SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 2004 Commission File Number 33-24317
JORDAN INDUSTRIES, INC.
(Exact name of registrant as specified in charter)
Illinois 36-3598114
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
ArborLake Centre, Suite 550 60015
1751 Lake Cook Road (Zip Code)
Deerfield, Illinois
(address of Principal Executive Offices)
Registrant's telephone number, including Area Code: (847) 945-5591
Former name, former address and former fiscal year, if changed since last
report: Not applicable.
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 twelve (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 ninety (90) days.
Yes X No
------ -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Exchange Act).
Yes No X
------ -------
The number of shares outstanding of Registrant's Common Stock as of
November 15, 2004: 98,501.0004.
2
JORDAN INDUSTRIES, INC.
INDEX
Part I. Financial Information Page No.
- ----------------------------- --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2004
(Unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2004 and 2003 (Unaudited)
and the Nine Months Ended September 30, 2004 and 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2004 and 2003 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 26
Part II. Other Information 27
- --------------------------
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submissions of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
3
JORDAN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
September 30, December 31,
2004 2003
------------- -----------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $24,078 $16,173
Accounts receivable, net 119,856 101,860
Inventories 143,886 126,504
Assets of discontinued operations (See Note E) 2,271 15,352
Income tax receivable 2,886 5,637
Prepaid expenses and other current assets 15,912 27,327
-------- --------
Total Current Assets 308,889 292,853
Property, plant and equipment, net 85,134 89,956
Investments in and advances to affiliates 38,357 46,664
Goodwill, net 248,765 247,900
Other assets 19,389 24,155
-------- --------
Total Assets $700,534 $701,528
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current Liabilities:
Accounts payable $69,581 $54,001
Accrued liabilities 99,511 86,667
Liabilities of discontinued operations
(See Note E) 421 9,060
Current portion of long-term debt 13,921 20,087
-------- -------
Total Current Liabilities 183,434 169,815
Long-term debt, less current portion 718,479 728,124
Other non-current liabilities 13,922 14,587
Deferred income taxes 11,818 8,198
Minority interest 735 472
Preferred stock 2,690 2,535
Shareholders' Equity (net capital deficiency):
Common stock $.01 par value: 100,000 shares
authorized and 98,501 shares issued and
outstanding 1 1
Additional paid-in capital 2,116 2,116
Accumulated other comprehensive income (loss) 1,307 (1,012)
Accumulated deficit (233,968) (223,308)
-------- ---------
Total Shareholders' Equity (net capital
deficiency) (230,544) (222,203)
-------- ---------
Total Liabilities and Shareholders'
Equity (net capital deficiency) $700,534 $701,528
======== ========
See accompanying notes to condensed consolidated financial statements.
4
JORDAN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
Net sales $187,072 $171,135 $546,320 $506,716
Cost of sales, excluding
130,428 115,292 375,010 337,912
depreciation
Selling, general and
administrative expenses,
excluding depreciation 37,634 38,662 113,816 112,403
Depreciation 3,330 5,313 12,460 16,033
Amortization of other intangibles 26 36 124 134
Income from sale of affiliates (See
Note N) - - (7,954) -
Management fees and other 30 30 278 388
------ ------ ------ ------
Operating income 15,624 11,802 52,586 39,846
Other (income) expenses:
Interest expense 12,937 20,896 51,828 62,349
Interest income (42) (204) (1,874) (717)
Loss on sale of subsidiary - 481 - 481
Other 81 566 (280) (8,062)
------- ------- ------- -------
12,976 21,739 49,674 54,051
------- ------- ------- -------
Income (loss) from continuing
operations before income taxes and
minority interest 2,648 (9,937) 2,912 (14,205)
Provision for income taxes 2,149 2,479 8,125 8,732
------- ------- ------- -------
Income (loss) from continuing
operations before minority interest 499 (12,416) (5,213) (22,937)
Minority interest 102 100 263 172
------- ------- ------- -------
Income (loss) from continuing
operations 397 (12,516) (5,476) (23,109)
Loss from discontinued operations,
net of tax (See Note E) (1,497) (304) (3,859) (15)
Gain (loss) on sale of discontinued
operations, net of tax (See Note E) - 8,190 (1,171) 8,190
------- ------- ------- --------
Net loss $(1,100) $(4,630) $(10,506) $(14,934)
======= ======== ======= ========
See accompanying notes to condensed consolidated financial statements.
5
JORDAN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
September 30,
-----------------
2004 2003
---- ----
Cash flows from operating activities:
Net loss $(10,506) $(14,934)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss (gain) on sale of discontinued operations
(See Note E) 1,171 (8,190)
Income from sale of affiliates (See Note N) (7,954) -
Loss on sale of subsidiary - 481
Depreciation and amortization 12,584 16,167
Amortization of deferred financing fees 6,616 4,641
Minority interest 263 172
Non-cash interest 221 36
Deferred income taxes 3,620 7,496
Gain on disposal of fixed assets (256) (3,780)
Other (1,598) (4,578)
Changes in operating assets and liabilities:
Increase in current assets (29,331) (17,852)
Increase in current liabilities 9,148 5,918
Decrease in non-current assets (508) (3,641)
(Decrease) increase in non-current liabilities (665) 320
Decrease in net assets of discontinued operations 116 180
------- -------
Net cash used in operating activities (17,079) (17,564)
Cash flows from investing activities:
Proceeds from sale of fixed assets 844 3,893
Capital expenditures (5,317) (7,775)
Net proceeds from sale of discontinued operations
(See Note E) 6,155 9,400
Net proceeds from sale of affiliates (See Note N) 27,207 -
Acquisition of subsidiary (315) -
Net proceeds from sale of subsidiary - 678
Additional purchase price payments - (750)
------- -------
Net cash provided by investing activities 28,574 5,446
Cash flows from financing activities:
Proceeds from revolving credit facilities, net 6,070 21,285
Repayment of long-term debt (11,615) (13,676)
Proceeds from other borrowings 4,820 2,244
Payment of financing fees (3,820) -
------- -------
Net cash (used in) provided by financing
activities (4,545) 9,853
Effect of exchange rate changes on cash 955 5,550
------- -------
Net increase in cash and cash equivalents 7,905 3,285
Cash and cash equivalents at beginning of period 16,173 19,929
------- -------
Cash and cash equivalents at end of period $24,078 $23,214
======= =======
See accompanying notes to condensed consolidated financial statements.
6
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
A. Organization
- ----------------
The unaudited condensed consolidated financial statements, which reflect all
adjustments that management believes necessary to present fairly the results of
interim operations and are of a normal recurring nature, should be read in
conjunction with the Notes to the Consolidated Financial Statements (including
the Summary of Significant Accounting Policies) included in the Company's
audited consolidated financial statements for the year ended December 31, 2003,
which are included in the Company's Annual Report filed on Form 10-K for such
year (the "2003 10-K"). Results of operations for the interim periods are not
necessarily indicative of annual results of operations.
B. Summary of Significant Accounting Policies
- ----------------------------------------------
The condensed consolidated financial statements include the accounts of Jordan
Industries, Inc. and its subsidiaries. Material intercompany transactions and
balances are eliminated in consolidation. Operations of certain subsidiaries
outside the United States are included for periods ending two months prior to
the Company's year-end and interim periods to ensure timely preparation of the
condensed consolidated financial statements.
The Company has recorded an income tax provision for the nine months ended
September 30, 2004 primarily due to its foreign and state tax expense, as well
as the change in its deferred tax items. The Company's domestic losses have not
been benefited for federal tax purposes.
C. Inventories
- ---------------
Inventories are summarized as follows:
September 30, December 31,
2004 2003
------------ -----------
Raw materials $63,436 $ 54,588
Work-in-process 20,747 17,652
Finished goods 59,703 54,264
-------- --------
$143,886 $126,504
======== ========
D. Comprehensive Loss
- -------------------------------
Total comprehensive loss for the three months and nine months ended
September 30, 2004 and 2003 was as follows:
Three Months ended Nine Months ended
September 30, September 30,
------------------ ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss $(1,100) $(4,630) $(10,506) $(14,934)
Foreign currency translation 881 1,143 2,319 8,859
------- ------- -------- --------
Comprehensive loss $ (219) $(3,487) $ (8,187) $(6,075)
======= ======= ======== ========
7
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
E. Discontinued Operations
- ---------------------------
On January 20, 2004, the Company sold certain assets and liabilities of JII
Promotions' Ad Specialty and Calendar product lines to a third party for $6,155.
Concurrent with the above transaction, the Company agreed to wind down the
remaining activities of JII Promotions and to ultimately retain only the
pension-related liabilities and various immaterial capital leases. The
consolidated financial statements reflect JII Promotions as a discontinued
operation for all periods presented. Assets and liabilities of discontinued
operations in the condensed consolidated balance sheets represent assets and
liabilities of JII Promotions, excluding the retained liabilities discussed
above. The Company recorded a loss on the sale of $1,171. There was no tax
benefit on the loss on sale or on the loss from discontinued operations.
On September 19, 2003, the Company sold the net assets of the School Annual
division of JII Promotions to a third party for cash proceeds, net of fees, of
$9,400. The Company recognized a gain of $8,190 related to the sale of this
division.
Net sales of JII Promotions for the nine month period ending September 30, 2004
and the year ended December 31, 2003 were $1,083 and $51,933, respectively. JII
Promotions was a part of the Specialty Printing and Labeling segment.
F. Acquisition of Subsidiary
- ----------------------------
During September 2004, Kinetek acquired substantially all of the net assets of
O. Thompson, a New York City-based elevator control company. The total
acquisition cost was $887 of which $315 was paid in cash during the third
quarter of 2004, with the remaining to be paid during the fourth quarter of
2004. The $572 of deferred acquisition costs are a component of other current
liabilities at September 30, 2004. The acquisition has been accounted for using
the purchase method of accounting. Accordingly, the operating results of the
acquired business have been included in the consolidated operating results of
Kinetek since the date of acquisition. The operating results of O. Thompson are
included with those of Kinetek's wholly-owned subsidiary, Motion Control.
G. Additional Purchase Price Agreements
- ----------------------------------------
The Company has a contingent purchase price agreement relating to its
acquisition of Deflecto in 1998. The agreement is based on Deflecto achieving
certain earnings before interest and taxes and is payable on April 30, 2008. If
Deflecto is sold prior to April 30, 2008, the agreement is payable 120 days
after the transaction. Additional consideration, if any, will be recorded as an
addition to goodwill.
Kinetek has a contingent purchase price agreement relating to its acquisition of
Motion Control on December 18, 1997. The terms of this agreement provide for
additional consideration to be paid to the sellers. The agreement is exercisable
at the sellers' option during a five year period that began in 2003. When
exercised, the additional consideration will be based on Motion Control's
operating results over the two preceding fiscal years. Payments, if any, under
the contingent agreement will be placed in a trust and paid out in cash over a
three or four-year period, in annual installments according to a schedule, which
is included in the agreement. Additional consideration, if any, will be recorded
as an addition to goodwill.
8
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
H. Pension Plans and Other Post-Retirement Benefit Plans
- ---------------------------------------------------------
The components of net periodic benefit cost for the Company's pension plans for
the three months and nine months ended September 30, 2004 and 2003 were as
follows:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $195 $169 $585 $507
Interest cost 310 299 930 897
Expected return on plan assets (270) (294) (810) (882)
Prior service costs recognized 15 14 45 42
Recognized net actuarial loss (gain) 31 (2) 93 (6)
----- ----- ----- -----
Net periodic benefit cost $ 281 $ 186 $843 $ 558
===== ===== ===== =====
The components of net periodic benefit cost for the Company's post-retirement
healthcare benefit plans for the three months and nine months ended September
30, 2004 and 2003 were as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 46 $ 38 $ 138 $ 114
Interest cost 90 72 270 216
Recognized net actuarial loss 48 31 144 93
----- ----- ------ ------
Net periodic benefit cost $ 184 $ 141 $ 552 $ 423
====== ===== ====== =====
I. Business Segment Information
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the Company's business segment disclosures. There have been no
changes from the Company's December 31, 2003 consolidated financial statements
with respect to segmentation or the measurement of segment profit or loss,
except for the reclassification of JII Promotions to discontinued operations in
all periods (See Note E).
J. Exchange Offer
On February 18, 2004, the Company completed an Exchange Offer, whereby it
exchanged $173,334 of new Senior Notes (the "Exchange Notes") for $247,619 of
Old Senior Notes. The Exchange Notes were co-issued by JII Holdings LLC, a
wholly owned subsidiary of the Company, and its wholly owned subsidiary, JII
Holdings Finance Corporation. The Exchange Notes bear interest at 13% per annum
which is payable semi annually on February 1 and August 1 of each year, and
mature on April 1, 2007. The notes that were exchanged bore interest at 10 3/8%
per annum and paid interest semi annually on February 1 and August 1. The
remaining Old Senior Notes mature on August 1, 2007.
The Exchange Offer has been accounted for as a troubled debt restructuring in
conformity with Statement of Financial Accounting Standards No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructurings" (SFAS No. 15). SFAS
No. 15 requires that, when there is a modification of terms such as this, if the
total debt service of the new debt is less than the carrying amount on the
balance sheet of the old debt, the carrying amount should be reduced to the
total debt service amount. This reduction resulted in a gain of $2,015, which
was required by SFAS No. 15 to be offset by fees incurred on the transaction.
Fees of $7,383, which were in excess of the gain,
9
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
were recorded as interest expense through the third quarter of 2004. The
remaining reduction in the principal of the Exchange Notes compared to the Old
Senior Notes will be recognized over the period to maturity of the Exchange
Notes as a reduction of interest expense.
K. Waiver Agreement
- --------------------
On January 31, 2004, the Company and holders of $90,067 of the Company's Senior
Subordinated Discount Debentures entered into a Waiver Agreement which provides
that the participating note holders waive any rights to claim an event of
default if the Company does not make the scheduled interest payments as required
in the applicable indenture. The Company may pay interest on these Senior
Subordinated Discount Debentures only if such payment complies with the
restricted payments covenant in the indenture governing the Exchange Notes.
Should the Company be prohibited from or elect not to make interest payments on
these notes, the interest will continue to accrue on the Senior Subordinated
Discount Debentures at the original rate of 11 3/4% per year and will be due and
payable to the holders at the maturity date of the notes. Pursuant to the Waiver
Agreement, the maturity date of the participating notes is the earlier of (1)
the date on which all of the outstanding principal and interest on the Exchange
Notes and the Senior Secured Discount Debentures not participating in the Waiver
Agreement have been paid in full, (2) the date six months after the original
maturity of the participating notes, or (3) the date on which the Company enters
into a bankruptcy proceeding.
L. Modification Agreement
- --------------------------
On February 18, 2004, certain of the Company's Senior Subordinated Discount
Debenture note holders entered into a Modification Agreement which provides for
a reduction in their stated maturity value and a reduction of their applicable
interest rate. The aggregate maturity value of the notes held by the parties to
the Modification Agreement is $22,978 which has been reduced to $6,893. The
interest rate on these notes has been reduced to a stated rate of 1.61% from
11.75%. On April 1, 2004 certain holders of an additional $1,745 of the
Company's Senior Subordinated Discount Debentures elected to participate in the
Modification Agreement. The maturity value of these notes has been reduced to
$524. The holders of these modified notes retain the right to collect the
original maturity value and interest thereon at the original interest rate if
the Company meets certain financial tests and ratios. Under the Modification
Agreement, these notes mature on the earlier of (1) the date that all other
Senior Subordinated Discount Debenture note holders have been paid in full, (2)
the date that is six months after the original maturity date, or (3) the date on
which the Company enters into a bankruptcy proceeding.
The Company has determined that this modification will be accounted for as a
troubled debt restructuring as required by SFAS No. 15. The effect of this
accounting treatment will not reduce the carrying value of the modified notes;
however, the interest expense associated with the modified notes will be
calculated using the modified stated interest rate of 1.61% per annum and the
reduced maturity amount.
The remaining Senior Subordinated Discount Debentures that are not party to the
Modification Agreement will continue to accrue interest at 11.75% and represent
$70,163 of the total outstanding principal amount of $94,886.
10
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
M. Condensed Consolidating Financial Statements (Unaudited)
Pursuant to the Exchange Offer described in Note J, JII Holdings LLC, a wholly
owned subsidiary of the Company, and its wholly owned subsidiary, JII Holdings
Finance Corporation, co-issued senior secured notes which have been guaranteed
by the Company and may, in the future, be guaranteed by certain of the Company's
subsidiaries. The following condensed consolidating financial information is
provided in lieu of separate financial statements for the issuers of these
notes.
Three Months Ended September 30, 2004
-------------------------------------------------------------------------------------------------
Jordan Ind JII Holdings JII Finance Operating Subs Eliminations Consolidated
---------- ----------- ---------- ------------- ------------ ------------
Net Sales $ - $ - $ - $187,072 $ - $187,072
Cost of sales,
excluding depreciation - - - 130,428 - 130,428
Selling, general, and
administrative expenses,
excluding depreciation 1,003 - - 36,631 - 37,634
Depreciation (1,302) - - 4,632 - 3,330
Amortization of
goodwill and other
intangibles 1 - - 25 - 26
Income from sale of
affiliates - - - - - -
Management fees and other 30 (4) - 4 - 30
------ -------- ------ ------- ------ --------
Operating income 268 4 - 15,352 - 15,624
Other (income) and
expenses:
Interest expense 2,893 844 - 9,200 - 12,937
Intercompany interest
(income) expense (4,328) (6,251) - 10,576 3 -
Interest income (5) - - (72) 35 (42)
Intercompany
management fee
(income) expense (848) (973) - 1,821 - -
Equity in (earnings)
losses of subsidiaries (1,695) 4,324 - - (2,629) -
Intercompany expense
(income) 5,293 - - (5,293) - -
Other, net 58 - - 23 - 81
----- ------ ------ ------ ----- ----
1,368 (2,056) - 16,255 (2,591) 12,976
Income (loss) from
continuing operations
before taxes and
minority interest (1,100) 2,060 - (903) 2,591 2,648
Provision (benefit) for
income taxes - - - 3,129 (980) 2,149
-------- ------ ------ ----- ------ -----
Income (loss) from
continuing operations
before minority interest (1,100) 2,060 - (4,032) 3,571 499
Minority interest - - - 102 - 102
-------- ------ ------ ------ ----- -----
Income (loss) from
continuing operations (1,100) 2,060 - (4,134) 3,571 397
Loss from discontinued
operations, net of tax - - - (1,497) - (1,497)
Loss on sale of
discontinued operations,
net of tax - - - - - -
------ ------ ------ ----- ------ -----
Net income (loss) $ (1,100) $2,060 $ - $(5,631) $3,571 $ (1,100)
========= ====== ====== ======== ====== ========
11
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended September 30, 2003
--------------------------------------------------------------------------------------------------
Jordan Ind JII Holdings JII Finance Operating Subs Eliminations Consolidated
---------- ------------ ----------- -------------- ------------ ------------
Net Sales $ - $ - $ - $171,135 $ - $171,135
Cost of sales,
excluding depreciation - - - 115,292 - 115,292
Selling, general, and
administrative expenses,
excluding depreciation 266 - - 38,396 - 38,662
Depreciation 373 - - 4,940 - 5,313
Amortization of
goodwill and other
intangibles 1 - - 35 - 36
Management fees and other (126) - - 156 - 30
-------- ------ ------- --------- ------ ------
Operating (loss) income (514) - - 12,316 - 11,802
Other (income) and
expenses:
Interest expense 10,779 - - 10,117 - 20,896
Intercompany interest
(income) expense (992) (6,255) - 7,247 - -
Interest income (231) - - (2) 29 (204)
Intercompany management fe
(income)expense (731) (1,040) - 1,771 - -
Loss on sale of division - - - 481 - 481
Equity in losses (earnings
of subsidiaries 4,526 5,823 - - (10,349) -
Other, net - - - 566 - 566
------- ------ ------- ------ ------ ------
13,351 (1,472) - 20,180 (10,320) 21,739
(Loss) income from continuing
operations before taxes and
minority interest (13,865) 1,472 - (7,864) 10,320 (9,937)
Provision for income taxes - - - 441 2,038 2,479
------ ----- ------- ------ ------ ------
(Loss) income from continuing
operations before minority
interest (13,865) 1,472 - (8,305) 8,282 (12,416)
Minority interest - - - 100 - 100
------ ------ ------- ------- ------ -------
(Loss) income from
continuing operations (13,865) 1,472 - (8,405) 8,282 (12,516)
Loss from discontinued
operations, net of tax - - - (304) - (304)
Loss (gain) on sale of
discontinued operations, net 9,235 - - (1,045) - 8,190
------- ------ ------- ------- ------ --------
of tax
Net (loss) gain $(4,630) $1,472 $ - $(9,754) $8,282 $(4,630)
======== ====== ======= ======== ====== ========
12
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Nine Months Ended September 30, 2004
-----------------------------------------------------------------------------------------------------
Jordan Ind JII Holdings JII Finance Operating Subs Eliminations Consolidated
---------- ------------ ----------- -------------- ------------ ------------
Net Sales $ - $ - $ - $546,320 $ - $546,320
Cost of sales,
excluding depreciation - - - 375,010 - 375,010
Selling, general, and
administrative expenses,
excluding depreciation 3 - - 113,813 - 113,816
Depreciation (640) - - 13,100 - 12,460
Amortization of
goodwill and other
intangibles 4 - - 120 - 124
Income from sale of
affiliates (7,954) - - - - (7,954)
Management fees and other 278 (375) - 375 - 278
------ ------- ------ -------- ------ -------
Operating income 8,309 375 - 43,902 - 52,586
Other (income) and
expenses:
Interest expense 12,770 9,039 - 30,019 - 51,828
Intercompany interest
(income) expense (10,276) (14,460) - 24,733 3 -
Interest income (1,762) - - (216) 104 (1,874)
Intercompany management
fee (income) expense (2,998) (2,389) - 5,387 - -
Equity in losses
(earnings) of
subsidiaries 18,885 15,583 - - (34,468) -
Intercompany expense
(income) 5,293 - - (5,293) - -
Other, net 58 - - (336) (2) (280)
------ ------ ------ --------- -------- -------
21,970 7,773 - 54,294 (34,363) 49,674
(Loss) income from
continuing operations
before taxes and
minority interest (13,661) (7,398) - (10,392) 34,363 2,912
Provision (benefit) for
income taxes - - - 8,751 (626) 8,125
------ ------ ------ -------- ------- ------
(Loss) income from
continuing operations
before minority interest (13,661) (7,398) - (19,143) 34,989 (5,213)
Minority interest - - - 263 - 263
------ ------ ------ ------ ------ ------
(Loss) income from
continuing operations (13,661) (7,398) - (19,406) 34,989 (5,476)
Loss from discontinued
operations, net of tax - - - (3,859) - (3,859)
Gain (loss) on sale of
discontinued operations,
net of tax 3,155 - - (4,326) - (1,171)
--------- -------- ------- --------- ------
Net loss $(10,506) $(7,398) $ - $(27,591) $34,989 $(10,506)
========= ======== ======= ========= ======= =========
13
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Nine Months Ended September 30, 2003
-----------------------------------------------------------------------------------------------------
Jordan Ind JII Holdings JII Finance Operating Subs Eliminations Consolidated
---------- ------------ ----------- -------------- ------------ ------------
Net Sales $ - $ - $ - $506,716 $ - $506,716
Cost of sales,
excluding depreciation - - - 337,912 - 337,912
Selling, general, and
administrative expenses,
excluding depreciation 903 - - 111,500 - 112,403
Depreciation 1,121 - - 14,912 - 16,033
Amortization of
goodwill and other
intangibles 4 - - 130 - 134
Management fees and other 13 - - 375 - 388
-------- ------- ------ --------- -------
Operating (loss) income (2,041) - - 41,887 - 39,846
Other (income) and
expenses:
Interest expense 32,280 - - 30,069 - 62,349
Intercompany interest
(income) expense (2,977) (18,377) - 21,354 - -
Interest income (674) - - (132) 89 (717)
Intercompany
management fee (income
expense (2,177) (3,120) - 5,297 - -
Equity in (earnings)
losses of
subsidiaries (6,796) 9,635 - - (2,839) -
Loss on sale of - - - 481 - 481
subsidiary
Other, net 2,472 - - (10,534) - (8,062)
------- ------ ------ -------- ------ -------
22,128 (11,862) - 46,535 (2,750) 54,051
(Loss) income from
continuing operations
before taxes and
minority interest (24,169) 11,862 - (4,648) 2,750 (14,205)
Provision for
income taxes - - - 7,551 1,181 8,732
-------- ------ ------- -------- --------- -------
(Loss) income from
continuing operations
before minority interest (24,169) 11,862 - (12,199) 1,569 (22,937)
Minority interest - - - 172 - 172
------- ------ ------ -------- -------
(Loss) income from
continuing operations (24,169) 11,862 - (12,371) 1,569 (23,109)
Loss from discontinued
operations, net of tax - - - (15) - (15)
Loss (gain) on sale of
discontinued operations,
net of tax 9,235 - - (1,045) - 8,190
--------- ------- ------ ------- -------
Net (loss) income $(14,934) $11,862 $ - $(13,431) $ 1,569 $(14,934)
========= ======= ====== ========== ======= =========
14
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Nine Months Ended September 30, 2003
------------------------------------------------------------------------------------------
Jordan Ind JII Holdings JII Finance Operating Subs Eliminations Consolidated
---------- ------------ ----------- -------------- ------------ ------------
Current assets:
Cash and equivalents $3,465 $ - $ - $20,613 $ - $24,078
Intercompany receivables 8,563 (24,355) - 12,363 3,429 -
Accounts receivable, net - - - 119,856 - 119,856
Inventories - - - 143,886 - 143,886
Assets of discontinued
operations - - - 2,271 - 2,271
Income tax receivable - - - 2,886 - 2,886
Prepaids and other
current assets 6,480 - - 9,432 - 15,912
------ ------- ---- ------- -------- -------
Total current assets 18,508 (24,355) - 311,307 3,429 308,889
Property, plant and
equipment, net 1,931 - - 83,203 - 85,134
Investments and advances to
affiliates 26,013 - - 12,344 - 38,357
Investments in subsidiaries 51,462 172,256 - - (223,718) -
Goodwill, net - - - 264,489 (15,724) 248,765
Intercompany notes
receivable - 235,179 - 1,000 (236,179) -
Other assets 1,189 7,096 - 11,104 - 19,389
------- -------- ---- -------- --------- -
Total assets $99,103 $390,176 $ - $683,447 $(472,192) $700,534
======= ======== ==== ======== ========== ========
Current liabilities:
Accounts payable $ - $ - $ - $69,581 $ - $69,581
Accrued liabilities 43,031 4,024 - 52,451 5 99,511
Liabilities of
discontinued operations - - - 421 - 421
Intercompany payables - - - (11,817) 11,817 -
Current portion of long
term debt 5 - - 13,916 - 13,921
------- ------- ---- ------- ------ -------
Total current liabilities 43,036 4,024 - 124,552 11,822 183,434
Long term debt 122,128 229,397 - 366,954 - 718,479
Other non current liabilities - - - 13,922 - 13,922
Intercompany payables (61,963) - - 298,133 (236,170) -
Deferred income taxes 12,192 - - 591 (965) 11,818
Minority interest - - - 735 - 735
Preferred stock of a
subsidiary (350) - - 122,263 (119,223) 2,690
Shareholders equity (deficit) (15,940) 156,755 - (243,703) (127,656) (230,544)
-------- ------- ----- --------- ---------
Total liabilities and
shareholders equity $99,103 $390,176 $ - $683,447 $(472,192) $700,534
======= ======== ===== ======== ========== ========
15
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Balance Sheet as of December 31, 2003
-----------------------------------------------------------------------------------------------
Jordan Ind JII Holdings JII Finance Operating Subs Eliminations Consolidated
---------- ------------ ----------- -------------- ------------ -----------
Current assets:
Cash and equivalents $ 6,301 $ - $ - $ 9,872 $ - $ 16,173
Intercompany receivables 14,689 (13,313) - 769 (2,145) -
Accounts receivable, net - - - 101,860 - 101,860
Inventories - - - 126,504 - 126,504
Assets of discontinued
operations - - - 15,352 - 15,352
Income tax receivable - - - 5,637 - 5,637
Prepaids and other
current assets 14,275 - - 13,052 - 27,327
-------- --------- --------- -------- --------- --------
Total current assets 35,265 (13,313) - 273,046 (2,145) 292,853
Property, plant and
equipment, net 924 - - 89,032 - 89,956
Investments and advances to
affiliates 34,320 - - 12,344 - 46,664
Investments in subsidiaries 49,129 172,847 - - (221,976) -
Goodwill, net - - - 263,624 (15,724) 247,900
Intercompany notes
receivable - 226,501 - 1,000 (227,501) -
Other assets 10,603 - - 13,552 - 24,155
-------- -------- --------- -------- --------- --------
Total assets $130,241 $386,035 $ - $652,598 $(467,346) $701,528
======== ======== ========= ======== ========= ========
Current liabilities:
Accounts payable $ - $ - $ - $ 54,001 $ - $ 54,001
Accrued liabilities 43,820 - - 43,140 (293) 86,667
Liabilities of
discontinued operations - - - 9,060 - 9,060
Intercompany payables - - - (6,210) 6,210 -
Current portion of long
term debt - - - 20,087 - 20,087
-------- -------- --------- -------- --------- --------
Total current liabilities 43,820 - - 120,078 5,917 169,815
Long term debt 367,661 - - 360,463 - 728,124
Other non current liabilities - - - 14,587 - 14,587
Intercompany payables (44,291) - - 271,792 (227,501) -
Deferred income taxes 12,192 - - (3,994) - 8,198
Minority interest - - - 472 - 472
Preferred stock of a (350) - - 122,699 (119,814) 2,535
subsidiary
Shareholders equity (deficit) (248,791) 386,035 - (233,499) (125,948) (222,203)
-------- -------- --------- -------- -------- --------
Total liabilities and
shareholders equity $130,241 $386,035 $ - $652,598 $(467,346) $701,528
======== ======== ========= ======== ========== ========
16
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Nine Months Ended September 30, 2004
-----------------------------------------------------------------------------------------------
Jordan Ind JII Holdings JII Finance Operating Subs Eliminations Consolidated
---------- ------------ ----------- -------------- ------------ -----------
Net cash (used in) provided by
operating activities $(36,077) $ 3,820 - $ 15,178 $ - $(17,079)
Cash flows from investing
activities
Proceeds from sales of
fixed assets - - - 844 - 844
Capital expenditures (98) - - (5,219) - (5,317)
Net proceeds from sale of
discontinued operations 6,155 - - - - 6,155
Net proceeds from sales of
affiliates 27,207 - - - - 27,207
Acquisition of subsidiary - - - (315) - (315)
-------- -------- ------- -------- ------- -------
Net cash provided by (used
in) investing activities 33,264 - - (4,690) - 28,574
Cash flows from financing
activities
Proceeds from revolving
credit facility - - - 6,070 - 6,070
Payment of deferred
financing costs - (3,820) - - - (3,820)
Repayment of long term debt (23) - - (11,592) - (11,615)
Proceeds from other
borrowings - - - 4,820 - 4,820
-------- -------- ------- -------- ------- -------
Net cash (used in) financing
activities (23) (3,820) - (702) - (4,545)
Effect of exchange rate
changes on cash - - - 955 - 955
-------- -------- ------- -------- ------- -------
Net (decrease) increase in cash
and equivalents (2,836) - - 10,741 - 7,905
Cash and equivalents at
beginning of year 6,301 - - 9,872 - 16,173
-------- -------- ------- -------- ------- -------
Cash and equivalents at end of
year $ 3,465 $ - $ - $ 20,613 $ - $24,078
======== ======== ======= ======== ======= =======
17
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Nine Months Ended September 30, 2003
-----------------------------------------------------------------------------------------------
Jordan Ind JII Holdings JII Finance Operating Subs Eliminations Consolidated
---------- ------------ ----------- -------------- ------------ ------------
Net cash used in operating
activities $(10,913) $ - $ - $ (6,651) $ - $(17,564)
Cash flows from investing
activities
Proceeds from sales of
fixed assets - - - 3,893 - 3,893
Capital expenditures (55) - - (7,720) - (7,775)
Net proceeds from sale of
discontinued operations 9,400 - - - - 9,400
Net proceeds from sale of
subsidiary 678 - - - - 678
Additional purchase price
payments - - - (750) - (750)
------- -------- -------- -------- ------- -------
Net cash provided by (used in)
investing activities 10,023 - - (4,577) - 5,446
Cash flows from financing
activities
Proceeds from revolving
credit facility - - - 21,285 - 21,285
Repayment of long term debt (23) - - (13,653) - (13,676)
Proceeds from other
borrowings - - - 2,244 - 2,244
------- -------- -------- -------- ------- --------
Net cash (used in) provided by
financing activities (23) - - 9,876 - 9,853
Effect of exchange rate changes
on cash - - - 5,550 - 5,550
------- -------- -------- -------- ------- -------
Net (decrease) increase in
cash and equivalents (913) - - 4,198 - 3,285
Cash and equivalents at
beginning of year 3,335 - - 16,594 - 19,929
------- -------- -------- -------- ------- -------
Cash and equivalents at end of
year $2,422 $ - $ - $ 20,792 $ - $23,214
======= ======== ======== ========= ======= =======
18
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
N. Affiliate Transactions
- --------------------------
On May 4, 2004, two of the Company's affiliates, DMS Holdings, Inc. and Mabis
Healthcare Holdings, Inc., ("DMS/Mabis") were sold to a third party. A portion
of the proceeds from the sale was used to repay the Company for operating
expenses which the Company paid on behalf of DMS/Mabis in prior periods, as well
as accrued and unpaid management fees due the Company. These repayments totaled
$806 and $1,069, respectively. Also as a result of the sale, the Company was
paid a fee of $1,725 for the termination of its management fee arrangement with
DMS/Mabis, and a fee of $1,600 pursuant to certain advisory agreements. The
Company recorded income of approximately $4,309 in the second quarter of 2004 as
a result of this transaction.
On May 13, 2004, one of the Company's affiliates, Flavor and Fragrance Holdings,
Inc., ("FFG") was sold to a third party. A portion of the proceeds was used to
repay the principal and accrued interest on the note the Company received when
the net assets of Flavorsource were sold to FFG on January 1, 2002. This
principal and accrued interest totaled $12,181. In addition, a portion of the
proceeds from the sale was used to repay the Company for operating expenses
which the Company paid on behalf of FFG in prior periods, as well as accrued and
unpaid management fees due the Company. These repayments totaled $4,509 and
$1,672, respectively. Also as a result of the sale, the Company was paid a fee
of $1,705 for the termination of its management fee arrangement with FFG, and a
fee of $1,940 pursuant to certain advisory agreements. The Company recorded
income of approximately $3,645 in the second quarter of 2004 as a result of this
transaction.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
The following discussion should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the 2003 10-K and the financial statements and the related notes
thereto.
Results of Operations
- ---------------------
Summarized below are the net sales, operating income (loss) and operating
margins (as defined) for each of the Company's business segments for the three
month and nine month periods ended September 30, 2004 and 2003. Due to the
divestiture of the net assets of the School Annual division of JII Promotions in
September 2003 and the subsequent sale of certain assets of the Ad Specialty and
Calendar product lines in January 2004, the operations of JII Promotions have
been classified as Discontinued Operations on the Company's Consolidated
Statement of Operations in all periods. JII Promotions was part of the Specialty
Printing and Labeling segment. (See Note E to the financial statements.) The
following discussion reviews the following segment data and certain of the
consolidated financial data for the Company.
Three Months Ended Nine Months Ended
September 30, September 30, 2004
------------------------- --------------------------
2004 2003 2004 2003
------- ------ ------- ------
Net Sales:
Specialty Printing and Labeling $12,717 $12,563 $38,936 $37,632
Jordan Specialty Plastics 36,831 30,455 102,864 87,529
Jordan Auto Aftermarket 35,736 37,643 116,354 118,845
Kinetek 84,917 72,655 242,525 215,847
Consumer and Industrial Products 16,871 17,819 45,641 46,863
-------- -------- -------- --------
Total $187,072 $171,135 $546,320 $506,716
======== ======== ======== ========
Operating Income (Loss):
Specialty Printing and Labeling $1,303 $1,325 $4,358 $3,423
Jordan Specialty Plastics 3,113 1,898 7,027 5,419
Jordan Auto Aftermarket 951 1,062 7,443 9,221
Kinetek 9,868 7,183 26,439 24,558
Consumer and Industrial Products 804 1,054 (913) 100
------- ------- ------- -------
Total(a) $16,039 $12,522 $44,354 $42,721
======= ======= ======= =======
Operating Margin(b)
Specialty Printing and Labeling 10.3% 10.6% 11.2% 9.1%
Jordan Specialty Plastics 8.5% 6.2% 6.8% 6.2%
Jordan Auto Aftermarket 2.7% 2.8% 6.4% 7.8%
Kinetek 11.6% 9.9% 10.9% 11.4%
Consumer and Industrial Products 4.8% 5.9% (2.0)% 0.2%
Total 8.6% 7.3% 8.1% 8.4%
- ----------------------
(a) Before corporate overhead and management fees of $415 and $720 for the
three months ended September 30, 2004 and 2003, respectively, and
$(8,232) and $2,875 for the nine months ended September 30, 2004 and
2003, respectively. Corporate overhead and management fees for the nine
months ended September 30, 2004 includes income from the sale of three
affiliates of $7,954.
(b) Operating margin is operating income (loss) divided by net sales.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Specialty Printing and Labeling. As of September 30, 2004, the Specialty
Printing and Labeling group ("SPL") consisted of Valmark, Pamco, and Seaboard.
Net sales for the three months ended September 30, 2004 increased $0.2 million,
or 1.2%, over the same period in 2003. This increase was primarily due to higher
sales of rollstock and membrane switches at Valmark, $0.1 million and $0.2
million, respectively, and increased sales of labels at Pamco, $0.1 million.
Partially offsetting these increases were lower sales of folding boxes at
Seaboard, $0.2 million. Net sales for the nine months ended September 30, 2004
increased $1.3 million, or 3.5%, over the same period in 2003. This increase was
primarily due to increased sales of membrane switches, screen printed products
and rollstock at Valmark, $1.1 million, $0.2 million, and $0.2 million,
respectively, and higher sales of labels at Pamco, $0.9 million. Partially
offsetting these increases were lower sales of folding boxes at Seaboard, $1.1
million. The increase at Valmark was primarily due to a sales increase of
approximately 25% to one of its largest customers in the medical equipment
market. Additionally, sales to a major customer of electronic sensors more than
doubled from the same period in 2003.
Operating income for the three months ended September 30, 2004 was consistent
with the same period in 2003. This was primarily due to higher operating income
at Valmark, which was offset by lower operating income at Seaboard. Operating
income for the nine months ended September 30, 2004 increased $0.9 million, or
27.3%, over the same period in 2003. This increase was primarily due to higher
operating income at Valmark and Pamco, $1.0 million and $0.2 million,
respectively, as well as reduced corporate expenses. Partially offsetting these
increases was lower operating income at Seaboard, $0.6 million. Operating income
increases at Valmark and Pamco are attributable to the higher sales volumes
discussed above.
Jordan Specialty Plastics. As of September 30, 2004, the Jordan Specialty
Plastics group ("JSP") consisted of Beemak, Sate-Lite, and Deflecto.
Net sales for the three months ended September 30, 2004 increased $6.4 million,
or 20.9%, over the same period in 2003. This increase was primarily due to
higher sales of hardware and office products at Deflecto, $3.2 million and $2.5
million, respectively, increased sales of bike reflectors and other
injection-molded products at Sate-Lite, $0.4 million each, and higher sales of
fabricated products at Beemak, $1.4 million. Partially offsetting these
increases were lower sales of injection-molded products at Beemak, $0.7 million.
In addition, net sales decreased due to the divestiture of the Midwest Color
division of Sate-Lite in September 2003, $0.8 million. Net sales for the nine
months ended September 30, 2004 increased $15.3 million, or 17.5%, over the same
period in 2003. This increase was primarily due to higher sales of hardware and
office products at Deflecto, $8.9 million and $5.1 million, respectively,
increased sales of fabricated and display products at Beemak, $1.3 million and
$0.7 million, respectively, and higher sales of truck and auto reflectors, bike
reflectors, plastic hospital supplies, and warning triangles at Sate-Lite, $0.4
million, $0.8 million, $0.3 million, and $0.1 million, respectively. Partially
offsetting these increases were lower sales of thermoplastic colorants at
Sate-Lite, $2.3 million, due to the sale of the Midwest Color division, as
mentioned above. The increase in net sales of office products at Deflecto was
largely driven by the introduction of new products and increased sales of
chairmats. Strong sales of hardware products at Deflecto were driven by
increased sales in retail channels as well as the wholesale construction market.
Additionally, net sales were positively impacted by Deflecto's ability to pass
through some raw material price increases by raising selling prices.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Operating income for the three months ended September 30, 2004 increased $1.2
million, or 64.0%, over the same period in 2003. This increase was primarily due
to higher operating income at Deflecto, $0.6 million, Sate-Lite, $0.4 million,
and Beemak, $0.3 million. Partially offsetting these increase were slightly
higher corporate expenses, $0.1 million. Operating income for the nine months
ended September 30, 2004 increased $1.6 million, or 29.7%, over the same period
in 2003. This increase was primarily due to higher operating income at Deflecto,
$1.0 million, Sate-Lite, $0.5 million, and Beemak, $0.2 million. Partially
offsetting these increases were slightly higher corporate expenses, $0.1
million. Operating income at Deflecto has benefited from significant cost
reductions during the first nine months of 2004, which have helped to offset
increases in raw material costs.
Jordan Auto Aftermarket. As of September 30, 2004, the Jordan Auto
Aftermarket group ("JAAI") consisted of Dacco, Alma and Atco.
Net sales for the three months ended September 30, 2004 decreased $1.9
million, or 5.1%, from the same period in 2003. This decrease was primarily
due to lower sales of torque converters and soft parts at Dacco, air
conditioning compressors at Alma, and air conditioning hose assemblies at
Atco. Partially offsetting these decreases were higher sales of drive trains
at Alma and fittings at Atco. Net sales in the third quarter were negatively
impacted by the hurricane weather in early September which resulted in
temporary store closings at six Dacco locations and disrupted other sales
channels in the southeast. Net sales for the nine months ended September 30,
2004 decreased $2.5 million, or 2.1% from the same period in 2003. This
decrease was primarily due to lower sales of torque converters at Dacco, air
conditioning compressors at Alma, and driers and accumulators and air
conditioning hose assemblies at Atco. Partially offsetting these decreases
were higher sales of drive trains at Alma and fittings at Atco. Net sales of
air conditioning products have decreased primarily due to the summer of 2004
being one of the coolest summers on record. In addition, net sales were
negatively impacted by excess inventories of hose assemblies at a key
customer. Partially offsetting these decreases were higher sales of tubing,
assemblies, and fittings for the truck market resulting from increased fleet
truck purchases in advance of new emissions standards scheduled to become
effective in 2007.
Operating income for the three months ended September 30, 2004 decreased $0.1
million, or 10.5% from the same period in 2003. This decrease was primarily due
to lower operating income at Dacco and Alma, partially offset by higher
operating income at Atco and reduced corporate expenses. Operating income for
the nine months ended September 30, 2004 decreased $1.8 million, or 19.3%, from
the same period in 2003. This decrease was primarily due to lower operating
income at Dacco and Alma, partially offset by reduced corporate expenses.
Operating income was negatively impacted by inefficiencies in the supply chain
during the second quarter and first half of 2004. In addition, new product
introductions have resulted in ramp up inefficiencies, while the development of
new suppliers resulted in higher costs than anticipated. These conditions were
compounded by peak demand of two key customers which resulted in higher than
expected labor costs during the second quarter.
Kinetek. As of September 30, 2004, the Kinetek group consisted of
Imperial Group, Merkle-Korff, FIR, ED&C, Motion Control, Advanced DC and
DeSheng.
Net sales for the three months ended September 30, 2004 increased $12.3
million, or 16.9%, over the same period in 2003. This increase was primarily
due to higher sales of subfractional motors, $3.3 million, fractional/integral
motors, $8.4 million, and controls, $0.6 million. Net sales for the nine
months ended September 30, 2004 increased $26.7 million, or 12.4%, over the
same period in 2003.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
This increase was primarily due to higher sales of subfractional motors, $2.9
million, fractional/integral motors $19.6 million, and controls, $4.7 million.
The higher sales of subfractional motors was driven the introduction of a
redesigned ice-crusher motor sold to Whirlpool and higher demand for products
used in the medical, restaurant, and automotive end markets. Increased sales
of fractional/integral motors was led by sharp growth in U.S. sales of DC
products used in material handling and golf car applications and strong demand
for AC and DC products used in the floor care end market in the U.S. Partially
offsetting these increases were lower sales of subfractional motor products
sold to major appliance customers and the inclusion of significant one-time
sales to a general vending customer during the first quarter of 2003. In
addition, European sales of fractional/integral motors modestly decreased due
to general weakness in Kinetek's principal markets in Europe and the Middle
East.
Operating income for the three months ended September 30, 2004 increased $2.7
million, or 37.4%, over the same period in 2003. This increase was primarily due
to higher operating income in the motors segment and controls segment, 12.3% and
9.0%, respectively. Operating income for the nine months ended September 30,
2004, increased $1.9 million, or 7.7%, over the same period in 2003. This
increase was primarily due to higher operating income in the motors segment,
3.9%, partially offset by lower operating income in the controls segment, 0.6%.
The increases in operating income were primarily due to the higher sales levels
mentioned above. Partially offsetting the sales increases were lower gross
margins resulting from increased metal component costs and the inability to
fully absorb these increases in the form of higher sales prices, unfavorable
product mix, and temporary inefficiencies during the planning and execution
phases of two facility moves and one facility closure. Additionally, operating
expenses increased during the nine months ended September 30, 2004 due to
employment increases in preparation for the launch of a new line of elevator
control products.
Consumer and Industrial Products. As of September 30, 2004, the Consumer
and Industrial Products group consisted of Welcome Home LLC and its two
divisions, Cape Craftsmen and Welcome Home, and Cho-Pat, and GramTel.
Net sales for the three months ended September 30, 2004 decreased $0.9 million,
or 5.3%, from the same period in 2003. This decrease was primarily due to lower
retail sales at Welcome Home, $0.8 million, and decreased sales of home
accessories at Cape Craftsmen, $0.3 million. Partially offsetting these
decreases were higher sales of orthopedic supports at Cho-Pat, $0.1 million, and
data recovery services at GramTel, $0.1 million. Net sales for the nine months
ended September 30, 2004 decreased $1.2 million, or 2.6%, from the same period
in 2003. This decrease was primarily due to lower sales of home accessories at
Cape Craftsmen, $1.0 million, and decreased retail sales at Welcome Home, $0.8
million. Partially offsetting these decreases were higher sales of orthopedic
supports at Cho-Pat and data recovery services at GramTel, $0.3 million each.
Decreased sales at Welcome Home are attributable to strong competition and
pricing pressures in the home furnishing retail arena.
Operating income for the three months ended September 30, 2004 decreased $0.3
million, or 23.7%, from the same period in 2003. This decrease was primarily due
to higher operating loss at Welcome Home, $0.5 million. Partially offsetting
this decrease was higher operating income at Cape Craftsmen, $0.2 million.
Operating loss for the nine months ended September 30, 2004 increased $1.0
million. This increase in operating loss was primarily due to higher operating
loss at Welcome Home, $1.0 million, and decreased operating income at
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Cape Craftsmen, $0.3 million. Partially offsetting these variances was higher
operating income at Cho-Pat, $0.1 million, and lower operating loss at
GramTel, $0.2 million. Increased operating losses at Welcome Home are the
result of top line pressures, as discussed above, coupled with the highly
fixed nature of Welcome Home's cost structure.
Consolidated Results: (See Condensed Consolidated Statement of Operations).
Consolidated net sales for the three months ended September 30, 2004 increased
$15.9 million, or 9.3%, over the same period in 2003. This increase was
primarily due to higher sales of rollstock and membrane switches at Valmark,
hardware and office products at Deflecto, bike reflectors and other
injection-molded products at Sate-Lite, fabricated products at Beemak, drive
trains at Alma, fittings at Atco, and subfractional motors, fractional/integral
motors, and controls at Kinetek. Partially offsetting these increases were lower
sales of folding boxes at Seaboard, injection-molded products at Beemak, torque
converters and soft parts at Dacco, air conditioning compressors at Alma, air
conditioning hose assemblies at Atco, retail sales at Welcome Home, and home
accessories at Cape. In addition, net sales of thermoplastic colorants at
Sate-Lite decreased due to the divestiture of the Midwest Color division in
September 2003. Consolidated net sales for the nine months ended September 30,
2004 increased $39.6 million, or 7.8%, over the same period in 2003. This
increase was primarily due to higher sales of membrane switches, screen printed
products and rollstock at Valmark, labels at Pamco, hardware and office products
at Deflecto, fabricated and display products at Beemak, truck and auto
reflectors, bike reflectors, and plastic hospital supplies at Sate-Lite, drive
trains at Alma, fittings at Atco, subfractional motors, fractional/integral
motors and controls at Kinetek, and data recovery services at GramTel. Partially
offsetting these increases were lower sales of folding boxes at Seaboard, torque
converters at Dacco, air conditioning compressors at Alma, driers and
accumulators and air conditioning hose assemblies at Atco, home accessories at
Cape Craftsmen, and retail sales at Welcome Home. Additionally, net sales
decreased due to the sale of Midwest Color, as mentioned above.
Consolidated operating income for the three months ended September 30, 2004
increased $3.8 million, or 32.4%, over the same period in 2003. Consolidated
operating income for the nine months ended September 30, 2004 increased $12.7
million, or 32.0%, over the same period in 2003. These increases were primarily
due to significant cost reductions at Deflecto and overall higher sales
throughout the consolidated group. In addition, consolidated operating income
benefited from lower corporate expenses, and income received from the sale of
three affiliates of the consolidated group. Partially offsetting these increases
was lower operating income due to increases in raw material costs at Deflecto,
supply chain and ramp-up inefficiencies in the Jordan Auto Aftermarket group,
and lower gross margins at Kinetek resulting from increased metal component
costs, unfavorable product mix, and temporary inefficiencies during the planning
and execution phases of two facility moves and one facility closure.
Liquidity and Capital Resources.
In general, the Company requires liquidity for working capital, capital
expenditures, interest, taxes, debt repayment and its acquisition strategy. Of
primary importance are the Company's working capital requirements, which
increase whenever the Company experiences strong incremental demand or
geographical expansion.
The Company had approximately $125.5 million of working capital at September 30,
2004 compared to approximately $123.0 million at December 31, 2003.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Operating activities. Net cash used in operating activities for the nine months
ended September 30, 2004 was $17.1 million compared to net cash used in
operating activities of $17.6 million for the same period in 2003. The decrease
in cash used is primarily due to favorable operating results compared to 2003.
Investing activities. Net cash provided by investing activities for the nine
months ended September 30, 2004 was $28.6 million compared to net cash provided
by investing activities of $5.4 million for the same period in 2003. The
increase in cash provided by investing activities is primarily due to the
divestiture of the Ad Specialty and Calendar divisions of JII Promotions in the
first quarter of 2004, the sale of three affiliates in the second quarter of
2004, and decreased capital expenditures in 2004 compared to 2003. Partially
offsetting these increases is net proceeds from the sale of the School Annual
division of JII Promotions in September 2003.
Financing activities. Net cash used in financing activities for the nine months
ended September 30, 2004 was $4.5 million compared to net cash provided by
financing activities of $9.9 million for the same period in 2003. The decrease
in cash provided by financing activities is primarily due to lower net
borrowings on revolving credit facilities and increased payment of financing
fees resulting from the Exchange Offer. Partially offsetting these variances is
lower repayment of long-term debt and increased proceeds from other borrowings
in 2004 versus the same period in 2003.
The Company is party to two credit agreements under which the Company is able to
borrow up to $110.0 million to fund acquisitions, provide working capital and
for other general corporate purposes. The credit agreements mature in 2005 and
2006. The agreements are secured by a first priority security interest in
substantially all of the Company's assets. As of September 30, 2004, the Company
had approximately $25.0 million of available funds under these arrangements.
On February 18, 2004, the Company completed an Exchange Offer, whereby it
exchanged $173.3 million of new Senior Notes (the "Exchange Notes") for $247.6
million of Old Senior Notes. The Exchange Notes were co-issued by JII Holdings
LLC, a wholly owned subsidiary of the Company, and its wholly owned subsidiary,
JII Holdings Finance Corporation. The Exchange Notes bear interest at 13% per
annum which is payable semi annually on February 1 and August 1 of each year,
and mature on April 1, 2007. The notes that were exchanged bore interest at 10
3/8% per annum and paid interest semi annually on February 1 and August 1. The
remaining Old Senior Notes mature on August 1, 2007.
The Exchange Offer has been accounted for as a troubled debt restructuring in
conformity with Statement of Financial Accounting Standards No. 15 "Accounting
by Debtors and Creditors for Troubled Debt Restructurings" (SFAS No. 15). SFAS
No. 15 requires that, when there is a modification of terms such as this, if the
total debt service of the new debt is less than the carrying amount on the
balance sheet of the old debt, the carrying amount should be reduced to the
total debt service amount. This reduction resulted in a gain of $2.0 million,
which was required by SFAS No. 15 to be offset by fees incurred on the
transaction. Fees of $7.4 million which were in excess of the gain, were
recorded as interest expense through the third quarter of 2004. The remaining
reduction in the principal of the Exchange Notes compared to the Old Senior
Notes will be recognized over the period to maturity of the Exchange Notes as a
reduction of interest expense.
On January 31, 2004, the Company and holders of $90.1 of the Company's Senior
Subordinated Discount Debentures entered into a Waiver Agreement which provides
that the participating note holders waive any rights to claim an event of
default if the Company does not make the scheduled interest payments as required
in the applicable indenture.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
The Company may pay interest on these Senior Subordinated Discount Debentures
only if such payment complies with the restricted payments covenant in the
indenture governing the Exchange Notes. Should the Company be prohibited from
or elect not to make interest payments on these notes, the interest will
continue to accrue on the Senior Subordinated Discount Debentures at the
original rate of 11 3/4% per year and will be due and payable to the holders
at the maturity date of the notes. Pursuant to the Waiver Agreement, the
maturity date of the participating notes is the earlier of (1) the date on
which all of the outstanding principal and interest on the Exchange Notes and
the Senior Secured Discount Debentures not participating in the Waiver
Agreement have been paid in full, (2) the date six months after the original
maturity of the participating notes, or (3) the date on which the Company
enters into a bankruptcy proceeding.
On February 18, 2004, certain of the Company's Senior Subordinated Discount
Debenture note holders entered into a Modification Agreement which provides for
a reduction in their stated maturity value and a reduction of their applicable
interest rate. The aggregate maturity value of the notes held by the parties to
the Modification Agreement is $23.0 million which has been reduced to $6.9
million. The interest rate on these notes has been reduced to a stated rate of
1.61% from 11.75%. On April 1, 2004 certain holders of an additional $1.7
million of the Company's Senior Subordinated Discount Debentures elected to
participate in the Modification Agreement. The maturity value of these notes has
been reduced to $0.5 million. The holders of these modified notes retain the
right to collect the original maturity value and interest thereon at the
original interest rate if the Company meets certain financial tests and ratios.
Under the Modification Agreement, these notes mature on the earlier of (1) the
date that all other Senior Subordinated Discount Debenture note holders have
been paid in full, (2) the date that is six months after the original maturity
date, or (3) the date on which the Company enters into a bankruptcy proceeding.
The Company has determined that this modification will be accounted for as a
troubled debt restructuring as required by SFAS No. 15. The effect of this
accounting treatment will not reduce the carrying value of the modified notes;
however, the interest expense associated with the modified notes will be
calculated using the modified stated interest rate of 1.61% per annum and the
reduced maturity amount.
The remaining Senior Subordinated Discount Debentures that are not party to the
Modification Agreement will continue to accrue interest at 11.75% and represent
$70.2 million of the total outstanding principal amount of $94.9 million.
The Company may, from time to time, use cash, including cash generated from
borrowings under its credit agreement, to purchase either its 11 3/4% Senior
Subordinated Discount Debentures due 2009, its 10 3/8% Senior Notes due 2007, or
its 13% Exchange Notes due 2007, or any combination thereof, through open market
purchases, privately negotiated purchases or exchanges, tender offers,
redemptions or otherwise, and may, from time to time, pursue various refinancing
or financial restructurings, including pursuant to current solicitations and
waivers involving those securities, in each case, without public announcement or
prior notice to the holders thereof, and if initiated or commenced, such
purchases or offers to purchase may be discontinued at any time.
The Company's aggregate business has a certain degree of seasonality. Welcome
Home's sales are somewhat stronger toward year-end due to the nature of their
products and their popularity as holiday gifts.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Item 3. Quantitative and Qualitative Disclosures About Market Risks
- -------------------------------------------------------------------
The Company's debt obligations are primarily fixed-rate in nature and, as such,
are not sensitive to changes in interest rates. At September 30, 2004, the
Company had $55.1 million of variable rate debt outstanding. A one-percentage
point increase in interest rates would increase the annual amount of interest
paid by approximately $0.6 million. The Company does not believe that its market
risk financial instruments on September 30, 2004 would have a material effect on
future operations or cash flows.
The Company is exposed to market risk from changes in foreign currency exchange
rates, including fluctuations in the functional currency of foreign operations.
The functional currency of operations outside the United States is the
respective local currency. Foreign currency translation effects are included in
accumulated other comprehensive income in shareholder's equity.
Item 4. Controls and Procedures
- -------------------------------
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-15 of the
Securities Exchange Act of 1934 ("Exchange Act") promulgated thereunder, our
chief executive officer and chief financial officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report (the "Evaluation Date"). Based on such evaluation,
our chief executive officer and chief financial officer have concluded that our
disclosure controls and procedures were effective as of the Evaluation Date to
ensure that information required to be disclosed in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms. There have been no
changes in our internal controls over financial reporting during the period
covered by this report that were identified in connection with the evaluation
referred to above that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
27
Part II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Unregistered Sales of Securities and Use of Proceeds
-----------------------------------------------------
None
Item 3. Defaults upon Senior Securities
---------------------------------
None
Item 4. Submission of Matters to a Vote of Security
-------------------------------------------
Holders
-------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits
--------
A list of exhibits filed with this
report is contained on the Exhibit Index
immediately preceding such exhibits and
is incorporated herein by reference
28
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JORDAN INDUSTRIES, INC.
November 15, 2004 By: /s/ Norman R. Bates
-----------------------
Norman R. Bates
Chief Financial Officer
29
EXHIBIT INDEX
Exhibit
Number Description
31(a) Certificate of Chief Executive Officer pursuant to Rule 13a-14
(a) or Rule 15d-14 (a)
31(b) Certificate of Chief Financial Officer pursuant to Rule 13a-14
(a) or Rule 15d-14 (a)
32(a) Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes Oxley Act of 2002
32(b) Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes Oxley Act of 2002
30