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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, 2002 Commission File Number 33-24317
JORDAN INDUSTRIES, INC.
(Exact name of registrant as specified in charter)
Illinois 36-3598114
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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None N/A
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. X .
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes --- No X . ---
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
March 31, 2003:98,501.0004.
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 22 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., a leading manufacturer of electric
motors, gears, and motion control systems.
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, 2002.
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Jordan Industries, Inc.
$720.0 Million of Net Sales (1)
SPECIALTY PRINTING AND LABELING - JII Promotions
$104.6 Million of Net Sales - Pamco
- Valmark
- Seaboard
CONSUMER AND INDUSTRIAL PRODUCTS - Cape Craftsmen
$69.0 Million of Net Sales - Welcome Home
- Cho-Pat
- GramTel
JORDAN SPECIALTY PLASTICS (2) - Beemak
$108.0 Million of Net Sales - Sate-Lite
- Deflecto
JORDAN AUTO AFTERMARKET (2) - Dacco
$155.7 Million of Net Sales - Alma
- Atco
Kinetek - Imperial
$282.7 Million of Net Sales - Gear
- Merkle-Korff
- FIR
- ED&C
- Motion Control
- Advanced D.C.
- DeSheng
- ---------------------------
(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. See note 5 to the financial statements.
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The Company's operations were conducted through the following business units as
of December 31, 2002:
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, 2002, the Specialty
Printing and Labeling group generated net sales of $104.6 million. Each of the
Specialty Printing and Labeling subsidiaries is discussed below:
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 2002 were $52.3 million. Approximately 61%
of JII Promotions' 2002 net sales were derived from distributing a broad variety
of corporate recognition, 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 25% of JII Promotions' 2002 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 14% of 2002 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 1,000 suppliers. Calendars and specialty advertising products are sold
through a 575 person sales force, most of whom 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
lines include graphic panel overlays, membrane switch control panels, and
adhesive-backed labels. Approximately 40% of Valmark's 2002 net sales of $13.7
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million were derived from the sales of membrane switch control panels, 42% from
graphic panel overlays, and 18% from labels and other products.
Valmark sells to four primary markets: personal computers, general electronics,
turn-key services, and medical instrumentation. During 2002, Valmark's specialty
screen print products were subject to increased foreign price competition,
primarily in the personal computers and telecommunications markets. Valmark does
operate relatively free of foreign competition in its other product markets, due
primarily to the high level of communication and long history with its
customers, the relatively short time frame required to produce orders of
non-membrane switch products, and the significant engineering and product
development investments required to secure and manufacture orders for its
membrane switch control panel customers.
Valmark is able to provide OEMs with a broader range of products than many of
its competitors. Valmark's markets are very competitive in terms of price and
accordingly, Valmark's advantage over its competitors is derived from its
diverse product line and excellent quality ratings.
Pamco. Pamco, which was founded in 1953 and purchased by the Company in 1994, is
a manufacturer and distributor of a wide variety of printed tapes and labels.
Pamco offers a range of products from simple one and two-color labels, such as
basic bar 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 2002. The remaining 7% of sales were
purchased printed products and included business cards and stationery.
Pamco's products are marketed by a team of eight sales representatives who
procure new accounts and service existing accounts. Existing accounts are
serviced by eight customer service representatives and two internal salespeople.
Pamco's customers represent several different industries with the five largest
customers accounting for approximately 18% of 2002 net sales of $18.3 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 38% of Seaboard's 2002 net sales of $20.3
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.
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.
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Consumer and Industrial Products
Consumer and Industrial Products serves many product segments. It manufactures
and imports gift items; is a specialty retailer of gifts and decorative home
furnishings; manufactures orthopedic supports and pain reducing medical devices;
and provides data storage services at a Secure Network Access Center. For the
year ended December 31, 2002, the Consumer and Industrial Products subsidiaries
generated combined net sales of $69.0 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 an importer of gifts, wooden furniture, framed art and other
accessories. Cape Craftsmen is located in North Carolina and imports from the
Far East. Cape Craftsmen sells its products through three in-house salespeople
and 200 independent sales representatives. Net sales in 2002 were $12.7 million,
excluding sales to Welcome Home, a related party, of $17.2 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
118 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 $51.9 million in the year ended December
31, 2002.
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 20
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 Cho-Pat's Original Knee
Strap, designed to reduce the pain from patellar tendonitis. Cho-Pat
manufactures most of its products in-house. Cho-Pat sells its products to
medical professionals, all branches of the military, college, high school and
professional team coaches and trainers, medical product distributors and
wholesalers, retail drug and sporting goods stores, and direct to individuals
domestically and internationally. Cho-Pat had net sales of $1.4 million in 2002.
GramTel. GramTel Communications, Inc. was started by the Company in December
2000. GramTel is a data storage and information technology disaster recovery
company. It owns and operates a state-of-the-art technology center that houses
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business-critical computer systems, applications, and data. Their facility
provides alternate sites for companies to continue operations in the event of a
disaster or emergency event. GramTel leverages its infrastructure and technical
staff to support business's data storage needs at a fraction of the cost of
performing these tasks in-house. It provides the facilities, technical personnel
and network connectivity to keep business's critical operations available 24
hours a day. GramTel had net sales of $1.2 million in the year ended December
31, 2002.
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, 2002,
the Jordan Specialty Plastics subsidiaries generated combined net sales of
$108.0 million. Each of the Jordan Specialty Plastics subsidiaries is discussed
below:
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 3,000 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
2002 were $5.5 million.
Beemak's products are both injection-molded and custom fabricated. 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, 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.
The display holder industry is very fragmented, consisting of a few other known
holder and display firms and regionally-based sheet fabrication shops.
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 accounted for approximately 35% of
Sate-Lite's net sales in 2002. Sales of emergency warning triangles and
specialty reflectors and lenses to commercial truck customers accounted for
approximately 21% of net sales in 2002. Sales of colorants to the thermoplastics
industry accounted for approximately 24% of net sales in 2002. Sales of storage
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containers accounted for approximately 11% of net sales. The remaining 9% of
2002 net sales were derived from other miscellaneous plastic injection-molded
products. Sate-Lite's net sales for 2002 were $14.0 million, excluding sales to
Deflecto, a related party, of $0.9 million.
Sate-Lite's bicycle and truck/auto products are sold directly to a number of
OEMs. The three largest OEM customers are Tandem (China), Truck Light and Ideal,
which account for a total of approximately 15% of Sate-Lite's net sales in 2002.
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 2002,
Sate-Lite's ten largest customers accounted for approximately 41% of net sales.
Sate-Lite's bicycle products are marketed to bicycle OEMs 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 30% of its total 2002 net sales. 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, 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 colorants market.
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 65% of Deflecto's net
sales in 2002, 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 35% of net sales in 2002 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 2002 were $88.5 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
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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.
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 OEMs. For the year
ended December 31, 2002, the Jordan Auto Aftermarket subsidiaries generated
combined net sales of $155.7 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, transmission
repair shops and mechanics. Dacco's independent sales representatives sell
nationwide to independent warehouse distributors and transmission repair shops.
Dacco also operates 42 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 2002, no single customer accounted for more than 3% of
Dacco's net sales. Net sales were $62.7 million during the year ended December
31, 2002.
The domestic market for Dacco's hard products is fragmented and Dacco's
competitors consist of a number of small regional and local re-builders, as well
as several larger national suppliers. Dacco believes that it competes strongly
against these re-builders by offering a broader product line, quality products,
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and competitive 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 at least one of its competitors is larger than Dacco in this
area. Dacco competes in the soft products market on the basis of its competitive
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 OEMs, as well as numerous direct aftermarket customers.
Torque converters and clutch and disc assemblies are also referred to as drive
trains. Net sales were $78.3 million during the year ended December 31, 2002.
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. Alma also
supplies air conditioning compressors to retailers, independent warehouse
distributors, and air conditioning repair specialists. 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.
Alma competes based on quality, price, and customer service. The market for OE
service products is very demanding, requiring stringent quality standards,
therefore providing some barriers to entry to smaller, less capable competitors.
Through the years, Alma has been recognized by its customers for its high levels
of service and quality.
Atco. Atco Products, Inc. was founded in 1968 and was acquired by the Company in
July 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 their ISO-9000 certified plant in Ennis,
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Texas. Atco has led the way with innovations such as the patented portable
hand-operated model 3700 crimping tool. Net sales were $14.7 million during the
year ended December 31, 2002.
Kinetek
Kinetek is a 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, Advanced D.C. and De Sheng;
and electronic motion control systems ("controls") which includes the
subsidiaries Electrical Design & Control and Motion Control Engineering. For the
year ended December 31, 2002 Kinetek generated net sales of $282.7 million.
Kinetek has established itself as a reliable niche manufacturer of high-quality,
economical, custom electric motors, gearmotors, gears and electronic motion
control systems used in a wide variety of applications including vending
machines, refrigerator ice dispensers, commercial dishwashers, commercial floor
care equipment, golf carts, lift trucks, automated material handling systems and
elevators. Kinetek's products are custom designed to meet specific application
requirements. Less than 5% of Kinetek's products are sold as stock products.
Kinetek offers a wide variety of options to provide greater flexibility in its
custom designs. These options include thermal protectors, special mounting
brackets, custom leads and terminals, single or double shaft extensions, brakes,
cooling fans, special heavy gearing, custom shaft machining and custom software
solutions. Kinetek also provides value-added assembly work, incorporating some
of the above options into its final motor and control products. All of the
custom-tailored motors, gearmotors and control systems are designed for long
life, quiet operation, and superior performance.
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
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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 OEMs 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 Kinetek's motion control products
control elevators and automated conveyor systems used in automotive
manufacturing.
Backlog
As of December 31, 2002 the Company had a backlog of approximately $79.1
million. The backlog is primarily due to motor sales at Merkle-Korff, a Kinetek
subsidiary, printing and graphic component sales at Valmark, folding boxes at
Seaboard and air conditioning assemblies and parts at Atco. Management believes
that the Company will ship substantially all of its backlog during 2003.
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.
12
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, 2002, the Company and its subsidiaries employed approximately
7,200 people. Approximately 2,400 of these employees were members of various
labor unions. The Company believes that its subsidiaries' relations with their
respective employees are good.
Environmental Regulations
The Company is subject to numerous U.S. and foreign, federal, state, provincial
and local laws and regulations relating to the storage, handling, 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
13
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 held off approving the plan until the former owner delineates the horizontal
and vertical extent of contamination to the agency's satisfaction. In November
2002, the former owner submitted a revised sampling plan and is waiting for DEQ
approval to proceed. The second property is contaminated with petroleum
constituents and chlorinated solvents and the former owner, under the
supervision of DEQ is investigating the scope and extent of the contamination.
The former owner also submitted a remedial action plan to DEQ in November 2002.
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.
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
14
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.
In 1990 Dacco removed two underground storage tanks ("UST") from its Cookeville,
Tennessee property which had stored waste transmission oil. Groundwater
monitoring wells (5) revealed limited levels of petroleum contaminants. Until
May 2002, Dacco, under the direction of DEC, had periodically monitored for the
presence of petroleum in the wells. The costs of the investigation and
monitoring had been relatively low and had been reimbursed by the DEC
Underground Storage Tank Fund ("UST Fund"). In May 2002, because of the
lingering presence of some petroleum in one of the wells, DEC directed the
installation of four additional groundwater monitoring wells in the vicinity of
the former USTs. In June, a substantial quantity of petroleum product was found
in one of the wells. In July 2002, with DEC's permission, Dacco installed a
petroleum recovery system in the well and, at DEC's direction, Dacco installed
an additional ten groundwater monitoring wells. All monitoring wells were
sampled and analyzed in September and December 2002. This sampling revealed that
the USTs removed in 1990 were not the likely source of the petroleum product. In
February 2003, DEC, relying on the September and December 2002 sampling results,
reassigned the site from the list of UST Fund eligible sites to the Solid Waste
Management Program. Dacco has instructed its environmental consultants to define
the scope and extent of the petroleum product plume in order to determine
whether additional product recovery is required and, if so, to prepare a
proposal for the DEC. DEC has directed Dacco to submit a proposed monitoring and
product recovery plan by May 1, 2003. Dacco has filed claims for reimbursement
of approximately $110 for the costs it incurred for the investigation of the
site prior to reassignment to the Solid Waste Program. To date, DEC has not paid
the claims. Dacco will bear full responsibility for payment of future costs for
the site investigation and product recovery.
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, 2002, and the location, the primary use, the capacity,
and ownership status thereof, are set forth in the table below.
SQUARE OWNED/
COMPANY LOCATION USE FEET LEASED
- ---------------- --- ------ ------
Advanced DC
Syracuse, NY Manufacturing/Administration 49,600 Owned
Syracuse, NY Manufacturing 45,600 Leased
Carrollton, TX Warehouse 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
Athens, TX Manufacturing 67,000 Leased
Atco
Ferris, TX Manufacturing 93,100 Owned
Ennis, TX Manufacturing 24,100 Owned
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
Cookeville, TN Administration 7,000 Leased
Deflecto
Indianapolis, IN Manufacturing/Administration 182,600 Owned
Fishers, IN Distribution 134,400 Leased
St. Catherines, Ont. Manufacturing/Administration 53,000 Owned
St. Catherines, Ont. Assembly 80,000 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
Houston, TX Subleased 21,000 Leased
Jefferson, GA Manufacturing 30,000 Leased
Dover, OH Assembly 20,000 Leased
De Sheng
Shunde, Guangdong Manufacturing/Administration 926,000 Owned
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/ 33,000 Leased
Manufacturing
Gear
Grand Rapids, MI Manufacturing/Administration 45,000 Owned
GramTel
South Bend, IN Sales/Administration/Other 19,000 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
Perry, OH Research & Development 5,000 Leased
JII Promotions
Columbus, OH Sales 11,000 Leased
Coshocton, OH Manufacturing/Administration 218,000 Owned
Red Oak, IA 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 108,300 Leased
New York, NY Sales 600 Leased
Pamco
Des Plaines, IL Manufacturing/Administration 52,000 Owned
King of Prussia, PA Subleased 24,000 Leased
Sate-Lite
Niles, IL Manufacturing/Administration 70,650 Leased
Shunde, Guangdong Manufacturing/Administration/ 142,000 Leased
Assembly
Seaboard
Fitchburg, MA Manufacturing/Administration 260,000 Owned
Miami, FL Manufacturing/Administration 68,100 Leased
Carlstadt, NJ Manufacturing 49,700 Leased
Valmark
Livermore, CA Manufacturing/Administration 74,200 Leased
Welcome Home
Wilmington, NC Administration/Warehouse 29,500 Leased
17
Dacco also owns or leases 42 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, Wisconsin and Kentucky.
Welcome Home leases 118 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 and New York, 5 stores in
North Carolina, Georgia and Missouri, and 4 stores in Pennsylvania, Oregon 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 2003, 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, 2002.
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, 2002, there were 21 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 Indentures, dated as of
July 25, 1997 and March 22, 1999, by and between the Company and U.S.
Bank Trust 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, 2002. The financial data has 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)
---------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Operating data: (1)
Net sales........................ $720,032 $722,823 $807,296 $766,655 $633,579
Cost of sales, excluding 460,312 460,004 513,755 497,223 406,970
------- ------- ------- ------- -------
depreciation....................
Gross profit, excluding 259,720 262,819 293,541 269,432 226,609
depreciation....................
Selling, general and 179,189 177,291 173,370 153,582 131,055
administrative expense,
excluding depreciation..........
Operating income................. 46,819 28,718 55,013 69,245 57,977
Interest expense................. 89,372 91,344 92,009 87,058 70,184
Interest income.................. (1,249) (791) (1,464) (1,083) (1,656)
Loss from continuing (35,984) (64,001) (38,884) (6,603) (10,912)
operations before income
taxes and minority interest(2).
Loss from continuing (29,870) (58,272) (36,046) (5,731) (15,081)
operations......................
Balance sheet data (at end
of period):
Cash and cash equivalents........ 20,109 26,050 21,713 19,973 14,967
Working capital.................. 115,739 159,127 154,599 161,570 144,474
Total assets..................... 709,244 829,396 887,501 1,159,496 955,405
Long-term debt (less 715,516 819,406 787,694 837,712 1,054,327
current portion)...............
Net capital deficiency (3)....... (199,806) (139,056) (82,010) (238,835) (208,144)
- -----------------------------------------
(1) The Company has made several acquisitions and divestitures 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 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 3 to the financial statements) and a loss on the sale of
a subsidiary of $2,798 (see note 14 to the financial statements). Loss from
continuing operations before income taxes and minority interest in 2002
includes a gain on the liquidation of a subsidiary of $1,888 (see note 15
to the financial statements), a gain on the sale of a facility of $1,431,
and the write-down of certain assets held for sale of $1,800.
(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, 2002, 2001, and 2000. 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,
-----------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Net Sales:
Specialty Printing & Labeling $104,594 $112,123 $122,691
Jordan Specialty Plastics 108,043 98,733 98,353
Jordan Auto Aftermarket 155,754 147,047 141,213
Kinetek 282,666 287,362 316,666
Consumer and Industrial Products 68,975 77,558 128,373
-------- -------- --------
Total $720,032 $722,823 $807,296
======== ======== ========
Operating Income (Loss) (1):
Specialty Printing & Labeling $3,707 $(984) $7,210
Jordan Specialty Plastics 7,501 2,057 1,928
Jordan Auto Aftermarket 17,488 17,194 20,449
Kinetek 38,444 37,272 36,497
Consumer and Industrial Products 1,037 (3,485) 3,071
------- -------- --------
Total $68,177 $52,054 $69,155
======= ======== ========
Operating Margin (2):
Specialty Printing & Labeling 3.5% (0.9%) 5.9%
Jordan Specialty Plastics 6.9% 2.1% 2.0%
Jordan Auto Aftermarket 11.2% 11.7% 14.5%
Kinetek 13.6% 13.0% 11.5%
Consumer and Industrial Products 1.5% (4.5%) 2.4%
Combined 9.5% 7.2% 8.6%
(1) Before corporate overhead of $21,358, $23,336, and $14,142 for the
years ended December 31, 2002, 2001, and 2000, respectively. Certain
amounts in the prior year have been reclassified to conform with the
current year presentation.
(2) Operating margin is operating income (loss) divided by net sales.
21
Specialty Printing & Labeling. As of December 31, 2002, the Specialty Printing
& Labeling group consisted of JII Promotions, Valmark, Pamco, and Seaboard.
2002 Compared to 2001. Net sales for the year ended December 31, 2002 decreased
$7.5 million, or 6.7%, from 2001. This decrease is primarily due to lower sales
of calendars and outside specialties at JII Promotions, $1.6 million and $1.5
million, respectively, decreased sales of screen printed products, membrane
switches, and rollstock at Valmark, $3.3 million, $0.9 million, and $0.5
million, respectively, and lower sales of folding boxes at Seaboard, $0.4
million. Partially offsetting these decreases were higher sales of school
annuals at JII Promotions, $0.4 million, and increased sales of labels at Pamco,
$0.3 million.
Operating income for the year ended December 31, 2002 increased $4.7 million
from 2001. This increase is due in part to the non-amortization provisions of
Statement of Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets", which positively affected operating income by $1.4 million
in 2002 (see note 3 to the consolidated financial statements). In addition, this
increase is due to higher operating income at JII Promotions, $1.2 million, and
Pamco, $3.5 million. Partially offsetting these increases was lower operating
income at Valmark, $1.1 million, and Seaboard, $0.3 million. The increase in
operating income at Pamco is primarily due to the closing of Pamco's East Coast
facility in October 2001, and the increase at JII Promotions is due to the
closing of the Red Oak facility in December 2001.
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.
Jordan Specialty Plastics. As of December 31, 2002 the Jordan Specialty Plastics
group consisted of Sate-Lite, Beemak, and Deflecto.
2002 Compared to 2001. Net sales for the year ended December 31, 2002 increased
$9.3 million, or 9.4%, over 2001. This increase is primarily due to increased
22
sales of hardware products and office products at Deflecto, $9.2 million and
$0.4 million, respectively, higher sales of tooling and truck reflectors at
Sate-Lite, $0.2 million and $0.2 million, respectively, and increased sales of
plastic injection-molded and fabricated products at Beemak, $0.2 million and
$0.5 million, respectively. Partially offsetting these increases were lower
sales of warning triangles, Tilt Bins and thermoplastic colorants at Sate-Lite,
$0.2 million, $0.5 million, and $0.7 million.
Operating income for the year ended December 31, 2002 increased $5.4 million, or
264.7%, over 2001. This increase is due in part to the non-amortization
provisions of SFAS No. 142 which positively affected operating income by $1.4
million in 2002 (see note 3 to the consolidated financial statements). In
addition, this increase is due to higher operating income at Deflecto and
Beemak, $4.9 million and $0.1 million, respectively, partially offset by lower
operating income at Sate-Lite, $1.0 million. The increase in operating income at
Deflecto is due to increased sales, ongoing headcount reductions and continued
focus on operational efficiencies.
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 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.
Jordan Auto Aftermarket. As of December 31, 2002, the Jordan Auto Aftermarket
group consisted of Dacco, Alma, and Atco. 2002 Compared to 2001. Net sales for
the year ended December 31, 2002 increased $8.7 million, or 5.9%, over 2001.
This increase is primarily due to the acquisition of Atco in June 2001. Atco
contributed net sales of $14.7 million in 2002 compared with net sales of $5.8
million in 2001. In addition, sales of air conditioning compressors increased
at Alma. Partially offsetting these increases was lower sales of
remanufactured torque converters, soft parts and drive trains at Dacco and
Alma.
Operating income for the year ended December 31, 2002 increased $0.3 million, or
1.7%, from 2001. Operating income increased $2.0 million due to the
23
non-amortization provisions of SFAS No. 142 (see note 3 to the consolidated
financial statements). The group also benefited from a full year of sales at
Atco and the higher sales of air conditioning compressors mentioned above.
Partially offsetting these increases were higher corporate expenses and the
decline in operating income related to the decrease in sales of soft parts and
drive trains.
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 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 $3.3 million or 15.9% 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.
Kinetek. As of December 31, 2002, the Motors and Gears group consisted of
Imperial, Gear, Merkle-Korff, FIR, ED&C, Motion Control, Advanced DC and De
Sheng.
2002 Compared to 2001. Consolidated net sales for the year ended December 31,
2002 decreased $4.7 million, or 1.6%, from 2001. Continued economic weakness
depressed all of Kinetek's principal market resulting in a net sales decrease of
$10.9 million, while moderate pricing pressure throughout Kinetek's product
lines totaled a $3.4 million reduction in sales. These decreases were partially
offset by the addition of the partial year sales from the formation of the De
Sheng joint venture, $7.7 million, the impact of the stronger Euro on
translation of European sales, $1.3 million, and the net impact of market share
gains and losses, $1.6 million.
Sales of Kinetek's motors segment declined from $206.2 million in 2001 to $202.4
million in 2002, a decline of 1.8%. Subfractional motor sales declined by 1.0%
compared to 2001, driven largely by pricing pressure in all markets and weak
demand in vending markets. Sales of fractional/integral motor products declined
2.3% from 2001, primarily due to continued sharp declines in demand for DC
motors used in the material handling market and weak demand in Europe. These
declines were partially offset by gains in market share and new product
introductions in floor care and elevator markets, as well as the addition of De
Sheng and the translation gains from European sales as described above.
Sales of Kinetek's controls segment declined from $81.2 million in 2001 to $80.2
million in 2002, a decrease of 1.2%. The decline is primarily due to lower sales
of elevator control products to the New York City market, where activity in the
24
real estate and construction sectors has been lower since the events of
September 11, 2001. Sales to other geographic regions increased, but by less
than the declines in New York.
Kinetek's operating income for the year ended December 31, 2002 increased $1.2
million, or 3.1%, over 2001. The increase in operating income was primarily
driven by the non-amortization provisions of SFAS No. 142 (see note 3 to the
consolidated financial statements). This adoption resulted in an $8.0 million
reduction in amortization expense, $6.6 million for the motors segment and $1.4
million for the controls segment. This increase was offset by two principal
factors: 1) Kinetek's gross profit fell from $104.1 million (36.2% of sales) in
2001 to $100.4 million (35.5% of sales) in 2002. This decline is attributable to
the sales volume and selling price declines discussed previously, which were
partially offset by Kinetek's continued variable cost productivity and material
cost reduction initiatives. 2) Operating expenses increased from $49.3 million
in 2001 to $52.0 million in 2002. The increase is due to the addition of the
operating expenses of De Sheng, and to increased corporate expenses related to
Kinetek's ongoing reorganization and restructuring.
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 3 to the 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.
Consumer and Industrial Products. As of December 31, 2002, the Consumer and
Industrial Products group consisted of Cape Craftsmen, Welcome Home, Cho-Pat and
GramTel.
25
2002 Compared to 2001. Net sales for the year ended December 31, 2002 decreased
$8.6 million, or 11.1%, from 2001. This decrease is primarily due to the
divestiture of Riverside in January 2001, $4.1 million, and Flavorsource in
January 2002, $5.7 million, as well as the shut down of Online Environs in
September 2002, $0.7 million. In addition, retail sales at Welcome Home
decreased $1.6 million, sales of orthopedic supports at Cho-Pat decreased $0.1
million, and sales of Internet connection services at ISMI decreased $0.9
million, prior to ISMI's divestiture in December 2002. Partially offsetting
these decreases were higher sales of home accessories at Cape, $3.7 million, and
increased sales of data storage and disaster recovery services at GramTel, $0.8
million.
Operating income for the year ended December 31, 2002 increased $4.5 million
over 2001. This increase is due in part to the non-amortization provisions of
SFAS No. 142, which positively affected operating income by $0.6 million in 2002
(see note 3 to the consolidated financial statements). This increase is also due
to the divestiture of Riverside and the shut down of Online Environs, as
Riverside had an operating loss of $0.4 million in 2001 and Online Environ's
operating loss decreased, $0.8 million. In addition, operating income increased
at Cape, $1.7 million and Welcome Home, $0.8 million, and GramTel's operating
loss decreased by $1.0 million. Partially offsetting these increases was lower
operating income at Flavorsource of $0.8 million, due to its sale in January
2002.
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.
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%).
Consolidated Operating Results. (See Consolidated Statements of Operations).
26
2002 Compared to 2001. Net sales for the year ended December 31, 2002 decreased
$2.8 million, or 0.4%, from 2001. This decrease is due to lower sales of
calendars and outside specialties at JII Promotions, decreased sales of screen
printed products at Valmark, lower sales of Tilt Bins and thermoplastic
colorants at Sate-Lite, decreased sales of remanufactured torque converters and
drive trains at Dacco and Alma, lower sales of fractional/integral motor
products at Kinetek and decreased retail sales at Welcome Home. In addition,
sales decreased due to the divestitures of Riverside in January 2001 and
Flavorsource in January 2002, as well as the shut down of Online Environs in
September 2002. Partially offsetting these decreases were higher sales of school
annuals at JII Promotions, labels at Pamco, hardware and office products at
Deflecto, fabricated products at Beemak, air conditioning compressors at Alma,
home accessories at Cape, and data storage and disaster recover services at
GramTel. In addition, sales increased due to the acquisition of Atco in June
2001 and the addition of De Sheng in April 2002.
Operating income increased $18.1 million, or 63.0%, over 2001. Operating income
increased $14.1 million related to the adoption of SFAS No. 142 (see note 3 to
the consolidated financial statements). In addition, operating income increased
at JII Promotions, Pamco, Deflecto, Cape, Welcome Home, and GramTel. Operating
income also increased due to the acquisitions mentioned above. Partially
offsetting these increases was lower operating income at Valmark, Sate-Lite, and
Kinetek. In addition, operating income decreased due to the sale of Flavorsource
as mentioned above. The increased operating income at Pamco was due to the
closing of Pamco's East Coast facility, the increase at JII Promotions was due
to the closing of the Red Oak facility, and the increase at Deflecto is due to
ongoing headcount reductions and continued focus on operational efficiencies.
The decreased operating income at Kinetek is due to lower gross profit resulting
from a decline in sales prices and increased operating expenses related to
Kinetek's ongoing reorganization and restructuring.
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 products 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.
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
27
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.
Interest expense stayed relatively consistent between 2002 and 2001.
Income taxes - See note 13 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
The Company had approximately $115.7 million of working capital at the end of
2002 compared to approximately $159.1 million at the end of 2001.
The Company has acquired businesses through leveraged buyouts, and, as a result,
has significant debt in relation to total capitalization. See "Item 1 -
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 2003.
Capital spending levels in 2003 are anticipated to be consistent with 2002
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, 2002
was $21.8 million, compared to $30.3 million provided by operating activities
during the same period in 2001. This decrease is primarily due to a lower
reduction in accounts receivable and an increase in inventories, as well as an
increased reduction in accounts payable and accrued expenses from 2001,
partially offset by an increased reduction in prepaids and other current assets
from 2001.
Net cash used in investing activities for year ended December 31, 2002 was $20.4
million, compared to $7.6 million used in investing activities during the same
period in 2001. The increase is due primarily to the proceeds from the sale of a
subsidiary in the prior year and increased additional purchase price payments in
the current year, partially offset by decreased spending on acquisitions in the
current year.
28
Net cash used in financing activities for the year ended December 31, 2002 was
$10.6 million, compared to $17.6 million used in financing activities during the
same period in 2001. The decrease is primarily due to lower repayments on the
Company's revolving credit facilities of $8.1 million, decreased payments of
financing costs of $4.2 million in 2002 and the issuance of senior notes at
Kinetek, $20.5 million. Partially offsetting these increases was the repurchase
of a portion of the Company's 2009 Debentures of $31.4 million.
The Company and its subsidiaries are party to two credit agreements under which
the Company is able to borrow up to $145 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, 2002, the Company had
approximately $57.5 million of available funds under these arrangements. (See
note 12 to the consolidated financial statements.)
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. Additionally, the Company
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.
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 or find alternative sourcing to
mitigate 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
29
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
In accordance with SFAS No. 142, we discontinued recording goodwill amortization
effective January 1, 2002. SFAS No. 142 prescribes a two-step process for
impairment testing of goodwill. The first phase screens for potential
impairment, while the second phase, if necessary, measures the impairment.
Goodwill is potentially impaired if the net book value of a reporting unit
exceeds its estimated fair value. The Company performed the transitional
impairment review of its reporting units during the year and recorded a non-cash
after-tax charge of $87.1 million. This charge has been recorded as a cumulative
effect of a change in accounting principle. See note 3 to the consolidated
financial statements for further details.
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. Either the cost method or
equity method of accounting is used to account for these investments depending
on the level of the Company's ownership in these affiliates. Each quarter, we
review the carrying amount of these investments and record an impairment charge
when we believe an investment has experienced a decline in value below its
carrying amount 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
30
favorable than those projected by management, additional inventory reserves may
be required.
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,
2002 (in thousands):
Payments by Period
---------------------------------------------------------
Total Less 1-3 4-5 After 5
than 1 years years years
year
---------------------------------------------------------
Long-term debt and $755,718 $34,893 $12,749 $609,964 $98,112
capital leases
Operating leases 66,804 16,888 22,243 13,060 14,613
---------------------------------------------------------
Total $822,522 $51,781 $34,992 $623,024 $112,725
---------------------------------------------------------
31
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, 2002, the
Company had $37.2 million of variable rate debt outstanding. A one percentage
point increase in interest rates would increase the annual amount of interest
paid by approximately $0.4 million. The Company does not believe that its market
risk financial instruments on December 31, 2002 would have a material effect on
future operations or cash flows.
The Company is exposed to market risk from changes in foreign currency exchange
rates, including fluctuations in the functional currency of foreign operations.
The functional currency of operations outside the United States is the
respective local currency. Foreign currency translation effects are included in
accumulated other comprehensive income in shareholder's equity.
32
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
--------
Report of Independent Auditors................................ . 34
Consolidated Balance Sheets as of December 31, 2002 and 35
2001.......................................................... .
Consolidated Statements of Operations for the years ended December 36
31, 2002, 2001, and 2000...................................... . 37
Consolidated Statements of Changes in Shareholder's Equity (Net 37
Capital Deficiency) for the years ended December 31, 2002, 2001 and
2000.......................................................... .
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000............................. . 38
Notes to Consolidated Financial Statements.................... . 40
33
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, 2002 and 2001 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, 2002.
Our audits also included the financial statement schedule listed in the Index at
Item 15(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 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 provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Jordan Industries,
Inc. at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, 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.
In 2002, as discussed in Note 3, the Company changed its method of accounting
for goodwill to conform with Financial Accounting Standards Board Statement No.
142.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 18, 2003
34
JORDAN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
___December 31,___
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $20,109 $26,050
Accounts receivable, net of allowance of 109,101 109,384
$6,560 and $4,497 in 2002 and 2001, respectively
Inventories 130,453 122,528
Income tax receivable 3,745 12,245
Deferred income taxes - 8,100
Prepaid expenses and other current assets 25,857 19,030
------ --------
Total current assets 289,265 297,337
Property, plant and equipment, net 101,907 99,602
Investments in and advances to affiliates 42,353 36,443
Goodwill, net 245,351 358,970
Other assets 30,368 37,044
-------- --------
Total Assets $709,244 $829,396
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $58,631 $47,848
Accrued liabilities 78,582 71,372
Advance deposits 1,420 1,853
Current portion of long-term debt 34,893 17,137
------ --------
Total current liabilities 173,526 138,210
Long-term debt 715,516 819,406
Other non-current liabilities 14,484 8,668
Deferred income taxes 2,904 -
Minority interest 278 4
Preferred stock of a subsidiary 2,342 2,164
Shareholder's equity (net capital deficiency):
Common stock $.01 par value: authorized - 100,000 1 1
shares; issued and outstanding - 98,501 shares
Additional paid-in capital 2,116 2,116
Accumulated other comprehensive loss (11,877) (15,249)
Accumulated deficit (190,046) (125,924)
--------- ---------
Total shareholder's equity (net capital (199,806) (139,056)
--------- ---------
deficiency)
Total Liabilities and Shareholder's Equity (Net $709,244 $829,396
========= =========
Capital Deficiency)
See accompanying notes.
35
JORDAN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Net sales $720,032 $722,823 $807,296
Cost of sales, excluding depreciation 460,312 460,004 513,755
Selling, general, and administrative 179,189 177,291 173,370
expense, excluding depreciation
Depreciation 22,832 23,387 24,070
Amortization of goodwill and other 1,694 15,709 31,108
intangibles
Management fees and other 9,186 17,714 9,980
------- --------- -------
Operating income 46,819 28,718 55,013
Other (income) and expenses:
Interest expense 89,372 91,344 92,009
Interest income (1,249) (791) (1,464)
Gain on deconsolidation of liquidated (1,888) - -
subsidiary
Loss on sale of subsidiaries 518 - 2,798
Other, net (3,950) 2,166 554
-------- --------- --------
82,803 92,719 93,897
-------- --------- --------
Loss from continuing operations before
income tax benefit and minority interest (35,984) (64,001) (38,884)
Income tax benefit (6,388) (5,323) (3,191)
-------- --------- --------
Loss from continuing operations before
minority interest (29,596) (58,678) (35,693)
Minority interest 274 (406) 353
-------- --------- --------
Loss from continuing operations (29,870) (58,272) (36,046)
Discontinued operations, net of taxes - - (203,924)
Extraordinary gain, net of tax (52,518) - -
Cumulative effect of change in accounting 87,065 - -
principle, net of tax --------- ---------- ---------
Net (loss) income $(64,417) $(58,272) $167,878
========= ========== =========
36
See accompanying notes.
JORDAN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(NET CAPITAL DEFICIENCY)
(dollars in thousands)
Common Stock
-------------
Accumulated
Number Additional Other
Shares Paid-in Comprehensive Accumulated
Shares Amount Capital Income (Loss) Deficit Total
Balance at December 31, 1999 98,501 $ 1 $ 2,116 $(5,740) $(235,212) $(238,835)
Non-cash dividends on preferred stock - - - - (152) (152)
of subsidiary
Comprehensive income(loss):
Translation - - - (10,901) - (10,901)
Net income - - - - 167,878 167,878
-----------
Total comprehensive income 156,977
------- ------- --------- --------- ----------- -----------
Balance at December 31, 2000 98,501 1 2,116 (16,641) (67,486) (82,010)
Non-cash dividends on preferred stock - - - - (166) (166)
of subsidiary
Comprehensive income(loss):
Translation - - - 1,972 - 1,972
Minimum pension liability - - - (580) - (580)
adjustment
Net loss - - - - (58,272) (58,272)
-----------
Total comprehensive loss (56,880)
------- ------- --------- ----------- ----------- -----------
Balance at December 31, 2001 98,501 1 2,116 (15,249) (125,924) (139,056)
Non-cash dividends on preferred stock - - - - (178) (178)
of subsidiary
Gain on sale of subsidiary to an - - - - 473 473
affiliate
Comprehensive income(loss):
Translation - - - 6,107 - 6,107
Minimum pension liability - - - (2,735) - (2,735)
adjustment
Net loss - - - - (64,417) (64,417)
-----------
Total comprehensive loss (61,045)
------- ------- --------- ----------- ----------- -----------
Balance at December 31, 2002 98,501 $ 1 $ 2,116 $ (11,877) $(190,046) $(199,806)
======= ======= ========= =========== =========== ===========
37
See accompanying notes.
JORDAN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net (loss) income $(64,417) $(58,272) $167,878
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Cumulative effect of accounting change 87,065 - -
Extraordinary gain on early extinguishment (52,518) - -
of debt
Gain on deconsolidation of liquidated (1,888) - -
subsidiary
Write-down of assets held for sale 1,800 - -
Loss on sale of subsidiaries 518 - 2,798
(Gain)/loss on disposal of fixed assets (1,238) 1,691 3,342
Gain on sale of discontinued - - (213,520)
operations, net of tax
Amortization of deferred financing 6,193 4,666 5,067
costs
Depreciation and amortization 24,526 39,096 55,178
Deferred income taxes 11,004 3,752 3,999
Minority interest 274 (406) 4
Non-cash interest expense 6,145 22,642 20,160
Changes in operating assets and liabilities
(net of acquisitions and dispositions):
Accounts receivable 2,358 13,107 1,384
Inventories (5,437) 3,903 (6,454)
Prepaid expenses and other current 23,280 (12,390) (13,729)
assets
Non-current assets (1,861) 542 (5,008)
Accounts payable and accrued (12,293) (470) (24,716)
liabilities
Advance deposits (433) (84) 286
Non-current liabilities 3,433 12,642 7,830
Other (4,719) (118) (169)
--------- -------- ----------
Net cash provided by operating 21,792 30,301 4,330
activities
Cash flows from investing activities:
Proceeds from sale of discontinued - - 149,285
operations 3,242 1,391 1,296
Proceeds from sale of fixed assets (13,895) (12,814) (21,246)
Capital expenditures
Acquisitions of subsidiaries (9,503) (12,384) (48,154)
Additional purchase price payments (1,002) (260) (3,093)
Net cash acquired in purchase of 788 14 1,196
subsidiaries
Net proceeds from sale of subsidiary - 16,663 -
Investments in affiliates - (161) (17,842)
--------- -------- ----------
Net cash (used in) provided by $(20,370) $(7,551) $61,442
investing activities