UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: April 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number: 000-28499
JAGGED EDGE MOUNTAIN GEAR, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 84-144-8778
------------------------------ -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
55 E. 100 S. MOAB, UT 84532
--------------------------------------
(Address of principal executive offices)
435-259-8900
-----------------------------
(Registrant's telephone number)
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 the filing
requirements for at least the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
SHARES OUTSTANDING of common stock, $0.001 par value per share, as of June 20,
2002 are 17,773,478.
JAGGED EDGE MOUNTAIN GEAR, INC.
Index to Form 10-QSB
April 30, 2002
Page
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Balance Sheets as of: F-1
April 30, 2002 and July 31, 2001
Statements of Operations for the Three Month and F-2
Nine Month Periods Ended April 30, 2002 and 2001
Statements of Cash Flows for the Nine Months Ended F-3
April 30, 2002 and 2001
Notes to Financial Statements F-4
Item 2: Management's Discussion and Analysis of Financial Condition F-6
And Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk F-12
Part II. OTHER INFORMATION:
Item 1: Legal Proceedings 2
Item 6: Exhibits and Reports on Form 8-K 2
Signature Page 3
Part I
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JAGGED EDGE MOUNTAIN GEAR, inc.
BALANCE SHEETS
April 30, July 31,
2002 2001
---- ----
ASSETS:
Current Assets:
Cash $ 48,129 $ 200,163
Accounts receivable, less allowance for 53,804 14,904
doubtful accounts of $45,000 and $45,000
Inventories 818,958 288,467
Prepaid expenses 4,382 4,894
----------- -----------
Total Current Assets 925,272 508,428
----------- -----------
Equipment and leasehold Improvements, net 72,945 113,806
Other Assets:
Trade name, net 16,167 17,667
Deposits 17,153 11,361
----------- -----------
33,320 29,028
----------- -----------
Total Assets $ 1,031,537 $ 651,262
=========== ===========
LIABILITIES & EQUITY:
Current Liabilities:
Accounts payable and accrued liabilities 1,318,086 370,680
Credit cards 150,672 77,165
Current portion of long-term debt 520,679 113,564
----------- -----------
Total Current Liabilities 1,989,437 561,409
Notes Payable:
Long-term debt, net of current portion 0 255,000
----------- -----------
Sub Total 0 255,000
----------- -----------
Total Liabilities 1,989,437 816,409
Stockholders' Equity:
Preferred stock $.001 par value;
10 million shares authorized, none issued
Common stock $.001 par value;
50 million shares authorized,
17,773,478 and 16,759,978 shares issued
and outstanding 17,774 16,760
Additional paid in capital 2,400,156 2,332,409
Accumulated (deficit) (3,375,829) (2,514,316)
----------- -----------
Total Stockholders' Equity (957,900) (165,147)
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,031,537 $ 651,262
=========== ===========
See accompanying notes.
F-1
JAGGED EDGE MOUNTAIN GEAR, INC.
STATEMENTS OF OPERATIONS
For the Three Month and Nine Month Periods Ended April 30, 2002 and 2001
Three Months Nine Months
Ended April 30, Ended April 30,
2002 2001 2002 2001
---- ---- ---- ----
Sales $ 687,295 $ 689,962 $ 1,787,053 $ 2,948,241
Cost of Goods Sold 501,106 416,049 1,075,686 1,699,229
------------ ------------ ------------ ------------
Gross Profit 186,189 273,913 711,367 1,249,012
Selling expenses 306,694 188,257 961,850 1,025,679
General & administrative 146,920 213,879 480,202 549,476
------------ ------------ ------------ ------------
(Loss) Before Interest, Tax, Depreciation (267,426) (128,223) (730,686) (326,143)
and Amortization
Interest expense 34,955 7,184 108,284 53,574
Depreciation & amortization 14,120 21,700 42,361 64,932
------------ ------------ ------------ ------------
Net (Loss) from Operations (316,501) (157,107) (881,331) (444,649)
------------ ------------ ------------ ------------
Other income / (expense) 1,842 83,749 1,842 83,749
------------ ------------ ------------ ------------
Net (Loss) from continuing Operations (314,659) (73,358) (879,489) (360,900)
------------ ------------ ------------ ------------
Extraordinary gain from settlement 0 0 18,065 0
of debt
------------ ------------ ------------ ------------
NET (LOSS) ($ 314,659) ($ 73,358) ($ 861,424) ($ 360,900)
============ ============ ============ ============
Basic and Diluted (Loss) Per Share
Loss Before Extraordinary Income ($ 0.02) ($ 0.00) ($ 0.05) ($ 0.02)
Extraordinary Income $ 0.00 $ 0.00 $ 0.00 $ 0.00
------------ ------------ ------------ ------------
Net (Loss) ($ 0.02) ($ 0.00) ($ 0.05) ($ 0.02)
============ ============ ============ ============
Weighted Average Shares 17,765,236 16,745,078 17,692,685 16,743,039
============ ============ ============ ============
See accompanying notes.
F-2
JAGGED EDGE MOUNTAIN GEAR, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended April 30, 2002 and 2001
2002 2001
---- ----
Cash Flows from Operating Activities:
Net (loss) ($861,424) ($360,900)
Depreciation and amortization 42,361 64,932
Value of stock options issued for interest 28,287 0
Common stock issued in lieu of interest 473 667
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (38,900) (103,929)
Decrease in other accounts receivable 0 29,341
(Increase)decrease in inventories (530,491) 478,876
(Increase) decrease in prepaid expenses and other current assets 423 (5,290)
Increase in accounts payable and accrued liabilities 947,406 165,024
Increase in credit cards payable 73,507 1,339
--------- ---------
Net Cash Used by Operating Activities (338,357) 270,060
--------- ---------
Cash Flows from Investing Activities
Deposits (5,792) 0
Purchase of equipment 0 0
--------- ---------
Net Cash Used by Investing Activities (5,792) 0
--------- ---------
Cash Flows from Financing Activities
Principle payments on short-term debt (151,314) (606,093)
Proceeds from short-term debt 303,429 502,285
Proceeds from exercise of stock options 40,000 0
--------- ---------
Net Cash Provided by Financing Activities 192,115 (103,808)
--------- ---------
Decrease in Cash and Cash Equivalents (152,034) 166,252
Cash and Cash Equivalents - Beginning of Year 200,163 64,277
--------- ---------
Cash and Cash Equivalents - End of period $ 48,129 $ 230,529
========= =========
Supplemental disclosures:
Cash paid for interest $ 21,146 $ 12,743
========= =========
See accompanying notes.
F-3
Notes to Financial Statements:
Note 1 - Management's Representation:
The management of Jagged Edge Mountain Gear, Inc. (JEMG, "The Company") without
audit, has prepared the attached financial statements pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. Accordingly, the interim,
unaudited financial statements should be read in conjunction with the financial
statements included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended July 31, 2001 (the Form "10-KSB").
These financial statements have been prepared by the Company in a manner
consistent with that used in the preparation of the financial statements
included in the Form 10-KSB. In the opinion of Management, the accompanying
financial statements reflect all adjustments considered necessary for fair
presentation of financial position and results of operations and cash flows for
the periods presented. All adjustments were of a normal recurring nature, and
the attached financial statements present fairly the financial position for the
nine-month period ended on April 30, 2002. The results of operations for the
three-month and nine-month periods ended on April 30, 2002 are not necessarily
indicative of the results to be expected for the fiscal year ending July 31,
2002. Certain amounts recorded in the fiscal year 2001 (FY2001) three-month and
nine-month periods have been reclassified to conform to the fiscal year 2002
(FY2002) presentation.
Note 2 - Basis of Presentation:
The Company has incurred significant recurring losses since inception. This,
coupled with a shortage of liquidity at April 30, 2002, raises substantial doubt
about its ability to continue as a going concern. On May 24, 2002 the Company
filed a voluntary petition for reorganization under Chapter 11 of the federal
bankruptcy laws ("Bankruptcy Code" or "Chapter 11") in the United States
Bankruptcy Court for the District of Colorado ("Court") under case number
02-17894-ABC. The Company's Management is currently operating their business as
debtors-in-possession pursuant to the Bankruptcy Code. The Company decided to
seek judicial reorganization based upon a rapid decline in liquidity resulting
from below-plan catalog and wholesale sales and earnings performance in the
second and third quarters. Contributing factors included the economic recession,
the September 11, 2001 tragedy, anthrax mailings and resultant mail slowdown,
and difficulties in implementing a new catalog mail order and warehousing
distribution facility. Each of the preceding, in Managements opinion had severe
adverse effects upon Company sales performance. As a debtor-in-possession, the
Company is authorized to continue to operate as an ongoing business, but may not
engage in transactions outside the ordinary course of business without the
approval of the Court, after notice and an opportunity for a hearing. The
Company still requires significant additional financing to satisfy outstanding
obligations and continue operations. Unless the Company successfully obtains
suitable significant additional financing there is substantial doubt about the
Company's ability to continue as a going concern.
Note 3 - Debt:
Notes payable additions and subsequent payments during the nine-month period
ended April 30, 2002 consisted of the following:
o A short-term note payable in the amount of $75,000 to a banking
institution dated October 22, 2001, interest at 7.5%, due date
December 22, 2001. This note has been paid in full.
o A short-term note payable in the amount of $60,000 to a private
individual dated October 15, 2001, interest at 21%, due date January
15, 2001. $60,000 has been paid. A remaining balance of $0 is due.
o The Company failed to make required payments on a production letter of
credit in the amount of $100,000. As a result, the manufacturer drew
upon a standby letter of credit secured by a note payable. On February
1, 2002 the Company recorded the production accounts payable as a
short-term note payable. Interest rate 20%, due date immediate.
o The Company failed to make required payments on a production letter of
credit in the amount of $38,429. As a result, the manufacturer drew
upon a standby letter of credit secured by a note payable. On February
1, 2002 the Company recorded the production accounts payable as a
short-term note payable. Due date immediate.
o A short-term note payable in the amount of $30,000 to a related party
dated October 12, 2001, interest at 5.5%, indefinite due date. No
principal payments have been made to date.
o A note payment of $12,750 was paid On March 19, 2002. Original note
amount $255,000, current principal balance $242,250. The Company
failed to make timely payments of principal and interest to the note
holder. As a result the note due date was accelerated and became
payable immediately and the long term principal balance has been
reclassified to short term.
Total notes payable as of April 30, 2002 consist of the following:
Short-term notes payable balance $520,679
Long-term notes payable balance $ -0
--------
TOTAL BALANCE $520,679
========
F-4
Note 4 - Stock Issued in lieu of Interest:
During the current three-month period the company issued 4,500 shares of
restricted common stock to comply with a requirement of one of its loan
agreements. The Company recorded $158 of interest expense related to this
transaction. For the year-to-date nine-month period the Company has issued
13,500 shares of restricted common stock. Total non cash interest expense
recorded is $473. During the comparative nine-month period, the Company issued
4,600 shares of restricted common stock valued at $668 as compensation for
accrued interest.
Note 5 - Exercise of Stock Option:
During August 2001 the Company issued 1,000,000 shares of restricted common
stock through the exercise of common stock options by an outside investor group.
Net proceeds to the Company were $40,000. No common stock options were exercised
during the comparative period.
Note 6 - Earnings Per Share:
Basic earnings (loss) per share are computed by dividing net income (loss) by
the weighted average number of shares common stock outstanding during each
period. Diluted earnings per share are computed on the basis of the average
number of common shares outstanding plus the dilutive effect of convertible
debt, stock options and warrants. The basic and the dilutive earnings per share
are the same in fiscal 2002 and 2001 since the Company had net losses and
inclusion of the effect of stock options would be anti-dilutive.
Note 7 - Inventory:
Of the $818,958 of total inventories reported by the Company as of April 30,
2002 an unspecified and unidentified amount of inventory is subject to pending
litigation in Federal Bankruptcy Court as to title and ownership of the goods.
The outcome of this litigation is uncertain, as is the dollar amount (if any) of
any required adjustment upon the Court's final resolution. The Company's
accounting policy is to record inventory at cost. Company management has
recorded inventory values based upon currently available information however, as
discussed above, the outcome of this litigation is uncertain.
Note 8 - Value of stock options issued for interest:
The Company issued 500,000 stock options on May 21, 2001 at an exercise price of
$0.10 per share as a condition of one of its loan agreements. As a result of the
issuance of these stock options and the required computation of expense per FAS
123, the Company is currently recording $3,143 each quarter of interest expense
directly related to these options.
F-5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
As discussed in Note 2 to the financial statements, On May 24, 2002 the Company
filed a voluntary petition for reorganization under Chapter 11 of the federal
bankruptcy laws ("Bankruptcy Code" or "Chapter 11") in the United States
Bankruptcy Court for the District of Colorado ("Court") under case number
02-17894-ABC. As previously discussed, the Company has suffered recurring
losses, negative cash flows from operations and resulting working capital
shortages. Unless the Company can raise additional equity or obtain additional
debt, there is substantial doubt as to the Company's ability to continue
operations as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Results of Operations
- ---------------------
Company operations for the three-month period ended April 30, 2002 as compared
to the three months ended April 30, 2001 resulted in a net loss of approximately
$314,659 as compared to a net loss of $73,358 respectively for the comparative
period. Net loss per share for the comparative three-month periods was $0.02 and
$0.00, based upon weighted average shares outstanding of 17,765,236 and
16,745,078 respectively. Net sales were approximately $687,295 for the current
three-month period ended April 30, 2002 versus $689,962 for the three-month
period ended April 30, 2001. Net sales for the nine-months ended April 30, 2002
were approximately $1,787,053 versus sales of $2,948,241 for the comparative
period of 2001. A decrease in sales of $1,161,188. Company operations for the
nine-month period ended April 30, 2002 as compared to the nine-months ended
April 30, 2001 resulted in a net loss of approximately $861,424 as compared to a
net loss of $360,900 respectively. Net loss per share for the comparative
nine-month periods ended April 30, 2002 and 2001 was $0.05 and $0.02
respectively, based upon weighted average shares outstanding of 17,692,685 and
16,743,039, respectively. Management attributes the decreased sales over the
nine-month period to disappointing mail order sales results, significantly
reduced emphasis on wholesale customer sales, and reduced retail store sales.
The following describes areas of significance within the Company for the current
three-month reporting period.
o Mail order sales. Company mail order sales were up approximately
$63,177 from the comparative three-month period. See revenue
discussion below.
o Reduced wholesale sales. Company wholesale sales were down
approximately $94,088 from the comparative three-month period. See
revenue discussion below.
o Retail store sales. Company retail sales were up approximately $29,794
from the comparative three-month period. See revenue discussion below.
o Decreased product profit margins of 27% during the current three-month
period versus profit margins of 39% during the comparative three-month
period. Primarily due to increased emphasis on discounted retail store
sales, particularly in Salt Lake City and Park City Utah during the
Olympics.
o Increased selling costs of $306,694 during the current period versus
selling costs of $188,257 during the comparative period. See selling
expense discussion below.
o Depreciation and amortization expense of $14,120 versus $21,700 during
the comparative period.
F-6
Revenues
- --------
The Company's total net product sales during the three-month periods ended April
30, 2002 and 2001 were approximately $687,295 and $689,962 respectively, a
decrease in net revenues of $2,667 from the comparative period. For the
nine-month periods ended April 30, 2002 and 2001 net sales revenues were
approximately $1,787,053 and $2,948,241 respectively, a decrease in net revenues
of $1,161,188 or 39% from the comparative period.
Retail store gross sales for the three-month periods ended April 30, 2002 and
2001 were approximately $530,767 and $500,973 respectively, an increase in net
revenues of $29,794 or 6%. Retail store sales comprised 77% and 73% of total net
product sales, respectively for the three-month periods. For the nine-month
periods ended April 30, 2002 and 2001 retail revenues were approximately
$1,087,740 and $1,175,457 respectively, a decrease in revenues of $87,717 or 8%.
Retail store gross sales comprised 61% and 40% of total net product sales,
respectively for the nine-month periods. Fundamental reasons retail sales were
up during the current three-month period versus the comparative period were:
o The Company opening two temporary store locations in Utah during the
Olympics, in Park City and Salt Lake City. The Park City store, in
particular was extremely successful and has prompted Company
management to lease a permanent store location in downtown Park City.
o Destination tourism's decrease after the tragedy of September 11, 2001
and necessary airport security measures appears to be of a temporary
nature.
The Company is cautiously optimistic regarding improved retail sales
through the current fiscal year and beyond and is taking steps to increase
retail sales, such as the above mentioned Park City store opening. Although
no assurances can be given as to the long-term success of this location,
Management feels that customer support had been positive throughout the
Olympics and believes it will continue. However weather, the current forest
fires, tourism and uncertainties related to the economy are factors beyond
management control, all of which affect retail sales in the ski resort
towns where Jagged Edge operates. Therefore, no assurances can be given as
to the success of the Company's retail efforts.
Wholesale sales for the three-month periods ended April 30, 2002 and 2001 were
approximately $29,980 and $124,068 respectively, for a decrease of $94,088 or
76% from the comparative period. Wholesale sales for the three-month period
comprised 4% and 18% of total net product sales, respectively. For the
nine-month periods ended April 30, 2002 and 2001 wholesale sales were
approximately $91,255 and $1,065,210 respectively, for a decrease of $973,955 or
91%. Wholesale sales for the nine-month period comprised 5% and 36% of total net
product sales, respectively. A Management decision to focus limited product
purchasing and manufacturing resources on the sales divisions (retail and
catalog) expected to contribute the maximum gross profit to the Company had been
made in spring 2001. Additionally, in the short run, Management's analysis of
total direct wholesale costs including, but not limited to, salaries,
commissions, warehousing, discounting, freight, etc. indicated a net deficit
contribution to the Company for the division, when operating at the current
sales volumes. Management believes that in the long run the wholesale division
can provide profit opportunities for the Company, but requires increasing
economies of scale and tight management control to capitalize on the potential
opportunities.
Mail Order sales for the three-month periods ended April 30, 2002 and 2001 were
approximately $125,955 and $62,778 respectively, an increase of $63,177 or 101%.
Catalog and Mail Order gross sales comprised 18% and 9% of total net product
sales, respectively for the three-month periods. Management was extremely
disappointed in the resultant overall mail order sales numbers as selling costs
allocated to the catalog division, and the numbers of catalogs mailed were
increased significantly. Management attributes, in part, the following as
factors contributing to the disappointing sales:
o The country entering a recession.
o The September 11 tragedy. The following article reflected the
country's economic belief during that time frame:
o NEW YORK (Reuters) -- "Nearly half of all Americans believe the
attacks on the United States on Sept. 11 will push the country
into recession, according to a special survey released on Friday
by The Conference Board, a global business research
organization."
F-7
o The anthrax letters and resultant slowdown in mail delivery.
o The Company establishing a relationship with an outside company to
handle both the call center and fulfillment functions. There were
numerous problems encountered in establishing this relationship, in
particular with this company's computer system and capabilities. The
timing of, and resolution of the problems impaired the limited sales
window, which must take place over a specific calendar time frame.
The following table is provided as an aid to further understand Company sales
for the three-month period ended April 30, 2002:
---------------------
Change From April
30, 2001 to April
Three 30, 2002
% Months % Three Months ---------------------
Revenues: Total 4/30/02 Total 4/30/01 % $
----- ------- ----- ------- - -
Retail Division 77.2% $ 530,767 72.6% $ 500,973 5.9% $29,794
Wholesale Division 4.4% 29,980 18.0% 124,068 -75.8% ($94,088)
Mail Order Division 18.3% 125,955 9.1% 62,778 100.6% $63,177
----------------------------------------- ---------------------
Total Sales Revenues 99.9% 686,703 99.7% 687,819 -0.2% ($1,116)
Shipping & Freight
Collected 0.1% 592 0.3% 2,143 -72.4% ($1,551)
----------------------------------------- ---------------------
Total Revenues 0.1% $ 687,295 0.3% $ 689,962 -0.4% ($2,667)
========================================= =====================
The following table is provided as an aid to further understand Company sales
for the nine-month period ended April 30, 2002:
---------------------
Change From April
30, 2001 to April
30, 2002
% Nine Months % Nine Months ---------------------
Revenues: Total April 30, 2002 Total April 30, 2001 % $
----- -------------- ----- -------------- - -
Retail Division 60.9% $1,087,740 39.9% $ 1,175,457 -7.5% ($87,717)
Wholesale Division 5.1% 91,255 36.1% 1,065,210 -91.4% ($973,955)
Mail Order Division 31.4% 560,766 22.1% 650,668 -13.8% ($89,902)
--------------------------------------------- ---------------------
Total Sales Revenues 97.4% 1,739,761 98.1% 2,891,335 -39.8% ($1,151,574)
Shipping & Freight
Collected 2.6% 47,292 1.9% 56,906 -16.9% ($9,613)
--------------------------------------------- ---------------------
Total Revenues 100.0% $ 1,787,053 100.0% $ 2,948,241 -39.4% ($1,161,188)
============================================= =====================
Cost of Goods Sold
- ------------------
The Company's total product cost of sales for all sales during the three-month
periods ended April 30, 2002 and 2001 were approximately $501,106 and $416,049
or 73% and 60% of sales respectively, for an increase of $85,057 or 20% from the
comparative period. Total product cost of sales for all sales during the
nine-month periods ended April 30, 2002 and 2001 were approximately $1,075,686
and $1,699,229 or 60% and 58% of net sales respectively, for a decrease of
$623,543 or 37% from the comparative period.
Cost of sales as a percentage of total sales in the three-month period ended
April 30, 2002 increased to 73% from 60% in the comparative period ended
April 30, 2001. This increase was primarily the result of the sales of product
at less than retail prices through the Jagged Edge retail stores, including the
Utah locations. During the comparative period, the overall mix of sales between
retail stores and the wholesale division (at 50% of retail price) resulted in a
higher cost of products sold by the Company.
Cost of sales as a percentage of total sales in the nine-month period ended
April 30, 2002 increased to 60% from 58% in the comparative period ended
April 30, 2001. This increase was consistent with the increased product
discounting related to the Utah retail locations.
F-8
Selling Expenses
- ----------------------------
Selling expenses for the three-month periods ended April 30, 2002 and 2001 were
approximately $306,694 and $188,257, respectively, an increase in expense of
$118,437 or 62% over the comparative period. For the nine-month periods ended
April 30, 2002 and 2001 selling expenses were approximately $961,850 and
$1,025,679 respectively, a decrease in expense of $63,829 or 6% over the
comparative period.
The three-month current period increase in selling expenses was a direct result
of final expense amortization of deferred catalog production costs, and
operational expenses incurred at the Company's outsourced fulfillment center.
The nine-month reduction in selling expenses was a direct result of the
reduction in wholesale sales described above, the elimination of the support
infrastructure required to service wholesale customers properly, and the
ancillary support expenses typical of a wholesale operation. Significant areas
of change are described below:
o Net savings in advertising and promotional expense for the period
ended April 30, 2002 of $45,000 over the comparative nine-month
period.
o Elimination of sales and support salaries & wages and associated taxes
to $0 from $123,794 during the comparative six-month period.
o Reduction in retail store salaries and wages by $30,000.
o Elimination of contract employee expenses of $19,000 incurred during
the comparative six-month period.
o Increased catalog mail order costs incurred by $191,350.
o Materially reduced trade show and other miscellaneous sales expenses.
F-9
General & Administrative Expenses
- ---------------------------------
General and Administrative expenses for the three-month periods ended April
30, 2002 and 2001 were approximately $146,920 and $213,879, respectively, for a
decrease of $66,959 from the comparative three-month period. Expenses for the
nine-month periods ended April 30, 2002 and 2001 were approximately $480,202 and
$549,476, respectively, for a decrease of $69,274 from the comparative
nine-month period. The decrease in general & administrative expenses was the net
result in large part of a combination of expenses eliminated, offset by certain
expense increases. In large part the expense reductions were the result of the
Company downsizing and its subsequent move to Moab, Utah from Telluride,
Colorado. The following are key decreases and increases in general and
administrative expense:
o A reduction or elimination of administrative and clerical salaries &
wages during the nine-month period of approximately $22,000 over the
comparative period.
o Reduced employee benefits during the nine-month period by $17,200 over
the comparative period.
o A reduction in administrative office rents resulting in savings of
$24,410 for the nine-month period.
o An increase of $75,000 of consultant costs during the current period
related to senior management guidance, logistics, production, and
inventory issues.
Interest Expense
- ----------------
Interest expense for the three-month periods ended April 30, 2002 and 2001 was
Approximately $34,955 and $7,184 respectively, an increase of $27,771 or 386%.
Expense for the nine-month periods ended April 30, 2002 and 2001 was
approximately $108,284 and $53,574 respectively, or an increase of $54,710.
Interest expense was incurred primarily as a result of notes payable and letters
of credit extended for production. The Company is currently recording $3,143
each quarter of non-cash interest expense directly related to the issuance of
common stock options in May 2001.
Liquidity and Capital Resources
- --------------------------------
During the nine months ended April 30, 2002, the Company's current ratio
declined to .53 as compared to .91 at July 31, 2001. Net working capital
decreased $768,933 to $(821,914) at April 30, 2002 from $(52,981) at July 31,
2001.
Principal changes in the components of net working capital for the nine-month
period ended April 30, 2002 as compared to fiscal year end July 31, 2001 consist
of:
------------------
Change From July
31, 2001 to
April 30, 2002
% % ------------------
Working Capital Components: Total 4/30/02 Total 7/31/01 $
----- ------- ----- ------- -
Cash & cash equivalents 5.2% 48,129 39.4% 200,163 ($152,034)
Trade receivables 5.8% 53,804 2.9% 14,904 $38,900
Inventories 88.5% 818,958 56.7% 288,467 $530,491
Pre-paid expenses 0.5% 4,382 1.0% 4,894 ($512)
---------------------------------------- -----------------
Current Assets 100.0% 925,273 100.0% 508,428 $416,845
Accounts payable and
accrued liabilities 75.4% 1,318,086 66.0% 370,680 $947,406
Current maturities of notes
payable 15.9% 278,429 20.2% 113,564 $164,865
Other current payables 8.6% 150,672 13.7% 77,165 $73,507
---------------------------------------- -----------------
Current Liabilities 100.0% 1,747,187 100.0% 561,409 $1,185,778
------------- ------------ -----------------
Working Capital $ (821,914) $ (52,981) ($768,933)
============= ============ =================
- ------------------------------------------------------------------------------------------
Current Ratio 0.53 0.91 (0.38)
- ------------------------------------------------------------------------------------------
F-10
The principal reasons for the net decrease in working capital during the period
are the following:
o The Company's cash balances decreased to $48,129 at April 30, 2002,
from $200,163 at July 31, 2001 primarily as a result of inventory
purchases and use of cash in day to day operations.
o Inventory increased by $530,491 due to a poor catalog selling season.
o Trade accounts payable increased by $947,406 due to inventory
purchases.
Loan proceeds and increases in accounts payable were used primarily to release
overseas goods and increase inventory levels. Other portions of the proceeds
were used primarily for operating expenses.
Of the $818,958 of total inventories reported by the Company as of April 30,
2002 an unspecified and unidentified amount of inventory is subject to pending
litigation in Federal Bankruptcy Court as to title and ownership of the goods.
The outcome of this litigation is uncertain, as is the dollar amount (if any) of
any required adjustment upon the Court's final resolution. The Company's
accounting policy is to record inventory at cost. Company management has
recorded inventory values based upon currently available information however, as
discussed above and in footnote 7, the outcome of this litigation is uncertain.
F-11
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The Company is exposed to certain market risks, which include foreign currency
risks, interest rate risks, and inflation risk. The Company does not engage in
financial transactions for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
- -----------------------------------
The Company's inventory purchases from contract manufacturers in Korea are
denominated in United States dollars; however, purchase prices for the Company's
products may be impacted by fluctuations in the exchange rate between the United
States dollar and the local currencies of the contract manufacturers, which may
have the effect of increasing the Company's cost of goods in the future.
In addition, the Company's sales are denominated at the time of order
commitment, in the United States dollar, which may have a negative impact on
order completion or fulfillment or the rate of growth of sales in those
countries if the U.S. dollar were to strengthen significantly versus the related
foreign currency. Due to the number of foreign currencies involved and the fact
that not all of these foreign currencies fluctuate in the same manner against
the United States dollar, the Company cannot quantify in any meaningful way the
potential effect of such fluctuations on future income.
Furthermore, the Company may be affected by economic and political conditions in
each of the countries in which it transacts business, although the Company
believes this risk is minimal. Potential risks associated with operating in the
international arena include:
o Economic instability, including the possible revaluation of
currencies.
o Labor or civil unrest.
o In certain parts of the world, political instability.
The Company has not as yet been materially affected by any such risks, but
cannot predict the likelihood of such developments occurring or the impact of
any such risks to the future profitability of the Company.
Interest Rate Risk
- -------------------
The interest payable on some of the Company's loans is based on variable
interest rates and therefore affected by changes in market interest rates. If
interest rates on existing variable rate debt rises due to increases in the
prime rate, the Company's results from operations and cash flows would be
impacted, although the Company believes, not materially.
Inflation Risk
- --------------
The Company believes that the relatively moderate rates of inflation over the
last three years in the United States, where it primarily competes, have not had
a significant effect on its net sales or results of operations.
F-12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information on legal proceedings, see Item 3 of the July 31, 2001
Form 10-KSB.
On May 24, 2002 the Company filed a voluntary petition for reorganization under
Chapter 11 of the federal bankruptcy laws ("Bankruptcy Code" or "Chapter 11") in
the United States Bankruptcy Court for the District of Colorado ("Court") under
case number 02-17894-ABC. The Company's Management is currently operating their
business as debtors-in-possession pursuant to the Bankruptcy Code.
As described in Note 8 to the financial statements, of the $818,958 of total
inventories reported by the Company as of April 30, 2002 an unspecified and
unidentified amount of inventory is subject to pending litigation in Federal
Bankruptcy Court as to title and ownership of the goods. The outcome of this
litigation is uncertain, as is the dollar amount (if any) of any required
adjustment upon the Court's final resolution.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On May 31, 2002 a form 8-K report was filed as notification of the
Company's reorganization under chapter 11 of the Federal Bankruptcy code.
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SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Jagged Edge Mountain Gear, Inc.
(Registrant)
Dated: July 08, 2002 By: /s/ Margaret A. Quenemoen
-------------------------------
Margaret A. Quenemoen
President
Dated: July 08, 2002 By: /s/ Craig Carr
-------------------------------
Craig Carr
CFO
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