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, 2004 Commission File Number 33-24317
JORDAN INDUSTRIES, INC.
(Exact name of registrant as specified in charter)
Illinois 36-3598114
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
ArborLake Centre, Suite 550 60015
1751 Lake Cook Road (Zip Code)
Deerfield, Illinois
(address of Principal Executive Offices)
Registrant's telephone number, including Area Code:
(847) 945-5591
Former name, former address and former fiscal year, if changed since last
report: Not applicable.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past ninety (90) days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Exchange Act).
Yes No X
----- -----
The number of shares outstanding of Registrant's Common Stock as of
May 17, 2004: 98,501.0004.
2
JORDAN INDUSTRIES, INC.
INDEX
Part I. Financial Information Page No.
- ----------------------------- --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2004
(Unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2004 and 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2004 and 2003 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information 17
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
Of Equity Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submissions of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
3
JORDAN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31,
2004 2003
--------- ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $21,176 $16,173
Accounts receivable, net 115,982 101,860
Inventories 133,827 126,504
Net assets of discontinued operations (See Note E) 3,666 6,292
Income tax receivable 5,198 5,637
Prepaid expenses and other current assets 23,274 27,327
-------- --------
Total Current Assets 303,123 283,793
Property, plant and equipment, net 87,193 89,956
Investments in and advances to affiliates 46,758 46,664
Goodwill, net 248,432 247,900
Other assets 22,482 24,155
-------- --------
Total Assets $707,988 $692,468
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
(NET CAPITAL DEFICIENCY)
Current Liabilities:
Accounts payable $61,797 $54,001
Accrued liabilities 98,894 86,667
Current portion of long-term debt 20,090 20,087
-------- --------
Total Current Liabilities 180,781 160,755
Long-term debt, less current portion 736,444 728,124
Other non-current liabilities 14,536 14,587
Deferred income taxes 10,511 8,198
Minority interest 571 472
Preferred stock 2,586 2,535
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 income (loss) 1,980 (1,012)
Accumulated deficit (241,538) (223,308)
-------- --------
Total Shareholder's Equity (net capital
deficiency) (237,441) (222,203)
Total Liabilities and Shareholder's
Equity (net capital deficiency) $707,988 $692,468
======== ========
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,
---------------------------------
2004 2003
---- ----
Net sales $168,517 $162,246
Cost of sales, excluding
114,101 107,213
depreciation
Selling, general and
administrative expenses,
excluding depreciation 38,272 35,937
Depreciation 4,951 5,313
Amortization of other intangibles 46 61
Management fees and other (70) 30
-------- -------
Operating income 11,217 13,692
Other (income) expenses:
Interest expense 23,659 20,745
Interest income (270) (267)
Other 335 (3,393)
-------- -------
23,724 17,085
-------- -------
Loss before income taxes,
minority interest, and discontinued
operations (12,507) (3,393)
Provision for income taxes 3,942 3,016
-------- -------
Loss before minority interest and
discontinued operations (16,449) (6,409)
Minority interest 99 (61)
-------- -------
Loss before discontinued operations (16,548) (6,348)
Loss from discontinued operations,
net of tax (See Note E) 460 1,551
Loss on sale of discontinued
operations, net of tax (See Note E) 1,171 -
-------- -------
Net loss $(18,179) $(7,899)
======== =======
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,
--------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net loss $(18,179) $(7,899)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on sale of subsidiaries 1,171 -
Depreciation and amortization 4,997 5,374
Amortization of deferred financing fees 1,590 1,543
Minority interest 99 (61)
Non-cash interest income (24) (35)
Deferred income taxes 2,313 1,511
Loss (gain) on disposal of fixed assets 21 (3,725)
Other 441 62
Changes in operating assets and liabilities:
Increase in current assets (16,953) (28,977)
Increase in current liabilities 11,468 12,661
Decrease (increase) in non-current assets 64 (2,552)
(Decrease) increase in non-current liabilities (51) 334
Decrease (increase) in net assets of
discontinued operations (1,700) 5,226
------- -------
Net cash used in operating activities (14,743) (16,538)
Cash flows from investing activities:
Proceeds from sale of fixed assets 320 3,744
Capital expenditures (1,685) (3,160)
Net proceeds from sale of subsidiaries 6,155 -
------- ------
Net cash provided by investing
activities 4,790 584
Cash flows from financing activities:
Proceeds from revolving credit facilities, net 15,958 23,423
Repayment of long-term debt (1,046) (7,245)
Proceeds from other borrowings 431 602
Payment of financing fees (2,164) (21)
------- ------
Net cash provided by financing
activities 13,179 16,759
Effect of exchange rate changes on cash 1,777 4,324
------- ------
Net increase in cash and cash equivalents 5,003 5,129
Cash and cash equivalents at beginning of period 16,173 19,929
------- -------
Cash and cash equivalents at end of period $21,176 $25,058
======= =======
See accompanying notes to condensed consolidated financial statements.
6
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
A. Organization
- ----------------
The unaudited condensed consolidated financial statements, which reflect all
adjustments that management believes necessary to present fairly the results of
interim operations and are of a normal recurring nature, should be read in
conjunction with the Notes to the Consolidated Financial Statements (including
the Summary of Significant Accounting Policies) included in the Company's
audited consolidated financial statements for the year ended December 31, 2003,
which are included in the Company's Annual Report filed on Form 10-K for such
year (the "2003 10-K"). Results of operations for the interim periods are not
necessarily indicative of annual results of operations.
B. Summary of Significant Accounting Policies
- ----------------------------------------------
The condensed consolidated financial statements include the accounts of Jordan
Industries, Inc. and its subsidiaries. Material intercompany transactions and
balances are eliminated in consolidation. Operations of certain subsidiaries
outside the United States are included for periods ending two months prior to
the Company's year-end and interim periods to ensure timely preparation of the
condensed consolidated financial statements.
The Company has recorded an income tax provision on its loss before taxes due to
its foreign and state tax expense, but its domestic losses have not been
benefited for federal tax purposes.
C. Inventories
- ---------------
Inventories are summarized as follows:
March 31, December 31,
2004 2003
---------- ------------
Raw materials $ 59,931 $ 54,588
Work-in-process 18,677 17,652
Finished goods 55,219 54,264
--------- --------
$ 133,827 $126,504
========= ========
D. Comprehensive Loss
- ----------------------
Total comprehensive loss for the three months ended March 31, 2004 and 2003 is
as follows:
Three Months ended
March 31,
-----------------------
2004 2003
---- ----
Net loss $(18,179) $(7,899)
Foreign currency translation 2,992 5,672
-------- -------
Comprehensive loss $(15,187) $(2,227)
======== =======
7
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
E. Discontinued Operations
- ---------------------------
On January 20, 2004, the Company sold certain assets and liabilities of JII
Promotions' Ad Specialty and Calendar product lines to a third party for $6,155.
Concurrent with the above transaction, the Company agreed to wind down the
remaining activities of JII Promotions, and to ultimately retain only the
pension-related liabilities and various immaterial capital leases. The
consolidated financial statements reflect JII Promotions as a discontinued
operation for all periods presented. Net assets of discontinued operations in
the condensed consolidated balance sheets reflect net assets of JII Promotions,
excluding the retained liabilities discussed above. The Company recorded a loss
on the sale of $1,171. There was no tax benefit on the loss on sale or on the
loss from discontinued operations.
Net sales of JII Promotions for the three month period ending March 31, 2004 and
2003 were $1,083 and $7,461, respectively. JII Promotions is a part of the
Specialty Printing and Labeling segment.
F. 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.
G. 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, 2004 and 2003 are as follows:
Three Months Ended
March 31,
--------------------------
2004 2003
---- ----
Service cost $ 195 $ 169
Interest cost 310 299
Expected return on plan assets (270) (294)
Prior service costs recognized 15 14
Recognized net actuarial loss (gain) 31 (2)
------- -------
Net periodic benefit cost $ 281 $ 186
======= =======
8
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
The components of net periodic benefit cost for the Company's post-retirement
healthcare benefit plans for the three months ended March 31, 2004 and 2003 are
as follows:
Three Months Ended
March 31,
------------------
2004 2003
---- ----
Service cost $46 $38
Interest cost 90 72
Recognized net actuarial loss 48 31
---- ----
Net periodic benefit cost $184 $141
==== ====
H. Business Segment Information
- --------------------------------
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the Company's business segment disclosures. There have been no
changes from the Company's December 31, 2003 consolidated financial statements
with respect to segmentation or the measurement of segment profit or loss,
except for the reclassification of JII Promotions to discontinued operations in
all periods (See Note E).
I. Exchange Offer
- ------------------
On February 18, 2004, the Company completed an Exchange Offer, whereby it
exchanged $173,334 of new Senior Notes (the "Exchange Notes") for $247,619 of
Old Senior Notes. The Exchange Notes were co-issued by JII Holdings LLC, a
wholly owned subsidiary of the Company, and its wholly owned subsidiary, JII
Holdings Finance Corporation. The Exchange Notes bear interest at 13% per annum
which is payable semi annually on February 1st and August 1st of each year, and
mature on April 1, 2007. The notes that were exchanged bore interest at 10 3/8%
per annum, paid interest semi annually on February 1st and August 1st, and were
scheduled to mature on August 1, 2007.
The Exchange Offer has been accounted for as a troubled debt restructuring in
conformity with Statement of Financial Accounting Standards No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructurings" (SFAS No. 15). SFAS
No. 15 requires that, when there is a modification of terms such as this, if the
total debt service of the new debt is less than the carrying amount on the
balance sheet of the old debt, the carrying amount should be reduced to the
total debt service amount. This reduction resulted in a gain of $2,149, which
was required by SFAS No. 15 to be offset by fees incurred on the transaction.
Fees of $6,315, which were in excess of the gain, were recorded as interest
expense during the first quarter of 2004. The remaining reduction in the
principal of the Exchange Notes compared to the Old Senior Notes will be
recognized over the period to maturity of the Exchange Notes as a reduction of
interest expense.
J. Waiver Agreement
- --------------------
On January 31, 2004, the Company and certain holders of the Company's Senior
Subordinated Discount Debentures entered into a Waiver Agreement which states
that the participating note holders waive any rights to claim an event of
default if the Company does not make the scheduled interest payments as required
in the applicable indenture. Should the Company elect not to make interest
payments on these notes, the interest will continue to accrue at its original
rate of 11.75% per year and will be due and payable to the holders at the
maturity date of the notes. Pursuant to the Waiver
9
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Agreement, the maturity date of the participating notes is the earlier of (1)
the date on which all of the outstanding principal and interest on the Exchange
Notes and the Senior Secured Discount Debentures not participating in the Waiver
Agreement have been paid in full, (2) the date six months after the original
maturity of the participating notes, or (3) the date on which the Company enters
into a bankruptcy proceeding.
K. Modification Agreement
- -------------------------
On February 18, 2004, certain of the Company's Senior Subordinated Discount
Debenture note holders entered into a Modification Agreement which provides for
a reduction in their stated maturity value and a reduction of their applicable
interest rate. The aggregate maturity value of the notes held by the parties to
the Modification Agreement is $24,007 which has been reduced to $7,202. The
interest rate on these notes has been reduced to a stated rate of 1.61% from
11.75%. The holders of these modified notes retain the right to collect the
original maturity value and interest thereon at the original interest rate if
the Company meets certain financial tests and ratios. Under the Modification
Agreement, these notes mature on the earlier of (1) the date that all other
Senior Subordinated Discount Debenture note holders have been paid in full, (2)
the date that is six months after the original maturity date, or (3) the date on
which the Company enters into a bankruptcy proceeding.
The Company has determined that this modification will be accounted for as a
troubled debt restructuring as required by SFAS No. 15. The effect of this
accounting treatment will not reduce the carrying value of the modified notes;
however, the interest expense associated with the modified notes will be
calculated using the modified stated interest rate of 1.61% per annum and the
reduced maturity amount.
The remaining Senior Subordinated Discount Debentures that are not party to the
Modification Agreement will continue to accrue interest at 11.75% and represent
$70,879 of the total outstanding principal amount of $94,886.
L. Subsequent Events
- ---------------------
On April 1, 2004, certain holders of an additional $1,847 of the Company's
Senior Subordinated Discount Debentures elected to participate in the
Modification Agreement as discussed in Note K. Under the terms of the
Modification Agreement, the maturity value of these notes has been reduced to
$554 with an applicable stated interest rate of 1.61% per annum. These notes
have the same terms and conditions as the notes modified as of February 18,
2004.
On May 4, 2004, two of the Company's affiliates, DMS Holdings, Inc. and Mabis
Healthcare Holdings, Inc., ("DMS/Mabis") were sold to a third party. A portion
of the proceeds from the sale was used to repay the Company for operating
expenses which the Company paid on behalf of DMS/Mabis in prior periods, as well
as accrued and unpaid management fees due the Company. These repayments totaled
$806 and $1,069, respectively. Also as a result of the sale, the Company was
paid a fee of $1,725 for the termination of their management fee arrangement
with DMS/Mabis, and a fee of $1,600 pursuant to certain advisory agreements. The
Company anticipates recording income of approximately $4,309 in the second
quarter as a result of this transaction.
On May 13, 2004, one of the Company's affiliates, Flavor and Fragrance Holdings,
Inc., ("FFG") was sold to a third party. A portion of the proceeds was used to
repay the principal and accrued interest on the note the Company received when
the net assets of Flavorsource were sold to FFG on January 1, 2002. This
principal and accrued interest
10
JORDAN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
totaled $12,181. In addition, a portion of the proceeds from the sale was used
to repay the Company for operating expenses which the Company paid on behalf of
FFG in prior periods, as well as accrued and unpaid management fees due the
Company. These repayments totaled $4,509 and $1,672, respectively. Also as a
result of the sale, the Company was paid a fee of $1,705 for the termination of
their management fee arrangement with FFG, and a fee of $1,940 pursuant to
certain advisory agreements. The Company anticipates recording income of
approximately $3,645 in the second quarter as a result of this transaction.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
The following discussion should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the 2003 10-K and the financial statements and the related notes
thereto.
Results of Operations
- ---------------------
Summarized below are the net sales, operating income (loss) and operating
margins (as defined) for each of the Company's business segments for the three
month periods ended March 31, 2004 and 2003. Due to the divestiture of the net
assets of the School Annual division of JII Promotions in September 2003 and the
subsequent sale of certain assets of the Ad Specialty and Calendar product lines
in January 2004, the operations of JII Promotions have been classified as
Discontinued Operations on the Company's Consolidated Statement of Operations in
all periods. JII Promotions is part of the Specialty Printing and Labeling
segment. (See Note E to the financial statements.) The following discussion
reviews the following segment data and certain of the consolidated financial
data for the Company.
Three Months Ended
March 31,
--------------------------
2004 2003
---- ----
Net Sales:
Specialty Printing and Labeling $12,483 $ 12,780
Jordan Specialty Plastics 32,820 27,865
Jordan Auto Aftermarket 33,838 36,622
Kinetek 75,717 71,252
Consumer and Industrial Products 13,659 13,727
-------- --------
Total $168,517 $162,246
======== ========
Operating Income (Loss):
Specialty Printing and Labeling $1,165 $ 1,125
Jordan Specialty Plastics 1,833 1,755
Jordan Auto Aftermarket 2,492 3,352
Kinetek 6,707 8,808
Consumer and Industrial Products (1,079) (969)
-------- --------
Total(a) $11,118 $14,071
======== ========
Operating Margin(b)
Specialty Printing and Labeling 9.3% 8.8%
Jordan Specialty Plastics 5.6% 6.3%
Jordan Auto Aftermarket 7.4% 9.2%
Kinetek 8.9% 12.4%
Consumer and Industrial Products (7.9)% (7.1)%
Total 6.6% 8.7%
- -------------------
(a) Before corporate overhead and management fees of $(99) and $379 for the
three months ended March 31, 2004 and 2003, respectively.
(b) Operating margin is operating income (loss) divided by net sales.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Specialty Printing and Labeling. As of March 31, 2004, the Specialty
-------------------------------
Printing and Labeling group ("SPL") consisted of Valmark, Pamco, and Seaboard.
Net sales for the three months ended March 31, 2004 decreased $0.3 million, or
2.3%, from the same period in 2003. This decrease was primarily due to lower
sales of folding boxes at Seaboard, $0.9 million. Partially offsetting this
decrease were higher sales of membrane switches and screen printed products at
Valmark, $0.1 million each, and increased sales of labels at Pamco, $0.4
million.
Operating income for the three months ended March 31, 2004 remained consistent
with the same period in 2003. Operating income increased at Valmark and Pamco,
$0.2 million each, while operating income decreased at Seaboard, $0.4 million,
all of which were primarily driven by the sales fluctuations discussed above.
Jordan Specialty Plastics. As of March 31, 2004, the Jordan Specialty
-------------------------
Plastics group ("JSP") consisted of Beemak, Sate-Lite, and Deflecto.
Net sales for the three months ended March 31, 2004 increased $5.0 million, or
17.8%, over the same period in 2003. This increase was primarily due to higher
sales of both hardware and office products at Deflecto, $3.3 million and $1.2
million, respectively. In particular, increased sales of chairmats at Deflecto
of $0.8 million contributed to the higher sales of office products. In addition,
sales of bike reflectors, truck and auto lenses, plastic hospital supplies and
custom molded products increased at Sate-Lite, $0.2 million, $0.3 million, $0.1
million, and $0.2 million, respectively, and sales of display products,
injection-molded products and fabricated products increased at Beemak, $0.4
million, $0.1 million, and $0.1 million, respectively. Partially offsetting
these increases were lower sales of thermoplastic colorants at Sate-Lite, $0.9
million, due to the sale of the Midwest Color division in September 2003.
Operating income for the three months ended March 31, 2004 increased $0.1
million, or 4.4%, over the same period in 2003. This increase was primarily due
to higher operating income at Sate-Lite and Beemak, $0.1 million and $0.4
million, respectively, as a result of domestic headcount reductions, increased
manufacturing in China, and the closure of the molding division of Beemak which
contributed to a decrease in overhead expenses. Partially offsetting these
increases was lower operating income at Deflecto, $0.4 million.
Jordan Auto Aftermarket. As of March 31, 2004, the Jordan Auto
-----------------------
Aftermarket group ("JAAI") consisted of Dacco, Alma and Atco.
Net sales for the three months ended March 31, 2004 decreased $2.8 million, or
7.6%, from the same period in 2003. This decrease was primarily due to lower
sales of drive trains and air conditioning compressors at Alma and driers and
accumulators, air conditioning hose assemblies and fittings at Atco. Partially
offsetting these decreases were higher sales of soft parts and scrap at Dacco.
Operating income for the three months ended March 31, 2004 decreased $0.9
million, or 25.7%, from the same period in 2003. This decrease was due to lower
operating income at Alma and Atco, partially offset by increased operating
income at Dacco. The decreased operating income at Alma and Atco was the result
of lower sales, particularly in the case of Alma due largely to changes in
warranty policies at OEM customers, and increased insurance costs. The increased
operating income at Dacco was due to increased sales coupled with significant
reductions in workers compensation insurance costs as the result of an
intensified cost containment initiative.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Kinetek. As of March 31, 2004, the Kinetek group consisted of Imperial,
-------
Gear, Merkle-Korff, FIR, ED&C, Motion Control, Advanced DC and DeSheng.
Net sales for the three months ended March 31, 2004 increased $4.5 million, or
6.3%, over the same period in 2003. This increase was primarily due to higher
sales of fractional and integral motor products, $4.1 million, and increased
sales of controls, $1.8 million. The increase in fractional and integral motors
sales was primarily attributable to general strength and share gains in
Kinetek's material handling and commercial floor care motor products, and an
increase in elevator motors sold in China. The higher sales of controls were
primarily due to increased sales of elevator controls and automotive assembly
line controls. Partially offsetting these increases are lower sales of
subfractional motors, $1.4 million. This decline primarily resulted from the
loss of value-added business with a major appliance customer, softness in the
vending machine market, and the loss of significant one-time sales to certain
restaurant product customers during the prior year period.
Operating income for the three months ended March 31, 2004 decreased $2.1
million, or 23.9% from the same period in 2003. This decrease was due to lower
operating income in both the motors and controls segments, $0.8 million and $0.7
million, respectively. This lower operating income was due to inflated prices on
metal components used in the assembly of motor products, lower gross margin on a
new elevator control product and other sales in the material handling and floor
care markets, and costs associated with two facility moves in the motors
segment.
Consumer and Industrial Products. As of March 31, 2004, the Consumer and
--------------------------------
Industrial Products group consisted of Welcome Home LLC and its two divisions,
Cape Craftsmen and Welcome Home, and Cho-Pat, and GramTel.
Net sales for the three months ended March 31, 2004 decreased $0.1 million, or
0.5%, from the same period in 2003. This decrease was primarily due to lower
sales of home accessories at Cape, $0.2 million, and lower retail sales at
Welcome Home, $0.1 million. Partially offsetting these decreases were higher
sales of data storage and disaster recovery services at GramTel, $0.2 million.
Operating loss for the three months ended March 31, 2004 increased $0.1 million
from the same period in 2003. This increase was primarily due to increased
operating loss at Welcome Home, $0.1 million, and lower operating income at
Cape, $0.2 million. Partially offsetting these variances was higher operating
income at GramTel and Cho-Pat, $0.1 million each. The operating income decrease
at Welcome Home is due to increased occupancy expenses at several of the retail
locations in addition to higher medical insurance costs. The operating income
decrease at Cape was primarily due to increased insurance costs.
Consolidated Results: (See Condensed Consolidated Statement of Operations).
- --------------------
Net sales for the three months ended March 31, 2004 increased $6.3 million, or
3.9%, over the same period in 2003. This increase was primarily due to higher
sales of labels at Pamco, hardware and office products at Deflecto, bike
reflectors, truck and auto lenses, and custom molded products at Sate-Lite,
display products at Beemak, soft parts at Dacco, and fractional and integral
motors and controls at Kinetek. Partially offsetting these increases were lower
sales of folding boxes at Seaboard, drive trains
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
and air conditioning compressors at Alma, driers and accumulators, air
conditioning hose assemblies and fittings at Atco, and subfractional motors at
Kinetek. In addition, sales of thermoplastic colorants decreased at Sate-Lite
due to the divestiture of the Midwest Color division in September 2003.
Operating income for the three months ended March 31, 2004 decreased $2.5
million, or 18.1%, from the same period in 2003. This decrease was due to lower
sales at certain subsidiaries in the Specialty Printing and Labeling and Jordan
Auto Aftermarket groups, increased insurance costs, inflated component prices
and costs associated with facility moves at Kinetek, and increased occupancy
expenses on retail locations at Welcome Home. Partially offsetting these
decreases was higher operating income due to domestic headcount reductions,
increased manufacturing in China and closure of the molding division at Beemak,
and intensified insurance cost containment 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 $122.3 million of working capital at March 31,
2004 compared to approximately $123.0 million at the end of 2003.
Operating activities. Net cash used in operating activities for the three months
- --------------------
ended March 31, 2004 was $14.7 million compared to net cash used in operating
activities of $16.5 million for the same period in 2003. The decrease in cash
used is primarily due to improved working capital management compared to 2003.
Investing activities. Net cash provided by investing activities for the three
- --------------------
months ended March 31, 2004 was $4.8 million compared to net cash provided by
investing activities of $0.6 million for the same period in 2003. The increase
in cash provided by investing activities is primarily due to the divestiture of
the Ad Specialty and Calendar divisions of JII Promotions in the first quarter
of 2004.
Financing activities. Net cash provided by financing activities for the three
- --------------------
months ended March 31, 2004 was $13.2 million compared to net cash provided by
financing activities of $16.8 million for the same period in 2003. The decrease
in cash provided by financing activities is primarily due to lower net
borrowings on revolving credit facilities and increased payment of financing
fees resulting from the Exchange Offer. Partially offsetting these variances is
the lower repayment of long-term debt in the first quarter of 2004 versus the
same period in 2003.
The Company is party to two credit agreements under which the Company is able to
borrow up to $145.0 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, 2004, the Company had
approximately $21.9 million of available funds under these arrangements.
On February 18, 2004, the Company completed an Exchange Offer, whereby it
exchanged $173,334 of new Senior Notes (the "Exchange Notes") for $247,619 of
Old Senior Notes. The Exchange Notes were co-issued by JII Holdings LLC, a
wholly owned subsidiary of the Company, and its wholly owned subsidiary, JII
Holdings Finance Corporation. The
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Exchange Notes bear interest at 13% per annum which is payable semi annually on
February 1st and August 1st of each year, and mature on April 1, 2007. The notes
that were exchanged bore interest at 10 3/8% per annum, paid interest semi
annually on February 1st and August 1st, and were scheduled to mature on August
1, 2007.
The Exchange Offer has been accounted for as a troubled debt restructuring in
conformity with Statement of Financial Accounting Standards No. 15 "Accounting
by Debtors and Creditors for Troubled Debt Restructurings" (SFAS No. 15). SFAS
No. 15 requires that, when there is a modification of terms such as this, if the
total debt service of the new debt is less than the carrying amount on the
balance sheet of the old debt, the carrying amount should be reduced to the
total debt service amount. This reduction resulted in a gain of $2,149, which
was required by SFAS No. 15 to be offset by fees incurred on the transaction.
Fees of $6,315 which were in excess of the gain, were recorded as interest
expense during the first quarter of 2004. The remaining reduction in the
principal of the Exchange Notes compared to the Old Senior Notes will be
recognized over the period to maturity of the Exchange Notes as a reduction of
interest expense.
On January 31, 2004, the Company and certain holders of the Company's Senior
Subordinated Discount Debentures entered into a Waiver Agreement which states
that the participating note holders waive any rights to claim an event of
default if the Company does not make the scheduled interest payments as required
in the applicable indenture. Should the Company elect not to make interest
payments on these notes, the interest will continue to accrue at its original
rate of 11.75% per year and will be due and payable to the holders at the
maturity date of the notes. Pursuant to the Waiver Agreement, the maturity date
of the participating notes is the earlier of (1) the date on which all of the
outstanding principal and interest on the Exchange Notes and the Senior Secured
Discount Debentures not participating in the Waiver Agreement have been paid in
full, (2) the date six months after the original maturity of the participating
notes, or (3) the date on which the Company enters into a bankruptcy proceeding.
On February 18, 2004, certain of the Company's Senior Subordinated Discount
Debenture note holders entered into a Modification Agreement which provides for
a reduction in their stated maturity value and a reduction of their applicable
interest rate. The aggregate maturity value of the notes held by the parties to
the Modification Agreement is $24,007 which has been reduced to $7,202. The
interest rate on these notes has been reduced to a stated rate of 1.61% from
11.75%. The holders of these modified notes retain the right to collect the
original maturity value and interest thereon at the original interest rate if
the Company meets certain financial tests and ratios. Under the Modification
Agreement, these notes mature on the earlier of (1) the date that all other
Senior subordinated Discount Debenture note holders have been paid in full, (2)
the date that is six months after the original maturity date, or (3) the date on
which the Company enters into a bankruptcy proceeding.
The Company has determined that this modification will be accounted for as a
troubled debt restructuring as required by Statement of Financial Accounting
Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings", (SFAS No. 15). The effect of this accounting treatment will be
to not reduce the carrying value of the modified notes; however, the interest
expense associated with the modified notes will be calculated using the modified
stated interest rate of 1.61% per annum and the reduced maturity amount.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
The remaining Senior Subordinated Discount Debentures that are not party to the
Modification Agreement will continue to accrue interest at 11.75% and represent
$70,879 of the total outstanding principal amount of $94,886.
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 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. Welcome
Home's sales are somewhat stronger toward year-end due to the nature of their
products and their popularity as holiday gifts.
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, 2004, the Company
had $62.0 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, 2004 would have a material effect on future
operations or cash flows.
The Company is exposed to market risk from changes in foreign currency exchange
rates, including fluctuations in the functional currency of foreign operations.
The functional currency of operations outside the United States is the
respective local currency. Foreign currency translation effects are included in
accumulated other comprehensive income in shareholder's equity.
Item 4. Controls and Procedures
- -------------------------------
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-15 of the
Securities Exchange Act of 1934 ("Exchange Act") promulgated thereunder, our
chief executive officer and controller 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 controller 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.
17
Part II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity 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
--------------------------------
(a) A list of exhibits filed with this report is contained on
the Exhibit Index immediately preceding such exhibits and is
incorporated herein by reference
18
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 17, 2004 By: /s/ Lisa M. Ondrula
-------------------
Lisa M. Ondrula
Vice President, Controller
(Principal Financial Officer)
19
EXHIBIT INDEX
Exhibit
Number Description
4.1 Indenture, dated as of February 18, 2004, among JII Holdings, LLC and
JII Holdings Finance Corporation, as Issuers, Jordan Industries, Inc.
as Initial Guarantor, and U.S. Bank National Association, as Trustee
10.1 Waiver Agreement, dated as of January 31, 2004, by and between Jordan
Industries, Inc. and the other persons signatory thereto.
10.2 Modification Agreement, dated as of February 18, 2004, by and among
Jordan Industries, Inc. and those holders of Jordan Industries' 11 3/4%
Senior Subordinated Discount Debentures due 2009 identified on
Schedule A attached thereto, including Addendum thereto dated
April 1, 2004 31(a) Certificate of Chief Executive Officer pursuant to
Rule 13a-14 (a) or Rule 15d-14 (a) 31(b) Certificate of Controller
pursuant to Rule 13a-14 (a) or Rule 15d-14 (a)
31(a) Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a)
31(b) Certificate of Controller pursuant to Rule 13a-14(a) or Rule 15d-14(a)