325,600 shares of
common stock at exercise prices of $9.10 and $10.00 per share. We believe the
issuance of the notes and warrants was exempt from registration under Section
4(2) of the Securities Act and under Rule 506 of Regulation D promulgated
thereunder.
On September 22, 1999, our Registration Statement on Form S-1, Registration No.
333-78357, pursuant to which we registered the offer and sale of 4,300,000
shares of our common stock by us and an
<PAGE>
additional 300,000 shares by one of our shareholders, was declared effective by
the SEC. On September 23, 1999, we commenced our initial public offering of
3,700,000 shares of common stock, and one of our shareholders commenced his
offering of an additional 300,000 shares, at a public offering price of $10.00
per share. We completed the sale of these shares on September 28, 1999. The
managing underwriters of the offering were D.A. Davidson & Co., Janney
Montgomery Scott LLC and First Security Van Kasper (the "Underwriters"). On
October 19, 1999, the Underwriters exercised their option to purchase an
additional 600,000 shares of common stock from us to cover over-allotments. We
completed this sale on October 21, 1999, as of which date our offering
terminated.
We received gross proceeds of $43.0 million, and the selling shareholder
received gross proceeds of $3.0 million, upon completion of the offering.
Expenses incurred by us in connection with the offering totaled approximately
$1.3 million, excluding the underwriting discount of approximately $3.0 million.
Consequently, the net proceeds to us from the offering were approximately
$38.7 million. As of September 30, 1999, we had realized and used the net
proceeds of the offering (excluding the net proceeds from the exercise of the
over-allotment option) as follows:
<TABLE>
<S> <C>
- ------------------------------------------------------- ------------------------
Net Proceeds from sale by Jore Corporation of $33.1 million
3,700,000 shares
- ------------------------------------------------------- ------------------------
USE OF PROCEEDS
- ------------------------------------------------------- ------------------------
Repayment of indebtedness and related interest $12.9 million
- ------------------------------------------------------- ------------------------
S Corporation dividend and shareholder advances $4.0 million
- ------------------------------------------------------- ------------------------
Capital expenditures and working capital $8.3 million
- ------------------------------------------------------- ------------------------
Investments and liquid marketable securities $7.9 million
- ------------------------------------------------------- ------------------------
Total $33.1 million
- ------------------------------------------------------- ------------------------
</TABLE>
Of the $4.0 million in distributions and shareholder advances, the following
amounts were paid to officers, directors and 10% shareholders:
<TABLE>
<S> <C>
Matt Jore and Family Trust $ 2,080,890
Mike Jore and Family Trust $ 1,040,310
David H. Bjornson $ 447
Dan Gabig $ 248
Kelly Grove $ 248
Bruce Romfo $ 7,462
</TABLE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting held on July 2, 1999, the shareholders agreed to increase
the number of shares reserved for issuance under the Amended and Restated 1997
Stock Plan to 1,300,000. The number of shares voted in favor of the amendment
was 8,812,500, with no votes against and no abstentions.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed as part of this Form 10-Q:
(a) Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K - None
Items 3 and 5 of Part II have been omitted from this Report as not applicable.
- - ------------------------------------------------------------------------------
SIGNATURES
- - ------------------------------------------------------------------------------
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
JORE CORPORATION
/s/ David H. Bjornson
-------------------------------------
By: David H. Bjornson
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 15, 1999
<TABLE> <S> <C>
<PAGE>
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<RECEIVABLES> 0 0 12,871,406 0
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</TABLE>
