10-Q 1 form10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended June 30, 2004 Commission File Number 33-24317 JORDAN INDUSTRIES, INC. (Exact name of registrant as specified in charter) Illinois 36-3598114 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) ArborLake Centre, Suite 550 60015 1751 Lake Cook Road (Zip Code) Deerfield, Illinois (address of Principal Executive Offices) Registrant's telephone number, including Area Code: (847) 945-5591 Former name, former address and former fiscal year, if changed since last report: Not applicable. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No ------ ------ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act). Yes No X ------ ------ The number of shares outstanding of Registrant's Common Stock as of August 16, 2004: 98,501.0004. 2 JORDAN INDUSTRIES, INC. INDEX Part I. Financial Information Page No. ----------------------------- -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 2004 (Unaudited) and December 31, 2003 3 Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2004 and 2003 (Unaudited) and the Six Months Ended June 30, 2004 and 2003 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 25 Part II. Other Information 27 -------------------------- Item 1. Legal Proceedings Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases Of Equity Securities Item 3. Defaults Upon Senior Securities Item 4. Submissions of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 3 JORDAN INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (ALL DOLLAR AMOUNTS IN THOUSANDS) June 30, December 31 2004 2003, -------- ----------- ASSETS (unaudited) Current Assets: Cash and cash equivalents $21,637 $16,173 Accounts receivable, net 125,703 101,860 Inventories 136,226 126,504 Net assets of discontinued operations (See Note E) 2,029 6,292 Income tax receivable 4,287 5,637 Prepaid expenses and other current assets 19,889 27,327 -------- -------- Total Current Assets 309,771 283,793 Property, plant and equipment, net 85,311 89,956 Investments in and advances to affiliates 34,163 46,664 Goodwill, net 247,983 247,900 Other assets 20,680 24,155 -------- -------- Total Assets $697,908 $692,468 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY (NET CAPITAL DEFICIENCY) Current Liabilities: Accounts payable $ 68,483 $54,001 Accrued liabilities 96,480 86,667 Current portion of long-term debt 8,308 20,087 -------- -------- Total Current Liabilities 173,271 160,755 Long-term debt, less current portion 726,458 728,124 Other non-current liabilities 13,859 14,587 Deferred income taxes 11,323 8,198 Minority interest 633 472 Preferred stock 2,637 2,535 Shareholder's Equity (net capital deficiency): Common stock $.01 par value: 100,000 shares authorized and 98,501 shares issued and outstanding 1 1 Additional paid-in capital 2,116 2,116 Accumulated other comprehensive income (loss) 426 (1,012) Accumulated deficit (232,816) (223,308) -------- -------- Total Shareholder's Equity (net capital deficiency) (230,273) (222,203) --------- --------- Total Liabilities and Shareholder's Equity (net capital deficiency) $697,908 $692,468 ======== ======== See accompanying notes to condensed consolidated financial statements. 4 JORDAN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) THREE MONTHS ENDED SIX MONTHS ENDED June 30, June 30, ------------------ ---------------- 2004 2003 2004 2003 ------ ------ ------ ------ Net sales $190,731 $173,335 $359,248 $335,581 Cost of sales, excluding 130,481 115,407 244,582 222,620 depreciation Selling, general and administrative expenses, excluding depreciation 37,910 37,804 76,182 73,741 Depreciation 4,179 5,407 9,130 10,720 Amortization of other intangibles 52 37 98 98 Income from sale of affiliates (See (7,954) - (7,954) - Note M) Management fees and other 318 328 248 358 -------- -------- -------- ------- Operating income 25,745 14,352 36,962 28,044 Other (income) expenses: Interest expense 15,232 20,708 38,891 41,453 Interest income (1,562) (246) (1,832) (513) Other (696) (5,235) (361) (8,628) -------- ------- ------- ------- 12,974 15,227 36,698 32,312 -------- ------- ------- ------- Income (loss) before income taxes, minority interest, and discontinued operations 12,771 (875) 264 (4,268) Provision for income taxes 2,034 3,237 5,976 6,253 -------- ------- ------- ------- Income (loss) before minority interest and discontinued operations 10,737 (4,112) (5,712) (10,521) Minority interest 62 133 161 72 -------- ------- ------- ------- Income (loss) before discontinued operations 10,675 (4,245) (5,873) (10,593) (Loss) income from discontinued operations, net of tax (See Note E) (1,902) 1,840 (2,362) 289 Loss on sale of discontinued operations, net of tax (See Note E) - - (1,171) - ------- ------- ------- -------- Net income (loss) $ 8,773 $(2,405) $(9,406) $(10,304) ======= ======= ======= ======== See accompanying notes to condensed consolidated financial statements. 5 JORDAN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) SIX MONTHS ENDED June 30, -------------------- 2004 2003 ------ ------ Cash flows from operating activities: Net loss $(9,406) $(10,304) Adjustments to reconcile net loss to net cash used in operating activities: Loss on sale of discontinued operations 1,171 - Income from sale of affiliates (7,954) - Depreciation and amortization 9,228 10,818 Amortization of deferred financing fees 4,539 3,092 Minority interest 161 72 Non-cash interest 96 28 Deferred income taxes 3,125 5,233 Gain on disposal of fixed assets (196) (3,774) Other 15 (4,468) Changes in operating assets and liabilities: Increase in current assets (31,964) (25,044) Increase in current liabilities 10,106 7,005 Decrease (increase) in non-current assets 530 (3,765) (Decrease) increase in non-current liabilities (728) 441 Increase (decrease) in net assets of discontinued operations (63) 3,437 ------- ------- Net cash used in operating activities (21,340) (17,229) Cash flows from investing activities: Proceeds from sale of fixed assets 796 3,861 Capital expenditures (3,690) (6,133) Net proceeds from sale of discontinued operations 6,155 - Net proceeds from sale of affiliates (See Note M) 27,207 - Additional purchase price payments - (750) ------- ------- Net cash provided by (used in) investing activities 30,468 (3,022) Cash flows from financing activities: Proceeds from revolving credit facilities, net 4,376 28,635 Repayment of long-term debt (10,653) (11,886) Proceeds from other borrowings 5,224 266 Payment of financing fees (3,498) - ------- ------- Net cash (used in) provided by financing activities (4,551) 17,015 Effect of exchange rate changes on cash 887 5,093 ------- Net increase in cash and cash equivalents 5,464 1,857 Cash and cash equivalents at beginning of period 16,173 19,929 ------- ------- Cash and cash equivalents at end of period $21,637 $21,786 ======= ======= See accompanying notes to condensed consolidated financial statements. 6 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) A. Organization ---------------- The unaudited condensed consolidated financial statements, which reflect all adjustments that management believes necessary to present fairly the results of interim operations and are of a normal recurring nature, should be read in conjunction with the Notes to the Consolidated Financial Statements (including the Summary of Significant Accounting Policies) included in the Company's audited consolidated financial statements for the year ended December 31, 2003, which are included in the Company's Annual Report filed on Form 10-K for such year (the "2003 10-K"). Results of operations for the interim periods are not necessarily indicative of annual results of operations. B. Summary of Significant Accounting Policies ---------------------------------------------- The condensed consolidated financial statements include the accounts of Jordan Industries, Inc. and its subsidiaries. Material intercompany transactions and balances are eliminated in consolidation. Operations of certain subsidiaries outside the United States are included for periods ending two months prior to the Company's year-end and interim periods to ensure timely preparation of the condensed consolidated financial statements. The Company has recorded an income tax provision for the six months ended June 30, 2004 primarily due to its foreign and state tax expense. The Company's domestic losses have not been benefited for federal tax purposes. C. Inventories --------------- Inventories are summarized as follows: June 30, December 31, 2004 2003 ------------ ------------- Raw materials $58,624 $ 54,588 Work-in-process 19,241 17,652 Finished goods 58,361 54,264 -------- -------- $136,226 $126,504 ======== ======== D. Comprehensive Income (loss) ------------------------------- Total comprehensive income (loss) for the three months and six months ended June 30, 2004 and 2003 is as follows: Three Months ended Six Months ended June 30, June 30, ------------------- ------------------ 2004 2003 2004 2003 ------ ------ ------ ------ Net income (loss) $ 8,773 $(2,405) $(9,406) $(10,304) Foreign currency translation (1,554) 2,044 1,438 7,716 ------- ------- ------- -------- Comprehensive income (loss) $ 7,219 $ (361) $(7,968) $ (2,588) ======= ======= ======= ======== 7 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) E. Discontinued Operations --------------------------- On January 20, 2004, the Company sold certain assets and liabilities of JII Promotions' Ad Specialty and Calendar product lines to a third party for $6,155. Concurrent with the above transaction, the Company agreed to wind down the remaining activities of JII Promotions and to ultimately retain only the pension-related liabilities and various immaterial capital leases. The consolidated financial statements reflect JII Promotions as a discontinued operation for all periods presented. Net assets of discontinued operations in the condensed consolidated balance sheets represent net assets of JII Promotions, excluding the retained liabilities discussed above. The Company recorded a loss on the sale of $1,171. There was no tax benefit on the loss on sale or on the loss from discontinued operations. Net sales of JII Promotions for the six month period ending June 30, 2004 and the year ended December 31, 2003 were $1,083 and $51,933, respectively. JII Promotions was a part of the Specialty Printing and Labeling segment. F. Additional Purchase Price Agreements ---------------------------------------- The Company has a contingent purchase price agreement relating to its acquisition of Deflecto in 1998. The agreement is based on Deflecto achieving certain earnings before interest and taxes and is payable on April 30, 2008. If Deflecto is sold prior to April 30, 2008, the agreement is payable 120 days after the transaction. Additional consideration, if any, will be recorded as an addition to goodwill. Kinetek has a contingent purchase price agreement relating to its acquisition of Motion Control on December 18, 1997. The terms of this agreement provide for additional consideration to be paid to the sellers. The agreement is exercisable at the sellers' option during a five year period that began in 2003. When exercised, the additional consideration will be based on Motion Control's operating results over the two preceding fiscal years. Payments, if any, under the contingent agreement will be placed in a trust and paid out in cash over a three or four-year period, in annual installments according to a schedule, which is included in the agreement. Additional consideration, if any, will be recorded as an addition to goodwill. G. Pension Plans and Other Post-Retirement Benefit Plans --------------------------------------------------------- The components of net periodic benefit cost for the Company's pension plans for the three months and six months ended June 30, 2004 and 2003 were as follows: Three Months Ended Six Months Ended ------------------ ---------------- June 30, June 30, -------- -------- 2004 2003 2004 2003 ---- ---- ---- ---- Service cost $ 195 $ 169 $ 390 $ 338 Interest cost 310 299 620 598 Expected return on plan assets (270) (294) (540) (588) Prior service costs recognized 15 14 30 28 Recognized net actuarial loss (gain) 31 (2) 62 (4) ----- ------ ----- ----- Net periodic benefit cost $ 281 $ 186 $ 562 $ 372 ===== ====== ===== ===== 8 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) The components of net periodic benefit cost for the Company's post-retirement healthcare benefit plans for the three months and six months ended June 30, 2004 and 2003 were as follows: Three Months Ended Six Months Ended ------------------ ---------------- June 30, June 30, -------- -------- 2004 2003 2004 2003 ---- ---- ---- ---- Service cost $46 $38 $92 $76 Interest cost 90 72 180 144 Recognized net actuarial loss 48 31 96 62 ----- ----- ----- ----- Net periodic benefit cost $ 184 $ 141 $ 368 $ 282 ===== ===== ===== ===== H. Business Segment Information -------------------------------- See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the Company's business segment disclosures. There have been no changes from the Company's December 31, 2003 consolidated financial statements with respect to segmentation or the measurement of segment profit or loss, except for the reclassification of JII Promotions to discontinued operations in all periods (See Note E). I. Exchange Offer ------------------ On February 18, 2004, the Company completed an Exchange Offer, whereby it exchanged $173,334 of new Senior Notes (the "Exchange Notes") for $247,619 of Old Senior Notes. The Exchange Notes were co-issued by JII Holdings LLC, a wholly owned subsidiary of the Company, and its wholly owned subsidiary, JII Holdings Finance Corporation. The Exchange Notes bear interest at 13% per annum which is payable semi annually on February 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 $2,149, which was required by SFAS No. 15 to be offset by fees incurred on the transaction. Fees of $7,249, which were in excess of the gain, were recorded as interest expense during the first quarter of 2004. The remaining reduction in the principal of the Exchange Notes compared to the Old Senior Notes will be recognized over the period to maturity of the Exchange Notes as a reduction of interest expense. J. Waiver Agreement -------------------- On January 31, 2004, the Company and certain holders of the Company's Senior Subordinated Discount Debentures entered into a Waiver Agreement which 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. Should the Company elect not to make interest payments on these notes, the interest will continue to accrue at its 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 9 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) Senior Secured Discount Debentures not participating in the Waiver Agreement have been paid in full, (2) the date six months after the original maturity of the participating notes, or (3) the date on which the Company enters into a bankruptcy proceeding. K. Modification Agreement ------------------------- On February 18, 2004, certain of the Company's Senior Subordinated Discount Debenture note holders entered into a Modification Agreement which provides for a reduction in their stated maturity value and a reduction of their applicable interest rate. The aggregate maturity value of the notes, including accrued but unpaid interest, held by the parties to the Modification Agreement is $24,007 which has been reduced to $7,202. The interest rate on these notes has been reduced to a stated rate of 1.61% from 11.75%. On April 1, 2004 certain holders of an additional $1,847 of the Company's Senior Subordinated Discount Debentures elected to participate in the Modification Agreement. The maturity value of these notes, including accrued but unpaid interest, has been reduced to $554. The holders of these modified notes retain the right to collect the original maturity value and interest thereon at the original interest rate if the Company meets certain financial tests and ratios. Under the Modification Agreement, these notes mature on the earlier of (1) the date that all other Senior Subordinated Discount Debenture note holders have been paid in full, (2) the date that is six months after the original maturity date, or (3) the date on which the Company enters into a bankruptcy proceeding. The Company has determined that this modification will be accounted for as a troubled debt restructuring as required by SFAS No. 15. The effect of this accounting treatment will not reduce the carrying value of the modified notes; however, the interest expense associated with the modified notes will be calculated using the modified stated interest rate of 1.61% per annum and the reduced maturity amount. The remaining Senior Subordinated Discount Debentures that are not party to the Modification Agreement will continue to accrue interest at 11.75% and represent $69,032 of the total outstanding principal amount of $94,886.

18 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) M. Affiliate Transactions -------------------------- On May 4, 2004, two of the Company's affiliates, DMS Holdings, Inc. and Mabis Healthcare Holdings, Inc., ("DMS/Mabis") were sold to a third party. A portion of the proceeds from the sale was used to repay the Company for operating expenses which the Company paid on behalf of DMS/Mabis in prior periods, as well as accrued and unpaid management fees due the Company. These repayments totaled $806 and $1,069, respectively. Also as a result of the sale, the Company was paid a fee of $1,725 for the termination of their management fee arrangement with DMS/Mabis, and a fee of $1,600 pursuant to certain advisory agreements. The Company recorded income of approximately $4,309 in the second quarter as a result of this transaction. On May 13, 2004, one of the Company's affiliates, Flavor and Fragrance Holdings, Inc., ("FFG") was sold to a third party. A portion of the proceeds was used to repay the principal and accrued interest on the note the Company received when the net assets of Flavorsource were sold to FFG on January 1, 2002. This principal and accrued interest totaled $12,181. In addition, a portion of the proceeds from the sale was used to repay the Company for operating expenses which the Company paid on behalf of FFG in prior periods, as well as accrued and unpaid management fees due the Company. These repayments totaled $4,509 and $1,672, respectively. Also as a result of the sale, the Company was paid a fee of $1,705 for the termination of their management fee arrangement with FFG, and a fee of $1,940 pursuant to certain advisory agreements. The Company recorded income of approximately $3,645 in the second quarter as a result of this transaction. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------------------------------------------- The following discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the 2003 10-K and the financial statements and the related notes thereto. Results of Operations --------------------- Summarized below are the net sales, operating income (loss) and operating margins (as defined) for each of the Company's business segments for the three month and six month periods ended June 30, 2004 and 2003. Due to the divestiture of the net assets of the School Annual division of JII Promotions in September 2003 and the subsequent sale of certain assets of the Ad Specialty and Calendar product lines in January 2004, the operations of JII Promotions have been classified as Discontinued Operations on the Company's Consolidated Statement of Operations in all periods. JII Promotions was part of the Specialty Printing and Labeling segment. (See Note E to the financial statements.) The following discussion reviews the following segment data and certain of the consolidated financial data for the Company.

------------------- (a) Before corporate overhead and management fees of $(8,548) and $1,776 for the three months ended June 30, 2004 and 2003, respectively, and $(8,647) and $2,155 for the six months ended June 30, 2004 and 2003, respectively. Corporate overhead and management fees for the three and six months ended June 30, 2004 include income from the sale of three affiliates of $7,954. (b) Operating margin is operating income (loss) divided by net sales. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) Specialty Printing and Labeling. As of June 30, 2004, the Specialty Printing and Labeling group ("SPL") consisted of Valmark, Pamco, and Seaboard. Net sales for the three months ended June 30, 2004 increased $1.4 million, or 11.8%, over the same period in 2003. This increase was primarily due to higher sales of membrane switches and screen printed products at Valmark, $0.8 million and $0.3 million, respectively, and increased sales of labels at Pamco, $0.4 million. Partially offsetting these increases were lower sales of folding boxes at Seaboard, $0.1 million. Net sales for the six months ended June 30, 2004 increased $1.2 million, or 4.6%, over the same period in 2003. This increase was primarily due to higher sales of membrane switches and screen printed products at Valmark, $0.9 million and $0.4 million, respectively, and increased sales of labels at Pamco, $0.8 million. Partially offsetting these increases were lower sales of folding boxes at Seaboard, $0.9 million. The increase at Valmark was primarily due to a sales increase of approximately 30% to one of its largest customers in the medical equipment market. Additionally, sales to a major customer of electronic sensors more than doubled from the same period in 2003. Operating income for the three months ended June 30, 2004 increased $0.9 million, or 94.2%, over the same period in 2003. This increase was primarily due to higher operating income at Valmark, $0.7 million, and Seaboard, $0.1 million, as well as reduced corporate expenses. Operating income for the six months ended June 30, 2004 increased $1.0 million, or 45.6%, over the same period in 2003. This increase was primarily due to higher operating income at Valmark, $0.9 million, and Pamco, $0.2 million, as well as reduced corporate expenses. Partially offsetting these increases was lower operating income at Seaboard, $0.3 million. The significantly improved margins at Valmark were primarily driven by volume leverage and cost reductions as well as favorable product mix. Jordan Specialty Plastics. As of June 30, 2004, the Jordan Specialty Plastics group ("JSP") consisted of Beemak, Sate-Lite, and Deflecto. Net sales for the three months ended June 30, 2004 increased $4.0 million, or 13.7%, over the same period in 2003. This increase was primarily due to higher sales of hardware and office products at Deflecto, $2.3 million and $1.5 million, respectively. In particular, increased sales of chairmats at Deflecto of $1.1 million contributed to the higher sales of office products. In addition, sales of truck and auto lenses, bike reflectors, plastic hospital supplies, and custom molded products increased at Sate-Lite, $0.2 million, $0.2 million, $0.1 million, and $0.3 million, respectively, and sales of display products increased at Beemak, $0.3 million. Partially offsetting these increases were lower sales of fabricated products at Beemak, $0.2 million, and decreased sales of thermoplastic colorants at Sate-Lite, $0.7 million, due to the sale of the Midwest Color division in September 2003. Net sales for the six months ended June 30, 2004 increased $9.0 million, or 15.7%, over the same period in 2003. This increase was primarily due to higher sales of hardware and office products at Deflecto, $5.6 million and $2.6 million, respectively. The increase in sales of office products was driven primarily by higher sales of chairmats of $1.9 million. In addition, sales of display products and injection-molded products increased at Beemak, $0.7 million and $0.2 million, respectively, and sales of truck and auto lenses, bike reflectors, plastic hospital supplies and custom-molded products increased at Sate-Lite, $0.3 million, $0.5 million, $0.3 million, and $0.4 million, respectively. Partially offsetting these increases were lower sales of thermoplastic colorants at Sate-Lite of $1.6 million due to the sale of the Midwest Color division. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) Operating income for the three months ended June 30, 2004 increased $0.3 million, or 17.8%, over the same period in 2003. This increase was primarily due to higher operating income at Beemak. Operating income for the six months ended June 30, 2004 increased $0.4 million, or 11.2%, over the same period in 2003. This increase was primarily due to higher operating income at Beemak and Sate-Lite, $0.7 million and $0.1 million, respectively, partially offset by lower operating income at Deflecto, $0.4 million. Significant cost reductions at Deflecto throughout the first half of 2004 have been largely offset by substantial increases in raw material costs. Retailers and distributors have accepted some price increases, but those price increases have not fully offset the increases in raw material costs. Jordan Auto Aftermarket. As of June 30, 2004, the Jordan Auto Aftermarket group ("JAAI") consisted of Dacco, Alma and Atco. Net sales for the three months ended June 30, 2004 increased $2.2 million, or 4.9%, over the same period in 2003. This increase was primarily due to higher sales of drive trains and air conditioning compressors at Alma and fittings at Atco. Partially offsetting these increases were lower sales of driers and accumulators and air conditioning hose assemblies at Atco and torque converters and soft parts at Dacco. Net sales for the six months ended June 30, 2004 decreased $0.6 million, or 0.7%, from the same period in 2003. This decrease was primarily due to lower sales of driers and accumulators and air conditioning hose assemblies at Atco and decreased sales of torque converters at Dacco. Partially offsetting these decreases were higher sales of drive trains and air conditioning compressors at Alma and soft parts and scrap at Dacco. Operating income for the three months ended June 30, 2004 decreased $0.8 million, or 16.8%, from the same period in 2003. This decrease was due to lower operating income at Dacco, Alma, and Atco, partially offset by reduced corporate expenses. Operating income for the six months ended June 30, 2004 decreased $1.7 million, or 20.4%, from the same period in 2003. This decrease was due to lower operating income at Alma and Atco, partially offset by lower corporate expenses. Operating income at Alma and Atco was negatively impacted by inefficiencies in the supply chain during the second quarter and first half of 2004. New product introductions have resulted in ramp up inefficiencies while the development of new suppliers resulted in higher costs than anticipated. These conditions were compounded by peak demand of two key customers which resulted in higher than expected labor costs. Kinetek. As of June 30, 2004, the Kinetek group consisted of Imperial, Gear, Merkle-Korff, FIR, ED&C, Motion Control, Advanced DC and DeSheng. Net sales for the three months ended June 30, 2004 increased $10.0 million, or 13.8%, over the same period in 2003. This increase was primarily due to higher sales of subfractional motors, $0.9 million, fractional/integral motors, $6.7 million, and controls, $2.4 million. The increase in sales of subfractional motors was primarily due to slightly higher demand for refrigeration appliance motors and "other" products such as those used in medical, restaurant, and automotive end markets. Net sales for the six months ended June 30, 2004 increased $14.4 million, or 10.1%, over the same period in 2003. This increase was primarily due to higher sales of fractional/integral motors, $10.8 million, and controls, $4.1 million. Partially offsetting these increases were lower sales of subfractional motors, $0.5 million. The second quarter and year-to-date sales increases of fractional/integral motors were primarily due to sharp growth in U.S. sales of DC products used in material handling and golf car applications and strong demand for AC and DC products used in the domestic floor care 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) end market. Partially offsetting these increases were lower sales of fractional/integral motors in the European and Middle Eastern markets. The second quarter and year-to-date sales increases of controls were primarily due to higher sales of elevator controls and automotive assembly line controls. Operating income for the three months ended June 30, 2004 increased $1.3 million, or 15.1%, over the same period in 2003. This increase was due to higher operating income in the motors segment, 7.6%, and controls segment, 21.0%. Operating income for the six months ended June 30, 2004 decreased $0.8 million, or 4.6%, from the same period in 2003. This decrease was primarily due to lower operating income in the controls segment, 4.9%. Operating income for the motors segment for the six months ended June 30, 2004 was consistent with the same period in the prior year. The lower operating income for the year-to-date period was primarily due to increased metal component costs and the inability to fully absorb these increases in the form of higher sales prices, unfavorable product mix, the completion in the first quarter of 2004 of two facility moves, and employment increases in preparation for the launch of a new line of elevator control products. Consumer and Industrial Products. As of June 30, 2004, the Consumer and Industrial Products group consisted of Welcome Home LLC and its two divisions, Cape Craftsmen and Welcome Home, and Cho-Pat, and GramTel. Net sales for the three months ended June 30, 2004 decreased $0.2 million, or 1.3%, from the same period in 2003. This decrease was primarily due to lower sales of home accessories at Cape, $0.5 million. Partially offsetting this decrease were higher retail sales at Welcome Home, $0.1 million, increased sales of orthopedic supports at Cho-Pat, $0.1 million, and higher sales of data storage and disaster recovery services at GramTel, $0.1 million. Net sales for the six months ended June 30, 2004 decreased $0.3 million, or 0.9%, from the same period in 2003. This decrease was primarily due to lower sales of home accessories at Cape, $0.7 million. Partially offsetting this decrease were higher sales of orthopedic supports at Cho-Pat, $0.2 million, and increased sales of data storage and disaster recovery services at GramTel, $0.2 million. Operating income for the three months ended June 30, 2004 decreased $0.7 million from the same period in 2003. This decrease was primarily due to higher operating loss at Welcome Home, $0.5 million, and lower operating income at Cape, $0.4 million. Partially offsetting these variances were higher operating income at Cho-Pat, $0.1 million, and lower operating loss at GramTel, $0.1 million. Operating loss for the six months ended June 30, 2004 increased $0.8 million, or 80.0%, from the same period in 2003. This increase was primarily due to higher operating loss at Welcome Home, $0.5 million, and decreased operating income at Cape, $0.5 million. Partially offsetting these variances were higher operating income at Cho-Pat, $0.1 million, and lower operating loss at GramTel, $0.1 million. Consolidated Results: (See Condensed Consolidated Statement of Operations). Consolidated net sales for the three months ended June 30, 2004 increased $17.4 million, or 10.0%, over the same period in 2003. This increase was primarily due to higher sales of membrane switches and screen printed products at Valmark, labels at Pamco, hardware and office products at Deflecto, drive trains and air conditioning compressors at Alma, fittings at Atco, and subfractional motors, fractional/integral motors, and controls at Kinetek. Partially offsetting these increases were lower sales of driers and accumulators and air conditioning hose 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) assemblies at Atco, torque converters and soft parts at Dacco, home accessories at Cape, and thermoplastic colorants at Sate-Lite. The decrease in sales of thermoplastic colorants was due to the divestiture of the Midwest Color division of Sate-Lite in September 2003. Consolidated net sales for the six months ended June 30, 2004 increased $23.7 million, or 7.1%, over the same period in 2003. This increase was primarily due to higher sales of membrane switches and screen printed products at Valmark, labels at Pamco, hardware and office products at Deflecto, display products at Beemak, truck and auto lenses, bike reflectors, plastic hospital supplies and custom-molded products at Sate-Lite, drive trains and air conditioning compressors at Alma, soft parts and scrap at Dacco, and fractional/integral motors and controls at Kinetek. Partially offsetting these increases were lower sales of folding boxes at Seaboard, driers and accumulators and air conditioning hose assemblies at Atco, torque converters at Dacco, subfractional motors at Kinetek, home accessories at Cape, and thermoplastic colorants at Sate-Lite. Consolidated operating income for the three months ended June 30, 2004 increased $11.4 million, or 79.4%, over the same period in 2003. Consolidated operating income for the six months ended June 30, 2004 increased $8.9 million, or 31.8%, over the same period in 2003. These increases were primarily due to significantly improved margins at Valmark driven by volume leverage, cost reductions, and favorable product mix, significant cost reductions at Deflecto, and overall higher sales throughout the consolidated group. In addition, consolidated operating income benefited from lower corporate expenses, and income received from the sale of three affiliates of the consolidated group. Partially offsetting these increases were lower operating income due to substantial increases in raw material costs at Deflecto, supply chain and ramp-up inefficiencies at Alma at Atco, and decreased gross margins at Kinetek stemming from higher metal component costs, the completion of two facility moves and increased employment in preparation for the launch of a new product family of elevator controls. Liquidity and Capital Resources. ------------------------------- In general, the Company requires liquidity for working capital, capital expenditures, interest, taxes, debt repayment and its acquisition strategy. Of primary importance are the Company's working capital requirements, which increase whenever the Company experiences strong incremental demand or geographical expansion. The Company had approximately $136.5 million of working capital at June 30, 2004 compared to approximately $123.0 million at December 31, 2003. Operating activities. Net cash used in operating activities for the six months ended June 30, 2004 was $21.3 million compared to net cash used in operating activities of $17.2 million for the same period in 2003. The increase in cash used is primarily due to unfavorable working capital variances compared to 2003. Investing activities. Net cash provided by investing activities for the six months ended June 30, 2004 was $30.5 million compared to net cash used in investing activities of $3.0 million for the same period in 2003. The decrease in cash used in investing activities is primarily due to the divestiture of the Ad Specialty and Calendar divisions of JII Promotions in the first quarter of 2004 and the sale of three affiliates in the second quarter of 2004. Financing activities. Net cash used in financing activities for the six months ended June 30, 2004 was $4.6 million compared to net cash provided by financing activities of $17.0 million for the same period in 2003. The decrease in cash 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) provided by financing activities is primarily due to lower net borrowings on revolving credit facilities and increased payment of financing fees resulting from the Exchange Offer. Partially offsetting these variances is lower repayment of long-term debt and increased other borrowings in 2004 versus the same period in 2003. The Company is party to two credit agreements under which the Company is able to borrow up to $130.0 million to fund acquisitions, provide working capital and for other general corporate purposes. The credit agreements mature in 2005 and 2006. The agreements are secured by a first priority security interest in substantially all of the Company's assets. As of June 30, 2004, the Company had approximately $45.6 million of available funds under these arrangements. On February 18, 2004, the Company completed an Exchange Offer, whereby it exchanged $173,334 of new Senior Notes (the "Exchange Notes") for $247,619 of Old Senior Notes. The Exchange Notes were co-issued by JII Holdings LLC, a wholly owned subsidiary of the Company, and its wholly owned subsidiary, JII Holdings Finance Corporation. The 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 $2,149, which was required by SFAS No. 15 to be offset by fees incurred on the transaction. Fees of $7,249 which were in excess of the gain, were recorded as interest expense during the first quarter of 2004. The remaining reduction in the principal of the Exchange Notes compared to the Old Senior Notes will be recognized over the period to maturity of the Exchange Notes as a reduction of interest expense. On January 31, 2004, the Company and certain holders of the Company's Senior Subordinated Discount Debentures entered into a Waiver Agreement which 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. Should the Company elect not to make interest payments on these notes, the interest will continue to accrue at its original rate of 11.75% per year and will be due and payable to the holders at the maturity date of the notes. Pursuant to the Waiver Agreement, the maturity date of the participating notes is the earlier of (1) the date on which all of the outstanding principal and interest on the Exchange Notes and the Senior Secured Discount Debentures not participating in the Waiver Agreement have been paid in full, (2) the date six months after the original maturity of the participating notes, or (3) the date on which the Company enters into a bankruptcy proceeding. On February 18, 2004, certain of the Company's Senior Subordinated Discount Debenture note holders entered into a Modification Agreement which provides for a reduction in their stated maturity value and a reduction of their applicable interest rate. The aggregate maturity value of the notes, including accrued but unpaid interest, held by the parties to the Modification Agreement is $24,007 which has been reduced to $7,202. The interest rate on these notes has been reduced to a stated rate of 1.61% from 11.75%. On April 1, 2004 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) certain holders of an additional $1,847 of the Company's Senior Subordinated Discount Debentures elected to participate in the Modification Agreement. The maturity value of these notes, including accrued but unpaid interest, has been reduced to $554. The holders of these modified notes retain the right to collect the original maturity value and interest thereon at the original interest rate if the Company meets certain financial tests and ratios. Under the Modification Agreement, these notes mature on the earlier of (1) the date that all other Senior Subordinated Discount Debenture note holders have been paid in full, (2) the date that is six months after the original maturity date, or (3) the date on which the Company enters into a bankruptcy proceeding. The Company has determined that this modification will be accounted for as a troubled debt restructuring as required by Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings", (SFAS No. 15). The effect of this accounting treatment will be to not reduce the carrying value of the modified notes; however, the interest expense associated with the modified notes will be calculated using the modified stated interest rate of 1.61% per annum and the reduced maturity amount. The remaining Senior Subordinated Discount Debentures that are not party to the Modification Agreement will continue to accrue interest at 11.75% and represent $69,032 of the total outstanding principal amount of $94,886. The Company may, from time to time, use cash, including cash generated from borrowings under its credit agreement, to purchase either its 11 3/4% Senior Subordinated Discount Debentures due 2009 or its 10 3/8% Senior Notes due 2007, or any combination thereof, through open market purchases, privately negotiated purchases or exchanges, tender offers, redemptions or otherwise, and may, from time to time, pursue various refinancing or financial restructurings, including pursuant to current solicitations and waivers involving those securities, in each case, without public announcement or prior notice to the holders thereof, and if initiated or commenced, such purchases or offers to purchase may be discontinued at any time. The Company's aggregate business has a certain degree of seasonality. Welcome Home's sales are somewhat stronger toward year-end due to the nature of their products and their popularity as holiday gifts. Item 3. Quantitative and Qualitative Disclosures About Market Risks ------------------------------------------------------------------- The Company's debt obligations are primarily fixed-rate in nature and, as such, are not sensitive to changes in interest rates. At June 30, 2004, the Company had $50.4 million of variable rate debt outstanding. A one-percentage point increase in interest rates would increase the annual amount of interest paid by approximately $0.5 million. The Company does not believe that its market risk financial instruments on June 30, 2004 would have a material effect on future operations or cash flows. The Company is exposed to market risk from changes in foreign currency exchange rates, including fluctuations in the functional currency of foreign operations. The functional currency of operations outside the United States is the respective local currency. Foreign currency translation effects are included in accumulated other comprehensive income in shareholder's equity. Item 4. Controls and Procedures ------------------------------- Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-15 of the Securities Exchange Act of 1934 ("Exchange Act") promulgated thereunder, our 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) chief executive officer and controller have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the "Evaluation Date"). Based on such evaluation, our chief executive officer and controller have concluded that our disclosure controls and procedures were effective as of the Evaluation Date to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. There have been no changes in our internal controls over financial reporting during the period covered by this report that were identified in connection with the evaluation referred to above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 27 Part II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings ----------------- None Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity ---------------------------------------------------------------------- Securities ---------- None Item 3. Defaults upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) A list of exhibits filed with this report is contained on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference 28 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JORDAN INDUSTRIES, INC. August 16, 2004 By: /s/ Norman R. Bates ----------------------- Norman R. Bates Chief Financial Officer 29 EXHIBIT INDEX Exhibit Number Description ------- ----------- 31(a) Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) 31(b) Certificate of Controller pursuant to Rule 13a-14(a) or Rule 15d-14(a) 32(a) Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32(b) Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

JORDAN INDUSTRIES INC 10-Q