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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, 2001 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.)
Arbor Lake 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 no public market for such shares.
The number of shares outstanding of Registrant's Common Stock
as of April 3, 2002: 98,501.0004.
Item 1. BUSINESS
Jordan Industries, Inc. ("the Company") was organized to acquire and
operate a diverse group of businesses with a corporate staff providing
strategic direction and support. The Company is currently comprised of 24
businesses which are divided into five strategic business units: (i)
Specialty Printing and Labeling, (ii) Consumer and Industrial Products,
(iii) Jordan Specialty Plastics, (iv) Jordan Auto Aftermarket, and (v)
Kinetek.
As a result of the 2000 transactions described in note 4 to the financial
statements, the Jordan Telecommunication Products segment and the Capita
Technologies segment have been reported as discontinued operations for
financial reporting purposes in accordance with Accounting Principles Board
("APB") Opinion No. 30.
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 Kinetek, Inc., formerly known as Motors and Gears, Inc., a
leading domestic manufacturer of electric motors, gears, and motion control
systems.
Through the implementation of this strategy, the Company has demonstrated
significant and consistent growth in net sales. The Company generated
consolidated net sales of $722.8 million for the year ended December 31,
2001 as compared to $450.1 million for the year ended December 31, 1997,
representing a compound annual growth rate of 12.6%.
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, 2001.
-2-
Jordan Industries, Inc.
$722.8 Million of Net Sales (1)
SPECIALTY PRINTING AND LABELING - JII Promotions
$112.1 Million of Net Sales - Pamco
- Valmark
- Seaboard
CONSUMER AND INDUSTRIAL PRODUCTS - Cape Craftsmen
$77.6 Million of Net Sales - Welcome Home
- Cho-Pat
- Online Environs
- Internet Services of Michigan
- Flavorsource
- GramTel
JORDAN SPECIALTY PLASTICS (2) - Sate-Lite
$98.7 Million of Net Sales - Beemak
- Deflecto
JORDAN AUTO AFTERMARKET (2) - Dacco
$147.0 Million of Net Sales - Alma
- Atco
Kinetek (2) - Imperial
$287.4 Million of Net Sales - Gear
- Merkle-Korff
- FIR
- Electrical Design & Control
- Motion Control Engineering
- Advanced D.C. Motors
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(1) The results of operations of acquired businesses have been
included in the Company's consolidated results since the
respective dates of acquisition. See note 19 to the financial
statements.
(2) The Company's ownership in Jordan Specialty Plastics and
Jordan Auto Aftermarket is solely in the form of Cumulative
Preferred Stock. In 2001, Motors and Gears, Inc. changed
its name to Kinetek, Inc. Kinetek, Inc. is a wholly-owned
subsidiary of Motors and Gears Holdings Inc., of which the
Company's ownership is solely in the form of M&G Junior
Preferred Stock. See note 5 to the financial statements.
-3-
The Company's operations were conducted through the following business
units as of December 31, 2001:
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, 2001, the
Specialty Printing and Labeling group generated net sales of $112.1
million. Each of the Specialty Printing and Labeling subsidiaries is
discussed below:
JII Promotions. In 2001, in an effort to focus attention on its specialty
promotion strengths, Sales Promotion Associates, Inc. was renamed JII
Promotions, Inc. ("JII Promotions"). JII Promotions is a distributor of
corporate recognition, promotion and specialty advertising products and a
producer and distributor of calendars for corporate buyers and color and
black and white soft-cover yearbooks for kindergarten through eighth grade.
JII Promotions' net sales for fiscal 2001 were $55.0 million. Approximately
61% of JII Promotions' 2001 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 27% of JII Promotions'
2001 net sales were derived from sales 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. In addition, JII
Promotions manufactures and distributes color and black and white
soft-cover school yearbooks for kindergarten through eighth grade, which
accounted for approximately 12% of 2001 net sales.
JII Promotions distributes calendars that are assembled in-house as well as
by a number of outside suppliers. Facilities for in-house finishing include
a composing room, a camera room, and a calendar binding department. Print
stock, binding material, packaging and other materials are supplied by a
number of independent companies. Specialty advertising products are
purchased from more than 950 suppliers. Calendars and specialty advertising
products are sold through a 650 person sales force, most of who are
independent contractors.
Management believes that JII Promotions has one of the largest domestic
sales forces in the industry. With this large sales force and broad range
of calendars and corporate recognition products available, management
believes that JII Promotions 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 graphic components for the
electronics Original Equipment Manufacturer ("OEM") market. Valmark's
product line includes graphic panel overlays, membrane switch control
panels, adhesive-backed labels and electro magnetic shielding devices.
Approximately 35% of Valmark's 2001 net sales of $18.4 million were derived
from the sales of membrane switch control panels, 49% from graphic panel
overlays, 14% from labels and 2% from shielding devices.
-4-
The specialty screen print 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. While the majority of Valmark's customer base of approximately
1,200 is located in the Northern California area, Valmark conducts business
nationally through its network of manufacturing sales representatives.
Valmark sells to four primary markets: personal computers; general
electronics; turn-key services; and medical instrumentation. Sales to the
hospital and telecommunication industries have experienced the most growth
over recent years due to Valmark's membrane switch control panel
capabilities.
Valmark is able to provide OEM's 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 code and address labels, to eight-color,
laminated, embossed, and hot stamped labels for products such as video
games and food packaging. All of Pamco's products are made to customer
specifications and approximately 93% of all sales were manufactured
in-house in 2001. The remaining 7% of sales were purchased printed products
and included business cards and stationery.
Pamco's products are marketed by a team of 9 sales representatives who
procure new accounts and service existing accounts. Existing accounts are
serviced by 8 customer service representatives and 1 internal salesperson.
Pamco's customers represent several different industries with the five
largest customers accounting for approximately 14% of 2001 net sales of
$18.0 million.
Pamco competes in a highly fragmented industry. Pamco emphasizes its
impressive 24-hour turnaround time and its ability to accommodate rush
orders that other printers cannot handle. Pamco's ability to deliver a
quality product with quick turn around is its key competitive advantage.
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 35% of Seaboard's
2001 net sales of $20.7 million. Seaboard has exhibited high profit margins
and has gained a reputation for exceeding industry standards primarily due
to its excellent operating capabilities. Seaboard has historically been
highly successful in buying and profitably integrating smaller
acquisitions.
-5-
Seaboard's markets are very competitive in terms of price, and accordingly,
Seaboard's advantage over its competition is derived from its high quality
products and excellent service.
Consumer and Industrial Products
Consumer and Industrial Products serves many product segments. It
manufactures and imports gift items; manufactures orthopedic supports and
pain reducing medical devices; provides internet access to small Midwestern
markets; manufactures and develops flavors used in beverages and foods;
provides internet business development solutions and consulting services;
and provides dedicated internet connectivity, co-location, and data storage
services at regionally located Secure Network Access Centers. For the year
ended December 31, 2001, the Consumer and Industrial Products subsidiaries
generated combined net sales of $77.6 million. Each of the Consumer and
Industrial Products subsidiaries is discussed below.
Cape Craftsmen. Founded in 1966 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 the Far East. Cape Craftsmen sells its products through 3
in-house salespeople and 44 independent sales representatives. Net sales in
2001 were $9.0 million, excluding sales to Welcome Home, a related party,
of $15.3 million. 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.
Welcome Home. Welcome Home is a specialty retailer of gifts and decorative
home furnishings and accessories in North America. Welcome Home began
operations in the mid 1970's and was acquired by the Company in 1991. It
currently operates 117 stores located in factory outlet centers and
regional malls in 36 states. Welcome Home offers a broad product line of
2,000 to 3,000 items consisting of 12 basic groups, including decorative
home textiles, framed art, furniture, candles, lighting, fragrance,
decorative accessories, decorative garden, music, special opportunity
merchandise and seasonal products.
Competition is highly intense among specialty retailers, traditional
department stores and mass merchant discounters in outlet malls and other
high traffic retail locations. Welcome Home competes principally on the
basis of product assortment, convenience, customer service, price and the
attractiveness of its stores. Welcome Home had net sales of $53.5 million
in the year ended December 31, 2001.
Cho-Pat. In September 1997, the Company purchased Cho-Pat, Inc., a leading
designer and manufacturer of orthopedic related sports medicine devices
used in the prevention and treatment of certain biomechanical injuries.
Several of the devices designed by Cho-Pat hold U.S. patents. Cho-Pat
currently produces 19 different products primarily for reduction of pain
from injuries and the prevention of injuries resulting from over use of the
major joints. For the past 22 years, Cho-Pat's largest selling product has
been the Cho-Pat Knee Strap, designed to reduce the pain from patellar
tendonitis in the knee. Cho-Pat manufactures all of its products in-house.
Cho-Pat sells its products to medical professionals, all branches of the
military, colleges, high school and professional team coaches and trainers,
medical product distributors, wholesalers and retail drug and sporting
goods stores across the country and several overseas areas. Cho-Pat had net
sales of $1.6 million in 2001.
-6-
Online Environs. In March 2000, the Company purchased Online Environs, Inc.
Online is an international Internet business solutions developer and
consultant whose services are designed to help clients increase sales,
improve communications, and create and enhance business identities over the
Internet. Online is truly an innovative company specializing in web and
application development, implementation of technology products and MIS
services for clients. Online has a strong track record with a list of over
200 clients including the New England Patriots, Enterasys Networks, Compaq
and many others. Online had sales of $1.1 million in the year ended
December 31, 2001.
ISMI. Internet Services of Michigan was purchased by the Company in October
2000. ISMI is an Internet service provider with approximately 8,100
customers located in Michigan. ISMI offers standard dial-up resources as
well as high-speed Internet connections such as DSL, Satellite and ISDN.
ISMI also provides website development and creation services and web
hosting features. ISMI had net sales of $2.2 million in the year ended
December 31, 2001.
Flavorsource. In October 2000, the Company purchased Flavorsource, Inc.
Flavorsource develops and compounds flavors for use in a variety of
beverage products including coffee, tea, juices, sports drinks, and
carbonated beverages, as well as many food products such as nutrition bars,
bakery products, candy and chocolates. Additionally, Flavorsource acts as a
broker and distributor of natural cane sugar products. Flavorsource is a
customer service oriented company that specializes in hands-on product
development with its customers in addition to quality and on-time delivery.
Flavorsource had net sales of $5.7 million in the year ended December 31,
2001.
GramTel. GramTel Communications, Inc. was started by the Company in
December 2000. GramTel is an information technology outsourcing company. It
owns and operates state-of-the-art technology centers that house
mission-critical web servers, applications, and databases for small and
medium sized businesses. In addition, through its engineering and
programming staff, GramTel provides consulting, application management,
infrastructure management, security, and data storage services to its
customers. GramTel leverages its infrastructure and technical staff to
support business's information technology needs at a fraction of the cost
of performing these tasks in-house. It provides the facilities, Internet
bandwidth, and technical personnel to keep business's web-based operations
available 24 hours a day. GramTel had net sales of $0.4 million in the year
ended December 31, 2001.
Jordan Specialty Plastics
Jordan Specialty Plastics serves a broad range of wholesale and retail
markets within the highly-fragmented specialty plastics industry. The group
designs, manufactures and sells (1) "take-one" point of purchase brochure,
folder and application display holders, (2) modular storage systems
("Tilt-Bins"(TM)), (3) plastic injection-molded hardware and office supply
products, (4) extruded vinyl chairmats, (5) safety reflectors for bicycles
and commercial truck manufacturers and (6) colorants to the thermoplastics
industry. The companies that are part of Jordan Specialty Plastics have
provided their customers with products and services for an average of over
35 years. For the year ended December 31, 2001, the Jordan Specialty
Plastics subsidiaries generated combined net sales of $98.7 million. Each
of the Jordan Specialty Plastics subsidiaries is discussed below:
-7-
Beemak Plastics. Beemak, which was founded in 1951 and acquired by the
Company in July 1989, is an integrated manufacturer of custom
point-of-purchase displays, brochure holders and sign holders. Beemak sells
its proprietary holders and displays to approximately 6,000 customers
around the world. In addition, Beemak produces a small amount of custom
injection-molded plastic parts for customers on a contract manufacturing
basis. Beemak's net sales for 2001 were $4.8 million.
Beemak's products are both injection-molded and custom fabricated. Beemak's
molds are 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 sells its products through a direct sales force, independent
representatives, an extensive on-going advertising campaign and by
reputation. Beemak sells to distributors, major companies, and competitors,
which resell the product under a different name. Beemak has been successful
in providing excellent service on orders of all sizes, especially on small
orders.
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 benefited 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.
Sate-Lite Manufacturing. Sate-Lite specializes in safety reflectors for
bicycles and commercial truck manufacturers, colorants/masterbatches for
the thermoplastics industry, and a line of retail Tilt-Bin(TM) storage
containers. Sate-Lite was founded in 1968 and acquired by the Company in
1988. Bicycle reflectors and plastic bicycle parts account for
approximately 34% of Sate-Lite's net sales in 2001. Sales of emergency
warning triangles and specialty reflectors and lenses to commercial truck
customers accounted for approximately 21% of net sales in 2001. Sales of
colorants to the thermoplastics industry accounted for approximately 29% of
net sales in 2001. Sales of storage containers accounted for approximately
14% of net sales. The remaining 2% of 2001 net sales were derived from
other miscellaneous plastic injection molded products. Sate-Lite's net
sales for 2001 were $14.9 million.
Sate-Lite's bicycle and truck/auto products are sold directly to a number
of OEM's. The three largest OEM customers are Tandem (China), Federal Mogul
and Grote Industries, which account for a total of approximately 13% of
Sate-Lite's net sales in 2001. Colorants are sold primarily to plastic
processors in North America. The Tilt-Bin(TM) storage containers are sold
primarily to retail outlets used for in-store display fixtures, as well as
for home consumer use. In 2001, Sate-Lite's ten largest customers accounted
for approximately 38% of net sales.
Sate-Lite's bicycle products are marketed to bicycle OEM's in North America
and Asia. Sales to foreign customers are handled directly by management and
by independent trading companies on a commission basis. Sate-Lite's net
export sales accounted for approximately 28% of its total 2001 net sales.
Export sales were principally to China and Canada. The principal raw
materials used in manufacturing Sate-Lite's products are plastic resins,
metal fasteners, and color pigments. Sate-Lite purchases these materials
from several independent suppliers. In the fourth quarter of 1998,
-8-
Sate-Lite opened a wholly-owned manufacturing factory in China. Sate-Lite
sells to a variety of companies in Asia including Tandem, Giant, Southern
Cross, and other bicycle manufacturers who have increased their sales to
the North American market through mass market bicycle brands such as Huffy,
Mongoose, Pacific, and Schwinn.
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 bicycle parts market consist primarily of foreign
companies. Sate-Lite competes with regional companies in the thermoplastic
colorant markets.
Deflecto Corporation. Founded in 1960 and acquired by the Company in 1998,
Deflecto designs, manufactures and markets plastic injection-molded
products for mass merchandisers, major retailers and large wholesalers.
Deflecto sells its products in two product categories: hardware products
and office supply products. Hardware products, which comprised
approximately 61% of Deflecto's net sales in 2001, include heating and
cooling air deflectors, clothes dryer vents and ducts, kitchen vents and
ducts, sheet metal pipes and elbows, exhaust fittings, heating ventilation
and air conditioning registers and other widely recognized products. Office
supply products, many of which have patents and trademarks, represented
approximately 39% of net sales in 2001 and include such items as wall
pockets, literature displays, file and chart holders, business card
holders, chairmats and other top-branded office supply products. Deflecto's
net sales for 2001 were $79.0 million.
Deflecto manufactures approximately 90% of its products in-house, with the
remainder outsourced to other injection molders. Deflecto efficiently
manages the mix of manufactured and outsourced product due to its ability
to accurately project pricing, cost and capacity constraints. This strategy
enables Deflecto to grow without being constrained by capacity issues.
Deflecto sells its products through an in-house salaried sales force and
the use of independent sales representatives. Deflecto has the critical
mass to command strong positions and significant shelf space with the major
mass merchandisers and retailers. In the hardware products line, Deflecto
sells to major national retailers such as Ace Hardware, Wal-Mart, and Home
Depot, as well as to heating, ventilating and air conditioning ("HVAC") and
appliance part wholesalers. Deflecto sells its office supply products line
to major office supply retailers such as Office Max and Staples, as well as
to national wholesalers, such as United Wholesalers and S.P. Richards.
Deflecto has established strong relationships with its customers and is
known for delivering high quality, well packaged products in a timely
manner.
Competition in the hardware and office supplies business is increasing due
to the consolidation of companies serving the market. The increased
competition has prevented price increases and has forced manufacturers to
improve production efficiency, product quality and delivery. The Company
believes that Deflecto's mix of manufactured and outsourced product, and
its management of this process, allows it to maintain high production
efficiency, keeping costs down and product quality high.
-9-
Jordan Auto Aftermarket
Jordan Auto Aftermarket is the leading supplier of remanufactured torque
converters to the automotive aftermarket parts industry. In addition, it
produces newly manufactured torque converters, air conditioning
compressors, and clutch and disc assemblies for major automotive and
equipment OEM's. For the year ended December 31, 2001, the Jordan Auto
Aftermarket subsidiaries generated combined net sales of $147.0 million.
Each of the Jordan Auto Aftermarket 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.
The majority 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
the 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.
The remaining products sold by DACCO are classified as "soft" products,
such as sealing rings, bearings, washers, filter kits and rubber
components. Soft products are purchased from a number of vendors and are
resold 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 48 independent sales
representatives who accounted for approximately 46% of DACCO's net sales of
$65.7 million in 2001. These sales representatives sell nationwide to
independent warehouse distributors and transmission repair shops. DACCO
also operates 41 distribution centers, which sell directly to transmission
shops. DACCO's distribution centers average 5,400 square feet and cover a
50-100 mile selling radius. In 2001, no single customer accounted for more
than 2% 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
re-builders. DACCO believes that it competes strongly against these
re-builders 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.
Alma. Founded in 1944 and acquired by the Company in March 1999, Alma uses
a combination of remanufacturing and new production to produce torque
converters, air conditioning compressors, and clutch and disc assemblies
for major automotive and equipment OEM's such as Ford, Chrysler, GM, John
Deere, Caterpillar, and Case, as well as numerous other direct aftermarket
customers. Torque converters and clutch and disc assemblies are also
referred to as drive trains. Net sales were $75.6 million during the year
ended December 31, 2001.
-10-
Alma manufactures its products to customer's specifications, and its
engineering department works closely with the customer's engineers to
ensure that specifications are met. Torque converters are remanufactured
and sold to major automotive OEMs such as Ford and Chrysler, typically for
warranty replacement. Alma does not sell torque converters in the
independent aftermarket, which is the primary market for DACCO's torque
converters. Air conditioning compressors are both remanufactured and
produced new for the automotive aftermarket. Alma's compressors are sold to
the service arms of major automotive manufacturers such as Ford, Chrysler,
GM, John Deere, and Caterpillar. Alma supplies the majority of the
compressors purchased by these customers in the aftermarket. Clutch and
disc assemblies are both remanufactured and produced new and are sold
primarily to repackagers who then resell the products to automotive parts
distributors. Alma has long-term contracts with several customers, and has
developed strong relationships with all of its major customers. Alma was
selected by Ford to remanufacture, distribute, and fully merchandise Ford's
first two Ford Quality Renewal programs for torque converters and clutch
and disc assemblies. The use of Alma remanufactured Ford Quality Renewal
products in new vehicle warranty repair is indicative of Alma's
engineering, manufacturing and quality expertise. Approximately 21% of
Alma's 2001 sales were to Ford and approximately 11% were to Chrysler.
Alma's market is somewhat captive in that any supplier selling to the major
automotive and equipment OEMs must adhere to the same quality standards
with which Alma complies. Alma competes based on quality, price, and
customer service.
Atco. Atco Products, Inc. was founded in 1968 and was acquired by the
Company in July of 2001. The Company's office, engineering, sales, and
customer service departments are located in Ferris, Texas, where mobile air
conditioning components are manufactured. Atco focuses on quality parts,
quick responses to customer needs and deliveries.
Atco manufactures and distributes hose assemblies, driers and accumulators,
fittings, and crimping tools to a large customer base, including such
companies as GMSPO, PACCAR, Gates, Dana-Weatherhead, and other OE and
automotive aftermarket customers. Atco is the sole external source to
Kenworth and Peterbilt for steel and aluminum air conditioning tube
assemblies and hose end fittings, which are manufactured in the ISO-9000
certified plant in Ennis, Texas. Atco has led the way with innovations like
the patented portable hand-operated model 3700 crimping tool. Net sales
were $5.7 million from the date of acquisition through December 31, 2001.
Kinetek
Kinetek is a leading domestic manufacturer of specialty purpose electric
motors, gearmotors, gearboxes, gears, transaxles and electronic motion
controls, serving a diverse customer base, including consumer, commercial
and industrial markets. Its products are used in a broad range of
applications, including vending machines, golf carts, lift trucks,
industrial ventilation equipment, automated material handling systems and
elevators.
Kinetek operates in the businesses of electric motors ("motors") which
includes the subsidiaries Imperial, Gear, Merkle-Korff, Fir, and Advanced
D.C. Motors; and electronic motion control systems ("controls") which
includes the subsidiaries Electrical Design & Control and Motion Control
Engineering. For the year ended December 31, 2001 Kinetek generated net
sales of $287.4 million.
-11-
Electric Motors. Electric motors are devices that convert electric power
into rotating mechanical energy. The amount of energy delivered is
determined by the level of input power supplied to the electric motor and
the size of the motor itself. An electric motor can be powered by
alternating current ("AC") or direct current ("DC"). AC power is generally
supplied by power companies directly to homes, offices and industrial sites
whereas DC power is supplied either through the use of batteries or by
converting AC power to DC power. Both AC motors and DC motors can be used
to power most applications; the determination is made through the
consideration of power source availability, speed variability requirements,
torque considerations, and noise constraints.
The power output of electric motors is measured in horsepower. Motors are
produced in power outputs that range from less than one horsepower up to
thousands of horsepower.
SubFractional Motors. Kinetek's subfractional horsepower products are
comprised of motors and gearmotors, which power applications up to 30 watts
(1/25 horsepower). These small, "fist-sized" AC and DC motors are used in
light duty applications such as snack and beverage vending machines,
refrigerator ice dispensers and photocopy machines.
Fractional/Integral Motors. Kinetek's fractional/integral horsepower
products are comprised of AC and DC motors and gearmotors having power
ranges from 1/8 to 100 horsepower. Primary end markets for these motors
include commercial floor equipment, commercial dishwashers, commercial
sewing machines, industrial ventilation equipment, golf carts, lift trucks
and elevators.
Gears and Gearboxes. Gears and gearboxes are mechanical components used to
transmit mechanical energy from one source to another source. They are
normally used to change the speed and torque characteristics of a power
source such as an electric motor. Gears and gearboxes come in various
configurations such as helical gears, bevel gears, worm gears, planetary
gearboxes, and right-angle gearboxes. For certain applications, an electric
motor and a gearbox are combined to create a gearmotor.
Kinetek's precision gear and gearbox products are produced in sizes of up
to 16 inches in diameter and in various customized configurations such as
pump, bevel, worm and helical gears. Primary end markets for these products
include original equipment manufacturers ("OEM's") of motors, commercial
floor care equipment, aerospace and food processing product equipment.
Electronic Motion Control Systems. Electronic motion control systems are
assemblies of electronic and electromechanical components that are
configured in such a manner that the systems have the capability to control
various commercial or industrial processes such as conveyor systems,
packaging systems, elevators, and automated assembly operations. The
components utilized in a motion control system are typically electric motor
drives (electronic controls that vary the speed and torque characteristics
of electric motors), programmable logic controls ("PLCs"), transformers,
capacitors, switches and software to configure and control the system. The
majority of the Company's motion control products control elevators and
automated conveyor systems used in automotive manufacturing.
-12-
Backlog
As of December 31, 2001 the Company had a backlog of approximately $80.2
million. The backlog is primarily due to motor sales at Merkle-Korff, a
Kinetek subsidiary, and printing and graphic component sales at Valmark.
Management believes that the Company will ship substantially all of its
backlog during 2002.
Seasonality
The Company's aggregate business has a certain degree of seasonality. JII
Promotions and Welcome Home's sales are somewhat stronger toward year-end
due to the nature of their products. Calendars at JII Promotions have an
annual cycle while home furnishings and accessories at Welcome Home 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 protects its confidential, proprietary information as trade
secrets. 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 Company's business, financial
condition, or results of operations.
The Company is also subject to the risk of adverse claims and litigation
alleging infringement of 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 on 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, 2001, the Company and its subsidiaries employed
approximately 6,500 people. Approximately 1,700 of these employees were
members of various labor unions. The Company believes that its
subsidiaries' relations with their respective employees are good.
-13-
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, emissions 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 costs 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 storm water and
release of hazardous chemicals. The Company believes it is in substantial
compliance with such laws and regulations.
The Company generally conducts an assessment of compliance and the
equivalent of a Phase I environmental survey on each acquisition candidate
prior to purchasing a 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 cleanup
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.
FIR, a wholly-owned subsidiary of Kinetek, 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.
Alma owns two properties in Alma, MI that are contaminated by chlorinated
solvent and oil contamination. One is on the Michigan List of Sites of
Environmental Contamination and has been the subject of investigation by
the Michigan Department of Environmental Quality ("DEQ") since 1982. By
1985, the former owner had cleaned out, closed and capped the lagoons,
which were the source of the contamination and in 1992, had installed a
groundwater remediation system. On January 5, 1999 the former owner
submitted to DEQ a proposed remedial action plan which recommends that the
groundwater treatment system continue to operate for up to thirty years, a
deed restriction that limits the use of the property to industrial use and
the adoption, by the City of Alma, of an ordinance which prohibits the
private use of groundwater for drinking water. DEQ has not yet approved or
denied the plan. The second property is contaminated with petroleum
constituents and chlorinated solvents. The scope and extent of the
contamination is being investigated. In connection with the acquisition of
these properties, the Company obtained indemnification and assurances from
the Seller that the Seller bore full responsibility for the completion of
the investigation and remediation of the historic contamination of the two
properties. DEQ has required the former owner to conduct additional
groundwater sampling and analysis to more completely delineate the vertical
and horizontal extent of the contamination at both locations. The former
owner anticipates completing the additional investigations and submitting
revised remedial action plans by the end of 2002.
-14-
In October 1997, the Tennessee Department of Environmental Control ("DEC")
requested information from DACCO about a contaminated spring adjacent to
its Cookeville, Tennessee property. The spring is reportedly contaminated
with materials which DACCO does not believe would have originated at the
facility, and DACCO therefore does not believe that it caused the
contamination or that it will be responsible for the clean-up. In September
1998, the DEC informed DACCO that the spring requires further
investigation, and that DACCO's Cookeville property meets the criteria for
designation as a state Superfund cleanup site. The DEC has subsequently
agreed to examine the potential liability of other companies in the area
before pursuing DACCO for cleanup costs. DEC conducted an additional
investigation and a preliminary site assessment in August 2000. The results
revealed very low levels of petroleum constituents, chlorinated solvents
and chloroform and DEC determined that no further action is required.
-15-
Item 2. Properties
The Company leases approximately 49,200 square feet of office space for its
headquarters in Illinois. The principal properties of each subsidiary of
the Company at December 31, 2001, and the location, the primary use, the
capacity, and ownership status thereof, are set forth in the table below.
COMPANY LOCATION USE SQUARE OWNED/
---------------- --- ------ ------
LEASE
Advanced DC
Syracuse, NY Manufacturing/Administration 49,600 Owned
Syracuse, NY Manufacturing 45,600 Leased
Carrollton, TX Manufacturing/Administration 29,000 Leased
Dewitt, NY Manufacturing 18,700 Leased
Eternoz, France Manufacturing/Administration 19,000 Leased
Putzbrunn, Germany Warehouse 1,200 Leased
Alma
Alma, MI Manufacturing/Warehouse 271,450 Owned
Alma, MI Manufacturing/Warehouse 101,900 Owned
Alma, MI Warehouse 44,060 Owned
Alma, MI Warehouse 33,400 Owned
Alma, MI Warehouse 9,600 Owned
Atco
Ferris, TX Manufacturing 93,100 Owned
Ennis, TX Manufacturing 24,100 Owned
Athens, TX Manufacturing 88,800 Leased
Beemak
Rancho Dominguez, CA Manufacturing/Administration 104,000 Leased
Cape Craftsmen
Elizabethtown, NC Manufacturing/Administration 113,000 Leased
Elizabethtown, NC Assembly 30,750 Leased
Wilmington, NC Administration 6,250 Leased
Clarkton, NC Assembly 48,000 Leased
Cho-Pat
Mt. Holly, NJ Manufacturing/Administration 7,500 Leased
Dacco
Cookeville, TN Manufacturing/Administration 355,000 Owned
Huntland, TN Manufacturing 72,000 Owned
Deflecto
Indianapolis, IN Manufacturing/Administration 182,600 Owned
Fishers, IN Manufacturing 134,400 Leased
St. Catherines, Ont. Manufacturing/Administration 50,000 Owned
St. Catherines, Ont. Assembly 78,000 Leased
Midvale, OH Manufacturing/Assembly 20,430 Owned
Pearland, TX Manufacturing 63,000 Leased
Newport, Wales Manufacturing 66,000 Owned
Aurora, Ontario Manufacturing/Administration 30,500 Leased
Ontario, CA Manufacturing 36,500 Leased
-16-
ED&C
Troy, MI Manufacturing/Administration 33,700 Leased
FIR
Casalmaggiore, Italy Manufacturing/Administration 100,000 Owned
Varano, Italy Manufacturing 30,000 Owned
Bedonia, Italy Manufacturing 8,000 Leased
Reggio Emilia, Italy Manufacturing/Distribution 30,000 Leased
Genova, Italy Research & Development/Manufacturing 33,000 Leased
Gear
Grand Rapids, MI Manufacturing/Administration 45,000 Owned
GramTel
South Bend, IN Sales/Administration/Other 9,000 Owned
Imperial
Akron, OH Manufacturing 106,000 Leased
Middleport, OH Manufacturing 85,000 Owned
Cuyahoga Falls, OH Manufacturing 58,000 Leased
Alamagordo, NM Manufacturing 40,200 Leased
Oakwood Village, OH Manufacturing/Administration 25,000 Leased
ISMI
Howell, MI Administration/Sales 2,700 Leased
JII Promotions
Columbus, OH Sales 11,000 Leased
Coshocton, OH Manufacturing/Administration 218,000 Owned
Red Oak, IA Manufacturing/Assembly/Administration 140,000 Owned
Merkle-Korff
Des Plaines, IL Design/Administration 38,000 Leased
Richland Center, WI Manufacturing 45,000 Leased
Darlington, WI Manufacturing 68,000 Leased
Des Plaines, IL Manufacturing/Administration 112,000 Leased
San Luis Potosi, Manufacturing 46,000 Leased
Mexico
Motion Control
Rancho Cordova, CA Manufacturing/Administration 80,600 Leased
New York, NY Sales 600 Leased
Online Environs
Boston, MA Design/Sales 4,700 Leased
Pamco
Des Plaines, IL Manufacturing/Administration 52,000 Owned
King of Prussia, PA Subleased 24,000 Leased
Sate-Lite
Niles, IL Manufacturing/Administration 117,835 Leased
Shunde, Guangdong Manufacturing/Administration 47,000 Leased
Seaboard
Fitchburg, MA Manufacturing/Administration 260,000 Owned
Miami, FL Manufacturing/Administration 90,000 Owned
Carlstadt, NJ Manufacturing 50,000 Leased
Valmark
Fremont, CA Manufacturing/Administration 46,700 Leased
Fremont, CA Manufacturing/Administration 14,830 Leased
Welcome Home
Wilmington, NC Administration/Warehouse 29,500 Leased
-17-
DACCO also owns or leases 41 distribution centers, which average 5,400
square feet in size. DACCO maintains five distribution centers in Florida,
four distribution centers in Tennessee, three distribution centers in
Illinois and Virginia, two distribution centers in each of Arizona,
Indiana, Michigan, Texas, Alabama, California, South Carolina and Ohio with
the remaining distribution centers located in Pennsylvania, Minnesota,
Missouri, Nebraska, West Virginia, Oklahoma, Nevada, Georgia, Maryland and
Kentucky.
Welcome Home leases 117 specialty retail stores in 36 states, with the
majority of store locations in outlet malls. Welcome Home maintains 16
stores in California, 9 stores in Florida, 6 stores in Texas, 5 stores in
North Carolina, Georgia, Missouri and New York, and 4 stores in each of
Michigan, Pennsylvania and Washington. The remaining stores are located
throughout the United States.
Merkle-Korff and Motion Control lease certain production and office space
from related parties. The Company believes that the terms of these leases
are comparable to those which would have been obtained by the Company had
the leases been entered into with an unaffiliated third party.
To the extent that any of the Company's existing leases expire in 2002, the
Company believes that its existing leased facilities are adequate for the
operations of the Company and its subsidiaries.
Item 3. LEGAL PROCEEDINGS
The Company's subsidiaries are parties to various legal actions arising in
the normal course of their businesses. 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 or results
of operations 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, 2001.
-18-
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
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.
(a) At December 31, 2001, there were 18 holders of record of the
Company's Common Stock.
(b) The Company has not declared any cash dividends on its Common
Stock since the Company's formation in May 1988. The Indenture,
dated as of July 25, 1997, by and between the Company and U.S.
Bank Trust National Association f/k/a First Bank National
Association, as Trustee, (the "Trustee") with respect to the 10
3/8% Senior Notes and the Indenture dated as of April 2, 1997, by
and between the Company and the Trustee with respect to the 11
3/4% Senior Subordinated Discount Debentures (collectively the
"Indentures") contain restrictions on the Company's ability to
declare or pay dividends on its capital stock. The Indentures each
prohibit the declaration or payment of any dividends or the making
of any distribution by the Company or any Restricted Subsidiary
(as defined in the Indentures) other than dividends or
distributions payable in stock of the Company or a Subsidiary and
other than dividends or distributions payable to the Company.
-19-
Item 6. SELECTED FINANCIAL DATA
The following table presents selected operating, balance sheet and other
data of the continuing operations of the Company and its subsidiaries as of
and for the five years ended December 31, 2001. The financial data have
been derived from the consolidated financial statements of the Company and
its subsidiaries. As a result of the 2000 transactions described in note 4
to the financial statements, the Jordan Telecommunications Products segment
and the Capita Technologies segment have been reported as discontinued
operations for financial reporting purposes in accordance with Accounting
Principles Board ("APB") Opinion No. 30, and their results have been
excluded from the information shown below.
Year Ended December 31,
-------------------------------------------------------------------
(Dollars in thousands)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Operating data: (1)
Net Sales............................. $722,823 $807,296 $766,655 $633,579 $450,102
Cost of sales, excluding
depreciation......................... 460,004 513,755 497,223 406,970 282,654
------- ------- ------- ------- -------
Gross profit, excluding
depreciation......................... 262,819 293,541 269,432 226,609 167,448
Selling, general and
administrative expense,
excluding depreciation............... 177,291 173,370 153,582 131,055 100,778
Operating income...................... 28,718 55,013 69,245 57,977 39,221
Interest expense...................... 91,344 92,009 87,058 70,184 66,947
Interest income....................... (791) (1,464) (1,083) (1,656) (2,227)
Loss from continuing
operations before income
taxes and minority interest(2)....... (64,001) (38,884) (6,603) (10,912) (7,382)
Loss from continuing
operations........................... (58,272) (36,046) (5,731) (15,081) (10,603)
Balance sheet data (at end
of period):
Cash and cash equivalents............. 26,050 21,713 19,973 14,967 43,512
Working capital....................... 159,127 154,599 161,570 144,474 124,941
Total assets.......................... 829,396 887,501 1,159,496 955,405 849,595
Long-term debt (less
current portion).................... 819,406 787,694 837,712 1,054,327 915,145
Net capital deficiency (3)............ (139,056) (82,010) (238,835) (208,144) (175,285)
- -----------------
(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) Loss from continuing operations before income taxes and minority
interest in 1997 includes a gain on the sale of a subsidiary of
$17,081, and the recording of equity in the loss of an investee of
$3,386. Loss from continuing operations before income taxes and
minority interest in 1999 includes a gain on the sale of a subsidiary
of $10,037. Loss from continuing operations before income taxes and
minority interest in 2000 includes a $14,636 write-down of goodwill
related to a subsidiary of Kinetek (see note 22 to the financial
statements) and a loss on the sale of a subsidiary of $2,798 (see note
14 to the financial statements).
(3) No cash dividends on the Company's Common Stock have been declared or
paid.
-20-
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 (loss) and
operating margin (as defined below) for each of the Company's business
groups for the fiscal years ended December 31, 2001, 2000, and 1999. This
discussion should be read in conjunction with the historical consolidated
financial statements and the related notes thereto contained elsewhere in
this Annual Report.
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Net Sales:
Specialty Printing & Labeling $112,123 $122,691 $117,678
Jordan Specialty Plastics 98,733 98,353 86,284
Jordan Auto Aftermarket 147,047 141,213 131,935
Kinetek 287,362 316,666 307,877
Consumer and Industrial Products 77,558 128,373 122,881
-------- -------- --------
Total $722,823 $807,296 $766,655
======== ======== ========
Operating Income (Loss) (1):
Specialty Printing & Labeling $ (984) $ 7,210 $7,638
Jordan Specialty Plastics 2,057 1,928 4,319
Jordan Auto Aftermarket 19,494 20,449 16,675
Kinetek 37,272 36,497 50,597
Consumer and Industrial Products (3,485) 3,071 7,867
------- ------- -------
Total $54,354 $69,155 $87,096
======= ======= =======
Operating Margin (2):
Specialty Printing & Labeling (0.9%) 5.9% 6.5%
Jordan Specialty Plastics 2.1% 2.0% 5.0%
Jordan Auto Aftermarket 13.3% 14.5% 12.6%
Kinetek 13.0% 11.5% 16.4%
Consumer and Industrial Products (4.5%) 2.4% 6.4%
Combined 7.5% 8.6% 11.4%
- ---------------------
(1) Before corporate overhead of $25,636, $14,142, and $17,851 for the years
ended December 31, 2001, 2000, and 1999, respectively.
(2) Operating margin is operating income (loss) divided by net sales.
-21-
Specialty Printing & Labeling. As of December 31, 2001, the Specialty
Printing & Labeling group consisted of JII Promotions, Valmark, Pamco, and
Seaboard.
2001 Compared to 2000. Net sales decreased $10.6 million or 8.6% for the
year ended December 31, 2001. Net sales decreased primarily due to lower
sales of outside specialties, calendars, and school annuals at JII
Promotions, $5.2 million, $1.5 million, and $0.3 million, respectively,
decreased sales of screen printing, rollstock, membrane switches and
shrouds at Valmark, $1.5 million, $1.4 million, $0.2 million and $0.2
million, respectively, and lower sales of labels at Pamco, $0.5 million.
Partially offsetting these decreases were increased sales of folding boxes
at Seaboard, $0.2 million. The decrease in outside specialties at JII
Promotions is due to large one-time orders in 2000, which were not repeated
in 2001. Valmark's sales decrease is due to lower sales to Apple Computer,
which experienced a downturn resulting from slowing demand for personal
computers. The increase in sales at Seaboard is primarily due to the
acquisition of Pioneer in July 2001.
Operating income decreased $8.2 million or 113.7% for the year ended
December 31, 2001. This decrease is primarily due to lower operating income
at JII Promotions, $3.1 million, Valmark, $3.3 million, and Pamco, $2.1
million, partially offset by increased operating income at Seaboard, $0.3
million. The lower operating income at JII Promotions and Valmark is due to
the sales decreases mentioned above, as well as higher accounts receivable
write-offs due to the slowing economy. The decrease at Pamco is due to
losses at the East Coast facility, which was closed in October 2001.
Operating margin decreased to (0.9%) as the result of these decreases.
2000 Compared to 1999. Net sales increased $5.0 million or 4.3% for the
year ended December 31, 2000. Net sales increased primarily due to
increased sales of outside specialties at JII Promotions, $1.2 million,
screen printing and membrane switches at Valmark, $1.6 million and $0.9
million, respectively, labels at Pamco, $1.2 million and packaging at
Seaboard, $0.4 million. Partially offsetting these increases was the
decrease in calendar sales at JII Promotions of $0.3 million. The decrease
in sales of calendars at JII Promotions is due to consolidation in the
banking and insurance industries. The increase in sales at Valmark is
primarily the result of Valmark's successful initiative to provide Apple
Computer with the product identification labels for its new computer
products.
Operating income decreased $0.4 million or 5.6% for the year ended December
31, 2000. The majority of the decrease was due to lower operating income at
Pamco, $0.8 million and Seaboard, $0.3 million, partially offset by
increases in operating income at JII Promotions, $0.1 million and Valmark,
$0.6 million. The increase in operating income at Valmark is due primarily
to the increase in sales to Apple as mentioned above. The decrease in
operating income at Pamco was due to start-up costs at its new facility in
Pennsylvania.
Jordan Specialty Plastics. As of December 31, 2001 the Jordan Specialty
Plastics group consisted of Sate-Lite, Beemak, and Deflecto.
2001 Compared to 2000. Net sales increased $0.4 million or 0.4% for the
year ended December 31, 2001. Net sales increased primarily due to higher
sales of hardware products at Deflecto, $5.2 million. Partially offsetting
this increase is lower sales of thermoplastic colorants at Sate-Lite, $0.9
million, decreased sales of plastic injection molded products and
-22-
fabricated products at Beemak, $1.5 million and $0.5 million, respectively,
and lower sales of office products at Deflecto, $1.9 million. The decrease
in sales at Beemak is due to lower advertising dollars being spent due to
the slowing economy, and competition from various plastic injection molding
companies. The lower sales of office products at Deflecto are primarily due
to the loss of wall pocket business at Office Depot during 2001.
Operating income increased $0.1 million or 6.7% for the year ended December
31, 2001. This increase is due to higher operating income at Sate-Lite and
Deflecto, $0.5 million each. Partially offsetting these increases is lower
operating income at Beemak, $0.7 million, and increased corporate expenses,
$0.2 million. The increase in operating income at Deflecto and Sate-Lite is
due to better overhead absorption, even at lower sales levels, cost cutting
instituted in late 2000, as well as the ramp up of Sate-Lite's China
facility. The decreased operating income at Beemak is primarily due to the
lower sales mentioned above as well as an increase in accounts receivable
write-offs due to the depressed economic climate. Operating margin remained
relatively consistent in 2001 primarily due to the better overhead
absorption mentioned above.
2000 Compared to 1999. Net sales increased $12.1 million or 14.0% for the
year ended December 31, 2000. The increase in net sales was primarily due
to increases in sales at Deflecto and Sate-Lite, $12.0 million and $1.5
million, respectively, partially offset by decreased sales at Beemak, $1.4
million. The increase in sales at Deflecto is due to the acquisitions of
Yearntree and IDL in December 1999 and June 2000, respectively, which added
$5.1 million and $4.6 million to 2000 sales, in addition to increased sales
of hardware products of $7.1 million. These increases were partially offset
by decreased sales in Deflecto's office product line of $4.8 million.
Sate-Lite's increase in sales resulted from the addition of the
Tilt-Bin(TM) product line which was transitioned from Beemak to Sate-Lite
in August 2000, $0.8 million, and increased sales at Midwest Color of $0.7
million. Beemak's sales decreased due to the transfer of the Tilt-Bin(TM)
product line to Sate-Lite. Beemak's sales from the Tilt-Bin(TM) product
line for the period from January to July 2000 amounted to $1.3 million as
compared to $2.7 million for the full year of 1999.
Operating income decreased $2.4 million or 55.4% for the year ended
December 31, 2000. Lower operating income was due to decreases at Beemak
and Deflecto, $0.9 million and $1.6 million, respectively, partially offset
by increases at Sate-Lite of $0.1 million. Decreased operating income at
Beemak is attributable to the Tilt-Bin(TM) transfer to Sate-Lite and a
shift of product mix to more fabricated product, which is a lower margin
product. Deflecto's decrease in operating income was due to a $1.5 million
management severance accrual in December. Increased operating income at
Sate-Lite was due to greater operating efficiencies and the increased sales
resulting from the Tilt-Bin(TM) addition to their product line.
Jordan Auto Aftermarket. As of December 31, 2001, the Jordan Auto
Aftermarket group consisted of DACCO, Alma, and Atco.
2001 Compared to 2000. Net sales increased $5.8 million or 4.1% for the
year ended December 31, 2001. This increase is primarily due to the
acquisition of Atco in July 2001. Atco manufactures accumulators, driers,
fittings, hose assemblies, and other air conditioning components for the
automotive and heavy truck industries. Atco contributed net sales of $5.8
million from its acquisition date through December 31, 2001. In addition,
net sales of soft parts increased at Dacco and sales of air compressors
increased at Alma. Partially offsetting these increases were lower sales of
remanufactured torque converters and drive train components at Alma and
-23-
DACCO. The increase in soft parts at DACCO is primarily due to the addition
of two new DACCO stores around the country while higher sales of air
compressors is due to the sales of new compressors through existing sales
channels. Sales of rebuilt torque converters decreased due to the
unseasonably warm winter experienced around the country.
Operating income decreased $1.0 million or 4.7% for the year ended December
31, 2001. The lower operating income is primarily due to decreased
operating income at both DACCO and Alma due to the lower sales levels
mentioned above. This decrease is partially offset by the contribution of
operating income of $0.7 million from Atco from its acquisition date
through December 31, 2001. Operating margin decreased to 13.3% due to the
decreases in sales.
2000 Compared to 1999. Net sales increased $9.3 million or 7.0% for the
year ended December 31, 2000. The increase was due to increased sales at
Alma of $11.9 million, including increased sales of drive train components
and air compressors, partially offset by a decrease in sales at DACCO. The
primary reason for the increase at Alma was due to a full year's results
being included in 2000 as compared with approximately nine months results
included in 1999. The decrease in DACCO's sales resulted from lower sales
of converters, other hard parts, and scrap sales, partially offset by
increased sales of soft parts.
Operating income increased $3.8 million or 22.6% for the year ended
December 31, 2000. Increases at Alma and DACCO were $2.6 million and $1.8
million, respectively, partially offset by increased corporate expenses of
$0.6 million. The major reason for the increase in operating income at Alma
is due to the increase in 2000 sales, as mentioned above. DACCO's operating
income increased as a result of focused cost cutting efforts aimed at
achieving production efficiencies and a price increase instituted in
October 2000.
Kinetek. As of December 31, 2001, the Motors and Gears group consisted of
Imperial, Gear, Merkle-Korff, FIR, ED&C, Motion Control, and Advanced DC.
2001 Compared to 2000. Net sales decreased $29.3 million or 9.3% for the
year ended December 31, 2001. Sales of the Company's motors segment
declined 11.6% in 2001 and sales of the controls segment declined 2.8%.
Sales in all of Kinetek's principal markets were down in 2001 primarily as
a result of the recessionary conditions experienced in the U.S. and Europe.
Subfractional motor sales decreased 17.4% in 2001 as compared with 2000,
driven by continued contraction of the bottle and can vending market in
addition to general economic weakness that hurt the division's appliance,
general vending, and other product lines. Sales of fractional/integral
motor products declined 7.5% from 2000 levels, mainly due to sharp declines
in demand for DC powered motors sold to material handling customers in the
last nine months of 2001. Sales to customers of floor care, elevator, and
other fractional/integral motor products in the U.S. and Europe were down
by modest rates in line with the general industrial economic recession. The
fall in sales of the controls segment was a result of lower sales in the
elevator modernization market caused by a flat market and a shift in
product mix toward demand for lower priced units.
Operating income increased $0.8 million or 2.1%, for the year ended
December 31, 2001. The slight increase in operating income was a result of
three key factors: 1) Amortization of goodwill and other intangible assets
was $15.3 million lower in 2001, due to the $14.6 million goodwill
impairment charge at ED&C in 2000. See Note 22 to the Company's
-24-
consolidated financial statements regarding the circumstances that
triggered the impairment and how the impairment was determined. 2)
Kinetek's gross profit declined $12.7 million or 10.9% as a result of the
sales declines discussed above. Gross margins fell from 36.9% of sales in
2000 to 36.2% in 2001 due to unfavorable manufacturing cost leverage caused
by the lower volume and to sales declines concentrated in Kinetek's higher
margin product lines. 3) Selling, general, and administrative expenses
increased $2.2 million, or 4.6% in 2001 compared with 2000 as a result of
costs incurred related to facility closures and Kinetek's continued focus
on research and development of new products and markets.
2000 Compared to 1999. Net sales increased $8.8 million or 2.9% for the
year ended December 31, 2000. The increase in net sales was primarily due
to increased sales of fractional/integral products, 3.4%. This growth is
the result of strong performance in the material handling, utility vehicle
and European markets (net of unfavorable Euro exchange rates). Sales of
electronic motion control systems increased by 15.2% as a result of
continued strength in the elevator modernization market. The increase in
sales was partially offset by decreases in subfractional motor sales, 6.4%,
due to weakness in the bottle and can vending market.
Operating income decreased $14.1 million or 27.9% for the year ended
December 31, 2000. The decrease was primarily the result of the $14.6
million goodwill impairment charge at ED&C (see note 22 to the financial
statements). Excluding the impact of the goodwill impairment, operating
income would have increased 1.1%, primarily as a result in the increased
sales and gross margin. The improvement to gross margin was driven by the
company's continued product design changes, manufacturing process
improvements, and outsourcing and insourcing of component purchases.
Offsets to the gross margin improvement include increased selling, general
and administrative expenses.
Consumer and Industrial Products. As of December 31, 2001, the Consumer and
Industrial Products group consisted of Cape Craftsmen, Welcome Home,
Cho-Pat, Online Environs, Flavorsource, ISMI and GramTel.
2001 Compared to 2000. Net sales decreased $50.8 million or 39.6% for the
year ended December 31, 2001. This decrease is primarily due to the
divestiture of Riverside in February 2001, $50.7 million. In addition,
sales decreased due to lower sales of home accessories at Cape Craftsmen,
$3.7 million, decreased retail sales at Welcome Home, $0.9 million, lower
sales of orthopedic supports at Cho-Pat, $0.3 million, and decreased sales
of web site development services at Online Environs, $1.9 million.
Partially offsetting these decreases are higher sales of internet services
at ISMI, $1.7 million, and increased sales of flavors at Flavorsource, $5.0
million. The decrease in sales at Cape Craftsmen, a wholesaler of home
accessories and gift items, and Welcome Home, a retail store chain, are
primarily due to the drop in overall retail sales due to the current
economic slowdown and the September 11th tragedy. Online Environs has seen
a drastic drop in demand for web site development and modification, which
is also consistent with the negative economic climate and lower information
technology spending. The increase in sales at ISMI and Flavorsource are
primarily due to the acquisitions of those subsidiaries in October 2000.
-25-
Operating income decreased $6.6 million or 213.5% for the year ended
December 31, 2001. This decrease is due to lower operating income at Cape
Craftsmen, $1.3 million, Welcome Home, $0.5 million, Cho-Pat, $0.3 million,
Online Environs, $1.6 million, GramTel, $1.4 million, and ISMI, $0.3
million. In addition, operating income decreased $1.4 million due to the
divestiture of Riverside in February 2001. Partially offsetting these
decreases is higher operating income at Flavorsource, $0.2 million. The
decreases in operating income are due to the decreases in sales mentioned
previously, mostly due to the negative economic climate, as well as a
decrease in gross profit margin due to competition, and the negative impact
on absorbed overhead resulting from lower sales. These decreases resulted
in operating margin decreasing to (4.5%).
2000 Compared to 1999. Net sales increased $5.5 million or 4.5% for the
year ended December 31, 2000. Net sales increased primarily due to higher
sales at Welcome Home, $19.1 million, sales to third parties at Cape of
$1.9 million, and sales of knee straps and related products at Cho-Pat,
$0.2 million. In addition, ISMI, Online Environs, GramTel and Flavorsource
were added to the group in 2000, increasing net sales by $0.5 million, $3.1
million, $0.3 million and $0.7 million, respectively. The increase in sales
was offset by decreases in Riverside sales of $2.0 million, and the sale of
Parsons and Pex, which had 1999 net sales of $10.8 million and $1.2 million
respectively. Total consolidated sales at Cape decreased $6.3 million due
to a twelve month elimination of Cape's intercompany sales to Welcome Home
in the current year versus six months in 1999 due to Welcome Home's
reconsolidation in mid 1999. Welcome Home's sales increase was the result
of being consolidated for a full year in 2000 versus six months in 1999.
Operating income decreased $4.8 million or 61.0% for the year ended
December 31, 2000. The decrease in operating income is primarily the result
of lower operating income at Welcome Home, $5.5 million, resulting from
their reconsolidation. Due to the seasonality of Welcome Home's business,
the majority of its operating income is recorded in the fourth quarter,
therefore, because of the timing of Welcome Home's reconsolidation, its
typical slow season was not included in the 1999 consolidated results. Also
contributing to the decrease in operating income were the dispositions of
Parsons and Pex, which contributed operating income in 1999 of $2.3 million
and $0.4 million respectively. Offsetting the decrease in operating income
were increases at Cape, $1.1 million and Riverside, $2.2 million. In
addition, Cho-Pat recorded increased operating income of $0.1 million.
Consolidated Operating Results. (See Consolidated Statements of Operations).
2001 Compared to 2000. Net sales decreased $84.5 million or 10.5% for the
year ended December 31, 2001. This decrease was partially attributed to the
divestiture of Riverside in February 2001. Riverside contributed net sales
of $54.8 million in 2000 compared to $4.1 million in 2001. In addition, net
sales decreased due to lower sales of outside specialties and calendars at
JII Promotions, decreased sales of screen printing and rollstock at
Valmark, lower sales of labels at Pamco, decreased sales of thermoplastic
colorants at Sate-Lite, lower sales of plastic injection molded product at
Beemak, decreased sales of office products at Deflecto, decreased sales of
both motors and controls at Kinetek, lower sales of home accessories at
Cape Craftsmen, and decreased sales of web site development services at
Online Environs. Partially offsetting these decreases were sales due to the
acquisitions of Pioneer in the Specialty Printing and Labeling group and
Atco in the Jordan Auto Aftermarket group, both of which occurred in 2001,
and ISMI and Flavorsource in the Consumer and Industrial Products group,
both of which occurred in late 2000. In addition, net sales of hardware
products increased at Deflecto and net sales of soft parts and air
compressors increased at DACCO and Alma.
-26-
Operating income decreased $26.3 million or 47.8% for the year ended
December 31, 2001. This decrease was partially due to the sale of
Riverside, as mentioned above. In addition, operating income declined due
to losses at the East Coast facility of Pamco, accounts receivable
write-offs at JII Promotions and Beemak, lower gross margin at Kinetek due
to unfavorable product mix, increased operating expenses at Kinetek due to
facility closures, and decreased retail sales stemming from the negative
economic climate which greatly impacted Cape Craftsmen and Welcome Home.
Partially offsetting these decreases is better overhead absorption at
Deflecto and Sate-Lite due to cost cutting measures implemented in late
2000 and the ramp up of Sate-Lite's China facility. In addition, operating
income was positively impacted by the acquisitions of Pioneer, Atco, ISMI
and Flavorsource, as mentioned above, and the reduction in amortization
expense at Kinetek. Kinetek's operating income was negatively impacted in
2000 by $14.6 million due to the goodwill impairment charge at ED&C.
2000 Compared to 1999. Net sales increased $40.6 million or 5.3% for the
year ended December 31, 2000 as compared to 1999. The increase in sales
partially resulted from Welcome Home's inclusion in the consolidated
financial statements for the full year due to its reconsolidation in mid
1999, $19.1 million, and the Company's acquisitions of Yearntree and
Rolite, $5.1 million and $4.6 million, respectively. In addition, increased
sales of outside specialties at JII Promotions, greater sales of membrane
switches and screen printing at Valmark, increased sales of drive trains
and air compressors at Alma, higher sales of fractional/integral products
and electronic motion control systems in the Motors and Gears group and an
increase of sales to third parties at Cape also contributed to higher 2000
sales. Sales also increased due to the acquisitions of ISMI, GramTel,
Online Environs and Flavorsource in the Consumer and Industrial Products
group. Offsetting these increases were lower calendar sales at JII
Promotions, decreased sales in Deflecto's office products division, lower
converter sales at DACCO, a decrease in sub fractional motor sales in the
Motors and Gears group, and the sale of Parsons and Pex in 1999.
Operating income decreased $14.2 million or 20.6% for the year ended
December 31, 2000. The decrease in operating income was due to a $14.6
million goodwill impairment charge in the Motors and Gears group relating
to ED&C. SPL had lower operating income due to Pamco's new operations in
Pennsylvania. In addition, the sales of Parsons and Pex contributed to the
decrease. Partially offsetting these decreases was increased operating
income in the Auto Aftermarket group for both DACCO and Alma due to DACCO's
price increase and cost cutting efforts and Alma's increase in sales as
mentioned above. Operating income for SPL increased slightly due to
Valmark's increased sales to Apple.
Interest expense stayed relatively consistent between 2001 and 2000.
Income taxes - See note 13 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
The Company had approximately $159.1 million of working capital from
continuing operations at the end of 2001 compared to approximately $154.6
million at the end of 2000.
-27-
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 12 to the Consolidated Financial Statements.
Management expects modest growth in net sales and operating income in
2002. Capital spending levels in 2002 are anticipated to be consistent with
2001 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 charge obligations for at least the next 12
months.
The Company is, and expects to continue to be, in compliance with the
provisions of its Indentures.
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,
2001 was $30.3 million, compared to $4.3 million provided by operating
activities during the same period in 2000. The increase is primarily
attributed to decreased accounts receivable balances and increased
non-current liabilities.
Net cash used in investing activities for year ended December 31, 2001 was
$7.6 million, compared to $61.4 million provided by investing activities
during the same period in 2000. The decrease is due primarily to the
proceeds from the sale of discontinued operations in the prior year,
partially offset by decreased spending on acquisitions in the current year.
Net cash used in financing activities for the year ended December 31, 2001
was $17.6 million, compared to $59.6 million used in financing activities
during the same period in 2000. The decrease is primarily due to lower
repayments on the Company's revolving credit facilities of $52.3 million,
partially offset by the payment of financing costs of $6.0 million in 2001.
The Company and its subsidiaries are party to two credit agreements under
which the Company is able to borrow up to $160 million, based on the value
of certain assets, to fund acquisitions, provide working capital and for
other general corporate purposes. The credit agreements mature in 2005 and
2006. The agreements are secured by a first priority security interest in
substantially all of the Company's assets. As of December 31, 2001, the
Company had approximately $76.7 million of available funds under these
arrangements. See note 12 to the financial statements for additional
details.
-28-
The Company may, from time to time, use cash, including borrowings under
its credit agreements, to purchase either its 11 3/4% Senior Subordinated
Discount Debentures due 2009 or its 10 3/8% Senior Notes due 2007, or any
combination thereof, through open market purchases, privately negotiated
purchases or exchanges, tender offers, redemptions or otherwise, and may,
from time to time, pursue various refinancing or financial restructurings,
including pursuant to current solicitations and waivers involving those
securities, in each case, without public announcement or prior notice to
the holders thereof, and if initiated or commenced, such purchases or
offers to purchase may be discontinued at any time.
If the Company's EBITDA and cash flow continue through 2002 at the levels
experienced in the fourth quarter and year ended December 31, 2001, the
Company would barely generate sufficient cash to cover its interest payment
obligations in respect of its bank debt, Senior Notes and Senior
Subordinated Discount Notes (which cease to accrue, and become cash-pay
obligations in the fourth quarter of 2002). This assumes no further
general, economic or industry declines, which may necessitate the Company
to further reduce capital expenditures and acquisitions, and no assurances
can be given that, at the end of 2002, the Company will have sufficient
financial resources to pay its cash interest obligations.
Foreign Currency Impact
The Company is exposed to fluctuations in foreign currency exchange rates.
Decreases in the value of foreign currencies relative to the U.S. dollar
have not resulted in significant losses from foreign currency translation.
However, there can be no assurance that foreign currency fluctuations in
the future would not have an adverse effect on the Company's business,
financial condition or results of operations.
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.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to the
consolidated financial statements included in Item 8 of this Form 10-K. Our
discussion and analysis of financial condition and results from operations
are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of the financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses. On an on-going basis, we evaluate the
estimates that we have made. These estimates have been based upon
historical experience and on various other assumptions that we believe to
be reasonable under the circumstances. However, actual results may differ
from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the more
significant judgments and estimates we have used in the preparation of the
consolidated financial statements.
Goodwill and Other Intangible Assets
The valuation and classification of goodwill and other intangible assets
and the assignment of useful amortization lives involves significant
judgments and the use of estimates. The testing of these intangibles for
impairment also requires significant use of judgment and assumptions.
We assess the impairment of goodwill and other identifiable intangibles
whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Some factors we consider important which
could trigger an impairment review include: (1) significant
-29-
underperformance relative to expected historical or projected future
operating results, (2) significant changes in the manner of our use of the
acquired assets or the strategy for our overall business, and (3)
significant negative industry or economic trends. When we determine that
the carrying value of goodwill and other identified intangibles may not be
recoverable based upon the existence of one or more indicators of
impairment, we measure any impairment based on the undiscounted forecasted
cash flows of the business to which the goodwill and other identified
intangibles relate. During 2000, the Company recorded a goodwill impairment
charge of $14.6 million related to ED&C, a Kinetek subsidiary. See Note 22
to the consolidated financial statements.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," on
January 1, 2002 we will cease to amortize goodwill arising from
acquisitions we completed prior to July 1, 2001. In lieu of amortization,
we are required to perform an initial impairment review of our goodwill in
2002 and an annual impairment review thereafter. If we determine through
the impairment review process that goodwill has been impaired, we must
record the impairment charge in our statement of operations.
Investments in Affiliates
Periodically, we make strategic investments in debt and/or equity
securities of affiliated companies. See Note 8 to the consolidated
financial statements for details of these investments. These debt and/or
equity securities are not currently publicly traded on any major exchange.
The cost method of accounting is used to account for these investments as
we hold a non-material ownership percentage. Each quarter, we assess the
value of these investments by using information acquired from industry
trends, the management of these companies and other external sources. Based
on the information acquired, we record an impairment charge when we believe
an investment has experienced a decline in value that is other than
temporary. Future adverse changes in market conditions or poor operating
results of underlying investments could result in losses or an inability to
recover the carrying value of the investments that may not be reflected in
an investment's current carrying value, thereby possibly requiring an
impairment charge in the future.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are estimated at the individual operating
companies based on estimates of losses on customer receivable balances.
Estimates are developed by using standard quantitative measures based on
historical losses, adjusting for current economic conditions and, in some
cases, evaluating specific customer accounts for risk of loss. The
establishment of reserves requires the use of judgment and assumptions
regarding the potential for losses on receivable balances. Though we
consider our allowance for doubtful accounts balance to be adequate and
proper, changes in economic conditions in specific markets in which we
operate could have a material effect on reserve balances required.
Excess and Obsolete Inventory
We record reserves for excess and obsolete inventory equal to the
difference between the cost of inventory and its estimated market value
using assumptions about future product life-cycles, product demand and
market conditions. If actual product life-cycles, product demand and market
conditions are less favorable than those projected by management,
additional inventory reserves may be required.
-30-
Income Taxes
As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes in each of the jurisdictions
in which we operate. This process involves estimating our actual current
tax expense together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are
included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future
taxable income and to the extent we believe that recovery is not likely, we
must establish a valuation allowance. Increases (decreases) in the
valuation allowance are included as an increase (decrease) to our
consolidated income tax provision in the statement of operations.
Contractual Obligations
The following table summarizes our contractual obligations as of December
31, 2001 (in thousands):
Payments by Period
-----------------------------------------------------------------
Less than 1-3 4-5 After 5
Total 1 year years years years
-----------------------------------------------------------------
Long-term debt and
capital leases $849,373 $17,137 $26,494 $307,282 $498,460
Operating leases 52,664 12,874 17,888 10,350 11,552
-----------------------------------------------------------------
Total $902,037 $30,011 $44,382 $317,632 $510,012
-----------------------------------------------------------------
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's debt obligations are primarily fixed-rate in nature and, as
such, are not sensitive to changes in interest rates. At December 31, 2001,
the Company had $30.4 million of variable rate debt outstanding. A one
percentage point increase in interest rates would increase the annual
amount of interest paid by approximately $0.3 million. The Company does not
believe that its market risk financial instruments on December 31, 2001
would have a material effect on future operations or cash flows.
The Company is exposed to market risk from changes in foreign currency
exchange rates, including fluctuations in the functional currency of
foreign operations. The functional currency of operations outside the
United States is the respective local currency. Foreign currency
translation effects are included in accumulated other comprehensive income
in shareholder's equity.
-31-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
Reports of Independent Auditors................................... 33
Consolidated Balance Sheets as of
December 31, 2001 and 2000........................................ 37
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000, and 1999........................... 38
Consolidated Statements of Changes in Shareholder's
Equity (Net Capital Deficiency) for the years ended
December 31, 2001, 2000 and 1999.................................. 39
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000, and 1999 .......................... 40
Notes to Consolidated Financial Statements........................ 42
-32-
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, 2001 and 2000 and the related
consolidated statements of operations, shareholder's equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 2001. 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
schedule based on our audits. We did not audit the financial statements of
certain subsidiaries whose statements reflect net sales constituting 21%
for the year ended December 31, 1999, of the related consolidated total.
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 auditing standards generally
accepted in the United States. 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, 2001 and 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in
the United States. 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.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 19, 2002
-33-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholder of Alma Products I, Inc.:
We have audited the balance sheet of ALMA PRODUCTS I, INC. (a Michigan
corporation) as of December 31, 1999, and the related statements of
operations, shareholder's equity and cash flows for the period from
March 22, 1999 to December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 audit provides 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 Alma Products I, Inc.
as of December 31, 1999, and the results of its operations and its cash
flows for the period from March 22, 1999 to December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan
February 18, 2000
-34-
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 and a wholly-owned subsidiary of Kinetek, Inc.
formerly known as Motors and Gears, Inc.) as of December 31, 1999, and the
related statements of income, shareholder's equity and cash flows for the
year then ended (not 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 auditing standards generally
accepted in the United States. 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 audit provides 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 Motion Control
Engineering, Inc. as of December 31, 1999 and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Sacramento, California
January 21, 2000
-35-
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors
FIR Group Holding Italia S.p.A.
We have audited the consolidated balance sheet of FIR Group
Holding Italia S.p.A. (a wholly-owned subsidiary of Kinetek, Inc., formerly
Motors and Gears, Inc.) as of October 31, 1999, and the related
consolidated statements of income, shareholders' equity and cash flows for
the year then ended. 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
FIR Group Holding Italia S.p.A. as of October 31, 1999, and the results of
its operations and its cash flow for the year then ended, in conformity
with generally accepted accounting principles.
/s/ PRICEWATERHOUSECOOPERS S.p.A.
Bologna, 26 January 2000
-36-
JORDAN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
----------------------
2001 2000
---- ----
Current assets:
Cash and cash equivalents $26,050 $21,713
Accounts receivable, net of allowance of
$4,497 and $4,384 in 2001 and 2000, respectively 109,384 128,265
Inventories 122,528 139,046
Income tax receivable 12,245 -
Deferred income taxes 8,100 9,001
Prepaid expenses and other current assets 19,030 27,455
------- -------
Total current assets 297,337 325,480
Property, plant and equipment, net 99,602 107,526
Investments in and advances to affiliates 36,443 41,402
Goodwill, net 358,970 371,487
Deferred income taxes - 2,851
Other assets 37,044 38,755
------- -------
Total Assets $829,396 $887,501
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (NET CAPITAL DEFICIENCY)
- -------------------------------------------------------------
Current liabilities:
Accounts payable $47,848 $68,236
Accrued liabilities 71,372 65,108
Advance deposits 1,853 1,937
Current portion of long-term debt 17,137 35,600
------ ------
Total current liabilities 138,210 170,881
Long-term debt 819,406 787,694
Other non-current liabilities 8,668 8,528
Minority interest 4 410
Preferred stock 2,164 1,998
Shareholder's equity (net capital deficiency):
Common stock $.01 par value: authorized - 100,000
shares; issued and outstanding - 98,501 shares 1 1
Additional paid-in capital 2,116 2,116
Accumulated other comprehensive loss (15,249) (16,641)
Accumulated deficit (125,924) (67,486)
--------- --------
Total shareholder's equity (net capital
deficiency) (139,056) (82,010)
--------- --------
Total Liabilities and Shareholder's Equity (Net
Capital Deficiency) $829,396 $887,501
======== =========
See accompanying notes.
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JORDAN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Net sales $722,823 $807,296 $766,655
Cost of sales, excluding depreciation 460,004 513,755 497,223
Selling, general, and administrative
expense, excluding depreciation 177,291 173,370 153,582
Depreciation 23,387 24,070 20,647
Amortization of goodwill and other
intangibles 15,709 31,108 15,504
Management fees and other 17,714 9,980 10,454
------- ------- -------
Operating income 28,718 55,013 69,245
Other income and expenses:
Interest expense 91,344 92,009 87,058
Interest income (791) (1,464) (1,083)
Loss (gain) on sale of subsidiaries - 2,798 (10,037)
Other 2,166 554 (90)
------- ------- -------
92,719 93,897 75,848
------- ------- -------
Loss from continuing operations before
income taxes and minority interest (64,001) (38,884) (6,603)
Income tax benefit (5,323) (3,191) (952)
------- ------- ------
Loss from continuing operations before
minority interest (58,678) (35,693) (5,651)
Minority interest (406) 353 80
------- ------- -------
Loss from continuing operations (58,272) (36,046) (5,731)
Discontinued operations, net of taxes
(Note 4) - 203,924 (12,848)
------- ------- -------
Net (loss) income $(58,272) $167,878 $(18,579)
======== ======== ========
See accompanying notes.
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