10-Q 1 from10q-2nd_qtr2002.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SECURITIES EXCHANGE ACT OF 1934 Commission File Number 333-53987 JACKSON PRODUCTS, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 75-2470881 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 801 Corporate Centre Drive, Suite 300, Saint Charles, Missouri 63304 -------------------------------------------------------------------------------- (Address of principal executive offices) (636) 300-2700 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: None -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None -------------------------------------------------------------------------------- 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 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 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of August 14, 2002. 43,172 shares of Class A Common Stock at August 14, 2002 15,647 shares of Class B Common Stock at August 14, 2002 2,849 shares of Class C Common Stock at August 14, 2002 JACKSON PRODUCTS, INC. INDEX PAGE Part I. Financial Information: Item 1. Consolidated Financial Statements as of June 30, 2002 (unaudited) and December 31, 2001 and the three and six months ended June 30, 2002 and 2001 (unaudited): Consolidated Balance Sheets....................................... 2 Consolidated Statements of Operations............................. 3 Consolidated Statements of Cash Flows............................. 4 Notes to Consolidated Financial Statements........................ 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 22 Item 3. Quantitative and Qualitative Disclosure about Market Risk....... 28 Part II. Other Information................................................. 28 Signature Page............................................................... 29

4 JACKSON PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements and schedules include all normal recurring adjustments and other adjustments as indicated which are, in the opinion of management of the Company, necessary for a fair statement of the operating results for the periods presented. Certain 2001 balances have been reclassified to conform to 2002 presentation. The following notes should be read in conjunction with the accompanying unaudited consolidated financial statements and the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission. Operating results for the three-month and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. (2) INVENTORIES Inventories at June 30, 2002 consist of the following (in thousands): Raw materials............................................ $12,243 Work-in-process......................................... 5,641 Finished goods............................................ 15,732 ------- $33,616 ======= (3) FINANCING ACTIVITIES Credit Facility. During 1998, the Company entered into a credit agreement (as amended, the Credit Facility) with a group of banks (the Credit Facility Lenders), which provided for two lines of credit in the aggregate amount of $125.0 million. The lines consist of an acquisition facility in the principal amount of up to $95.0 million and a revolving credit facility in the principal amount of up to $30.0 million. The Credit Facility was amended on June 19, 1998 to include Swing Line Loans, which allowed the Company to borrow up to $3.0 million from the Swing Line Bank (Fleet National Bank) so long as all the sum of the outstanding swing line loans, revolving credit loans and letters of credit outstanding did not exceed the total commitment under the revolving credit facility of $30.0 million. A second amendment to the Credit Facility was entered into on May 17, 1999 to increase the acquisition facility to $105.0 million and permit the Company's acquisition of TMT-Pathway. The Company could not borrow under the acquisition facility beyond April 30, 2001 at which time the commitment of the Credit Facility Lenders to advance additional funds under the acquisition facility was scheduled to expire and the principal amount of the acquisition facility became due in quarterly installments having a final maturity of March 31, 2004. The Credit Facility contains several financial covenants based on operating results for the previous four quarters. Due to operating losses generated by decreased sales volume and gross margin percentages and historically high natural gas costs incurred in the previous four quarters, the Company was not in compliance with certain financial covenants under the Credit Facility as of June 30, 2001, September 30, 2001 or December 31, 2001. A third amendment to the Credit Facility was entered into effective July 1, 2001, pursuant to which the Credit Facility Lenders agreed to forbear from exercising their rights and remedies relating to the aforementioned defaults under the Credit Facility through September 30, 2001, the usage under the revolving credit facility was limited to $24.0 million and the applicable margin for base rate and LIBOR based loans was increased to 2.0% and 3.0%, respectively. A fourth amendment to the Credit Facility was entered into on October 1, 2001, pursuant to which the Credit Facility Lenders agreed to extend their forbearance through March 31, 2002 and make other modifications to the Credit Facility, including increasing the applicable margin for base rate and LIBOR based loans to 3.0% and 4.0%, respectively, and for certain loans to a fixed rate of 15% per annum, imposing additional limitations on usage under the revolving credit facility, and adding additional financial covenants pertaining to minimum levels of EBITDA and maximum levels of capital expenditures. A fifth amendment to the Credit Facility was entered into on March 29, 2002, pursuant to which the Credit Facility Lenders agreed to extend their forbearance relating to the aforementioned defaults through April 12, 2002 5 and, subject to certain conditions, including a $13.0 million investment in the Company by its stockholders and their affiliates no later than April 12, 2002 and the application of not less than $12.0 million of the proceeds of such investment to repay the acquisition facility, to permanently waive the aforementioned defaults under the Credit Facility which occurred in fiscal 2001 and certain other technical defaults and to reset the financial covenants and effect other amendments to the Credit Facility (described below). As all conditions to the fifth amendment were met, the fifth amendment became effective April 12, 2002. In connection with the fifth amendment the Company sold to certain stockholders and their affiliates, including CapStreet II, L.P. (formerly Summit Capital II, L.P.) and the Jordan Company LLC, $13.0 million of units of which $12.0 million was used to reduce outstanding debt under the Company's acquisition facility. The units consist of approximately $12.0 million of 15% secured senior subordinated notes (the Secured Senior Subordinated Notes) and $1.0 million of detachable warrants to purchase shares of Class A Common Stock of the Company. The Secured Senior Subordinated Notes have a maturity date of December 31, 2004 and an interest rate of 15% per annum, of which (i) 10% will be payable in cash semi-annually in arrears commencing September 30, 2002 and (ii) 5% will be payable in-kind compounded semi-annually. The Secured Senior Subordinated Notes are junior in right of payment to the Credit Facility and pari passu in right of payment to the Company's 9- 1/2% Senior Subordinated Notes. The $1.0 million of value assigned to the warrants is included in additional paid in capital and is being amortized over the duration of the Secured Senior Subordinated Notes. For each $1,000 (one thousand dollars) principal value of Secured Senior Subordinated Note purchased, a warrant to purchase 1.1238 shares of Class A Common Stock was issued. The warrants have an expiration date of April 1, 2014 and an exercise price of $0.01 per warrant. The Credit Facility, as amended, allows the total commitment of $30.0 million under the revolving credit facility to be available for borrowing, subject to usage caps of $22.5 million during the periods of December 15, 2002 through January 31, 2003 and December 15, 2003 through January 31, 2004. The amount of borrowings as of June 30, 2002 are unchanged from the fourth amendment and bear interest, at the option of the Company, at a rate per annum equal to (i) the Base Rate (as defined in the Credit Facility) plus 3.00% or (ii) the LIBOR Rate (as defined in the Credit Facility) plus 4.00%. Further, the Company owes a commitment fee of 0.50% on the unused portion of the revolving credit facility commitment. The fifth amendment requires all Base Rate and LIBOR Rate Loan interest to continue to be paid on the last day of the calendar month or on the drawdown date, which ever is earlier. The average interest rate on all outstanding borrowings under the Credit Facility was 5.24% at June 30, 2002. The Credit Facility, as amended, adds a new prepayment requirement that requires the Company to repay to the Credit Facility Lenders an amount equal to the Excess Cash Flow Payment (as defined in the Credit Facility). This amount is payable 90 days after the end of each fiscal year and is used to repay the principal on the acquisition facility in inverse order of maturity and upon payment in full of the acquisition facility, to reduce the revolving credit facility. Finally, the fifth amendment extends the final maturity of the acquisition facility and the revolving facility to June 30, 2004. In connection with the execution of the fifth amendment, the Company paid the Credit Facility Lenders a fee of approximately $0.5 million. The terms and conditions of the Secured Senior Subordinated Notes included the following: o a maturity date of December 31, 2004; o an interest rate of 15% per annum, of which (i) 10% will be payable in cash semi-annually in arrears and (ii) 5% will be payable in-kind compounded semi-annually; o subordination in right of payment to the Credit Facility Lenders; o subordinated second lien security interests in the collateral securing the obligations under the Credit Facility; o no repayment or redemption prior to the repayment in full of all obligations; and o no financial or other covenants which are more restrictive than the Credit Facility. The fifth amendment, among other things, reset the amortization on the acquisition facility, reset the financial covenants and established maximum capital expenditure amounts, each of which are described in the tables below: 6 Amortization on the acquisition facility has been be reset as follows: QUARTER ENDING AMOUNT -------------- ------ 03/31/02............................... $1.25 million 06/30/02............................... $1.25 million 09/30/02............................... $1.25 million 12/31/02............................... $1.25 million 03/31/03............................... $2.5 million 06/30/03............................... $2.5 million 09/30/03............................... $2.5 million 12/31/03............................... $2.5 million 03/31/04............................... $3.0 million Maturity Date (06/30/04)............... Remaining Balance The following financial covenants were established in the fifth amendment: EBITDA to Total Interest Expense. The Company will not permit the ratio of the EBITDA (as defined in the Credit Facility) of the Company and its restricted subsidiaries to Consolidated Total Interest Expense (as defined in the Credit Facility) for any period of four consecutive fiscal quarters ending during any period described in the table set forth below to be less than the ratio set forth opposite such period in such table: PERIOD ENDED RATIO 03/31/02.............................. 1.45:1.00 06/30/02.............................. 1.55:1.00 09/30/02.............................. 1.60:1.00 12/31/02.............................. 1.70:1.00 03/31/03.............................. 1.75:1.00 06/30/03 ............................. 1.85:1.00 09/30/03.............................. 1.95:1.00 12/31/03 and at the end of each quarter thereafter............. 2.00:1.00 Leverage Ratio. The Company will not permit the Leverage Ratio (as defined in the Credit Facility) as of the end of any fiscal quarter ending during any period described in the table set forth below to exceed the ratio set forth opposite such period in such table: PERIOD ENDED RATIO 03/31/02............................. 7.55:1.00 06/30/02............................. 7.45:1.00 09/30/02............................. 6.85:1.00 12/31/02............................. 6.25:1.00 03/31/03............................. 6.15:1.00 06/30/03............................. 6.00:1.00 09/30/03............................. 5.75:1.00 12/31/03 and at the end of each quarter thereafter............. 5.50:1.00 Consolidated Operating Cash Flow to Total Debt Service. The Company will not, for any period of four consecutive fiscal quarters ending during any period described in the table set forth below, permit the ratio of (i) Consolidated Operating Cash Flow (as defined in the Credit Facility) for such period to (ii) the sum of (a) Consolidated Total Interest Expense for such period and (b) all required payments of principal (including the principal component of capitalized lease payments) in respect of indebtedness due and payable by the Company and/or its restricted subsidiaries during such period to be less than the ratio set forth opposite such period in such table: 7 PERIOD ENDED RATIO 03/31/02............................. 0.80:1.00 06/30/02............................. 0.90:1.00 09/30/02............................. 1.00:1.00 12/31/02 and at the end of each quarter thereafter ............ 1.05:1.00 Minimum EBITDA. The Company will not permit EBITDA for any period ending on the dates set forth below, to be less than the amount set forth opposite such date in such table: PERIOD ENDED AMOUNT ------------ ------ 01/01/02 - 03/31/02.................. $5.3 million 01/01/02 - 04/30/02.................. $8.5 million 01/01/02 - 05/31/02.................. $12.4 million 01/01/02 - 06/30/02.................. $16.55 million 01/01/02 - 07/31/02.................. $20.225 million 01/01/02 - 08/31/02.................. $24.075 million 01/01/02 - 09/30/02.................. $27.7 million 01/01/02 - 10/31/02.................. $30.275 million 01/01/02 - 11/30/02.................. $31.8 million 01/01/02 - 12/31/02.................. $32.825 million 04/01/02 - 03/31/03.................. $33.0 million 07/01/02 - 06/30/03.................. $33.5 million 10/01/02 - 09/30/03.................. $34.0 million 01/01/03 - 12/31/03.................. $34.4 million 04/01/03 - 03/31/04.................. $34.7 million Maximum Capital Expenditures. The Company will not permit capital expenditures for any fiscal year to be greater than the amount set forth opposite such year in the table below. PERIOD ENDED AMOUNT ------------ ------ 01/01/02 - 03/31/02.................. $2.0 million 01/01/02 - 06/30/02.................. $4.0 million 01/01/02 - 09/30/02.................. $5.0 million 01/01/02 - 12/31/02.................. $5.9 million 01/01/03 - 03/31/03.................. $2.6 million 01/01/03 - 06/30/03.................. $5.1 million 01/01/03 - 09/30/03.................. $6.4 million 01/01/03 - 12/31/03.................. $7.6 million Available Credit Capacity. As of June 30, 2002, the Company had the following amounts outstanding under the Credit Facility: AMOUNTS OUTSTANDING -- CREDIT FACILITY (IN THOUSANDS) AMOUNT --------- Acquisition Facility $69,723 Revolving Credit Facility 21,932 Letters of Credit 1,760 -------- Total Amount Outstanding $93,415 ======== As a result of the fifth amendment to the Credit Facility, the Company's total borrowing capacity under the revolving credit facility was increased to $30.0 million, subject to the periodic usage caps described above. 8 Senior Subordinated Notes On April 16, 1998, the Company offered $115.0 million aggregate principal amount of Senior Subordinated Notes (the Notes) due April 15, 2005 (the Offering). The Notes bear interest at the rate of 9 1/2% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, commencing October 15, 1998. The payments of principal, premium, interest and liquidated damages on the Notes are unconditionally guaranteed, jointly and severally, by the Company's domestic subsidiaries (Guarantors). (4) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and Statement No. 142, "Goodwill And Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination be recognized and reported apart from goodwill. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company adopted the provisions of Statement 141 July 1, 2001, and Statement 142 as of January 1, 2002. With respect to goodwill amortization, the Company adopted FAS 142 effective January 1, 2002. The result of the application of the non-amortization provisions of FAS 142 for goodwill resulted in an increase to operating income of $4.1 million and $8.5 million for the three and six month periods ended June 30, 2002, respectively, over the prior year comparable periods. At June 30, 2002, the Company had goodwill of $42.4 million. As of January 1, 2002, the Company completed a goodwill impairment test. This test involved the use of estimates related to the fair market value of the company's reporting units with which the goodwill was associated. No impairment was indicated at that time. Since the impairment test was performed, no factors have changed which would material alter the test results. The following table presents a reconciliation of operating income for the three and six months ended June 30, 2001, as adjusted, to reflect the removal of goodwill amortization in accordance with SFAS No. 142, to be used for comparison purposes with the three and six months ended June 30, 2002. (Dollars in thousands, except per share amounts)

9 In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard applies to legal obligations associated with the retirement of tangible long-lived assets. Management does not believe adoption of these standards will have a material adverse effect on the Company's financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses the impairment or disposal of long-lived assets and the reporting of discontinued operations. The standard supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business. " As of the adoption date, the standard did not affect the financial position or results of operations of the Company. In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Statement 146 requires a Company to record a liability for costs associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. Statement 146 also provides specific guidance on accounting for "one-time termination benefits" to employees, contract termination costs, and an undefined set of "other associated costs." The new requirements are effective prospectively for exit and disposal costs initiated after December 31, 2002. Because of unknown future events, which would be subject to Statement 146, it is not practicable to reasonably estimate the impact of adopting this Statement on the Company's financial statements at the date of this report. (5) SUMMARY BY BUSINESS SEGMENT The Company has two reportable segments, which include the Personal Safety Products segment (PSP) and the Highway Safety Products segment (HSP). PSP includes consumable products designed for eye and face protection, head protection, hearing protection and other personal safety. Primary customers for these products are found in the welding, construction, janitorial, healthcare, sporting, and food service sectors as well as throughout general industry, including oil, gas and chemical processors, metal fabricators and auto and aircraft manufacturers. HSP's broad product offering includes reflective glass beads, traffic safety and work zone protection equipment, traffic markings and traffic markings applications equipment. Primary customers for these products consist of state and local municipalities, independent contract road stripers, thermoplastic manufacturers, and highway contractor supply and rental companies. The Company evaluates segment performance based upon a measure of profit represented by earnings before interest, taxes, depreciation, amortization and certain non-cash charges and or non-recurring charges (EBITDA). Presented below is a summary of financial data for the Company's reportable segments. EBITDA is not included herein as operating data and should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with GAAP. The Company has included EBITDA because the Company understands that it is one measure used by certain investors to determine the Company's operating cash flow and historical ability to service its indebtedness and because certain financial ratios are calculated on a similar basis. EBITDA has not been reduced by management and directors fees ($0.3 million and $0.2 million for the three months ended June 30, 2002 and 2001, respectively and $0.6 million and $0.5 million for the six months ended June 30, 2002 and 2001, respectively), both of which are subordinated to the Company's obligations under its financing agreements. Information presented below for total assets exclude intercompany receivables and investments in wholly owned subsidiaries. (DOLLARS IN THOUSANDS)

(6) CAPSTREET TRANSACTION On February 2, 2001, the closing of the transactions contemplated under the Stock Purchase Agreement, (the Purchase Agreement), dated December 29, 2000, between the Company, SCG Acquisition LLC, an affiliate of The CapStreet Group, LLC (CapStreet), and the then stockholders of the Company (the Stockholders), as amended February 1, 2001, occurred. Pursuant to the terms of the Purchase Agreement, the Stockholders sold 50% of the common stock of the Company (the Common Stock) to affiliates of CapStreet. In consideration for the stock purchased pursuant to the Purchase Agreement, at the closing, CapStreet paid the Stockholders an aggregate of $41.5 million less certain fees and expenses. The transaction was approved by the boards of directors of the Company and CapStreet and closed on February 2, 2001. 11 In conjunction with the execution of the Purchase Agreement, the Company incurred approximately $4.5 million of costs, of which $4.2 million have been reflected in the results of operations for the six month period ending June 30, 2001. Included in these costs were the termination of existing stock appreciation rights and the buy-out of certain stock options for an aggregate cost of $2.2 million. These costs were paid as part of the proceeds of the Purchase Agreement and, accordingly, are reflected as a capital contribution to the Company. The Company also incurred $1.1 million of incentives to certain officers and employees a portion of which were reinvested in the Company in whole and had professional fees and other transaction costs of approximately $1.2 million. (7) RESTRUCTURING CHARGES During the three months ended March 31, 2002 and the twelve months ended December 31, 2001, the Company recorded restructuring charges of $0.3 million and $3.8 million, respectively, related to the restructuring plan approved by the Company to prioritize its initiatives around higher potential areas of its business, focusing on profit contribution, reducing expenses, and improving efficiency. This restructuring program included a workforce reduction, consolidation of excess facilities, exiting/rationalization of certain product lines and restructuring of certain business functions. This restructuring took place in three phases beginning fiscal 2001 and was complete as of March 31, 2002. During the first quarter of fiscal 2001, in connection with the restructuring plan, the Company recorded a restructuring charge of $1.2 million for costs associated with exiting certain product lines. The Company streamlined its product offering by eliminating certain lines of spectacles, as well as the power air purified respirator products and the Company's golf/rain line. The $1.2 million of discontinued products identified were all disposed of during the second and third quarters of 2001. Of the remaining restructuring charges, $2.6 million was recorded primarily in the fourth quarter of fiscal 2001 and consisted of (i) $1.4 million of costs associated with domestic consolidation of two facilities within the PSP segment and (ii) $1.2 million of costs associated with the consolidation of the Company's European PSP operations into one common facility located in the United Kingdom. The domestic restructuring costs consisted of: exiting/rationalization of product lines ($0.6 million), lease termination costs ($0.3 million), professional fees ($0.2 million) and severance ($0.2 million). The European consolidation costs consisted of exiting/rationalization of product lines ($0.5 million), professional fees ($0.4 million) and severance ($0.3 million). During the first quarter of 2002, the Company recorded a restructuring charge of $0.3 million relating to severance costs associated with the consolidation of certain support functions between PSP divisions. These severance costs represent the final costs associated with the 2001 restructuring plan. (8) CURTAILMENT GAIN The Company's post retirement medical plan subject to FAS 106 was amended on March 1, 2002. As of June 1, 2002, no additional participants will be allowed to enroll or will be eligible for participation in the post retirement medical insurance plan. Accordingly, the Company reduced the liability for the post retirement medical plan and recorded a one-time curtailment gain of approximately $0.7 million in the first quarter of fiscal 2002. (9) CONDENSED CONSOLIDATING FINANCIAL INFORMATION Financial information regarding the Guarantors for the three and six month periods ended June 30, 2002 and 2001 is presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. The financial information regarding the Guarantors is being presented through condensed consolidating financial schedules since the guarantees are full and unconditional and are joint and several. Guarantor financial statements have not been presented because management does not believe that such financial statements are material to investors. Flex-O-Lite, Inc. was acquired by the Company's predecessor in 1994. OSD Envision, Inc. (OSD) was incorporated in October 1996 and acquired by the Company in 1996. In 1999, OSD was merged into the Company. American Allsafe Company was incorporated in March 1998 and acquired by the Company in 1998. Kedman Company (Kedman) was incorporated by its predecessors in September 1961 and acquired by the Company in 1998. In 1999, Kedman was merged into Allsafe. Crystaloid Technologies, Inc. was incorporated in March 1998 and acquired by the Company in 1998. Silencio/Safety Direct, Inc. was incorporated by its predecessors in May 1996 and acquired by the Company in 1998. Morton 12 Traffic Markings was acquired by the Company in May 1999 through TMT-Pathway, LLC, a limited liability company formed by the Company in 1999. 13

21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company is a leading designer, manufacturer and distributor of safety products serving a variety of niche applications within the personal and highway safety markets, principally throughout North America and in Europe. The Company markets its products under established, well-known brand names to an extensive network of distributors, wholesalers, contractors and government agencies. The Company currently has two reportable business segments: Personal Safety Products (PSP) and Highway Safety Products (HSP). The following discussion and analysis is intended to assist in understanding the Company's financial condition and results of operations for the three and six-month periods ended June 30, 2002 and 2001. The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and the notes thereto and the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission.

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 Net sales. Net sales decreased 3.9% to $57.1 million for the second quarter of 2002 from $59.4 million for second quarter of 2001. PSP net sales for the comparable three-month period decreased 8.0% to $21.8 million in 2002 from $23.7 million in 2001. The welding safety market continued to be soft during the second quarter of 2002. Declines in the industrial, construction, avionics and European markets continued to negatively impact PSP's second quarter 2002 net sales. HSP net sales for the comparable three-month period decreased 1.1% to $35.3 million in 2002 from $35.7 million in 2001 with increases in revenues from coating products and traffic beads being partially offset by lower revenues from traffic safety and work zone protection equipment. 22 Gross Margin. Gross margin increased 4.8% to $17.4 million for the second quarter of 2002 from $16.6 million for the second quarter of 2001. PSP gross margin for the comparable three-month period declined 6.1% to $7.7 million in 2002 from $8.2 million in 2001. However, PSP gross margin as a percentage of sales increased to 35.4% from 34.6% largely due to cost saving programs including material cost reductions, headcount reductions and a sales mix favoring higher margin new products. HSP gross margin for the comparable three-month period increased 15.5% to $9.7 million in 2002 from $8.4 million in 2001. HSP gross margin as a percentage of sales increased to 27.4% from 23.6% due to cost reduction initiatives, the decrease in natural gas costs over the prior year period, increased higher margin sales mix and reduced freight costs. Selling, general and administrative expenses. Selling, general and administrative expenses for the second quarter of 2002 were flat with the second quarter of 2001. During the second quarter of 2002, the Company incurred other non-recurring benefit reserves of $0.4 million. Operating Income. Operating income increased in the second quarter of 2002 116.7% to $9.1 million from $4.2 million in the second quarter of 2001. PSP operating income increased 106.3% or $1.7 million to $3.3 million in the second quarter 2002 from $1.6 million in 2001 due to strong cost reduction efforts and elimination of goodwill amortization expense of $1.9 million. HSP operating income increased 97.2% or $3.5 million in the second quarter of 2002 to $7.1 million from $3.6 million in the second quarter of 2001 due to cost reduction initiatives, decreased natural gas costs over the prior year period, increased higher margin sales of durable coatings and elimination of goodwill amortization expense of $2.1 million. Income Tax Expense. Income tax expense in the second quarter of 2002 increased to $1.1 million from $0.2 million in the second quarter of 2001 due to improved operating results. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 Net sales. Net sales decreased 3.0% to $102.0 million for the six months ended June 30, 2002 from $105.2 million for the six months ended June 30, 2001. PSP net sales for the comparable six-month period decreased 6.4% to $43.8 million in 2002 from $46.8 million in 2001 with continuing declines in the welding safety, construction, avionics and European markets. HSP net sales for the comparable six-month period decreased slightly to $58.2 million in 2002 from $58.3 million in 2001 with increases in revenues from coating products and traffic beads being partially offset by lower revenues from traffic safety and work zone protection equipment. Gross Margin. Gross margin increased 8.3% to $30.1 million for the six months ended June 30, 2002 from $27.8 million for the six months ended June 30, 2001. PSP gross margin for the comparable six-month period declined slightly to $15.3 million in 2002 from $15.7 million in 2001. However, PSP gross margin as a percentage of sales increased to 35.0% from 33.5% largely due to cost saving programs including material cost reductions, headcount reductions and a sales mix favoring higher margin new products. HSP gross margin for the comparable six-month period increased 22.5% to $14.7 million in 2002 from $12.0 million in 2001. HSP gross margin as a percentage of sales increased to 25.4% from 20.6% due largely to cost reduction initiatives, the decrease in natural gas costs over the prior year period, increased higher margin sales mix and reduced freight costs. Selling, general and administrative expenses. Selling, general and administrative expenses for the six months ended June 30, 2002 decreased 21.6% to $15.6 million for the six months ended June 30, 2002 from $19.9 million in the six months ended June 30, 2001. The six months ended June 30, 2002 included other non-recurring benefit reserves of $0.4 million. During the three months ended March 31, 2001, the Company incurred $3.3 million of non-recurring transaction-related expenses recorded in conjunction with the Purchase Agreement. Included in the non-recurring transaction-related expenses were $2.2 million of expense related to payment of stock appreciation rights and stock options and $1.1 million of acquisition incentives. Excluding the non-recurring transaction-related expenses, selling, general and administrative expenses decreased $1.0 million or 6.0% from period to period due to decreased headcount and cost reduction efforts. Operating Income (Loss.) Operating income increased in the six months ended June 30, 2002 to $14.2 million from ($1.7 million) in the six months ended June 30, 2001. The six months ended June 30, 2001 operating loss included $4.5 million of non-recurring transaction and restructuring charges associated with the Purchase Agreement and $8.5 million of goodwill amortization expense. Excluding such charges, operating income for the six months ended June 30, 2002 increased $2.9 million or 25.7% on improved margins and lower operating expenses. PSP operating income increased 204.5% to $6.7 million in the first half of fiscal 2002 from $2.2 million in the first half of fiscal 2001 due to strong cost reduction efforts and elimination of goodwill amortization expense of $4.1 million. HSP 23 operating income increased 288.5% in the first half of fiscal 2002 to $10.1 million from $2.6 million in the first half of fiscal 2001 due to cost reduction initiatives, decreased natural gas costs, increased higher margin sales of durable coatings, reduced freight costs and elimination of goodwill amortization expense of $4.3 million. Income Tax Expense (Benefit). Income tax expense (benefit) in the first half of fiscal 2002 increased to $1.0 million from ($3.5 million) in the first half of fiscal 2001 in part due to improved operating results and the one-time curtailment gain. The net first half fiscal 2001 benefit was due to the recognition of $3.8 million of net operating loss carryforwards associated with the first half fiscal 2001 taxable loss. Curtailment gain. The Company's post retirement medical plan subject to FAS 106 was amended on March 1, 2002. As of June 1, 2002, no additional participants will be allowed to enroll or will be eligible for participation in the post retirement medical insurance plan. Accordingly, the Company reduced the liability for the post retirement medical plan and recorded a one-time curtailment gain of approximately $0.7 million in the first quarter of fiscal 2002. Restructuring charge. Due to reduced demand from and lower capital spending by the Company's customers, the Company entered a restructuring program during 2001 to prioritize its initiatives around high-growth areas of its business, focus on profit contribution, reduce expenses and improve efficiency. This restructuring program included a workforce reduction, consolidation of excess facilities, elimination of certain product lines and restructuring of certain business functions. During the first quarter of 2001, in conjunction with the Company's corporate restructuring, the Company recorded $1.2 million of restructuring charges related to the elimination of certain product lines. During the second half of 2001, the Company recorded a restructuring charge in the amount of $2.6 million related to the consolidation of certain support functions between PSP divisions as well as the merger of European operations, which resulted in the closing of facilities in Germany and France and their consolidation in the United Kingdom. During the first quarter of 2002, the Company completed the restructuring program and recorded a restructuring charge of $0.3 million relating to the severance costs associated with the consolidation of certain support functions between PSP divisions. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities for the six months ended June 30, 2002 and 2001 was $1.8 million and $10.2 million, respectively. The improvement is largely due to stronger operating results of $11.4 million and working capital management for the first half of fiscal 2002 as compared to the first half of fiscal 2001. Changes in working capital resulted in cash uses of $7.5 million and $8.9 million for the six months ended June 30, 2002 and 2001, respectively. Cash used in investing activities for the six months ended June 30, 2002 and 2001 represent capital expenditures, which were $2.3 million and $1.9 million, respectively. Net cash provided by financing activities for the six months ended June 30, 2002 and 2001 was $3.9 million and $12.0 million. The significant reduction in borrowings in first half of fiscal 2002 is largely due to stronger operating cash flows, which resulted in significantly less use of the Company's existing debt structure than the prior year comparable period. The three months ended March 31, 2001 included significant borrowings due in part to transaction expenses associated with the Purchase Agreement. Additionally, first quarter 2001 included $2.2 million of additional paid in capital related to the payment of stock appreciation rights and stock options. On April 16, 1998, the Company offered $115.0 million aggregate principal amount of Senior Subordinated Notes (the Notes) due April 15, 2005 (the Offering). The Notes bear interest at the rate of 9 1/2% per annum, payable semi-annually in arrears on April 15 and October 15 of each year. The payment of principal, premium, interest and liquidated damages on the Notes are unconditionally guaranteed, jointly and severally, by the Company's domestic subsidiaries (Guarantors). Credit Facility. During 1998, the Company entered into a credit agreement (as amended, the Credit Facility) with a group of banks (the Credit Facility Lenders), which provided for two lines of credit in the aggregate amount of $125.0 million. The lines consist of an acquisition facility in the principal amount of up to $95.0 million and a revolving credit facility in the principal amount of up to $30.0 million. The Credit Facility was amended on June 19, 1998 to include Swing Line Loans, which allowed the Company to borrow up to $3.0 million from the Swing Line Bank (Fleet National Bank) so long as all the sum of the outstanding swing line loans, revolving credit loans and letters of credit outstanding did not exceed the total commitment under the revolving credit facility of $30.0 million. A second amendment to the Credit Facility was entered into on May 17, 1999 to increase the acquisition facility to $105.0 million and permit the Company's acquisition of TMT-Pathway. The Company could not borrow 24 under the acquisition facility beyond April 30, 2001 at which time the commitment of the Credit Facility Lenders to advance additional funds under the acquisition facility was scheduled to expire and the principal amount of the acquisition facility became due in quarterly installments having a final maturity of March 31, 2004. The Credit Facility contains several financial covenants based on operating results for the previous four quarters. Due to operating losses generated by decreased sales volume and gross margin percentages and historically high natural gas costs incurred in the previous four quarters, the Company was not in compliance with certain financial covenants under the Credit Facility as of June 30, 2001, September 30, 2001 or December 31, 2001. A third amendment to the Credit Facility was entered into effective July 1, 2001, pursuant to which the Credit Facility Lenders agreed to forbear from exercising their rights and remedies relating to the aforementioned defaults under the Credit Facility through September 30, 2001, the usage under the revolving credit facility was limited to $24.0 million and the applicable margin for base rate and LIBOR based loans was increased to 2.0% and 3.0%, respectively. A fourth amendment to the Credit Facility was entered into on October 1, 2001, pursuant to which the Credit Facility Lenders agreed to extend their forbearance through March 31, 2002 and make other modifications to the Credit Facility, including increasing the applicable margin for base rate and LIBOR based loans to 3.0% and 4.0%, respectively, and for certain loans to a fixed rate of 15% per annum, imposing additional limitations on usage under the revolving credit facility, and adding additional financial covenants pertaining to minimum levels of EBITDA and maximum levels of capital expenditures. A fifth amendment to the Credit Facility was entered into on March 29, 2002, pursuant to which the Credit Facility Lenders agreed to extend their forbearance relating to the aforementioned defaults through April 12, 2002 and, subject to certain conditions, including a $13.0 million investment in the Company by its stockholders and their affiliates no later than April 12, 2002 and the application of not less than $12.0 million of the proceeds of such investment to repay the acquisition facility, to permanently waive the aforementioned defaults under the Credit Facility which occurred in fiscal 2001 and certain other technical defaults and to reset the financial covenants and effect other amendments to the Credit Facility (described below). As all conditions to the fifth amendment were met, the fifth amendment became effective April 12, 2002. . In connection with the fifth amendment the Company sold to certain stockholders and their affiliates, including CapStreet II, L.P. (formerly Summit Capital II, L.P.) and the Jordan Company LLC, $13.0 million of units of which $12.0 million was used to reduce outstanding debt under the Company's acquisition facility. The units consist of approximately $12.0 million of 15% secured senior subordinated notes (the Secured Senior Subordinated Notes) and $1.0 million of detachable warrants to purchase shares of Class A Common Stock of the Company. The Secured Senior Subordinated Notes have a maturity date of December 31, 2004 and an interest rate of 15% per annum, of which (i) 10% will be payable in cash semi-annually in arrears commencing September 30, 2002 and (ii) 5% will be payable in-kind compounded semi-annually. The Secured Senior Subordinated Notes are junior in right of payment to the Credit Facility and pari passu in right of payment to the Company's 9- 1/2% Senior Subordinated Notes. The $1.0 million of value assigned to the warrants is included in additional paid in capital and is being amortized over the duration of the Secured Senior Subordinated Notes. For each $1,000 (one thousand dollars) principal value of Secured Senior Subordinated Note purchased, a warrant to purchase 1.1238 shares of Class A Common Stock was issued. The warrants have an expiration date of April 1, 2014 and an exercise price of $0.01 per warrant. The Credit Facility, as amended, allows the total commitment of $30.0 million under the revolving credit facility to be available for borrowing, subject to usage caps of $22.5 million during the periods of December 15, 2002 through January 31, 2003 and December 15, 2003 through January 31, 2004. The amount of borrowings as of June 30, 2002 are unchanged from the fourth amendment and bear interest, at the option of the Company, at a rate per annum equal to (i) the Base Rate (as defined in the Credit Facility) plus 3.00% or (ii) the LIBOR Rate (as defined in the Credit Facility) plus 4.00%. Further, the Company owes a commitment fee of 0.50% on the unused portion of the revolving credit facility commitment. The fifth amendment requires all Base Rate and LIBOR Rate Loan interest to continue to be paid on the last day of the calendar month or on the drawdown date, which ever is earlier. The average interest rate on all outstanding borrowings under the Credit Facility was 5.24% at June 30, 2002. The Credit Facility, as amended, adds a new prepayment requirement that requires the Company to repay to the Credit Facility Lenders an amount equal to the Excess Cash Flow Payment (as defined in the Credit Facility). This amount is payable 90 days after the end of each fiscal year and is used to repay the principal on the acquisition facility in inverse order of maturity and upon payment in full of the acquisition facility, to reduce the revolving credit facility. Finally, the fifth amendment extends the final maturity of the acquisition facility and the revolving facility to June 30, 2004. In connection with the execution of the fifth amendment, the Company paid the Credit Facility Lenders a fee of approximately $0.5 million. 25 The terms and conditions of the Secured Senior Subordinated Notes included the following: o a maturity date of December 31, 2004; o an interest rate of 15% per annum, of which (i) 10% will be payable in cash semi-annually in arrears and (ii) 5% will be payable in-kind compounded semi-annually; o subordination in right of payment to the Credit Facility Lenders; o subordinated second lien security interests in the collateral securing the obligations under the Credit Facility; o no repayment or redemption prior to the repayment in full of all obligations; and o no financial or other covenants which are more restrictive than the Credit Facility. The fifth amendment, among other things, reset the amortization on the acquisition facility, reset the financial covenants and established maximum capital expenditure amounts. Giving effect to the fifth amendment to the Credit Facility, the Company was in compliance with all of its financial covenants as of June 30, 2002. As a result of the fifth amendment to the Credit Facility, the Company's total borrowing capacity under the revolving credit facility was increased to $30.0 million, subject to the periodic usage caps described above. As of June 30, 2002, the Company had outstanding borrowings under its revolving credit facility of $21.9 million and $1.8 million of letters of credit outstanding resulting in availability of $6.3 million. In addition, after giving effect to the application of the proceeds from the $13.0 million investment described above, the amount outstanding under the Credit Facility was approximately $93.4 million. Liquidity. The Company believes that current and projected cash flows from operations together with available borrowing capacity under the Credit Facility are sufficient to fund working capital requirements, debt service requirements and planned capital expenditures through 2003. The Company contemplates capital expenditures of approximately $5.3 million for all of 2002, with $2.3 million spent as of June 30, 2002. The Company's beliefs regarding its liquidity through 2003 will be affected by, among other things, demand for the Company's products, the Company's ability to compete with industry participants, the impact of future laws and governmental regulations and general economic and capital markets conditions. The Company's current and projected cash flows from operations will not be sufficient to fund the Company's debt service requirements in 2004 and 2005. Accordingly, the Company expects to have to refinance a significant portion of it indebtedness in 2004. The Company can provide no assurance that it will be able to refinance its indebtedness on commercially reasonable terms. 26 FORWARD LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this report are forward-looking statements. Such forward-looking statements are identified by use of forward-looking words such as "anticipate," "believe," "plan," "estimate," "expect," and "intent" and other similar expressions. Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, the Company can give no assurance that these expectations will prove correct. These forward-looking statements are subject to various assumptions, risks and uncertainties. Specific factors could cause our actual results to differ materially from those contained in any forward-looking statement. These factors include, but are not limited to: o demand for the Company's products; o acceptance of new products developed or acquired by the Company; o the Company's ability to compete for market share with industry participants; o the impact of current and future laws and governmental regulations affecting the Company and its product offerings; o the Company's ability to protect its intellectual property rights; o general economic and capital markets conditions, including fluctuations in interest rates; o the Company's ability to make and integrate business acquisitions on economically acceptable terms; o the impact of seasonality and inflation on the Company's business; o costs and other effects of legal and administrative proceedings, settlements, investigations and claims, including environmental liabilities that may not covered by insurance or indemnity; o adverse labor relations; o the impact of raw materials and energy cost increases; and o the effect on the Company's results of operations and financial condition associated with implementing various accounting rules and regulations. When considering the Company's forward-looking statements, investors should also keep in mind the risk factors described in "Item 1. -- Business-Risk Factors" of the Company's Annual Report on Form 10-K. These risk factors could cause the Company's actual results to differ materially from those contained in any forward-looking statement. The Company does not assume any duty to update its forward-looking statements unless applicable securities laws require it to do so. 27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There have been no material changes in the Company's market risk during the six months ended June 30, 2002. For additional information, refer to Item 7 in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. PART II. OTHER INFORMATION Item 1. - Legal Proceedings None Item 2. - Changes in 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 (a) Exhibits. Exhibit Number Description ------ ----------------------- 906 Certificates of CEO/CFO (b) Reports on Form 8-K. None 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. JACKSON PRODUCTS, INC. (Registrant) Date: 08/14/02 By:/s/ Christopher T. Paule --------------------------- Christopher T. Paule President and Chief Executive Officer By:/s/ William L. Babler --------------------------- William L. Babler Chief Financial Officer 29 CERTIFICATION OF CHRISTOPHER T. PAULE OF JACKSON PRODUCTS, INC. PURSUANT TO 18 U.S.C. ss. 1350 I, Christopher T. Paule, President and Chief Executive Officer of Jackson Products, Inc. (the "Company"), hereby certify that the accompanying report on Form 10-Q for the period ending June 30, 2002 and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the "Report") by the Company fully complies with the requirements of that section. I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By:/s/ Christopher T. Paule ----------------------------------- Name: Christopher T. Paule Date: 8/14/02 CERTIFICATION OF WILLIAM L. BABLER OF JACKSON PRODUCTS, INC. PURSUANT TO 18 U.S.C. ss. 1350 I, William L. Babler, Chief Financial Officer of Jackson Products, Inc. (the "Company"), hereby certify that the accompanying report on Form 10-Q for the period ending June 30, 2002 and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the "Report") by the Company fully complies with the requirements of that section. I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By:/s/ William L. Babler ----------------------------------- Name: William L. Babler Date: 8/14/02

JACKSON PRODUCTS INC 10-Q