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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1997 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
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
None
Indicated by checkmark 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
March 31, 1998: 98,501.0004.
PART I
Item 1. BUSINESS
Jordan Industries, Inc. (the "Company") was organized to acquire and operate a
diverse group of businesses on a decentralized basis, with a corporate staff
providing strategic direction and support. The Company is currently comprised
of 32 businesses which are divided into five strategic business units: (i)
Specialty Printing and Labeling, (ii) Consumer and Industrial Products, (iii)
Motors and Gears (iv) Jordan Telecommunication Products and (v) Welcome
Home. As of January 21, 1997, Welcome Home is no longer consolidated in the
Company's results of operations. (See note 3 to the financial statements.)
The Company believes that its businesses are characterized by leading
positions in niche industries, high operating margins, strong management,
minimal working capital and capital expenditure requirements and low
sensitivity to technological change and economic cycles.
The Company's business strategy is to enhance the growth and profitability of
each business unit, and to build upon the strengths of those units through
product line and other strategic acquisitions. Key elements of this strategy
have been the consolidation and reorganization of acquired businesses,
increased focus on international markets, facilities expansion and the
acquisition of complementary product lines. When, through such activities,
the Company believes that critical mass is attained in a particular industry
segment, the related companies are organized as a discreet business unit. For
example, the Company acquired Imperial in 1983 and made a series of
complementary acquisitions, which resulted in the formation of Motors and
Gears, Inc., a leading domestic manufacturer of electric motors, gears, and
motion control systems. Similarly, the Company acquired Dura-Line in 1985,
and expanded its presence in the telecommunications industry through eleven
complementary acquisitions. The organization of these companies as Jordan
Telecommunication Products created a leading global supplier of products and
equipment serving the telecommunications industry. The Company is currently
evaluating various alternatives to expand its automotive aftermarket products
business and its specialty plastics business, and is utilizing its
subsidiaries, DACCO and Beemak, respectively, as the foundation for these
efforts.
Through the implementation of this strategy, the Company has demonstrated
significant and consistent growth in net sales. The Company generated
combined net sales of $707.1 million for the year ended December 31, 1997 as
compared to $327.3 million for the year ended December 31, 1992, representing
a compound annual growth rate of 16.7%.
The following chart depicts the operating subsidiaries which comprise the
Company's five strategic business units, together with the net sales for each
of the five groups for the year ended December 31, 1997.
JORDAN INDUSTRIES, INC.
$707.1 Million of Net Sales
SPECIALTY PRINTING AND LABELING -Sales Promotion Associates
$119.3 Million of Net Sales -Pamco
-Valmark
-Seaboard
CONSUMER AND INDUSTRIAL -DACCO
$179.6 Million of Net Sales -Sate-Lite
-Cape Craftsmen
-Beemak
-Riverside
-Parsons
-Cho-Pat
-Dura-Line Retube
JORDAN TELECOMMUNICATION PRODUCTS(1) -Dura-Line
$257.0 Million of Net Sales -AIM
-Cambridge
-Johnson
-Diversified
-Viewsonics
-Vitelec
-Bond
-Northern
-LoDan
-Engineered Endeavors
-Telephone Services, Inc.
MOTORS AND GEARS(1) -Imperial
$148.7 Million of Net Sales -Scott
-Gear
-Merkle-Korff
-FIR
-Electrical Design & Control
-Motion Control Engineering
WELCOME HOME(2) -Welcome Home
$2.5 Million of Net Sales
(1)The subsidiaries comprising Jordan Telecommunication Products and Motors
and Gears are Non-Restricted Subsidiaries, the common stock of which is owned
by stockholders and affiliates of the Company and management of the respective
companies. The Company's ownership in these subsidiaries is solely in the
form of JTP Junior Preferred Stock and M&G Junior Preferred Stock. See
footnote 5 to the financial statements.
(2)Welcome Home was deconsolidated as of January 21, 1997, the date of its
Chapter 11 bankruptcy filing. The sales included represent the period from
January 1, 1997 to January 21, 1997, only. See footnote 3 to the financial
statements.
The Company's operations were conducted through the following business units
as of December 31, 1997:
Specialty Printing and Labeling
The Specialty Printing and Labeling group manufactures and markets (i)
promotional and specialty advertising products for corporate buyers, (ii)
labels, tapes and printed graphic panel overlays for electronics and other
manufacturing companies and (iii) printed folding cartons and boxes and other
shipping materials. The companies that are part of Specialty Printing and
Labeling have provided its customers with products and services for an average
of over 40 years. For the fiscal year ended December 31, 1997, the Specialty
Printing and Labeling group generated net sales of $119.3 million. Each of
the Specialty Printing and Labeling subsidiaries is discussed below:
SPAI. The Company's former subsidiaries, The Thos. D. Murphy Co. ("Murphy"),
which was founded in 1889, and Shaw-Barton, Inc. ("Shaw-Barton"), which was
founded in 1940, merged to form JII/SPAI in March 1989. One hundred percent
of JII/SPAI's assets were sold by JII, on terms equivalent to those that would
have been obtained in an arm's length transaction, to the Specialty Printing
and Labeling group in August 1995 and the company was renamed Sales Promotion
Associates, Inc. ("SPAI"). SPAI is a producer and distributor of calendars
for corporate buyers and is a distributor of corporate recognition, promotion
and specialty advertising products.
SPAI's net sales for fiscal 1997 were $60.6 million. Approximately 58.5% of
SPAI's 1997 net sales were derived from distributing a broad variety of
corporate recognition products, promotion and specialty advertising
products. These products include apparel, watches, crystal, luggage, writing
instruments, glassware, caps, cases, labels and other items that are printed
and identified with a particular corporate logo and/or corporate advertising
campaign. Approximately 30% of SPAI's 1997 net sales were derived from the
sale of a broad variety of calendars, including hanging, desktop and pocket
calendars that are used internally by corporate customers and distributed by
them to their clients and customers. High-quality artistic calendars are also
distributed. SPAI also manufactures and distributes softcover school
yearbooks for kindergarten through eighth grade.
SPAI assembles and finishes calendars that are printed both in-house as well
as by a number of outside printers. Facilities for in-house manufacturing
include a composing room, a camera room, a calendar finishing department and a
full press room. Print stock, binding material, packaging and other materials
are supplied by a number of independent companies. Specialty advertising
products are purchased from more than 900 suppliers. Calendars and specialty
advertising products are sold through a 1,100-person sales force, most of whom
are independent contractors.
Management believes that SPAI has one of the largest domestic sales forces in
the industry. With this large sales force and a broad range of calendars and
corporate recognition products available, management believes that SPAI is a
strong competitor in its market. This market is very fragmented and most of
the competition comes from smaller-scale producers and distributors.
Valmark. Valmark, which was founded in 1976 and purchased by the Company in
1994, is a specialty printer and manufacturer of pressure sensitive label
products for the electronics Original Equipment Manufacturer ("OEM") market.
Valmark's products include adhesive-backed labels, graphic panel overlays,
multi-color membrane switches and ratio frequency interference ("RFI")
shielding devices. Approximately 63% of Valmark's 1997 net sales of $17.6
million were derived from the sale of graphic panel overlays and membrane
switches, 27% from labels and 10% from shielding devices.
The specialty screen products sold in the electronics industry continue to
operate relatively free of foreign competition due to the high level of
communication and short time frame usually required to produce orders.
Currently, the majority of Valmark's customer base of approximately 1,500 is
located in the Northern California area.
Valmark sells to four primary markets: personal computers; general
electronics; turn-key services; and medical instrumentation. Sales to the
personal computer industry have experienced the most growth over recent years
due to Valmark's RFI shield protection capabilities. Sales to Apple of RFI
devices represented approximately 12% of net sales in 1997.
Valmark is able to provide OEMs with a broader range of products than many of
its competitors. Valmark's markets are very competitive in terms of price and
accordingly Valmark's advantage over its competitors is derived from its
diverse product line and excellent quality ratings.
Pamco. Pamco, which was founded in 1953 and purchased by the Company in 1994,
is a manufacturer and distributor of a wide variety of printed tapes and
labels. Pamco offers a range of products from simple one and two-color
labels, such as basic bar codes and address labels, to seven-color,
varnish-finished labels for products such as video games and food packaging.
One hundred percent of Pamco's products are made to customers' specifications
and 92% of all sales are manufactured in-house. The remaining 8% of net sales
are purchased printed products and include business cards and stationery.
Pamco's products are marketed by a team of eighteen sales representatives who
focus on procuring new accounts. Existing accounts are serviced by nine
customer service representatives and five internal salespeople. Pamco's
customers represent several different industries with the five largest
accounting for approximately 19% of 1997 net sales of $16.0 million.
Pamco competes in a highly fragmented industry. Pamco emphasizes its
impressive 24-hour turnaround and its ability to accommodate rush orders that
other printers cannot handle.
Seaboard. Seaboard, which was founded in 1954 and purchased by the Company in
1996, is a manufacturer of printed folding cartons and boxes, insert packaging
and blister pack cards.
Seaboard sells directly to a broad customer base, located primarily east of
the Mississippi River, operating in a variety of industries including
hardware, personal hygiene, toys, automotive supplies, food and drugs.
Seaboard's top ten customers accounted for approximately 36% of Seaboard's
1997 net sales of $25.1 million.
Seaboard has exhibited consistent sales growth, high profit margins, and
excellent operating capabilities and has gained a reputation for exceeding
industry standards. Seaboard has historically been highly successful in
buying and profitably integrating smaller acquisitions.
Seaboard's markets are very competitive in terms of price and, accordingly,
Seaboard's advantage over its competitors is derived from its high quality
product and excellent service.
Consumer and Industrial Products
Consumer and Industrial Products serves many product segments. It is the
leading supplier of remanufactured torque converters to the automotive
aftermarket parts industry and is the leading integrated manufacturer of
specialty "take-one" point of purchase displays. In addition, Consumer and
Industrial Products manufactures and markets reflectors for bicycles;
publishes and markets Bibles, religious books and audio materials;
manufactures hot-formed titanium materials for the aerospace and other
industries; manufactures and imports gift items; and manufactures orthopedic
supports and pain reducing medical devices. The Company is currently evaluating
various alternatives to expand its automotive aftermarket products business and
its specialty plastics business, utilizing DACCO and Beemak, respectively, as
the foundation for such efforts. The companies which are part of Consumer and
Industrial Products have provided their customers with products and services
for an average of over 34 years. For the year ended December 31 1997, the
Consumer and Industrial Products subsidiaries generated combined net sales of
$179.6 million. Each of the Consumer and Industrial Products subsidiaries is
discussed below:
DACCO. DACCO is a producer of remanufactured torque converters, as well as
automotive transmission sub-systems and other related products used by
transmission repair shops. DACCO was founded in 1965 and acquired by the
Company in 1988.
Approximately 76% of DACCO's products are classified as "hard" products, which
primarily consist of torque converters and hydraulic pumps that have been
rebuilt or remanufactured by DACCO. The torque converter, which replaces a
clutch in an automatic transmission, transfers power from the engine to the
drive shaft. The hydraulic pump supplies oil to all the systems in the
transmission.
DACCO's primary supply of used torque converters is its customers. As a part
of each sale, DACCO recovers the used torque converter which is being replaced
with its remanufactured converter. DACCO also purchases used torque
converters from automobile salvage companies. Other hard parts, such as
clutch plates and fly wheels, are purchased from outside suppliers.
Approximately 24% of DACCO's products are classified as "soft" products, such
as sealing rings, bearings, washers, filter kits and rubber components.
Approximately 11,000 soft products are purchased from a number of vendors and
are re-sold in a broad variety of packages, configurations and kits.
DACCO's customers are automotive transmission parts distributors and
transmission repair shops and mechanics. DACCO has fifty-one independent
sales representatives who accounted for approximately 67% of DACCO's net sales
of $61.2 million in 1997. These sales representatives sell nationwide to
independent warehouse distributors and to transmission repair shops. DACCO
also owns and operates thirty-two distribution centers which sell directly to
transmission shops. DACCO distribution centers average 4,000 square feet,
cover a 50 to 100-mile selling radius and sell approximately 42% hard products
and 58% soft products. In 1997 no single customer accounted for more than 1%
of DACCO's net sales.
The domestic market for DACCO's hard products is fragmented and DACCO's
competitors primarily consist of a number of small regional and local
rebuilders. DACCO believes that it competes strongly against these rebuilders
by offering a broader product line, quality products, and lower prices, all of
which are made possible by DACCO's size and economies of operation. However,
the market for soft products is highly competitive and several of its
competitors are larger than DACCO. DACCO competes in the soft products market
on the basis of its low prices due to volume buying, its growing distribution
network and its ability to offer one-step procurement of a broad variety of
both hard and soft products.
Sate-Lite. Sate-Lite manufactures safety reflectors for bicycle and
commercial truck manufacturers, as well as plastic parts for bicycle
manufacturers and colorants for the thermoplastic industry. Sate-Lite was
founded in 1968 and acquired by the Company in 1988. Bicycle reflectors and
plastic bicycle parts accounted for approximately 41% of Sate-Lite's net sales
of $13.9 million in 1997. Sales of triangular flares and specialty reflectors
and lenses to commercial truck customers accounted for approximately 34% of
1997 net sales. The remainder of Sate-Lite's net sales was derived primarily
from the sale of colorants to the thermoplastics industry.
Sate-Lite's bicycle products are sold directly to a number of OEMs. The three
largest OEM customers for bicycle products are the Huffy Corporation,
Roadmaster and Murray/Ohio Manufacturing Company, which accounted for
approximately 25% of Sate-Lite's fiscal 1997 net sales. The triangular flares
and other truck reflector products are also sold to a broad range of OEM
customers. Colorants are sold primarily to mid-western custom molded plastic
parts manufacturers. In 1997, Sate-Lite's ten largest customers accounted for
approximately 52% of net sales.
Sate-Lite's products are marketed on a nationwide basis by its management.
Sales to foreign customers are handled directly by management and by
independent trading companies on a commission basis. In 1997, Sate-Lite's
export net sales accounted for approximately 14% of its total net sales.
Export sales were principally to China and Canada. The principal raw
materials used in manufacturing Sate-Lite's products are plastic resins,
adhesives, metal fasteners and color pigments. Sate-Lite obtains these
materials from several independent suppliers.
The markets for bicycle parts and thermoplastic colorants are highly
competitive. Sate-Lite competes in these markets by offering innovative
products and by relying on its established reputation for producing
high-quality plastic components and colorants. Sate-Lite's principal
competitors in the reflector market consist of foreign manufacturers.
Sate-Lite competes with regional companies in the colorants market.
Riverside. Riverside is a publisher of Bibles and a distributor of Bibles,
religious books and music recordings. Riverside was founded in 1943 and
acquired by the Company in 1988. Approximately 70% of Riverside's business
consists of products published by other companies. Riverside sells world-wide
to more than 12,000 wholesale, religious and trade book store customers,
utilizing an in-house telemarketing system, four independent sales
representative groups and printed sales media. In addition, Riverside sells a
small percentage of its products through direct mail and to retail customers.
No single customer accounted for more than 5% of Riverside's 1997 net sales of
$52.5 million.
Riverside also provides Bible indexing, warehousing, inventory and shipping
services for domestic book publishers and music producers. Riverside competes
with larger firms, including the Zondervan Corporation, The Thomas Nelson
Company, and Ingram Book Company, on the basis of price, product line and
customer service.
Parsons. Parsons is a diversified supplier of hot formed titanium parts,
precision machined parts and fabricated components for the U.S. aerospace
industry. Parsons was founded in 1959 and acquired by the Company in 1988.
Approximately 82% of Parsons' 1997 net sales of $15.0 million came from sales
to The Boeing Company. Parsons employs precision machining,
welding/fabrication and sheet metal forming processes to manufacture its
products at its facilities in Parsons, Kansas. Parsons continues to invest in
its titanium hot forming operation, which permits Parsons to participate in
the aerospace market for precision titanium components.
Parsons uses metals, including stainless steel, aluminum and titanium, to
fabricate its products. These materials are either supplied by Parsons'
customers or obtained from a number of outside sources.
Parsons sells its products directly to a broad base of aerospace and military
customers, relying on longstanding associations and Parsons' reputation for
high quality and service.
Beemak. Beemak, which was founded in 1951 and acquired by the Company in July
1989, is an integrated manufacturer of specialty "take-one" point-of-purchase
brochure, folder and application display holders. Beemak sells these
proprietary products to approximately 21,000 customers around the world. In
addition, Beemak produces a small amount of custom injection-molded plastic
parts for outside customers on a contract manufacturing basis. Beemak's net
sales for 1997 were $10.2 million.
Beemak's products are both injection molded and custom fabricated and its
molds made by outside suppliers. The manufacturing process consists primarily
of the injection molding of polystyrene plastic and the fabrication of plastic
sheets. Beemak also provides silk screening of decals and logos onto the
final product.
Beemak has no sales force. All sales originate from Beemak's extensive
on-going advertising campaign and reputation. Beemak sells to distributors,
major companies and competitors which resell the product under a different
name. Beemak has been very successful in providing excellent service on
orders of all sizes, especially small orders. Beemak's average order size was
approximately $400 in 1997.
The display holder industry is very fragmented, consisting of a few other
known holder and display firms and regionally based sheet fabrication shops.
Beemak has benefitted from the growth in "direct" advertising budgets at major
companies. Significant advertising dollars are spent each year on direct-mail
campaigns, point-of-purchase displays and other forms of non-media
advertising.
In January 1997, Beemak purchased the net assets of Arnon-Caine, Inc.
("Arnon-Caine"), a designer and distributor of modular storage systems
primarily for sale to wholesale home centers and hardware stores. During
the first half of 1997, Arnon-Caine subcontracted its production to third-
party injection molders located primarily in sourthern California, which used
materials and equipment similar to that used by Beemak. Since July 1997,
Beemak has served as Arnon-Caine's primary supplier. The integration of Arnon-
Caine into Beemak's operations will provide for future manufacturing cost
savings as well as coordinated marketing efforts.
Cape Craftsmen. Founded in 1991 and purchased by the Company in 1996, Cape
Craftsmen is a manufacturer and importer of gifts, wooden furniture, framed
art and other accessories. Cape Craftsmen manufactures in North Carolina and
imports from Mexico and the Far East. Cape Craftsmen sells its products
through one in-house salesperson and forty independent sales representatives.
Approximately 68% of Cape Craftsmen's net sales of $14.6 million in 1997 were
to Welcome Home, an affiliated entity. Cape Craftsmen competes in a highly
fragmented industry and has therefore found it most effective to compete on
the basis of price with most wood manufacturers and importers. Cape Craftsmen
also strives to deliver better quality and service than its competitors.
Cho-Pat. In September 1997, the Company purchased Cho-Pat, Inc., a leading
designer and manufacturer of orthopedic supports and patented preventative and
pain reducing medical devices. Cho-Pat currently produces nine different
products primarily for reduction of pain from injuries and the prevention of
injuries resulting from over use of the major joints. From the acquisition
date through December 31, 1997 Cho-Pat had net sales of $0.4 million.
During 1997, two companies that were a part of the Consumer and Industrial
group were sold. Hudson, which was sold in May, contributed $6.7 million in
net sales from January 1, 1997 through its sale date, and Paw Print added $5.5
million of net sales from the beginning of the year through its sale date in
July 1997.
Motors and Gears
Motors and Gears is a leading domestic manufacturer of specialty purpose
electric motors, gears and motion control systems, serving a diverse customer
base. Its products are used in a broad range of applications, including
vending machines, refrigerator ice dispensers, commercial floor care
equipment, elevators, photocopy machines, and conveyor and automation
systems. The Motors and Gears subsidiaries have sold their brand name
products to their customers for over 70 years. For the year ended December
31, 1997, Motors and Gears' subsidiaries generated combined net sales of
$148.7 million. Each of Motors and Gears' subsidiaries is discussed below.
Merkle-Korff. Merkle-Korff was founded in 1911 and was purchased, along with
its wholly owned subsidiaries, Elmco Industries, Inc. and Mercury Industries,
Inc., by the Company's subsidiary, Motors & Gears Industries, Inc., in
September 1995. Merkle-Korff is a custom manufacturer of Alternating Current
("AC") and Direct Current ("DC") refrigerators, freezers, dishwashers, vending
machines, business machines, pumps and compressors. Approximately 62% of
Merkle-Korff's 1997 net sales of $91.2 million, were drived from the home
appliance and vending machine market. Merkle-Korff's prominent customers
include General Electric Company, Vendo, Whirlpool Corporation and
Dixie-Narco, Inc. In 1997, the Company's top 10 customers represented
approximately 54% of total sales.
Barber-Colman, founded in 1894, was purchased by Merkle-Korff in 1996 and
renamed Colman Motor Products ("Colman Motors") in January 1997. Colman
Motors is a vertically integrated manufacturer of both AC and DC subfractional
horsepower motors and gear motors. The Colman Motors' product line serves a
wide variety of applications, and they are used as components in such products
as vending machines, copiers, printers, ATM machines, currency changers, X-ray
machines, peristaltic pumps, HVAC activators, medical equipment and others.
The majority of Colman Motors' products are sold directly to OEMs; however,
management has initiated an effort to direct small orders to four
distributors. Each of these distributors is fully stocked with Colman Motors'
standardized parts and equipment using a computerized catalog system which
facilitates the efficient selection of products and components at the
distributor level.
Merkle-Korff experiences limited competition across its product lines
including Colman Motor Products. Competitors are generally much smaller in
terms of revenues but also produce a much more limited product line.
Imperial. Imperial manufactures elevator motors, floor care equipment motors
and automatic hose reel motors. Imperial was founded in 1889 and acquired by
the Company in 1988. All of Imperial's assets were sold on arm's length terms
to Motors and Gears Industries, Inc. in November 1996.
Imperial designs, manufactures and distributes specialty electric motors for
industrial and commercial use. Its products, AC and DC motors, generators and
permanent magnet motors are sold principally in the U.S. and Canada and to a
limited extent in Europe and Australia. Approximately 28% of Imperial's 1997
net sales of $27.9 million were drived from elevator motors, ranging from 5 to
100 horsepower, sold to major domestic elevator manufacturers. Approximately
72% of Imperial's 1997 net sales were drived from permanent magnet motors and
parts sold primarily to domestic manufacturers of floor care equipment.
Otis Elevator Company, Westinghouse Corporation and other leading elevator
manufacturers have in recent years discontinued internal manufacturing of
motors and have turned to Imperial and other independent manufacturers. In
1997, Clark Industries, Inc. accounted for approximately 11% of Imperial's net
sales, and Imperial's top ten customers accounted for 58% of total net sales.
Imperial's products are marketed domestically by its management and one
independent sales representative and internationally by management.
Imperial manufactures specialty motors with steel, magnets, copper wire,
castings and other components supplied by a variety of firms. In the elevator
motor market, Imperial competes with several firms of varying size. The other
markets in which Imperial competes are also highly competitive. However, the
Company's management believes that Imperial is able to effectively compete
with these firms on the basis of product reliability, price and customer
service.
Scott. Scott was founded in 1982 and acquired by Imperial in August 1988.
Scott's net sales in 1997 were $4.1 million. All of Scott's assets were sold
on arm's-length terms to Motors and Gears Industries, Inc. in November 1996.
Scott manufacutres and sells floor care machine motors; silicone controlled
rectifier motors, which are variable speed motors used in conveyers, machine
tools, treadmills, mixers and metering pumps; and low voltage DC motors.
Scott offers a number of standard motors designed for a variety of
applications. Scott also custom designs motors for special applications.
Scott manufactures many of the sub-assemblies, components and molds for its
products from raw materials, which gives it the ability to manufacture these
special application motors. Scott obtains these raw materials from a number
of independent sources.
Scott markets its products through an internal sales force and serves OEMs
requiring custom designed products. Numerous competitors exist and tend to be
of similar size and scope.
Gear. Gear manufactures precision gears and gear boxes for OEMs requiring
high-precision commercial gears. Gear was founded in 1952 and acquired by
Imperial in November 1988. All of Gear's assets were sold on arm's-length
terms to Motors and Gears Industries, Inc. in November 1996. Gear
manufactures precision gears for both AC and DC electric motors in a variety
of sizes. The gears are sold primarily to the food, floor care machine and
aerospace industries and to other manufacturers of machines and hydraulic
pumps. Gear's products are nationally advertised in trade journals and are
sold by one internal salesman and one independent sales representative. Gear
precision machines its products from steel forgings and castings. Net sales
for Gear in 1997 were $11.9 million.
The gear industry is very fragmented and competitive. Gear competes primarily
on the basis of quality. In addition, the ability of Imperial, Scott and Gear
to offer both electric motors and gear boxes as a package, and to custom
design these items for customers, may allow all three subsidiaries to gain
greater market penetration.
FIR. Founded in 1925 and acquired by the Company in June 1997, FIR is a
leading European manufacturer of AC and DC motors and pumps for special-end
applications such as pumps for commercial dishwashers, motors for industrial
sewing machines, motors for industrial fans and ventilators, explosion-proof
motors for gasoline pumps and the oil industry, and asynchronous and brushless
motors for lift doors. With the exception of motors for industrial sewing
machines, FIR produces custom products only after receiving specific customer
orders. Motors for industrial sewing machines, which comprised approximately
15% of FIR's 1997 net sales of $14.8 million since its date of acquisition,
are fairly standardized and are manufactured and stocked based on internal
forecasts.
FIR sells both directly to customers and through two non-exclusive independent
sales rperesentatives located in France and Germany. The Company enjoys
long-term relationships with its customers, some of which have been customers
for over 20 years. The successful development of long-term customer
relationships is a direct result of FIR's reputation for high-quality products
and on-time delivery. Within FIR's 450-plus customer base, no single customer
accounts for more than 7% of sales. FIR's top 10 customers in 1997 accounted
for approximately 38% of total sales.
FIR has many competitors across a very fragmented European motor market.
However, FIR has distinguished itself by providing highly engineered custom
products for small markets.
FIR provides Motors and Gears with a strong foundation upon which to expand
its overseas market. Through FIR, Motors and Gears will have access to
established European markets, including Italy, Germany, France, Spain and
Great Britain, as well as emerging Eastern European markets such as Poland,
the Czech Republic, and Russia. Through its European market presence and
established brand name, the Company believes FIR will enable Motors and Gears
to further develop leadership positions within market niches and expand
globally.
ED&C. ED&C is a full-service electrical engineering company which designs,
engineers and manufactures electrical control systems and panels for material
handling systems and other like applications, and was purchased by Motors &
Gears Industries, Inc. in October of 1997. ED&C provides comprehensive
design, build and support services to produce electronic control panels which
regulate the speed and movement of conveyor systems used in a variety of
automotive plants and other industrial applications. ED&C had net sales of
$1.8 million from the acquisition date through December 31, 1997.
Motion Control. In December 1997, the Company's subsidiary Motors & Gears
Industries, Inc. purchased Motion Control, a manufacturer of electronic motion
control products for elevator markets and specifically the elevator
modernization market. Motion Control's net sales from the acquisition date
through the end of the year were $1.2 million.
Jordan Telecommunication Products
Jordan Telecommunication Products ("JTP") is a leading supplier of
infrastructure products and equipment, electronic connectors and custom cable
assemblies to the telecommunications industry. It has provided its customers
with products and services for an average of over 20 years. For the fiscal
year ended December 31, 1997, Jordan Telecommunication Products generated
combined net sales of $257.0 million.
JTP acquired all of the Jordan Telecommunication Products subsidiaries from
the Company, concurrent with the issuance of certain debt for aggregate
consideration of $294.0 million, consisting of $284.0 million of cash proceeds
and $10.0 million of assumed obligations (See footnote 5 to the financial
statements). As part of the transactions, the Company purchased $20.0 million
aggregate initial liquidation preference of JTP Junior Preferred Stock,
resulting in net cash proceeds to the Company of $264.0 million. Each of the
Jordan Telecommunication Products subsidiaries is discussed below.
Dura-Line. Dura-Line is a manufacturer and supplier of "Innerduct" pipe
through which fiber optic cable is installed and housed. Dura-Line sells this
product to major telecommunications companies throughout the world. Dura-Line
also manufactures flexible polyethylene water and natural gas pipe. Dura-Line
was founded in 1974, and acquired by the Company in 1988.
In 1997, approximately 96% of Dura-Line's net sales of $97.0 million came from
sales of its Innerduct product. Dura-Line sells to major telecommunications
companies, such as SPT Telecom, GTE, Bell South and Pacific Bell, each of
which accounted for less than 12% of Dura-Line's Innerduct net sales.
Innerduct is marketed worldwide by Dura-Line's management, ten manufacturing
representatives and forty in-house sales representatives. Dura-Line
negotiates long-term contracts with major telecommunications companies for its
Innerduct product line. The cable conduit market is highly competitive. In
the United States, Dura-Line faces competition from a wide range of companies
including national, international and regional suppliers of cable conduit. In
addition to other independent manufacturers of cable conduit outside of the
United States, Dura-Line's competitors include manufacturers that produce pipe
and tubing for other uses, such as gas and water transportation. Competition
within the industry is based primarily on quality, price, production capacity,
field support, technical capabilities, service and reputation.
In addition, approximately 4% of Dura-Line's 1997 net sales came from the sale
of polyethylene water and natural gas pipe to a variety of hardware stores,
contractors, plumbing supply firms and distributors. Dura-Line markets its
water and natural gas pipe products through sixty manufacturing
representatives in the Sourthern and Eastern U.S. The water and natural gas
pipe market is very competitive. Dura-Line competes on the basis of qualilty
and price with a number of regional and local firms.
Dura-Line's products are manufactured through the plastic extrusion process.
Dura-Line procures raw plastic for extrusion from a number of independent
suppliers. In March 1989, Dura-Line opened a new manufacturing facility in
the United Kingdom to manufacture products for sale to British Telecom and
other foreign customers. Approximately 52% of Dura-Line's net sales are
foreign sales. In late 1990, Dura-Line purchased a facility in Reno, Nevada.
This facility opened in early 1991 and has increased Dura-Line's annual
capacity by approximately 50%. In 1993, Dura-Line entered into joint venture
agreements in the Czech Republic and Israel to service Eastern Europe and the
Middle East more effectively. In early and late 1995, Dura-Line opened
subsidiaries in Mexico and China to manufacture and supply HDPE plastic
conduit systems to Central and South American markets as well as China and
other Asian markets. Dura-Line owns 100% of the equity in both subsidiaries.
In August 1996, Dura-Line incorporated a subsidiary in India under a joint
venture agreement in which Dura-Line has the controlling interest. The
subsidiary was established to manufacture and supply HDPE plastic conduit
systems to India and neighboring countries.
AIM. AIM, which was founded in 1981 and acquired by the Company in May 1989,
is an importer and manufacturer of electronic connectors, adapters, switches,
tools and other electronic hardware products for the commercial and consumer
electronics markets. Electronic connectors are AIM's main product,
representing more than 44% of AIM's 1997 net sales of $14.7 million.
AIM's products are manufactured to its specifications overseas, primarily in
the Far East, and carry the "AIM" logo. Producers are under the supervision
of an AIM agent. The products are sold worldwide to electronics, electrical,
general line and industrial distributors. AIM has warehousing and order
processing systems that enable AIM to provide delivery on a 24-hour basis to
most customers.
AIM sells nationwide to approximately 2,000 distributors in the U.S. and
Central and South America. AIM uses a combination of fifteen manufacturers,
representative organizations and six factory direct salesmen to service
existing accounts and to locate new distributors. The customer base is very
broad, with the larget customer accounting for about 3% of sales. AIM also
mails product catalogs and other marketing pieces to current customers and
potential new accounts.
The two largest companies in the $13.0 billion domestic connector and
interconnect supply industry are AMP and Amphenol. AMP and Amphenol
specialize strictly in electronic device production. Small and mid-sized
companies such as AIM have captured market share during the past 10 years by
offering distributors better service on orders compared to the industry
leaders.
In 1994, AIM began to market manufactured cable and harness assemblies made at
its facility in Florida. Sales of cable and harness assemblies are estimated
to be approximately 12% of AIM's 1997 net sales.
Cambridge. Cambridge, which was founded in 1972 and acquired by the Company
in September 1989, is a domestic provider of high-quality electronic
connectors, plugs, adapters and other accessories. Cambridge is primarily a
designer and marketer of approximately 300 types of specialty radio frequency
("RF") coaxial electronic connectors used in radio, mobile communications,
television and computer equipment. RF coaxial connectors are used to
integrate separate systems by connecting input-output power and signal
transmission sources. Cambridge is essentially an assembly operation. The
primary componets of Cambridge's connector products are screw machine and
diecast parts which are purchased from approximately twenty suppliers. The
production process is highly automated, with direct labor accounting for only
12% of 1997 net sales of $6.9 million. Equipment consists of semi-automatic
parts assembly and packaging equipment which has been designed and
manufactured by Cambridge.
A portion of Cambridge's connectors are manufactured according to a design
that allows users to affix the connector to the cable faster and easier
without the need for complicated tools and time-consuming soldering.
Cambridge sells its products nationwide to 450 distributors, 100 OEMs, and
approximately 150 other various end-users. Cambridge uses a combination of
six manufacturers' representative organizations and five factory direct
salesmen located throughout North America. Cambridge's two largest customers
(excluding AIM) account for approximately 22% of 1997 net sales. Cambridge
also mails a large number of catalogs to current customers and potential new
accounts. Cambridge strongly emphasizes that it is an "American" producer of
high-quality electronic connectors.
Cambridge competes in the same market as AIM. Cambridge does not offer the
product selection of its large competitors; however, it competes effectively
by targeting distributors and manufacturers which require fast service and
prefer an American-made product.
Johnson. Purchased by the Company in 1996, Johnson was the components
division of E.F. Johnson Company, Inc., which was founded in 1953. Johnson is
a high-quality, fully integrated manufacturer of RF coaxial connectors and
electronic hardware. Johnson specializes in manufacturing miniature and
sub-miniature RF connectors used primarily in telecommunication, computer and
other OEM applications which require high frequency ranges. The miniature and
sub-miniature connector arena is experiencing excellent growth as the size of
electronic card products continues to shrink.
Johnson sells approximately 35% of its products directly to OEMs in large
orders, while the remaining 65% of Johnson's sales are sold in smaller
quantities through over 80 distributors, primarily in the United States and
Canada. Johnson's National Sales Manager coordinates the selling efforts of
three company employed Regional Sales Managers and 21 independent
representative organizations. In 1997, Johnson generated net sales of $19.8
million.
Vitelec. Vitelec was founded in 1987 and purchased by the Company in 1996.
Vitelec is an importer, packager and master distributor of over 700 different
connectors, plugs, jacks, sockets, adapters and terminators, cabling
convertors, cable assemblies and other accessories for data communications and
telecommunications networks sold to the commercial and consumer electronics
markets. Vitelec's RF products are subcontract manufactured for them in
Taiwan. Vitelec, through its Vidata subsidiary, also distributes local area
network ("LAN") and wide area network ("WAN") cabling, connectors and
converters and the accessories for data communication networks.
Vitelec sells its products via five company-employed salespeople, four
in-house and one located in Paris, France. Vitelec has customers in 42
countries. The largest customer accounted for 9% of 1997 net sales of $5.4
million, with the rest of the customer base being very fragmented.
AIM, Cambridge, Johnson and Vitelec all supply the electronic connector
industry which is highly fragmented with more than 1,500 connector
manufacturers competing worldwide. As a result, the companies generally
compete with different suppliers in each of the various categories of the
overall market in which the comanies operate, as well as with certain large
national suppliers. The companies compete within this market primarily on the
basis of quality, reliability, reputation, customer service, delivery time and
price.
Diversified. Diversified was founded in 1988 and purchased by the Company in
1996. Diversified is a broad-line provider and value-added reseller of wire,
cable, connectors and custom cable assemblies. Diversified's product offering
is used in LANs, custom cable assemblies, cable for electrical applications,
cable for sound and security, cable for OEM applications and other
miscellaneous cable applications. In 1997, Diversified generated net sales of
$31.3 million.
Diversified sells its products through a skilled direct sales force. The
sales staff consists of 20 inside and 5 outside salespeople, all of whom are
product and market specialists. Diversified markets and advertises its
products through various trade journals dependent on the marketplace.
Specialty wire and cable distribution is highly fragmented. Diversified
competes in this market by focusing on service, quality, price, value added
capabilities and reputation.
Viewsonics. Viewsonics was founded in 1974 and purchased by the Company in
1996. Viewsonics designs, manufactures and markets branded cable television
("CATV"), electronic network components, and electronic security components
mainly for the "drop" or home connection portion of the CATV infrastructure.
Viewsonics develops, warehouses and sells its products out of its Florida
facility. Viewsonics sources the majority of its products from China, 60% of
which is manufactured in Viewsonics' Shanghai facility, and the remaining 40%
is manufactured by subcontractors. The overseas procurement has allowed
Viewsonics to lower production costs and it has also positioned Viewsonics to
exploit the overeseas CATV component markets as they develop.
Viewsonics sells 50% of its products to multisystem operatons including
companies such as Time/Warner, Cencast, Continental Cablevision, and TCI.
Viewsonics also sells to a network of distributors, six of whom account for
the majority of the other 50% of sales. In 1997, Viewsonics generated net
sales of $12.4 million. Competition in the industry is focused on quality
service, engineering support and price.
Bond. Bond was founded in 1988 and the Company acquired 80% of the
outstanding shares of Bond in 1996. Bond designs, engineers and manufactures
high-quality custom electronic cables and connector sub-assemblies for
computer-related and telecommunications customers. All of Bond's products are
custom-made and are specifically designed to meet a customer's needs. Bond
has three fully integrated, independent manufacturing facilities. Bond has
rapidly become an industry leader due to its commitment to high quality,
competitively priced products offered in conjunction with outstanding and
dependable service.
Bond has established two separate, very profitable sales agencies in Northern
and Sourthern California to represent them. Bond is continuing to actively
solicit strategic new customers located throughout the United States via an
independent sales representative network. In 1997, Bond's single-largest
customer accounted for approximately 49% of its net sales of $21.8 million.
LoDan. LoDan, founded in 1967 and acquired by the Company in May 1997,
designs, engineers, manufactures, and distributes high-quality, custom
electronic cable assemblies, sub assemblies, and electro-mechanical assemblies
to OEMs in the data and telecommuncations segments of the electronics
industry. LoDan manufactures approximately 78% of the products it sells
in-house at an ISO-9001 certified manuacturing facility, with the remaining
22% being distributed products. For fiscal 1996, LoDan's net sales were $14.7
million.
The acquisiton of LoDan has bolstered the presence of Jordan Telecommunication
Products in the custom cable assembly business. LoDan's customer base, which
compliments that of Bond, was built based on providing innovative solutions to
customers' needs. The Company's largest customer, Cisco Systems, is the
world's pre-eminent networking company and provides LoDan with access to
international markets. LoDan's products are sold through internal and
external sales forces.
Bond and LoDan supply the custom cable assembly market which encounters
competition from a broad range of companies, several of which are much larger
and have greater financial resources than either Bond or LoDan. In addition
to other independent manufacturers of cable assemblies, offshore manufacturers
compete in this market, primarily on the basis of price. Competition within
the industry is based on quality, production, capacity, breadth of product
line, engineering support capability, price, local support capability, systems
support and financial strength.
Northern. Northern was founded in 1985 and was purchased by the Company in
1996. Northern designs, manufactures and markets power conditioning and power
protection equipment for primarily telecommunication applications, such as
cellular and Personal Communication System ("PCS") networks. Northern also
offers a variety of products including voltage regulators, uninterruptible
power supplies, isolation transformers, and grounding devices to protect any
power-critical application.
Northern sells on a direct basis through its own highly technical in-house
sales force of 23 employees, who are supported by seven application engineers
and four product development engineers. Northern sells to such large telecom
OEMs as Sprint, Motorola, Lucent, Erickson and Nokia. Northern's largest
customer accounted for approximately 45% of net sales in 1997 of $23.3 million
and its 10 largest customers accounted for approximately 58% of net sales in
1997.
Engineered Endeavors ("EEI"). EEI was founded in 1987 and acquired by JTP in
September 1997. EEI designs complete cellular and PCS towers, manufactures
monopole antenna mount platforms, custom bill and clock towers, and
accessories. EEI also distributes ancillary products used in the construction
of cellular and PCS towers. EEI reported $7.5 million of net sales from its
acquisition date through the end of the year.
Telephone Services, Inc. ("TSI"). In October 1997, JTP acquired 70% of TSI.
TSI designs, manufactures and provides custom cable assemblies, terminal
strips and terminal blocks and other connecting devices primarily to the
telephone operating companies and major telecommunication manufactures. TSI
recorded $4.4 million of net sales from its acquisition date through December
31, 1997.
Backlog
As of December 31, 1997, the Company had a backlog of approximately $109.6
million, compared with $75.0 million as of December 31, 1996 The backlog in
1997 is primarily due to titanium hot formed sales at Parsons and motor sales
at Merkle Korff. Management believes that the backlog may not be indicative
of future sales.
Seasonality
The Company's aggregate business has a certain degree of seasonality. SPAI's
and Riverside's sales are somewhat stronger toward year-end due to the nature
of their products. Calendars at SPAI have an annual cycle while Bibles and
religious books at Riverside are popular as holiday gifts.
Research and Development
As a general matter, the Company operates businesses that do not require
substantial capital or research and development expenditures. However,
development efforts are targeted at certain subsidiaries as market
opportunities are identified. None of these subsidiaries' development efforts
require substantial resources from the Company.
Patents, Trademarks, Copyrights and Licenses
The Company relies on a combination of patent, copyright, trademark and trade
secret laws and contractual agreements to protect its proprietary technology
and know how. The Company owns and uses trademarks and brandnames to identify
itself as a source of certain goods and services including the DURA-LINE and
SILICORE trademarks, both of which are registered in the United States and
various foreign countries, and the VIEWSONICS brandname, in which the Company
has common law rights. The Company's SILICORE technology includes a patented
solid co-extruded polymer lubricant lining that uses a silicone-based
lubricant which is marketed and sold under the SILICORE trademark. There can
be no assurance that the Company will be granted additional patents or that
the Company's patents either will be upheld as valid if ever challenged or
will prevent the development of competitive products. The Company's U.S.
patent with respect to the SILICORE lubricant lining expires in 2007. The
Company has not sought foreign patents for most of its technologies, including
technologies which have been patented in the United States, such as the
SILICORE lubricant lining, which may adversely affect the Company's ability to
protect its technologies and products in foreign countries. The Company
protects its confidential, proprietary information as trade secrets.
Except for the SILICORE polymer pipe products, certain of the Company's CATV
components and its fiber optic connector technology, the Company's products
are generally not protected by virtue of any proprietary rights such as
patents. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to prevent misappropriation of
its technology and know-how or that the Company's competitors will not
independently develop technologies that are substantially equivalent to or
superior to the Company's technology. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent
as do the laws of the United States. In the Company's opinion, the loss of
any intellectual property asset, would not have a material adverse effect on
the conduct of the Company's business.
The Company is also subject to the risk of adverse claims and litigation
alleging infringement of the proprietary rights of others. From time to time,
the Company has received notice of infringement claims from other parties.
Although the Company does not believe it infringes the valid proprietary
rights of others, there can be no assurance against future infringement claims
by third parties with respect to the Company's current or future products.
The resolution of any such infringement claims may require the Company to
enter into license arrangements or result in protracted and costly litigation,
regardless of the merits of such claims.
Employees
As of December 31, 1997, the Company and its subsidiaries employed
approximately 6,200 people. Approximately 1,100 of these employees were
members of various labor unions. The company has not experienced any work
stoppages in the past five years as a result of labor disruptions. The
Company believes that its subsidiaries' relations with their respective
employees are good.
Environmental Regulations
The Company is subject to numerous U.S. and foreign federal, state,
provincial, and local laws and regulations relating to the storage, handling,
emission and discharge of materials into the environment, including the U.S.
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), the Clean Water Act, the Clean Air Act, the Emergency Planning and
Community Right-To-Know Act and the Resource Conservation and Recovery Act.
Under CERCLA and analogous state laws, a current or previous owner or operator
of real property may be liable for the cost of removal or remediation of
hazardous or toxic substances on, under, or in such property. Such laws
frequently impose cleanup liability regardless of whether the owner or
operator knew of or was responsible for the presence of such hazardous or
toxic substances and regardless of whether the release or disposal of such
substances was legal at the time it occurred. Regulations of particular
significance to the Company's ongoing operations include those pertaining to
handling and disposal of solid and hazardous waste, discharge of process
wastewater and stormwater and release of hazardous chemicals. The Company
believes it is in substantial compliance with such laws and regulations.
The Company generally conducts a Phase I environmental survey on each
acquisition candidate prior to purchasing the company to assess the potential
for the presence of hazardous or toxic substances that may lead to cleanup
liability with respect to such properties. The Company does not currently
anticipate any material adverse effect on its results of operations, financial
condition or competitive position as a result of compliance with federal,
state, provincial, local or foreign environmental laws or regulations.
However, some risk of environmental liability and other costs is inherent in
the nature of the Company's business, and there can be no assurance that
material environmental costs will not arise. Moreover, it is possible that
future developments such as the obligation to investigate or clean up
hazardous or toxic substances at the Company's property for which
indemnification is not available, could lead to material costs of
environmental compliance and cleanup by the Company.
Barber-Colman Motors, a product line of the Company and formerly a
wholly-owned subsidiary of the Company, leases property that has been the
subject of remedial investigation and corrective action following the removal
of a small, underground waste oil tank in 1994. Contaminated soils have been
removed up to the edge of the foundation of an overlying structure and down to
bedrock. The Wisconsin Department of Natural Resources has advised the
Company that no further action is necessary at this time. In connection with
the acquisition of Barber-Colman, the Company obtained indemnification from
the former owner of Barber-Colman Motors for environmental liability resulting
from its prior operations.
FIR, a wholly-owned subsidiary of the Company, owns property in Casalmaggiore,
Italy that is the subject of investigation and remediation under the review of
government authorities for soils and groundwater contaminated by historic
waste handling practices. In connection with the acquisition of FIR, the
Company obtained indemnification from the former owners for this investigation
and remediation.
DACCO is a potentially responsible party ("PRP") at the John P. Saad & Sons
site in Nashville, Tennessee (the "Saad Site").
DACCO and a number of other PRPs have entered into a consent agreement with
the U.S. Environmental Protection Agency (the "EPA"), dated April 18, 1990,
and follow-on orders relating to the clean-up of the Saad Site (the "Consent
Agreements"). All work has been completed under the Consent Agreements.
Additional work proceeded under a Unilateral Administrative Order for Removal
Response Activities dated July 28, 1995. This work has been completed and
DACCO has paid its full share of total expenses related to the clean-up
efforts. It is not likely that the EPA will make any further removal
requirements.
DACCO's interim allocation of expenses relating to the clean-up is currently
1.48 percent. It is not likely that DACCO will have to make any additional
payments to the Steering Committee. Total expenses incurred by the PRP group
through January 1998 are approximately $4.3 million. These expenses include
removal costs, engineering and attorneys fees, but do not include
administrative oversight costs incurred by the EPA or the State of Tennessee.
The EPA has incurred administrative oversight costs of approximately $1.1
million through January 1998. The EPA has agreed not to pursue DACCO or other
members of the Saad Site Steering Committee for its administrative oversight
costs in exchange for their cooperation in pursuing recalcitrant parties.
DACCO is not responsible for costs incurred by the State of Tennessee.
Item 2. Properties
The Company leases approximately 31,700 square feet of office space for its
headquarters in Illinois. The principal properties of each subsidiary of the
Company at December 31, 1997, and the location, the primary use, the capacity,
and ownership status thereof, are set forth in the table below:
SQUARE OWNED/
COMPANY LOCATION USE FEET LEASED
AIM
Sunrise, FL Manufacturing/Administration/
Distribution 28,000 Leased
Beemak
Gardena, CA Manufacturing (2 buildings) 34,500 Leased
Warehouse 12,000 Leased
Bond
Anaheim, CA Manufacturing/Administration 16,000 Leased
Fremont, CA Manufacturing/Administration 17,000 Leased
Austin, TX Manufacturing/Administration 12,000 Leased
Cambridge
Windsor, CT Manufacturing 9,000 Leased
Cape Craftsmen
Elizabethtown, NC Manufacturing 230,200 Leased
Wilmington, NC Administration 8,500 Leased
Cho-Pat
Hainesport, NJ Manufacturing/Administration 7,000 Leased
DACCO
Cookeville, TN Administration/Manufacturing 140,000 Owned
Huntland, TN Manufacturing 65,000 Owned
Rancho Cucamonga, CA Administration/Manufacturing 40,000 Owned
Diversified
Troy, MI Manufacturing/Administration/Distribution 45,000 Leased
Nashville, TN Distribution/Sales Office 7,100 Leased
Dura-Line
Middlesboro, KY Manufacturing/Administration 80,000 Owned
Grimsby, U.K. Manufacturing/Administration 35,000 Owned
Sparks, NV Manufacturing 35,000 Owned
Zlin, Czech Republic Manufacturing/Administration 40,000 Owned
Knoxville, TN Administration 10,000 Leased
Tel Aviv, Israel Manufacturing/Administration 10,000 Leased
Queretaro, Mexico Manufacturing/Administration 43,000 Leased
Mexico City, Mexico Sales Office/Administration 2,000 Leased
Shanghai, China Manufacturing/Administration 50,000 Owned
Shanghai, China Sales Office/Administration 1,000 Leased
Goa, India Manufacturing/Administration 48,000 Owned
New Delhi, India Manufacturing/Administration 2,000 Leased
ED&C
Troy, MI Manufacturing/Administration 12,000 Leased
Troy, MI Administration 4,000 Leased
EEI
Mentor, OH Manufacturing/Administration 48,000 Leased
Belle Chasse, LA Warehouse 105,000 Leased
FIR
Casalmaggiore, Italy Manufacturing/Administration 100,000 Owned
Varano, Italy Manufacturing 30,000 Owned
Bedonia, Italy Manufacturing 8,000 Owned
Reggio Emilia, Italy Manufacturing 35,000 Leased
Reggio Emilia, Italy Manufacturing 30,000 Leased
Genoa, Italy Manufacturing 33,000 Leased
Gear
Grand Rapids, MI Manufacturing/Administration 39,000 Owned
Imperial
Akron, OH Manufacturing/Administration 43,000 Owned
Stow, OH Administration 7,000 Leased
Middleport, OH Manufacturing 85,000 Owned
Cuyahoga Falls, OH Manufacturing 63,000 Leased
Johnson
Waseca, MN Manufacturing/Administration 70,000 Subleased
LoDan
San Carlos, CA Manufacturing/Administration 22,500 Leased
San Carlos, CA Manufacturing 13,500 Leased
Merkle-Korff
Des Plaines, IL Manufacturing/Administration 38,000 Leased
Des Plaines, IL Manufacturing/Administration 45,000 Leased
Richland Center, WI Manufacturing/Administration 45,000 Leased
Crystal Lake, IL Manufacturing 46,000 Leased
Darlington, WI Manufacturing 68,000 Leased
Belvedere, IL Design/Administration 12,000 Leased
Motion Control
Rancho Cordova, CA Administration 40,000 Leased
Northern
Liberty Lake, WA Manufacturing/Administration 22,600 Leased
Pamco
Des Plaines, IL Manufacturing/Administration 24,500 Owned
Parsons
Parsons, KS Manufacturing/Administration 97,500 Owned
Riverside
Iowa Falls, IA Distribution/Administration 65,900 Leased
Sparks, NV Distribution 35,000 Leased
Sate-Lite
Niles, IL Manufacturing/Administration 120,000 Leased
Scott
Alamogordo, NM Manufacturing 15,000 Leased
Seaboard
Fitchburg, MA Administration/Manufacturing 260,000 Owned
Miami, FL Manufacturing 90,000 Owned
Brentwood, NY Manufacturing 35,000 Leased
Brooklyn, NY Manufacturing 35,000 Leased
Bohemia, NY Manufacturing 20,000 Leased
SPAI
Red Oak, IA Manufacturing/Administration
(Four buildings) 136,500 Owned
Coshocton, OH Manufacturing/Administration 240,000 Leased
SQUARE OWNED/
COMPANY LOCATION USE FEET LEASED
TSI
Grand Prairie, TX Manufacturing/Administration 15,000 Leased
Shasta Lake City, FL Administration 6,000 Leased
Riverview, FL Manufacturing 75,000 Leased
Tampa, FL Manufacturing 20,000 Leased
Valmark
Fremont, CA Manufacturing/Administration 46,000 Leased
Fremont, CA Manufacturing/Administration 15,000 Leased
Viewsonics
Boca Raton, FL Administration/Distribution/
Research and Development 14,500 Leased
Shanghai, China Manufacturing/Administration 25,000 Leased
St. Petersburg,Russia Manufacturing/Administration 10,000 Leased
VitelecBordon, U.K. Distribution/Administration/
Assembly 16,500 Owned
Paris, France Sales Office 1,000 Leased
DACCO also owns or leases thirty-two distribution centers, which average 4,000
square feet in size. DACCO maintains four distribution centers in Florida,
California, and Tennessee, two distribution centers in each of Illinois,
Arizona, Michigan, Texas and Alabama, and the remaining distribution centers
are located in Pennsylvania, Indiana, Minnesota, Missouri, Nebraska, New
Jersey, West Virginia, Ohio, Oklahoma and South Carolina.
Merkle-Korff's facilities are leased from the chairman of Merkle-Korff and
Northern's Liberty Lake, Washington, facility is leased from a general
partnership consisting of the former owners. The Company believes that the
terms of these leases are comparable to those which would have been obtained
by the Company had these leases been entered into with an unaffiliated third
party.
On January 1, 1998, Merkle-Korff entered into a new lease agreement in
preparation for exiting the Crystal Lake, IL and Belvedere, IL locations. The
new facility is approximately 112,000 square feet and will be used primarily
for manufacturing. The six year lease expires on December 31, 2003 and
includes an option to extend the agreement an additional five years.
On January 19, 1998, ED&C entered into a new lease agreement in preparation
for exiting both Troy, MI locations. The new facility is approximately 29,240
square feet and will be used for manufacturing and administration. The five
year lease expires December, 2002. The relocation to the new facility was
completed in February of 1998.
The Company also has sales representatives in field offices in Florida,
Illinois, Ohio, Oregon, Virginia and internationally in Brazil, Bulgaria,
Germany, Malaysia, Romania, Russia and Slovakia.
None of the Company's significant existing leases are scheduled to expire in
1998. The Company believes that its existing leased facilities are adequate
for the operations of the Company and its subsidiaries.
Item 3. LEGAL PROCEEDINGS
On January 21, 1997, Welcome Home filed for Chapter 11 bankruptcy protection.
As a result of the Chapter 11 filing, the results of Welcome Home are not
consolidated with the Company's results for periods subsequent to January 21,
1997.
The Company's subsidiaries are parties to various other legal actions arising
in the normal course of their business. The Company believes that the
disposition of such actions individually or in the aggregate will not have a
material adverse effect on the consolidated financial position of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
year ended December 31, 1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a)The only authorized, issued and outstanding class of capital stock of the
Company is Common Stock. There is no established public trading market for
the Company's Common Stock.
(b)At December 31, 1997, there were 19 holders of record of the Company's
Common Stock.
(c)The Company has not declared any cash dividends on its Common Stock since
the Company's formation in May, 1988. The Indenture (the "Indenture"), dated
as of September 9, 1997, by and between the Company and First Bank National
Association, as Trustee, with respect to the 10 3/8% Senior Notes and the 11
3/4% Senior Subordinated Discount Debentures contain restrictions on the
Company's ability to declare or pay dividends on its capital stock. The
Indenture prohibits the declaration or payment of any dividends or the making
of any distribution by the Company or any Restricted Subsidiary (as defined in
the Indenture) other than dividends or distributions payable in stock of the
Company or a Subsidiary and other than dividends or distributions payable to
the Company.
Item 6. SELECTED FINANCIAL DATA
The following table presents selected operating, balance sheet and other
data of the Company and its subsidiaries as of and for the five years ended
December 31, 1997. The financial data of the Company and its subsidiaries as
of and for the years ended December 31, 1993 through 1997 were derived from
the consolidated financial statements of the Company and its subsidiaries.
Year Ended December 31,
(Dollars in thousands)
1997 1996 1995 1994 1993
Operating data:(1)
Net sales.................. $707,112 $601,567 $507,311 $424,391 $358,611
Cost of sales, excluding
depreciation.............. 446,580 375,745 320,653 262,730 221,518
Gross profit, excluding
depreciation.............. 260,532 225,822 186,658 161,661 137,093
Selling, general and
administrative expense.... 148,921 150,951 121,371 97,428 80,496
Operating income .......... 55,444 13,392 32,360 42,944 36,387
Interest expense........... 82,455 63,340 46,974 40,887 41,049
Interest income ........... (2,713) (2,538) (2,841) (1,471) (1,845)
Income (loss) before income
taxes, minority interest,
equity in earnings of investee,
and extraordinary items... (6,173) (47,410) (11,773) 27,689 (2,817)
Income (loss) before extra-
ordinary items (2)....... (14,260) (51,884) (7,470) 23,741 (3,483)
Net income (loss) (2) $(45,618) $(55,690) $ (7,470)$ 23,741 $(29,675)
Balance sheet data (at end of period):
Cash and cash equivalents $ 52,500 $ 32,797 $ 41,253 $ 56,386 $ 68,273
Working capital........... 176,508 123,479 115,387 123,395 121,490
Total assets.............. 930,231 681,885 532,384 398,474 338,509
Long-term debt
(less current portion)... 921,871 687,936 513,690 380,966 356,981
Net capital deficiency(3). $(175,285)$(130,281)$(74,479)$(66,867) $(90,669)
(1)The Company has acquired a diversified group of operating companies over
the five year period which significantly affects the comparability of the
information shown above.
(2)Net loss in 1993 includes an extraordinary loss of $26,192 related to the
Company's refinancing. Net income in 1994 includes a gain from the sale of a
partial interest in Welcome Home of $24,161. Net loss in 1995 includes $6,929
of restructuring and non-recurring charges related to Welcome Home. Net loss
in 1996 includes compensation expense related to a stock appreciation right
and other compensation agreements of $9,822, the loss on the purchase of an
affiliate, $4,488, and restructuring charges related to Welcome Home, $8,106,
and other non-recurring changes, $4,136. Net loss in 1997 includes
compensation expense related to a stock appreciation right and other
compensation agreements of $15,871, a gain on the sale of a subsidiary of
$17,081, the recording of equity in the loss of an investee of $3,386, and
an extraordinary loss of $31,358 related to the Company's refinancing.
(3)No cash dividends on the Company's Common Stock have been declared or
paid.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Historical Results of Operations
Summarized below are the historical net sales, operating income and
operating margin (as defined below) for each of the Company's business groups
for the fiscal years ended December 31, 1997, 1996 and 1995. This discussion
should be read in conjunction with the historical consolidated financial
statements and the related notes thereto contained elsewhere in this Annual
Report.
In 1995, The Company's business segments were realigned into five
distinct groups. In 1996, Dura-Line was moved from the Consumer and
Industrial Products segment to the Telecommunications Products segment. In
1997, the Retube product line of Dura-Line was moved from the
Telecommunication Products segment to the Consumer and Industrial Products
segment. Prior period results were also realigned into these new groups in
order to provide accurate comparisons between periods.
Year ended December 31,
1997 1996 1995
(dollars in thousands)
Net Sales:
Specialty Printing & Labeling.. $119,346 $109,587 $ 96,514
Motors and Gears............... 148,669 117,571 54,218
Telecommunications Products.... 257,010 131,592 98,777
Welcome Home(3)................ 2,456 81,855 93,166
Consumer and Industrial Products(4) 179,631 160,962 164,636
Total ..................... $707,112 $601,567 $507,311
Operating Income (1):
Specialty Printing & Labeling.. 10,031 7,078 $ 8,067
Motors and Gears............... 31,058 26,164 12,236
Telecommunications Products.... 18,365 13,490 17,774
Welcome Home(3)................ (1,107) (15,975) (10,066)
Consumer and Industrial Products(4) 23,497 17,941 21,987
Total .................... $81,844 $ 48,698 $ 49,998
Operating Margin (2):
Specialty Printing & Labeling.. 8.4% 6.5% 8.4%
Motors and Gears............... 20.9% 22.3% 22.6%
Telecommunications Products.... 7.1% 10.3% 18.0%
Welcome Home(3)................ (45.1)% (19.5%) (10.8)%
Consumer and Industrial Products(4) 13.1% 11.2% 13.4 %
Combined (1)................... 11.6% 8.1% 9.9 %
(1) Before corporate overhead of $26,400 for the year ended December 31,
1997. The Telecommunications Products operating income includes expense of
$15,871 related to compensation agreements in 1997. The operating income for
the year ended December 31, 1996 is before corporate overhead of $26,946, the
write-off of $4,488 in notes receivable resulting from the Cape Craftsmen
acquisition and the charge of $3,872 for a compensation agreement. 1995
results are before corporate overhead of $17,638. The Telecommunications
Products' operating income includes the AIM and Cambridge SARA expense of
$5,422 for the year ended December 31, 1996, and $400 for the year ended
December 31, 1995.
(2)Operating margin is operating income divided by net sales.
(3)For the period from January 1, 1997 to January 21, 1997, the date of the
Chapter 11 filing (See Footnote 3 to the financial statements).
(4)Consumer and Industrial Products includes Hudson for the period from
January 1, 1997 to May 15, 1997, and Paw Print for the period from January 1,
1997 to July 25, 1997. (See Footnote 16 to the financial statements).
Specialty Printing & Labeling. As of December 31, 1997, the Specialty
Printing and Labeling group consisted of SPAI, Valmark, Pamco, and Seaboard.
1997 Compared to 1996. Net sales increased $9.8 million or 8.9% and
operating income increased $3.0 million or 41.7%. Sales increased due to
higher sales of ad specialty products at SPAI, $2.2 million, increased sales
of rollstock and membrane switches at Valmark, $1.0 million and $0.6 million,
respectively, higher sales of labels at Pamco, $0.3 million, and increased
sales of folding boxes at Seaboard, $7.3 million, due to the acquisition of
Seaboard in May 1996. Partially offsetting these increases were decreased
sales of calendars and school annuals at SPAI, $0.1 million and $0.2 million,
respectively, and lower sales of shielding devices at Valmark, $1.3 million.
Operating income increased due to higher operating income at SPAI, $0.6
million, increased operating income at Valmark, $0.1 million, and higher
operating income at Seaboard, $2.6 million. Partially offsetting these
increases was decreased operating income at Pamco, $0.3 million. The higher
operating income at SPAI is due to lower selling, general, and administrative
costs, primarily medical insurance and commissions, while the increase at
Valmark is due to higher sales and lower operating costs. The decrease in
operating income at Pamco is attributed to lower gross profit stemming from
decreased sales of custom-made labels. Operating margin increased 1.9%, from
6.5% in 1996 to 8.4% in 1997, primarily due to higher sales and lower
operating costs as discussed above.
1996 Compared to 1995. Net sales increased $13.1 million or 13.6% and
operating income decreased $1.0 million or 12.3%. Sales increased due to the
1996 acquisition of Seaboard, which contributed $17.8 million in sales. The
Seaboard acquisition was offset by sales declines at Valmark, $4.4 million,
and Pamco, $.3 million. The sales decline at Valmark is primarily due to
lower sales of shielding devices to Apple Computer.
The decrease in operating income is due to decreases at SPAI, $.6 million,
Valmark, $1.9 million, and Pamco, $.8 million. These decreases were partially
offset by the acquisition of Seaboard, which contributed $2.3 million in
operating income during 1996. The decrease in operating income at SPAI is due
to higher selling, general and administrative expenses, which should
contribute to future sales. The decrease at Valmark is due to lower sales,
while the decrease at Pamco is due to lower sales and a lower gross margin
stemming from price pressures coupled with higher operating costs. Operating
margin decreased 1.9%, from 8.4% in 1995 to 6.5% in 1996, due to lower gross
margins and increased selling, general and administrative expense mentioned
above.
Motors and Gears. As of December 31, 1997, the Motors and Gears group
consisted of Imperial, Scott, Gear, Merkle-Korff, FIR, ED&C and Motion
Control. Effective January 1997, Barber-Colman became a fully integrated
division of Merkle-Korff. Motors and Gears operates in two separate business
segments; electric motors ("motors") and electronic motion control systems
("controls"). Motors and Gears entered the controls business segment through
the acquisition of ED&C and Motion Control during 1997.
1997 Compared to 1996. Net sales increased $31.1 million or 26.5% and
operating income increased $4.9 million or 18.7%. Sales increased partially
due to the acquisitions of the FIR Group in June 1997, ED&C in October 1997,
and Motion Control in December 1997. These companies contributed $14.8
million, $1.8 million, and $1.2 million, respectively, in 1997, or 57.2% of
the total increase in net sales. In addition, net sales increased due to an
18.3% increase in sales of subfractional motors at Merkle-Korff and a 24.0%
increase in sales of planetary gears at Gear. Partially offsetting these
increases was a 6.6% decrease in sales of fractional/integral motors at
Imperial and Scott.
The sales increases were primarily due to (a) strong sales of subfractional
motors in the vending and appliance markets and (b) strong sales of planetary
gears in the floor care market. The decrease in net sales of
fractional/integral motors was primarily due to unusually strong sales in the
first half of 1996 resulting from the high backlog of orders accumulated in
the fourth quarter of 1995.
The increase in operating income was primarily due to the increase in sales of
subfractional motors and planetary gears as discussed above. Partially
offsetting these increases were slightly decreased gross margins in the
fractional/integral motors group due to FIR operating at slightly lower gross
margins than the rest of the group, and increased operating expenses
attributed to the acquisitions of Barber-Colman in 1996, and FIR, ED&C and
Motion Control in 1997. Operating margin decreased 1.4% from 22.3% in 1996 to
20.9% in 1997, due to the decreased gross margins and increased operating
expenses discussed above.
1996 Compared to 1995. Net sales increased $63.4 million or 116.8%, and
operating income increased $14.0 million or 113.8%. The increase in net sales
is partially due to the acquisition of Barber-Colman in March of 1996 which
reported sales of $17.6 million from its acquisition date through the end of
the year. The group also benefitted from a full year of the results of
Merkle-Korff which was purchased in September 1995. Merkle-Korff had sales of
$59.6 million for the full year of 1996 as compared to $14.1 million for the
period from the acquisition date to the end of 1995. This accounted for $45.4
million of the current year increase. In addition, Scott's sales increased
$0.4 million due to higher motor sales.
The increase in operating income was partially attributable to the acquisition
of Barber-Colman, which contributed $1.7 million of operating income to the
current years results. Also, operating income for the entire year for
Merkle-Korff was $15.2 million as compared to $2.6 million for the period from
the acquisition date to the end of 1995. This accounted for $12.6 million of
the current year's increase. The above were partially offset by decreases in
operating income at Imperial and Gear of $0.2 million and $0.3 million,
respectively. Operating margin decreased from 22.6% to 22.3% due to the
addition of Barber-Colman, which operates at a lower operating margin than the
rest of the group.
Telecommunications Products. As of December 31, 1997, the
Telecommunications Products group consisted of Dura-Line, AIM, Cambridge,
Johnson, Diversified, Viewsonics, Vitelec, Bond, Northern, LoDan, EEI and
TSI. Due to the similarity of many of the Telecommunications Products
subsidiaries' product lines, management evaluates, oversees and manages the
companies based on three product group segments: Infrastructure Products and
Equipment which includes Dura-Line, Viewsonics, Northern and EEI; Electronic
Connectors and Components which includes AIM, Cambridge, Johnson and Vitelec;
and Custom Cable Assemblies and Specialty Wire and Cable which includes Bond,
Diversified, LoDan and TSI.
1997 Compared to 1996. Net sales increased $125.4 million or 95.3% and
operating income increased $4.9 million or 36.1%. The increase in net sales
was primarily due to the acquisitions of Johnson, Diversified, Viewsonics,
Vitelec, and Bond in 1996 and Northern, LoDan, EEI and TSI in 1997. These
companies contributed net sales of $19.8 million, $31.3 million, $12.4
million, $5.4 million, $21.8 million, $23.3 million, $14.7 million, $7.5
million, and $4.4 million, respectively, in 1997 compared to net sales in 1996
of $16.9 million for Johnson, $13.9 million for Diversified, $5.1 million for
Viewsonics, $2.4 million for Vitelec, $3.6 million for Bond, and $0 for
Northern, LoDan, EEI, and TSI. In addition, net sales increased $26.7 million
due to higher sales of infrastructure products and equipment, particularly
cable conduit. This increase was primarily due to higher international sales
resulting from the addition of new manufacturing facilities in Mexico and
China.
Operating income increased primarily due to the acquisitions discussed above.
These companies contributed operating income in 1997 of $3.6 million, $1.4
million, $3.7 million, $1.0 million, $2.7 million, $4.3 million, $1.1 million,
$1.0 million and $0.1 million, respectively, compared to operating income in
1996 of $2.9 million for Johnson, $0.7 million for Diversified, $0.5 million
for Vitelec, $0.3 million for Bond, and $0 for Viewsonics, Northern, LoDan,
EEI, and TSI. In addition, operating income at Aim increased $4.1 million due
to Stock Appreciation Rights ("SAR") expense of $5.2 million in 1996.
Operating income at Aim, excluding SAR expense, decreased $1.1 million in 1997
primarily due to lower domestic sales and gross profits. Partially offsetting
the increase in operating income related to the above acquisitions, operating
income at Dura-Line decreased $13.7 million. This decrease was due to SAR
expense of $15.9 million in 1997 related to the acquisition of Dura-Line in
1988. Operating income at Dura-Line, excluding SAR, increased $2.2 million in
1997 primarily due to higher sales of cable conduit in Europe, particularly
the Czech Republic.
Operating margin decreased 3.2%, from 10.3% in 1996 to 7.1% in 1997.
Excluding the SAR expenses, operating margins would have decreased 0.8%, from
14.2% in 1996 to 13.4% in 1997. The decrease in operating margin was
primarily due to international market development costs in 1997 not incurred
in 1996 and lower operating margins at Aim.
1996 Compared to 1995. Net sales increased $32.8 million or 33.2% and
operating income decreased $4.3 million or 24.1%. The increase in sales was
due primarily to the following 1996 acquisitions: Johnson Components, $16.9
million, Diversified, $13.9 million, Viewsonics, $5.1 million, Vitelec, $2.4
million, and Bond, $3.6 million. Net sales also increased due to higher sales
of electronic connectors at AIM, $0.5 million. Partially offsetting the sales
increases were decreased sales of Innerduct at Dura-Line, $7.4 million, and
lower sales of connectors at Cambridge, $2.2 million. The decrease in
Innerduct sales at Dura-Line is due to a general market slowdown in the U.S.
and U.K. due to uncertainty surrounding the anticipated effects of the Telecom
Act. The decreased Innerduct sales in the U.S. and U.K. were partially offset
by increased sales of $10.7 million or 90% in the Czech Republic, where the
Czech subsidiary has approximately an 80% share of the Czech market, plus the
opening of the Mexico and China operations in 1996, which contributed $1.1
million and $.3 million to net sales, respectively.
The decrease in operating income is due primarily to Dura-Line, $4.5 million,
and AIM, $4.4 million. Partially offsetting the decrease in operating income
are the 1996 acquisitions: Johnson, $2.9 million, Diversified, $0.5 million,
Vitelec, $0.5 million, and Bond, $.2 million. Cambridge also helped to
partially offset the decrease with a $.3 million increase in operating
income. The decrease at AIM is due to increased compensation expense of $5.0
million related to a Stock Appreciation Rights Agreement ("SARA") (see
footnote 21 to the financial statements). The decrease at Dura-Line is due to
lower sales coupled with increased operating costs related to Dura-Line's
global expansion, $1.9 million. Excluding AIM's SARA expense, operating
income for the group would have increased $.3 million or 1.7%.
Operating margin decreased 7.7%, from 18.0% in 1995 to 10.3% in 1996. In
addition to the effect of AIM's SARA expense, the decline in the group's
operating margin is partially attributable to (1) the acquisition of
Diversified, which operates at a lower margin as compared to other companies
in the group, and (2) a lower margin at Dura-Line due to higher operating
costs primarily associated with international expansion.
Welcome Home. (See note 3 to the Consolidated Financial Statements.)
1997 Compared to 1996. Net sales decreased $79.4 million or 97.0%, while
the operating loss decreased $14.9 million or 93.1%. These fluctuations are
the direct result of Welcome Home's Chapter 11 bankruptcy filing on January
21, 1997 (see note 3 to the financial statements). As a result of the filing,
the Company no longer has the ability to control the operations and financial
affairs of Welcome Home. Accordingly, the results of operations of Welcome
Home from January 21, 1997 to December 31, 1997, are not included in the
consolidated results of the Company. Since January 21, 1997 the Company has
accounted for its investment in Welcome Home under the equity method of
accounting.
1996 Compared to 1995. Sales decreased $11.3 million or 12.1%. The
decrease in sales is due to a downturn in outlet mall traffic and the closing
of 26 stores in 1996 related to the company's reorganization efforts.
Operating income decreased $5.9 million or 58.7% due to lower sales, higher
operating costs, and non-recurring restructuring charges. The decrease in
operating income caused by the above factors was partially offset by an
improvement in the gross margin to 40.5% from 38.3% stemming from fewer
markdowns in 1996. The operating margin decreased from (10.8%) to (19.5%).
On January 21, 1997, Welcome Home filed a voluntary petition for relief under
Chapter 11 ("Chapter 11") of title 11 of the United States code in the United
States Bankruptcy Court for the Southern District of New York ("Bankruptcy
Court").
Consumer and Industrial Products. As of December 31, 1997, the Consumer
and Industrial Products group consisted of DACCO, Sate-Lite, Riverside,
Parsons, Beemak, Cape, Cho-Pat and Dura-Line Retube.
1997 Compared to 1996. Net sales increased $18.7 million or 11.6%. The
increase in net sales is partially due to the acquisitions of Cape and Paw
Print in July and November 1996, respectively, Arnon-Caine (by Beemak) in
January 1997, and Cho-Pat in September 1997. These companies contributed net
sales of $12.8 million, $5.5 million, $3.9 million, and $0.4 million,
respectively, in 1997 compared to net sales in 1996 of $1.3 million for Cape,
$1.6 million for Paw Print, and $0 for Arnon-Caine and Cho-Pat. Further
contributing to the rise in 1997 net sales were increased sales of soft parts
and scrap at DACCO, $0.6 million and $0.2 million, respectively, higher sales
of bicycle reflectors and custom molding products at Sate-Lite, $0.5 million
and $0.2 million, respectively, higher sales of bibles, books, audio tapes,
and music products at Riverside, $0.9 million, $1.4 million, $1.0 million, and
$0.8 million respectively, increased sales of aircraft parts at Parsons, $7.6
million, and higher sales of plastic pipe at Dura-Line Retube, $0.2 million.
Partially offsetting these increases were decreased sales of rebuilt
converters at DACCO, $1.8 million, lower contract distribution sales at
Riverside, $3.1 million, decreased sales of plastic injection molded products
at Beemak, $0.7 million, and lower sales at Hudson, $8.8 million, due to the
sale of the Company.
The sales increases were primarily due to (a) the increased focus on sales of
soft parts through an expanded line of retail stores at DACCO, (b) the
extension of sales of bicycle reflectors into Asian markets at Sate-Lite, (c)
the resolution of computer system problems at Riverside which negatively
impacted the fourth quarter of 1996, and (d) strong sales of aircraft parts to
Boeing at Parsons. The decrease in net sales of rebuilt converters at DACCO
was primarily due to good weather in the Northeast part of the United States,
while the lower sales to contract distribution customers at Riverside were due
to less focus on the lower margin contract distribution business and more
focus on the higher margin publishing and distribution business.
Operating income increased $5.6 million or 31.0%. The increase in operating
income was partially due to the acquisitions of Cape, Paw Print and
Arnon-Caine. These companies contributed $0.4 million, $1.6 million and $1.4
million, respectively, in 1997, compared to operating income in 1996 of ($0.2)
million for Cape, and $0 for Paw Print and Arnon-Caine. In addition, the
increase was due to higher operating income at: Sate-Lite, $1.1 million,
Riverside, $0.6 million, Parsons, $2.8 million, Beemak, $0.6 million
(excluding Arnon-Caine), and Dura-Line Retube, $0.1 million. These increases
were partially offset by decreased operating income at DACCO, $2.1 million and
Hudson $1.1 million, due to the divestiture of the company. The increase in
operating income was primarily due to (a) higher gross profit at Sate-Lite
stemming from increased sales of custom molded products, (b) improved product
mix at Riverside, (c) increased gross profit at Parsons due to higher sales of
titanium hot formed products, and (d) decreased operating expenses at Beemak
due to a focused cost cutting program. The offsetting decrease to operating
income at DACCO was primarily due to lower sales and slightly higher material
prices.
1996 Compared to 1995. Net sales decreased $3.7 million or 2.2% and
operating income decreased $4.0 million or 18.4%. The decrease in net sales
is due to decreased scrap sales at DACCO, $1.0 million, lower sales of (a) mag
wheels to bicycle manufacturers, $.8 million, (b) emergency warning triangles,
$.4 million, and (c) colorants to the thermoplastics industry, $.4 million at
Sate-Lite, decreased sales of bibles and religious books, $4.8 million, and
contract distribution sales, $4.2 million at Riverside, decreased lock sales
at Hudson, $.7 million, and lower POG sales at Beemak, $2.5 million.
Partially offsetting the decrease in net sales are the acquisitions of Cape
and Paw Print, which contributed sales of $1.3 million and $1.6 million during
1996, respectively, increased sales of rebuilt converters and soft parts at
DACCO, $4.5 million, and $1.2 million, respectively, increased sales of
titanium parts at Parsons, $1.1 million, and increased sales of plastic pipe
at Dura-Line Retube, $1.4 million.
The sales decreases are due to (a) industry buying trends, uncertainty
surrounding safety regulations, and price competition from competitors at
Sate-Lite (b) increased competition coupled with a downturn in the religious
market at Riverside, and (c) a new IBM product line in 1995 coupled with lower
1996 sales to Kryptonite at Hudson. Sales of POGS at Beemak during 1995 are
isolated to that year, when Beemak took advantage of the short-lived interest
in POGS. Sales increases at DACCO are due primarily to the company's strong
market presence and good market conditions in general, while sales increases
at Parsons are due to strong Boeing activity.
The decrease in operating income is due to lower operating income at:
Sate-Lite, $1.3 million, Riverside, $2.5 million, Hudson, $1.3 million,
Beemak, $1.0 million, Cape $0.2 million, and Dura-Line Retube, $0.5 million.
These decreases are partially offset by increased operating income at DACCO,
$2.0 million, and Parsons, $0.8 million. The decreases in operating income
are due to lower sales as well as certain non-recurring charges at Sate-Lite
and Beemak, $1.0 million collectively, higher operating costs at Riverside,
and compensation expense related to a stock appreciation right plan at Hudson,
$.5 million. Increased operating income at DACCO was due to higher sales and
steady margins, while operating income at Parsons increased due to higher
sales and a higher gross margin. The decrease in the operating margin is
driven by overall lower sales and the effect of non-recurring charges.
Consolidated Operating Results. (see Consolidated Statements of
Operations).
1997 Compared to 1996. Net sales increased $105.5 million or 17.6%, and
operating income increased $42.1 million or 314.0%. The increase was
primarily due to the 1997 acquisitions of FIR, ED&C, and Motion Control in the
Motors and Gears group, Northern, LoDan, EEI, and TSI in the
Telecommunications Products group, and Arnon-Caine and Cho-Pat in the Consumer
and Industrial Products group. Sales also increased from the benefit of a
full year of sales at Seaboard in the Specialty Printing and Labeling group,
Johnson, Diversified, Viewsonics, Vitelec, and Bond in the Telecommunications
group, Barber-Colman in the Motors and Gears group, and Cape in the Consumer
and Industrial Products group. In addition, sales increased due to higher
sales of ad specialty products at SPAI, increased sales of subfractional
motors at Merkle-Korff, higher sales of planetary gears at Gear, increased
sales of cable conduit at Dura-Line, and increased sales of titanium aircraft
parts at Parsons. Partially offsetting these increases, were lower sales of
shielding devices at Valmark, decreased sales of fractional/integral motors at
Imperial and Scott, and lower sales at Welcome Home due to their
deconsolidation from the Company's financial statements.
Operating income increased primarily due to the 1997 acquisitions, a full year
of operations at the companies acquired in 1996, lower medical and commissions
expenses at SPAI, lower compensation expenses at AIM as their SAR was expensed
in 1996, increased gross profits at Sate-Lite from sales of custom molded
products, and higher gross profits at Parsons. In addition, operating income
increased due to the deconsolidation of Welcome Home. Partially offsetting
these increases were decreased gross profits at Pamco stemming from lower
sales of custom labels, decreased gross profits at FIR, increased operating
expenses attributed to the Motors and Gears acquisitions, higher operating
expenses at Dura-Line stemming from the SAR expense, lower sales and slightly
higher material prices at DACCO, and decreased operating income at Hudson due
to the divestiture of the company in May of 1997. Consolidated operating
margin increased 5.6%, from 2.2% in 1996 to 7.8% in 1997 due to the above
factors.
Interest expense increased $19.1 million or 30.2% primarily due to the
increase in long-term debt stemming from the Company's refinancing in July
1997.
1996 Compared to 1995. Consolidated net sales increased $94.3 million or
18.6% and operating income increased $19.0 million or 58.8%. The increase is
primarily due to the 1996 acquisitions of Seaboard in the Specialty Printing
and Labeling group, Johnson, Diversified, Viewsonics, Vitelec, and Bond in the
Telecommunications Products group, Barber-Colman in the Motors and Gears
group, and Cape and Paw Print in the Consumer and Industrial Products group.
Sales also increased from the benefit of a full year of sales at Merkle-Korff,
increased sales of rebuilt converters and other hard parts at DACCO, and
increased sales of titanium parts to Boeing at Parsons. Partially offsetting
the sales increases were lower sales at Welcome Home, decreased sales of
shielding devices to Apple Computer at Valmark, lower sales of Innerduct at
Dura-Line, and lower sales of connectors at AIM and Cambridge.
The decrease is primarily due to increased corporate expenses, the write-off
in notes receivable related to the Cape acquisition, higher compensation
expense related to compensation agreements and stock appreciation rights plans
at AIM, Cambridge, and Hudson, $9.4 million, collectively, lower sales and
increased global expansion costs at Dura-Line, lower sales at Valmark, lower
sales due to store closings and increased restructuring charges at Welcome
Home, lower sales and higher operating costs at Riverside, and certain
non-recurring charges at Beemak and Sate-Lite. These decreases were partially
offset by the 1996 acquisitions, a full year of operations at Merkle-Korff,
increased operating income at DACCO due to higher sales, and higher operating
income at Parsons due to higher Boeing sales. Consolidated operating margin
decreased to 2.2% from 6.4% due to the above factors. If the decrease in
operating income at Welcome Home, $5.9 million, the increase in compensation
expense related to SARA and other compensation agreements, $9.4 million, the
loss on the purchase of Cape Craftsmen, $4.5 million, and other non-recurring
changes of $4.1 million are excluded from the above analysis, operating income
would have increased $4.9 million or 15.1%.
Interest expense increased $16.4 million or 34.8% primarily due to increased
revolver borrowings at the corporate level as well as Welcome Home and the
inclusion of a full year of interest on Merkle-Korff debt and interest on the
Motors and Gears, Inc. Senior Notes issued in 1996.
Interest income decreased $.3 million or 10.6% due to lower average cash
balances stemming primarily from 1996 acquisition activity.
Liquidity and Capital Resources
The Company had approximately $176.5 million of working capital at the
end of 1997 compared to approximately $123.5 million at the end of 1996. The
increase in working capital from 1996 to 1997 was primarily due to higher
receivables, inventory, and other current assets of $44.8 million, $15.9
million, and $3.0 million, respectively, and higher cash balances of $19.7
million. These increases in working capital are partially offset by higher
accounts payable, $11.7 million, higher accrued expenses, $12.6 million,
increased current portion of long-term debt, $0.8 million, and increased other
current liabilities of $5.3 million.
The Company has acquired businesses through leveraged buyouts, and as a
result has significant debt in relation to total capitalization. See
"Business". Most of this acquisition debt was initially financed through the
issuance of bonds which were subsequently refinanced in 1997. See Note 5 to
the Consolidated Financial Statements.
In connection with each acquisition of a subsidiary, the subsidiary
entered into intercompany notes, and intercompany management and tax sharing
agreements, which permit the subsidiaries, including the majority-owned
subsidiaries, substantial flexibility in moving funds from the subsidiaries to
the Company.
Management expects continued growth in net sales and operating income in
1998. Capital spending levels in 1998 are anticipated to be consistent with
1997 levels and, along with working capital requirements, will be financed
internally from operating cash flow. Operating margins and operating cash
flow are expected to be favorably impacted by ongoing cost reduction programs,
improved efficiencies and sales growth. Management believes that the
Company's cash on hand and anticipated funds from operations will be
sufficient to cover its working capital, capital expenditures, debt service
requirements and other fixed charges obligations for at least the next 12
months.
The Company is, and expects to continue to be, in compliance with the
provisions of the Indentures relating to the Company's Senior Notes, 2007
Seniors, 2009 Debentures, and Senior Subordinated Discount Debentures.
None of the subsidiaries require significant amounts of capital spending
to sustain their current operations or to achieve projected growth.
Net cash provided by operating activities for the year ended December 31, 1997
was $17.5 million, compared to $23.1 million provided from operating
activities during the same period in 1996. The decrease is attributed to
increases in accounts receivable and inventories due to revenue growth and is
partially offset by increases in accounts payable and accrued expenses.
Net cash used in investing activities for the year ended December 31, 1997 was
$184.7 million, compared to $167.2 million used in investing activities during
the same period in 1996. Increased acquisition of subsidiaries is partially
offset by net proceeds from sale of subsidiary, redemption of investment in
affiliate, decreased capital expenditures, and decreased notes receivable from
affiliate.
Net cash provided by financing activities for the year ended December 31, 1997
was $180.1 million, compared to $136.0 million provided from financing
activities during the same period in 1996. Proceeds from the Jordan
Industries, Inc., Motors and Gears, Inc., and Jordan Telecommunications
Products, Inc. debt issuances and the Jordan Telecommunications Products, Inc.
preferred stock issuance are partially offset by the increase in repayment of
long-term debt, and lower borrowings under revolving credit facilities.
Impact of Inflation
General inflation has had only a minor effect on the operations of the
Company and its internal and external sources for liquidity and working
capital, as the Company has been able to increase prices to reflect cost
increases, and expects to be able to do so in the future.
Year 2000
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 96-14, Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000, which provides
that costs associated with modifying computer software for the year 2000 be
expensed as incurred. The Company is assessing the extent of the necessary
modifications to its computer software.
The Company is in the process of conducting a comprehensive review of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and is developing an implementation plan to resolve the issue.
The Year 2000 problem is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Any of the
company's programs that have time-sensitive software may recognize a date
using "00" as the Year 1900 rather than the Year 2000. This could result in a
system failure or miscalculations. Management has not yet assessed the Year
2000 compliance expense and related potential affect on the company's
earnings.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
Reports of Independent Auditors .................. 36
Consolidated Balance Sheets as of December 31,
1997 and 1996................................. 41
Consolidated Statements of Operations for the
years ended December 31, 1997, 1996 and 1995.. 42
Consolidated Statements of Changes in
Shareholders' Equity (Net Capital Deficiency)
for the years ended December 31, 1997, 1996
and 1995...................................... 43
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995.. 44
Notes to Consolidated Financial Statements........ 46
Report of Independent Auditors
The Board of Directors and Shareholders
Jordan Industries, Inc.
We have audited the accompanying consolidated balance sheets of Jordan
Industries, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1997. Our audits also included the financial statement schedule
listed in the index at Item 14 (a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the schedule based on our
audits. We did not audit the financial statements of certain subsidiaries
whose statements reflect total assets constituting 19% and 5% as of
December 31, 1997 and 1996, respectively, and net sales constituting 10% and
3% for the years ended December 31, 1997 and 1996, respectively, of the
related consolidated totals. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it
relates to data included for these subsidiaries, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Jordan Industries, Inc. at
December 31, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois /s/ ERNST & YOUNG LLP
March 27, 1998
Independent Auditors' Report
Board of Directors
Diversified Wire & Cable, Inc.
Troy, Michigan
We have audited the balance sheets of Diversified Wire & Cable, Inc. as of
December 31, 1997 and 1996 and the related statements of operations, changes
in stockholders' equity and cash flows for the year ended December 31, 1997
and for the period June 25, 1996 (Commencement of Operations) through December
31, 1996, respectively, (not separately presented herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosure in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the financial position of Diversified Wire & Cable,
Inc. as of December 31, 1997 and 1996, and the results of its operations, the
changes in stockholders' equity and its cash flows for the year ended December
31, 1997 and for the period June 25, 1996 through December 31, 1996,
respectively, in conformity with generally accepted accounting principles.
Mellen, Smith & Pivoz, P.C.
Bingham Farms, Michigan /s/MELLEN, SMITH & PIVOZ, P.C.
January 22, 1998
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of FIR Group
We have audited the consolidated balance sheet of Fir Group (the
"Company") composed of FIR Elettromeccanica S.p.A., CIME S.P.A., Selin Sistemi
S.p.A., TEA S.r.1. and Nuova BETA S.r.1. as of October 31, 1997, and the
related consolidated statements of income, retained earnings, and cash flows
for the five months then ended (not separately presented herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of October 31, 1997, and the results of its operations and its cash
flows for the five months then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND S.p.A.
/S/COOPERS & LYBRAND S.p.A.
Milan, 27 February 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Motion Control Engineering, Inc.:
We have audited the balance sheet of MOTION CONTROL ENGINEERING, INC. (a
California corporation) as of December 31, 1997 and the related statements of
income, shareholders' equity and cash flows for the 13 days ended December 31,
1997 (not separately presented herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable ba