UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
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 Charter)
Montana 81-0465233
(State of incorporation) (I.R.S. Employer ID)
45000 Highway 93 South
Ronan, Montana 59864
(Address of principal executive offices)
(406) 676-4900
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
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 __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 the 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. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, computed with reference to the closing price of such stock, as of
March 1, 2001 was $12,463,504.
The number of shares of common stock outstanding as of March 1, 2001 was
13,946,843.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held June 4, 2001, are incorporated by reference into Part
III of this report.
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JORE CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
INDEX
PART I PAGE
Item 1. Business 4
Item 2. Properties 21
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 4A Executive Officers of the Registrant 22
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholders Matters 23
Item 6. Selected Consolidated Financial Data 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk 32
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure (None)
PART III
Item 10. Directors and Executive Officers of the Registrant 59
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial Owners and
Management 59
Item 13. Certain Relationships and Related Transactions 59
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K 60
Signatures 63
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PART I
"Jore" (which may also be referred to as the "Company," "we," "us" or "our")
means Jore Corporation and its subsidiaries, as the context requires.
ITEM 1. BUSINESS
OVERVIEW
Jore Corporation is a leader in the design, manufacture and marketing of
innovative power tool accessories and hand tools for the do-it-yourself and
professional craftsman markets. We offer a comprehensive system of proprietary
drilling and driving products that save users time through enhanced
functionality, productivity and ease of use. We manufacture our products using
advanced technologies and equipment designs, intended to achieve competitive
advantages in cost, quality and production capacity. Our products are sold under
private labels to the industry's largest power tool retailers and manufacturers
such as Sears, Roebuck and Co., ("Sears"), Tru*Serv Corporation, Canadian Tire
Corporation Limited, Black & Decker Corporation and Makita Corporation. Our
products also are sold under the Stanley(R) brand, to which we have an exclusive
licensing agreement for power tool accessories, at The Home Depot, Inc.,
Menard's, Andersons, Mid-States and other retailers. We also recently signed an
exclusive licensing agreement for use of the Porter Cable(R) brand, which we
will introduce at Lowe's in the second quarter of 2001.
Our 2000 operating results reflect difficult but important initiatives
undertaken to (i) continue our transition to a technology-based vertically
integrated manufacturing operation, (ii) implement a direct-to-retail sales
approach under the Stanley(R) brand, and (iii) complete the nationwide launch of
the Stanley(R) brand into the nation's largest home improvement retailer, The
Home Depot. These transitional efforts resulted in a significant operating loss
for the year. We believe the transitional efforts are now substantially
complete.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, during the year ended December 31, 2000, the Company incurred a net
loss of $10.9 million and the Company's current liabilities exceeded its current
assets by $42.1 million. The Company also holds significant amounts of inventory
which has been written down by $5.9 million to net realizable value. In
addition, the Company has substantial excess manufacturing capacity (see Note 14
of Consolidated Financial Statements). As described in Note 9, the Company was
not in compliance with several provisions of its long-term debt agreements as of
December 31, 2000, and accordingly, long-term debt totaling $33.6 million has
been classified as a current liability. These factors, among others, raise
substantial doubt about whether the Company will be able to continue as a going
concern for a reasonable period of time.
Jore Corporation was incorporated in Montana in 1993. Its principal office is
located at 45000 Highway 93 South, Ronan, MT 59864.
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INDUSTRY OVERVIEW
We compete in the tool industry, with specific participation in the power tool
accessories market and, to a lesser extent, the hand tool market. We estimate
that the domestic markets for these industry segments are $3.2 billion and $3.0
billion, respectively, with worldwide markets roughly double those amounts.
Approximately $1.4 billion of the domestic power tool accessories market is
attributable to drilling and driving accessories.
The development and widespread use of cordless power tools has created a growing
installed base of these tools among do-it-yourself consumers, professional
craftsmen, contractors, and industrial users. The increased use of cordless
power drills has led to a growing demand for new accessories to improve product
functionality and ease of use. This has led to the growth in the quick-change
drilling and driving accessories market, which today totals approximately $80 to
$100 million.
Historically, the power tool accessories market has been addressed by a
fragmented group of manufacturers that produce traditional drilling, driving,
cutting, and surface preparation accessories. In recent years, the industry has
been consolidating as larger manufacturers seek to broaden their product
offerings, gain market leverage with leading retailers, and expand production
capacity. Industry production techniques largely rely on embedded capital
equipment and production facilities which use traditional, multi-step
manufacturing methods that have remained relatively unchanged for years. The
industry generally has been slow to introduce innovative new products or adopt
advanced manufacturing technologies.
STRATEGY
Our strategy is to capture additional business opportunities by leveraging the
significant investments that we have made in manufacturing capabilities, retail
distribution, and product innovation. Specific elements of this strategy and
near-term opportunities include the following:
Grow Business with Existing Retail Customers: We expect growth in revenues from
existing customers, particularly The Home Depot, Sears and Lowe's. The roll-out
of Jore's products under the Stanley(R) brand throughout The Home Depot's 1,100
store system was substantially completed in October 2000. This product launch
has been validated by solid early sales levels, in spite of limited initial
product awareness at the store level, and the need to fine-tune product set
configurations and merchandising strategies. Finally, we anticipate that our
internal sales initiative and licensed brand product roll-outs will create
opportunities for increased business with other customers, including Canadian
Tire, Tru*Serv, and Lowe's.
Expand Retail Customer Base: We believe that our entrance into The Home Depot
will create opportunities with other major retailers. In the near-term, we are
examining opportunities to sell our products to additional retailers, such as
Ace, Wal-Mart, Price-Costco, Sam's Club and others. Key elements of
consideration include branding strategies, set configurations, pricing and
channel conflict issues.
Introduce Innovative New Products: Jore currently has a number of new products
in various stages of design and development. These include product extensions
within the current quick-change drilling and driving system, new hand tools, and
new power tool accessories outside of the drilling and driving category. We have
also undertaken several new product development initiatives to broaden our shelf
space and customer base.
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Enter the Industrial Market: The Company believes it has an opportunity to
leverage its manufacturing capacity into the production of drill bits for the
industrial market. Jore's proprietary drill bit manufacturing process enables
the production of industrial-quality bits at lower cost than conventional
manufacturing techniques. This is particularly significant given present
equipment and facility utilization rates. We have initiated preliminary
discussions with several large industrial customers and distributors. Based on
these discussions, we believe that we can effectively compete for industrial
business.
OPERATING STRATEGY
Sales Transition: We believe our initiative to license the Stanley(R) and
Porter-Cable(R) brands and sell our products directly to major retailers
positions us for future success. Retailers are seeking direct relationships with
product manufacturers to avoid the margin compression or price expansion that
results when the manufacturer sells to the branded OEM, which in turn sells to
the retailer. However, the transition from an OEM sales strategy to a
direct-to-retail branded sales strategy was not without difficulty. OEM
customers, as expected, scaled back orders, resulting in an $8 million reduction
in OEM sales from 1999 to 2000. At the same time, the lead-time and marketing
expenditures required to gain shelf space and product awareness at The Home
Depot were greater than anticipated. Product line reviews for major retailers
have occurred infrequently. For example, we were not awarded the fast-change
drilling and driving category at The Home Depot until May 2000, much later than
anticipated, and our Stanley(R)-branded products were not in place throughout
The Home Depot system until October 2000. In the intervening months, we
established store-level service and product support functions, developed a
distribution system to support the requirements of 1,100 stores (versus 15
distribution centers at Sears, for example), built a new distribution center,
and fine-tuned product set configurations and merchandising strategies for the
big-box store environment.
Operational Transition: We believe our continuing movement to technological
vertical integration ("TVI") in our manufacturing, assembly and packaging
operations positions us for future success. We believe our TVI approach allows
us to maintain our standards for product quality and innovation while remaining
cost competitive. However, the transition from an outsourced component approach
to our TVI strategy was also not without difficulty. During 1999 and 2000, the
Company invested nearly $70 million in new equipment and facilities. Throughout
2000 we incurred inefficiencies as we continually dealt with revised and refined
equipment installations, cycle times and process flows. This resulted in lower
equipment utilization rates and higher product costs which led to the sharp
decline in margins throughout 2000. We believe, however, that implementation of
our TVI strategy has positioned us to increase our margins in future periods.
Focus on Creative Merchandising and Rapid Prototyping: We distinguish ourselves
by our ability to quickly design and prototype attractive packaging and retail
displays. In addition, we continually evaluate the logistics of receiving,
displaying and purchasing products in retail environments. As a result, we
deliver our products and systems in attractive packages and effective retail
plan-o-grams that, in coordination with each customer's requirements, are easy
to set up and display and are aesthetically appealing to consumers. We believe
this responsiveness and attention to detail provides us with a competitive
advantage in serving our customers and encourages consumer purchases.
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Enhance Information and Control Systems Technology: Integrating our design,
development, manufacturing, sales and management operations is critically
important. We continue to work towards refining our enterprise resource planning
software in order to facilitate enterprise-wide communication and coordination
among our employees. Real time communication among engineers, product managers,
quality assurance personnel, and graphic designers will enable us to carefully
control the design, development, manufacture and marketing of our products.
Develop, Motivate and Retain Highly Productive Personnel: We are committed to
creating a working environment that values the contributions of all personnel
and rewards personal initiative. Whenever possible we seek to retrain and
redeploy, rather than displace, employees when we implement manufacturing
improvements or technology upgrades. By encouraging employees to attend our
internal education programs, we believe that we improve the capabilities of our
employees and leverage our investment in process technology and information
management systems. Our programs cover a range of topics including computer
aided design, spreadsheet and database management, work-flow efficiency, sales
education and automation training.
PRODUCTS
Jore manufactures and sells products in three categories, including quick-change
power tool accessories, hand tools and industrial quality drilling and driving
tools.
Quick-Change System: The heart of the Company's power tool accessories lineup is
a patented quick-change drilling and driving system that provides the user rapid
interchangeability of a full range of hex-shank drilling, driving and surface
preparation accessories. Users chuck the connector into their drill and can then
quickly change between accessories throughout any project without having to
continually chuck and re-chuck drill bits, screwdriver bits, or other
accessories. Our proprietary products also include reversible drilling and
driving accessories, screw guides, and other specialized accessories designed to
save users time and improve tool functionality.
We offer quick-change connectors in a variety of styles and sizes to fit the
needs of both do-it-yourself consumers and professional craftsmen. The
connectors are used in conjunction with a variety of hex-shank accessories
including high-speed drill bits, masonry drill bits, wood-boring spade bits,
wire brushes and other surface preparation applications.
Hand Tools: Jore also sells a multiple bit screwdriver with bit storage in the
handle marketed to Sears as the Ready-Bit, with or without a ratcheting feature.
Additionally, Jore markets its own proprietary Torque-Driver(R), a screwdriver
with interchangeable bits and a flip-out handle that provides the user with
additional torque for hand screwdriving applications and which accepts multiple
sizes of Jore's quick-connect screwdriver bits.
Industrial Quality Drilling and Driving Accessories: The majority of our capital
investment in the last two years has been concentrated in our state-of-the-art
drill bit manufacturing operation, but has also included rotary transfer,
plastic injection, metal injection and machining operations. With
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a co-development partner, Jore designed, developed and has brought into service
41 rotary transfer drill grinding machines that grind the most advanced
geometries onto a ground-from-solid high-speed steel drill bit. These machines
can also be used to manufacture other cutting tools, including end mills, router
bits and masonry bits. Jore's Edgerton, Wisconsin facility produces a full range
of screwdriver bits.
Our products are principally sold in set configurations. Sets typically include
high-speed steel drill bits, quick-change connectors, various screw and fastener
drivers, screw guides, reversible drills and drivers, and related accessories.
Some sets also include our Torque-Driver(R) product. In addition to sets, we
also sell individual products as open stock to allow users to expand or replace
their accessories.
Manufacturing and Process Technologies
Jore's manufacturing strategy has always been to utilize technology to mitigate
foreign producers' cost advantage in labor, while also allowing for
sophisticated product and process design advances. The Company has invested
nearly $70 million in property, plant and equipment over the past two years to
support these efforts. As currently configured, our manufacturing operation has
the capacity to produce approximately 50 million drill bits per year (see Note
14 of the consolidated financial statements).
While quick-change drilling and driving products make up the bulk of the current
revenue mix, Jore's unique and proprietary computerized processes used in
manufacturing round-shank and hex-shank drill bits make up the heart of our
manufacturing capabilities.
We use advanced technology to create the highest quality, most cost-effective
processes available to manufacture, assemble and package our products. We
operate based on the concept of "Kaizen," a Japanese word meaning "never ending
improvement." Our processes are based on continuing research into materials,
technology and machines from other companies and industries. Our focus on
innovation and continuous process improvement covers all facets of operations,
from inspection of raw materials to final assembly and packaging of the end
product. The application of advanced technology manufacturing allows us to
enhance product quality, lower production costs, improve customer
responsiveness, and rapidly scale and increase production capacity to support
sales growth.
Our in-house manufacturing processes include drill bit grinding, high-speed
machining, injection molding, blow molding, die-casting, metal forming and
stamping. We have jointly designed and developed a proprietary drill bit
manufacturing machine that automates all aspects of drill bit production,
resulting in improved quality, lower production costs and increased production
capacity.
We also operate high speed machining centers to produce a variety of our
component parts, such as screwdriver bits and countersinks. Our injection
molding operations produce a variety of plastic components such as storage cases
and screwdriver handles. We produce hex-shank accessories using our proprietary
die-casting processes and screw driving accessories are produced using our
proprietary metal forming and stamping equipment. Our equipment incorporates
micro processing technology that allows us to capture, analyze and manipulate
data to more effectively manage and coordinate our operations.
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We constantly monitor all facets of the manufacturing process for inefficiencies
and strive to use technology or new processes that save time, reduce costs, and
improve quality. We first seek to identify and quantify any advantages that we
believe we can achieve by developing a new process. We then seek a solution by
investigating machine manufacturing companies throughout the world that can
potentially address our needs. If an appropriate machine is not available from
an outside source, we will collaborate in the design with a manufacturer to
build process-specific equipment or design and build such equipment internally.
Product Development
We focus our efforts on the design and development of product improvements and
new products based on an evaluation of the needs and demands of consumers. We
maintain an active dialogue with users of our products to ascertain the most
desirable enhancements for our current products and systems and to aid in the
development of new products. Our product and process innovation group is
comprised of 48 people, including 11 engineers, 7 industrial designers and
machinists, 8 graphics designers and 22 technicians.
We have a disciplined process by which we identify and develop potential new
products and bring them to market.
Conceptualization and Engineering of New Products or Improvement to Existing
Products: Our personnel visit job sites to observe current construction and
manufacturing methods and to identify potential opportunities to improve
existing products or create new products. Once we identify a need for a new
product or an improvement to an existing product we begin a conceptualization
process involving feedback from end-users and personnel within our manufacturing
operations. Using computerized engineering software, we develop
three-dimensional computerized drawings and manipulate these images to optimize
functionality and form.
Prototyped Production: Once we are satisfied regarding the functional and
aesthetic objectives of a particular product, our engineering software sends the
three-dimensional computerized model to our rapid prototyping system. Our system
produces a three-dimensional plastic model that we then test for aesthetics,
functionality and general design. Once we are satisfied with the concept
prototype, we commission a fully functional prototype to be made for performance
testing and evaluation as a working prototype. In many cases, the rapid
prototype model serves this function as well.
Selection of Raw Material and Production Equipment: In order to select the
appropriate raw material, we use the working prototype to test alternative
materials in many different conditions. After we have determined the appropriate
raw material and product specifications, we send engineering drawings, concept
prototypes and working prototypes to selected manufacturing equipment suppliers
so that they are able to submit proposals on design and fixturing of appropriate
equipment. Our equipment committee evaluates the proposals from these suppliers
and selects the best design to produce our product.
Assembly, Packaging And Automation Fixtures: We design automated work cells to
efficiently assemble and package our products. Our automation team evaluates and
selects the appropriate technology and equipment for each process. Our work
cells, comprised of several process-specific work-centers, are designed and
arranged for efficient flow of product and personnel. Our automation team
designs safe, ergonomic workstations based upon the needs of our production
team.
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Customers
Historically, we exclusively sold our products under private labels to leading
power tool manufacturers and retailers. In mid-1999, however, we signed an
agreement with The Stanley Works whereby we were granted the exclusive license
to the Stanley(R) brand in the power tool accessories category in North America.
This licensing agreement allowed us to initiate efforts to market our products
under a highly recognized name directly to major retailers. Today we sell our
products to three categories of customers: (i) manufacturers of power tool
accessories; (ii) private label to retailers under their proprietary brands; and
(iii) direct to retailers under licensed brands.
Power Tool Manufacturers: The Company sells its products to select power tool
manufacturers (or "OEM customers"), which in turn offer the products through
their own distribution channels under their own brands. Jore supplies the
products either in final packaged form or as unpackaged products which the
manufacturers combine and package with related drilling and driving products.
Our OEM customers include Black & Decker and Makita, which sell the products
under the DeWalt(R) and Makita(R) brands, respectively. These manufacturers were
some of Jore's initial customers and sales to these customers continued to grow
in size through 1999. In 2000, sales to OEM customers declined sharply as we
became a direct competitor with the introduction of our own products under the
Stanley(R) brand.
Private Label Retailers: We sell our products to several leading retailers which
offer the products in their stores under their own private label brands. We
coordinate closely with these customers on promotional and merchandising
strategies and displays, and supply these customers with products in final
packaged form. The customers then assume responsibility for shelf management and
product support at the store level.
Our private label retail customers include Lowe's, Canadian Tire, and Tru*Serv,
which offer the products under the Task Force(R), MasterCraft(R), and Master
Mechanic(R) brands, respectively. The Company's leading customer in this
category is Sears, our largest overall customer. Sears offers Jore products
under the Craftsman(R) Speed-Lok(R) trademark, and has enjoyed tremendous
consumer response to the products. In recognition of this success, Sears has
honored Jore for three straight years with its Partner in Progress award, which
is earned by only 1% of Sears' vendors. The Craftsman Speed-Lok(R) line remains
the best selling product within Sears' power tool accessories category.
Direct to Retailers: With our licensing of the Stanley(R) brand, we initiated
efforts in late 1999 and 2000 to sell our products directly to major retailers
under one of the most respected names in the tool business. In May 2000, we were
awarded the fast-change drilling and driving category at The Home Depot, the
nation's largest home improvement retailer. Jore's Stanley(R)-branded products
were in place throughout The Home Depot's 1100 store system by October 2000, and
generated strong results in the fourth quarter. We anticipate growth in sales of
our products at The Home Depot in 2001. The
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licensing of the Porter Cable(R) brand in the first quarter of 2001 for initial
sales to Lowes, provides another opportunity to grow our direct-to-retail
channel.
SALES AND MARKETING
Our sales and marketing resources include internal sales and marketing
personnel, an internal graphics department, and contracted regional service
groups. We seek to develop long-term, mutually beneficial relationships with our
customers at all levels of the customer's organization. The sales and marketing
team works closely with customers to create coordinated promotional and
merchandising campaigns. Specific marketing activities that we provide include
merchandising events, plan-o-grams, promotional displays, and packaging design.
We have recently undertaken initiatives to enhance our sales and marketing
organization, particularly in view of the transition to a direct-to-retail sales
strategy. Specifically, we are winding down our relationship with Manufacturers'
Sales Associates, LLC ("MSA") a sales representative organization that receives
a commission on sales to specific customers.
Management Structure: In mid-March, 2001, a Vice President of Sales and
Marketing and three individuals with broad retail experience joined the Company
to lead the Sales and Marketing Department. In 2000, we added a former associate
buyer for the power tool accessories product category at Sears. We intend to
establish a network of regional sales managers as we believe there are
opportunities for rapid growth much like those already experienced at The Home
Depot.
We believe these efforts to enhance our sales and marketing organization will
improve responsiveness to customers, enhance manufacturing coordination and
demand planning, and generate greater success with new business opportunities.
Internal sales and marketing support is delivered by our in-house graphics
department, consisting of six graphic designers and two support personnel. This
group is responsible for designing and implementing all packaging and
promotional materials. The group has specialists in computer animation, 3D
renderings and package and promotional material design. The graphics department
also develops our annual reports, brochures and catalogs.
To support customers and product offerings at the store level, Jore now has
service contracts in place with the leading regional service groups in the
country. These groups were recommended and introduced to us by The Home Depot
and Lowe's, based on their extensive experience with customer support. We
believe that we are now positioned to effectively and efficiently support a
national direct-to-retail sales strategy.
Most of our sales are derived from purchase orders for products to be delivered
to our customers within 30 days of receipt of the order. As is customary in the
power tools accessories market, we rely on our customers' forecasts to
anticipate future order volumes, and typically do not enter into long-term
supply agreements with our customers. As a result, we typically do not maintain
a significant backlog of purchase orders. See "Risk Factors--Our dependence on
customer forecasts to manage our business may cause us to misallocate our
production, inventory or other resources."
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Competition
The power tool accessories market and the hand tool market are highly
competitive. 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. As we expand into new markets, we can
expect to encounter similar competitive environments.
Competitors in power tool accessories include Vermont American Corporation,
Black & Decker, 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 independent "job shops" that supply products under
private labels to OEM and retail customers. Competitors in the hand tools market
include American Tool, Cooper Industries, Inc., The Stanley Works and others,
including some foreign companies. Competitive factors in our markets include:
o Establishing favorable brand recognition;
o Maintaining manufacturing efficiency and expertise;
o Developing a breadth of product offerings;
o Implementing appropriate pricing;
o Providing strong marketing support;
o Manufacturing high quality products; and
o Obtaining access to retail outlets and sufficient shelf space.
Intellectual Property
Our ability to compete effectively depends in part on our ability to develop and
protect our proprietary technology. We have 14 United States and foreign design
and utility patents covering a variety of our products and processes. While our
patents have been important to our business, we do not believe that our business
is dependent on any single patent or group of patents. We also own or license
several registered trademarks and sell many products to our customers under
arrangements that allow us to maintain control of our trademarks while granting
customers exclusive use of specified trademarks for limited purposes. For
example, we have granted Sears the exclusive right to use the Speed-Lok(R)
trademark in connection with Sears' sales of quick-change systems and other
products, provided that Sears purchases a minimum quantity of Jore products
annually. The primary trademarks we own or use in our business include
Speed-Lok(R), Speed Shank(R), Quad-Driver(R), Bit-Lok(R), High Torque Power
Driver(R), Torque Driver(TM), JoreTech(TM), Where Innovation Meets Reality(TM)
and Auto Jaw(TM). Certain of our trademarks are integral to our business and we
aggressively monitor and protect these and other trademarks.
In April 1999, we entered into an agreement with The Stanley Works that grants
us the exclusive license to sell power tool accessories under the Stanley(R)
brand in North America. The Agreement provides for the payment by us to The
Stanley Works of a percentage of our sales of our Stanley(R)-branded products,
with certain minimum payment obligations, during the term of the agreement. The
term of the Agreement is through December 2004, and may be renewed by us through
December 2009.
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In exchange for our agreement to have The Norton Company be our preferred
supplier of grinding wheels and surface preparation products, we were granted an
exclusive license to use the Speed-Lok(R) name in connection with the sale of
power tool accessories.
We enter into confidentiality agreements with our employees and consultants upon
the commencement of an employment or consulting relationship. These agreements
generally require that all confidential information developed or made known to
the individual by us during the course of the individual's relationship with us
be kept confidential and not disclosed to third parties. These agreements also
generally provide that inventions conceived by the individual in the course of
rendering services to us shall be our exclusive property.
Information Management
Through our information management systems, we seek to electronically integrate
all aspects of our operations, from procurement of raw materials to sale of our
packaged products to end-users. Our fully-integrated enterprise resource
planning software system allows centralized management of key functions,
including inventory, order processing, accounts receivable, accounts payable,
general ledger, shop floor control, bar-coded inventory, material requirements
planning, scheduling and electronic data interchange. This information system
enables us to ship to customers on a same-day basis, respond quickly to order
changes and provide a high level of customer service. Our new system integrates
our internal processes and allows for cross-platform information sharing among
our various departments. We are continually refining our management information
system through customization and employee training to maximize our
effectiveness.
Personnel and Human Resources
As of March 15, 2001, we employed 373 full-time employees and 5 part-time
employees, of whom 22 were in sales and marketing, 74 in finance and
administration, 22 in technology development and application and 260 in
operations. All but 13 of our employees are located at our facilities near Ronan
and Missoula, Montana, with 11 being located at our Jore Edgerton screwdriver
bit facility in Wisconsin. No employees are covered by collective bargaining
agreements, we have never had a work stoppage and we believe we maintain good
relations with our employees.
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 expect growth in sales and production and cannot assure you that we will be
able to manage any future growth effectively. The addition of The Home Depot as
a significant customer in 2000 strained our management, production, engineering,
financial and other resources. To manage our growth effectively, we must operate
our manufacturing capacity efficiently while maintaining high levels of quality
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
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business, financial condition and results of operations, such as declines in
revenues and profit margins.
We are in violation of our debt covenants and, unless our lenders continue to
waive their rights under our debt agreements, we may be required to liquidate
our assets:
Our operating line of credit requires the following financial ratio covenants:
(i) current ratio not less than 1:1; (ii) leverage ratio not to exceed 2.5:1;
and (iii) funded debt to EBITDA not to exceed 4.25:1. As of December 31, 2000 we
were out of compliance with all of these covenants.
We entered into a forbearance agreement in March 2001 that provides us an
overadvance limit of $8.1 million on our operating line of credit. In exchange
for this forbearance, we have granted second mortgages on certain property and
plant equipment and certain officers have provided personal guarantees. The bank
forbearance extends to April 30, 2001, at which time it will be reviewed. Our
current borrowing base of eligible accounts receivable and inventory supports
$21 million in borrowings and the agreement allows us to borrow up to
approximately $29 million. We are currently overadvanced by $7.5 to $8 million.
We have 19 lenders from which we have borrowed money to finance equipment
purchases. We have requested from each lender a three-month forbearance on all
interest and principal payments due them. Seven of the nineteen lenders have
agreed to this forbearance and the remaining twelve lenders have requested
additional information.
There can be no assurance that we will successfully restructure our debt, or
that our creditors will waive their rights under our credit agreements. Without
a debt restructuring or extension, or an equity infusion, we will be forced to
liquidate our assets.
We expect to continue to rely on debt to fund our operations:
We have historically relied on debt and may seek additional debt funding in the
future. As of December 31, 2000, we had approximately $77 million of outstanding
debt, which accounted for 69% of our total capitalization. Our leverage poses
the risks that:
o We may be unable to repay our debt due to a decline in revenues or
disruption in cash flow;
o We may be unable to obtain additional financing;
o 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;
o We have pledged substantially all of our inventory and accounts
receivable as collateral; and
o 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.
We may need additional capital which could dilute your interest in the Company
and which may not be available when needed:
We are currently trying to restructure our existing debt, and we may require
additional equity or debt financing to meet future working capital needs and to
enhance our financial position for future operations. We cannot assure
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you that such additional financing will be available or, if available, that such
financing can be obtained on satisfactory terms. 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.
We have extended unsecured creditors past their normal terms of payment which
could disrupt our sources of supply:
We have approximately $11.9 million of accounts payable, half of which are more
than 60 days past due. We are working with equipment providers to defer or
cancel receipt of capital equipment. Most of our current inventory needs are
paid for on a COD basis, which we expect will adequately support current sales.
However, there can be no assurance that our vendors will continue to supply
Jore's product needs, which could ultimately disrupt our product flow and
adversely effect our financial position and results of operations.
It may become more difficult to sell our stock in the public market:
Our common stock is quoted in the Nasdaq National Market. In order to remain
listed on this market, the Company must meet Nasdaq's listing maintenance
standards. If the bid price of our common stock falls below $1.00 for an
extended period, or we are unable to continue to meet Nasdaq's standards for any
other reason, our common stock could be delisted from the Nasdaq National
Market.
If the common stock were delisted, we likely would seek to list the common stock
on the Nasdaq SmallCap Market or for quotation on the American Stock Exchange or
a regional stock exchange. However, listing our stock for quotation on these
markets or exchanges could reduce the liquidity for our common stock.
If the common stock were not listed or quoted on another market or exchange,
trading of the common stock would be conducted in the over-the-counter market on
an electronic bulletin board established for unlisted securities or in what are
commonly referred to as the "pink sheets." As a result, an investor would find
it more difficult to dispose of, or to obtain accurate quotations for the price
of the common stock. In addition, a delisting from the Nasdaq National Market
and failure to obtain listing or quotation on another market or exchange would
subject our securities to so-called "penny stock" rules that impose additional
sales practice and market-making requirements on broker-dealers who sell and/or
make a market in such securities. Consequently, removal from the Nasdaq National
Market and failure to obtain listing or quotation on another market or exchange
could affect the ability or willingness of broker-dealers to sell and/or make a
market in the common stock and the ability of purchasers of the common stock to
sell their securities in the secondary market. In addition, if the market price
of the common stock falls below $1.00 per share, we may become subject to
certain penny stock rules even if our common stock is still quoted on the Nasdaq
National Market. While such penny stock rules should not affect the quotation of
our common stock on the Nasdaq National Market, such rules may further limit the
market liquidity if the common stock and the ability of investors to sell the
common stock in the secondary market.
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
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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 initiative to enhance our sales and marketing resources could disrupt our
sales efforts:
We have terminated our relationship with Manufacturing Sales Associates and
replaced it with an in-house direct sales organization. These efforts include
adding key sales and marketing professionals to our staff and establishing
store-level service and support for our retail customers. Failure to
successfully execute our sales and marketing initiatives could disrupt our sales
efforts and damage our customer relationships.
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 2000, sales to
Sears, The Home Depot, Black & Decker/DeWalt and Makita accounted for 55.8%,
15.6%, 9.7%, and 8.5% respectively, of our net revenues. In 1999, sales to
Sears, Black & Decker/DeWalt and Makita accounted for 58.3%, 22.8%, and 10.0%
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. 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.
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
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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
customers and generally affecting the markets for our products, may cause
customers to cancel, reduce or delay orders that were previously made or
anticipated.
The marketing of our products under the Stanley(R) 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 granted us the
exclusive license to sell power tool accessories under the Stanley(R) brand.
Some of our existing customers appear to view our license arrangement with
Stanley unfavorably, and therefore have reduced their purchases of our products.
In addition, retailers may choose not to offer our products under the Stanley(R)
or other licensed brands. The time and resources we spent in 2000 marketing our
products under the Stanley(R) brand lead to increased sales but our
profitability suffered. We cannot be certain sales levels will increase under
licensed brands or that any such sales will be at acceptable margins. Other
potential risks in connection with licensing brands from third parties include:
o The failure by licensors to maintain the integrity and quality of
their brand's image in the minds of its consumers;
o Our inability to meet the performance requirements of any licensing
agreement may cause licensors to terminate such agreements; and
o Customer demand of exclusive arrangements.
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:
o Obtaining customer acceptance of our products;
o Managing existing customer relationships;
o Establishing relationships with new customers;
o Displacing incumbent vendor relationships; and
o Successfully introducing new products under licensed brands.
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.
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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 adverse effect on our business and prospects. We
have employment agreements with key personnel, 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. For example, in 2000 we initiated litigation
against an equipment supplier regarding its sale of exclusive equipment to
competitors of Jore. Pursuant to the litigation, Jore is not taking delivery of
additional equipment or making minimum payments to the manufacturer. 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:
o Functionality, quality and pricing;
o Demand from end-users;
o Favorable reviews in trade publications;
o Adequate marketing support;
o The introduction of competitive products; and
o General trends in the power and hand tool industries and the home
improvement market.
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 1998, 1999 and 2000 approximately 67%, 67% and 70% respectively, of
our net revenues were generated during the third and fourth
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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.
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:
o Local acceptance of our products;
o Currency controls and fluctuations in foreign exchange rates;
o Regulatory requirements such as tariffs and trade barriers;
o Longer payment cycles and increased difficulty in collecting accounts
receivable;
o Unfavorable tax consequences; and o Transportation and logistics.
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.
In December 2000, we entered into litigation with International Tool Machines of
Florida, Inc. ("ITM"), the manufacturer and supplier of our proprietary drill
bit manufacturing machinery. We believe that ITM sold and made available
machines that are substantially identical to our proprietary machines in
violation of our exclusive agreement. If ITM is permitted to sell our
proprietary machines to third parties, we could lose a significant competitive
advantage, which could have a material adverse effect on our operating results.
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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 2019. 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 you 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
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.
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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 62.2% 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 other investors. 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.
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, parts of which became operational during July of
1999. If the system fails to perform reliably or otherwise does not meet our
expectations, or if we fail to successfully complete the implementation of other
modules of the system, 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 costs and our responsiveness to customers.
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 2. PROPERTIES
Our operations are housed in approximately 280,000 square feet of owned
facilities located on a 120 acre site near Ronan, Montana, a 44,000 square foot
distribution facility located in Missoula, Montana, which we rent with an option
to purchase, a 20,000 square foot leased warehouse in Missoula, Montana and
approximately 10,000 square feet of leased space in Edgerton, Wisconsin. Our
existing facilities in Ronan, Montana include three buildings
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from which we provide manufacturing, assembly, packaging, warehousing and
administrative functions. We believe these facilities are sufficient to continue
to meet our needs for the foreseeable future
ITEM 3. 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.
In December 2000, we entered into litigation with International Tool Machines of
Florida, Inc. ("ITM"), the manufacturer and supplier of our proprietary drill
bit manufacturing machinery. We commenced this litigation because we believe
that ITM has sold and made available machines that are substantially our
proprietary machines and the related technology to third parties in violation of
our exclusive dealing and nondisclosure agreements with ITM. In addition, we
believe ITM intends to continue doing so. We seek to prevent ITM from selling
these or similar machines to others, including our competitors, in violation of
existing agreements with ITM. ITM has filed a counterclaim alleging breach of
contract and damages, among other things.
We originally commenced similar litigation in May 2000, and had previously
settled the case in June 2000. However, we became aware of additional
information which led us to the conclusion that ITM was not honoring the
agreements or the settlement agreement, and we recommenced the litigation.
If ITM is permitted to sell our proprietary drill bit manufacturing equipment to
third parties, including our competitors, we would lose our exclusive right to
these technologically advanced drill bit manufacturing machines. As a result,
the comparative advantages that we enjoy over our competitors in our drill bit
manufacturing process could be lost, and our competitors would be able to
achieve significant cost savings and quality improvements in producing drill
bits. An outcome unfavorable to us in this matter could have a material adverse
effect on our competitive position in the drill bit market.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for a vote of stockholders of the Company during the
fourth quarter of the year ended December 31, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of Jore Corporation, as of March 1, 2001,
and their ages and positions, are as follows:
Name Age Position
Matthew B. Jore 38 President, Chief Executive Officer
and Chairman
Michael W. Jore 41 Executive Vice President and
Director
David H. Bjornson 44 Executive Vice President, General
Counsel, Secretary and Director
Monte Giese 30 Chief Financial Officer
Mick Quinlivan 41 Controller
Jeffrey M. Heutmaker 38 Vice President--Strategic Initiatives
Matthew B. Jore is the founder of Jore Corporation. He has served as our
President since June 1990, Chief Executive Officer since March 1999 and a
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Director since its inception in February 1990. He holds a B.S. degree in
Economics from the University of Montana.
Michael W. Jore has served as Executive Vice President since November 1998 and
Director of Jore Corporation since February 1990. From June 1990 to November
1998, he was the Vice President of Jore Corporation. Before joining Jore
Corporation, he worked for Plum Creek Timber, L.L.C. for ten years. Matthew and
Michael Jore are brothers.
David H. Bjornson has served as General Counsel since November 1998, Executive
Vice President since March 2000 and as a Director since May 1998. Mr. Bjornson
also served as Chief Financial Officer from November 1998 through March 2000.
From 1985 to 1998, he was a partner or associate attorney with law firms in
Seattle, Washington and Missoula, Montana, focusing his practice in the area of
business transactions and corporate and tax law. From 1979 to 1981 he worked
with the international accounting firm of Touche Ross & Co. in Seattle. He holds
an L.L.M. degree in taxation from New York University, and a J.D. and a B.A.
degree in Business Administration with honors from the University of Montana.
Mr. Bjornson also holds a Certified Public Accountant Certificate.
Monte Giese has served as Chief Financial Officer since April 2000. A 1993
graduate of Harvard University, from 1993 to 1995, Mr. Giese was an investment
banker with Alex Brown and Sons in Baltimore, Maryland. From 1995 to April 2000,
he was a Vice President in the investment banking division of D. A. Davidson &
Co.
Mick Quinlivan has served as Controller of Jore Corporation since January 2001.
From 1996 to December 2000, Mr. Quinlivan served as Controller for Itron, Inc.,
a manufacturer of data collection systems. Prior to 1996, he worked in various
financial management positions for Itron, Inc. He has a B.B.A. degree from
Gonzaga University and holds a CPA certificate.
Jeffrey M. Heutmaker has served as Vice President--Strategic Initiatives since
June 1999. From June 1996 to June 1999 Mr. Heutmaker was an attorney with Van
Valkenberg Furber Law Group P.L.L.C, a law firm located in Seattle, Washington.
From 1985 to 1996, Mr. Heutmaker practiced law in Seattle, Washington, including
with the international firm of Bogle & Gates, where his practice focused on
securities law, licensing and mergers and acquisitions transactions. He holds a
J.D. degree from Notre Dame Law School and a B.A. degree in Economics and
English Literature from the University of Puget Sound.
Our executive officers will serve as officers of Jore Corporation until the
regular meeting of the Board of Directors in June 2001 or until their respective
successors shall have been elected.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Information
Our common stock is traded on the Nasdaq National Stock Market ("Nasdaq") under
the symbol "JORE." Our common stock commenced trading on September 23, 1999. The
following table sets forth the high and low daily average sale prices for our
common stock as reported on the Nasdaq for the period from September 23, 1999
through the end of fiscal year 1999, and for fiscal year 2000.
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High Low
Year ended December 31, 1999
Third Quarter (from September 23) $12.3125 $9.1000
Fourth Quarter $12.8750 $7.0625
Year ended December 31, 2000
First Quarter $ 9.9375 $ 5.5625
Second Quarter $ 6.2500 $ 4.6875
Third Quarter $ 5.7813 $ 4.8750
Fourth Quarter $ 5.9844 $ 3.4063
Holders
As of March 1, 2001, there were approximately 99 holders of record of Jore
common stock.
Dividends
We did not declare or pay any dividends in 2000, and do not anticipate paying
cash dividends in the foreseeable future. We intend to retain future earnings
for reinvestment in the operation and expansion of our business. Any
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon our financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors deems relevant.
Under certain loan covenants associated with our line of credit facility, we are
restricted from declaring or paying dividends, or from purchasing, redeeming,
retiring or otherwise acquiring for value any of our shares of stock, or from
otherwise distributing property to shareholders with some limited exceptions.
Sales of Unregistered Securities
On December 22, 2000, we issued 37,500 shares of our common stock for $4.00 per
share and warrants exercisable for three years for 15,000 shares at $5.00 per
share to an unrelated party. The offer and sale of these securities was exempt
from registration under the Securities Act of 1933, as amended, pursuant to
section 4(2) thereof by virtue of the nature of the offering.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and notes thereto and other
financial information included elsewhere in this report.
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(In thousands except per share amounts)
2000 1999(*2) 1998 1997 1996
Operating Data
Net sales $ 52,847 $ 53,872 $44,888 $23,656 $ 9,686
Income (loss) from operations (9,412) 9,255 7,734 3,445 (63)
Net income (loss) before extraordinary item (13,325) 6,477 6,240 2,541 (558)
and income taxes
Provision (benefit) for income taxes (2,424) 2,545 -- -- --
Income (loss) before extraordinary item (10,901) 3,932 6,240 2,541 (558)
Extraordinary item:
Loss related to early retirement of
debt, net of taxes -- 914 -- -- --
Net income (loss) $ (10,901) $ 3,018 $ 6,240 $ 2,541 $ (558)
Income (loss) before extraordinary item
per common share:
Basic (0.79) $ 0.37 $ 0.66 $ 0.27
Diluted (0.79) $ 0.36 $ 0.66 $ 0.27
Effect of extraordinary item on income (loss)
per common share:
Basic -- $ (0.09) -- --
Diluted -- $ (0.09) -- --
Net income (loss) per common share:
Basic (0.79) $ 0.28 $ 0.66 $ 0.27
Diluted (0.79) $ 0.28 $ 0.66 $ 0.27
Shares used in calculation of income per share
Basic 13,857 10,653 9,412 9,358
Diluted 13,857 10,893 9,436 9,358
Pro forma data (unaudited) *1:
Net income -- $ 3,018 $ 6,240 $ 2,541
Proforma provision for income taxes -- 1,303 2,343 900
Pro forma net income -- $ 1,715 $ 3,897 $ 1,641
Pro forma net income per common share
(unaudited):
Basic -- $ 0.16 $ 0.41 $ 0.18
Diluted -- $ 0.16 $ 0.41 $ 0.18
BALANCE SHEET DATA
Inventories $ 26,206 $ 27,795 $ 8,072 $ 4,740 $ 2,974
Current assets 48,471 58,683 25,111 11,375 5,166
Property, plant and equipment, net 79,882 58,561 19,816 6,081 4,196
Total assets 129,284 117,908 45,963 17,759 9,548
Total current liabilities $ 90,528 $ 42,605 $25,083 $10,549 $ 5,210
Long-term debt, net of current portion 3,402 27,779 14,589 4,689 4,189
Total liabilities 95,325 73,153 39,673 15,238 9,399
Total shareholders' equity 33,959 44,754 6,289 2,521 149
-25-
*1 - Pro Forma Information - Prior to its initial public offering of common
stock ("IPO") in September 1999, the Company and its subsidiaries elected S
Corporation status under the Internal Revenue Code. In connection with the IPO,
the Company's S Corporation status was terminated and the Company became subject
to federal and state income taxes applicable to C corporations. The accompanying
consolidated statements of operations reflect a pro forma income tax provision
or benefit for all periods prior to the Company's IPO as if the Company had been
taxed as a C corporation.
*2 - As restated. See Note 15 to the consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANAYLISIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Subsequent to the issuance of the consolidated financial statements for the year
ended December 31, 1999, the Company's management determined that the net
deferred tax liability resulting from the conversion to a C corporation from an
S corporation should have been recorded as income tax expense rather than a
direct reduction of equity in the 1999 consolidated financial statements. As a
result, the accompanying 1999 consolidated financial statements have been
restated from amounts previously reported to give effect to the correction of
this item. See Note 15 of the consolidated financial statements for a summary of
significant effects of the restatement.
Management's discussion and analysis of financial condition and results of
operations for the years ended December 31, 2000, 1999, and 1998 have been
adjusted to reflect the restatement.
The following discussion and analysis should be read in conjunction with Jore
Corporation's Consolidated Financial Statements and related Notes thereto
included herein under Item 8. All statements, trend analysis and other
information contained in this Form 10-K relative to markets for Jore
Corporation's products and trends in revenue, gross margin and anticipated
expense levels, as well as other statements including words such as "seek,"
"anticipate," "believe," "plan," "estimate," "expect" and "intend" and other
similar expressions, constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements are subject to business and economic risks, and our
actual results of operations may differ materially from those contained in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under "Risk
Factors" set forth in Item 1 above. You should not rely on these forward-looking
statements, which reflect only our opinion as of the date of this report. We do
not assume any obligation to update forward-looking statements.
Overview
We are a leader in the design, manufacture and marketing of innovative power
tool accessories and hand tools for the do-it-yourself and professional
craftsman markets. Our products include industrial quality drilling and driving
power tool accessories, a proprietary quick-change drilling and
-26-
driving system, and selected hand tools. The quick-change system provides rapid
interchangeability for a full range of hex-shank drilling, driving, and surface
preparation accessories. The system also includes proprietary reversible
drilling and driving tools, screw guides, and other specialized accessories
designed to save users time and improve tool functionality.
We manufacture our products using advanced technologies and equipment designs to
achieve competitive advantages in cost, quality, and production capacity. During
the past two years we have invested nearly $70 million in state-of-the-art
manufacturing and assembly capabilities. We have also vertically integrated our
production capabilities which include metal injection and casting, rotary
transfer cutting, plastic injection molding, blow molding, and advanced
machining.
Our business commenced in 1987 where we sold 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. By
1996, we expanded our product portfolio to include our reversible drilling and
driving tools 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 retailers such as Sears, The Home Depot, Canadian
Tire, and Tru*Serv. We increased our gross margins in 1999 by selling direct to
major retailers, and through sales of private label and Stanley branded
products.
Our 2000 operating results reflect difficult but important initiatives
undertaken to complete the transition to a technology-based, vertically
integrated manufacturing operation, generate incremental sales volume through
the direct-to-retail channel under the Stanley(R) brand, and enhance our sales
and marketing organization in light of the direct-to-retail sales strategy.
These transitional efforts resulted in significant inefficiencies and start-up
costs totaling $9.8 million.
Because of our results for 2000, early in 2001, we made some critical decisions
to improve our operating performance. Specifically, we: a) engaged in active
discussions with candidates to strengthen our senior management team; b) reduced
our workforce from approximately 600 employees one year ago to approximately 370
employees currently, resulting in an insignificant charge to operations; and c)
retained Glass & Associates, a management consulting firm, to assist in
improving operations and restructuring our credit facilities. In addition, we
have retained the investment banking firm of D.A. Davidson to actively explore
strategic partnerships or equity financing.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, during the year ended December 31, 2000, we incurred a net loss of
$10.9 million and our current liabilities exceeded our current assets by $42.1
million. We also hold significant amounts of inventory which has been written
down by $5.9 million to net realizable value. In addition, we have substantial
excess manufacturing capacity (see Note 14 in the consolidated financial
statements). As described in Note 9, we were not in compliance with several
provisions of our long-term debt agreements as of December 31, 2000, and
accordingly, long-term debt totaling $33.6 million has been classified as a
current liability. These factors, among others, raise substantial doubt about
whether we will be able to continue as a going concern for a reasonable period
of time.
-27-
Results of Operations
The following table sets forth, for the periods indicated, certain financial
data as a percentage of net revenues:
Years Ended December 31,
---------------------------
1998 1999 2000
------ ------ ------
Net revenues 100.0% 100.0% 100.0%
Cost of goods sold 69.5 65.6 89.4
Gross profit 30.5 34.4 10.6
Operating expenses:
Product development 1.1 1.2 2.4
Sales and marketing 5.6 6.0 14.0
General and administrative 6.6 10.1 11.9
Total operating expense 13.3 17.3 28.3
Income (loss) from operations 17.2 17.1 (17.7)
Other expense:
Interest expense 3.0 5.7 7.4
Other income expense 0.3 (0.5) 0.0
Net other expense 3.3 5.2 7.4
Net income (loss) before
extraordinary item and
income taxes 13.9% 12.0% (25.2%)
2000 Compared to 1999
Net revenues decreased 2% from $53.9 million in 1999 to $52.8 million in 2000.
We deferred approximately $1.0 million of revenue from the fourth quarter 2000
until the first quarter 2001 to comply with the guidance of Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements." This guidance,
among other things, stipulates revenue recognition according to terms of
shipment. We expect that adoption of this new accounting guidance will not
materially affect cash flows, financial position or results of operations in the
future.
The overall decrease in net revenues in 2000 is primarily a result of Jore's
shift in sales focus from power tool manufacturers to direct-to-retail sales
under licensed or private label brands. Revenues from the OEM channel were $9.6
million in 2000 as compared to $17.7 million in 1999. Revenues from the
direct-to-retail channel under licensed brands were $8.3 million in 2000, up
from $1.4 million in 1999. Revenues to private label retailers increased
slightly to $35.0 million in 2000 from $34.7 million in 1999.
We expect that revenues from the OEM channel will continue to decrease in the
future as we focus on growing our sales through the direct-to-retail channels.
Cost of goods sold, excluding inventory and manufacturing variances, increased
from $35.3 million in 1999 to $37.5 million in 2000. As a percentage of
revenues, cost of goods sold increased from 65.6% in 1999 to 71.0% in 2000. This
increase is attributable to aggressive pricing on large sets, volume discounts
provided to new retail customers, and increased outgoing freight costs.
Inventory and manufacturing variances: Throughout 2000, we incurred
inefficiencies as we continually dealt with, revised and refined equipment
installations, cycle times, and process flows. This resulted in lower equipment
utilization rates and higher product costs which led to the sharp decline in
margins during 2000. During 2000 we incurred $9.8 million of inventory and
manufacturing variances related to production inefficiencies, and start-up
costs. Of the total, $5.9 million was comprised of excess labor
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and overhead associated with start-up activities for the nationwide rollout of
our fast-change products to The Home Depot, and inventory builds in anticipation
of higher revenues for the year. Construction of our new distribution center in
the second half of the year, and deployment of additional capital equipment,
compounded some of the inefficiencies. The remaining variance amount of $3.9
million consists equally of inventory count variances and shrinkage,
extraordinary freight charges for material and product expediting, and higher
purchase costs for raw materials.
Our 2001 beginning inventories are stated at market value, and as such, we will
not generate profits as we sell this inventory.
Product development expenses increased from $621,000 in 1999 to $1.3 million in
2000, representing a 106.9% increase. Increases in professional and technical
staff during 2000 accounted for the majority of the increase. In addition to the
labor expensed in 1999 and 2000, we capitalized $1.3 million and $1.5 million
respectively, of labor related to equipment constructed in-house. Product
development expenses are expected to decrease in 2001 as we scale back certain
activities and staffing.
Sales and marketing expenses increased from $3.2 million in 1999 to $7.4 million
in 2000, representing a 129% increase. Advertising and promotional expenses grew
$2.6 million due to increased retail advertising, primarily intensive in-store
consumer education and promotional activities to support the nationwide roll-out
at The Home Depot, and promotional activities at other retailers. Higher sales
commission expenses and the addition of inside sales professionals during 2000
also contributed to the overall increase. We expect sales and marketing expenses
to decrease slightly in 2001.
General and administrative expenses increased from $5.5 million in 1999 to $6.3
million in 2000, or 15%. This growth results from selected staff additions, an
increase in professional fees paid to outside consultants and higher
depreciation and property taxes. General and administrative expenses are
expected to decline in 2001 due primarily to staff reductions that were
implemented early in 2001.
Other expense: Net interest expense increased 39%, from $2.8 million in 1999 to
$3.9 million in 2000 due to a higher level of debt used to finance our capital
expansion program. Interest expense is expected to increase in 2001 as we
complete the majority of our vertical integration efforts and correspondingly
capitalize a lesser amount of interest, and from anticipated higher interest
rates on our operating line of credit. Capitalized interest was $1.1 million in
1999 and $2.2 million in 2000.
Income taxes: Our effective tax rate was 53% (pro forma as restated. See Note 15
to the consolidated financial statements) and 18% in 1999 and 2000,
respectively. We provided valuation allowances on our deferred tax assets in
2000, causing the effective rate to decrease from the previous year. The
valuation allowances were provided because certain components of our deferred
tax assets may expire before they can be utilized. Our effective tax rate varies
from year-to-year due to changes in valuation allowances, new or revised tax
legislation, and differences in the level of business performed in various tax
jurisdictions.
1999 Compared to 1998
Net revenues increased from $44.9 million in 1998 to $53.9 million in 1999,
representing a 20.0% increase. Of the $9.0 million increase, sales to existing
customers accounted for $6.2 million and sales to new customers accounted for
$2.8 million. Most of this increase for new customers resulted
-29-
from additional sales under the Stanley(R) brand to The Home Depot, Menards and
various other outlets.
Cost of goods sold increased from $31.2 million in 1998 to $35.3 million in
1999, representing a 13.3% increase. Cost of goods sold as a percentage of
revenues decreased from 69.4% in 1998 to 65.6% in 1999. This decrease is
attributable to an increase in sales to direct retailers at better margins, a
larger sales volume over which to spread fixed overhead costs, reductions in
material costs, and savings related to new manufacturing processes.
Product development expenses increased from $495,000 in 1998 to $621,000 in
1999, representing a 25.4% increase. Professional and technical labor accounted
for the majority of the increase as we hired additional engineers and machinists
to develop our proprietary products and corresponding processes. Capitalized
labor for equipment constructed in-house was $211,000 in 1998 and $1,276,000 in
1999.
Sales and marketing expenses increased from $2.5 million in 1998 to $3.2 million
in 1999, representing a 28.7% increase. Advertising and promotion expenses
increased by approximately $1.0 million due to increased retail advertising, but
this increase was partially offset by a decrease in the sales commission
percentage paid to our sales representative. We increased our internal marketing
and graphics staff to accommodate increased sales and customer support
activities from growing customer diversification.
General and administrative expenses increased from $3.0 million in 1998 to $5.5
million in 1999, representing an 82.8% increase. The increase resulted from the
hiring of three new senior level executives as well as increased finance and
administrative staff from 67 at December 31, 1998 to 115 at December 31, 1999.
Other nonrecurring items which increased general and administrative costs were
training and other costs associated with our new management information system,
costs associated with our year 2000 computer systems review and compliance, and
certain indirect costs associated with our initial public offering.
Other expense increased from $1.5 million in 1998 to $2.8 million in 1999, due
to a larger amount of debt and the corresponding increase in interest expense.
Extraordinary item: We incurred an extraordinary expense of approximately $1.0
million in August 1999 related to the termination of our former operating line
of credit. We expensed the prepayment penalty and the unamortized financing
costs associated with the credit line. The proceeds to extinguish the debt came
from our new credit line with First Security Bank.
Pro forma provision for income taxes: 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 for 1999 reflects a tax rate of 52.7% (as restated, see
Note 15 to the consolidated financial statements), 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
Capital expenditures and financing associated with those expenditures have been
primary factors affecting our financial condition during the last four years.
Historically, we have funded our operating and investing needs with short-term
lines of credit and term loans for equipment purchases and, to a lesser extent,
cash provided by operations. Our initial public offering of
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common stock in September 1999 provided cash of $38.6 million. These proceeds
were used to repay debt, distribute the accumulated but undistributed S
Corporation earnings of the Company, purchase capital equipment, and invest in
marketable securities. Cash, cash equivalents and short-term investments were
$477,000 as of December 31, 2000, compared to $7.8 million as of December 31,
1999. This decrease is primarily attributable to funding our 2000 capital
acquisitions.
Net cash used by operating activities was $0.9 million in 1998, $12.3 million in
1999 and $1.9 million in 2000. The significant decline in operating cash
required for 2000 as compared to 1999 was due to lower cash needs for inventory,
accounts payable and accounts receivable, partially offset by the 2000 net loss.
We expect the lower cash needs for inventory will continue in 2001.
Net cash used by investing activities was $16.5 million in 1998, $49.7 million
in 1999 and $18.0 million in 2000. Acquisitions of plant and equipment decreased
from $41 million in 1999 to $26.2 million in 2000. Over the past three years we
have made minimum annual purchases of certain drill bit manufacturing machines
under an agreement that provides Jore the exclusive right to own and operate the
machines. As more fully described in Footnote 14 of Notes to our Consolidated
Financial Statements, we have initiated legal action against the manufacturer of
these machines for marketing them to our competitors in violation of our
agreement. Consequently, we are no longer honoring the terms of the agreement as
it relates to minimum annual purchase commitments. In addition, we have
substantially completed our vertical integration efforts, and therefore we
expect to spend less than $8.0 million for capital equipment acquisitions in
2001.
Net cash provided by financing activities was $17.3 million in 1998, $62.0
million in 1999 and $20.7 million in 2000. Our initial public offering in 1999
provided $38.6 million in cash. Proceeds from long-term borrowings were $24.9
million in 1999 and $18.3 million in 2000. Proceeds from borrowings on our
operating line of credit were $11.5 million in 1999 and $10.0 million in 2000.
We have a revolving line of credit with First Security Bank, N.A., with a
maximum borrowing limit of $35 million. Advances on the line are limited to 85%
of eligible accounts receivable and 65% of eligible inventory. Interest on the
revolving credit line is at the prime rate plus one-half percent or, at our
option, LIBOR plus 3%. The term of the agreement is through August 2001. This
line is secured by receivables, inventory, real estate, equipment and general
intangibles. At December 31, 2000, we had outstanding advances of $35 million on
this line.
On January 6, 2000, the Company closed a Rural Development Guaranteed Commercial
Real Estate Loan through Mountain West Bank, N.A., Missoula Branch, for $8.6
million. The loan is collateralized by real estate and buildings owned by the
Company and is personally guaranteed by Matthew B. Jore, the principal
shareholder of the Company and our Chief Executive Officer. The terms include a
20-year amortization, monthly payment of $77,734, with interest at the Wall
Street Journal Prime Rate plus .5%, adjusted every 5 years, 9% at inception.
This loan refinanced short-term debt of $2.5 million from the same lender, which
is reflected in Note 9.
We entered into a forbearance agreement in March 2001 that provides us an
overadvance limit of $8.1 million on our operating line of credit. In exchange
for this forbearance, we have granted second mortgages on certain property and
plant equipment and certain officers have provided personal guarantees. The bank
forbearance extends to April 30, 2001, at which time it
-31-
will be reviewed. Our current borrowing base of eligible accounts receivable and
inventory supports $21 million in borrowings and the agreement allows us to
borrow up to approximately $29 million. We are currently overadvanced by $7.5 to
$8 million.
There can be no assurance that we will successfully restructure our debt, or
that our creditors will waive their rights under our credit agreements. Without
a debt restructuring or extension, or an equity infusion, we will be forced to
liquidate our assets.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and established standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. The accounting standard is effective for the
Company beginning in fiscal 2001. The adoption of SFAS No. 133 did not have a
material effect on the Company's financial statements.
In the fourth quarter 2000, the Company applied the guidance of Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements." This
guidance, among other things, stipulates revenue recognition according to terms
of shipment. We expect that adoption of this new accounting guidance will not
materially effect cash flows, financial position or results of operations in the
future.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our cash equivalents and short-term investments 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.
The Company has exposure to interest rate risk from its short-term and long-term
debt. The Company's long-term debt is both fixed rate and variable rate. The
Company had $42.3 million and $31.3 million of long-term debt with fixed rates
at December 31, 2000 and 1999, respectively (see Notes 8 and 9 to the
consolidated financial statements for additional information on short-term and
long-term borrowings). Market risk for fixed-rate long-term debt is estimated as
the potential decrease in fair value resulting from a hypothetical 100 basis
points increase in interest rates and amounts to $500,274 as of December 31,
2000. The Company does not use derivative financial instruments to manage
interest rate risk. The annualized cash flow risk for the variable rate debt
based upon a hypothetical 100 basis point increase is estimated at $89,412 as of
December 31, 2000.
-32-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Jore Corporation
Ronan, Montana
We have audited the accompanying consolidated balance sheets of Jore Corporation
and subsidiaries (collectively, the "Company") as of December 31, 2000 and 1999,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
Our audits also included the financial statement schedules listed at Item 14.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Jore Corporation and subsidiaries
as of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 15, the accompanying 1999 consolidated financial statements
have been restated.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's loss from operations, negative
working capital, and noncompliance with long-term debt covenants, raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 21, 2001
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JORE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
- -----------------------------------------------------------------------------------------------------------------------------------
2000 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 353,174 $ 94,283
Short term investments 124,169 7,691,791
Accounts receivable, net of allowances for doubtful accounts of $142,384
and $56,645, respectively 16,081,543 19,031,479
Shareholder notes receivable 1,145,753 1,564,219
Notes receivable from affiliates 24,754 11,799
Inventories 26,206,127 27,795,284
Other current assets 4,535,751 2,494,509
------------- -------------
Total current assets 48,471,271 58,683,364
PROPERTY, PLANT, AND EQUIPMENT, Net 79,882,489 58,560,925
INTANGIBLES AND OTHER LONG-TERM ASSETS 930,046 663,268
------------- -------------
TOTAL ASSETS $ 129,283,806 $ 117,907,557
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,943,635 $ 7,255,786
Accrued expenses 4,348,739 5,966,163
Operating line of credit 35,000,000 25,000,000
Current portion of long-term debt 38,898,805 3,530,287
Shareholder notes payable 337,273 81,495
Other current liabilities -- 770,981
------------- -------------
Total current liabilities 90,528,452 42,604,712
LONG-TERM DEBT, Net of current portion 3,401,648 27,779,153
DEFERRED INCOME TAX LIABILITIES
1,394,956 2,769,253
------------- -------------
Total liabilities 95,325,056 73,153,118
COMMITMENTS AND CONTINGENCIES (Notes 1, 8, 9, 11, and 14)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value
Authorized, 30,000,000 shares; no shares issued or outstanding -- --
Common stock, no par value
Authorized, 100,000,000 shares; issued and
outstanding, 13,917,191 and 13,826,020 shares, respectively 41,235,617 40,757,891
Deferred compensation - stock options (25,793) (16,529)
Retained earnings (deficit) (7,251,074) 4,013,077
------------- -------------
Total shareholders' equity 33,958,750 44,754,439
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 129,283,806 $ 117,907,557
============= =============
See notes to consolidated financial statements
-34-
JORE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
(As Restated
see Note 15)
NET REVENUES $ 52,847,038 $ 53,871,762 $44,888,324
COST OF GOODS SOLD (including $9.8 million of inventory
variances in 2000, see Notes 15 and 16) 47,265,837 35,313,825 31,167,724
------------ ------------ -----------
GROSS PROFIT 5,581,201 18,557,937 13,720,600
OPERATING EXPENSES:
Product development 1,285,035 620,950 495,235
Sales and marketing 7,398,908 3,227,881 2,508,818
General and administrative 6,308,324 5,454,268 2,983,035
------------ ------------ -----------
Total operating expenses 14,992,267 9,303,099 5,987,088
------------ ------------ -----------
INCOME (LOSS) FROM OPERATIONS (9,411,066) 9,254,838 7,733,512
OTHER (INCOME) EXPENSE:
Interest expense, net 3,894,623 2,873,674 1,337,938
Other (income) expense 18,944 (95,709) 159,059
------------ ------------ -----------
Net other expense 3,913,567 2,777,965 1,496,997
------------ ------------ -----------
MINORITY INTEREST 3,519
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
AND INCOME TAXES (13,324,633) 6,476,873 6,240,034
INCOME TAX EXPENSE (BENEFIT) (2,423,748) 2,544,890 --
------------ ------------ -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (10,900,885) 3,931,983 6,240,034
EXTRAORDINARY ITEM -
Loss related to early retirement of debt, net of taxes of $106,428 -- 913,952 --
NET INCOME (LOSS) $(10,900,885) $ 3,018,031 $ 6,240,034
============ ============ ===========
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
PER SHARE:
Basic $ (0.79) $ 0.37 $ 0.66
Diluted $ (0.79) $ 0.36 $ 0.66
EFFECT OF EXTRAORDINARY ITEM ON NET INCOME (LOSS) PER SHARE:
Basic $ -- $ (0.09) $ --
Diluted $ -- $ (0.09) $ --
NET INCOME (LOSS) PER SHARE:
Basic $ (0.79) $ 0.28 $ 0.66
Diluted $ (0.79) $ 0.28 $ 0.66
SHARES USED IN CALCULATION OF INCOME (LOSS) PER SHARE:
Basic 13,857,294 10,653,247 9,412,497
Diluted 13,857,294 10,893,393 9,435,777
PRO FORMA DATA (UNAUDITED):
Net income -- $ 3,018,031 $ 6,240,034
Proforma provision for income taxes -- $ 1,303,057 $ 2,343,193
Pro forma net income -- $ 1,714,974 $ 3,896,841
PRO FORMA NET INCOME PER SHARE (UNAUDITED):
Basic -- $ 0.16 $ 0.41
Diluted -- $ 0.16 $ 0.41
See notes to consolidated financial statements.
-35-
JORE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- ----------------------------------------------------------------------------------------------------------------------
Common Stock Deferred Retained
------------------------------- Compensa- Earnings
Shares Amount tion (Deficit) Total
BALANCE, JANUARY 1, 1998 9,390,521 $ 736,392 $ -- $ 1,784,420 $ 2,520,812
Common stock issued 63,587 757,000 757,000
Common stock issued for land 54,436 195,048 195,048
Shareholder distributions (3,425,127) (3,425,127)
Noncash compensation - stock options 1,623 1,623
Deferred compensation - stock options 6,491 (6,491) --
Net income 6,240,034 6,240,034
---------- ----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1998 9,508,544 1,694,931 (4,868) 4,599,327 6,289,390
Common stock issued for land 14,256 82,302 82,302
Common stock warrants 311,629 311,629
Common stock , initial public
offering, net 4,300,000 38,609,246 38,609,246
Exercise of stock options 3,220 23,846 23,846
Noncash compensation - stock options 24,276 24,276
Deferred compensation - stock options 35,937 (35,937) --
Shareholder distributions (3,604,281) (3,604,281)
Net income (as restated, see Note 15) 3,018,031 3,018,031
---------- ----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1999 13,826,020 40,757,891 (16,529) 4,013,077 44,754,439
Common stock issued 37,500 150,000 150,000
Common stock purchased through ESPP 29,675 135,579 135,579
Exercise of stock options 23,996 143,766 143,766
Noncash compensation - stock options 21,429 21,429
Deferred compensation - stock options 30,693 (30,693) --
Tax benefit attributable to appreciation
of common stock options exercised 17,688 17,688
Shareholder distributions (363,266) (363,266)
Net loss (10,900,885) (10,900,885)
---------- ----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 2000 13,917,191 $41,235,617 $ (25,793) $ (7,251,074) $ 33,958,750
========== =========== =========== ============ ============
See notes to consolidated financial statements.
-36-
JORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- -----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
(As Restated,
See Note 15)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(10,900,885) $ 3,018,031 $ 6,240,034
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 4,894,796 2,479,596 1,129,247
Deferred income taxes (2,328,527) 2,328,527
Extraordinary item, early retirement of debt, before tax 1,020,380
Provision for inventory obsolescence 1,351,728 287,218 24,552
Changes in operating assets and liabilities:
Accounts receivable 2,796,738 (4,430,498) (8,587,968)
Inventories 237,433 (20,011,004) (3,356,048)
Other current assets (1,087,013) (1,169,059) (771,949)
Accounts payable 4,687,849 149,726 3,643,664
Accrued expenses (1,617,421) 3,892,461 831,615
Other current liabilities 79,379 183,171 (22,107)
------------ ------------ ------------
Net cash used by operating activities (1,885,923) (12,251,451) (868,960)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (26,199,344) (41,018,613) (15,216,599)
Increase in intangibles and other long-term assets (298,727) (911,207) (862,686)
Advances on notes receivable (7,500) (25,000)
Proceeds on notes receivable 30,176 560
Advances on shareholder notes receivable (108,245) (2,909,618) (1,077,893)
Proceeds on shareholder notes receivable 526,711 2,604,382
Advances on notes receivable from affiliates (12,955) (1,800) (326,272)
Proceeds on notes receivable from affiliates 73,918 304,933
Purchase of investments (7,691,791)
Proceeds from sale of investments 7,567,622
Other, net 17,936 152,253 676,788
------------ ------------ ------------
Net cash used by investing activities (18,507,002) (49,679,800) (16,526,169)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to shareholders (363,266) (3,604,281) (3,425,127)
Proceeds from initial public offering, net 38,609,246
Proceeds from options exercised 143,766 23,846
Proceeds from employee stock purchase plan 135,579
Capital contributions 150,000 757,000
Proceeds from long-term debt 18,274,514 24,887,217 17,149,307
Payments on long-term debt (7,283,501) (10,165,315) (6,016,653)
Proceeds from short-term debt 744,078 15,120,487
Payments on short-term debt (1,149,353) (14,355,597)
Proceeds from operating line of credit, net 10,000,000 11,475,195 8,851,867
------------ ------------ ------------
Net cash provided by financing activities 20,651,817 61,990,798 17,316,394
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 258,892 59,547 (78,735)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 94,283 34,736 113,471
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 353,175 $ 94,283 $ 34,736
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 4,408,412 $ 2,839,645 $ 1,368,383
Income taxes 131,097
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Property acquired under capital leases $ 11,510,704 $ 21,514,918 $ 76,466
Warrants issued with debt -- 311,629 --
Common stock issued for land -- 82,302 195,048
See notes to consolidated financial statements
-37-
JORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business - Jore Corporation (Jore) is a Montana corporation
engaged in the design, manufacture and marketing of innovative power tool
accessories and hand tools for the do-it-yourself and professional craftsman
markets. Jore sells its products under its own licensed Stanley(R) label and
under private labels to the industry's largest power tool retailers and
manufacturers.
Reorganization - Prior to its initial public offering (IPO) on September 23,
1999, Jore merged with two affiliated companies. Because these business
combinations were with companies under common control, the mergers were
accounted for in a manner similar to a pooling-of-interests. The combined
entities included Montana American Manufacturing Corporation (MAMC) and Montana
American Equipment, LLC (MAE).
MAMC, a Montana corporation, was formed March 26, 1996. On October 1, 1998, MAMC
merged with Jore, and the former MAMC shareholders received 360,654 shares of
the Company's common stock.
MAE, a Montana limited liability company, was formed September 9, 1996. On
January 1, 1999, Jore acquired the assets of MAE, net of outstanding
indebtedness, in exchange for 452,774 shares of the Company's common stock.
Principles of Consolidation - The financial statements include the accounts of
Jore Corporation and its subsidiaries which include MAMC, MAE, JB Tool, LLC (JB
Tool), and Jore International Ltd. (collectively referred to as the "Company").
Intercompany transactions and balances have been eliminated. JB Tool, LLC was
dissolved on July 1, 2000, and all of its assets and liabilities were
distributed to and assumed by Jore Corporation effective as of that date.
Basis of Presentation - The accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the consolidated financial statements, during the year ended December
31, 2000, the Company incurred a net loss of $10.9 million, and as of December
31, 2000, the Company's current liabilities exceeded its current assets by $42.1
million. The Company also holds significant amounts of inventory which has been
written down by $5.9 million to net realizable value. In addition, the Company
has substantial excess manufacturing capacity and has entered into an agreement
to make additional purchases of equipment as discussed in Note 14. As described
in Notes 8 and 9, the Company was not in compliance with several provisions of
its debt agreements as of December 31, 2000 and, accordingly, long-term debt
totaling $33.6 million, has been classified as a current liability. These
factors, among others, raise substantial doubt about whether the Company will be
able to continue as a going concern for a reasonable period of time.
-38-
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to comply with the terms and covenants of its
financing agreements, to obtain additional financing or refinancing as may be
required, and ultimately to attain successful operations.
Management is taking several steps to improve financial performance and enhance
shareholder value. First, the senior management team is being strengthened
through the addition of a new vice president of sales and marketing, and a new
financial controller. Jore is also seeking a new president and chief operating
officer. Second, the Company has reduced its workforce from approximately 600
employees at February 1, 2000 to approximately 300 employees currently. Third,
Jore is restructuring its internal sales organization and winding down its
relationship with a third party sales organization. Lastly, the Company has
hired an outside consultant to assist with debt restructuring, and an investment
banking firm to explore other strategic alternatives.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from estimates. Material estimates that are susceptible to change in the
near-term relate to the determination of inventory obsolescence reserves, and
the estimated cash flows used in evaluating recoverability of long-lived assets.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Short term Investments - Short-term investments consist of FNMA Notes, US
Treasury Notes, and Certificates of Deposit, which mature in one year or less,
and are classified as held-to-maturity. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities, investments classified as
held-to-maturity are reported at amortized cost.
Inventories - Inventories are stated at the lower of cost (first-in, first-out
basis) or market. The Company provides for obsolete and unsaleable inventories
based on management's evaluation of current demand and recent usage.
Barter Transactions - In December 2000, the Company entered into a barter
transaction whereby inventories in the amount of $1.0 million, at cost, were
exchanged for trade credits of $1.4 million. The Company expenses the
capitalized barter credits over a three-year period, or as they are used.
Capitalized barter credits amounted to approximately $1.0 million at December
31, 2000. The trade credits expire in December 2003. The Company accounts for
such transactions at the lower of the net realizable value of the inventory or
the barter credits.
-39-
Property, Plant and Equipment - Property, plant and equipment are stated at cost
less accumulated depreciation. Cost includes acquisition, delivery, set-up, and
interest costs incurred prior to actual production. Betterments that
significantly improve equipment utilization or output, or extend useful lives,
are recorded as additions to cost. Maintenance and repairs are charged to
expense as incurred.
Depreciation of buildings, most manufacturing equipment, and office equipment is
recorded using the units of production method and straight-line methods over the
following useful lives:
Buildings 40 years
Land and leasehold improvements 10-15 years
Plant, tooling, and packaging equipment 5-10 years
units of production
Office equipment and furniture 3-7 years
Vehicles 5 years
Intangibles and Other Assets - Patents and trademarks are amortized on a
straight-line basis over their estimated useful lives of 17 years. Deferred
financing costs incurred in connection with borrowings are capitalized and
amortized to interest expense over the life of the related obligation.
Revenue Recognition - Revenues from sales of product are generally recognized
upon shipment, or when received by the customer, depending on shipping terms.
Provision for estimated sales returns and allowances is recorded at the time of
sale. The effect of implementing Staff Accounting Bulletin 101 in the fourth
quarter of fiscal year 2000, combined with accounting for the arrangement with a
new customer, resulted in the deferral of approximately $1.0 million of revenue
from fiscal year 2000 into fiscal year 2001. The effect on net income was not
significant.
Product Development - 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.
Advertising and Promotion - Costs associated with advertising and promoting
products are expensed as incurred.
Long-Lived Assets - Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable or whenever management has committed to a plan to dispose
of the assets. Such assets are carried at the lower of book value or fair value.
An asset is considered impaired when estimated future undiscounted cash flows
are less than the carrying amount of the asset. In the event the carrying amount
of such asset is not deemed recoverable, the asset is adjusted to its estimated
fair value.
Net Income (Loss) Per Common Share - Basic net income per common share is
calculated by dividing net income by the weighted average number of common
shares outstanding during the period. Diluted net income per common share is
calculated by dividing net income by the weighted average number of shares
outstanding plus all additional common shares that would have been outstanding
if potentially dilutive common shares had been issued. For the net loss in
fiscal year 2000, the number of shares used for basic and diluted net income per
-40-
share is the same, because the effect of including the additional 111,383
potentially dilutive common shares would be antidilutive.
The following table reconciles the number of shares utilized in the net income
(loss) per share calculations:
Years Ended December 31,
-----------------------------------------------------------
2000 1999 1998
Numerator - income (loss) available
to common shareholders $(10,900,885) $ 3,018,031 $6,240,034
Denominator - weighted average number
of common shares outstanding:
Common shares-- basic 13,857,294 10,653,247 9,412,497
Effect of dilutive stock options 240,146 23,280
------------ ----------- ----------
Common shares-- diluted 13,857,294 10,893,393 9,435,777
============ =========== ==========
Stock Split - A 216.017-for-1 split of the Company's common stock was effected
on May 12, 1999. All references in the financial statements to shares, share
prices, per share amounts and stock plans have been adjusted retroactively to
reflect the split.
Deferred Income Taxes - The Company uses an asset and liability approach for
financial accounting and reporting for income taxes. Deferred income taxes are
provided for temporary differences in the bases of assets and liabilities as
reported for financial statement purposes and income tax purposes.
Pro forma Consolidated Income Statement Data - The unaudited pro forma results
of operations information includes a pro forma income tax provision for each of
the two years ended December 31, 1999 and 1998, assuming effective tax rates of
52.7% and 37.6%, respectively (see Note 12), comparable to what would have been
reported had Jore operated as a C Corporation during the years ended December
31, 1998 and the entire year ended December 31, 1999. Prior to the Company's
IPO, it was treated as an S corporation for income tax purposes.
Extraordinary Item - On August 27, 1999, the Company recorded an extraordinary
expense of approximately $1.0 million from the termination of its operating line
of credit. The extraordinary expense consisted of a prepayment penalty and the
remaining unamortized financing costs, net of taxes. The proceeds to extinguish
the debt came from a newly established credit line.
Recent Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, as amended, Accounting for Derivative
Instruments and Hedging Activities, and established standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. The standard is effective for the Company on
January 1, 2001. The adoption of SFAS No. 133 did not have a material effect on
the Company.
-41-
Financial Instruments - Financial instruments consist of cash and cash
equivalents, short-term investments, accounts receivable, notes receivable,
accounts payable and long-term debt. The carrying value of cash and cash
equivalents, short-term investments, notes receivable, and accounts payable
approximates fair value because of the short-term maturity of those instruments.
The Company has estimated the fair value of accounts receivable discounted based
on average outstanding days, at the interest rate of the Company's credit line
at December 31, 2000. The fair value of long-term debt with variable interest
rates approximates the carrying amount as the borrowings are at adjustable
interest rates which reprice based on fluctuations in market conditions and the
level of operating cash flow of the Company. The fair value of the Company's
long-term debt with fixed interest rates was based on the estimated equivalent
rate on the last business day of the year. The following is a summary of the
carrying amounts and estimated fair values for the Company:
2000 1999
----------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
As of December 31 Amount Fair Value Amount Fair Value
Cash and cash equivalents $ 353,174 $ 353,174 $ 94,283 $ 94,283
Short-term investments 124,169 124,169 7,691,791 7,676,100
Accounts receivable 16,081,543 15,580,683 19,031,479 18,703,640
Notes receivable 24,754 24,754 11,799 11,799
Accounts payable 11,943,635 11,943,635 7,255,786 7,255,786
Long-term debt - variable 8,941,217 8,941,217 11,083,331 11,083,331
Long-term debt - fixed 33,359,236 33,270,927 20,226,109 20,138,032
Comprehensive Income - The Company classifies components of other comprehensive
income by their nature in the financial statements and displays the accumulated
balance of other comprehensive income as a separate component of shareholder's
equity in the consolidated balance sheets. There were no other components of
comprehensive income other than the net income (loss) during the periods covered
by the accompanying financial statements.
Significant Customers - A majority of the Company's sales are concentrated among
a few major customers. Sales to customers who individually accounted for 10% of
total sales for each of the three years in the period ended December 31, 2000
and receivables from customers who individually accounted for 10% of total
receivables at December 31, 2000 and 1999 are as follows:
2000 1999 1998
Sales to:
Customer A 55.8% 58.3% 60.2%
Customer B 15.6 2.7 0.0
Customer C 9.7 22.8 17.2
Customer D 8.5 10.0 14.5
----- ----- -----
89.6 93.8 91.9
All other customers 10.4 6.2 8.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
-42-
2000 1999
Receivables from:
Customer A 72.9% 69.5%
Customer B 10.3 0.0
Customer C 2.7 18.1
----- -----
85.9 87.6
All other customers 14.1 12.4
----- -----
100.0% 100.0%
===== =====
Sales are made without collateral and bad debt expense for the years ended
December 31, 2000, 1999 and 1998 was $151,234, $56,645, and $-0-, respectively.
Interest Costs - Interest costs are capitalized for assets that are constructed
or produced by/for the Company. Capitalized interest costs for the years ended
December 31, 2000 and 1999 were $2.1 million and $1.1 million, respectively.
Reclassifications - Certain prior year balances have been reclassified to
conform to the current year classifications.
-43-
SHORT-TERM INVESTMENTS
Short-term investments as of December 31, 2000 and 1999 consist of the
following:
2000 1999
Certificates of deposit $ 124,169 $ 558,712
FNMA securities 4,143,105
U.S. Treasury notes 2,989,974
---------- ----------
Short term investments $ 124,169 $7,691,791
========== ==========
4. INVENTORIES
Inventories consist of the following as of December 31, 2000 and 1999
(work-in-progress includes finished sub-assemblies, which can be sold in bulk or
added to a packaged set):
2000 1999
Component parts/raw materials $ 10,464,839 $ 13,135,170
Work-in-progress 11,077,262 11,880,460
Finished goods 6,438,675 3,268,239
Obsolescence reserve (1,774,649) (488,585)
------------ ------------
Inventories $ 26,206,127 $ 27,795,284
============ ============
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following as of December 31, 2000
and 1999:
2000 1999
Buildings and leasehold improvements $ 12,468,396 $ 7,478,959
Land and land improvements 2,579,985 2,557,169
Plant, tooling, packaging equipment 53,920,033 24,436,751
Office equipment and furniture 3,149,867 2,264,524
Vehicles 109,259 279,654
Construction-in-progress 241,401 3,828,129
Machinery-in-progress 16,757,511 22,212,966
------------ ------------
89,226,452 63,058,152
Accumulated depreciation (9,343,963) (4,497,227)
------------ ------------
Property, plant, and equipment, net $ 79,882,489 $ 58,560,925
============ ============
-44-
6. OTHER CURRENT ASSETS
Other current assets consist of the following as of December 31, 2000 and 1999:
2000 1999
Deferred tax assets $1,394,956 $ 440,726
Supplies inventory 1,072,063 767,648
Barter credits 1,024,816
Prepaid expenses and other 885,099 1,207,531
Income tax receivable 131,097
Other receivables 27,720 47,704
Notes receivable 30,900
---------- ----------
Other current assets $4,535,751 $2,494,509
========== ==========
7. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following as of December 31, 2000 and
1999:
2000 1999
Notes payable at 6.75% $660,346
Income taxes payable 109,933
Other current liabilities 702
-------- --------
Other current liabilities None $770,981
======== ========
8. LINE OF CREDIT
The Company has an accounts receivable and inventory revolving line of credit
with First Security Bank with a maximum borrowing limit of $35 million at
December 31, 2000.
Advances on the line are limited to 85% of eligible accounts receivable and 65%
of inventory. Interest on the revolving credit line advances is at prime plus
one-half of a percent or LIBOR plus 3% at the Company's option (10.25% and 9.00%
at December 31, 2000 and 1999, respectively). The term of the agreement is
through August 2001, and the agreement contains personal guarantees by certain
Company shareholders. Outstanding advances on the line at December 31, 2000 were
$35 million. This line is secured by receivables, inventory, patents and general
intangibles.
The line of credit requires the following financial ratio covenants: (i) current
ratio not less than 1:1; (ii) leverage ratio not to exceed 2.5 to 1; and (iii)
funded debt to EBITDA not to exceed 4.25 to 1. As of December 31, 2000, the
Company was not in compliance with any of these covenants.
The bank and the Company completed and signed a forbearance agreement related to
the line of credit on March 21, 2001 that provides an over
-45-
advance limit of $8.1 million. The Company's borrowing base on March 21, 2001
supported approximately $21 million in borrowings and the agreement allows
borrowings up to $29 million. As of March 21, 2001, the Company is currently
over advanced by approximately $7.5 to $8.0 million. This forbearance extends to
April 30, 2001, at which point it will again be reviewed.
9. LONG-TERM DEBT
As of December 31, 2000 and 1999, the Company has entered into numerous
long-term borrowings with various financial institutions, primarily to finance
the purchase of manufacturing equipment. Unless otherwise noted, the following
long-term obligations require monthly principal and interest payments, and are
secured by underlying equipment.
2000 1999
Notes payable:
Due July 2002, interest at 9.87%* $ 141,025 $ 219,172
Due January 2003, interest at prime plus 2%*
(11.50% at December 31, 2000) 59,194 85,529
Due March 2003, interest at 8.90% 869,778
Due March 2003, interest at 8.90% 934,905
Various notes payable due November 2003*
through June 2004, interest rates from 7.00% to 9.00% 49,124 67,959
Due June 2004, interest at 9.37% 440,156 533,069
Due June 2004, interest at 9.66% 474,892 583,688
Due October 2004, interest at 8.96%* 519,004 627,626
Due October 2004, interest at 8.96%* 692,010 836,837
Due December 2004, interest at 8.97%* 1,485,045 1,780,531
Due December 2004, interest at 8.97%* 421,916 505,850
Due December 2004, interest at 9.74%* 231,394 276,518
Due December 2004, interest at 9.87%* 78,498 93,754
Due February 2005, interest at 8.85% 567,248 677,231
Due August 2005, interest at 7.8% 631,444 741,669
Due October 2005, interest at 8.095% 637,113 742,572
Due January 2020, interest at 9.00% 2,500,000
Due January 2020, interest at 9.00%* 8,483,984
----------- -----------
Total notes payable $15,846,952 $11,141,783
=========== ===========
*As of December 31, 2000, these notes are in violation of debt covenants or
default provisions.
-46-
Capital lease obligations
Various leases due July 2001 to December 2003,
interest from 6.844% to 18.924% $ 99,013 $ 173,641
Due November 2002, interest at 7.990% 7,168 10,937
Due June 2003, interest at 7.9% 14,548 19,732
Various leases due November 2004 to July 2005,
interest from 6.658% to 6.759% 85,267 102,106
Due July 2005, interest at 9.121%* 335,628 385,659
Due July 2005, interest at 8.447%* 767,211 884,356
Due October 2005, interest at 7.771%* 556,362 637,607
Due November 2005, interest at 10.219% 202,707
Due December 2005, interest at 7.996%* 300,386 342,258
Due January 2006, interest at 7.148% 32,520
Due January 2006, interest at 8.13%* 382,890 447,302
Due April 2006, interest at 8.271%* 295,718 333,774
Due June 2006, interest at 8.926%* 249,714 283,394
Due June 2006, interest at 9.495%* 1,565,244 1,772,263
Due June 2006, interest at 8.916%* 1,282,592 1,455,645
Due July 2006, interest at 8.924%* 421,973 477,818
Due August 2006, interest at 9.140%* 169,163 190,966
Due August 2006, interest at 9.140%* 767,537 866,460
Due September 2006, interest at 9.172%* 715,136 805,493
Due November 2006, interest at 9.275%* 3,028,965 3,396,419
Due February 2007, interest at 9.250% 79,710
Due February 2007, interest at 9.250% 114,631
Due March 2007, interest at 9.250% 685,875
Due March 2007, interest at 9.250% 399,584
Due March 2007, interest at 9.724%* 2,295,073
Due April 2007, interest at 9.230%* 1,293,340 1,446,623
Due April 2007, interest at 9.250% 1,120,699
Due April 2007, interest at 9.233%* 960,143
Due April 2007, interest at 9.233%* 799,572
Due May 2007, interest at 9.250% 1,810,000
Due June 2007, interest at 9.261%* 2,317,412
Due June 2007, interest at 9.261%* 1,947,625
Due July 2007, interest at 8.954%* 729,477
Due July 2007, interest at 9.250% 630,000
Due September 2007, interest at 10.642%* 582,533
Due November 2007, interest at 10.00%* 617,429
Due December 2007, interest at 9.196%* 3,282,550
Due December 2007, interest at 9.500%* 178,078 1,181,022
Due January 2008, interest at 9.500%* 170,527 113,685
------------ ------------
Total capital lease obligations 26,453,501 20,167,659
------------ ------------
Total long-term debt 42,300,453 31,309,440
Less current portion (38,898,805) (3,530,287)
------------ ------------
Total long-term debt $ 3,401,648 $ 27,779,153
============ ============
-47-
*As of December 31, 2000, these capital lease obligations were in violation of
debt covenants or default provisions.
As of December 31, 2000, scheduled future maturities of long-term debt are as
follows:
Obligations under
Notes Payable Capital Leases Total
Year ending December 31:
2001 $ 1,644,062 $ 5,976,272 $ 7,620,334
2002 1,768,755 5,821,954 7,590,709
2003 2,714,594 5,804,150 8,518,744
2004 1,797,275 5,789,800 7,587,075
2005 487,989 5,880,308 6,368,297
Thereafter 7,434,277 6,457,096 13,891,373
----------- ------------ ------------
Subtotal 15,846,952 35,729,580 51,576,532
Less amounts representing interest -- (9,276,079) (9,276,079)
----------- ------------ ------------
$15,846,952 $ 26,453,501 $ 42,300,453
=========== ============ ============
Several of these long-term debt obligations have financial covenant requirements
which were not met as of December 31, 2000. Accordingly, long-term debt totaling
$33.6 million, has been classified as a current liability.
The Company has requested from its nineteen equipment lenders a three-month
forbearance on all interest and principal due them. As of March 21, 2001, seven
of the nineteen lenders have agreed to this forbearance and the remaining twelve
lenders have requested additional information.
10. SHAREHOLDERS' EQUITY
Authorized Shares - On May 11, 1999, the Articles of Incorporation were amended
to increase the authorized number of shares of the Company's common stock from
50,000 to 100,000,000 shares of no par value common stock and to authorize
30,000,000 shares of no par value preferred stock. On May 12, 1999, the Company
effected a 216.017-for-1 split of the Company's common stock. All references in
the financial statements to shares, share prices, per share amounts and stock
plans have been adjusted retroactively to reflect the stock split.
Public Offering - On September 23, 1999, the Company completed an initial public
offering (the IPO) in which it raised net proceeds of $38.6 million, including
exercise of the overallotment option. A portion of the net proceeds was used to
repay debt, fund a distribution to shareholders representing previously taxed
but undistributed S corporation earnings, and acquire capital equipment.
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 of the Company. This dividend was
distributed to such shareholders on a pro rata basis depending on the number
shares of common stock held by each shareholder, and the number of days in 1999
that each shareholder held such shares. The total dividend was $4.0 million. The
difference between the S
-48-
corporation distribution and historical retained earnings consists primarily of
temporary differences between book and tax income, prior year distributions in
excess of accumulated adjustment account, effect of elimination entries and
retained earnings of the subsidiaries.
Dividend Restrictions - Under certain loan covenants associated with its line of
credit facility, the Company is restricted from declaring or paying dividends,
or from purchasing, redeeming, retiring or otherwise acquiring for value any of
its shares of stock, or from otherwise distributing property to shareholders
with some limited exceptions.
11. STOCK OPTION, STOCK WARRANTS, AND STOCK PURCHASE PLANS
1997 Stock Plan - On September 15, 1997, the Board of Directors approved the
implementation of the 1997 Stock Plan (the Stock Plan). The Stock Plan provides
employees an opportunity to purchase shares of stock which qualify as incentive
stock options under the Internal Revenue Code (the Code). Employees, outside
directors, and consultants of the Company may purchase shares of stock under
nonqualified stock options. The Stock Plan also provides for the direct award or
sale of shares to employees, outside directors, and consultants of the Company.
Options granted under the Stock Plan generally expire ten years from the date of
grant and typically vest over a period of four years such that 20% vests
immediately and an additional 20% vests after each additional year of continuous
service. As of December 31, 2000, 762,620 shares remained available out of a
total of 2,400,000 shares of stock authorized as available under the Stock Plan.
Activity and price information regarding the options are summarized as follows:
2000 1999 1998
------------------------ -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning
of year $ 1,508,166 $ 7.69 422,312 $ 4.42 None
Granted 183,916 6.84 1,089,074 8.95 422,312 $ 4.42
Exercised (23,996) 5.93 (3,220) 7.41
Cancelled (57,922) 8.76 -- -- --
----------- ---------- ----------
Outstanding at end of year 1,610,164 7.58 1,508,166 7.69 422,312 4.42
=========== ========== ==========
Options exercisable at
end of year 1,057,744 516,004 84,482
=========== ========== ===========
Weighted average fair
value of options granted
during year $ 4.91 $ 3.08 $ 0.14
=========== ========== ===========
Information regarding stock options outstanding and exercisable as of December
31, 2000 is summarized as follows:
-49-
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Outstanding at Contractual Average Outstanding Average
at
Range of December 31, Life Exercise December 31, Exercise
Exercise Prices 2000 (in years) Price 2000 Price
$4.42 406,431 7.75 $ 4.42 242,272 $ 4.42
$5.25 - 5.88 117,500 9.38 $ 5.64 89,500 $ 5.68
$7.06 - 8.81 451,080 8.41 $ 8.07 268,391 $ 7.79
$9.10 - 11.63 635,153 8.36 $ 9.43 457,581 $ 9.62
--------- --------- --------- --------- ---------
$4.42 - 11.63 1,610,164 8.29 $ 7.58 1,057,744 $ 7.69
========= ========= ========= ========= =========
The Company has elected to follow the measurement provisions of APB Opinion No.
25, under which no recognition of expense is required in accounting for stock
options granted to employees for which the exercise price equals or exceeds the
fair market value of the stock at the grant date. All options granted through
December 31, 2000 have been granted at an option price at or greater than fair
market value on the date of grant. Accordingly, the Company has recognized no
compensation expense for employees during the years ended December 31, 2000,
1999 and 1998. The Company did record compensation expense of $21,429, $24,276
and $1,623 for options granted to non-employees for the years ended December 31,
2000, 1999 and 1998, respectively.
To estimate compensation expense that would be recognized under SFAS No. 123,
Accounting for Stock-Based Compensation, the Company uses the modified
Black-Scholes option pricing model. The following assumptions for options
granted, and the corresponding compensation expense are shown in the table
below:
2000 1999 1998
Risk-free interest rate 5.67% - 6.04% 4.21% - 6.28% 4.21%
Expected volatility 78.26% 0% - 36.33% 0%
Dividend yield 0 0 0
Expected life (years) 6 2 to 6 6
Compensation expense $ 837,751 $ 583,797 $ 12,797
Net income (loss) as reported (10,900,885) 3,018,031 6,240,034
Pro forma net income (loss) (11,738,636) 2,434,234 6,227,237
Pro forma EPS - basic $(0.85) $0.23 $0.66
Pro forma EPS - diluted $(0.85) $0.22 $0.65
In February 1999, the Company granted nonqualified options to purchase 311,064
shares of common stock to certain directors. The options are fully vested. These
nonqualified options were granted outside of the Stock Plan. Because these fall
under APB 25 there is no compensation value recognized.
In February 1999, the Company granted warrants to purchase 11,881 shares of the
Company's common stock in exchange for services to be provided in connection
with the Company's IPO.
-50-
On April 7, 1999, the Company closed a loan for $2 million from D.A. Davidson &
Co., who were the managing underwriters of the Company's IPO. The rate is 6.5%
plus warrants to purchase 71,933 shares of common stock at an exercise price of
$10.00 per share. The debt was subsequently paid at the closing of the IPO. The
warrants expire three years from the date of grant.
From June 4 to June 11, 1999, the Company closed short-term loans with various
unrelated parties for a total of $4,045,000. Rates range from 6.5% to 7.0% plus
warrants to purchase 201,800 shares of the Company's common stock at $9.10 to
$10.00 per share. All except $146,909 was paid at the closing of the IPO. The
warrants expire three years from the date of grant, and have an estimated fair
value of $174,600. The proceeds of the debt were allocated between the debt and
the warrants based on the relative fair value of the two securities on the date
of issuance. The portion allocated to the warrants is being accreted to interest
expense over the term of the debt agreement.
From July 14 to August 9, 1999, the Company closed short-term loans with various
unrelated parties for a total of $7,390,000. Rates range from 6.5% to 7% plus
warrants to purchase 325,600 shares of the Company's common stock at $9.10 to
$10.00 per share. All except $513,438 was subsequently paid at the closing of
the IPO. The warrants expire three years from the date of the grant, and have an
estimated fair value of $137,299. The proceeds of the debt were allocated
between the debt and the warrants based on the relative fair value of the two
securities on the date of issuance. The portion allocated to the warrants is
being accreted to interest expense over the term of the debt agreement.
On December 22, 2000, the Company closed a transaction with a private investor,
issuing 37,500 shares and a warrant to purchase 15,000 shares of common stock of
the Company at an exercise price of $5.00. The warrant extends for three years
from the date of the grant and has an estimated fair value of $16,476. The
proceeds from this transaction were used for general corporate purposes.
1999 Employee Stock Purchase Plan - Under the Company's Employee Stock Purchase
Plan, the Company is authorized to issue up to 1,000,000 shares of common stock
to its eligible employees who work more than 20 hours each week and are employed
more than five months in any calendar year. Employees who own 5% or more of the
Company's common stock are not eligible to participate in the Plan. Under the
terms of the Plan, eligible employees can choose payroll deductions each year of
up to 15% of their gross base pay. Such deductions are applied toward the
discounted purchase price of the common stock. The purchase price of the common
stock is 85% of the fair market value of the stock as defined in the Plan.
Approximately 40% of eligible employees have participated in the Plan since its
inception on December 31, 1999. Under the Plan, the Company sold 29,675 shares
to employees in 2000.
12. INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31, 2000 and 1999:
-51-
2000 1999
Current income tax expense (benefit)
Federal $ (64,196) $ 216,363
State (31,025)
----------- ----------
Total current income tax expense (benefit) (95,221) 216,363
----------- ----------
Deferred income tax expense (benefit)
Federal (1,448,220) 2,105,057
State (880,307) 223,470
----------- ----------
Total deferred income tax expense (benefit) (2,328,527) 2,328,527
----------- ----------
Total income tax expense (benefit) $(2,423,748) $2,544,890
=========== ==========
A reconciliation of the federal statutory income tax rate and the Company's
effective income tax rates follows:
Year Ended December
------------------------------------------------
2000 1999 1998
(Pro forma) (Pro forma)
Federal statutory income tax rate (34.0)% 34.0% 34.0%
State income taxes (4.5) 4.5 4.5
Native American employment credit (0.8) (2.9) (1.2)
Foreign sales corporation (0.1) (1.5) --
Meals and entertainment 0.1 0.2 0.2
Other (0.9) (0.8) 0.1
Conversion to C Corporation 19.2
Valuation allowance 22.0 -- --
----- ---- ----
Effective tax rate (18.2)% 52.7% 37.6%
===== ==== ====
-52-
The components of the net deferred tax assets and liabilities recognized on the
accompanying balance sheets are as follows:
2000 1999
----------------------------------- ---------------------------------
Current Long-Term Current Long-Term
Deferred tax assets:
Net operating loss carryover $ $ 8,033,301 $ -- $ --
Inventory obsolescence reserves 540,317 268,000
Allowance for sales returns
and bad debts 701,908 22,000
Accrued vacation and wages 152,731 151,000
General business credits
carryover 240,668
Valuation allowance (2,447,003)
---------- ----------- -------- -----------
Total deferred tax assets $1,394,956 $ 5,826,966 $441,000 $ --
---------- ----------- -------- -----------
Deferred tax liabilities:
Depreciation (6,741,638) (2,769,000)
Other (480,284)
---------- ----------- -------- -----------
Total deferred tax liabilities (7,221,922) (2,769,000)
---------- ----------- -------- -----------
Net deferred income tax
asset (liability) $1,394,956 $(1,394,956) $441,000 $(2,769,000)
========== =========== ======== ===========
As of December 31, 2000, the Company has recorded a valuation allowance of
approximately $2.4 million against its deferred tax assets. The Company had
available at December 31, 2000 unused tax operating loss carryovers of
approximately $20.9 million, which may be applied against future taxable income,
and expire in 2020.
Pro Forma Income Taxes (Unaudited) - Prior to filing its IPO, the Company and
its subsidiaries elected S Corporation status, under the Internal Revenue Code.
As discussed in Note 2 and in connection with the IPO, the Company's S
Corporation status was terminated and the Company became subject to federal and
state income taxes applicable to C corporations. The accompanying consolidated
statements of operations reflect a pro forma income tax provision or benefit for
all periods prior to the Company's IPO.
13. RELATED PARTY TRANSACTIONS
Jore Land, LLC (Jore Land), is owned by the Company's majority shareholder and
owned certain real property leased to the Company under an agreement that was to
expire on September 30, 2003, with an option to renew for an additional five
year term. The lease was accounted for as an operating lease. Amounts paid under
this lease during the years ended December 31, 2000, 1999, and 1998 were $-0-,
$42,000, and $84,000, respectively. On February 1, 1999, the Company acquired an
option to purchase approximately 40 acres of land and the attached construction
improvements, including the property referred to above, at fair market value
from Jore Land, LLC. On June 28, 1999, the Company exercised the option, for
payment of $2.7 million, and the lease was terminated.
At December 31, 2000, 1999, and 1998, Jore Land owed the Company the net amounts
of $-0-, $9,999 and $34,102, respectively.
-53-
Periodically, the Company's employees perform work for Jore Land in
administrative and technical areas, such as engineering and accounting. Charges
for these types of services by the Company for the years ended December 31,
2000, 1999, and 1998 were $-0-, $20,417, and $10,157, respectively.
Shareholder notes receivable totaling $1.1 million and $1.6 million at December
31, 2000 and 1999, respectively, are due on demand and bear interest at 6%. The
total amount of interest income earned in 2000 and 1999 from shareholder notes
was $121,570 and $54,589, respectively.
Shareholder notes payable are due on demand and bear interest at 10%. The total
amount of accrued interest expense in 2000 and 1999 from shareholder notes was
$13,009 and $143, respectively.
Beginning January 1, 1998, the Company's sales affiliate, Manufacturers
Specialty Marketing, Inc. (MSM), received a commission on Company sales, which
amounted to $1,785,913 during the year ended December 31, 1998. Of this amount,
$225,279 was payable at year-end 1998. Beginning January 1, 1999, most Company
sales were made through Manufacturers' Sales Associates, LLC (MSA), an affiliate
of MSM. MSA receives a commission on most Company sales. The agreement
terminates upon notice by either party at least 60 days in advance of the
intended termination date. MSM was owned 100% by one non-employee director of
Jore and one other non-employee former director of the Company. MSA is owned by
the same two individuals and four other non-employee salesmen who market the
Company's products. Commissions earned by MSA for the years ended December 31,
2000 and 1999 were $1,380,817 and $1,245,424, respectively. As of December 31,
2000 and 1999, the Company had prepaid commissions to MSA of $412,791 and
$298,608, respectively.
MBJ Flying Service, a company owned by the father of the Company's majority
shareholder, provides aviation services to the Company. Total payments to MBJ
Flying Service during the years ended December 31, 2000 was $60,178. There were
no payments made in 1999 or 1998.
Printing Press, Incorporated (PPI), a company partially owned by a former
non-employee director and shareholder of the Company, provides packaging
services to the Company. Total purchases from PPI during the years ended
December 31, 2000, 1999, and 1998 were $1,880,653, $2,597,810, and $2,003,062,
respectively. Related accounts payable balances at December 31, 2000 and 1999
were $132,975 and $256,775, respectively.
The Company has entered into consulting agreements with a non-employee director
of the Company. Total fees incurred during the years ended December 31, 2000 and
1999 were $107,916 and $16,667, respectively. An additional $90,417 will be
incurred in 2001 under this agreement.
Affiliates of a non-employee director of the Company were participants in a
bridge loan facility, which was closed in June 1999 and repaid in full in
October 1999. The affiliates of the director received warrants for 20,000 shares
of Company common stock at a purchase price of $9.10, exercisable for 3 years
from their date of issuance. The warrants have an estimated fair value of
$18,698.
-54-
14. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company has noncancellable operating leases for various
property and equipment. These leases expire at various times over the next five
years. A material portion of the leases are for manufacturing equipment. The
agreements pertaining to the manufacturing equipment are five-year leases with
two one-year renewal options. The majority of these operating leases were
amended to become capital leases in November of 1999. Their maturities are
reflected in the debt footnote disclosure.
Rent expense for each of the years ended December 31, 2000, 1999, and 1998
totaled $277,781, $535,618, and $301,181, respectively. Future minimum lease
payments required under operating leases are as follows:
Year ending December 31:
2001 $366,243
2002 251,868
2003 264,598
2004 210,204
2005 140,135
Thereafter None
License Agreements - In January 1998, the Company entered into an agreement with
a third party for its interest in one invention. The Company pays the party a
fee based on the manufacturing cost and the Company's margin related to this
invention. Expenses for the years ended December 31, 2000 and 1999 were $17,592
and $41,090, respectively.
On April 28, 1999, the Company signed an agreement with The Stanley Works that
grants the exclusive license to the Stanley(R) brand name for all power tool
accessories for a contracted royalty rate. The terms of the agreement are
through December 2004, and may be renewed by the Company through December 2009.
Royalties paid to The Stanley Works as of December 31, 2000 and 1999 were
$110,000 and $117,336, respectively.
On December 27, 1999, the Company signed agreements with The Norton Company, to
purchase substantially all of the Company's grinding wheels, abrasives and
surface preparation products from Norton or its affiliates. The terms of the
agreement are through December 2004. In exchange for this purchasing agreement,
the Company obtained an exclusive, royalty-free license to use the name
"Speed-Lok(TM)" for sales of drilling and driving products in North America for
an indefinite duration. There are no minimum purchase volumes or fixed pricing
agreements required. If the supply arrangements are terminated, the Company will
be required to pay a royalty of 3% on all "Speed-Lok(TM)" product sales annually
to Norton, with a minimum royalty of $500,000.
Purchase Commitments - In May 1999, the Company entered into a strategic
alliance agreement with a manufacturer of certain proprietary equipment. The
manufacturer agreed to produce and sell to the Company this equipment for five
years on an exclusive basis provided it purchases approximately $5.3 million in
equipment each year. In addition to the minimum purchases, the Company must pay
an additional $1.0 million to the principal of the manufacturer for consulting
services in placing the equipment in service, of which $400,000 was payable
during the first year and $200,000 in each subsequent year until fully paid. In
exchange for these payments, the Company will receive exclusive access to the
-55-
equipment and its proprietary design for the five-year period. This equipment is
being financed through capital leases under a master lease agreement. The
Company is currently in litigation with the manufacturer regarding its sale of
the exclusive equipment to competitors of the Company. Pursuant to the
litigation, the Company is no longer purchasing or taking delivery of additional
equipment. See discussion below at Litigation.
Research and Development Agreements - During 1999, the Company entered into two
agreements with a third party to accomplish certain product research and
development. The two agreements require total payments of $500,000. Total
payments to date under this agreement are $309,566.
Product Warranty Reserve - In the past, the Company experienced minimal returns
of manufactured products. Therefore, the financial statements do not include a
product warranty reserve at December 31, 2000 or 1999.
Litigation - In December 2000, the Company entered into litigation with
International Tool Machines of Florida, Inc. ("ITM"), the manufacturer and
supplier of its proprietary drill bit manufacturing machinery. Management
believes that ITM has violated its exclusive dealing and nondisclosure
agreements with the Company as well as a previous settlement agreement with ITM
with respect to previous breach of contracts. The Company seeks to prevent ITM
from selling these or similar machines to others. ITM has filed several
counterclaims alleging breach of contract and damages.
If ITM is permitted to sell the Company's proprietary drill bit manufacturing
equipment to third parties, including its competitors, it would lose its
exclusive right to these technologically advanced drill bit manufacturing
machines. An unfavorable outcome to the Company in this matter could have a
material adverse effect on the Company's competitive position in the drill bit
market. No estimate of the range of possible loss can be made at this time.
The Company is, from time to time, a party to various other legal actions and
administrative proceedings and subject to various other claims arising in the
ordinary course of business. The Company and its legal counsel believe the
disposition of these matters will not have a material adverse effect on the
financial position or operations of the Company.
15. RESTATEMENT
Subsequent to the issuance of the consolidated financial statements for the year
ended December 31, 1999, the Company's management determined that the net
deferred tax liability resulting from the conversion to a C corporation from an
S corporation should have been recorded as income tax expense rather than a
direct reduction of equity in the 1999 consolidated financial statements. As a
result, the accompanying 1999 consolidated financial statements have been
restated from the amounts previously reported to give effect to the correction
of this item. The effect of the restatement is an increase in income tax expense
from $633,238 to $2,544,890, a decrease in income before extraordinary items
from $5,843,635 ($0.55 and $0.54 per basic and diluted share) to $3,931,983
($0.37 and $0.36 per basic and diluted share), and a decrease in net income from
$4,929,683 ($0.46 and $0.45 per basic and diluted share) to $3,018,031 ($0.28
and $0.28 per basic and diluted share) for the year ended December 31, 1999. Net
equity for the related period did not change.
-56-
Previously reported quarterly results for 2000 have also been restated to
reflect unfavorable inventory variances that were identified in the fourth
quarter. See further discussion at Note 16.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Subsequent to the issuance of the Company's unaudited interim financial
statements on a Form 10-Q for the period ended September 30, 2000, the Company's
management determined that approximately $4.6 million of a total $9.8 million in
2000 inventory and manufacturing variance adjustments recorded to cost of sales
in the fourth quarter should have been recorded in the previous interim periods.
As a result, the interim results of operations for the quarters ended March 31,
June 30, and September 30, 2000 have been restated from the amounts previously
reported in the Company's Form 10-Q's. A summary of the unaudited quarterly
financial information including the effects of the restatement is as follows:
(Quarter Ended)
(In Thousands, except for per share information) (Unaudited)
-----------------------------------------------------------------------------------
March 31, June 30, September 30, December 30,
2000 2000 2000 2000
---------------------- --------------------- --------------------- ------------
As As As
Previously As Previously As Previously As
Reported Restated Reported Restated Reported Restated Total
Net revenues $ 7,063 $ 7,063 $ 9,018 $ 9,018 $ 15,870 $ 15,870 $ 20,896 $ 52,847
Cost of goods sold 4,988 5,733 7,086 8,359 10,862 12,569 20,605 47,266
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 2,075 1,330 1,932 659 5,008 3,301 291 5,581
Operating expenses:
Productdevelopment 110 110 339 339 397 397 439 1,285
Sales and marketing 483 483 1,163 1,163 1,575 1,575 4,178 7,399
General and
administrative 1,679 1,679 1,558 1,558 1,628 1,628 1,443 6,308
-------- -------- -------- -------- -------- -------- -------- --------
Total operatingexpenses 2,272 2,272 3,060 3,060 3,600 3,600 6,060 14,992
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations (197) (942) (1,128) (2,401) 1,408 (299) (5,769) (9,411)
Other expense (income) 608 608 948 948 1,053 1,053 1,305 3,914
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income tax (805) (1,550) (2,076) (3,349) 355 (1,352) (7,074) (13,325)
Income tax benefit (282) (282) (714) (609) (101) (246) (1,287) (2,424)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (523) $ (1,268) $ (1,362) $ (2,740) $ 254 $ (1,106) $ (5,787) $(10,901)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share:
Basic $ (0.04) $ (0.09) $ (0.10) $ (0.20) $ 0.02 $ (0.08) $ (0.42) $ (0.79)
Diluted $ (0.04) (0.09) $ (0.10) $ (0.20) $ 0.02 $ (0.08) $ (0.42) $ (0.79)
Weighted average
common shares
Outstanding:
Basic 13,836 13,836 13,844 13,844 13,867 13,867 13,857 13,857
Diluted 13,836 13,836 13,844 13,844 13,932 13,867 13,857 13,857
-57-
The results for 2000 were adversely affected by the $9.8 million in costs
relating to inventory and manufacturing variances generated from production
inefficiencies and start-up costs. Of the total costs, $5.9 million was
comprised of excess manufacturing and labor costs associated with start-up for
the nationwide rollout of the Company's fast-change products at The Home Depot,
construction and implementation of a new distribution center, and deployment of
capital equipment for the Company's continuing vertical integration efforts.
These inefficiencies and costs also were related to building product in
anticipation of higher revenue for the year. The Company experienced an
unexpected softness in the retail market in the fourth quarter and was unable to
rapidly scale back production. The remaining $3.9 million of the costs was
comprised of physical count variances, extraordinary freight charges, and
purchase price variances.
The following is a summary of unaudited quarterly financial information for the
year ended December 31, 1999:
--------------------------------------------------------------
QUARTER ENDED
--------------------------------------------------------------
(In Thousands)
Sept. 30, 1999 Total
March 31, June 30, As As Dec. 31, As As
1999 1999 Previously Restated, 1999 Previously Restated,
Reported see Note 15 Reported see Note 15
Net revenues $9,798 $8,259 $14,378 $ 14,378 $21,436 $53,871 $53,871
Cost of goods sold 6,858 5,886 9,282 9,282 13,287 35,313 35,313
------ ------ ------- -------- ------- ------- -------
Gross profit 2,940 2,373 5,096 5,096 8,149 18,558 18,558
------ ------ ------- -------- ------- ------- -------
Operating expenses:
Product development 117 109 268 268 127 621 621
Sales and marketing 376 382 822 822 1,648 3,228 3,228
General and administrative 1,150 1,167 1,618 1,618 1,519 5,454 5,454
------ ------ ------- -------- ------- ------- -------
Total operating expenses 1,643 1,658 2,708 2,708 3,294 9,303 9,303
------ ------ ------- -------- ------- ------- -------
Income from operations 1,297 715 2,388 2,388 4,855 9,255 9,255
Other expense 457 598 1,069 1,069 654 2,778 2,778
------ ------ ------- -------- ------- ------- -------
Income before income tax 840 117 1,319 1,319 4,201 6,477 6,477
Income tax expense 7 25 1,937 601 633 2,545
------ ------ ------- -------- ------- ------- -------
Income (loss) before
extraordinary item 840 110 1,294 (618) 3,600 5,844 3,932
Extraordinary item 914 914 914 914
------ ------ ------- -------- ------- ------- -------
Net income (loss) $ 840 $ 110 $ 380 $ (1,532) $ 3,600 $ 4,930 $ 3,018
====== ====== ======= ======== ======= ======= =======
Certain amounts in prior quarters have been reclassified to conform to current
presentation.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the Directors of the Company is set forth in the
Proxy Statement relating to the Company's annual meeting of stockholders to be
held on June 4, 2001 (the "Proxy Statement") under the heading "Election of
Directors," which information is incorporated herein by reference. Information
regarding the executive officers of the Company is included as Item 4A of Part I
of this Form 10-K. Information required by Item 405 of Regulation S-K is set
forth in the Proxy Statement under the heading "Compliance with Section 16(a) of
the Securities Exchange Act of 1934," which information is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the captions
"Board of Directors" and "Executive Compensation" in the Company's Proxy
Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
management is set forth under the caption "Security Ownership of Management and
Other Beneficial Owners" in the Company's Proxy Statement, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is set
forth under the caption "Certain Relationships and Related Transactions" in the
Company's Proxy Statement, which information is incorporated herein by
reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements. The following financial statements of the
Company and the report of the independent public accountants
thereon, are included in this Form 10-K.
Report of Independent Public Accountants
Balance Sheets as of December 31, 2000 and
December 31, 1999
Statements of Operations for the years ended December
31, 2000, 1999 and 1998
Statements of Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998
Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because the
required information is included in the consolidated financial statements or the
notes thereto, or is not applicable or required.
3. Exhibits
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Description of capital stock contained in the Amended
and Restated Articles (See Exhibit 3.1)
4.2 Description of rights of security holders contained in
the Bylaws (See Exhibit 3.2)
4.3 Form of common stock certificate (1)
4.4 Form of Common Stock Warrant issued in pre-IPO bridge
financing
4.5 Form of Registration Rights Agreement executed in
pre-IPO bridge financing
10.1 Amended and Restated Jore Corporation 1997 Stock Plan
(1)
10.1.1 Amendment dated October 25, 1999 to the Amended and
Restated Jore Corporation 1997 Stock Plan (2)
10.2 Common Stock Purchase Option, dated February 10, 1999,
between Jore Corporation and William M. Steele, Trustee
of the Steele Family Trust
10.4 Exclusive Supply Agreement, dated October 1, 1998,
between Jore Corporation and Sears, Roebuck and Co.
*(1)
10.8 Master Equipment Lease Agreement, dated July 6, 1998,
between Key Corp and Jore Corporation (1)
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10.9 Interim funding Loan and Security Agreement, dated
March 3, 1999, between Key Corp Leasing and Jore
Corporation (1)
10.10 Patent Assignment, dated January 1, 1999, between Jore
Corporation and Matthew Jore (1)
10.12 Patent Assignment, dated January 1, 1999, between Jore
Corporation and Matthew Jore (1)
10.13 Patent Assignment, dated January 1, 1999, between Jore
Corporation and Matthew Jore (1)
10.14 Form of Lock-up Agreement executed by certain of Jore
Corporation's shareholders (1)
10.15 Patent Assignment, dated April 2, 1999, between Jore
Corporation and Matthew Jore (1)
10.16 License Agreement, dated April 28, 1999, by and among
Stanley Logistics, Inc., The Stanley Works and Jore
Corporation*(1)
10.18 Patent Assignment, dated January 1, 1999, between Jore
Corporation and Matthew Jore (1)
10.19 Limited Craftsman(R) Trademark License Agreement, dated
May 3, 1999, between Sears, Roebuck and Co. and Jore
Corporation (1)
10.20 Sales and Marketing Agreement, dated January 1, 1999,
between Jore Corporation and Manufacturers' Sales
Associates, LLC*(1)
10.21 Employment Agreement, dated June 8, 1999, between
Matthew B. Jore and Jore Corporation (1)
10.22 Purchase Agreement, dated April 7, 1999, between DADCO
and Jore Corporation (1)
10.23 Guaranty, dated April 7, 1999, given by Matthew B. Jore
to DADCO (1)
10.24 Purchase Agreement, dated June 4, 1999, between Blaine
Huntsman and Jore Corporation (1)
10.25 Guaranty, dated June 4, 1999, given by Matthew B. Jore
to Blaine Huntsman (1)
10.26 Registration Rights Agreement, dated June 4, 1999,
between Jore Corporation and Blaine Huntsman (1)
10.27 Independent Contractor Agreement, dated June 30, 1999,
between Thomas E. Mahoney and Jore Corporation (1)
10.27.1 First Amendment to Independent Contractor Agreement,
dated July 23, 1999, between Thomas E. Mahoney and Jore
Corporation
10.27.2 Second Amendment to Independent Contractor Agreement,
dated September 30, 1999, between Thomas E. Mahoney and
Jore Corporation
10.28 Strategic Alliance Agreement, dated May 7, 1999,
between Jore Corporation and International Tool
Machines of Florida, Inc. (1)
10.29 Business Consultant and Management Agreement, dated May
7, 1999, between Jore Corporation and Karl Giebmanns
(1)
10.30 Credit Agreement, dated August 19, 1999, between First
Security Bank, N.A. and Jore Corporation (1)
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10.31 Indemnity Agreement, dated September 14, 1999, between
Matthew B. Jore, Michael W. Jore, Merle B. Jore, The
Michael Jore Family Trust, The Matthew Jore Family
Trust and The Merle and Faye Jore Family Trust (1)
10.32 Jore Corporation 1999 Employee Stock Purchase Plan (3)
10.32.1 Jore Corporation 1999 Employee Stock Purchase Plan, as
amended
10.33 Supply Agreement, dated December 27, 1999, between
Norton Company and Jore Corporation
10.34 Trademark License Agreement, dated December 27, 1999,
between Norton Company and Jore Corporation
10.35 Amendment dated as of September 20, 2000, relating to
the License Agreement dated as of April 28, 1999,
between Jore Corporation, Stanley Logistics, Inc., and
the Stanley Works *(4)
16.1 Letter, dated July 7, 1999, from Galusha, Higgins &
Galusha re change in certifying accountant (1)
21.0 List of Jore Corporation's Subsidiaries (1)
23.1 Consent of Deloitte & Touche LLP
- --------------------------------------------------------------------------------
* Portions of this exhibit have been omitted pursuant to an order of the
Commission granting the Company's application respecting confidential treatment
thereof.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 333-78357 as amended.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-8, No. 333-94029.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8, No. 333-94043.
(4) Incorporated by reference to 10-Q filed on November 14, 2000.
(b) Reports on Form 8-K.
Jore Corporation filed no reports on Form 8-K during the fourth
quarter of 2000.
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SIGNATURES
- -------------------------------------------------------------------------------
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
JORE CORPORATION
/s/ MONTE W. GIESE
-------------------------------------
By: Monte W. Giese
Title: Chief Financial Officer
Date: April 13, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date:
/s/ Matthew B. Jore President, Chief Executive Officer
- ------------- ----------------------- Chairman
Matthew B. Jore (Principal Executive Officer)
/s/ Monte W. Giese Chief Financial Officer
- ------------- ----------------------- (Principal Financial and Accounting
Monte W. Giese Officer)
/s/ Michael W. Jore Executive Vice President and
- ------------- ----------------------- Director
Michael W. Jore
/s/ David H. Bjornson Executive Vice President, General
- ------------- ----------------------- Counsel, Secretary and Director
David H. Bjornson
/s/ Thomas E. Mahoney Director
- ------------- -----------------------
Thomas E. Mahoney
/s/ James K.Loebbecke Director
- ------------- -----------------------
James K.Loebbecke
/s/ James Mathias Director
- ------------- -----------------------
James Mathias
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Schedule II
Valuation and Qualifying
Accounts
Year Ended Balance at Charged/(Credited) to Inventory Balance at end of
beginning of costs and disposed or period
period expenses written off
Inventory Valuation Allowance
December 31, 2000 $488,585 $1,351,728 $(65,664) $1,774,649
December 31, 1999 435,354 287,218 ($233,987) 488,585
December 31, 1998 410,802 24,552 0 435,354
Accounts Receivable Valuation
Allowance
Year Ended Balance at Charged/(Credited) to Accounts Balance at end of
beginning of costs and receivable written period
period expenses off
December 31, 2000 $ 56,645 $ 151,234 $ (65,495) $ 142,384
December 31, 1999 -- 56,645 -- 56,645
December 31, 1998 -- -- -- --
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