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 March 31, 2005 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
May 16, 2005: 98,501.0004.
2
JORDAN INDUSTRIES, INC.
INDEX
Part I. Financial Information No.
- ----------------------------- ---
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2005
(Unaudited) and December 31, 2004 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2005 and 2004 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2005 and 2004 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information 24
- --------------------------
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)
March 31, December 31,
2005 2004
-------- ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 12,753 $ 15,412
Accounts receivable, net 115,435 109,554
Inventories 136,641 130,033
Assets of discontinued operations (See Note E) 2,622 3,432
Income tax receivable 2,652 3,631
Prepaid expenses and other current assets 12,674 12,363
-------- --------
Total Current Assets 282,777 274,425
Property, plant and equipment, net 82,926 85,036
Investments in and advances to affiliates 41,078 40,882
Goodwill, net 245,104 245,309
Other assets 15,087 16,754
-------- --------
Total Assets $666,972 $662,406
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current Liabilities:
Accounts payable $64,165 $62,796
Accrued liabilities 83,420 81,451
Liabilities of discontinued operations (See Note E) 726 698
Current portion of long-term debt 24,303 27,874
-------- --------
Total Current Liabilities 172,614 172,819
Long-term debt, less current portion 698,612 689,399
Other non-current liabilities 27,178 25,167
Deferred income taxes 16,373 14,255
Minority interest 1,069 1,003
Preferred stock of a subsidiary 2,799 2,744
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) 4,564 3,685
Accumulated deficit (258,354) (248,783)
-------- --------
Total Shareholders' Equity (net capital
deficiency) (251,673) (242,981)
-------- --------
Total Liabilities and Shareholders'
Equity (net capital deficiency) $666,972 $662,406
======== ========
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
March 31,
-------------------
2005 2004
Net sales $175,453 $168,409
Cost of sales, excluding
depreciation 125,609 114,321
Selling, general and administrative
expenses, excluding depreciation 37,716 38,005
Depreciation 3,759 4,932
Amortization 41 46
Management fees and other 30 (70)
--------- --------
Operating income 8,298 11,175
Other (income) expenses:
Interest expense 13,636 23,659
Interest income (57) (270)
Gain on sale of subsidiary (251) -
Other 26 333
--------- --------
13,354 23,722
Loss from continuing operations before
income taxes and minority interest (5,056) (12,547)
Provision for income taxes 3,038 3,933
--------- --------
Loss from continuing operations before
minority interest (8,094) (16,480)
Minority interest 66 99
--------- --------
Loss from continuing operations (8,160) (16,579)
Discontinued operations:
Loss from discontinued operations, net
of tax (See Note E) (1,356) (429)
Loss on sale of discontinued operations,
net of tax (See Note E) - (1,171)
--------- --------
(1,356) (1,600)
Net loss $(9,516) $(18,179)
========= ========
See accompanying notes to condensed consolidated financial statements.
5
JORDAN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
March 31,
2005 2004
------ ------
Cash flows from operating activities:
Net loss $(9,516) $(18,179)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on sale of discontinued operations
(See Note E) - 1,171
Gain on sale of subsidiary (251) -
Depreciation and amortization 3,800 4,978
Amortization of deferred financing fees 1,613 1,590
Minority interest 66 99
Non-cash interest 134 (24)
Deferred income taxes 2,011 1,641
Loss on disposal of fixed assets 8 21
Other 15 444
Changes in operating assets and liabilities:
Increase in current assets (12,013) (19,395)
(Decrease)/increase in current liabilities (1,794) 11,771
(Increase)/decrease in non-current assets (189) 2,222
Increase/(decrease) in non-current liabilities 2,011 (51)
Decrease/(increase) in net assets of
discontinued operations 838 (850)
------- -------
Net cash used in operating activities (13,267) (14,562)
Cash flows from investing activities:
Proceeds from sale of fixed assets 166 320
Capital expenditures (1,611) (1,684)
Net proceeds from sale of discontinued operations
(See Note E) - 6,155
Acquisition of subsidiary (481) -
Net proceeds from sale of subsidiary 1,075 -
------- -------
Net cash (used in)/provided by investing
activities (851) 4,791
Cash flows from financing activities:
Proceeds from revolving credit facilities, net 12,319 15,958
Repayment of long-term debt (3,763) (1,140)
Proceeds from other borrowings 2,447 525
Payment of financing fees - (2,164)
------- -------
Net cash provided by financing activities 11,003 13,179
Effect of exchange rate changes on cash 456 1,777
------- -------
Net (decrease)/increase in cash and cash equivalents (2,659) 5,185
Cash and cash equivalents at beginning of period 15,412 15,517
------- -------
Cash and cash equivalents at end of period $12,753 $20,702
======= =======
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, 2004,
which are included in the Company's Annual Report filed on Form 10-K for such
year (the "2004 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.
Shipping and handling costs are classified in cost of sales in the statement of
operations. Certain prior year amounts have been reclassified from revenue to
cost of sales to conform to the current year presentation.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities - An Interpretation of Accounting Research
Bulletin (ARB) No. 51." This interpretation provides guidance on how to identify
variable interest entities and how to determine whether or not those entities
should be consolidated. The Company adopted the provisions of FIN 46 as of
January 1, 2005 and determined that there are no variable interest entities that
the Company would be required to consolidate.
The Company has recorded income tax expense of $3,038 for the three months
ended March 31, 2005 primarily attributable to foreign taxes, state taxes and
the change in the Company's deferred tax liability. Due to the uncertainty of
when the goodwill deferred tax liability will reverse, the Company has not
considered any future reversal of the deferred tax liability related to
goodwill to support the realization of deferred tax assets. Additionally, the
Company continues to maintain a full valuation allowance against its deferred
tax assets.
During 2004, the Company realized $88,392 of cancellation of indebtedness
income as a result of modifications to certain of its outstanding debt. The
Internal Revenue Code provides exceptions to the recognition of certain types
of cancellation of indebtedness income for U.S federal income tax purposes.
These rules will require the Company to reduce specified tax attributes which
may include the reduction of net operating loss carryforwards and the tax
basis of assets. However, the amount of reduction to any specific attribute is
dependent upon an election not required to be made until the filing of the
Company's 2004 federal tax return. It is possible that the effect of the
attribute reduction could result in a decrease in the tax basis of goodwill,
which would result in an increase in the Company's deferred tax liabilities
and could result in a financial statement charge to income tax expense in the
period when the election is made.
The Company has recorded an income tax provision for the three months ended
March 31, 2005 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:
March 31, December 31,
2005 2004
------------ -------------
Raw materials $ 63,164 $ 57,453
Work-in-process 14,058 13,693
Finished goods 59,419 58,887
-------- --------
$136,641 $130,033
======== ========
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
D. Comprehensive Loss
- ----------------------
Total comprehensive loss for the three months ended March 31, 2005 and 2004 was
as follows:
Three Months ended
March 31,
----------------------
2005 2004
------ ------
Net loss $(9,516) $(18,179)
Foreign currency translation 879 2,992
-------- --------
Comprehensive loss $(8,637) $(15,187)
=======,= =========
E. Discontinued Operations
- ---------------------------
During 2004, the Company undertook a plan to sell Electrical Design & Control
("ED&C"), a subsidiary of Kinetek. As such, the consolidated financial
statements reflect ED&C as a discontinued operation in all periods presented.
On May 2, 2005, the Company sold certain inventory, equipment, intellectual
property assets and contracts of ED&C. This sale occurred subsequent to March
31, 2005, and has no impact on the financial statements of the Company as of
that date. The results of the sale will be reflected in the quarter ended June
30, 2005.
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 in all periods presented. 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.
Summarized selected financial information for the discontinued operations are
as follows:
Three months ended March 31,
----------------------------
2005 2004
---- ----
Revenues $868 $3,687
Loss from discontinued
operations (1,356) (429)
The major classes of assets and liabilities of the discontinued operations are
as follows:
March 31, December 31,
2005 2004
--------- ------------
Current assets $ 1,462 $ 2,267
Property, plant and equipment, net 1,130 1,134
Other long-term assets 30 31
-------- --------
Total assets 2,622 3,432
Current liabilities 726 698
-------- --------
Net assets of discontinued
operations $ 1,896 $ 2,734
======== ========
8
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
F. Acquisition of Subsidiary
- ----------------------------
On March 28, 2005, the Company, through its wholly owned subsidiary, Kinetek,
paid in cash the remaining acquisition cost for its September 30, 2004
acquisition of O. Thompson, a New York City-based elevator control company. The
total acquisition cost was originally $887 which was subsequently adjusted to
$853 during the first quarter of 2005. Of the total acquisition price, $372 was
paid during 2004, and the remaining $481 was paid during the first quarter of
2005.
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.
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 ended March 31, 2005 and 2004 were as follows:
Three Months Ended
March 31,
---------------------
2005 2004
---- ----
Service cost $177 $195
Interest cost 315 310
Expected return on plan assets (296) (270)
Prior service costs recognized 15 15
Recognized net actuarial loss 32 31
---- ----
Net periodic benefit cost $243 $281
==== ====
The components of net periodic benefit cost for the Company's post-retirement
healthcare benefit plans for the three months ended March 31, 2005 and 2004 were
as follows:
Three Months Ended
March 31,
---------------------
2005 2004
---- ----
Service cost $37 $46
Interest cost 55 90
Recognized net actuarial loss 5 48
--- ----
Net periodic benefit cost $97 $184
=== ====
9
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
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, 2004 consolidated financial statements
with respect to segmentation or the measurement of segment profit or loss.
J. Management Discussion of Liquidity
- --------------------------------------
As discussed in the 2004 10-K, one of the Company's revolving credit facilities
contains a provision for the step-down in maximum borrowing capacity during
2005. As of June 1, 2005, the Company's maximum borrowings under this agreement
will decrease from $75,000 to $55,000. This, coupled with the facts that the
Company has experienced operating losses in recent years and has used cash in
operating activities, has caused the Company's executive management to evaluate
various options to improve the Company's liquidity. To this end, the Company has
restructured some of its outstanding debt through the Exchange Offer discussed
in the 2004 10-K and the Modification and Waiver Agreements also discussed in
the 2004 10-K. The effect of these transactions has been to reduce cash paid for
interest in the current year as well as to provide for further reductions in
debt maturity payments if certain financial performance is not achieved. In
addition, the Company expects improved operating performance on a consolidated
basis over the prior year. Specifically, new product development and the
continued shift of manufacturing to China in the Specialty Plastics and Kinetek
groups are expected to improve results. In addition, the exit of a certain
unprofitable business with a specific customer and plans to improve production
efficiencies within the Auto Aftermarket Group will increase operating margins.
Further, the Company has evaluated its holdings of investments in affiliates
and, when appropriate, will sell certain investments, similar to the sale of the
Company's investments in DMS Holdings Inc, Mabis Healthcare Holdings Inc. and
Flavor and Fragrance Holdings Inc. as described in the 2004 10-K. The Company
believes that through its efforts discussed above, the Company will have
sufficient liquidity to meet its obligations in the coming year.
M. Sale of Subsidiary
- ----------------------
On March 24, 2005, the Company sold the assets of Cho-Pat, Inc. ("Cho-Pat") to
Cho-Pat's management team for proceeds of $1,075. Cho-Pat is a designer and
manufacturer of orthopedic related sports medicine devices and was part of the
Consumer and Industrial Products segment. The Company recognized a gain of $251
related to the sale of Cho-Pat.
10
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
N. Warranties
- --------------
The Company provides warranties on certain products for varying lengths of time.
The Company estimates the costs that may be incurred and records a liability in
the amount of such costs at the time product revenue is recognized. Changes to
the Company's product warranty accrual during the three months ended March 31,
2005 and 2004 are as follows:
Three months ended
March 31,
------------------
2005 2004
---- ----
Balance, beginning of period $2,315 $1,700
Warranties issued 453 525
Change in estimate (225) -
Settlements (371) (201)
------ ------
Balance, end of period $2,172 $2,024
====== ======
11
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
O. Condensed Consolidating Financial Statements (Unaudited)
Pursuant to the Exchange Offer described in the 2004 10-K, wholly owned
subsidiaries of the Company, JII Holdings, LLC and JII Holdings Finance
Corporation, issued senior secured notes which have been guaranteed by the
Company and 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 March 31, 2005
----------------------------------------------------------------------------------------------------
Jordan JII JII Non-
Industries Holdings Finance Guarantors Guarantors Eliminations Consolidated
---------- -------- ------- ---------- ---------- ------------ ------------
Net Sales $ - $ - $ - $ 89,153 $ 86,300 $ - $ 175,453
Cost of sales,
excluding depreciation - - - 64,536 61,073 - 125,609
Selling, general, and
administrative expenses,
excluding depreciation (469) - - 21,871 16,314 - 37,716
Depreciation 180 - - 2,038 1,541 - 3,759
Amortization 1 - - 10 30 - 41
Management fees and other 30 - - (30) 30 - 30
-------- -------- ------- -------- -------- -------- ---------
Operating income 258 - - 728 7,312 - 8,298
Other (income) and
expenses:
Interest expense 2,828 710 - 1,173 8,925 - 13,636
Intercompany interest
(income) expense (1,624) (5,369) - 5,272 1,720 1 -
Interest income (8) - - - (86) 37 (57)
Intercompany
management fee
(income) expense (793) (901) - 692 1,002 - -
Equity in (earnings)
losses of
subsidiaries 8,378 8,096 - - - (16,474) -
(Gain)/loss on sale of
subsidiary (273) - - 22 - - (251)
Other, net 1,266 - - 14 (1,254) - 26
--------- -------- ------- -------- -------- -------- ---------
9,774 2,536 - 7,173 10,307 (16,436) 13,354
Loss from continuing
operations before taxes
and minority interest (9,516) (2,536) - (6,445) (2,995) 16,436 (5,056)
Provision for income
taxes - - - 868 1,758 412 3,038
-------- -------- ------- -------- -------- -------- ---------
Loss from continuing
operations before
minority interest (9,516) (2,536) - (7,313) (4,753) 16,024 (8,094)
Minority interest - - - 66 - - 66
-------- -------- ------- -------- -------- -------- ---------
Loss from continuing
operations (9,516) (2,536) - (7,379) (4,753) 16,024 (8,160)
Discontinued operations:
Loss from discontinued
operations, net of tax - - - (716) (640) - (1,356)
Loss on sale of
discontinued
operations, net of tax - - - - - - -
-------- -------- ------- -------- -------- -------- ---------
- - - (716) (640) - (1,356)
-------- -------- ------- -------- -------- -------- ---------
Net loss $ (9,516) $ (2,536) $ - $ (8,095) $ (5,393) $ 16,024 $ (9,516)
======== ======== ======= ======== ======== ======== =========
12
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended March 31, 2005
----------------------------------------------------------------------------------------------------
Jordan JII JII Non-
Industries Holdings Finance Guarantors Guarantors Eliminations Consolidated
---------- -------- ------- ---------- ---------- ------------ ------------
Net Sales $ - $ - $ - $ 90,687 $ 77,722 $ - $ 168,409
Cost of sales,
excluding depreciation - - - 61,649 52,672 - 114,321
Selling, general, and
administrative expenses,
excluding depreciation (439) - - 21,812 16,632 - 38,005
Depreciation 380 - - 2,164 2,388 - 4,932
Amortization 1 - - 9 36 - 46
Management fees and other (70) (371) - 371 - - (70)
-------- --------- -------- -------- -------- -------- ---------
Operating income 128 371 - 4,682 5,994 - 11,175
Other (income) and
expenses:
Interest expense 7,078 6,551 - 1,097 8,933 - 23,659
Intercompany interest
(income) expense (5,009) (2,029) - 5,975 1,062 1 -
Interest income (239) - - (1) (64) 34 (270)
Intercompany
management fee (1,328) (351) - 738 943 (2) -
(income)expense
Equity in losses
(earnings)of
subsidiaries 20,960 8,742 - - - (29,702) -
Other, net - - - 53 278 2 333
-------- --------- -------- -------- -------- -------- ---------
21,462 12,913 - 7,862 11,152 (29,667) 23,722
Loss from continuing
operations before
taxes and minority
interest (21,334) (12,542) - (3,180) (5,158) 29,667 (12,547)
Provision for income - - - 677 1,752 1,504 3,933
-------- --------- -------- -------- -------- -------- ---------
taxes
Loss from continuing
operations before
minority interest (21,334) (12,542) - (3,857) (6,910) 28,163 (16,480)
Minority interest - - - 99 - - 99
-------- --------- -------- -------- -------- -------- ---------
Loss from continuing
operations (21,334) (12,542) - (3,956) (6,910) 28,163 (16,579)
Discontinued operations:
(Loss) income from
discontinued - - - (460) 31 - (429)
operations, net of tax
Gain (loss) on sale of
discontinued
operations, net of tax 3,155 - - (4,326) - - (1,171)
--------- --------- --------- -------- -------- -------- --------
3,155 - - (4,786) 31 - (1,600)
--------- --------- --------- -------- -------- -------- --------
Net loss $ (18,179) $(12,542) $ - $ (8,742) $ (6,879) $ 28,163 $(18,179)
========= ======== ========= ======== ======== ======== ========
13
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Balance Sheet as of March 31, 2005
----------------------------------------------------------------------------------------------------
Jordan JII JII Non-
Industries Holdings Finance Guarantors Guarantors Eliminations Consolidated
---------- -------- ------- ---------- ---------- ------------ ------------
Current assets:
Cash and equivalents $ 1,440 $ - $ - $ 916 $ 10,397 $ - $ 12,753
Intercompany receivables 22,274 (33,099) - (2,538) 15,437 (2,074) -
Accounts receivable, net - - - 46,676 68,759 - 115,435
Inventories - - - 79,513 57,128 - 136,641
Assets of discontinued
operations - - - 1,120 1,502 - 2,622
Income tax receivable - - - - 2,652 - 2,652
Prepaids and other
current assets 5,190 - - 7,750 4,522 (4,788) 12,674
--------- --------- -------- --------- -------- --------- --------
Total current assets 28,904 (33,099) - 133,437 160,397 (6,862) 282,777
Property, plant and
equipment, net 1,577 - - 44,474 36,875 - 82,926
Investments and advances to
affiliates 28,734 - - - 12,344 - 41,078
Investments in subsidiaries 53,032 204,805 - - - (257,837) -
Equity in earnings of
subsidiaries (245,990) (107,202) - - - 353,192 -
Goodwill, net - - - 78,234 182,594 (15,724) 245,104
Intercompany notes
receivable (1,000) 208,726 - - 1,000 (208,726) -
Other assets 380 5,677 - 3,601 5,429 - 15,087
--------- --------- -------- -------- -------- --------- ---------
Total assets $(134,363) $ 278,907 $ - $259,746 $398,639 $(135,957) $666,972
========= ========= ======== ======== ======== ========= ========
Current liabilities:
Accounts payable $ - $ - $ - $ 27,670 $ 36,495 $ - $ 64,165
Accrued liabilities 34,790 3,756 - 26,531 23,737 (5,394) 83,420
Liabilities of
discontinued operations - - - - 726 - 726
Intercompany payables - - - (13,203) 6,861 6,342 -
Current portion of long
term debt 250 - - 5,254 18,799 - 24,303
--------- --------- -------- --------- -------- --------- --------
Total current liabilities 35,040 3,756 - 46,252 86,618 948 172,614
Long term debt 121,902 218,400 - 58,072 300,238 - 698,612
Other non current
liabilities 12,779 - - 8,735 5,664 - 27,178
Intercompany payables (50,424) - - 227,428 31,722 (208,726) -
Deferred income taxes (1,637) - - (13,196) 30,591 615 16,373
Minority interest - - - 1,069 - - 1,069
Preferred stock of a
subsidiary (350) - - 38,587 2,799 (38,237) 2,799
Shareholders equity (deficit)
(251,673) 56,751 - (107,201) (58,993) 109,443 (251,673)
--------- --------- -------- --------- -------- --------- --------
Total liabilities and
shareholders equity $(134,363) $ 278,907 $ - $ 259,746 $398,639 $(135,957) $666,972
========= ========= ======== ========= ======== ========= ========
14
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Balance Sheet as of December 31, 2004
----------------------------------------------------------------------------------------------------
Jordan JII JII Non-
Industries Holdings Finance Guarantors Guarantors Eliminations Consolidated
---------- -------- ------- ---------- ---------- ------------ ------------
Current assets:
Cash and equivalents $ 2,152 $ - $ - $ 1,693 $ 11,567 $ - $ 15,412
Intercompany receivables 9,543 (25,053) - (2,245) 14,931 2,824 -
Accounts receivable, net - - - 42,656 66,898 - 109,554
Inventories - - - 73,883 56,150 - 130,033
Assets of discontinued
operations - - - 1,409 2,023 - 3,432
Income tax receivable - - - - 3,631 - 3,631
Prepaids and other
current assets 4,625 - - 9,236 4,878 (6,376) 12,363
--------- -------- ------- -------- -------- --------- --------
Total current assets 16,320 (25,053) - 126,632 160,078 (3,552) 274,425
Property, plant and
equipment, net 1,721 - - 45,828 37,487 - 85,036
Investments and advances to
affiliates 28,538 - - - 12,344 - 40,882
Investments in subsidiaries 52,241 202,512 - - - (254,753) -
Equity in earnings of
subsidiaries (222,701) (82,684) - - - 305,385 -
Goodwill, net - - - 78,648 182,385 (15,724) 245,309
Intercompany notes
receivable (1,000) 204,871 - - 1,000 (204,871) -
Other assets 395 6,387 - 3,887 6,085 - 16,754
--------- --------- -------- -------- -------- --------- --------
Total assets $(124,486) $ 306,033 $ - $254,995 $399,379 $(173,515) $662,406
========= ========= ======== ======== ======== ========= ========
Current liabilities:
Accounts payable $ - $ - $ - $ 25,662 $ 37,134 $ - $ 62,796
Accrued liabilities 37,895 9,389 - 22,662 18,277 (6,772) 81,451
Liabilities of
discontinued
operations - - - 150 548 - 698
Intercompany payables - - - (15,740) 4,501 11,239 -
Current portion of long
term debt 250 - - 5,387 22,237 - 27,874
--------- --------- -------- -------- -------- --------- ---------
Total current liabilities 38,145 9,389 - 38,121 82,697 4,467 172,819
Long term debt 121,890 224,033 - 41,779 301,697 - 689,399
Other non current
liabilities 10,830 - - 8,711 5,626 - 25,167
Intercompany payables (50,384) - - 223,537 31,722 (204,875) -
Deferred income taxes (1,636) - - (13,497) 29,388 - 14,255
Minority interest - - - 1,003 - - 1,003
Preferred stock of a
subsidiary (350) - - 38,025 2,744 (37,675) 2,744
Shareholders equity (deficit) (242,981) 72,611 - (82,684) (54,495) 64,568 (242,981)
--------- --------- -------- -------- -------- --------- ---------
Total liabilities and
shareholders equity $(124,486) $306,033 $ - $254,995 $399,379 $(173,515) $ 662,406
========== ======== ======== ======== ======== ========= =========
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended March 31, 2005
----------------------------------------------------------------------------------------------------
Jordan JII JII Non-
Industries Holdings Finance Guarantors Guarantors Eliminations Consolidated
---------- -------- ------- ---------- ---------- ------------ ------------
Net cash (used in) provided
by operating activities $(1,751) $ - $ - $(16,193) $ 4,677 $ - $(13,267)
Cash flows from investing
activities
Proceeds from sales of
fixed assets - - - 92 74 - 166
Capital expenditures (36) - - (836) (739) - (1,611)
Net proceeds from sale of
discontinued operations - - - - - - -
Acquisition of subsidiary - - - - (481) - (481)
Net proceeds from sale of
subsidiary 1,075 - - - - - 1,075
------- -------- -------- -------- ------- -------- --------
Net cash provided by (used
in) investing activities 1,039 - - (744) (1,146) - (851)
Cash flows from financing
Activities
Proceeds from revolving
credit facilities, net - - - 16,509 (4,190) - 12,319
Repayment of long term - - - (349) (3,414) - (3,763)
debt
Proceeds from other
borrowings - - - - 2,447 - 2,447
Payment of deferred
financing costs - - - - - - -
------- -------- -------- -------- ------- -------- --------
Net cash provided by
(used in) financing
activities - - - 16,160 (5,157) - 11,003
Effect of exchange rate
changes on cash - - - - 456 - 456
------- -------- -------- -------- ------- -------- --------
Net decrease in
cash and equivalents (712) - - (777) (1,170) - (2,659)
Cash and equivalents at
beginning of period 2,152 - - 1,693 11,567 - 15,412
------- -------- -------- -------- ------- -------- --------
Cash and equivalents at
end of period $ 1,440 $ - $ - $ 916 $10,397 $ - $ 12,753
======= ======== ======== ======== ======= ======== ========
16
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended March 31, 2004
----------------------------------------------------------------------------------------------------
Jordan JII JII Non-
Industries Holdings Finance Guarantors Guarantors Eliminations Consolidated
---------- -------- ------- ---------- ---------- ------------ ------------
Net cash used in operating
activities $ (7,289) $ 2,164 $ - $ (11,623) $ 2,186 $ - $ (14,562)
Cash flows from investing
activities
Proceeds from sales of
fixed assets - - - 306 14 - 320
Capital expenditures (19) - - (768) (897) - (1,684)
Net proceeds from sale of
discontinued operations 6,155 - - - - - 6,155
--------- -------- -------- --------- --------- -------- ---------
Net cash provided by (used
in) investing activities 6,136 - - (462) (883) - 4,791
Cash flows from financing
activities
Proceeds from revolving
credit facility - - - 11,700 4,258 - 15,958
Repayment of long term
debt (5) - - (532) (603) - (1,140)
Proceeds from other
borrowings - - - - 525 - 525
Payment of financing fees - (2,164) - - - - (2,164)
--------- -------- -------- --------- --------- -------- ---------
Net cash (used in) provided
by financing activities (5) (2,164) - 11,168 4,180 - 13,179
Effect of exchange rate
changes on cash - - - - 1,777 - 1,777
--------- -------- -------- --------- --------- -------- ---------
Net (decrease) increase
in cash and equivalents (1,158) - - (917) 7,260 - 5,185
Cash and equivalents at
beginning of period 6,301 - - 1,738 7,478 - 15,517
--------- -------- -------- --------- --------- -------- ---------
Cash and equivalents at
end of period $ 5,143 $ - $ - $ 821 $ 14,738 $ $ 20,702
========= ======== ======== ========= ========= ======== =========
17
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 2004 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 periods ended March 31, 2005 and 2004. Due to the sale of ED&C, a
subsidiary of Kinetek, in the second quarter of 2005 the results of ED&C have
been classified as discontinued operations in all periods presented. (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
March 31,
-------------------------
2005 2004
---- ----
Net Sales:
Specialty Printing and Labeling $ 12,297 $ 12,482
Jordan Specialty Plastics 38,996 35,316
Jordan Auto Aftermarket 30,004 33,839
Kinetek 80,277 73,113
Consumer and Industrial Products 13,879 13,659
-------- --------
Total $175,453 $168,409
======== ========
Operating Income (Loss):
Specialty Printing and Labeling $ 1,250 $ 1,166
Jordan Specialty Plastics 1,372 1,833
Jordan Auto Aftermarket (89) 2,493
Kinetek 7,077 6,665
Consumer and Industrial Products (1,992) (1,078)
-------- --------
Total(a) $ 7,618 $ 11,079
======== ========
Operating Margin(b)
Specialty Printing and Labeling 10.2% 9.3%
Jordan Specialty Plastics 3.5% 5.2%
Jordan Auto Aftermarket (0.3)% 7.4%
Kinetek 8.8% 9.1%
Consumer and Industrial Products (14.4)% (7.9)%
Total 4.3% 6.6%
- ----------------
(a) Before corporate overhead and management fees of $(680) and $(96) for the
three months ended March 31, 2005 and 2004, respectively.
(b) Operating margin is operating income (loss) divided by net sales.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Consolidated Results. (See Condensed Consolidated Statement of Operations.)
--------------------
Net sales for continuing operations increased $7.0 million, or 4.2%, to $175.5
million for the first quarter of 2005 from $168.4 million for the same period
last year. The increase in sales was primarily due to strong growth for Kinetek
and Jordan Specialty Plastics which grew 9.8% and 10.4%, respectively. These
increases were partially offset by a 11.3% decline in the Automotive Aftermarket
segment largely resulting from the discontinuation of business with a large
customer in the climate control segment. The improved economy helped both the
Kinetek and Jordan Specialty Plastics segments but most of the growth in these
segments continues to result from the introduction of new products and market
share gains in several niche markets. Kinetek also benefited from sales of
products designed and produced by the recently acquired O. Thompson subsidiary.
Operating income from continuing operations decreased $2.9 million, or 25.7%, to
$8.3 million for the first quarter of 2005 from $11.2 million for the same
period last year. The decrease in operating income was primarily due to the
decline in operating income at Automotive Aftermarket and to a lesser extent
Jordan Specialty Plastics and Welcome Home. Operating income for Kinetek and
Specialty Printing and Labeling improved by 6.2% and 7.4% respectively. Raw
material inflation compressed product margins at Kinetek and Jordan Specialty
Plastics in the first quarter. Beginning in the second half of 2004, all
companies began to pass along some of these costs to their customers with
greater success but to a lesser extent than the increased cost. The decrease in
operating income for the Automotive Aftermarket was mostly due to lower sales
volumes and production inefficiencies resulting from consigned parts shortages
in the torque converter business.
The Company has recorded income tax expense of $3,038 for the three months
ended March 31, 2005 primarily attributable to foreign taxes, state taxes and
the change in the Company's deferred tax liability. Due to the uncertainty of
when the goodwill deferred tax liability will reverse, the Company has not
considered any future reversal of the deferred tax liability related to
goodwill to support the realization of deferred tax assets. Additionally, the
Company continues to maintain a full valuation allowance against its deferred
tax assets.
During 2004, the Company realized $88,392 of cancellation of indebtedness
income as a result of modifications to certain of its outstanding debt. The
Internal Revenue Code provides exceptions to the recognition of certain types
of cancellation of indebtedness income for U.S federal income tax purposes.
These rules will require the Company to reduce specified tax attributes which
may include the reduction of net operating loss carryforwards and the tax
basis of assets. However, the amount of reduction to any specific attribute is
dependent upon an election not required to be made until the filing of the
Company's 2004 federal tax return. It is possible that the effect of the
attribute reduction could result in a decrease in the tax basis of goodwill,
which would result in an increase in the Company's deferred tax liabilities
and could result in a financial statement charge to income tax expense in the
period when the election is made.
Specialty Printing and Labeling. As of March 31, 2005, the Specialty
Printing and Labeling group ("SPL") consisted of Valmark, Pamco, and Seaboard.
Net sales of continuing operations decreased $0.2 million, or 1.5%, to $12.3
million for the first quarter of 2005 from $12.5 million for the same period
last year. Revenues for Valmark product lines were up 15%, while sales of Pamco
labels and Seaboard folding box products declined 9% and 6%, respectively, in
the first quarter. Sales related to membrane switch products at Valmark were up
well over last year largely driven by sales in the medical equipment market.
Operating income from continuing operations increased $0.1 million, or 7.4%, to
$1.3 million for the first quarter of 2005 from $1.2 million for the same period
last year. The increase in operating income is largely due to cost savings
generated by a management reorganization and reduction in employment at Valmark.
These savings were partially offset by the sales decreases at the other
operating companies.
Jordan Specialty Plastics. As of March 31, 2005, the Jordan Specialty
Plastics group ("JSP") consisted of Beemak, Sate-Lite, and Deflecto.
Net sales increased $3.7 million, or 10.4%, to $39.0 million for the first
quarter of 2005 from $35.3 million for the same period last year. The increased
sales were the result of a stronger economy, the introduction of several new
products, market share gains, and selling price increases which only partially
offset the dramatic increase in raw material costs in 2004 and in the first
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
quarter of 2005. Revenues were up significantly at several of the superstore
retailers for both hardware and office products as a result of market share
gains and the introduction of several new products. Strong sales with the
superstore retailers for office products were partially offset by lower sales
with several of the large distributors. Chairmat sales increased significantly
in the first quarter with the largest increases coming from distributors and
international markets. Increased sales of bike related products and safety
reflectors for commercial trucks also contributed to the overall sales growth.
Operating income decreased $0.5 million, or 25.2%, to $1.4 million for the first
quarter of 2005 from $1.8 million for the same period last year. The decrease in
operating income is largely due to raw material inflation and to a lesser extent
the sales mix experienced in the first quarter. Selling price increases
continued to be more than offset by significant raw material price increases.
Resin prices continued to increase significantly in the first quarter compared
with both the first quarter of 2004 as well as the fourth quarter of 2004.
Metals based raw material increases slowed from the fourth quarter of 2004 but
were significant compared with the first quarter of last year. The Company
continues to pursue cost reduction initiatives and price increases to overcome
the raw material inflation plaguing the industry.
Jordan Auto Aftermarket. As of March 31, 2005, the Jordan Auto
Aftermarket group ("JAAI") consisted of Dacco, Alma and Atco.
Net sales decreased $3.8 million, or 11.3%, to $30.0 million for the first
quarter of 2005 from $33.8 million for the same period last year. The continued
reduction in the volume of transmission repairs due to improved original
equipment quality and the implementation of new warranty policies of automotive
manufacturers in 2003 was a significant contributor to the decline. In addition,
the discontinuation of business with a large customer in the climate control
market represented $1.9 million of sales decrease. The climate control market
continues to be soft as inventories appear to be at acceptable levels and
customers are wary of building inventory due to the cool spring and a cool
summer in 2004. This decrease was partially offset by the introduction of new
torque converter products in the second half of 2004 as well as the opening of
new DACCO retail distribution centers in targeted locations. Sales of tubing
assemblies and fittings for the truck market were up significantly in the first
quarter building momentum from a strong 2004. The growth in the truck market is
due to a stronger economy and many companies updating their fleets in advance of
the new emissions standards set to become effective in 2007. Selling price
increases on certain product lines in the third and fourth quarters of 2004 also
partially offset the market softness in both the climate control and torque
converter remanufacturing segments.
Operating income decreased $2.6 million to a loss of $0.1 million for the first
quarter of 2005 from $2.5 million for the same period last year. The sales
decline in the torque converter aftermarket segment had a significant impact on
the decline in operating income specifically due to the high fixed cost nature
of the business. In addition, operating income was negatively impacted by a
contractual price reduction for a large customer and production inefficiencies
resulting from consigned parts shortages in the torque converter business. The
decreases in operating income for the torque converter and climate control
segments were nominally offset by increased operating income associated with the
sales of tubing assemblies and fittings in the truck market.
Kinetek. As of March 31, 2005, the Kinetek group consisted of Imperial
Group, Merkle-Korff, FIR, Motion Control, Advanced DC and DeSheng.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Net sales for the three months ended March 31, 2005 were $80.3 million, an
increase of $7.2 million, or 9.8% from the same period in 2004. Sales of
Kinetek's motors segment were $60.2 million, an increase of 11.4%, or $6.2
million from $54.0 million posted in the first quarter of the previous year.
Sales of subfractional motor products were $19.9 million, an increase of $0.8
million, or 4.4%, from the first quarter of 2004. The increase was driven by
sales of a product introduced during the fourth quarter of 2004 to a certain
restaurant equipment customer. This project has been substantially completed,
and Kinetek expects lower sales of this product after the first quarter of 2005.
Sales of products used by major appliance customers were about flat with the
previous year, with the loss of business value-added subassembly products
substantially replaced by sales of a new product to a certain major appliance
customer which began during the third quarter of 2004, and which is expected to
continue. Sales of fractional and integral motor products increased $5.3
million, or 15.2%, to $40.3 million from the year-earlier first quarter sales of
$35.0 million. The increase in sales was driven by share gains for DC motors
used in battery-electric golf cars, and to improvements in North American
markets for motors used in material handling and commercial floor care
equipment. Sales in European markets which are served by Kinetek's FIR Group of
subsidiaries continued to be difficult, with sales in local currency declining
5.8% for the 2005 quarter compared with the previous year. This decline was
mostly offset by the favorable impact of translation, which added $0.5 million
in sales over the first quarter of 2004. First quarter 2005 sales for Kinetek's
controls segment were $20.1 million, an increase of $1.0 million, or 5.3%, from
the same period of 2004. The increased sales were attributable to sales of
elevator control products that were designed and produced by Kinetek's recently
acquired O. Thompson subsidiary, which were partially offset by a somewhat
softer market for elevator control products in comparison to the first quarter
of 2004.
Operating income for the first quarter of 2005 was $7.1 million, an increase of
$0.4 million, or 6.2%, from the same period of the previous year. Operating
income for the first three months of 2005 in the motors segment was $8.6
million, an increase of $0.1 million, or 1.4% higher than in 2004's first
quarter. Operating income for the controls segment was $2.0 million, an increase
of $0.1 million, or 4.8% from the corresponding quarter of the prior year. Total
Kinetek gross margin was $23.6 million, which was $0.4 million, or 1.8% lower
than in 2004. Gross margin as a percentage of sales decreased to 29.4% in 2005,
from 32.9% in 2004. The decrease in margin percentage is attributable to a
combination of factors, the most significant of which are: 1) During the first
quarter of 2005, Kinetek continued to experience significant inflation on metal
(primarily copper and steel) components used in the assembly of motor products,
as well as on freight and plastic resins. Competitive pressures in Kinetek's
principal markets have made it difficult to pass along these higher costs to its
customers in the form of higher prices and 2) several sizable pieces of market
share gained in the golf car, material handling, and floor care segments carry
lower margins than Kinetek's historical levels. It has been Kinetek's recent
strategy to capture share gains at competitive prices and to expand margins as
we gain volume leverage and implement planned cost reductions.
Consumer and Industrial Products. As of March 31, 2005, the Consumer and
Industrial Products group consisted of Welcome Home LLC and its two divisions,
Cape Craftsmen and Welcome Home, and GramTel.
Net sales increased $0.2 million, or 1.6%, to $13.9 million for the first
quarter of 2005 from $13.7 million for the same period last year. Sales for
Welcome Home decreased 1.4% in first quarter while third party sales for Cape
Craftsman increased 27% from prior year. Comparable store sales at Welcome Home
decreased 8% in the first quarter. The decline in comparable Welcome Home store
sales was primarily the result of a difficult retail environment in Welcome
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Home's category in outlet malls. Welcome Home is currently transitioning to a
new merchandising strategy emphasizing a more focused product offering.
Operating loss increased $0.9 million to a loss of $2.0 million for the first
quarter of 2005 from a loss of $1.1 million for the same period last year.
Merchandise margins decreased at Welcome Home largely due to promotional
discounts used to increase the turnover of seasonal and discontinued inventory
and to continue the migration to a new merchandising strategy. The decrease in
operating income at Welcome Home was partially offset by increased operating
income associated with the higher sales at Cape Craftsman.
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 $108.3 million of working capital at March 31,
2005 compared to approximately $98.9 million at December 31, 2004.
Operating activities. Net cash used in operating activities for the three
months ended March 31, 2005 was $13.3 million. This was relatively consistent
with cash used in operating activities for the same period in 2004.
Investing activities. Net cash used in investing activities for the three
months ended March 31, 2005 was $0.9 million compared to net cash provided by
investing activities of $4.8 million during the same period in 2004. This
decrease in net cash provided was primarily due to net proceeds of $6.2
million from the sale of the Ad Specialty and Calendar divisions of JII
Promotions in the first quarter of 2004. This was partially offset by the
proceeds of $1.1 million received from the sale of Cho-Pat in the first
quarter of 2005.
Financing activities. Net cash provided by financing activities for the three
months ended March 31, 2005 was $11.0 million compared to net cash provided by
financing activities of $13.2 million during the same period in 2004. This
decrease was primarily due to lower net proceeds from revolving credit
agreements of $3.6 million.
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 March 31, 2005, the Company had
approximately $22.4 million of available funds under these arrangements.
In conjunction with the Exchange Offer completed by the Company in February 2004
(see 2004 10-K), one of the Company's revolving credit facilities was amended to
reduce, over time, the maximum loan commitment under the facility. As of
December 31, 2004, the maximum loan commitment under the facility was $75.0
million. As of June 1, 2005, that commitment will be reduced to $55.0 million
and again to $45.0 million as of March 1, 2006 and through the remaining life of
the agreement. At this time, the Company does not expect the decrease in
available funds in the current year to have a material impact on its operations.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
Kinetek's credit agreement expires December 18, 2005. Kinetek intends to replace
the credit facility in 2005. Management is confident such refinancing can be
obtained under favorable terms to Kinetek, however, such terms will be subject
to market conditions which may change significantly.
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.
As discussed above, one of the Company's revolving credit facilities contains a
provision for the step-down in maximum borrowing capacity during 2005. As of
June 1, 2005 the Company's maximum borrowings under this agreement will decrease
from $75.0 million to $55.0 million. This, coupled with the facts that the
Company has experienced operating losses in recent years and has used cash in
operating activities, has caused the Company's executive management to evaluate
various options to improve the Company's liquidity. To this end, the Company has
restructured some of its outstanding debt through the Exchange Offer discussed
in the 2004 10-K and the Modification and Waiver Agreements also discussed in
the 2004 10-K. The effect of these transactions has been to reduce cash paid for
interest in the current year as well as to provide for further reductions in
debt maturity payments if certain financial performance is not achieved. In
addition, the Company expects improved operating performance on a consolidated
basis over the prior year. Specifically, new product development and the
continued shift of manufacturing to China in the Specialty Plastics and Kinetek
groups are expected to improve results. In addition, the exit of a certain
unprofitable business with a specific customer and plans to improve production
efficiencies within the Auto Aftermarket Group will increase operating margins.
Further, the Company has evaluated its holdings of investments in affiliates
and, when appropriate, will sell certain investments, similar to the sale of the
Company's investments in DMS Holdings Inc, Mabis Healthcare Holdings Inc. and
Flavor and Fragrance Holdings Inc. as described in the 2004 10-K. The Company
believes that through its efforts discussed above, the Company will have
sufficient liquidity to meet its obligations in the coming year.
23
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 March 31, 2005, the Company
had $58.9 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 March 31, 2005 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.
24
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
25
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.
May 16, 2005 By: /s/ Norman R. Bates
-----------------------
Norman R. Bates
Chief Financial Officer
26
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)