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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, 2004 Commission File Number 33-24317
JORDAN INDUSTRIES, INC.
(Exact name of registrant as specified in charter)
Illinois 36-3598114
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 24, 2005:98,501.0004.
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TABLE OF CONTENTS
Part I Page
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Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Part II
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Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of
Operations 21
Item 7A. Quantitative and Qualitative Disclosures About
Market Risks 34
Item 8. Financial Statements and Supplementary Data
35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 79
Item 9A. Controls and Procedures 79
Item 9B. Other Information 79
Part III
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Item 10. Directors and Executive Officers 80
Item 11. Executive Compensation 82
Item 12. Security Ownership of Certain Beneficial Owners
and Management 83
Item 13. Certain Relationships and Related Transactions 84
Part IV
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Item 14. Principal Accountant Fees and Services 88
Item 15. Exhibits and Financial Statement Schedules 89
Signatures 90
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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 18 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.
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, 2004.
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Jordan Industries, Inc.
$723.3 Million of Net Sales (1)
SPECIALTY PRINTING AND LABELING - Pamco
$51.1 Million of Net Sales - Valmark
- Seaboard
CONSUMER AND INDUSTRIAL PRODUCTS - Welcome Home LLC
$68.8 Million of Net Sales - Cho-Pat
- GramTel
JORDAN SPECIALTY PLASTICS - Beemak
$147.6 Million of Net Sales - Sate-Lite
- Deflecto
JORDAN AUTO AFTERMARKET - Dacco
$141.9 Million of Net Sales - Alma
- Atco
Kinetek - Imperial Group
$313.9 Million of Net Sales - Merkle-Korff
- FIR
- Motion Control
- Advanced D.C.
- Kinetek DeSheng
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(1) The results of operations of acquired businesses have been
included in the Company's consolidated results since the
respective dates of acquisition. See Note 19 to the financial
statements.
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The Company's operations were conducted through the following business units as
of December 31, 2004:
Specialty Printing and Labeling
The Specialty Printing and Labeling Group manufactures and markets (i) labels,
tapes, and printed graphic panel overlays for electronics and other
manufacturing companies and (ii) 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, 2004, the Specialty
Printing and Labeling group generated net sales of $51.1 million. Each of the
Specialty Printing and Labeling subsidiaries is discussed below:
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 50% of Valmark's 2004 net sales of $14.4
million were derived from the sales of membrane switch control panels, 38% from
graphic panel overlays, and 12% from labels and other products.
Valmark sells to four primary markets: medical instrumentation, general
electronics, turn-key services serving primarily the telecommunications market,
and personal computers. During 2004, Valmark's products were subject to
increased foreign price competition in all of its market segments. Although
Valmark does not operate free of foreign competition within any of its markets,
it does maintain advantages over foreign competitors 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, exceptional customer service and excellent quality
ratings.
Pamco. Pamco, which was founded in 1953 and acquired 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 candy, housewares, health and beauty aids
and food packaging. All of Pamco's products are made to customer specifications
and approximately 80% of all sales were manufactured in-house in 2004. The
remaining 20% of sales were purchased printed products and included such items
as business cards and stationery.
Pamco's products are marketed by a team of 11 sales representatives who procure
new accounts and service existing accounts. Existing accounts are serviced by 8
customer service representatives. Pamco's customers represent many different
industries with the five largest customers accounting for approximately 17% of
2004 net sales of $19.8 million.
Pamco competes in a highly fragmented industry. Pamco emphasizes its 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.
-5-
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 41% of Seaboard's 2004 net sales of $16.9
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.
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, 2004, the Consumer and Industrial Products subsidiaries
generated consolidated net sales of $68.8 million. Each of the Consumer and
Industrial Products subsidiaries is discussed below.
Welcome Home LLC. During 2002, Cape Craftsmen and Welcome Home were combined
into one entity, Welcome Home LLC. Cape Craftsmen remains a division of Welcome
Home LLC that imports gifts, wooden furniture, framed art and other accessories
from the Far East, while the Welcome Home division is a retailer specializing in
such imports.
Cape Craftsmen sells its products through 4 in-house salespeople and 100
independent sales representatives. Cape Craftsmen competes in a highly
fragmented industry and has therefore found it most effective to compete with
most wood manufacturers and importers on the basis of price. Cape Craftsmen also
strives to deliver better quality and service than its competitors. Net sales of
the Cape Craftsmen division in 2004 were $13.1 million, excluding sales to the
Welcome Home division, of $19.1 million.
Welcome Home currently operates 121 stores located in factory outlet centers and
regional malls in 37 states. Welcome Home offers a broad product line of 2,500
to 4,000 items consisting of 9 basic groups, including framed art, furniture,
candles, lighting, decorative accessories, decorative garden items, 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 for the year ended December
31, 2004.
Cho-Pat. In September 1997, the Company purchased Cho-Pat, Inc., a designer and
manufacturer of orthopedic related sports medicine devices used in the
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prevention and treatment of certain biomechanical injuries. Cho-Pat currently
produces 19 different products, including three which are covered by U.S.
patents, that are used to prevent and reduce the pain resulting from the overuse
and degeneration of the major joints. Cho-Pat's largest selling product is
Cho-Pat's Original Knee Strap, which is designed to reduce the pain associated
with patellar tendonitis and other knee ailments. Cho-Pat manufactures most of
its products in-house and sells them through medical product distributors and
wholesalers, retail drug and sporting good stores, as well as direct to medical
professionals, physical therapists, athletic trainers, schools and universities,
professional athletes, and individuals in the U.S. and internationally. Cho-Pat
had net sales of $1.7 million in 2004.
GramTel. GramTel USA, 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 business-critical
computer systems, applications, and data. The 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 the
data storage needs of businesses at a fraction of the cost that businesses would
incur to perform these tasks in-house. It provides the facilities, technical
personnel and network connectivity to keep the critical operations of businesses
available 24 hours a day. GramTel had net sales of $2.1 million for the year
ended December 31, 2004.
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) plastic injection-molded hardware and office
supply products, (3) extruded vinyl chairmats, and (4) safety reflectors for
bicycles and commercial truck manufacturers. 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, 2004,
the Jordan Specialty Plastics subsidiaries generated consolidated net sales of
$147.6 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 a manufacturer and distributor 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
2004 were $6.5 million.
Beemak's products are both injection-molded and custom fabricated and are both
produced in-house and outsourced to other injection molders. 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.
-7-
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, heavy duty commercial vehicles, and disposable health care products.
Sate-Lite was founded in 1968 and acquired by the Company in 1988. Bicycle
reflectors and plastic bicycle parts accounted for 35% of Sate-Lite's net sales
in 2004, sales of emergency warning triangles and specialty reflectors and
lenses to commercial truck customers accounted for approximately 20% of net
sales in 2004, and sales of disposable health care products accounted for
approximately 11% of net sales. An additional 34% of 2004 net sales were derived
from other miscellaneous plastic injection molded products. Sate-Lite's net
sales for 2004 were $14.4 million, excluding sales to Deflecto and Beemak,
related parties, of $5.2 million and $0.7 million, respectively.
Sate-Lite's bicycle and truck/auto products are sold directly to a number of
OEMs. The three largest OEM customers are Truck-Lite, Tandem (China), and Giant
Phoenix (China) which accounted for approximately 10% of Sate-Lite's net sales
in 2004. The disposable health care products are sold primarily to a single
distributor who has a long-term supply agreement with a major domestic health
care products supplier. In 2004, Sate-Lite's five largest customers accounted
for approximately 30% 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. Sate-Lite's
net export sales accounted for approximately 37% of its total 2004 sales. The
principal raw materials used in manufacturing Sate-Lite's products are plastic
resins. Sate-Lite purchases these materials from several independent suppliers.
In 1998, Sate-Lite opened a wholly owned manufacturing factory in China.
Sate-Lite sells to a variety of companies in Asia including Tandem, Ideal,
Giant/Phoenix, and other bicycle manufacturers who have increased their sales to
the North American bicycle market through mass market branded companies such as
Huffy, Pacific Cycle (Mongoose, Schwinn, Roadmaster, GT), Kent and Magna.
The markets for bicycle and truck/auto parts are highly competitive. Sate-Lite
competes in these markets by being a low cost producer, offering innovative
products and by relying on its established reputation for producing high quality
plastic components in the industries served. Sate-Lite's principal competitors
in the bicycle parts market consist primarily of foreign companies and Cortina,
James King, and Accutek in the truck/auto markets.
Deflecto Corporation. Founded in 1960 and acquired by the Company in 1998,
Deflecto designs, manufactures and markets plastic injection-molded products for
mass merchandisers, major retailers and large wholesalers. Deflecto sells its
products in two product categories: hardware products and office supply
products. Hardware products, which comprised approximately 66% of Deflecto's net
sales in 2004, 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 34% of net sales in 2004 and include such
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items as wall pockets, literature displays, file and chart holders, business
card holders, chairmats and other top-branded office supply products. Deflecto's
consolidated net sales for 2004 were $126.7 million.
Deflecto manufactures approximately 90% of its products in-house, with the
remainder outsourced to other injection molders. Deflecto efficiently manages
the mix of manufactured and outsourced product due to its ability to accurately
project pricing, cost and capacity constraints. This strategy enables Deflecto
to grow without being constrained by capacity issues.
Deflecto sells its products through an in-house salaried sales force and the use
of independent sales representatives. Deflecto has the critical mass to command
strong positions and significant shelf space with the major mass merchandisers
and retailers. In the hardware products line, Deflecto sells to major national
retailers such as Ace Hardware, Wal-Mart, and Home Depot, as well as to heating,
ventilating and air conditioning ("HVAC") and appliance part wholesalers.
Deflecto sells its office supply products line to major office supply retailers
such as Office Max and Staples, as well as to national wholesalers, such as
United Stationers 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
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, 2004, the Jordan Auto Aftermarket subsidiaries generated
consolidated net sales of $141.9 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
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nationwide to independent warehouse distributors and transmission repair shops.
Dacco also operates 46 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 2004, no single customer accounted for more than 2% of
Dacco's net sales. Net sales were $56.3 million during the year ended December
31, 2004.
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,
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-stop 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 $70.8 million during the year ended December 31, 2004.
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 believes it 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.
Management believes 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
original equipment service products is very demanding, requiring stringent
quality standards, thereby 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 was founded in 1968 and was acquired by the Company in July 2001. The
Company's office, engineering, sales, and customer service departments are
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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 Atco's QS-9000 certified plant in Ennis,
Texas. Atco has led the way with innovations such as the patented portable
hand-operated model 3700 crimping tool. Net sales were $14.8 million during the
year ended December 31, 2004.
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, and elevators.
Kinetek operates in the businesses of electric motors ("motors") which includes
the subsidiaries Imperial Group, Merkle-Korff, Fir, Advanced D.C. and Kinetek De
Sheng; and electronic motion control systems ("controls") which includes the
subsidiary Motion Control Engineering. For the year ended December 31, 2004
Kinetek generated net sales of $313.9 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, 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.
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Electric Motors. Electric motors are devices that convert electric power into
rotating mechanical energy. The amount of energy delivered is determined by the
level of input power supplied to the electric motor and the size of the motor
itself. An electric motor can be powered by alternating current ("AC") or direct
current ("DC"). AC power is generally supplied by power companies directly to
homes, offices and industrial sites whereas DC power is supplied either through
the use of batteries or by converting AC power to DC power. Both AC motors and
DC motors can be used to power most applications; the determination is made
through the consideration of power source availability, speed variability
requirements, torque considerations, and noise constraints.
The power output of electric motors is measured in horsepower. Motors are
produced in power outputs that range from less than one horsepower up to
thousands of horsepower.
SubFractional Motors. Kinetek's subfractional horsepower products are comprised
of motors and gearmotors, which power applications up to 30 watts (1/25
horsepower). These small, "fist-sized" AC and DC motors are used in light duty
applications such as snack and beverage vending machines, refrigerator ice
dispensers and photocopy machines.
Fractional/Integral Motors. Kinetek's fractional/integral horsepower products
are comprised of AC and DC motors and gearmotors having power ranges from 1/8 to
100 horsepower. Primary end markets for these motors include commercial floor
care 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 a range of
elevators. The components utilized in an elevator 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.
Backlog
As of December 31, 2004 the Company had a backlog of approximately $91.5 million
compared with a backlog of $87.2 million as of December 31, 2003. The backlog is
primarily due to motor sales at Merkle-Korff and controls sales at Motion
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Control, both subsidiaries of Kinetek, printing and graphic component sales at
Valmark, folding boxes at Seaboard, plastic products at Deflecto and air
conditioning assemblies and parts at Atco. Management believes that the Company
will ship substantially its entire backlog during 2005.
Seasonality
The Company's aggregate business has a certain degree of seasonality. Welcome
Home's sales are somewhat stronger toward year-end due to the nature of their
products. Home furnishings and accessories at Welcome Home are popular as
holiday gifts.
Research and Development
As a general matter, the Company operates businesses that do not require
substantial capital or research and development expenditures. However,
development efforts are targeted at certain subsidiaries as market opportunities
are identified.
Patents, Trademarks, Copyrights and Licenses
The Company protects its confidential, proprietary information as trade secrets.
With some exceptions noted in the business descriptions above, 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, 2004, the Company and its subsidiaries employed approximately
6,500 people. Approximately 1,800 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 Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), the Clean
-13-
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 the handling or release of
hazardous chemicals. The Company believes it is in substantial compliance with
such laws and regulations.
In 2003, the USEPA has sent the Company letters which indicate that it may be a
potential responsible party at two Superfund sites. The first alleged that, JII
Promotions had shipped lead typeface to the Pittsburgh Metal & Equipment site in
New Jersey. The Company has agreed to settle this matter through an
Administrative Consent Order for a payment of less than $3 thousand. The second
alleged that, Alma sent wastes to the proposed Lake Calumet Cluster site in
Illinois. Alma made a claim under the environmental indemnity from the former
owner of Alma and the former owner has assumed responsibility for this matter.
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
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, Michigan that are contaminated by chlorinated
solvent and oil contamination, the main plant on Michigan Avenue and a satellite
plant on North Court Street. The former owner retained full responsibility for
the continued investigation and remediation of the contaminated groundwater and
soil at the properties when Alma acquired them in April 1999. The Michigan
Avenue property has been the subject of investigation by the Michigan Department
of Environmental Quality, ("MDEQ"), since 1982. By 1985, the former owner had
cleaned out, closed and capped the lagoons that were the source of the
contamination and in 1992, installed a groundwater remediation system. In
January 1999, the former owner submitted to the MDEQ a proposed remedial action
-14-
plan that recommends that the groundwater treatment system continue to operate
for up to 30 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 that
prohibits the private use of groundwater for drinking water. The MDEQ 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 MDEQ has approved the
additional investigation. Some of the sampling was conducted in 2004; the rest
is scheduled for Spring 2005. The former owner plans to submit the data to MDEQ
and receive approval of the remedial action plan. The second property is
contaminated with petroleum constituents and chlorinated solvents and the former
owner, under the supervision of the MDEQ, is investigating the scope and extent
of the contamination. In May 2003, the former owner also submitted a remedial
action plan with respect to this property to the MDEQ and an interim response
plan for removed contaminated soils deemed to be the source of contamination.
Contamination soils were excavated in 2004 and ground soil sampling is scheduled
for Spring 2005.
Alma has received two claims for contribution to the investigation and cleanup
of waste materials at offsite locations. One is the notice letter from the USEPA
referenced above regarding the Lake Calumet Cluster site. USEPA sent a follow-up
information request letter in December 2004. The other is a claim by TPI
Petroleum for the removal or remediation of asbestos-containing clutch plates
allegedly discarded in the 1950s or 1960s at TPI's property in Alma.
In connection with its 1999 acquisition of the Alma properties and other assets,
the Company obtained indemnification and a $1.5 million environmental escrow.
Claims for losses against the environmental escrow were to be filed by March
2004. Prior to the deadline, Alma filed claims for the Michigan Avenue
contamination, the North Court Street contamination, the TPI Petroleum claim and
the proposed Lake Calumet Cluster site. Although undisputed amounts remaining in
environmental escrow are to be distributed to the former owners in March 2004,
the claims filed put the total amount in the environmental escrow in dispute.
The $1.5 million remains in escrow to cover the outstanding claims.
Since October 1997, Dacco has engaged in investigation and remediation of
possible releases of petroleum and other chemicals into the soil and groundwater
from underground storage tanks and facility operations at its Cookeville,
Tennessee property under the direction of the Tennessee Department of
Environmental Conservation, ("TNDEC"). In 2002 and 2003, Dacco conducted
extensive monitoring of the extent of the contamination, the potential for
offsite migration and the methods for remediation. In July 2002, Dacco installed
a simple, free product recovery system in one of the monitoring wells located in
the area with the most extensive contamination. The investigation concluded that
the contamination was relatively small and contained, and the consultant
recommended that Dacco continue to use the free product recovery well until
quarterly monitoring results confirm that the release was contained onsite.
Dacco submitted this proposal to the TNDEC in August 2003 and has continued to
operate the free product recovery system. It estimates that the total potential
cost for the Cookeville site will be between $10 and $200 over the next five
years.
-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, 2004, and the location, the primary use, the capacity,
and ownership status thereof, are set forth in the table below.
COMPANY LOCATION USE SQUARE OWNED/
---------------- --- FEET LEASED
------ ------
Advanced DC
Syracuse, NY Manufacturing/Administration 49,600 Owned
Syracuse, NY Manufacturing 18,500 Leased
Eternoz, France Manufacturing/Administration 19,000 Leased
Putzbrunn, Germany Warehouse 1,200 Leased
Alma
Alma, MI Manufacturing/Warehouse 276,200 Owned
Alma, MI Manufacturing/Warehouse 103,000 Owned
Alma, MI Warehouse 46,000 Owned
Alma, MI Warehouse 33,400 Owned
Alma, MI Warehouse 9,600 Owned
Alma, MI Warehouse 43,000 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 Assembly/Warehouse/Administration 175,000 Leased
Elizabethtown, NC Warehouse 10,000 Leased
Elizabethtown, NC Warehouse 30,000 Leased
Wilmington, NC Administration 6,250 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
Pearland, TX Manufacturing/Assembly 80,000 Leased
Newport, Wales Manufacturing 92,000 Owned
Aurora, Ontario Manufacturing/Administration 34,000 Leased
Ontario, CA Manufacturing 36,500 Leased
Jefferson, GA Manufacturing 31,000 Leased
Dover, OH Manufacturing 56,000 Leased
Houston, TX Manufacturing/Assembly 33,000 Leased
Mira Loma, CA Warehouse 44,000 Leased
Kinetek De Sheng
Shunde, Guangdong Manufacturing/Administration 926,000 Owned
ED&C
Troy, MI Manufacturing/Administration 33,000 Leased
-16-
FIR
Casalmaggiore, Italy Manufacturing/Administration 100,000 Owned
Varano, Italy Manufacturing 30,000 Owned
Bedonia, Italy Manufacturing 8,000 Leased
Reggio Emilia, Italy Manufacturing/Distribution 30,000 Leased
Genova, Italy Research & Development/Manufacturing 33,000 Leased
GramTel
South Bend, IN Sales/Administration/Other 19,000 Owned
Imperial Group
Akron, OH Manufacturing 106,000 Leased
Middleport, OH Manufacturing 85,000 Owned
Alamagordo, NM Manufacturing 40,200 Leased
Perry, OH Research & Development 5,000 Leased
Solon, OH Manufacturing/Administration 66,500 Leased
Grand Rapids, MI Manufacturing/Administration 45,000 Owned
JII Promotions
Coshocton, OH Manufacturing/Administration 218,000 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 52,000 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
Glendale, NY Manufacturing/Administration 11,200 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/Assembly 143,000 Leased
Seaboard
Fitchburg, MA Manufacturing/Administration 260,000 Owned
Miami, FL Manufacturing/Administration 38,050 Leased
Carlstadt, NJ Manufacturing 49,700 Leased
Enfield, NC Warehouse 50,000 Leased
Valmark
Livermore, CA Manufacturing/Administration 74,200 Leased
Welcome Home
Wilmington, NC Administration/Warehouse 10,000 Leased
Wilmington, NC Administration/Warehouse 12,000 Leased
-17-
Dacco also owns or leases 46 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, Ohio,
Indiana, Alabama and Virginia, two distribution centers in each of Arizona,
Michigan, Texas, Georgia and California, with the remaining distribution centers
located in South Carolina, Pennsylvania, Minnesota, Missouri, Nebraska, West
Virginia, Oklahoma, Nevada, New York, Maryland, Wisconsin and Kentucky.
Welcome Home leases 121 specialty retail stores in 37 states, with the majority
of store locations in outlet malls. Welcome Home maintains 15 stores in
California, 9 stores in Florida, 6 stores in Texas, 5 stores in New York, North
Carolina, Georgia, Ohio, Missouri and Pennsylvania, and 4 stores in Tennessee
and Washington. The remaining stores are located throughout the United States.
Merkle-Korff, Motion Control and Seaboard lease certain production, office and
warehouse 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 2005, 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, 2004.
-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, 2004, 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 February 18, 2004 and February 16, 2005, by
and between the Company and U.S. Bank National Association, as
Trustee, (the "Trustee") with respect to the 13% Senior Secured
Notes, the Indentures dated as of July 25, 1997 and March 22, 1999,
by and between the Company and 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, 2004. The financial data has been derived from the
consolidated financial statements of the Company and its subsidiaries. As a
result of the divestitures of the Jordan Telecommunications Products segment and
the Capita Technologies segment in 2000, the JII Promotions entity within the
Specialty Printing and Labeling segment in 2003 and 2004, and the anticipated
sale of Electrical Design & Control ("ED&C"), a subsidiary of Kinetek, these
segments and entities have been reported as discontinued operations for
financial reporting purposes in accordance with Accounting Principles Board
("APB") Opinion No. 30 and Statement of Financial Accounting Standards ("SFAS")
No. 144, and their results have been excluded from the information shown below.
Year Ended December 31,
(Dollars in thousands)
-------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Operating data: (1)
Net sales................................. $723,279 $666,931 $667,151 $665,962 $743,567
Cost of sales, excluding
depreciation............................. 500,180 448,423 429,648 426,578 474,868
------- ------- ------- ------- -------
Gross profit, excluding
depreciation............................. 223,099 218,508 237,503 239,384 268,699
Selling, general and
administrative expense,
excluding depreciation................... 153,399 153,871 157,899 153,519 150,312
Operating income.......................... 57,372 42,797 46,981 30,397 65,234
Interest expense(2)....................... 66,048 83,215 89,332 91,312 92,046
Interest income........................... (2,267) (1,352) (1,248) (784) (1,442)
(Loss) income from continuing
operations before income
taxes and minority interest(3)........... (4,901) (35,096) 53,390 (62,145) (24,780)
(Loss) income from continuing
operations .............................. (8,406) (43,725) 23,181 (56,378) (21,908)
Balance sheet data (at end
of period):
Cash and cash equivalents................. 15,412 15,517 19,717 25,565 20,899
Working capital........................... 98,872 103,571 102,218 151,045 139,609
Total assets.............................. 662,406 690,632 703,510 826,431 887,501
Long-term debt (less
current portion)........................ 689,399 728,124 715,516 819,406 783,844
Net capital deficiency (4)................ (242,981) (227,363) (201,558) (139,056) (82,010)
- -----------------------------------------
(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) Interest expense decreased in 2004 primarily due to the treatment of the
Company's Exchange Offer as a troubled debt restructuring pursuant to SFAS
No. 15. In addition, certain of the Company's 2009 Debenture note holders
entered into a Modification Agreement which provides for a reduction in
their stated maturity value and a reduction of their applicable interest
rate. See Note 12 to the financial statements.
(3) Loss from continuing operations before income taxes and minority interest
in 2000 includes a loss on the sale of a subsidiary of $2,798. Loss from
continuing operations before income taxes and minority interest in 2002
includes a gain on the extinguishment of long-term debt of $88,882, a gain
on the liquidation of a subsidiary of $1,888, a gain on the sale of a
facility of $1,431, and the write-down of certain assets held for sale of
$1,800. Loss from continuing operations before income taxes and minority
interest in 2003 includes a loss on the sale of a division of a subsidiary
of $401. Loss from continuing operations before income taxes and minority
interest in 2004 includes income from the sale of three affiliates of
$7,954.
(4) No cash dividends on the Company's Common Stock have been declared or paid.
-20-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
----------------------------------------------------------------
Historical Results of Operations
Summarized below are the historical net sales, operating income and
operating margin (as defined below) for each of the Company's business groups
for the fiscal years ended December 31, 2004, 2003, and 2002. Due to the
divestiture of the net assets of the School Annual division of JII Promotions
in September 2003 and the subsequent sale of certain assets of the Ad
Specialty and Calendar product lines in January 2004, the operations of JII
Promotions have been classified as discontinued operations in the Company's
Consolidated Statement of Operations in all periods. JII Promotions was part
of the Specialty Printing and Labeling segment. (See Note 5 to the financial
statements.) Additionally, due to the anticipated sale of ED&C, a subsidiary
of Kinetek, the results of ED&C have also been classified as discontinued
operations in all periods presented. (See Note 5 to the financial statements.)
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,
------------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
Net Sales:
Specialty Printing & Labeling $51,085 $48,647 $52,299
Jordan Specialty Plastics 147,665 125,974 115,305
Jordan Auto Aftermarket 141,862 144,874 155,754
Kinetek 313,867 278,309 274,818
Consumer and Industrial Products 68,800 69,127 68,975
-------- -------- -------
Total $723,279 $666,931 667,151
======== ======== =======
Operating Income (1):
Specialty Printing & Labeling $1,689 $3,663 $3,966
Jordan Specialty Plastics 9,832 5,482 7,501
Jordan Auto Aftermarket 3,783 7,266 17,488
Kinetek 34,153 30,048 38,347
Consumer and Industrial Products 1,919 2,297 1,037
------- ------- -------
Total $51,376 $48,756 $68,339
======= ======= =======
Operating Margin (2):
Specialty Printing & Labeling 3.3% 7.5% 7.6%
Jordan Specialty Plastics 6.7% 4.4% 6.5%
Jordan Auto Aftermarket 2.7% 5.0% 11.2%
Kinetek 10.9% 10.8% 14.0%
Consumer and Industrial Products 2.8% 3.3% 1.5%
Combined 7.1% 7.3% 10.2%
(1) Before corporate overhead of $(5,996), $5,959, and $21,358 for the
years ended December 31, 2004, 2003, and 2002, respectively. Certain
amounts in the prior year have been reclassified to conform with the
current year presentation.
(2) Operating margin is operating income divided by net sales.
-21-
Consolidated Operating Results. (See Consolidated Statements of Operations).
- -------------------------------
2004 Compared to 2003. Net sales increased $56.3 million, or 8.5%, to $723.3
million for 2004 from $666.9 million for 2003. The increase in sales was
primarily due to strong growth for Kinetek and Jordan Specialty Plastics which
grew 12.8% and 17.2%, respectively. These increases were partially offset by a
2.1% decline in the Jordan Auto Aftermarket segment. The improved economy helped
both the Kinetek and Jordan Specialty Plastics segments, and much of the growth
in these segments came from the introduction of new products and market share
gains in several niche markets.
Operating income increased $14.6 million, or 34.1%, to $57.4 million for 2004
from $42.8 million for 2003. The increase in operating income was primarily due
to increases at Kinetek and Jordan Specialty Plastics which grew 13.7% and
79.4%, respectively. In addition, operating income was positively impacted by
income from the sales of three affiliates of $8.0 million. These increases were
largely offset by decreases for the Jordan Auto Aftermarket and Specialty
Printing and Labeling segments. Additionally, raw material inflation compressed
product margins at Kinetek and Jordan Specialty Plastics. These segments were
unable to pass through much of the increased commodity prices for copper, steel,
wire, and resin throughout the year. Beginning in the second half of 2004, all
companies began to pass along some of these costs with greater success. The
Jordan Auto Aftermarket segment incurred several costs in 2004 associated with
the introduction of a new product line, and production inefficiencies during
peak demand for climate control products in the second and third quarters. Also,
2004 results included non recurring costs associated with the planned exit of
certain low-margin Jordan Auto Aftermarket business. The decrease in operating
income for the Specialty Printing and Labeling segment includes a non-cash
pretax goodwill impairment charge of $3.7 million.
2003 Compared to 2002. Net sales for the year ended December 31, 2003 decreased
$0.2 million, from 2002. This is primarily due to higher sales of membrane
switches at Valmark, hardware and office products at Deflecto, plastic hospital
supplies and bike reflectors at Sate-Lite, air conditioning compressors at Alma,
driers and accumulators and air conditioning hose assemblies at Atco, controls
at Kinetek, home accessories at Cape, retail sales at Welcome Home, and sales of
data storage and disaster recovery services at GramTel. Partially offsetting
these increases are lower sales of folding boxes at Seaboard, thermoplastic
colorants and Tilt Bins at Sate-Lite, remanufactured torque converters at Dacco,
drive trains at Alma, and motors at Kinetek. In addition, sales decreased due to
the sale of ISMI in December 2002, and the shutdown of Online Environs in
September 2002.
Operating income for the year ended December 31, 2003 decreased $4.2 million, or
8.9%, from 2002. This decrease was primarily due to the cumulative effect of
several adjustments, primarily relating to prior years, at Deflecto. In
addition, operating income declined due to increased development and marketing
costs at Kinetek, and a goodwill impairment loss at Cho-Pat. Partially
offsetting these decreases was higher operating income at Valmark due to
headcount reductions and cost cutting measures, increased operating income at
Sate-Lite due to sustained growth at its manufacturing facility in China, and
higher operating income at Welcome Home due to lower occupancy expenses and
lower discounting of products throughout the year.
Interest expense declined during 2004 primarily due to the treatment of the
Company's Exchange Offer as a troubled debt restructuring pursuant to SFAS No.
15. In addition, certain of the Company's 2009 Debenture note holders entered
-22-
into a Modification Agreement which provides for a reduction in their stated
maturity value and their applicable interest rate. Interest expense declined
during 2003 primarily due to the repurchase in 2002 of $119.0 million principal
amount of the Company's 2009 Debentures (see Note 12 to the financial
statements).
Income taxes - See Note 13 of to the financial statements.
Specialty Printing & Labeling. As of December 31, 2004, the Specialty Printing &
Labeling group consisted of Valmark, Pamco, and Seaboard.
2004 Compared to 2003. Net sales increased $2.4 million, or 5.0%, to $51.1
million for 2004 from $48.6 million for 2003. Revenues for Valmark and Pamco
product lines were up 14.6% and 8.3% respectively, while sales of the Seaboard
folding box products declined 5% in 2004. Sales related to screen printed,
rollstock, and membrane switch products were up well over last year partially
driven by a new product for pest control and increased sales in the medical
equipment market.
Operating income decreased $2.0 million, or 53.9%, to $1.7 million for 2004 from
$3.7 million for 2003. The decrease in operating income is largely due to a
non-cash pretax goodwill impairment charge of $3.7 million. Excluding this
charge, operating income would have increased $1.7 million, or 46.5%, to $5.4
million. Cost savings generated by a management reorganization and reduction in
employment at Valmark partially offset the goodwill impairment charge.
2003 Compared to 2002. Net sales for the year ended December 31, 2003 decreased
$3.7 million, or 7.0%, from 2002. This decrease is primarily due to lower sales
of screen printed products and rollstock at Valmark, $1.0 million, and $0.5
million, respectively, and lower sales of folding boxes at Seaboard, $2.5
million. Partially offsetting these decreases were higher sales of membrane
switches at Valmark, $0.3 million.
Operating income for the year ended December 31, 2003 decreased $0.3 million, or
7.6%, from 2002. This decrease was primarily due to lower operating income at
Pamco, $0.4 million, and Seaboard, $0.7 million. Partially offsetting these
decreases was increased operating income increased at Valmark, $0.7 million, and
lower corporate expenses, $0.1 million. The increased operating income at
Valmark is the result of headcount reductions and strict cost cutting measures
to bring the cost structure more in line with the lower sales volume.
Jordan Specialty Plastics. As of December 31, 2004 the Jordan Specialty Plastics
group consisted of Sate-Lite, Beemak, and Deflecto.
2004 Compared to 2003. Net sales increased $21.7 million, or 17.2%, to $147.7
million for 2004 from $126.0 million for 2003. The increased sales were the
result of a stronger economy, the introduction of several new products, market
share gains, and selling price increases which only partially offset the
dramatic increase in raw material costs in 2004. Revenues were up significantly
at several of the superstore retailers and large distributors for both hardware
and office products as a result of market share gains and the introduction of
several new products. Chairmat sales increased significantly for 2004 with
increased market shares at superstores, distributors, and wholesalers. Increased
-23-
sales of bike related products and safety reflectors for commercial trucks also
contributed to the overall sales growth. Partially offsetting the increased
sales of office products were lower selling prices of private label office
products as super stores continue migrating to private labeling strategies. In
addition, 2003 net sales included $2.3 million of thermoplastic colorants which
were not included in the 2004 results. The thermoplastic colorants product line
was divested in September of 2003.
Operating income increased $4.4 million, or 79.4%, to $9.8 million for 2004 from
$5.5 million for 2003. The increase in operating income is largely due to the
increased sales volume and selling price increases in 2004 and non-recurring
costs included in 2003 results. The selling price increases were more than
offset by significant raw material price increases for steel, aluminum, and
resin. Cost reduction initiatives continue to be pursued and several products
have been successfully transitioned to lower cost manufacturing operations in
China.
2003 Compared to 2002. Net sales for the year ended December 31, 2003 increased
$10.7 million, or 9.3%, over 2002. This increase is primarily due to higher
sales of hardware and office products at Deflecto, $12.6 million combined, and
increased sales of plastic hospital supplies and bike reflectors at Sate-Lite,
$1.6 million and $0.1 million, respectively. Partially offsetting these
increases were lower sales of thermoplastic colorants and Tilt Bins at
Sate-Lite, $1.5 million and $1.6 million, respectively, and decreased sales of
injection-molded products at Beemak, $0.5 million. The decreased sales of
thermoplastic colorants are primarily due to the divestiture of that division of
Sate-Lite in September 2003.
Operating income for the year ended December 31, 2003 decreased $2.0 million, or
26.9%, from 2002. This decrease was primarily due to lower operating income at
Deflecto, $3.5 million, and Beemak, $0.3 million. Partially offsetting these
decreases was higher operating income at Sate-Lite, $1.7 million, and lower
corporate expenses, $0.1 million. The lower operating income at Deflecto is the
result of adjustments related to prior years at one of Deflecto's subsidiaries,
$2.9 million. The increase in operating income at Sate-Lite is due to domestic
headcount and cost reduction programs as well as sustained growth at its
manufacturing facility in China.
Jordan Auto Aftermarket. As of December 31, 2004, the Jordan Auto Aftermarket
group consisted of Dacco, Alma, and Atco.
2004 Compared to 2003. Net sales decreased $3.0 million, or 2.1%, to $141.9
million for 2004 from $144.9 million for 2003. The decrease was primarily the
result of the continued reduction in the volume of transmission repairs due to
improved original equipment quality and the implementation of new warranty
policies of automotive manufacturers in 2003. This decrease was partially
offset by the introduction of new torque converter products in the second half
of 2004 as well as the opening of new DACCO retail distribution centers in
targeted locations. Continued softness in the climate control market was
offset by higher sales volumes of certain large customers in this segment.
Sales of tubing assemblies and fittings for the truck market were up
significantly for 2004 due to a stronger economy and many companies updating
their fleets in advance of the new emissions standards set to become effective
in 2007. Selling price increases on certain product lines in the third and
fourth quarters of 2004 also partially offset the market softness in both the
climate control and torque converter remanufacturing segments.
Operating income decreased $3.5 million, or 47.9%, to $3.8 million for 2004 from
$7.3 million for 2003. The decline in operating income was primarily the result
-24-
of several contributing factors including (i) operating inefficiencies resulting
from peak demand in the second and third quarters for climate control products,
(ii) supply chain issues associated with new products introduced in 2004 that
resulted in increased quality and freight costs, and (iii) production
inefficiencies resulting from consigned parts shortages in the torque converter
business, which also coincided with the peak of the climate control products
season.
In addition, during 2004 severance costs were recorded related to a management
reorganization associated with de-layering and changing certain management
personnel. Also, 2004 results include non-recurring costs associated with the
planned exit of certain low-margin business. The combined impact in 2004 of
these non-recurring costs was $1.5 million.
2003 Compared to 2002. Net sales for the year ended December 31, 2003 decreased
$10.9 million, or 7.0%, from 2002. This decrease was primarily due to lower
sales of remanufactured torque converters and other soft parts at Dacco and
decreased sales of drive trains at Alma. Partially offsetting these decreases
were higher sales of air conditioning compressors at Alma and driers and
accumulators and air conditioning hose assemblies at Atco. Alma sales decreased
due to a change in its OEM customers' reduced use of rebuilt products in their
warranty work.
Operating income for the year ended December 31, 2003 decreased $10.2 million,
or 58.5%, from 2002. This decrease was due to lower operating income at Dacco
and Alma. Partially offsetting these decreases was higher operating income at
Atco and lower corporate expenses. The decreased operating income at Dacco and
Alma are both the result of decreased cost absorption on lower sales. Alma's
operating income also suffered due to direct labor inefficiencies due to short
lead times required by a large customer.
Kinetek. As of December 31, 2004, the Kinetek group consisted of Imperial Group,
Merkle-Korff, FIR, Motion Control, Advanced DC and De Sheng.
2004 Compared to 2003. Net sales increased $35.6 million, from $278.3 million in
2003 to $313.9 million in 2004, a gain of 12.8%. The increased sales were driven
by the introduction of new products and net gains in market share, which
contributed approximately $20.0 million, and improvements in Kinetek's principal
markets in North America and Europe, which account for approximately $8.4
million in increased sales. The continued revaluation of the Euro against the
dollar during 2004 caused a $4.5 million improvement in sales due to the
favorable translation impact on Kinetek's European businesses. The acquisition
of O Thompson contributed $4.3 million in sales since the acquisition date. The
net impact of increases and decreases in selling prices is estimated to reduce
sales from the prior year by approximately $1.6 million, reflecting the
competitive global market for Kinetek's core products.
Sales in Kinetek's Motors segment increased from $201.7 million in 2003 to
$230.4 million in 2004, a gain of $28.7 million, or 14.2%. Subfractional motor
sales increased $3.7 million on the strength of an improved market for products
used in consumer refrigeration appliances, the partial year impact of a new ice
crusher product sold to a major appliance manufacturer, and numerous share gains
in smaller product categories. These gains were partly offset by the loss of
"value-added subassembly" ice crusher products sold to several key refrigeration
customers, for whom Kinetek continues to supply the ice crusher motor. Sales of
fractional and integral motors increased $25.0 million on significant gains in
market share and the sale of new products used in commercial floor care, and
-25-
recovery in the markets for material handling and golf car motor products.
Kinetek's European markets remained difficult during 2004, with sales down 4.6%
from 2003, due to general market conditions and the impact of net share losses.
The European sales declines were more than offset by the aforementioned increase
in sales due to favorable Euro translation. Sales of Kinetek's products in China
have benefited from that country's overall market strength and from share gains
in elevator motors as Kinetek expands its market presence geographically.
Sales in Kinetek's Controls segment increased $6.8 million, to $83.5 million in
2004, an increase of 8.9% from $76.7 million in the prior year. The increase in
sales was led by the inclusion of the partial year sales of O Thompson, which
contributed $4.3 million in sales. Sales of elevator controls and accessory
products increased $2.5 million, led by higher sales of the "I" family of
control products, the SmarTraq door operator system, and other non-controller
products.
Operating income increased to $34.2 million in 2004, an increase of $4.1
million, or 13.7%, from $30.0 million in 2003. Gross profit increased to $101.6
million (32.4% of net sales), from the prior year level of $96.1 million, (34.5%
of net sales). The increase in gross profit is mainly attributable to the
increases in sales described above. The impact of higher sales is partly offset
by the unfavorable impact of net reductions in selling prices resulting from
global market competition (approximately $1.6 million) and higher prices for
purchased components and services, particularly steel, copper, zinc, aluminum,
and freight. Gross margin as a percentage of sales declined in 2004 due to the
impacts of net selling price reductions, purchased cost inflation, and the
introduction of certain new products and share gains at competitive margins
which are lower than Kinetek's historical average. Selling, general, and
administrative expenses increased from $56.3 million in 2003 to $58.7 million.
Operating expenses increased modestly in line with the increases in sales, and
from costs associated with the relocation of operations of the Grand Rapids, MI,
Des Plaines, IL, and Oakwood Village, OH facilities. These increases were offset
in part by a one-time charge of $1.0 million in 2003 for excess medical claims
incurred by Kinetek's subsidiaries during 2001 and 2002.
2003 Compared to 2002. Net sales increased $3.5 million or 1.3% from $274.8
million in 2002 to $278.3 million in 2003. The sales variance is primarily due
to the impact of the stronger Euro on translation of European sales ($6.9
million increase) and the net impact of market share gains and losses ($10.6
million increase) resulting from Kinetek's introduction of new products to the
market. These gains were offset in part by the protracted sluggish economies in
North America and Europe, which continued to depress revenues in most of the
company's key market segments, for a revenue decline of $11.3 million. Pricing
pressure throughout Kinetek's product lines resulted in a $2.7 million reduction
in net sales.
Sales of Kinetek's Motors segment declined to $201.7 million in 2003 from $202.4
million in 2002, a decline of 0.4%. Subfractional motor sales declined by 0.6%
compared to 2003, as market driven declines concentrated in the vending and
appliance product lines, plus the loss of "value-added subassembly"
manufacturing for certain appliance customers, were nearly replaced by the
introduction of new products and share gains in other markets, such as medical,
restaurant, and commercial refrigeration. Sales of Fractional/Integral motor
-26-
products declined 0.3% from 2002. The variance was driven by general economic
softness in markets for motors used in commercial floor care, golf car,
elevator, and other applications. These declines were almost offset by net gains
from changes in market share and new product introductions in floor care and
elevator markets, and the translation impact on European sales described above.
Sales of Kinetek's Controls segment increased to $76.7 million in 2003, from
$72.4 million in 2002, an increase of $4.3 million, or 5.9%. The increase is the
result of recovery in the market for elevator control products and product line
extensions in the elevator modernization market.
Operating income declined 21.6%, from $38.3 million in 2002 to $30.0 million in
2003. Gross profit decreased from $99.1 million in 2002 (36.1% of sales) to
$96.1 million in 2003 (34.5% of sales). The decrease in gross profit is
primarily due to the aforementioned price reduction and shifts in the mix of
sales among Kinetek's product lines, some of which result from the high level of
new product introductions. Selling, general, and administrative expenses
increased to $56.3 million in 2003 from $50.9 million in 2002. The increase is
driven by increases in corporate overhead costs allocated to Kinetek, a one-time
charge of $1.0 million in 2003 for excess medical insurance claims incurred by
Kinetek's subsidiaries during 2001 and 2002, and increased development and
marketing costs for Kinetek's next-generation elevator control in anticipation
of broad market introduction in 2004.
Consumer and Industrial Products. As of December 31, 2004, the Consumer and
Industrial Products group consisted of Welcome Home LLC and its two divisions,
Cape Craftsmen and Welcome Home, and Cho-Pat and GramTel.
2004 Compared to 2003. Net sales decreased $0.3 million, or 0.5%, to $68.8
million for 2004 from $69.1 million for 2003. Sales for Welcome Home decreased
2.0% in 2004 while third party sales for Cape Craftsmen were consistent with
prior year. Comparable store sales at Welcome Home decreased 4.1% in 2004. The
decline in comparable Welcome Home store sales was primarily the result of a
difficult retail environment in Welcome Home's category in outlet malls. Welcome
Home closed four underperforming stores and opened eight new stores in 2004.
Cho-Pat sales of orthopedic supports grew 28.1% in 2004.
Operating income decreased $0.4 million, or 16.5%, to $1.9 million for 2004 from
$2.3 million for 2003. Merchandise margins decreased at Welcome Home largely due
to promotional discounts used to increase the turnover of slower moving
inventory. The decrease in operating income at Welcome Home was partially offset
by the non-cash Cho-Pat goodwill impairment charge of $0.7 million recorded in
2003.
2003 Compared to 2002. Net sales for the year ended December 31, 2003 increased
$0.2 million, or 0.2%, over 2002. This increase was primarily due to higher
sales of home accessories at Cape, $0.3 million, increased retail sales at
Welcome Home, $1.1 million, and higher sales of data storage and disaster
recovery services at GramTel, $0.7 million. Partially offsetting these increases
were lower sales of orthopedic supports at Cho-Pat, $0.1 million, the
divestiture of ISMI in December 2002 and the shutdown of Online Environs in
September 2002, $1.4 million and $0.4 million, respectively.
Operating income for the year ended December 31, 2003 increased $1.3 million, or
121.5%, over 2002. This increase is primarily due to higher operating income at
Welcome Home, $0.7 million, and GramTel, $0.6 million. In addition, operating
income increased due to the divestiture of ISMI and the shutdown of Online
-27-
Environs which generated operating losses in 2002 of $0.4 million and $0.7
million, respectively. Partially offsetting these increases was lower operating
income at Cape, $0.3 million, and Cho-Pat, $0.8 million. The increased operating
income at Welcome Home is due to increased comparative store sales, lower
occupancy expenses due to Welcome Home closing unprofitable stores and lower
discounting of its products during the year. The lower operating income at
Cho-Pat was primarily due to a goodwill impairment charge of $0.7 million.
Liquidity and Capital Resources
The Company had approximately $98.9 million of working capital at the end of
2004 compared to approximately $103.6 million at the end of 2003.
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 2005.
Capital spending levels in 2005 are anticipated to be consistent with 2004
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 used in operating activities for the year ended December 31, 2004 was
$13.4 million compared to $12.1 million used in operating activities in 2003.
This is primarily due to unfavorable working capital variances partially offset
by favorable operating results compared to 2003.
Net cash provided by investing activities for the year ended December 31, 2004
was $26.1 million compared to $2.7 million provided by investing activities in
2003. This increase in cash provided by investing activities is primarily due to
the divestiture of the Ad Specialty and Calendar divisions of JII Promotions in
the first quarter of 2004, the sale of three affiliates in the second quarter of
2004 and decreased capital expenditures in 2004 compared to 2003. Partially
offsetting these increases is net proceeds from the sale of the School Annual
division of JII Promotions in September 2003.
Net cash used in financing activities for the year ended December 31, 2004 is
$15.7 million compared to $0.9 million used in financing activities in 2003.
This increase in cash used in financing activities is primarily due to increased
net payments on revolving credit facilities, higher payment of financing fees
resulting from the Exchange Offer and increased payment of long-term debt.
Partially offsetting these increases is increased proceeds from other borrowings
-28-
related to one of Kinetek's foreign subsidiaries.
The Company and its subsidiaries are party to two credit agreements under which
the Company is able to borrow up to $95.0 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, 2004, the Company had
approximately $32.6 million of available funds under these arrangements. (See
Note 12 to the consolidated financial statements.)
In conjunction with the Exchange Offer completed by the Company in February 2004
(see discussion below), one of the Company's revolving credit facilities was
amended to reduce, over time, the maximum loan commitment under the facility. As
of December 31, 2004, the maximum loan commitment under the facility was $75.0
million. As of June 1, 2005, that commitment will be reduced to $55.0 million
and again to $45.0 million as of March 1, 2006 and through the remaining life of
the agreement. At this time, the Company does not expect the decrease in
available funds in the current year to have a material impact on its operations.
Kinetek's credit agreement expires December 18, 2005. Kinetek intends to replace
the credit facility in 2005. Management is confident such refinancing can be
obtained under favorable terms to Kinetek, however, such terms will be subject
to market conditions which may change significantly.
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, its 10 3/8% Senior Notes due 2007, or its 13% Exchange
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.
As discussed above, one of the Company's revolving credit facilities contains
a provision for the step-down in maximum borrowing capacity during 2005. As of
June 1, 2005 the Company's maximum borrowings under this agreement will
decrease from $75.0 million to $55.0 million. This, coupled with the facts
that the Company has experienced operating losses in recent years and has used
cash in operating activities, has caused the Company's executive management to
evaluate various options to improve the Company's liquidity. To this end, the
Company has restructured some of its outstanding debt through the Exchange
Offer discussed below and in Note 12 to the financial statements and the
Modification and Waiver Agreements also discussed below and in Note 12 to the
financial statements. The effect of these transactions has been to reduce cash
paid for interest in the current year as well as to provide for further
reductions in debt maturity payments if certain financial performance is not
achieved. In addition, the Company expects improved operating performance in
all segments over the prior year. Specifically, new product development and
the continued shift of manufacturing to China in the Specialty Plastics and
Kinetek groups are expected to improve results. In addition, the exit of a
certain unprofitable business with a specific customer and plans to improve
production efficiencies within the Auto Aftermarket Group will increase
operating margins. Further, the Company has evaluated its holdings of
-29-
investments in affiliates (See Note 8) and, when appropriate, will sell
certain investments, similar to the sale of the Company's investments in DMS
Holdings Inc, Mabis Healthcare Holdings Inc. and Flavor and Fragrance Holdings
Inc. as described in Note 15 to the financial statements. The Company believes
that through its efforts discussed above, the Company will have sufficient
liquidity to meet its obligations in the coming year.
On February 18, 2004, the Company completed an Exchange Offer, whereby it
exchanged $173.3 million of new Senior Notes (the "Exchange Notes") for $104.8
million of 2007 Seniors and $142.8 million of New 2007 Seniors (collectively,
"Old Senior Notes"). The Exchange Notes were co-issued by JII Holdings LLC, a
wholly owned subsidiary of the Company, and its wholly owned subsidiary, JII
Holdings Finance Corporation. The Exchange Notes bear interest at 13% per annum
which is payable semi annually on February 1 and August 1 of each year, and
mature on April 1, 2007. The notes that were exchanged bore interest at 10 3/8%
per annum and paid interest semi annually on February 1 and August 1. The
remaining Old Senior Notes mature on August 1, 2007.
The Exchange Offer has been accounted for as a troubled debt restructuring in
conformity with Statement of Financial Accounting Standards No. 15 "Accounting
by Debtors and Creditors for Troubled Debt Restructurings" (SFAS No. 15). SFAS
No. 15 requires that, when there is a modification of terms such as this, if the
total debt service of the new debt is less than the carrying amount on the
balance sheet of the old debt, the carrying amount should be reduced to the
total debt service amount. This reduction resulted in a gain of $2.0 million,
which was required by SFAS No. 15 to be offset by fees incurred on the
transaction. Fees of $7.5 million which were in excess of the gain, were
recorded as interest expense during 2004. The remaining reduction in the
principal of the Exchange Notes compared to the Old Senior Notes will be
recognized over the period to maturity of the Exchange Notes as a reduction of
interest expense. During 2004, the reduction in interest expense attributable to
this treatment was $19.6 million.
On January 31, 2004, the Company and holders of $89.9 million of the Company's
2009 Debentures and $0.2 million of the Company's Discount Debentures
(collectively, the "Waived Debentures") entered into a Waiver Agreement which
provides that the participating note holders waive any rights to claim an event
of default if the Company does not make the scheduled interest payments as
required in the applicable indenture. The Company may pay interest on these
Waived Debentures only if such payment complies with the restricted payments
covenant in the indenture governing the Exchange Notes. Should the Company be
prohibited from or elect not to make interest payments on these notes, the
interest will continue to accrue on the Waived Debentures at the original rate
of 11 3/4% per year and will be due and payable to the holders at the maturity
date of the notes. Pursuant to the Waiver Agreement, the maturity date of the
participating notes is the earlier of (1) the date on which all of the
outstanding principal and interest on the Exchange Notes and the 2009 and
Discount Debentures not participating in the Waiver Agreement have been paid in
full, (2) the date six months after the original maturity of the participating
notes, or (3) the date on which the Company enters into a bankruptcy proceeding.
On February 18, 2004, certain of the Company's 2009 Debenture note holders
entered into a Modification Agreement which provides for a reduction in their
stated maturity value and a reduction of their applicable interest rate. The
aggregate maturity value of the notes held by the parties to the Modification
Agreement is $23.0 million which has been reduced to $6.9 million. The interest
rate on these notes has been reduced to a stated rate of 1.61% from 11 3/4%. On
-30-
April 1, 2004 certain holders of an additional $1.7 million of the Company's
2009 Debentures elected to participate in the Modification Agreement. The
maturity value of these notes has been reduced to $0.5 million. The holders of
these modified notes retain the right to collect the original maturity value and
interest thereon at the original interest rate if the Company meets certain
financial tests and ratios. Under the Modification Agreement, these notes mature
on the earlier of (1) the date that all other 2009 Debenture note holders have
been paid in full, (2) the date that is six months after the original maturity
date, or (3) the date on which the Company enters into a bankruptcy proceeding.
The Company has determined that this modification will be accounted for as a
troubled debt restructuring as required by SFAS No. 15. The effect of this
accounting treatment will not reduce the carrying value of the modified notes;
however, the interest expense associated with the modified notes will be
calculated using the modified stated interest rate of 1.61% annum and the
reduced maturity amount.
The remaining 2009 and Discount Debentures that are not party to the
Modification Agreement will continue to accrue interest at 11 3/4% and represent
$70.2 million of the total outstanding principal amount of $94.9 million.
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
The Company purchases certain raw materials for use in the manufacture of its
products, including steel, aluminum, copper, and resin which are generally
available from multiple sources with adequate supply. While certain commodities
have experienced greater pricing volatility in the past year, the Company has
used a number of programs to address this risk such as entering into longer term
purchase contracts with suppliers of certain commodities and implementing
selling price adjustments over time. The Company believes it is not
significantly dependent on a limited number of suppliers and that practices are
in place to ensure an adequate supply of raw materials in the future.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to the consolidated
financial statements included in Item 8 of this Form 10-K. Our discussion and
analysis of financial condition and results from operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of the financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues, and expenses. On
an on-going basis, we evaluate the estimates that we have made. These estimates
have been based upon historical experience and on various other assumptions that
-31-
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 step is to identify when goodwill
impairment has occurred by comparing the fair value of a reporting unit with its
carrying amount, including goodwill. If the fair value of a reporting unit does
not exceed its carrying value, the second step of the goodwill test should be
performed to measure the amount of the impairment loss, if any. In this second
step, the implied fair value of the reporting unit's goodwill is compared with
the carrying amount of the goodwill. If the carrying amount of the reporting
unit's goodwill exceeds the implied fair value of that goodwill, an impairment
loss should be recognized in an amount equal to that excess, not to exceed the
carrying amount of the goodwill. If there is a decrease in product demand,
market conditions or any condition that changes the assumptions used to measure
fair value it could result in requiring a material impairment charge in the
future.
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, changes in economic conditions in specific
markets in which we operate could have a material effect on future reserve
balances required.
-32-
Excess and Obsolete Inventory
We record reserves for excess and obsolete inventory equal to the difference
between the cost of inventory and its estimated market value using assumptions
about future product life-cycles, product demand and market conditions. If
actual product life-cycles, product demand and market conditions are less
favorable than those projected by management, additional inventory reserves may
be required.
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
Contractual Obligations
The following table summarizes our contractual obligations as of December 31,
2004 (in thousands):
Payments by Period
--------------------------------------------------------------------------
Less than 1 1-3 4-5 After 5
Total year years years years
-------------- -------------- --------------- -------------- -------------
Long-term debt $659,581 $25,810 $535,499 $96,851 $1,421
Interest 187,844 67,090 109,380 10,890 484
Capital leases 8,802 2,064 3,115 3,261 362
Operating leases 66,341 14,880 21,552 14,458 15,451
-------------- -------------- --------------- -------------- -------------
Total $922,568 $109,844 $669,546 $125,460 $17,718
-------------- -------------- --------------- -------------- -------------
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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, 2004, the
Company had $46.0 million of variable rate debt outstanding. A one percentage
point increase in interest rates would increase the annual amount of interest
paid by approximately $0.5 million. The Company does not believe that its market
risk financial instruments on December 31, 2004 would have a material effect on
future operations or cash flows.
The Company is exposed to market risk from changes in foreign currency exchange
rates, including fluctuations in the functional currency of foreign operations.
The functional currency of operations outside the United States is the
respective local currency. Foreign currency translation effects are included in
accumulated other comprehensive income in shareholder's equity.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Page No.
--------
Report of Independent Registered Public Accounting Firm ............ 36
Consolidated Balance Sheets as of December 31, 2004
and 2003............................................................ 37
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003, and 2002................................... 38
Consolidated Statements of Changes in Shareholder's Equity
(Net Capital Deficiency) for the years ended December 31,
2004, 2003 and 2002................................................. 39
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002................................... 40
Notes to Consolidated Financial Statements.......................... 42
-35-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
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, 2004 and 2003 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, 2004.
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 the standards of the Public Company
Accounting Oversight Board (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. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
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, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, 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, 2005
-36-
JORDAN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
---------------------
Restated
2004 2003
---- ----
See Note 5)
-----------
ASSETS
- ------
Current assets:
Cash and cash equivalents $15,412 $15,517
Accounts receivable, net of allowance of
$7,233 and $7,312 in 2004 and 2003, respectively 109,554 97,471
Inventories 130,033 121,287
Assets of discontinued operations 3,432 21,648
Income tax receivable 3,631 5,637
Prepaid expenses and other current assets 12,363 18,605
------- -------
Total current assets 274,425 280,165
Property, plant and equipment, net 85,036 89,619
Investments in and advances to affiliates 40,882 48,826
Goodwill, net 245,309 247,900
Other assets 16,754 24,122
-------- --------
Total Assets $662,406 $690,632
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (NET CAPITAL DEFICIENCY)
- -------------------------------------------------------------
Current liabilities:
Accounts payable $62,796 $53,080
Accrued liabilities 81,451 81,779
Liabilities of discontinued operations 698 8,427
Current portion of long-term debt 27,874 20,087
------- -------
Total current liabilities 172,819 163,373
Long-term debt 689,399 728,124
Other non-current liabilities 25,167 14,587
Deferred income taxes 14,255 8,904
Minority interest