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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, 2002 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
------- -------
The aggregate market value of voting stock held by non-affiliates of the
Registrant is not determinable as such shares were privately placed and there
is currently no public market for such shares.
The number of shares outstanding of Registrant's Common Stock as of
November 14, 2002: 98,501.0004.
JORDAN INDUSTRIES, INC.
INDEX
Part I. Page No.
- ------- --------
Condensed Consolidated Balance Sheets
at September 30, 2002 (Unaudited), and December 31, 2001 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2002 and 2001 (Unaudited),
and the Nine Months Ended September 30, 2002 and 2001 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2002 and 2001 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Part II.
- --------
Other Information 22
Signatures 23
Officer Certificates 24
2
JORDAN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
September 30, December 31,
2002 2001
---- ----
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $28,434 $26,050
Accounts receivable, net 124,873 109,384
Inventories 132,102 122,528
Income tax receivable - 12,245
Deferred income taxes 19,335 8,100
Prepaid expenses and other current assets 22,880 19,030
------- -------
Total Current Assets 327,624 297,337
Property, plant and equipment, net 105,976 99,602
Investments in and advances to affiliates 41,278 36,443
Goodwill, net 242,441 358,970
Other assets 32,425 37,044
-------- --------
Total Assets $749,744 $829,396
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (NET CAPITAL DEFICIENCY)
Current Liabilities:
Accounts payable $57,356 $47,848
Accrued liabilities 94,753 71,372
Advance deposits 1,578 1,853
Current portion of long-term debt 32,007 17,137
------- -------
Total Current Liabilities 185,694 138,210
Long-term debt, less current portion 731,999 819,406
Other non-current liabilities 11,064 8,668
Minority interest 201 4
Preferred stock 2,296 2,164
Shareholder's 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 loss (10,728) (15,249)
Accumulated deficit (172,899) (125,924)
--------- ---------
Total Shareholder's Equity (net capital deficiency) (181,510) (139,056)
--------- ---------
Total Liabilities and Shareholder's
Equity (net capital deficiency) $749,744 $829,396
========= =========
See accompanying notes to condensed consolidated financial statements.
3
JORDAN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
------------------- --------------------
2002 2001 2002 2001
------ ------ ---- ----
Net sales $186,942 $180,026 $544,074 $547,605
Cost of sales, excluding
depreciation 119,949 115,218 346,636 350,013
Selling, general and
administrative expenses,
excluding depreciation 44,239 45,492 128,914 131,140
Depreciation 5,599 5,890 16,426 17,765
Amortization of goodwill
and other intangibles 397 3,945 1,181 11,826
Management fees and other 165 5,736 8,601 6,612
-------- -------- --------- --------
Operating income 16,593 3,745 42,316 30,249
Other (income) expenses:
Interest expense 20,752 22,559 66,916 68,622
Interest income (798) (210) (964) (735)
Gain on deconsolidation of
liquidated subsidiary (1,888) - (1,888) -
Other 331 545 (5,840) 931
-------- --------- ---------- --------
18,397 22,894 58,224 68,818
-------- ---------- ---------- --------
Loss before income taxes, minority
interest, extraordinary items and
cumulative effect of change in
accounting principle (1,804) (19,149) (15,908) (38,569)
(Benefit from) provision for
income taxes (580) 5,913 (5,405) 1,452
-------- ---------- --------- --------
Loss before minority interest, extraordinary
gain and cumulative effect of change in
accounting principle
(1,224) (25,062) (10,503) (40,021)
Minority interest 91 (200) 197 (365)
-------- ---------- --------- ---------
Loss before extraordinary items
and cumulative effect of change
in accounting principle (1,315) (24,862) (10,700) (39,656)
Extraordinary loss (gain), net of tax 161 - (52,523) -
Cumulative effect of change in
accounting principle, net of tax - - 89,139 -
-------- --------- --------- ---------
Net loss $(1,476) $(24,862) $(47,316) $(39,656)
======== ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
JORDAN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
September 30,
2002 2001
------ ------
Cash flows from operating activities:
Net loss $(47,316) $(39,656)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Cumulative effect of accounting change 89,139 -
Extraordinary gain on early retirement of debt (52,523) -
Gain on deconsolidation of liquidated subsidiary (1,888) -
Depreciation and amortization 17,607 29,591
Amortization of deferred financing fees 4,652 3,189
Minority interest 197 (365)
Non-cash interest 5,887 16,516
Other (4,640) -
Changes in operating assets and liabilities,
net of effects from acquisitions:
Decrease (increase) in current assets 26 (12,799)
Increase in current liabilities 1,693 1,239
Increase in non-current assets (3,017) (959)
Increase in non-current liabilities 2,749 7,016
-------- --------
Net cash provided by operating activities 12,566 3,772
Cash flows from investing activities:
Proceeds from sale of subsidiary - 16,663
Proceeds from sale of fixed assets 2,170 -
Capital expenditures (10,420) (9,345)
Acquisitions of subsidiaries (9,503) (13,238)
Additional purchase price payments (1,002) -
Net cash acquired in purchase of subsidiaries 788 14
Other (204) (11)
-------- --------
Net cash used in investing activities (18,171) (5,917)
Cash flows from financing activities:
Proceeds from revolving credit facilities, net 21,449 9,594
Proceeds from issuance of long-term debt - Kinetek 20,456 -
Repayment of long-term debt (7,416) (7,039)
Repurchase of Series A Debentures (31,354) -
Other borrowing 2,766 -
-------- --------
Net cash provided by financing
activities 5,901 2,555
Effect of exchange rate changes on cash 2,088 461
-------- --------
Net increase in cash and cash equivalents 2,384 871
Cash and cash equivalents at beginning of period 26,050 21,713
-------- --------
Cash and cash equivalents at end of period $28,434 $22,584
======== ========
See accompanying notes to condensed consolidated financial statements.
5
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,
2001, which are included in the Company's Annual Report filed on Form 10-K for
such year (the "2001 10-K"). Results of operations for the interim periods are
not necessarily indicative of annual results of operations.
B. Accounting Policies - New Pronouncements
The Company adopted the non-amortization provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets,
on January 1, 2002, which resulted in a decrease of approximately $2,700 to
the third quarter's net loss and a decrease of approximately $8,100 to the
nine month's net loss. This provision is expected to decrease the full-year
net loss by approximately $10,800.
The Company completed the transitional impairment review of its reporting
units during the second quarter and recorded a non-cash pretax charge of
$112,239 ($89,139 after-tax). This charge has been recorded as a cumulative
effect of a change in accounting principle retroactive to January 1, 2002 and
therefore increased the previously reported first quarter 2002 net loss of
$9,140 to a net loss of $98,279.
The impaired goodwill relates to the acquisitions of JII Promotions, Valmark,
and Pamco in the Specialty Printing and Labeling group, Sate-Lite and Beemak
in the Jordan Specialty Plastics group, Alma in the Jordan Auto Aftermarket
group, FIR and the L'Europa product line in the Kinetek group and Online
Environs in the Consumer and Industrial Products group. The Company determined
the fair value of each reporting unit using a discounted cash flow approach
taking into consideration projections based on the individual characteristics
of the reporting units, historical trends and market multiples for comparable
businesses. The resulting impairment is primarily attributable to a change in
the evaluation criteria for goodwill utilized under previous accounting
guidance, to the fair value approach stipulated in SFAS No. 142.
The following table provides comparative results had the non-amortization
provisions of SFAS No. 142 been adopted for all periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net loss $(1,476) $(24,862) $(47,316) $(39,656)
Goodwill amortization - 2,723 - 8,099
--------- --------- --------- ---------
Adjusted net loss $(1,476) $(22,139) $(47,316) $(31,557)
========= ========== ========= ==========
6
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 were as follows:
Specialty Jordan Consumer &
Printing Specialty Jordan Auto Industrial
& Labeling Plastics Aftermarket Kinetek Products Consolidated
---------- -------- ----------- ------- -------- ------------
Balance as of
January 1, 2002 $43,389 $41,253 $64,737 $194,622 $14,969 $358,970
Acquisition of
Subsidiary - - - 2,552 - 2,552
Additional Purchase Price
Payments - 902 - - - 902
Foreign exchange - - - 2,118 - 2,118
Sale of a subsidiary - - - - (9,498) (9,498)
Impairment loss (31,653) (6,694) (47,800) (21,300) (4,792) (112,239)
Other 8 - - - (372) (364)
--------- -------- --------- --------- -------- -----------
Balance at
September 30, 2002 $11,744 $35,461 $16,937 $177,992 $307 $242,441
======== ======== ========= ========= ======== ===========
As of September 30, 2002, the Company had no indefinite-lived intangible
assets. The Company had $973 of other intangible assets, net of accumulated
amortization of $26,683, which will continue to be amortized over their
remaining useful lives ranging from 1 to 10 years. These other intangible
asset amounts are included in other assets in the Company's balance sheets.
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. There was no impact to the
Company's operating results or financial position related to the adoption of
this standard.
7
C. Inventories
Inventories are summarized as follows:
September 30, December 31,
2002 2001
------------ ------------
Raw materials $49,865 $ 52,493
Work-in-process 21,443 17,329
Finished goods 60,794 52,706
-------- --------
$132,102 $122,528
======== ========
D. Comprehensive Income (Loss)
Total comprehensive income (loss) for the quarters and nine months ended
September 30, 2002 and 2001 is as follows:
Three Months ended Nine Months ended
September 30, September 30,
----------------------- -------------------
2002 2001 2002 2001
------- -------- ------ ------
Net loss $(1,476) $(24,862) $(47,316) $(39,656)
Foreign currency translation 3,806 (795) 4,521 741
------ --------- --------- ---------
Comprehensive income (loss) $2,330 $(25,657) $(42,795) $(38,915)
====== ========= ========= =========
8
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
E. Sale of Subsidiaries
Effective on January 1, 2002, the Company sold its subsidiary, Flavorsource,
Inc, ("Flavorsource") to Flavor & Fragrance Group Holdings, Inc. ("FFG") for a
$10,100 note. FFG's Chief Executive Officer is Mr. Quinn, and its stockholders
include Mr. Jordan, Mr. Quinn, Mr. Zalaznick, and Mr. Boucher, who are
directors and stockholders of the Company, as well as other partners,
principals, and associates of The Jordan Company, who are also stockholders of
the Company. As the transaction was among entities under common control, the
difference between the note received and the net assets of Flavorsource of
$473 has been reflected as a credit to retained earnings. Flavorsource is a
developer and compounder of flavors for use in beverages of all kinds,
including coffee, tea, juices, and cordials, as well as bakery products and
ice cream and dairy products. Flavorsource was a part of the Consumer &
Industrial Products segment prior to its disposal.
On February 2, 2001, the Company sold the assets of Riverside to a third-party
for cash proceeds of $16,663. Riverside is a publisher of Bibles and a
distributor of Bibles, religious books and music recordings. The Company
recognized a loss on the sale of $2,798, which was recorded in the fourth
quarter of 2000.
F. Liquidation of Online Environs
On March 14, 2000 the Company purchased Online Environs, Inc. ("Online
Environs"), an Internet business solutions developer and consultant. Online
Environs sales deteriorated sharply from the acquisition date through
September 20, 2002. On September 20, 2002, the Company shut down the
operations of Online Environs and liquidated the entity. At the time of its
liquidation, the liabilities of Online Environs exceeded its assets by $1,888
which, upon deconsolidation, are no longer liabilities of the consolidated
group. Accordingly, the Company has recorded a gain of $1,888 classified as
other income, to remove the net liabilities from the consolidated financial
statements.
G. Acquisition and Formation of Subsidiaries
On April 11, 2002, Kinetek, Inc. formed a cooperative joint venture with
Shunde De Sheng Electric Motor Group Co., Ltd. ("De Sheng Group"), which is
named Kinetek De Sheng (Shunde) Motor Co., Ltd (the "JV"). Kinetek Inc.
initially contributed approximately $9,503, including costs associated with
the transaction, for 80% ownership of the JV, with an option to purchase the
remaining 20% in the future. The JV acquired all of the net assets of Shunde
De Sheng Electric Motor Co., Ltd. ("De Sheng"), a subsidiary of De Sheng
Group. The JV also assumed approximately $7,198 of outstanding debt.
On July 23, 2001, the Company purchased the customer lists of The George
Kreisler Corporation ("Kreisler") for $204 in cash. Kreisler has been fully
integrated into Pamco.
On July 3, 2001, the Company purchased the assets of Pioneer Paper Corp.
("Pioneer"). Pioneer is a manufacturer of printed folding paperboard boxes,
insert packaging, and blister pack cards. The Company paid $3,134 in cash for
the assets. The purchase price was allocated to accounts receivable of $1,343,
inventory of $298, property plant and equipment of $1,000, net operating
liabilities of $(303), and resulted in an excess purchase price over
identifiable assets of $796. Pioneer has been fully integrated into Seaboard.
On June 30, 2001, the Company purchased Atco Products ("Atco"). Atco is a
manufacturer of air-conditioning components for the automotive aftermarket,
heavy duty truck OEs and international markets. The Company paid $7,344 in
cash for the assets of
9
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Atco. The purchase price was allocated to working capital of $4,264 and
property, plant and equipment of $3,080.
On April 6, 2001, Kinetek, through its wholly-owned subsidiary Merkle-Korff,
acquired substantially all of the assets, properties, and business of Koford
Engineering, Inc. for $690. The purchase price has been allocated to working
capital of $121, property, plant and equipment of $130, and resulted in an
excess purchase price over identifiable assets of $439.
On March 7, 2001, the Company purchased the assets of J.A. Larson Company ("JA
Larson"). JA Larson is a flexographic printer of pressure sensitive labels,
tags and seals, which are manufactured in a wide variety of shapes and sizes.
The Company paid $433 in cash for the assets. The purchase price was allocated
to inventory of $100, property and equipment of $20 and resulted in an excess
purchase price over identifiable assets of $313. JA Larson has been fully
integrated into Pamco.
The above acquisitions have been accounted for as purchases and their
operating results have been consolidated with the Company's results since the
respective dates of acquisition. Pro forma information with respect to the
Company as if the above acquisitions and divestitures had occurred at the
beginning of the respective period is not materially different than reported
results.
H. Investments in JAAI, JSP, and M&G Holdings
JAAI
During 1999, the Company completed the recapitalization of Jordan Auto
Aftermarket, Inc. ("JAAI"). As a result of the recapitalization, certain of
the Company's affiliates and JAAI management own substantially all of the JAAI
common stock and the Company's investment in JAAI is represented solely by the
Cumulative Preferred Stock of JAAI. The JAAI Cumulative Preferred Stock
controls over 97.5% of the combined voting power of JAAI capital stock
outstanding and accretes at plus or minus 97.5% of the cumulative JAAI net
income or net loss, as the case may be, through the earlier of an Early
Redemption Event (as defined) or the fifth anniversary of issuance (unless
redemption is prohibited by a JAAI or Company debt covenant).
The Company recapitalized JAAI in order to establish JAAI as a more
independent, stand-alone, industry-focused company. The Company continues to
consolidate JAAI and its subsidiaries, for financial reporting purposes, as
subsidiaries of the Company. The Company's consolidation of the results of
JAAI will be discontinued upon redemption of the JAAI Cumulative Preferred
Stock, or at such time as the JAAI Cumulative Preferred Stock ceases to
represent at least a majority of the voting power and a majority share in the
earnings of JAAI and its subsidiaries. The JAAI Cumulative Preferred Stock is
mandatorily redeemable upon certain events and is redeemable at the option of
JAAI, in whole or in part, at any time.
JSP
During 1998, the Company recapitalized Jordan Specialty Plastics, Inc.
("JSP"). As a result of the recapitalization, certain of the Company's
affiliates and JSP management own substantially all of the JSP common stock
and the Company's investment in JSP is represented solely by the Cumulative
Preferred Stock of JSP. The JSP Cumulative Preferred Stock controls over 97.5%
of the combined voting power of JSP capital stock outstanding and accretes at
plus or minus 97.5% of the cumulative JSP net income or net loss, as the case
may be, through the earlier of an Early Redemption Event (as defined) or the
fifth anniversary of issuance (unless redemption is prohibited by a JSP or
Company debt covenant).
10
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
The Company continues to consolidate JSP and its subsidiaries, for financial
reporting purposes, as subsidiaries of the Company. The Company's
consolidation of the results of JSP will be discontinued upon redemption of
the JSP Cumulative Preferred Stock, or at such time as the JSP Cumulative
Preferred Stock ceases to represent at least a majority of the voting power
and a majority share in the earnings of JSP and its subsidiaries. The JSP
Cumulative Preferred Stock is mandatorily redeemable upon certain events and
is redeemable at the option of JSP, in whole or in part, at any time.
M&G Holdings
Motors and Gears Holdings, Inc., ("M&G Holdings" or "M&G") along with its
wholly-owned subsidiary, Kinetek, Inc. ("Kinetek") (formerly Motors and Gears,
Inc.), was formed to combine a group of companies engaged in the manufacturing
and sale of fractional and sub-fractional motors and gear motors primarily to
customers located throughout the United States and Europe.
At the end of 1996, M&G was comprised of Merkle-Korff and its wholly-owned
subsidiary, Barber-Colman, and Imperial and its wholly-owned subsidiaries,
Scott and Gear. All of the outstanding shares of Merkle-Korff were purchased
by M&G in September 1995 and the net assets of Barber-Colman were purchased by
Merkle-Korff in March 1996. Barber-Colman was legally merged into Merkle-Korff
as of January 1, 1997 and now operates as a division of Merkle-Korff. The net
assets of Imperial, Scott, and Gear were purchased by M&G, from the Company,
at an arms length basis on November 7, 1996, with the proceeds from a debt
offering. The purchase price was $75,656, which included the repayment of
$6,008 in Imperial liabilities owed to the Company, and a contingent payment
payable pursuant to a contingent earnout agreement. Under the terms of the
contingent earnout agreement, 50% of Imperial, Scott, and Gear's cumulative
earnings before interest, taxes, depreciation and amortization, as defined,
exceeding $50,000 during the five fiscal years from December 31, 1996, through
December 31, 2000, was paid to the Company. The Company was paid $174 for this
agreement in the second quarter of 2001.
As a result of this sale to M&G, the Company recognized approximately $67,400
of deferred gain at the time of sale for U.S. Federal income tax purposes. A
portion of this deferred gain is recognized as M&G reports depreciation and
amortization over approximately 15 years on the step-up in basis of those
purchased assets. As long as M&G remains in the Company's affiliated group,
the gain recognized and the depreciation on the step-up in basis should
exactly offset each other. Upon any future de-consolidation of M&G from the
Company's affiliated group for U.S. Federal income tax purposes, any
unreported gain would be fully reported and subject to tax.
On May 16, 1997, the Company participated in a recapitalization of M&G
Holdings. In connection with the recapitalization, M&G Holdings issued 16,250
shares of M&G Holdings common stock (representing approximately 82.5% of the
outstanding shares of M&G Holdings common stock) to certain stockholders and
affiliates of the Company and M&G Holdings management for total consideration
of $2,200 (of which $1,110 was paid in cash and $1,090 was paid through
delivery of 8.0% zero coupon notes due 2007). As a result of the
recapitalization, certain of the Company's affiliates and M&G Holdings
management own substantially all of the M&G Holdings common stock and the
Company's investment in M&G Holdings is represented solely by the Cumulative
Preferred Stock of M&G Holdings (the "M&G Holdings Junior Preferred Stock").
The M&G Holdings Junior Preferred Stock represents 82.5% of M&G Holdings'
stockholder voting rights and 80% of M&G Holdings' net income or loss is
accretable to the M&G Holdings Junior Preferred Stock. The Company has
obtained an independent opinion as to the fairness, from a
11
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
financial point of view, of the recapitalization to the Company and its public
bondholders. The Company continues to consolidate M&G Holdings and its
subsidiaries, for financial reporting purposes, as subsidiaries of the
Company. The M&G Holdings Junior Preferred Stock discontinues its
participation in M&G Holdings' earnings on March 31, 2003. The Company's
consolidation of the results of M&G Holdings will be discontinued upon
redemption of the M&G Holdings Junior Preferred Stock, or at such time as the
M&G Holdings Junior Preferred Stock ceases to represent at least a majority of
the voting power and a majority share in the earnings of M&G Holdings and its
subsidiaries.
As long as the M&G Holdings Junior Preferred Stock is outstanding, the Company
expects the vote test to be satisfied. The M&G Holdings Junior Preferred Stock
is mandatorily redeemable upon certain events and is redeemable at the option
of M&G Holdings, in whole or in part, at any time.
The Company expects to continue to include M&G Holdings and its subsidiaries
in its consolidated group for U.S. Federal income tax purposes. This
consolidation would be discontinued, however, upon the redemption of the M&G
Holdings Junior Preferred Stock, which could result in recognition by the
Company of substantial income tax liabilities arising out of the
recapitalization. If such deconsolidation had occurred at September 30, 2002,
the Company believes that the amount of taxable income to the Company
attributable to M&G Holdings would have been approximately $53,600 (or
approximately $21,440 of tax liabilities, assuming a 40.0% combined Federal,
state, and local tax rate). The Company currently expects to offset these tax
liabilities arising from deconsolidation with redemption proceeds from the M&G
Holdings Junior Preferred Stock. Deconsolidation would also occur with respect
to M&G Holdings if the M&G Holdings Junior Preferred Stock ceased to represent
at least 80.0% of the voting power and 80.0% of the combined stock value of
the outstanding M&G Holdings Junior Preferred Stock and common stock of M&G
Holdings. As long as the M&G Holdings Junior Preferred Stock is outstanding,
the Company expects the vote test to be satisfied. The value test depends on
the relative values of the M&G Holdings Junior Preferred Stock and common
stock of M&G Holdings. The Company believes the value test is satisfied at
September 30, 2002. It is possible that on or before March 31, 2003, the M&G
Holdings Junior Preferred Stock would cease to represent 80.0% of the relevant
total combined stock value. In the event that deconsolidation for U.S. Federal
income tax purposes occurs without redemption of the M&G Holdings Junior
Preferred Stock, the tax liabilities discussed above would be incurred without
the Company receiving the proceeds of the redemption.
I. Additional Purchase Price Agreements
The Company had a deferred purchase price agreement relating to its
acquisition of Yearntree in December 1999. The agreement was based on
Yearntree achieving certain agreed upon cumulative net income before interest
and taxes for the 24 months beginning January 1, 2000 and ending December 31,
2001. On March 8, 2002, the Company paid $574 related to the above agreement.
The Company also has a deferred purchase price agreement relating to its
acquisition of Teleflow in July 1999. The agreement is based upon Teleflow
achieving certain agreed upon earnings before interest, taxes, depreciation,
and amortization for each year through the year ended December 31, 2002. The
Company paid $328 and $260 related to this agreement in April 2002 and 2001,
respectively.
The Company has a contingent purchase price agreement relating to its
acquisition of Deflecto in 1998. The plan is based on Deflecto achieving
certain earnings before interest and taxes and is payable on April 30, 2008.
If Deflecto is sold prior to
12
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
April 30, 2008, the plan is payable 120 days after the transaction.
The terms of Kinetek's 1997 Motion Control Engineering ("MCE") acquisition
agreement provide for additional consideration to be paid to the sellers. The
agreement is exercisable at the seller's option during a five-year period
beginning in 2003. When exercised, the additional consideration will be based
on MCE's operating results over the two preceding fiscal years. Payments, if
any, under the contingent agreement will be placed in a trust and paid from
the trust over a four-year period. Based on MCE's projections for 2002,
Kinetek would have to pay approximately $4,600 to the trust in September 2003,
if exercised. These payments will be recorded as an addition to goodwill.
J. Related Party Transactions
An individual who is shareholder, Director, General Counsel, and Secretary for
the Company is also a partner in a law firm used by the Company. The firm was
paid $977 and $534 in fees and expenses in the first nine months of 2002 and
2001, respectively. The rates charged to the Company were at arms-length.
Certain shareholders of TJC Management Corporation ("TJC") are also
shareholders of the Company. On July 25, 1997, a previous agreement with TJC
was amended and restated. Effective January 1, 2000, the Company owes TJC a
$250 quarterly fee for management services. The Company accrued and paid fees
to TJC of $500 in the first nine months of 2002 and accrued fees of $750 and
paid fees of $1,000 in the first nine months of 2001 related to this
agreement. The Company does not expect to accrue or pay any more money related
to this agreement. These expenses are classified in "management fees and
other" in the Company's statements of operations.
On July 25, 1997, a previous agreement with TJC was amended and restated.
Under the new agreement, the Company pays TJC an investment banking fee of up
to 1%, based on the aggregate consideration paid, for its assistance in
acquisitions undertaken by the Company or its subsidiaries, and a financial
consulting fee not to exceed 0.5% of the aggregate debt and equity financing
that is arranged by TJC, plus the reimbursement of out-of-pocket and other
expenses. The Company made no payments in either the first nine months of 2002
or 2001 to TJC for their assistance in relation to acquisition and refinancing
activities. At September 30, 2002, $8,429 was accrued related to this
agreement and is included in "accrued liabilities" on the Company's balance
sheet.
The Company has agreements to provide management and consulting services to
various entities whose shareholders are also shareholders of the Company. The
Company also has agreements to provide investment banking and financial
consulting services to these entities. Fees for management and consulting
services are typically a percentage of the entity's net sales or earnings
before interest, taxes, depreciation and amortization. Fees for investment
banking and financial consulting services are based on the aggregate
consideration paid for acquisitions or the aggregate debt and equity financing
that is arranged by the Company, plus the reimbursement of out-of-pocket and
other expenses. Amounts due from affiliated entities as a result of providing
the services described above were $4,987 and $3,810 as of September 30, 2002
and December 31, 2001, respectively, and are classified in "prepaid expenses
and other current assets" in the Company's balance sheets. The Company also
made unsecured advances to these entities for the purpose of funding operating
expenses and working capital needs. These advances totaled $14,434 and $13,318
as of September 30, 2002 and December 31, 2001, respectively, and are
classified in "prepaid expenses and other current assets" in the Company's
balance sheets
The Company had reserves of $10,700 and $10,400 at September
30, 2002 and December 31, 2001, respectively, related to these management and
consulting services and advances. The increase of $300 in the nine months
13
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
ended September 30, 2002 is reflected in "management fees and other" in the
Company's statements of operations.
K. Investments in and advances to affiliates
The Company has unsecured advances totaling $15,906 and $15,382 as of
September 30, 2002 and December 31, 2001, due from JIR Broadcast, Inc. and JIR
Paging, Inc. Each of these company's Chief Executive Officer is Mr. Quinn and
its stockholders include Messrs. Jordan, Quinn, Zalaznick, and Boucher, who
are the Company's directors and stockholders, as well as other partners,
principals and associates of The Jordan Company who are also the Company's
stockholders. These companies are engaged in the development of businesses in
Russia, including the broadcast and paging sectors. The Company receives notes
in exchange for these advances, which bear interest at a range from 10.75% to
12.0%.
In November 1998, the Company, through Kinetek, invested $5,585 in Class A
Preferred Units and $1,700 in Class B Preferred Units of JZ International,
LLC. In April 2000, the Company, through Kinetek, invested an additional
$5,059 in Class A Preferred Units of JZ International, LLC. This increased the
Company's investment in JZ International to $12,344 at September 30, 2002 and
December 31, 2001. JZ International's Chief Executive Officer is David W.
Zalaznick, and its members include Messrs. Jordan, Quinn, Zalaznick and
Boucher, who are the Company's directors and stockholders, as well as other
members. JZ International and its subsidiaries are focused on making European
and other international investments. The Company is accounting for this
investment under the cost method.
The Company has made unsecured advances totaling $11,201 and $11,331 as of
September 30, 2002 and December 31, 2001, respectively, to Internet Services
Management Group ("ISMG") an Internet service provider with approximately
93,000 customers. ISMG's stockholders include Mr. Jordan, Mr. Quinn, Mr.
Zalaznick, and Mr. Boucher, who are directors and stockholders of the Company,
as well as other partners, principals, and associates of The Jordan Company,
who are also stockholders of the Company. The Company receives notes in
exchange for these advances, which bear interest at 10.75%. The Company also
holds a 5% ownership interest in ISMG's common stock and $1,000 of ISMG's 5%
mandatorily redeemable cumulative preferred stock. The Company is accounting
for these investments under the cost method.
The Company made aggregate investments of $200 and $1,550 in the capital stock
of three different businesses in technology-related industries in 2001 and
2000, respectively. The Company's ownership in these businesses ranges from
1-15% on a fully diluted basis. The Company is accounting for these
investments under the cost method.
14
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
The Company has a 20% limited partnership interest in a partnership that was
formed during 2000 for the purpose of making equity investments primarily in
datacom/telecom infrastructure and software, e-commerce products and services,
and other Internet-related companies. The Company has a $10,000 capital
commitment, of which $2,665 and $2,230 had been contributed through September
30, 2002 and December 31, 2001, respectively. The Company is accounting for
this investment using the equity method of accounting. Certain stockholders of
the Company are also stockholders in the general partner of the partnership.
The Company has an agreement with the partnership's general partner to provide
management services to the partnership for annual fees of $1,250.
Effective on January 1, 2002, the Company sold the stock of Flavorsource to
FFG for a $10,100 note. The note accrues interest at 8% annually and has no
stated maturity date. FFG's stockholders include Mr. Jordan, Mr. Quinn, Mr.
Zalaznick, and Mr. Boucher, who are directors and stockholders of the Company,
as well as other partners, principals, and associates of The Jordan Company,
who are also stockholders of the Company.
The Company had reserves of $15,700 and $8,800 at September 30, 2002 and
December 31, 2001, respectively, related to the above investments in
affiliates. The increase of $6,900 in the nine months ended September 30, 2002
is reflected in "management fees and other" in the Company's statements of
operations.
L. 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, 2001 consolidated financial
statements with respect to segmentation or the measurement of segment profit
or loss.
M. Income taxes
The benefit from income taxes differs from the amount of income tax benefit
computed by applying the United States federal income tax rate to loss before
income taxes, minority interest, extraordinary gain and cumulative effect of
change in accounting principle. A reconciliation of the differences is as
follows:
Nine Months ended Nine Months ended
September 30, 2002 September 30, 2001
------------------- ------------------
Computed statutory tax benefit $(5,568) $(13,499)
Increase (decrease) resulting from:
Increase in valuation allowance - 10,953
Amortization of goodwill - 2,223
Disallowed meals and entertainment 72 323
State and local tax and other 91 1,452
-------- --------
(Benefit) provision from income taxes $(5,405) $1,452
======== ========
N. Kinetek Credit Agreement
On December 18, 2001, Kinetek, Inc. entered into a new Loan and Security
Agreement with Fleet Bank (the "Kinetek Agreement"). On April 12, 2002, the
Kinetek Agreement was amended and restated. The Kinetek Agreement now provides
for borrowings of up to $35,000 based on the value of certain assets,
including inventory, accounts receivable, machinery and equipment, and real
estate. Kinetek had $1,396 of outstanding borrowings, $7,554 of outstanding
letters of credit, and $22,554 of excess availability under this agreement at
September 30, 2002.
15
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
O. Jordan Industries Credit Agreement
On August 16, 2001, the Company entered into a new Loan and Security Agreement
with Congress Financial Corporation and First Union National Bank. The new
facility provides for borrowings up to $110,000 based on the value of certain
assets including inventory, accounts receivable and fixed assets. As of
September 30, 2002 the Company had borrowings of $50,462, $3,595 of
outstanding letters of credit, and $23,890 of excess availability under this
facility.
P. Kinetek Senior Secured Notes
On April 12, 2002, Kinetek Industries, Inc., a wholly-owned subsidiary of
Kinetek, Inc., issued $15,000 principal amount of 5% Senior Secured Notes and
$11,000 principal amount of 10% Senior Secured Notes for net proceeds of
$20,456. The notes are due in 2007 and are guaranteed by Kinetek, Inc. and
substantially all of its domestic subsidiaries. The notes are also secured by
a second priority lien on substantially all of the assets of the issuer and
the guarantors, which lien is subordinate to the existing lien securing
Kinetek, Inc.'s credit facility. Interest on the notes is payable
semi-annually on May 1 and November 1 of each year.
Q. Retirement of Debt
Between May 29, 2002 and June 5, 2002, the Company repurchased $119,000
principal amount of its $213,886 11.75% Series A Senior Subordinated Discount
Debentures due 2009 (the "Series A Debentures"), for total consideration of
$31,354, including expenses. The Series A Debentures were purchased from an
institutional investor. After the purchase, $94,886 principal amount of Series
A Debentures were outstanding. The Company has reported an extraordinary gain,
net of taxes, of $52,523 in the statement of operations related to this
purchase.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
The following discussion should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the 2001 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
quarters and nine month periods ended September 30, 2002 and 2001. This
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,
-------------------- -------------------
2002 2001 2002 2001
----- ------ ------ -----
Net Sales:
Specialty Printing and Labeling $25,732 $28,841 $73,747 $80,823
Jordan Specialty Plastics 28,778 25,179 81,388 75,475
Jordan Auto Aftermarket 40,742 37,408 124,644 115,165
Kinetek 74,463 70,309 216,904 222,850
Consumer and Industrial Products 17,227 18,289 47,391 53,292
-------- -------- -------- --------
Total $186,942 $180,026 $544,074 $547,605
======== ======== ======== =========
Operating Income (Loss):
Specialty Printing and Labeling $819 $(2,126) $2,816 $(2,099)
Jordan Specialty Plastics 2,469 (106) 6,779 1,740
Jordan Auto Aftermarket 6,006 4,704 17,643 15,783
Kinetek 11,450 9,643 33,029 30,833
Consumer and Industrial Products 191 (869) (1,696) (5,423)
------- -------- -------- ---------
Total (a) $20,935 $11,246 $58,571 $40,834
======= ======== ======== ========
Operating Margin (b)
Specialty Printing and Labeling 3.2% (7.4)% 3.8% (2.6)%
Jordan Specialty Plastics 8.6% (0.4)% 8.3% 2.3%
Jordan Auto Aftermarket 14.7% 12.6% 14.2% 13.7%
Kinetek 15.4% 13.7% 15.2% 13.8%
Consumer and Industrial Products 1.1% (4.8)% (3.6)% (10.2)%
Total (b) 11.2% 6.3% 10.8% 7.5%
- ----------------------------
(a) Before corporate overhead of $4,167 and $501 and advisory fees and other
of $175 and $7,000 for the three months ended September 30, 2002 and 2001,
respectively, and corporate overhead of $9,080 and $3,585 and advisory fees
and other of $7,175 and $7,000 for the nine months ended September 30, 2002
and 2001, respectively.
(b) Operating margin is operating income (loss) divided by net sales.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Specialty Printing and Labeling. As of September 30, 2002, the
Specialty Printing and Labeling group ("SPL") consisted of JII Promotions,
Valmark, Pamco, and Seaboard.
Net sales for the third quarter of 2002 decreased $3.1 million, or 10.8%, from
the same period in 2001. This decrease is primarily due to lower sales of
calendars, school annuals, and outside specialties at JII Promotions, $0.6
million, $0.1 million, and $0.5 million, respectively, lower sales of screen
printed products and membrane switches at Valmark, $0.8 million and $0.1
million, respectively, decreased sales of labels at Pamco, $0.3 million, and
lower sales of folding boxes at Seaboard, $0.7 million. Net sales for the
first nine months of 2002 decreased $7.1 million, or 8.8%, from the same
period in 2001. This decrease is primarily due to lower sales of calendars and
outside specialties at JII Promotions, $1.9 million and $1.4 million,
respectively, decreased sales of screen printed products, membrane switches,
shrouds and rollstock at Valmark, $2.6 million, $0.8 million, $0.1 million,
and $0.3 million, respectively, and lower sales of labels at Pamco, $0.6
million. Partially offsetting these decreases are higher sales of school
annuals at JII Promotions, $0.3 million, and increased sales of folding boxes
at Seaboard, $0.3 million.
Operating income for the third quarter of 2002 increased $2.9 million over the
same period in 2001. This increase is due to higher operating income at JII
Promotions, $1.0 million, Valmark, $0.3 million, and Pamco, $1.8 million,
partially offset by lower operating income at Seaboard, $0.2 million.
Operating income for the first nine months of 2002 increased $4.9 million over
the same period in 2001. This increase is due to higher operating income at
JII Promotions, $2.0 million, Pamco, $3.5 million, and Seaboard, $0.2 million,
partially offset by lower operating income at Valmark, $0.8 million. The
increase in operating income at Pamco is due to the closing of Pamco's East
Coast facility in October 2001.
Jordan Specialty Plastics. As of September 30, 2002, the Jordan
Specialty Plastics group ("JSP") consisted of Beemak, Sate-Lite, and Deflecto.
Net sales for the third quarter of 2002 increased $3.6 million, or 14.3%, over
the same period in 2001. This increase is primarily due to increased sales of
tooling at Sate-Lite, $0.4 million, higher sales of molded and fabricated
products at Beemak, $0.1 million each, and increased sales of hardware and
office products at Deflecto, $2.6 million and $0.9 million, respectively.
Partially offsetting these increases are decreased sales of bike and truck
reflectors and warning triangles at Sate-Lite, $0.3 million and $0.2 million,
respectively. Net sales for the first nine months of 2002 increased $5.9
million, or 7.8%, over the same period in 2001. This increase is primarily due
to higher sales of tooling, truck reflectors, and miscellaneous truck parts at
Sate-Lite, $0.3 million, $0.2 million, and $0.2 million, respectively,
increased sales of fabricated products at Beemak, $0.3 million, and higher
sales of hardware products at Deflecto, $6.8 million. These increases are
partially offset by lower sales of Tilt Bins and thermoplastic colorants at
Sate-Lite, $0.5 million and $0.7 million, respectively, and decreased sales of
office products at Deflecto, $0.7 million.
Operating income for the third quarter of 2002 increased $2.6 million over the
same period in 2001. This increase is due to higher operating income at
Deflecto, $3.0 million, partially offset by lower operating income at
Sate-Lite, $0.4 million. Operating income for the first nine months of 2002
increased $5.0 million, or 289.6%, over the same period in 2001. This increase
is due to higher operating income at Beemak, $0.1 million, and Deflecto $5.4
million, partially offset by lower operating income at Sate-Lite, $0.5
million. The increase in operating income at Deflecto is due to increased
sales, ongoing headcount reductions and continued focus on operational
efficiencies.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Jordan Auto Aftermarket. As of September 30, 2002, the Jordan Auto
Aftermarket group ("JAAI") consisted of Dacco, Alma and Atco.
Net sales for the third quarter of 2002 increased $3.3 million, or 8.9%, over
the same period in 2001. This increase is primarily due to higher sales of air
conditioning compressors at Alma coupled with increased sales of
remanufactured torque converters and drive train components at Dacco and Alma.
Net sales for the first nine months of 2002 increased $9.5 million, or 8.2%,
over the same period in 2001. This increase is primarily due to the
acquisition of Atco in June 2001. Atco contributed net sales of $12.3 million
in the first nine months of 2002 compared with net sales of $4.1 million in
the same period in 2001. In addition, sales of air conditioning compressors
increased at Alma.
Operating income for the third quarter of 2002 increased $1.3 million, or
27.7%, over the same period in 2001. Operating income for the first nine
months increased $1.9 million, or 11.8%, over the same period in 2001. This
higher operating income can primarily be attributed to the acquisition of Atco
and increased air compressor sales at Alma, partially offset by increased
corporate expenses.
Kinetek. As of September 30, 2002, the Kinetek group consisted of
Imperial, Gear, Merkle-Korff, FIR, ED&C, Motion Control, Advanced DC and
DeSheng.
Net sales for the third quarter of 2002 increased $4.2 million, or 5.9%, over
the same period in 2001. Net sales for the first nine months of 2002 decreased
$5.9 million, or 2.7%, from the same period in 2001. The acquisition of
DeSheng resulted in $3.0 million in added sales during the third quarter of
2002 and $4.7 million for the year to date. The increase in sales for the
third quarter is mainly attributable to the inclusion of DeSheng results. The
decline in total year to date sales resulted from general softness in
substantially all of Kinetek's principal markets, partially offset by the
DeSheng sales. The motors segment delivered a 5.1% increase in third quarter
sales versus 2001, with year to date sales 3.8% below the same period in 2001.
Net sales of subfractional motors increased 5.1% for the third quarter and
increased 0.1% year to date, led by increased demand for refrigeration
appliance motors and by Kinetek's new product introductions, but offset by
protracted weakness in vending motor markets. Net sales of fractional and
integral motors increased 8.4% for the third quarter and decreased 4.4% year
to date, compared with the same periods in 2001. The increase in third quarter
sales was led by the inclusion of DeSheng and from share gains and new
products introduced in the floor care and elevator motor product lines. These
increases more than offset sharp declines in sales of DC products used in
material handling applications, and moderately reduced demand for AC and DC
products used in the floor care end market, as well as a weak European market.
Net sales in the controls segment rose 8.0% in the third quarter and 0.3% for
the year to date compared with 2001 performance. The elevator modernization
market that drives this segment has experienced general softness and moderate
pricing pressure throughout 2002.
Operating income for the third quarter of 2002 increased $1.8 million, or
18.7%, over the same period in 2001. Operating income for the first nine
months of 2002 increased $2.2 million, or 7.1%, over the same period in 2001.
These increases are due to higher operating income in the motors segment,
14.6% and 5.2%, for the third quarter and nine months respectively, and
increased operating income in the controls segment, 15.4% and 2.0%, for the
third quarter and first nine months, respectively. These increases are due to
Kinetek's continued emphasis on cost reduction through productivity and
sourcing initiatives, partially offset by price competition in several key
markets and a shift in sales toward less profitable product lines.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Consumer and Industrial Products. As of September 30, 2002, the Consumer
and Industrial Products group consisted of Cape, Welcome Home, Cho-Pat, ISMI
and GramTel. Online Environs was formally shutdown during the third quarter.
(See Footnote F).
Net sales for the third quarter of 2002 decreased $1.1 million, or 5.8%, from
the same period in 2001. This decrease is primarily due to the divestiture of
Flavorsource in January 2002, $1.3 million. In addition, sales of Internet
connection services at ISMI decreased $0.3 million, sales of orthopedic
supports at Chopat decreased $0.1 million, retail sales at Welcome Home
decreased $0.8 million, and sales of web site development services at Online
Environs decreased $0.2 million. Partially offsetting these decreases are
increased sales of home accessories at Cape, $1.4 million, and higher sales of
information technology outsourcing services at GramTel, $0.2 million. Net
sales for the first nine months of 2002 decreased $5.9 million, or 11.1%, from
the same period in 2001. This decrease is also primarily due to the
divestiture of Flavorsource, $4.4 million, as well as the divestiture of
Riverside in February 2001, $4.1 million. In addition, sales decreased due to
lower sales of Internet connection services at ISMI, $0.7 million, lower sales
of orthopedic supports at Chopat, $0.1 million, and decreased sales of web
site development services at Online Environs, $0.5 million. Partially
offsetting these decreases are increased sales of home accessories at Cape,
$2.7 million, higher retail sales at Welcome Home, $0.6 million, and increased
sales of information technology outsourcing services at GramTel, $0.6 million.
Cape and Welcome Home have been helped by the consumers' inclination to "nest"
and decorate their homes, and Welcome Home has been helped by lower gas
prices, which accounts for higher traffic in outlet malls. GramTel sales
increased due to the increase in customers requiring web hosting and e-mail
hosting.
Operating income for the third quarter increased $1.1 million over the same
period in 2001. This increase is due to higher operating income at Cape, $0.4
million, lower operating loss at Welcome Home, $0.1 million, and higher
operating income at GramTel, $0.6 million. Operating loss for the first nine
months of 2002 decreased $3.7 million, over the same period in 2001. This
decrease is due to the divestiture of Riverside, as mentioned above, as
Riverside had an operating loss of $0.4 million for the first nine months of
2001. In addition, operating income increased at Cape, $1.2 million, Welcome
Home, $1.5 million, Chopat, $0.1 million, Online Environs, $0.4 million, and
GramTel, $0.6 million. Partially offsetting these increases is decreased
operating income at ISMI, $0.1 million and Flavorsource, $0.4 million, due to
the divestiture of Flavorsource in January 2002. The increased operating
income at Cape and Welcome Home is due to higher gross margins in addition to
the higher sales mentioned above.
Consolidated Results: (See Condensed Consolidated Statement of Operations).
Net sales for the third quarter of 2002 increased $6.9 million, or 3.8%, over
the same period in 2001. This increase is primarily due to higher sales of
tooling at Sate-Lite, increased sales of hardware and office products at
Deflecto, higher sales of air conditioning compressors, remanufactured torque
converters and drive trains at Alma and Dacco, increased sales of motors and
controls at Kinetek, and higher sales of home accessories at Cape. In
addition, net sales increased due to the acquisitions of Atco in June 2001 and
DeSheng in April 2002. Partially offsetting these increases are lower sales of
calendars and outside specialties at JII Promotions, decreased sales of screen
printed products at Valmark, lower sales of labels at Pamco, decreased sales
of folding boxes at Seaboard, lower sales of bike and truck reflectors at
Sate-Lite, and decreased retail sales at Welcome Home. In addition, net sales
decreased due to the divestiture of Flavorsource in January 2002.
Net sales for the first nine months of 2002 decreased $3.5 million, or 0.6%,
from the same period in 2001. This decrease is primarily due to the
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
divestitures of Flavorsource in January 2002 and Riverside in February 2001.
In addition, net sales decreased due to lower sales of calendars and outside
specialties at JII Promotions, decreased sales of screen printed products and
membrane switches at Valmark, lower sales of labels at Pamco, decreased sales
of Tilt Bins and thermoplastic colorants at Sate-Lite, lower sales of office
products at Deflecto, decreased sales of fractional and integral motors at
Kinetek, lower sales of Internet connection services at ISMI, and decreased
sales of web site development services at Online Environs. Partially
offsetting these decreases are higher sales due to the acquisitions of Atco
and DeSheng, as mentioned above. In addition, net sales increased due to
higher sales of school annuals at JII Promotions, increased sales of folding
boxes at Seaboard, higher sales of tooling at Sate-Lite, increased sales of
hardware products at Deflecto, higher sales of air conditioning compressors at
Alma, increased sales of home accessories at Cape, higher retail sales at
Welcome Home, and increased sales of information technology outsourcing
services at GramTel.
Operating income for the third quarter increased $12.8 million over the same
period in 2001. This increase is primarily due to higher operating income at
JII Promotions, Pamco, Deflecto, Jordan Auto Aftermarket, the motors and
controls segments of Kinetek, Cape, and GramTel, as well as the acquisitions
mentioned above. Partially offsetting these increases is lower operating
income at Seaboard and Sate-Lite, in addition to lower operating income due to
the divestiture of Flavorsource. Operating income for the first nine months of
2002 increased $12.1 million, or 39.9%, over the same period in 2001. This
increase is primarily due to higher operating income at JII Promotions, Pamco,
Deflecto, the motors and controls segments of Kinetek, Cape, Welcome Home, and
GramTel. In addition, operating income increased due to the acquisitions of
Atco and DeSheng. Partially offsetting these increases is lower operating
income at Valmark and Sate-Lite. The increased operating income at Pamco is
due to the closure of Pamco's East Coast facility in October 2001, the
increase in operating income at Deflecto is due to increased sales, ongoing
headcount reductions, and continued focus on operational efficiencies, and the
higher operating income at Kinetek is due to continued emphasis on cost
reduction through productivity and sourcing initiatives.
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 $141.9 million of working capital at September
30, 2002 compared to approximately $159.1 million at the end of 2001.
Operating activities. Net cash provided by operating activities for the nine
months ended September 30, 2002 was $12.6 million compared to net cash
provided by operating activities of $3.8 million during the same period in
2001. The increase in cash provided is primarily due to favorable working
capital variances compared with the same period in 2001.
Investing activities. Net cash used in investing activities for the nine
months ended September 30, 2002 was $18.2 million compared to net cash used in
investing activities of $5.9 million during the same period in 2001. The
increase in cash used is primarily due to the proceeds from the sale of a
subsidiary in the prior year.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Financing activities. Net cash provided by financing activities for the nine
months ended September 30, 2002 was $5.9 million compared to net cash provided
by financing activities of $2.6 million during the same period in 2001. This
change is primarily due to net revolver borrowings of $21.4 million in the
current year as compared to $9.6 million in the prior year and the issuance of
long-term debt at one of the Company's subsidiaries, Kinetek, of $20.5
million, partially offset by the retirement of debt in the current year of
$31.4 million.
The Company is party to two credit agreements under which the Company is able
to borrow up to $160.0 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 November 14, 2002, the
Company had approximately $33.4 million of available funds under these
arrangements.
The Company may, from time to time, use cash, including cash generated from
borrowings under its credit agreements, to purchase either its 11 3/4% Senior
Subordinated Discount Debentures due 2009 or its 10 3/8% Senior 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. JII
Promotions and Welcome Home's sales are somewhat stronger toward year-end due
to the nature of their products. Calendars at JII Promotions have an annual
cycle and home furnishings and accessories at Welcome Home are popular holiday
gifts.
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, 2002,
the Company had $51.9 million of variable rate debt outstanding. A one
percentage point increase in interest rates would increase the annual amount
of interest paid by approximately $0.5 million. The Company does not believe
that its market risk financial instruments on September 30, 2002 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.
Controls and Procedures
The Company's CEO and Principal Financial Officer have concluded, based on an
evaluation within 90 days of the filing date of this report, that the
Company's disclosure controls and procedures are effective for gathering,
analyzing and disclosing information required to be disclosed in the Company's
reports filed under the Securities Exchange Act of 1934. There have been no
significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
foregoing evaluation.
22
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
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 and Reports on Form 8-K
--------------------------------
8-K filed on May 29, 2002 regarding
the purchase of $110,000,000 principal
amount of the Company's Series A
Debentures.
8-K filed on June 5, 2002 regarding
the purchase of $9,000,000 principal
amount of the Company's Series A
Debentures.
23
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 14, 2002 By: /s/ Thomas C. Spielberger
---------------------------
Thomas C. Spielberger
Senior Vice President,
Finance and Accounting
24
CERTIFICATE
I, John W. Jordan II, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Jordan Industries,
Inc;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
----------------------
/s/ John W. Jordan II
------------------------------
Name: John W. Jordan II
Title: Chairman and CEO
25
CERTIFICATE
I, Thomas C. Spielberger, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Jordan Industries,
Inc;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material nformation relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
----------------------
/s/ Thomas C. Spielberger
------------------------------
Name: Thomas C. Spielberger
Title: SVP, Finance & Accounting
Principal Financial Officer
26