10-Q 1 form10q_mbr.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 March 31, 2005 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 May 16, 2005: 98,501.0004. 2 JORDAN INDUSTRIES, INC. INDEX Part I. Financial Information No. ----------------------------- --- Item 1. Financial Statements Condensed Consolidated Balance Sheets at March 31, 2005 (Unaudited) and December 31, 2004 3 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Item 4. Controls and Procedures 23 Part II. Other Information 24 -------------------------- Item 1. Legal Proceedings Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submissions of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits 3 JORDAN INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (ALL DOLLAR AMOUNTS IN THOUSANDS)

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 March 31, ------------------- 2005 2004 Net sales $175,453 $168,409 Cost of sales, excluding depreciation 125,609 114,321 Selling, general and administrative expenses, excluding depreciation 37,716 38,005 Depreciation 3,759 4,932 Amortization 41 46 Management fees and other 30 (70) --------- -------- Operating income 8,298 11,175 Other (income) expenses: Interest expense 13,636 23,659 Interest income (57) (270) Gain on sale of subsidiary (251) - Other 26 333 --------- -------- 13,354 23,722 Loss from continuing operations before income taxes and minority interest (5,056) (12,547) Provision for income taxes 3,038 3,933 --------- -------- Loss from continuing operations before minority interest (8,094) (16,480) Minority interest 66 99 --------- -------- Loss from continuing operations (8,160) (16,579) Discontinued operations: Loss from discontinued operations, net of tax (See Note E) (1,356) (429) Loss on sale of discontinued operations, net of tax (See Note E) - (1,171) --------- -------- (1,356) (1,600) Net loss $(9,516) $(18,179) ========= ======== See accompanying notes to condensed consolidated financial statements. 5 JORDAN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) THREE MONTHS ENDED March 31, 2005 2004 ------ ------ Cash flows from operating activities: Net loss $(9,516) $(18,179) Adjustments to reconcile net loss to net cash used in operating activities: Loss on sale of discontinued operations (See Note E) - 1,171 Gain on sale of subsidiary (251) - Depreciation and amortization 3,800 4,978 Amortization of deferred financing fees 1,613 1,590 Minority interest 66 99 Non-cash interest 134 (24) Deferred income taxes 2,011 1,641 Loss on disposal of fixed assets 8 21 Other 15 444 Changes in operating assets and liabilities: Increase in current assets (12,013) (19,395) (Decrease)/increase in current liabilities (1,794) 11,771 (Increase)/decrease in non-current assets (189) 2,222 Increase/(decrease) in non-current liabilities 2,011 (51) Decrease/(increase) in net assets of discontinued operations 838 (850) ------- ------- Net cash used in operating activities (13,267) (14,562) Cash flows from investing activities: Proceeds from sale of fixed assets 166 320 Capital expenditures (1,611) (1,684) Net proceeds from sale of discontinued operations (See Note E) - 6,155 Acquisition of subsidiary (481) - Net proceeds from sale of subsidiary 1,075 - ------- ------- Net cash (used in)/provided by investing activities (851) 4,791 Cash flows from financing activities: Proceeds from revolving credit facilities, net 12,319 15,958 Repayment of long-term debt (3,763) (1,140) Proceeds from other borrowings 2,447 525 Payment of financing fees - (2,164) ------- ------- Net cash provided by financing activities 11,003 13,179 Effect of exchange rate changes on cash 456 1,777 ------- ------- Net (decrease)/increase in cash and cash equivalents (2,659) 5,185 Cash and cash equivalents at beginning of period 15,412 15,517 ------- ------- Cash and cash equivalents at end of period $12,753 $20,702 ======= ======= 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, 2004, which are included in the Company's Annual Report filed on Form 10-K for such year (the "2004 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. Shipping and handling costs are classified in cost of sales in the statement of operations. Certain prior year amounts have been reclassified from revenue to cost of sales to conform to the current year presentation. In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities - An Interpretation of Accounting Research Bulletin (ARB) No. 51." This interpretation provides guidance on how to identify variable interest entities and how to determine whether or not those entities should be consolidated. The Company adopted the provisions of FIN 46 as of January 1, 2005 and determined that there are no variable interest entities that the Company would be required to consolidate. The Company has recorded income tax expense of $3,038 for the three months ended March 31, 2005 primarily attributable to foreign taxes, state taxes and the change in the Company's deferred tax liability. Due to the uncertainty of when the goodwill deferred tax liability will reverse, the Company has not considered any future reversal of the deferred tax liability related to goodwill to support the realization of deferred tax assets. Additionally, the Company continues to maintain a full valuation allowance against its deferred tax assets. During 2004, the Company realized $88,392 of cancellation of indebtedness income as a result of modifications to certain of its outstanding debt. The Internal Revenue Code provides exceptions to the recognition of certain types of cancellation of indebtedness income for U.S federal income tax purposes. These rules will require the Company to reduce specified tax attributes which may include the reduction of net operating loss carryforwards and the tax basis of assets. However, the amount of reduction to any specific attribute is dependent upon an election not required to be made until the filing of the Company's 2004 federal tax return. It is possible that the effect of the attribute reduction could result in a decrease in the tax basis of goodwill, which would result in an increase in the Company's deferred tax liabilities and could result in a financial statement charge to income tax expense in the period when the election is made. The Company has recorded an income tax provision for the three months ended March 31, 2005 primarily due to its foreign and state tax expense, as well as the change in its deferred tax items. The Company's domestic losses have not been benefited for federal tax purposes. C. Inventories --------------- Inventories are summarized as follows: March 31, December 31, 2005 2004 ------------ ------------- Raw materials $ 63,164 $ 57,453 Work-in-process 14,058 13,693 Finished goods 59,419 58,887 -------- -------- $136,641 $130,033 ======== ======== JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) D. Comprehensive Loss ---------------------- Total comprehensive loss for the three months ended March 31, 2005 and 2004 was as follows: Three Months ended March 31, ---------------------- 2005 2004 ------ ------ Net loss $(9,516) $(18,179) Foreign currency translation 879 2,992 -------- -------- Comprehensive loss $(8,637) $(15,187) =======,= ========= E. Discontinued Operations --------------------------- During 2004, the Company undertook a plan to sell Electrical Design & Control ("ED&C"), a subsidiary of Kinetek. As such, the consolidated financial statements reflect ED&C as a discontinued operation in all periods presented. On May 2, 2005, the Company sold certain inventory, equipment, intellectual property assets and contracts of ED&C. This sale occurred subsequent to March 31, 2005, and has no impact on the financial statements of the Company as of that date. The results of the sale will be reflected in the quarter ended June 30, 2005. 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 in all periods presented. 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. Summarized selected financial information for the discontinued operations are as follows: Three months ended March 31, ---------------------------- 2005 2004 ---- ---- Revenues $868 $3,687 Loss from discontinued operations (1,356) (429) The major classes of assets and liabilities of the discontinued operations are as follows: March 31, December 31, 2005 2004 --------- ------------ Current assets $ 1,462 $ 2,267 Property, plant and equipment, net 1,130 1,134 Other long-term assets 30 31 -------- -------- Total assets 2,622 3,432 Current liabilities 726 698 -------- -------- Net assets of discontinued operations $ 1,896 $ 2,734 ======== ======== 8 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) F. Acquisition of Subsidiary ---------------------------- On March 28, 2005, the Company, through its wholly owned subsidiary, Kinetek, paid in cash the remaining acquisition cost for its September 30, 2004 acquisition of O. Thompson, a New York City-based elevator control company. The total acquisition cost was originally $887 which was subsequently adjusted to $853 during the first quarter of 2005. Of the total acquisition price, $372 was paid during 2004, and the remaining $481 was paid during the first quarter of 2005. G. 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. H. 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 ended March 31, 2005 and 2004 were as follows: Three Months Ended March 31, --------------------- 2005 2004 ---- ---- Service cost $177 $195 Interest cost 315 310 Expected return on plan assets (296) (270) Prior service costs recognized 15 15 Recognized net actuarial loss 32 31 ---- ---- Net periodic benefit cost $243 $281 ==== ==== The components of net periodic benefit cost for the Company's post-retirement healthcare benefit plans for the three months ended March 31, 2005 and 2004 were as follows: Three Months Ended March 31, --------------------- 2005 2004 ---- ---- Service cost $37 $46 Interest cost 55 90 Recognized net actuarial loss 5 48 --- ---- Net periodic benefit cost $97 $184 === ==== 9 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) I. 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, 2004 consolidated financial statements with respect to segmentation or the measurement of segment profit or loss. J. Management Discussion of Liquidity -------------------------------------- As discussed in the 2004 10-K, 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 $75,000 to $55,000. 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 in the 2004 10-K and the Modification and Waiver Agreements also discussed in the 2004 10-K. 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 on a consolidated basis 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 investments in affiliates 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 the 2004 10-K. The Company believes that through its efforts discussed above, the Company will have sufficient liquidity to meet its obligations in the coming year. M. Sale of Subsidiary ---------------------- On March 24, 2005, the Company sold the assets of Cho-Pat, Inc. ("Cho-Pat") to Cho-Pat's management team for proceeds of $1,075. Cho-Pat is a designer and manufacturer of orthopedic related sports medicine devices and was part of the Consumer and Industrial Products segment. The Company recognized a gain of $251 related to the sale of Cho-Pat. 10 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) N. Warranties -------------- The Company provides warranties on certain products for varying lengths of time. The Company estimates the costs that may be incurred and records a liability in the amount of such costs at the time product revenue is recognized. Changes to the Company's product warranty accrual during the three months ended March 31, 2005 and 2004 are as follows: Three months ended March 31, ------------------ 2005 2004 ---- ---- Balance, beginning of period $2,315 $1,700 Warranties issued 453 525 Change in estimate (225) - Settlements (371) (201) ------ ------ Balance, end of period $2,172 $2,024 ====== ====== 11 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) O. Condensed Consolidating Financial Statements (Unaudited) Pursuant to the Exchange Offer described in the 2004 10-K, wholly owned subsidiaries of the Company, JII Holdings, LLC and JII Holdings Finance Corporation, issued senior secured notes which have been guaranteed by the Company and certain of the Company's subsidiaries. The following condensed consolidating financial information is provided in lieu of separate financial statements for the issuers of these notes.

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JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS)

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17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) 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 2004 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 periods ended March 31, 2005 and 2004. Due to the sale of ED&C, a subsidiary of Kinetek, in the second quarter of 2005 the results of ED&C have been classified as discontinued operations in all periods presented. (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. Three Months Ended March 31, ------------------------- 2005 2004 ---- ---- Net Sales: Specialty Printing and Labeling $ 12,297 $ 12,482 Jordan Specialty Plastics 38,996 35,316 Jordan Auto Aftermarket 30,004 33,839 Kinetek 80,277 73,113 Consumer and Industrial Products 13,879 13,659 -------- -------- Total $175,453 $168,409 ======== ======== Operating Income (Loss): Specialty Printing and Labeling $ 1,250 $ 1,166 Jordan Specialty Plastics 1,372 1,833 Jordan Auto Aftermarket (89) 2,493 Kinetek 7,077 6,665 Consumer and Industrial Products (1,992) (1,078) -------- -------- Total(a) $ 7,618 $ 11,079 ======== ======== Operating Margin(b) Specialty Printing and Labeling 10.2% 9.3% Jordan Specialty Plastics 3.5% 5.2% Jordan Auto Aftermarket (0.3)% 7.4% Kinetek 8.8% 9.1% Consumer and Industrial Products (14.4)% (7.9)% Total 4.3% 6.6% ---------------- (a) Before corporate overhead and management fees of $(680) and $(96) for the three months ended March 31, 2005 and 2004, respectively. (b) Operating margin is operating income (loss) divided by net sales. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) Consolidated Results. (See Condensed Consolidated Statement of Operations.) -------------------- Net sales for continuing operations increased $7.0 million, or 4.2%, to $175.5 million for the first quarter of 2005 from $168.4 million for the same period last year. The increase in sales was primarily due to strong growth for Kinetek and Jordan Specialty Plastics which grew 9.8% and 10.4%, respectively. These increases were partially offset by a 11.3% decline in the Automotive Aftermarket segment largely resulting from the discontinuation of business with a large customer in the climate control segment. The improved economy helped both the Kinetek and Jordan Specialty Plastics segments but most of the growth in these segments continues to result from the introduction of new products and market share gains in several niche markets. Kinetek also benefited from sales of products designed and produced by the recently acquired O. Thompson subsidiary. Operating income from continuing operations decreased $2.9 million, or 25.7%, to $8.3 million for the first quarter of 2005 from $11.2 million for the same period last year. The decrease in operating income was primarily due to the decline in operating income at Automotive Aftermarket and to a lesser extent Jordan Specialty Plastics and Welcome Home. Operating income for Kinetek and Specialty Printing and Labeling improved by 6.2% and 7.4% respectively. Raw material inflation compressed product margins at Kinetek and Jordan Specialty Plastics in the first quarter. Beginning in the second half of 2004, all companies began to pass along some of these costs to their customers with greater success but to a lesser extent than the increased cost. The decrease in operating income for the Automotive Aftermarket was mostly due to lower sales volumes and production inefficiencies resulting from consigned parts shortages in the torque converter business. The Company has recorded income tax expense of $3,038 for the three months ended March 31, 2005 primarily attributable to foreign taxes, state taxes and the change in the Company's deferred tax liability. Due to the uncertainty of when the goodwill deferred tax liability will reverse, the Company has not considered any future reversal of the deferred tax liability related to goodwill to support the realization of deferred tax assets. Additionally, the Company continues to maintain a full valuation allowance against its deferred tax assets. During 2004, the Company realized $88,392 of cancellation of indebtedness income as a result of modifications to certain of its outstanding debt. The Internal Revenue Code provides exceptions to the recognition of certain types of cancellation of indebtedness income for U.S federal income tax purposes. These rules will require the Company to reduce specified tax attributes which may include the reduction of net operating loss carryforwards and the tax basis of assets. However, the amount of reduction to any specific attribute is dependent upon an election not required to be made until the filing of the Company's 2004 federal tax return. It is possible that the effect of the attribute reduction could result in a decrease in the tax basis of goodwill, which would result in an increase in the Company's deferred tax liabilities and could result in a financial statement charge to income tax expense in the period when the election is made. Specialty Printing and Labeling. As of March 31, 2005, the Specialty Printing and Labeling group ("SPL") consisted of Valmark, Pamco, and Seaboard. Net sales of continuing operations decreased $0.2 million, or 1.5%, to $12.3 million for the first quarter of 2005 from $12.5 million for the same period last year. Revenues for Valmark product lines were up 15%, while sales of Pamco labels and Seaboard folding box products declined 9% and 6%, respectively, in the first quarter. Sales related to membrane switch products at Valmark were up well over last year largely driven by sales in the medical equipment market. Operating income from continuing operations increased $0.1 million, or 7.4%, to $1.3 million for the first quarter of 2005 from $1.2 million for the same period last year. The increase in operating income is largely due to cost savings generated by a management reorganization and reduction in employment at Valmark. These savings were partially offset by the sales decreases at the other operating companies. Jordan Specialty Plastics. As of March 31, 2005, the Jordan Specialty Plastics group ("JSP") consisted of Beemak, Sate-Lite, and Deflecto. Net sales increased $3.7 million, or 10.4%, to $39.0 million for the first quarter of 2005 from $35.3 million for the same period last year. 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 and in the first 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) quarter of 2005. Revenues were up significantly at several of the superstore retailers for both hardware and office products as a result of market share gains and the introduction of several new products. Strong sales with the superstore retailers for office products were partially offset by lower sales with several of the large distributors. Chairmat sales increased significantly in the first quarter with the largest increases coming from distributors and international markets. Increased sales of bike related products and safety reflectors for commercial trucks also contributed to the overall sales growth. Operating income decreased $0.5 million, or 25.2%, to $1.4 million for the first quarter of 2005 from $1.8 million for the same period last year. The decrease in operating income is largely due to raw material inflation and to a lesser extent the sales mix experienced in the first quarter. Selling price increases continued to be more than offset by significant raw material price increases. Resin prices continued to increase significantly in the first quarter compared with both the first quarter of 2004 as well as the fourth quarter of 2004. Metals based raw material increases slowed from the fourth quarter of 2004 but were significant compared with the first quarter of last year. The Company continues to pursue cost reduction initiatives and price increases to overcome the raw material inflation plaguing the industry. Jordan Auto Aftermarket. As of March 31, 2005, the Jordan Auto Aftermarket group ("JAAI") consisted of Dacco, Alma and Atco. Net sales decreased $3.8 million, or 11.3%, to $30.0 million for the first quarter of 2005 from $33.8 million for the same period last year. 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 was a significant contributor to the decline. In addition, the discontinuation of business with a large customer in the climate control market represented $1.9 million of sales decrease. The climate control market continues to be soft as inventories appear to be at acceptable levels and customers are wary of building inventory due to the cool spring and a cool summer in 2004. 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. Sales of tubing assemblies and fittings for the truck market were up significantly in the first quarter building momentum from a strong 2004. The growth in the truck market is 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 $2.6 million to a loss of $0.1 million for the first quarter of 2005 from $2.5 million for the same period last year. The sales decline in the torque converter aftermarket segment had a significant impact on the decline in operating income specifically due to the high fixed cost nature of the business. In addition, operating income was negatively impacted by a contractual price reduction for a large customer and production inefficiencies resulting from consigned parts shortages in the torque converter business. The decreases in operating income for the torque converter and climate control segments were nominally offset by increased operating income associated with the sales of tubing assemblies and fittings in the truck market. Kinetek. As of March 31, 2005, the Kinetek group consisted of Imperial Group, Merkle-Korff, FIR, Motion Control, Advanced DC and DeSheng. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) Net sales for the three months ended March 31, 2005 were $80.3 million, an increase of $7.2 million, or 9.8% from the same period in 2004. Sales of Kinetek's motors segment were $60.2 million, an increase of 11.4%, or $6.2 million from $54.0 million posted in the first quarter of the previous year. Sales of subfractional motor products were $19.9 million, an increase of $0.8 million, or 4.4%, from the first quarter of 2004. The increase was driven by sales of a product introduced during the fourth quarter of 2004 to a certain restaurant equipment customer. This project has been substantially completed, and Kinetek expects lower sales of this product after the first quarter of 2005. Sales of products used by major appliance customers were about flat with the previous year, with the loss of business value-added subassembly products substantially replaced by sales of a new product to a certain major appliance customer which began during the third quarter of 2004, and which is expected to continue. Sales of fractional and integral motor products increased $5.3 million, or 15.2%, to $40.3 million from the year-earlier first quarter sales of $35.0 million. The increase in sales was driven by share gains for DC motors used in battery-electric golf cars, and to improvements in North American markets for motors used in material handling and commercial floor care equipment. Sales in European markets which are served by Kinetek's FIR Group of subsidiaries continued to be difficult, with sales in local currency declining 5.8% for the 2005 quarter compared with the previous year. This decline was mostly offset by the favorable impact of translation, which added $0.5 million in sales over the first quarter of 2004. First quarter 2005 sales for Kinetek's controls segment were $20.1 million, an increase of $1.0 million, or 5.3%, from the same period of 2004. The increased sales were attributable to sales of elevator control products that were designed and produced by Kinetek's recently acquired O. Thompson subsidiary, which were partially offset by a somewhat softer market for elevator control products in comparison to the first quarter of 2004. Operating income for the first quarter of 2005 was $7.1 million, an increase of $0.4 million, or 6.2%, from the same period of the previous year. Operating income for the first three months of 2005 in the motors segment was $8.6 million, an increase of $0.1 million, or 1.4% higher than in 2004's first quarter. Operating income for the controls segment was $2.0 million, an increase of $0.1 million, or 4.8% from the corresponding quarter of the prior year. Total Kinetek gross margin was $23.6 million, which was $0.4 million, or 1.8% lower than in 2004. Gross margin as a percentage of sales decreased to 29.4% in 2005, from 32.9% in 2004. The decrease in margin percentage is attributable to a combination of factors, the most significant of which are: 1) During the first quarter of 2005, Kinetek continued to experience significant inflation on metal (primarily copper and steel) components used in the assembly of motor products, as well as on freight and plastic resins. Competitive pressures in Kinetek's principal markets have made it difficult to pass along these higher costs to its customers in the form of higher prices and 2) several sizable pieces of market share gained in the golf car, material handling, and floor care segments carry lower margins than Kinetek's historical levels. It has been Kinetek's recent strategy to capture share gains at competitive prices and to expand margins as we gain volume leverage and implement planned cost reductions. Consumer and Industrial Products. As of March 31, 2005, the Consumer and Industrial Products group consisted of Welcome Home LLC and its two divisions, Cape Craftsmen and Welcome Home, and GramTel. Net sales increased $0.2 million, or 1.6%, to $13.9 million for the first quarter of 2005 from $13.7 million for the same period last year. Sales for Welcome Home decreased 1.4% in first quarter while third party sales for Cape Craftsman increased 27% from prior year. Comparable store sales at Welcome Home decreased 8% in the first quarter. The decline in comparable Welcome Home store sales was primarily the result of a difficult retail environment in Welcome 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) Home's category in outlet malls. Welcome Home is currently transitioning to a new merchandising strategy emphasizing a more focused product offering. Operating loss increased $0.9 million to a loss of $2.0 million for the first quarter of 2005 from a loss of $1.1 million for the same period last year. Merchandise margins decreased at Welcome Home largely due to promotional discounts used to increase the turnover of seasonal and discontinued inventory and to continue the migration to a new merchandising strategy. The decrease in operating income at Welcome Home was partially offset by increased operating income associated with the higher sales at Cape Craftsman. 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 $108.3 million of working capital at March 31, 2005 compared to approximately $98.9 million at December 31, 2004. Operating activities. Net cash used in operating activities for the three months ended March 31, 2005 was $13.3 million. This was relatively consistent with cash used in operating activities for the same period in 2004. Investing activities. Net cash used in investing activities for the three months ended March 31, 2005 was $0.9 million compared to net cash provided by investing activities of $4.8 million during the same period in 2004. This decrease in net cash provided was primarily due to net proceeds of $6.2 million from the sale of the Ad Specialty and Calendar divisions of JII Promotions in the first quarter of 2004. This was partially offset by the proceeds of $1.1 million received from the sale of Cho-Pat in the first quarter of 2005. Financing activities. Net cash provided by financing activities for the three months ended March 31, 2005 was $11.0 million compared to net cash provided by financing activities of $13.2 million during the same period in 2004. This decrease was primarily due to lower net proceeds from revolving credit agreements of $3.6 million. The Company is party to two credit agreements under which the Company is able to borrow up to $110.0 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 March 31, 2005, the Company had approximately $22.4 million of available funds under these arrangements. In conjunction with the Exchange Offer completed by the Company in February 2004 (see 2004 10-K), 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. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) 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 cash generated from borrowings under its credit agreement, 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, 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. 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 in the 2004 10-K and the Modification and Waiver Agreements also discussed in the 2004 10-K. 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 on a consolidated basis 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 investments in affiliates 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 the 2004 10-K. The Company believes that through its efforts discussed above, the Company will have sufficient liquidity to meet its obligations in the coming year. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) 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 March 31, 2005, the Company had $58.9 million of variable rate debt outstanding. A one-percentage point increase in interest rates would increase the annual amount of interest paid by approximately $0.6 million. The Company does not believe that its market risk financial instruments on March 31, 2005 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 chief executive officer and chief financial officer 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 chief financial officer 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. 24 Part II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- None Item 2. Unregistered Sales of Securities and Use of Proceeds ---------------------------------------------------- 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 -------- A list of exhibits filed with this report is contained on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference 25 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. May 16, 2005 By: /s/ Norman R. Bates ----------------------- Norman R. Bates Chief Financial Officer 26 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 Chief Financial Officer pursuant to Rule 13a-14 (a) or Rule 15d-14 (a)

JORDAN INDUSTRIES INC 10-Q