Item 1. BUSINESS
Jordan Industries, Inc. (the "Company") is a private holding company which owns and manages a widely diversified group of operating companies. The capital stock of the Company is held by its management and the partners, principals, employees and affiliates of The Jordan Company (collectively, the "Jordan Group"). The Company was formed in order to provide its subsidiaries with long range planning, broader access to financial markets, and professional and financial management, while permitting its subsidiaries' management broad discretion in implementing their strategies and operating their day-to-day businesses. The Company conducts its operations exclusively through its subsidiaries.
The Company's business is divided into five groups. The Specialty Printing and Labeling group ("SPL"), which had 1996 net sales of approximately $109.6 million, consists of Sales Promotion Associates, Inc. ("SPAI"), Pamco Printed Tape and Label Company, Inc. ("Pamco"), Valmark Industries, Inc. ("Valmark"), and Seaboard Folding Box, Inc. ("Seaboard"). The Motors and Gears group, which had 1996 net sales of approximately $117.6 million, consists of The Imperial Electric Company ("Imperial") and its subsidiaries, The Scott Motors Company ("Scott"), and Gear Research, Inc. ("Gear"), and Merkle-Korff Industries, Inc. ("Merkle-Korff"), which consists of Merkle-Korff, Inc. and Barber-Colman Motors, ("Barber-Colman"). The Telecommunications Products group, which had 1996 net sales of approximately $133.0 million, consists of Dura-Line Corporation ("Dura-Line"), AIM Electronics Corporation ("AIM"), Cambridge Products Corporation ("Cambridge"), Johnson Components, Inc. ("Johnson"), Diversified Wire and Cable, Inc. ("Diversified"), Viewsonics, Inc. ("Viewsonics"), Vitelec Electronics, Ltd. ("Vitelec"), Bond Holdings, Inc. ("Bond"), and Northern Technologies, Inc. ("Northern"). Welcome Home, Inc. ("Welcome Home"), had 1996 net sales of $81.9 million. The Consumer and Industrial Products group, which had 1996 net sales of $159.5 million, includes DACCO, Incorporated ("DACCO"), Sate-Lite Manufacturing Company ("Sate-Lite"), Riverside Book and Bible Corporation ("Riverside"), Parsons Precision Products, Inc. ("Parsons"), Hudson Lock, Inc. ("Hudson"), Beemak Plastics, Inc. ("Beemak"), Cape Craftsmen, Inc. ("Cape"), and Paw Print Mailing Services, Inc. ("Paw Print").
All of the foregoing corporations are collectively referred to herein as the "Subsidiaries", and individually as a "Subsidiary". Certain of the Subsidiaries are designated as "Restricted Subsidiaries" under the Company's Indentures relating to the Company's 10 3/8% Senior Notes due 2003 and Senior Subordinated Discount Debentures due 2005. These Subsidiaries are DACCO, Sate- Lite, Riverside, Dura-Line, Parsons, Hudson, AIM, Cambridge, Beemak, Johnson, Diversified, Viewsonics, Vitelec, Bond, and Northern. Generally, the Specialty Printing and Labeling group and the Motors and Gears group and the Subsidiaries therein are and include "Non-Restricted Subsidiaries" under the Company's Indenture.
The Company is currently exploring a broad range of alternatives in connection with recapitalizing, refinancing and extending the cash payment obligations and maturities of the Company's indebtedness, which may include selling, financing, recapitalizing, reclassifying, spinning-off or similar transactions involving the Company's Subsidiaries, involving third party, Company or affiliate, investors or purchasers. In structuring these transactions, the Company believes that some of its Subsidiaries may strategically and financially benefit from being partly or wholly separated from the Company on a stand-alone, industry-focused basis. The timing and the Company's determination whether to proceed with such recapitalization, refinancing, extension or transactions will be subject to a number of considerations, including market conditions, financing alternatives, tax ramifications, acquisition and divestiture strategies and management philosophy and resources. The Company, moreover, consistent with its announced strategies, is constantly exploring, reviewing, discussing and negotiating acquisition and divestiture opportunities, which may, from time to time, result in understandings, letters of intent or agreements, including in connection with the foregoing recapitalization, refinancing, extension and related transactions. There can be no assurances as to the timing or the Company's determination or ability to proceed with or close such recapitalization, refinancing, extension, acquisitions, divestitures or transactions.
See Note 15 to the consolidated financial statements included elsewhere in this Annual Report with respect to business segment information for 1996, 1995 and 1994.
The Company owned the following percentages of the common shares of the subsidiaries as of March 31, 1997:
Subsidiary Percentage Ownership
Sate-Lite 98.6% Welcome Home 66.7% DACCO 100% Riverside 100% Parsons 85% Dura-Line 100% Hudson 100% AIM 100% Cambridge 100% Beemak 100% Vitelec 100% Viewsonics 100% Bond 80% Northern 100% Johnson 100% Diversified 87.5% Paw Print 100% Cape 100% Motors and Gears Holdings, Inc. 82.5% (1) SPL 83.3% (2)
(1) Motors and Gears Holdings, Inc. indirectly holds 100% of the common shares of Merkle-Korff and Imperial. Scott and Gear are owned through Imperial, which holds 100% of the common shares of Scott and Gear.
(2) SPL holds 100% of the common shares of SPAI, Valmark and Seaboard, and 80% of the common shares of Pamco.
Specialty Printing and Labeling Group
SPAI. The Company's former subsidiaries, The Thos. D. Murphy Co. ("Murphy"), which was founded in 1889, and Shaw-Barton, Inc. ("Shaw-Barton"), which was founded in 1940, merged to form JII/SPAI in March 1989. One-hundred percent of JII/SPAI's assets were sold at arms length into SPL in August of 1995 and the Company was renamed Sales Promotion Associates, Inc. ("SPAI"). SPAI is a producer and distributor of calendars for corporate buyers and is a distributor of corporate recognition, promotion and specialty advertising products.
Approximately 56.7% of SPAI's 1996 net sales are derived from distributing a broad variety of corporate recognition products, promotion and specialty advertising products. These products include apparel, watches, crystal, luggage, writing instruments, glassware, caps, cases, labels and other items that are printed and identified with a particular corporate logo and/or corporate advertising campaign. Approximately 31.4% of SPAI's 1996 net sales are derived from the sale of a broad variety of calendars, including hanging, desktop, and pocket calendars that are used internally by corporate customers and distributed by them to their clients and customers. High quality artistic calendars are also distributed. SPAI also manufactures and distributes soft- cover school yearbooks for kindergarten through eighth grade.
SPAI assembles and finishes calendars that are printed both in-house as well as by a number of outside printers. Facilities for in-house manufacturing include a composing room, a camera room, a calendar finishing department, and a full press room. Print stock, binding material, packaging and other materials are supplied by a number of independent companies. Specialty advertising products are purchased from more than 900 suppliers. Calendars and specialty advertising products are sold through a 900 person sales force, most of whom are independent contractors.
Management believes that SPAI has one of the largest domestic sales forces in the industry. With this large sales force and a broad range of calendars and corporate recognition products available, management believes that SPAI is a strong competitor in its market. This market is very fragmented and most of the competition comes from smaller scale producers and distributors.
Valmark. Valmark, which was founded in 1976 and purchased by the Company in 1994, is a specialty printer and manufacturer of pressure sensitive label products for the electronics OEM market. Valmark's products include adhesive backed labels, graphic panel overlays, multi-color membrane switches, and radio frequency interference (RFI) shielding devices. Approximately 61% of Valmark's 1996 net sales are derived from the sale of graphic panel overlays and membrane switches, 23% from labels, and 17% from shielding devices.
The specialty screen products sold in the electronics industry continue to operate relatively free of foreign competition due to the high level of communication and short time frame usually required to produce orders. Currently, the majority of Valmark's customer base of approximately 850 is located in the Northern California area.
Valmark sells to four primary markets: personal computers, general electronics, turn-key services, and medical instrumentation. The sales to the personal computer industry has experienced the most growth over recent years due to Valmark's RFI shield protection capabilities. Sales to Apple Computer of RFI devices represented approximately 18% of net sales in 1996.
Valmark is able to provide the electronics OEM's with a broader range of products than many of its competitors. Valmark's markets are very competitive in terms of price and accordingly Valmark's advantage over its competitors is derived from their diverse product line and excellent quality ratings.
Pamco. Pamco, which was founded in 1953 and purchased by the Company in 1994 is a manufacturer and distributor of a wide variety of printed tapes and labels. Pamco offers a range of products from simple one and two-color labels, such as basic bar codes and address labels to seven-color, varnish-finished labels for products such as video games and food packaging. 100% of Pamco's products are made to customers' specifications and 92% of all sales are manufactured in-house. The remaining 10% of net sales are purchased printed products and include business cards and stationary.
Pamco's products are marketed by a team of eighteen sales representatives who focus on procuring new accounts. Existing accounts are serviced by nine customer service representatives and five internal salespeople. Pamco's customers represent several different industries with the five largest accounting for approximately 21% of 1996 net sales.
Pamco competes in a highly-fragmented industry. Pamco emphasizes its impressive turnaround time of 24 hours and its ability to accommodate rush orders that other printers can not handle. Due to these characteristics, Pamco has posted significant growth over recent years.
Seaboard. Seaboard, which was founded in 1954 and purchased by the Company in 1996, is a manufacturer of printed folding cartons and boxes, insert packaging, and blister pack cards.
Seaboard sells directly to a broad customer base, located primarily east of the Mississippi River, and operating in a variety of industries including hardware, personal hygiene, toys, automotive supplies, food and drugs. Seaboard's top 10 customers accounted for approximately 36.1% of sales in 1996.
Seaboard has exhibited consistent sales growth, high profit margins for exceeding industry standards, and excellent operating capabilities. Seaboard has established a highly successful program for buying and profitably integrating smaller acquisitions.
Motors and Gears Group
Merkle-Korff. Merkle-Korff was founded in 1911 and was purchased, along with its wholly-owned subsidiaries, Elmco Industries, Inc. and Mercury Industries, Inc., by the Company in September 1995.
Merkle-Korff is a custom manufacturer of AC and DC motors and gear motors. Merkle-Korff's products are used in a wide range of products including refrigerators, freezers, dishwashers, vending machines, business machines, pumps and compressors. Approximately 60% of Merkle-Korff's 1996 sales were derived from the home appliance and vending machine market. Merkle-Korff's prominent customers include General Electric Company, Whirlpool Corporation and Dixie-Narco, Inc. The Company's top 10 customers represent approximately 61% of total sales.
Barber-Colman. Barber-Colman was founded in 1894 and purchased by Merkle-Korff in 1996.
Barber-Colman is a vertically integrated manufacturer of both alternating current and direct current subfractional horsepower motors and gearmotors. Barber-Colman's products serve a wide variety of applications, and they are used as components in such products as vending machines, copiers, printers, ATM machines, currency changers, X-Ray machines, peristaltic pumps, HVAC activators, medical equipment, and others.
The majority of Barber-Colman's products are sold directly to OEM's, however, management has initiated an effort to direct small orders to three distributors. Each of these distributors is fully stocked with Barber-Colman's standardized parts and equipment with their computerized catalog system which facilitates the efficient selection of products and components at the distributor level.
Imperial. Imperial manufactures elevator motors, floor care equipment motors and automatic hose reel motors. Imperial was founded in 1889 and acquired by the Jordan Group and Imperial's management in 1983. All of Imperial's assets were sold at arms-length to Motors and Gears Industries, Inc. in November 1996.
Imperial designs, manufactures and distributes specialty electric motors for industrial and commercial use. Its products, AC and DC motors, generators and permanent magnet motors are sold principally in the U.S. and Canada and to a limited extent in Europe and Australia. Approximately 29% of Imperial's 1996 net sales were derived from elevator motors, ranging from 5 to 100 horsepower, sold to major domestic elevator manufacturers. Approximately 69% of Imperial's 1996 net sales were derived from permanent magnet motors sold primarily to domestic manufacturers of floor care equipment. The remaining 2% of Imperial's 1996 net sales came from sales of miscellaneous parts.
Otis Elevator Company, Westinghouse Corporation and other leading elevator manufacturers have in recent years discontinued internal manufacturing of motors and have turned to Imperial and other independent manufacturers. In 1996, Clark Industries, Inc. accounted for approximately 11% of Imperial's net sales, and Imperial's top ten customers accounted for 55% of total net sales. Imperial's products are marketed domestically by its management and three independent sales representatives and internationally by management.
Imperial manufactures specialty motors with steel, magnets, copper wire, castings and other components supplied by a variety of firms. In the elevator motor market, Imperial competes with several firms of varying size. The other markets in which Imperial competes are also highly competitive. However, the Company's management believes that Imperial is able to effectively compete with these firms on the basis of product reliability, price and customer service.
Scott. Scott was founded in 1982 and acquired by Imperial in August 1988. All of Scott's assets were sold at arms-length to Motors and Gears Industries, Inc. in November 1996. Scott manufactures and sells floor care machine motors; silicone controlled rectifier motors, which are variable speed motors used in conveyers, machine tools, treadmills, mixers and metering pumps; and low voltage DC motors.
Scott offers a number of standard motors designed for a variety of applications. Scott also custom designs motors for special applications. Scott manufactures many of the sub-assemblies, components and molds for its products from raw materials, which gives it the ability to manufacture these special application motors. Scott obtains these raw materials from a number of independent sources.
Scott markets its products through an internal sales force of two and an external sales force of representatives and distributors.
Gear. Gear manufactures precision gears and gear boxes for OEMs requiring high precision commercial gears. Gear was founded in 1952 and acquired by Imperial in November 1988. All of Gear's assets were sold at arms-length to Motors and Gears Industries, Inc. in November 1996. Gear manufactures precision gears for both AC and DC electric motors in a variety of sizes. The gears are sold primarily to the food, floor care machine and aerospace industries and to other manufacturers of machines and hydraulic pumps. Gear's products are nationally advertised in trade journals and are sold by one internal salesmen and one independent sales representative. Gear precision machines its products from steel forgings and castings.
Gear competes primarily on the basis of quality. In addition, the ability of Imperial, Scott and Gear to offer both electric motors and gear boxes as a package, and to custom design these items for customers, may allow all three subsidiaries to gain greater market penetration.
Telecommunications Products Group
Dura-Line. Dura-Line is a manufacturer and supplier of "Innerduct" pipe through which fiber optic cable is installed and housed. Dura-Line sells this product to major telecommunications companies throughout the world. Dura-Line also manufactures flexible polyethylene water and natural gas pipe. Dura-Line was founded in 1971 and acquired by the Jordan Group and Dura-Line's management in 1985.
In 1996, approximately 98% of Dura-Line's net sales came from Innerduct. Dura-Line sells to major telecommunications companies, such as SPT Telecom, GTE, Bell South, and Pacific Telesis, each of which accounted for less than 10% of Dura-Line's Innerduct net sales. Innerduct is marketed worldwide by Dura- Line's management, ten manufacturing representatives and forty in-house sales representatives. Dura-Line negotiates long-term contracts with major telecommunications companies for its Innerduct product line. It competes for these sales on the basis of technical innovation, price, quality and service.
In addition, approximately 2% of Dura-Line's 1996 net sales came from the sale of polyethylene water and natural gas pipe to a variety of hardware stores, contractors, plumbing supply firms and distributors. Dura-Line markets its water and natural gas pipe products through sixty manufacturing representatives in the Southern and Eastern U.S. The water and natural gas pipe market is very competitive. Dura-Line competes on the basis of quality and price with a number of regional and local firms.
Dura-Line's products are manufactured through the plastic extrusion process. Dura-Line procures raw plastic for extrusion from a number of independent suppliers. In March 1989, Dura-Line opened a new manufacturing facility in the United Kingdom to manufacture products for sale to British Telecom and other foreign customers. Approximately 47% of Dura-Line's net sales are foreign sales. In late 1990, Dura-Line purchased a facility in Reno, Nevada. This facility opened in early 1991 and has increased Dura-Line's annual capacity by approximately 50%. In 1993, Dura-Line entered into joint venture agreements in the Czech Republic and Israel to service Eastern Europe and the Middle East more effectively. In early and late 1995, Dura-Line opened subsidiaries in Mexico and China to manufacture and supply HDPE plastic conduit systems to Central and South American markets as well as China and other Asian markets. Dura-Line owns 100% of the equity in both subsidiaries. In August 1996, Dura-Line incorporated a subsidiary in India under a joint venture agreement in which Dura-Line has the controlling interest. The subsidiary, which has not yet commenced operations, was established to manufacture and supply HDPE plastic conduit systems to India and neighboring countries.
AIM. AIM, which was founded in 1981 and acquired by the Company in May 1989, is an importer and manufacturer of electronic connectors, adapters, switches, tools and other electronic hardware products for the commercial and consumer electronics markets. Electronic connectors are AIM's main product, representing more than 46% of AIM's 1996 net sales.
AIM's products are manufactured to its specifications overseas, primarily in the Far East, and carry the "AIM" logo. Producers are under the supervision of an AIM agent. The products are sold worldwide to electronics, electrical, general line and industrial distributors. AIM has warehousing and order processing systems that enable AIM to provide delivery on a 24-hour basis to most customers.
AIM sells nationwide to approximately 2,000 distributors in the U.S. and Central and South America. AIM uses a combination of fifteen manufacturers' representative organizations and six factory direct salesmen to service existing accounts and to locate new distributors. The customer base is very broad, with the largest customer accounting for about 4% of sales. AIM also mails product catalogs and other marketing pieces to current customers and potential new accounts.
The two largest companies in the $13.0 billion domestic connector and interconnect supply industry are AMP and Amphenol. AMP and Amphenol specialize strictly in electronic device production. Small and mid-sized companies such as AIM have captured significant market share during the past 10 years by offering distributors better service on orders compared to the industry leaders.
In 1994, AIM began to market manufactured cable and harness assemblies made at its facility in Florida. The custom made assemblies are sold under the "Prestige" trademark to a wide range of customers. Sales of cable and harness assemblies are estimated to be approximately 12% of AIM's 1996 net sales.
Cambridge. Cambridge, which was founded in 1972 and acquired by the Company in September 1989, is a domestic manufacturer of high-quality electronic connectors, plugs, adapters, and other accessories. Cambridge is primarily a designer and marketer of approximately 300 types of specialty radio frequency (RF) coaxial electronic connectors for radio, mobile communications, television and computer equipment. RF coaxial connectors are used to integrate separate systems by connecting input-output power and signal transmission sources. The systems in which RF connectors are used may be complex, but RF connectors themselves serve a mechanical purpose which is technologically straightforward. Cambridge is essentially an assembly operation. The primary components of Cambridge's connector products are screw machine and diecast parts which are purchased from approximately twenty suppliers. The production process is highly automated, with direct labor accounting for only 6% of net sales. Equipment consists of semi-automatic parts assembly and packaging equipment which has been designed and manufactured by Cambridge.
Approximately 13% of Cambridge's connectors are manufactured according to a design that allows users to affix the connector to the cable faster and easier without the need for complicated tools and time-consuming soldering. These connectors are marketed under the "FASTFIT" trademark.
Cambridge sells its products nationwide to 450 distributors, 100 OEMs, and approximately 150 other various end-users. Cambridge uses a combination of six manufacturers' representative organizations and five factory direct salesmen located throughout North America. Cambridge's two largest customers (excluding AIM) account for approximately 26% of 1996 net sales. Cambridge also mails a large number of catalogs to current customers and potential new accounts. Cambridge strongly emphasizes that it is an "American" producer of high-quality electronic connectors.
Cambridge competes in the same market as AIM. Cambridge does not offer the product selection of its large competitors; however, it competes effectively by targeting distributors and manufacturers which require fast service and prefer an American-made product.
Johnson. Purchased by the Company in 1996, Johnson was the Components Division of E.F. Johnson Company, Inc., which was founded in 1953.
Johnson is a high-quality, fully integrated manufacturer of RF coaxial connectors (60%) and electronic hardware (40%). Johnson specializes in manufacturing miniature and sub-miniature RF connectors used primarily in telecommunication, computer, and other OEM applications which require high frequency ranges. The miniature and sub-miniature connector area is experiencing excellent growth as the size of electronic card products continues to shrink.
Johnson sells directly to OEM's (35%) in large orders while smaller quantities are sold through over 80 distributors (65%) primarily in the United States and Canada. Johnson's National Sales Manager coordinates the selling efforts of three company employed Regional Sales Managers and 21 independent representative organizations.
Diversified. Diversified was founded in 1988 and purchased by the Company in 1996.
Diversified is a broad line provider and value added reseller of wire, cable, and custom cable assemblies. Diversified's product offering is used in local area networks (LAN's), custom cable assemblies, cable for electrical applications, cable for sound and security, cable for OEM applications and other miscellaneous cable applications.
Diversified sells its products through a skilled direct sales force. The sales staff consists of 20 inside and 5 outside sales people, all of whom are product and market specialists. Diversified markets and advertises its products through various trade journals dependent on the marketplace.
Viewsonics. Viewsonics was founded in 1974 and purchased by the Company in 1996.
Viewsonics designs, manufactures and markets branded cable TV, electronic network components, and electronic security components mainly for the "drop" or home connection portion of the CATV infrastructure. Viewsonics develops, warehouses, and sells its products out of its Florida facility. Viewsonics sources the majority of its products from China, 60% of which is manufactured in Viewsonics' Shanghai facility, and the remaining 40% manufactured by subcontractors. Viewsonics has also developed manufacturing capabilities in St. Petersburg, Russia. This overseas procurement has allowed Viewsonics to lower production costs and it has also positioned Viewsonics to exploit the overseas CATV component markets as they develop.
Viewsonics sells 50% of its products to Multi System Operations (MSO's), including companies such as Time/Warner, Cencast, Continental Cablevision, and TCI. Viewsonics also sells to a network of distributors, six of whom account for the majority of the other 50% of sales.
Vitelec. Vitelec was founded in 1987 and purchased by a wholly owned subsidiary of the Company, Jordan Telecommunications Product Group Europe (JTPGE) in 1996.
Vitelec is an importer, packager and master distributor of over 400 RF connectors, plugs, jacks, sockets, adapters and terminators sold to the commercial and consumer electronics markets. Vitelec's RF products are subcontract manufactured for them in Taiwan. Vitelec, through its Vidata subsidiary, also distributes LAN and WAN cabling, connectors, converters, and the accessories for data communication networks.
Vitelec sells it products via 5 company employed sales people, four in- house and one located in Paris, France. Vitelec has customers in 42 countries. The largest customer accounts for 10% of sales, with the rest of the customer base being very fragmented and no one customer accounting for more than 1% of sales.
Bond. Bond was founded in 1988 and 80% of the outstanding shares of Bond were purchased by the Company in 1996.
Bond designs, engineers and manufactures high-quality custom electronic cables and connector sub-assemblies for computer-related and telecommunications customers. All of Bond's products are custom and are specifically designed to meet a customer's needs. Bond has three fully-integrated, independent manufacturing facilities. Bond has rapidly become an industry leader due to its commitment to high quality, competitively priced products offered in conjunction with outstanding and dependable service.
Bond has established two separate, very profitable sales agencies in Northern and Southern California to represent them. Bond is continuing to actively solicit strategic new customers located throughout the United States via an independent sales representative network. In 1996, Bond's single largest customer accounted for approximately 20% of sales.
Northern. Northern was founded in 1985 and was purchased by the Company in 1996.
Northern designs, manufactures and markets power conditioning and power protection equipment for primarily telecommunication applications, such as cellular and Personal Communication System (PCS) networks. Northern also offers a variety of products including voltage regulators, uninterruptible power supplies, isolation transformers, and grounding devices to protect any power critical application.
Northern sells on a direct basis through its own highly technical in-house sales force of 23 employees, who are supported by seven application engineers and four product development engineers. Northern sells to such large telecom OEM's as Sprint, Motorola, Lucent, Erickson and Nokia. Northern's largest customer accounted for 53.4% of sales in 1996 and its 10 largest customers accounted for 78.0% of sales.
Welcome Home (See Notes 3 and 4 to the Consolidated Financial Statements.)
Welcome Home is a national, specialty retailer of decorative home furnishing accessories. Welcome Home was acquired by the Company in 1991.
Welcome Home's stores are located primarily in high-end designer outlet malls. Their products include textiles, afghans, framed art, picture frames, wood, seasonal and other merchandise targeted to gift-buying and value- conscious consumers. Welcome Home sells its merchandise through 186 retail stores located throughout the United States and Canada.
Welcome Home's emphasis is on outlets located in malls where upscale manufacturers such as Ralph Lauren, Liz Claiborne, Ann Klein, Harve Bernard, Van Huesen, and others are located.
There is no direct competition for Welcome Home on a national basis. Comparable companies with similar product lines do not compete in the value- retail segment of the market.
Consumer and Industrial Products Group
DACCO. DACCO is a producer of remanufactured torque converters, as well as transmission sub-systems and other related products used by transmission repair shops. DACCO was founded in 1965 and acquired by the Company in 1988.
Approximately 78% of DACCO's products are classified as "hard" products, which primarily consist of torque converters and hydraulic pumps that have been rebuilt or remanufactured by DACCO. The torque converter, which replaces a clutch in an automatic transmission, transfers power from the engine to the drive shaft. The hydraulic pump supplies oil to all the systems in the transmission.
DACCO's primary supply of used torque converters is its customers. As a part of each sale, DACCO recovers the used torque converter which is being replaced with its remanufactured converter. DACCO also purchases used torque converters from automobile salvage companies. Other hard parts, such as clutch plates and fly wheels, are purchased from outside suppliers.
Approximately 22% of DACCO's products are classified as "soft" products, such as sealing rings, bushings, washers, filter kits and rubber components. Approximately 11,000 soft products are purchased from a number of vendors and are re-sold in a broad variety of packages, configurations and kits.
DACCO's customers are automotive transmission parts distributors and transmission repair shops and mechanics. DACCO has fifty-one independent sales representatives who accounted for approximately 70% of DACCO's net sales in 1996. These sales representatives sell nationwide to independent warehouse distributors and to transmission repair shops. DACCO also owns and operates thirty-one distribution centers which sell directly to transmission shops. DACCO distribution centers average 3,000 - 5,000 square feet, cover a 50 to 100 mile selling radius and sell approximately 42% hard products and 58% soft products. In 1996 no single customer accounted for more than 2% of DACCO's net sales.
The domestic market for DACCO's hard products is fragmented and DACCO's competitors primarily consist of a number of small regional and local rebuilders. DACCO believes that it competes strongly against these rebuilders by offering a broader product line, quality products, and lower prices, all of which are made possible by DACCO's size and economies of operation. However, the market for soft products is highly competitive and several of the competitors such as TranStar Industries and Aftermarket Technology Corporation are larger than DACCO. DACCO competes in the soft products market on the basis of its low prices due to volume buying, its growing distribution network and its ability to offer one-step procurement of a broad variety of both hard and soft products.
Sate-Lite. Sate-Lite manufactures safety reflectors for bicycle and commercial truck manufacturers, as well as plastic parts for bicycle manufacturers and colorants for the thermoplastics industry. Sate-Lite was founded in 1968 and acquired by the Jordan Group and Sate-Lite's management in 1985.
Bicycle reflectors and plastic bicycle parts accounted for approximately 38% of Sate-Lite's net sales in 1996. Sales of triangular flares and specialty reflectors and lenses to commercial truck customers accounted for approximately 38% of 1996 net sales. The remainder of Sate-Lite's net sales were derived primarily from the sale of colorants to the thermoplastics industry.
Sate-Lite's bicycle products are sold directly to a number of original equipment manufacturers ("OEMs"). The two largest OEM customers for bicycle products are the Huffy Corporation and Murray/Ohio Manufacturing Company, which accounted for approximately 21% of Sate-Lite's fiscal 1996 net sales. The triangular flares and other truck reflector products are also sold to a broad range of OEM customers. Colorants are sold primarily to mid-western custom molded plastic parts manufacturers. In 1996, Sate-Lite's ten largest customers accounted for approximately 56% of net sales.
Sate-Lite's products are marketed on a nationwide basis by its management. Sales to foreign customers are handled directly by management and by independent trading companies on a commission basis. In 1996, Sate-Lite's export net sales accounted for approximately 10% of its total net sales. Export sales were principally to China and Canada.
The principal raw materials used in manufacturing Sate-Lite's products are plastic resins, adhesives, metal fasteners and color pigments. Sate-Lite obtains these materials from several independent suppliers.
The markets for bicycle parts and thermoplastic colorants are highly competitive. Sate-Lite competes in these markets by offering innovative products and by relying on its established reputation for producing high quality plastic components and colorants. Sate-Lite's principal competitors in the reflector market consist of foreign manufacturers. Sate-Lite competes with regional companies in the colorants market.
Riverside. Riverside is a publisher of Bibles and a distributor of Bibles, religious books and music recordings. Riverside was founded in 1943 and acquired by the Company in 1988.
Approximately 69% of Riverside's business consists of products published by other companies. Riverside sells world-wide to more than 12,000 wholesaler, religious and trade book store customers, utilizing an in-house telemarketing system, four independent sales representative groups and printed sales media. In addition, Riverside sells a small percentage of its products through direct mail and to retail customers. No single customer accounted for more than 5% of Riverside's 1995 net sales.
Riverside also provides Bible indexing, warehousing, inventory and shipping services for domestic book publishers and music producers. Riverside competes with larger firms, including the Zondervan Corporation, The Thomas Nelson Company, Spring Arbor Distributors and Ingram Book Company, on the basis of price, product line and customer service.
Parsons. Parsons is a diversified supplier of hot formed titanium parts, precision machined parts and fabricated components for the U.S. aerospace industry. Parsons was founded in 1959 and acquired by the Jordan Group and Parsons' management in 1984.
Approximately 55% of Parsons' 1996 net sales came from sales to The Boeing Company. Parsons employs precision machining, welding/fabrication and sheet metal forming processes to manufacture its products at its facilities in Parsons, Kansas. Parsons continues to invest in its titanium hot forming operation, which permits Parsons to participate in the aerospace market for precision titanium components.
Parsons uses metals, including stainless steel, aluminum and titanium to fabricate its products. These materials are either supplied by Parsons' customers or obtained from a number of outside sources.
Parsons sells its products directly to a broad base of aerospace and military customers, relying on longstanding associations and Parsons' reputation for high quality and service.
Hudson. Hudson, which was founded in 1963 and acquired by the Company in April 1989, is a fully integrated manufacturer of custom and specialty medium security locks. Hudson produces cam, switch and latch locks for use in office furniture, mail boxes, point-of-sale terminals and a variety of other products.
Hudson manufactures customized lock housings and lock cores from customized molds. Tooling is originally purchased by Hudson from outside manufacturers, then cleaned and reworked on a regular basis at Hudson's own repair and maintenance shop. Customized tooling is especially valuable to Hudson because customers cannot easily switch lock suppliers without incurring substantial costs associated with the design and manufacture of new molds.
Hudson sells mainly to OEMs such as IBM, AT&T and Herman Miller. In addition, Hudson sells to postal services in Canada and the United States. The top 10 customers represented about 41% of Hudson's net sales in 1995. In addition to OEMs, Hudson sells to the locksmith trade industry through a distributor.
The $150 million medium/low security lock industry is mature and highly fragmented with a stable number of well-established competitors. Quality and service are important selling points. Price is less important due to the lock's small value relative to the customer's complete product. Foreign competition is not strong as a result of the customized nature of the locks. Major competitors are Chicago Lock, National Cabinet Lock, Fort Lock and ESP Corporation.
Beemak. Beemak, which was founded in 1951 and acquired by the Company in July 1989, is an integrated manufacturer of specialty "take-one" point-of- purchase brochure, folder and application display holders. Beemak sells these proprietary products to approximately 20,000 customers around the world. In addition, Beemak produces a small amount of custom injection molded plastics parts for outside customers on a contract manufacturing basis.
Beemak's products are both injection molded and custom fabricated. Beemak has molds made by outside suppliers. The manufacturing process consists primarily of the injection molding of polystyrene plastic and the fabrication of plastic sheets. Beemak also provides silk screening of decals and logos onto the final product.
Beemak has no sales force. All sales originate from Beemak's extensive on-going advertising campaign and reputation. Beemak sells to distributors, major companies, and even competitors which resell the product under a different name. Beemak has been very successful providing excellent service on orders of all sizes, especially small orders. Beemak's average order size was approximately $400 in 1996.
The display holder industry is very fragmented, consisting of a few other known holder and display firms and regionally-based sheet fabrication shops. Beemak has benefited from the growth in "direct" advertising budgets at major companies. Significant advertising dollars are spent each year on direct mail campaigns, point-of-purchase displays and other forms of non-media advertising.
Cape Craftsman. Cape was founded in 1991 and purchased by the Company in 1996.
Cape is a manufacturer and importer of gifts, wooden furniture, framed art, and other accessories. Cape manufactures in North Carolina, and imports from Mexico and the Far East.
Cape sells its products through one in-house salesperson and forty independent sales representatives. Approximately 77% of Capes sales in 1996 were to Welcome Home, an affiliated entity.
Paw Print. Paw Print was founded in 1982 and was purchased by the Company in 1996.
Paw Print is a fast growing, highly profitable value-added provider of business communication services for short-term, time-sensitive projects. Paw Print provides database management, mail list merge and purge, bar-coding, inserting of personalized letters, folding, gluing, addressing, labeling, sorting, cartage, and fulfillment for direct mailings. Paw Print charges for each of these individual services depending on the complexity and time sensitivity of each project. Paw Print is widely recognized throughout the industry as being able to reliably execute complex mailings within 24 to 72 hours.
Paw Print's customers include Cellular One, CompuServe, Victoria's Secret, Ameritech and DDB Needham, among others. In 1996, Paw Print's largest customer accounted for 3.0% of sales and its 10 largest customer accounted for 18.5% of sales.
Backlog
As of December 31, 1996, the Company had a backlog of approximately $75 million, compared with $53 million as of December 31, 1995. The current backlog is primarily due to motor sales at Merkle-Korff and Barber-Colman, Boeing sales at Parsons, and connector sales at Johnson and Bond. Management believes that the backlog may not be indicative of future sales.
Seasonality
The Company's aggregate business has a certain degree of seasonality. SPAI's, Welcome Home's and Riverside's sales are somewhat stronger towards year-end due to the nature of their products. Calendars have an annual cycle while home furnishing accessories and bibles and religious books are popular as holiday gifts.
Research and Development
As a general matter, the Company operates businesses that do not require substantial capital or research and development expenditures. However, development efforts are targeted at certain Subsidiaries as market opportunities are identified. None of these subsidiary development efforts require substantial resources from the Company.
Patents, Trademarks, Copyrights and Licenses
Sate-Lite has U.S. patents for certain elements of its triangular flares and for securing reflectors on bicycle wheels. Dura-Line has a U.S. patent for producing a form of Innerduct which is lubricated to permit easier installation of fiber optic cable. The Company also owns and licenses other patents, trademarks and copyrights. However, management believes that none of the Subsidiaries' operations is dependent to any significant extent upon any single or related group of patents, trademarks or copyrights.
Employees
As of December 31, 1996, the Company and the Subsidiaries employed approximately 6,218 people. Approximately 759 of these employees were members of labor unions at Sate-Lite, Gear, Imperial, SPAI, Seaboard, Merkle-Korff, and Dura-Line. The above Subsidiaries have not experienced any work stoppages in the past five years as a result of labor disruptions. The Company believes that the Subsidiaries' relations with its employees are good.
Environmental Regulations
The Company is subject to certain federal, state and local environmental laws and regulations. DACCO is a potentially responsible party ("PRP") at the John P. Saad & Sons site in Nashville, Tennessee (the "Saad Site").
DACCO and a number of other PRPs have entered into a consent agreement with the Environmental Protection Agency (the "EPA"), dated April 18, 1990, relating to the clean-up of the Saad Site (the "Consent Agreement"). All work was completed under this consent agreement. DACCO's interim allocation of expenses relating to the clean up is currently 1.48 percent. Total expenses incurred by the PRP group through January 1997 are approximately $4.1 million. These expenses include removal costs, engineering and attorney fees, but do not include administrative oversight costs incurred by the EPA or the State of Tennessee ("the State"). The EPA at both the Federal and State levels has incurred administrative oversight costs through January 1997 of approximately $.9 million. DACCO is not responsible for any costs incurred by the State of Tennessee.
Additional work under the Consent Agreement proceeded under a Unilateral Administrative Order for Removal Response Activities dated July 28, 1995. This work has been completed and DACCO has paid in full its share of total expenses related to the clean-up efforts. It is not likely that the EPA will make any further removal requirements.
Item 2.
Item 2. PROPERTIES.
The Company leases approximately 18,950 square feet of office space for its headquarters in Illinois. The principal properties of each Subsidiary of the Company, the location, the primary use, the capacity, and ownership status thereof, are set forth in the table below:
JORDAN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Year Ended December 31, 1996 1995 1994 Cash flows from operating activities: Net (loss) income $ (55,690) $( 7,470) $23,741 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Gain on sale of a partial interest in a subsidiary - - (24,161) Restructuring charges 8,106 5,913 - Other non-recurring charges - 1,016 - Amortization of deferred financing costs 3,001 1,743 1,405 Depreciation and amortization 30,438 21,684 19,099 Provision for (Benefit from) deferred income taxes 2,184 (4,247) (962) Loss on acquisition of affiliated company 4,488 - - Minority interest 59 (1,857) 2,616 Extraordinary loss 3,806 - - Non-cash interest 11,987 10,694 9,544 Changes in operating assets and liabilities (net of acquisitions): Accounts receivable 13,894 (8,084) (6,362) Inventories 796 (5,430) (13,394) Prepaid expenses and other current assets (851) (170) (1,317) Non-current assets (1,071) (2,020) (2,495) Accounts payable, accrued liabilities, and other current liabilities 2,560 3,856 9,247 Advance deposits 69 169 303 Non-current liabilities (526) 679 - Other (146) (266) (82)
Net cash provided by operating activities 23,104 16,210 17,182
Cash flows from investing activities: Capital expenditures (17,395) (15,276) (12,112) Notes receivable from affiliates (5,263) (13,424) (2,254) Acquisitions of subsidiaries (150,360)(102,125) (35,872) Cash acquired in purchase of subsidiaries 5,869 696 953 Net proceeds from sale of a partial interest in a subsidiary - - 26,544 Acquisitions of minority interests and other (81) (6,117) (2,143) Investment in Fannie May Holdings - (1,722) - Proceeds from asset sale - 732 - Net cash (used in) investing activities (167,230) (137,236) (24,884)
(Continued on following page.) See accompanying notes.
JORDAN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
(continued)
Year Ended December 31, 1996 1995 1994 Cash flows from financing activities: Proceeds of debt issuance - SPL Holdings, Inc. $ 13,000 $ 33,000 $ - Proceeds of debt issuance - MK Holdings, Inc. 20,000 72,500 - Proceeds of debt issuance - Motors and Gears, Inc. 170,000 - - Proceeds from revolving credit facilities, net 40,909 7,213 - Payment of financing costs (11,858) (2,322) (1,561) Repayment of long-term debt (98,143) (6,020) (2,624) Other borrowing 2,107 1,522 -
Net cash provided by (used in) financing activities 136,015 105,893 (4,185)
Foreign currency translation (345) - - Net (decrease) increase in cash and cash equivalents (8,456) (15,133) (11,887) Cash and cash equivalents at beginning of year 41,253 56,386 68,273 Cash and cash equivalents at end of year $ 32,797 $ 41,253 $ 56,386
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $45,563 $ 33,360 $ 29,839 Income taxes, net $ 2,603 $ 1,801 $ 2,213
Noncash investing activities:
Capital leases $ 5,543 $ 19,151 $ 7,422
See accompanying notes.
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
Note 1 - Organization
Jordan Industries, Inc. (the Company), an Illinois corporation, was formed by Chicago Group Holdings, Inc. on May 26, 1988 for the purpose of combining into one corporation certain companies in which partners and affiliates of The Jordan Company (the Jordan Group) acquired ownership interests through leveraged buy-outs. Chicago Group Holdings, Inc. was formed on February 8, 1988 and had no operations. The Company was merged with Chicago Group Holdings, Inc. on May 31, 1988 with the Company being the surviving company.
The Company's business is divided into five groups. The Specialty Printing and Labeling group consists of Sales Promotion Associates, Inc. ("SPAI"), Valmark Industries, Inc. ("Valmark"), Pamco Printed Tape and Label Co., Inc. ("Pamco") and Seaboard Folding Box, Inc. ("Seaboard"). The Motors and Gears group consists of The Imperial Electric Company ("Imperial") and its subsidiaries, The Scott Motors Company ("Scott") and Gear Research, Inc. ("Gear"), and Merkle-Korff Industries, Inc. ("Merkle-Korff"), which consists of Merkle-Korff, Inc. and Barber-Colman Motors, Inc. ("Barber-Colman"). The Telecommunications Products Group consists of Dura-Line Corporation ("Dura-Line"), AIM Electronics Corporation ("AIM"), Cambridge Products Corporation ("Cambridge"), Johnson Components, Inc. ("Johnson"), Diversified Wire and Cable, Inc. ("Diversified"), Viewsonics, Inc. ("Viewsonics"), Vitelec Electronics Ltd. ("Vitelec"), Bond Holdings, Inc. ("Bond"), and Northern Technologies, Inc. ("Northern"). Welcome Home, Inc. ("Welcome Home") is managed on a stand-alone basis and the remaining businesses comprise the Company's Consumer and Industrial Products group. This group consists of DACCO, Incorporated ("DACCO"), Sate-Lite Manufacturing Company ("Sate-Lite"), Riverside Book and Bible House, Inc. ("Riverside"), Parsons Precision Products, Inc. ("Parsons"), Hudson Lock, Inc. ("Hudson"), Beemak Plastics, Inc. ("Beemak"), Cape Craftsmen, Inc. ("Cape"), and Paw Print Mailing Services, Inc. ("Paw Print"). All of the foregoing corporations are collectively referred to herein as the "Subsidiaries," and individually as a "Subsidiary."
Note 2 - Significant accounting policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and subsidiaries. All significant intercompany balances and transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost or market. Inventories are primarily valued at either average or first-in, first-out (FIFO) cost.
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
Depreciation and amortization
Property, plant and equipment - Depreciation and amortization of property, plant and equipment is calculated using estimated useful lives, or over the life of the underlying leases, if less, using the straight-line method.
The useful lives of plant and equipment for the purpose of computing book depreciation are as follows:
Machinery and equipment 3-10 years Buildings and improvements 7-35 years Furniture & fixtures 5-10 years Leaseholds Life of Lease
Goodwill - Goodwill is being amortized on the straight-line basis over periods ranging from 15 to 40 years. Goodwill at December 31, 1996 and 1995 is net of accumulated amortization of $22,765, and $15,845, respectively.
Other assets
Patents are amortized over the remainder of their legal lives, which approximate their useful lives, on the straight-line basis. Deferred financing costs amounting to $23,008 and $9,703, net of accumulated amortization of $6,317 and $3,686 at December 31, 1996 and 1995, respectively, are amortized over the terms of the loans or, if shorter, the period such loans are expected to be outstanding. Non-compete covenants and customer lists amounting to $9,518 and $5,705, net of accumulated amortization of $44,626 and $42,648 at December 31, 1996 and 1995, respectively, are amortized on the straight-line basis over their estimated useful lives, ranging from three to ten years. Organizational costs are amortized over five years.
Adoption of FAS 121
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". FAS 121 requires, among other things, that the Company consider whether indicators of impairment of long-lived assets held for use are present, that if such indicators are present the Company determine whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying amount, and if so, that the Company recognize an impairment loss based on the excess of the carrying amount of the assets over their fair value.
The Company adopted the provisions of FAS 121 in the fourth quarter of 1995. Accordingly, the Company evaluated the ongoing value of its long-lived assets as of December 31, 1996, and December 31, 1995. It was determined that in 1995, Welcome Home had certain leasehold improvements and furniture and fixtures located in unprofitable stores with carrying values of $1,016 that were impaired and that given the nature of such items, their estimated fair
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
value was insignificant. Accordingly, Welcome Home recorded an impairment loss on such assets in the fourth quarter of 1995 of $1,016. This amount is included in "other non-recurring charges" in the 1995 consolidated statement of operations. The Company determined that an impairment loss was not incurred on long-lived assets for the year ended December 31, 1996, and therefore no such loss has been recorded during 1996. See Note 4 related to the Welcome Home restructuring.
Income taxes
The Company provides for deferred income taxes as temporary differences arise in recording income and expenses between financial reporting and tax reporting. The Company has not provided for U.S. Federal and State Income Taxes on undistributed earnings of foreign subsidiaries to the extent the undistributed earnings are considered to be permanently reinvested.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents.
At December 31, 1996, the Company's cash balance included $1,550 which is being held as collateral with respect to a capital lease. A certain cash balance is required to remain intact throughout the term of the lease which expires on November 17, 1998. An additional $3,000 is being held as collateral with regard to the Company's investment in Fannie May.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassification
Certain amounts in the 1995 financial statements have been reclassified to conform with the presentation in 1996.
Realignment of segment reporting
In 1995, The Company's business segments were realigned into five distinct groups. In 1996, Dura-Line was moved from the Consumer and Industrial Products segment to the Telecommunications Products segment. Prior period results were also realigned into these new groups in order to provide accurate comparisons between periods.
Note 3 - Welcome Home Chapter 11 Filing
On January 21, 1997, Welcome Home filed a voluntary petition for relief under Chapter 11 ("Chapter 11") of title 11 of the United States code in the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court"). In Chapter 11, Welcome Home will continue to manage its affairs and operate its business as a debtor-in-possession while it develops a reorganization plan that will restructure its operations and allow it to emerge from Chapter 11. As a debtor-in-possession in Chapter 11, Welcome Home may not engage in transactions outside of the ordinary course of business without approval of the Bankruptcy Court.
Subsequent to the filing, Welcome Home reached an agreement with Fleet Capital Corporation to provide secured debtor-in-possession financing in the form of a credit facility. The credit facility provides for borrowings dependent upon Welcome Home's level of inventory with maximum borrowings of $12,750. The agreement grants a security interest in substantially all assets. Advances under the facility bear interest at the prime rate plus 1.5%. The agreement will terminate on March 31, 1998.
As a result of Welcome Home's Chapter 11 filing, the Company no longer has the ability to control the operations and financial affairs of Welcome Home. Accordingly, the Company will no longer consolidate Welcome Home in its financial statements as of January 21, 1997, the date of the filing.
The operating results of Welcome Home included in the consolidated results of the Company over the last three years are as follows:
Year Ended December 31, 1996 1995 1994 Net sales $ 81,855 $ 93,166 $81,654 Operating income $(15,975) $(10,066) $ 7,076 Income (loss) before income taxes $(18,154) $(11,586) $ 4,836
The assets and liabilities of Welcome Home included in the consolidated results of the Company at December 31, 1996 is as follows:
December 31, 1996 Cash and cash equivalents $ 612 Inventories 16,291 Prepaids and other assets 575 Property and equipment, net 8,563 Other assets 222 Total assets $ 26,263
Accounts payable 4,104 Accrued expenses 7,723 Intercompany payable to the Company 15,622 Credit line 10,123 Capital leases 927 Total liabilities 38,499
Excess of liabilities over assets at December 31, 1996 12,236 Elimination of intercompany payables (15,622) Net assets included at December 31, 1996 $ 3,386
The amounts listed in the table do not reflect any adjustments resulting from the Welcome Home bankruptcy filings. Certain items, however, would be significantly impacted by a liquidation of Welcome Home. The ultimate disposition of the amounts are not expected to be finalized until the resolution of the Welcome Home bankruptcy proceedings, the timing of which cannot currently be estimated.
Cape Craftsmen, a consolidated subsidiary of the Company, would also be adversely affected by a liquidation of Welcome Home. Currently 77% of Cape's sales are to Welcome Home. Net assets included in the consolidated financial statements are $2.4 million after intercompany eliminations.
Note 4 - Restructuring charges
In the fourth quarter of 1995, Welcome Home adopted a restructuring plan which has continued into 1996. The major elements of the plan include a change in Welcome Home's merchandising strategy and the liquidation of merchandise which is not consistent with that strategy, closing unprofitable stores, and strengthening the Company's executive management team and information systems as necessary to successfully implement the above strategies.
In 1995, Welcome Home recorded the following restructuring charges:
(i) A charge of $2,379 against its inventory to reflect the reduction in the value of items owned as of December 31, 1995 which management determined did not fit with Welcome Home's strategy and, accordingly, were liquidated at reduced prices in 1996.
(ii) A charge of $2,816 against its recorded investment in its information systems as of December 31, 1995. Management determined that these systems would not support its merchandising and other strategies and, therefore, replaced these systems in 1996.
(iii) A charge of $526 to reflect the cost of planned store closings in 1996, representing primarily its recorded investment in the related furniture, fixtures and leasehold improvements.
(iv) A charge and accrued liability of $192 related to payments due to a former executive in accordance with its employment and severance agreement with that individual.
Restructuring charges incurred in 1996 were primarily due to store closings. In the fourth quarter of 1996, Welcome Home recorded restructuring charges of $8,106, of which $872 related to employee contracts, $4,266 related to leases and inventory, and $2,968 related to its investment in furniture, fixtures, and leasehold improvements.
See Note 3 for further discussion of Welcome Home.
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
Note 5 - Inventories
Inventories consist of: Dec. 31, Dec. 31, 1996 1995
Raw materials $ 26,682 $24,251 Work-in-process 12,274 5,968 Finished goods 69,176 54,040 $108,132 $84,259
Note 6 - Property, plant and equipment
Property, plant and equipment, at cost, consists of:
Dec. 31, Dec. 31, 1996 1995 Land $ 5,079 $ 4,365 Machinery and equipment 136,298 105,188 Buildings and improvements 38,458 33,844 Furniture and fixtures 25,851 18,995 205,686 162,392 Accumulated depreciation and amortization (94,646) (70,970) $111,040 $ 91,422
Note 7 - Notes receivable from affiliates and investment in affiliate
On July 29, 1996, the Company acquired the stock of Cape Craftsmen, Inc. ("Cape Craftsmen") in exchange for $12,128 of notes receivable from Cape Craftsmen. Since the Company and Cape Craftsmen have common ownership, the net assets of Cape Craftsmen were recorded at the historical basis, $7,640, and resulted in a non-cash loss of $4,488.
On May 15, 1995, the Company purchased $7,500 aggregate principal amount of Subordinated Notes and 75.6133 shares of Junior Class A PIK Preferred Stock of Fannie May Holdings, Inc. ("Fannie May") at face value for $9,071.
The Company also acquired 151.28 shares of Common Stock of Fannie May (representing 15.1% of the outstanding Common Stock of Fannie May on a fully diluted basis) for $151. These shares of Fannie May Common Stock were purchased from the John W. Jordan II Revocable Trust. On June 28, 1995, the Company purchased from The First National Bank of Chicago $7,000 aggregate principal amount of participation in term loans of Archibald Candy Corporation, a wholly owned subsidiary of Fannie May, for $7,000, and agreed to purchase up to an additional $3,000 aggregate principal amount of such participation, depending upon the financial performance of Fannie May. The additional $3,000 obligation is secured by a pledge from the Company with a $3,000 certificate of deposit purchased by the Company.
Fannie May's Chief Executive Officer is Mr. Quinn, and its stockholders include
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
Mr. Jordan, Mr. Quinn, Mr. Zalaznick, and Mr. Boucher, who are directors and stockholders of the Company, as well as other partners, principals and associates of The Jordan Company, who are also stockholders of the Company. Fannie May, which is also known as "Fannie May Candies", is a manufacturer and marketer of kitchen-fresh, high-end boxed chocolates through its 375 company- owned retail stores and through specialty sales channels. Its products are marketed under both the "Fannie May Candy" and "Fanny Farmer Candy" names.
On July 29, 1996, Mr. Jordan purchased $2,000 of the Fannie May Subordinated Notes from the Company at face value plus accrued interest.
Note 8 - Accrued liabilities
Accrued liabilities consist of: Dec. 31, Dec. 31, 1996 1995 Accrued vacation $2,276 $ 1,516 Accrued income taxes 5,470 1,874 Accrued other taxes 1,179 1,777 Accrued commissions 2,411 1,025 Accrued interest payable 15,064 13,152 Accrued payroll and payroll taxes 4,458 2,621 Accrued stock appreciation rights and preferred stock payments 7,127 - Restructuring reserve 4,906 - Insurance reserve 2,791 - Accrued other expenses 12,228 4,902 $57,910 $26,867
Note 9 - Operating leases
Certain subsidiaries lease land, buildings, and equipment under noncancellable operating leases.
Total minimum rental commitments under noncancellable operating leases at December 31, 1996 are:
1997 $13,704 1998 12,146 1999 10,466 2000 8,370 2001 6,150 Thereafter 15,686 $66,522
Rental expense amounted to $14,808, $11,378 and $8,173 for 1996, 1995 and 1994, respectively. The 1996 increase relates primarily to international expansion at Dura-Line and additional companies purchased in 1996.
Note 10 - Benefit plans
Certain subsidiaries of the Company have defined benefit pension plans. The total expense for these plans amounted to $127 and $117 in 1996 and 1995,
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
respectively. The subsidiaries make contributions to the plans equal to the amounts determined by accepted actuarial methods for the defined benefit plans and on a cents-per-hour basis for plans covering certain hourly employees.
Plan benefits are generally based on years of service and employee compensation during the last years of employment.
The following table sets forth the status of the defined benefit plans of the Company: Year Ended December 31, 1996 1995 Actuarial present value of benefit obligations: Vested $2,028 $2,351 Non-vested 6 18
Accumulated benefit obligation 2,034 2,369 Effect of future salary growth 612 570
Total projected benefit obligation 2,646 2,939
Assets relating to such benefits: Market value of funded assets, primarily invested in money market and equity securities 2,306 2,392 Underfunded projected benefit obligation (340) (547)
Net deferral (334) (163) Pension liability recorded as a long-term liability $ (674) $ (710)
The weighted average discount rates used in determining the actuarial present value of the projected benefit obligation range from 6.5%-7.25% in 1996 and 6%- 7.25% in 1995. The assumed long-term rates of return on plan assets range from 7.5%-7.75% in 1996 and 1995. The assumed rates of compensation increase range from 3.8%-4.0% in 1996 and 1995.
In January 1993 the Company established the Jordan Industries, Inc. 401(k) Savings Plan ("the Plan"), a defined-contribution plan. The Plan covers substantially all employees of the Company. Contributions to the Plan are discretionary and totaled $450 in 1996 and $152 in 1995.
Note 11 - Debt
Long-term debt consists of: Dec. 31, Dec. 31, 1996 1995 Revolving Credit Facilities (A) $ 56,622 $ 15,713 Notes payable (B) 2,199 1,907 Subordinated promissory notes (C) 19,100 13,000 Capital lease obligations (D) 27,494 26,295
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
Bank Term Loans (E) 36,037 94,375 Senior Notes (F) 445,000 275,000 Senior Subordinated Discount Debentures (G) 111,092 99,105 697,544 525,395 Less current portion 9,608 11,705
$687,936 $513,690
Aggregate maturities of long-term debt at December 31, 1996 are as follows:
1997 $ 9,608 1998 25,898 1999 45,688 2000 20,965 2001 25,701 Thereafter 569,684 $697,544
A At December 31, 1996, the Company had borrowings outstanding on lines of credit totaling $56,622. The borrowings were at Jordan Industries, Inc., $34,000, Welcome Home, $10,122, and SPL Holdings, $12,500.
On July 31, 1996, Jordan Industries, Inc. amended and restated its revolving credit facility with the First National Bank of Boston and other banks, increasing the facility amount from $50,000 to $85,000. The facility, which matures on June 29, 1999, will be used for working capital and acquisitions over the term of the loan. At December 31, 1996, Jordan Industries, Inc. had outstanding borrowings of $34,000. The applicable interest rate at December 31, 1996, was 8.75%. The facility is secured by substantially all of the assets of the Restricted Subsidiaries, excluding Welcome Home. The Company must comply with certain financial covenants as specified in the revolver agreement, and at December 31, 1996, the Company is in compliance with such covenants.
In May of 1995, Welcome Home entered into a Loan and Security Agreement with Shawmut Capital Corporation. The credit facility under this agreement provides for borrowings of up to 65% of Welcome Home's Eligible Inventory, with a maximum borrowing of $20,000. At December 31, 1996, Welcome Home had outstanding borrowings of $10,122, which carried a weighted average interest rate of 8.2%. The facility is secured by substantially all of Welcome Home's assets. At December 31, 1996, Welcome Home was in violation of certain financial covenants, however, the lender has waived this violation in connection with the debtor in possession financing.
In August 1995, SPL established a Revolving Credit Facility (the "Revolver") with The First National Bank of Boston. In May of 1996, the Revolver was amended and restated and available borrowings increased from $20,000 to $27,000. The aggregate outstanding amount at December 31, 1996, was $12,500. This facility bears interest at the Libor rate plus 2.75% payable on a 30, 60, or 90 day basis. The facility is secured by all of the assets of SPL. The applicable interest rate at December 31, 1996, was 9.75%. The Company must comply with certain financial covenants as specified in the revolver agreement, and at December 31, 1996, the Company is in compliance with such covenants.
Motors and Gears, Inc. has available a line of credit from Bankers Trust Company in the amount of $75,000. Outstanding borrowings carry a floating note of Libor plus 2.5% or base rate plus 1.5%. At December 31, 1996, no amounts were outstanding on the line of credit.
Dura-Line has available a line of credit from ABN Amro Bank N.V. of Prague, Czech Republic in the amount of $800. The line of credit matures on April 15, 1997, if not renewed. At December 31, 1996, no amounts were outstanding on the line of credit. Outstanding borrowings carry an interest rate of 1.25% above PRIBOR (Prague Inter-Bank Offered Rate). The applicable rate at December 31, 1996 was 12.18%. The facility is secured by the assets of Dura-Line's majority owned subsidiary, Dura-Line CT s.r.o., which is located in the Czech Republic. The facility is also guaranteed with a standby letter of credit.
B Notes payable are due in monthly or quarterly installments and bear interest at rates up to 9%. Certain assets of the subsidiaries are pledged as collateral for the loans.
C Subordinated promissory notes payable are due to minority interest shareholders and former shareholders of the subsidiaries in annual installments through 2004, and bear interest at 8%-9%. The loans are unsecured.
D Interest rates on capital leases range from 8.3% to 14.5% and mature in installments through 2001.
The future minimum lease payments as of December 31, 1996 under capital leases consist of the following:
1997 $ 6,525 1998 10,734 1999 3,913 2000 11,545 2001 302 Thereafter - Total 33,019
Less amount representing interest 5,525
Present value of future minimum lease payments $27,494
The present value of the future minimum lease payments approximates
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
the book value of property, plant and equipment under capital leases at December 31, 1996.
E Bank Term Loans consist of certain indebtedness at SPL ("SPL Senior Notes").
In August 1995, SPL borrowed $25,000 under a Term Loan agreement with The First National Bank of Boston with a maturity date of December 31, 2001. This debt bears interest at a rate of LIBOR plus 2.75% and is paid on a quarterly basis. At December 31, 1996, $21,890 was outstanding. The SPL Term Loans are secured by all of the assets of SPL. The applicable interest rate at December 31, 1996, was 8.31%.
In May 1996, SPL borrowed $13,000 under a Term Loan agreement with The First National Bank of Boston with a maturity date of June 30, 2002. This debt bears interest at a rate of Prime + 2.0% or Libor + 3.25%, and is paid on a quarterly basis. At December 31, 1996, $12,903 was outstanding. The applicable interest rate at December 31, 1996 was 8.81%.
F In July of 1993, the Company issued $275,000 10 3/8% Senior Notes ("Senior Notes") due 2003. These notes bear interest at a rate of 10 3/8% per annum, payable semi-annually in cash on February 1 and August 1 of each year. The payments began on February 1, 1994.
The Senior Notes are redeemable for 105.18750% of the principal amount from August 1, 1998 to July 31, 1999, 102.59375% from August 1, 1999 to July 31, 2000, and 100% from August 1, 2000 and thereafter plus any accrued and unpaid interest to the date of redemption.
The fair value of the Senior Notes was $270,875 at December 31, 1996. The fair value was calculated using the Senior Notes' December 31, 1996 market price multiplied by the face amount. The Senior Notes are not secured by the assets of the Company.
On November 7, 1996, a majority owned subsidiary of the Company, Motors and Gears Holdings, Inc., through its wholly-owned subsidiary, Motors and Gears Inc., issued $170,000 aggregate principal amount of 10 3/4% Senior Notes ("M&G Senior Notes"). Interest on the M&G Senior Notes is payable in arrears on May 15 and November 15 of each year commencing May 15, 1997. The M&G Senior Notes are redeemable at the option of Motors and Gears, Inc., in whole or in part, at any time on or after November 15, 2001. Motors and Gears, Inc. may also redeem up to 35% of the original aggregate principal amount prior to November 15, 1999, under certain circumstances.
The fair value of the M&G Senior Notes at December 31, 1996, was $174,250. The fair value was calculated using the M&G Senior
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
Notes' December 31, 1996 market price multiplied by the face amount. The M&G Senior Notes are not secured by the assets of Motors and Gears, Inc., Motors and Gears Holdings, Inc., or the Company.
G In July 1993 the Company issued $133,075 11 3/4% Senior Subordinated Discount Debentures, ("Discount Debentures") due 2005. The Discount Debentures were issued at a substantial discount from this principal amount. The interest on the Discount Debentures
will be payable in cash semi-annually on February 1 and August 1 of each year beginning in 1999.
The Discount Debentures are redeemable for 105.87500% of the accreted value from August 1, 1998 to July 31, 1999, 102.93750% from August 1, 1999 to July 31, 2000 and 100% from August 1, 2000 and thereafter plus any accrued and unpaid interest from August 1, 1998 to the redemption date if such redemption occurs after August 1, 1998.
The fair value of the Discount Debentures was $105,795 at December 31, 1996. The fair value was calculated using the Discount Debentures' December 31, 1996 market price multiplied by the face amount. The Discount Debentures are not secured by the assets of the Company.
The Indenture relating to the Senior Notes and Discount Debentures restricts the ability of the Company to incur additional indebtedness at its restricted subsidiaries. The Indenture also restricts: the payment of dividends, the repurchase of stock and the making of certain other restricted payments; restrictions that can be imposed on dividend payments to the Company by its subsidiaries; significant acquisitions; and certain mergers or consolidations. The Indenture will also require the Company to redeem the senior notes and Discount Debentures upon a change of control and to offer to purchase a specified percentage of the Senior Notes and Discount Debentures if it fails to maintain a minimum level of capital funds (as defined).
The Indenture relating to the M&G Senior Notes contains certain covenants which restrict: the payment of dividends, the repurchase of stock and the making of certain other restricted payments, certain mergers or consolidations and the assumption of certain levels of additional indebtedness.
The Company is, and expects to continue to be, in compliance with the provisions of these Indentures.
Included in interest expense is $3,001, $1,743 and $1,405 of amortization of debt issuance costs for the year ended December 31, 1996, 1995 and 1994, respectively.
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
Note 12 - Income taxes
The provision (benefit) for income taxes consists of the following:
Year Ended December 31, 1996 1995 1994 Current: Federal $ - $ 400 $ 356 Foreign 1,753 769 228 State and local 478 632 739 2,231 1,801 1,323 Deferred 2,184 (4,247) 9 Total $ 4,415 $(2,446) $1,332
Deferred income taxes consist of: Dec. 31, Dec. 31, 1996 1995 Deferred tax liabilities: Tax over book depreciation $ 7,346 $ 7,368 Basis in subsidiary 798 798 LIFO reserve 147 257 Intercompany tax gain 2,500 - Other 311 392 Total deferred tax liabilities 11,102 8,815
Deferred tax assets: NOL carryforwards 28,900 20,060 Stock Appreciation Rights Agreements 3,162 - Accrued interest on discount debentures 12,262 8,187 Pension obligation 174 211 Vacation accrual 591 613 Uniform capitalization of inventory 472 580 Allowance for doubtful accounts 1,020 721 Capital lease obligations 343 456 Tax asset basis over book basis at subsidiary 2,500 - Other 248 193
Total deferred tax assets 49,672 31,021
Valuation allowance for deferred tax assets (40,014) (21,466)
Net deferred tax assets 9,658 9,555
Net deferred tax (assets) liabilities $ 1,444 $ (740)
The (increase) decrease in the valuation allowance during 1996 and 1995 was $(18,548) and $1,962, respectively.
The provision (benefit) for income taxes differs from the amount of income tax benefit computed by applying the United States federal income tax rate to
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
(loss) income before income taxes, including the extraordinary loss. A reconciliation of the differences is as follows:
Year ended December 31, 1996 1995 1994
Computed statutory tax provision (benefit) $(17,413) $(4,003) $9,414 Increase (decrease) resulting from: Foreign subsidiary losses 1,465 680 - Amortization of goodwill 903 756 682 Disallowed meals and entertainment 645 425 - Use of separate company net operating loss carryforward - - (1,329) Tax basis in excess of book basis in partial sale of a subsidiary - - (8,460) State and local tax 478 632 1,010 Alternative minimum tax - 400 - Increase (decrease) in valuation allowance 18,548 (1,962) - Other items, net (211) (143) 15 Provision (benefit) for income taxes $ 4,415 $(2,446) $1,332
As of December 31, 1996, the consolidated loss carryforwards are approximately $59,000 and $47,000 for regular tax and alternative minimum tax purposes, respectively, and expire in various years through 2011. In addition, a subsidiary of the Company, which is not consolidated for tax purposes, has approximately $26,000 of net operating loss carryforwards that expire in various years through 2,011. A valuation reserve of $8,800 has been recorded against the related $8,800 asset.
Note 13 - Related party transactions
The principals, partners, officers, employees and affiliates of The Jordan Company (the "Jordan Group") own substantially all of the common stock of the Company.
On July 29, 1996, the Company acquired Cape Craftsmen from a related party in exchange for $12,128 of notes receivable from Cape Craftsmen.
On June 1, 1988, an agreement was executed, which was amended and restated on June 29, 1994, whereby the Company will pay TJC Management Corporation ("TJC") a quarterly fee equal to .75% of the Company's Cash Flow for the four full fiscal quarters next preceding the date of payment of such quarterly fee. Under this agreement the Company accrued fees to TJC of $2,530, $2,691 and $1,962 in 1996, 1995 and 1994, respectively.
In addition, beginning June 1, 1988, The Jordan Company is to be paid an investment banking fee of up to 2%, based on the aggregate consideration paid,
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
for its assistance in acquisitions undertaken by the Company or its subsidiaries, and a financial consulting fee not to exceed 1% of the aggregate debt and equity financing that is arranged by the Jordan Company, plus the reimbursement of out-of-pocket and other expenses. The Company paid $2,610, $2,055, and $1,803 in 1996, 1995, and 1994, respectively, to the Jordan Company for their fees in relation to acquisition and refinancing activities. In 1994, Welcome Home paid the Jordan Company $200 in relation to their New Bank Credit Facility.
In February 1988, the Company entered into an employment agreement with its President and Chief Operating Officer which provides for annual compensation, including base salary and bonus, of not less than $350. The agreement also provides for severance payments in the event of termination for reasons other than cause, voluntary termination, disability or death; disability payments, under certain conditions, in the event of termination due to disability; and a lump sum payment of $1,000 in the event of death. The Company maintains a $5,000 "key man" life insurance policy on its president under which the Company is the beneficiary.
An individual who is a shareholder, Director, General Counsel and Secretary for the Company is also a partner in a law firm used by the Company. The firm was paid $1,462, $376 and $660 in fees and expenses in 1996, 1995 and 1994, respectively. The rates charged to the Company were at arms-length.
Also see Notes 7, 16, 17, and 20.
Note 14 - Capital stock
Under the terms of a restricted common stock agreement with certain shareholders and members of management, the Company has the right, under certain circumstances, for a specified period of time to reacquire shares from certain shareholders and management at their original cost. Starting in 1993 or within 60 days of termination, the Company's right to repurchase may be nullified if $1,800, in the aggregate, is paid to the Company by management.
On January 20, 1989, the Company, in exchange for three thousand five hundred dollars, sold warrants to acquire 3,500 shares of its common stock to Mezzanine Capital & Income Trust 2001, PLC (MCIT), a publicly traded U.K. investment trust, in which principal stockholders of the Company also hold capital and income shares. These warrants were sold in conjunction with MCIT's purchase of $7,000 of Senior Subordinated Notes. Each Warrant entitles the holder to purchase one share of the Company's common stock at a price of $4.00 (dollars) at any time, subject to certain events, prior to January 20, 1999. These warrants were valued at $700 based on an independent appraisal.
On November 17, 1996, the Company issued an additional 1,500 shares of stock for $146 cash, and a promissory note of $1,314.
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
Note 15 - Business segment information
The Company's business operations are classified into five business segments: Specialty Printing and Labeling, Motors and Gears, Telecommunications Products, Welcome Home, and Consumer and Industrial Products.
Motors and Gears includes the manufacture of electric motors for both industrial and commercial use by Imperial; small electrical motors by Scott; precision gears and gear boxes by Gear; AC and DC gears and gear motors for both industrial and commercial use by Merkle-Korff; and subfractional AC and DC motors and gear motors by Barber-Colman.
Telecommunications Products includes the manufacture and distribution of silicon pre-lubricated plenum and other configurations of Innerduct, a proprietary plastic pipe used in the installation of fiber optic cable, and rigid polyethylene pipe used for transporting potable water by Dura-Line; electronic connectors and switches by AIM and Cambridge; RF coaxial connectors and electronic hardware by Johnson; cable TV electronic network components and electronic security components by Viewsonics; custom electronic cables and connectors for high technology, computer related applications by Bond; and power conditioning and power protection equipment by Northern. Diversified and Vitelec are not manufacturing-intensive. Diversified is a provider and value- added reseller of wire, cable, and custom cable assemblies, and Vitelec is an importer, packager, and master distributor of over 400 RF connectors and other electronic components.
Welcome Home includes the specialty retailing of decorative home furnishing accessories by 186 Welcome Home stores.
Consumer and Industrial Products includes the remanufacturing of transmission sub-systems for the U.S. automotive aftermarket by DACCO; manufacture and marketing of safety reflectors, lamp components, bicycle reflector kits, colorants and emergency warning triangles by Sate-Lite; the publishing of Bibles and the distribution of Bibles, religious books, and recorded music by Riverside; precision machined titanium hot formed parts used by the aerospace industry by Parsons; specialty-type locks by Hudson; point-of-purchase advertising displays by Beemak; decorative home furnishing accessories by Cape; and the provision of a full-range of direct mail marketing services by Paw Print.
Inter-segment sales exist between Cape and Welcome Home. These sales are eliminated in consolidation and are not presented in segment disclosures. Foreign operations and export sales are not significant on a consolidated basis. No single customer accounts for 10% or more of segment or consolidated net sales.
Operating income by business segment is defined as net sales less operating costs and expenses, excluding interest and corporate expenses.
Identifiable assets are those used by each segment in its operations. Corporate assets consist primarily of cash and cash equivalents, equipment, notes receivable from affiliates and deferred debt issuance costs.
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
Year ended December 31, 1996 1995 1994 Net sales: Specialty Printing & Labeling $109,587 $ 96,514 $ 82,828 Motors and Gears 117,571 54,218 36,854 Telecommunications Products 132,999 98,777 66,128 Welcome Home 81,855 93,166 81,654 Consumer and Industrial Products 159,555 164,636 156,927 Total $601,567 $507,311 $424,391
Operating income: Specialty Printing & Labeling $ 7,078 $ 8,067 $ 5,522 Motors and Gears 26,164 12,236 9,484 Telecommunications Products 12,985 17,774 11,996 Welcome Home (15,975) (10,066) 7,076 Consumer and Industrial Products 18,446 21,987 22,440 Total business segment operating income 48,698 49,998 56,518
Corporate expenses (35,306) (17,638) (13,574) Total consolidated operating income $ 13,392 $32,360 $ 42,944
Depreciation and amortization (including the amortization of goodwill and intangibles): Specialty Printing & Labeling $ 4,800 $ 3,776 $ 3,252 Motors and Gears 7,078 2,262 1,070 Telecommunications Products 7,204 5,105 5,101 Welcome Home 2,096 2,121 1,324 Consumer and Industrial Products 5,785 6,248 6,560 Total business segment depreciation and amortization 26,963 19,512 17,307
Corporate 3,475 2,172 1,792 Total consolidated depreciation and amortization $ 30,438 $21,684 $19,099
Capital expenditures: Specialty Printing & Labeling $ 2,235 $ 1,106 $ 1,401 Motors and Gears 1,381 870 219 Telecommunications Products 6,399 5,400 3,290 Welcome Home 1,403 5,022 3,434 Consumer and Industrial Products 3,325 2,625 3,490 Corporate 2,652 253 278 Total $ 17,395 $15,276 $12,112
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) Continued
Dec. 31, Dec. 31, Dec. 31, 1996 1995 1994 Identifiable assets: Specialty Printing & Labeling $107,016 $ 89,090 $ 76,997 Motors and Gears 173,565 142,289 27,988 Telecommunications Products 175,796 62,908 50,427 Welcome Home 25,464 32,176 32,232 Consumer and Industrial Products 136,021 112,804 119,767 Total business segment assets 617,862 439,267 307,411
Corporate assets 64,023 93,117 91,063 Total consolidated assets $681,885 $532,384 $398,474
Note 16 - Acquisition of minority interest
In March 1992, a subsidiary of the Company entered into an agreement with its minority shareholders whereby the shareholders would exchange their common stock, which amounted to a 24% interest, for 7% cumulative preferred stock. One-half of the preferred shares are redeemable in eight quarterly installments, including the accrued but unpaid dividends, beginning on or after April 1, 1993. As of December 31, 1996, these installments have been paid in full.
An additional $1,875 is not redeemable and pays a cumulative dividend of 7% per year. This amount is included in the shareholders' equity section of the balance sheet.
The shareholders entered into covenants not to compete for $2,679 which will be paid over five years beginning in 1992. Of this amount, $324 and $528 was paid in 1996 and 1995. The remaining payment of $81 was made in January 1997.
The shareholders were granted stock appreciation rights as part of the non- compete agreements with $5,952 to be paid over three years. The rights were paid off in 1995 with a final payment of $2,056.
The total consideration for minority interest which was accounted for as a purchase was $12,381.
Additionally, the former shareholders were granted stock appreciation rights exercisable in full or in part on the occurrence of the disposition by merger or otherwise, in one or more transactions of (a) more than 50% of the voting power and/or value of the capital stock of the subsidiary or (b) all or substantially all the business or assets of the subsidiary. The value of the stock appreciation rights is based on the ultimate sales price of the stock or assets of the subsidiary, and is essentially 15% of the ultimate sales price, less $15,625, of the stock or assets sold. No liability has been recorded relative to these rights.
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
Note 17 - Acquisitions of subsidiaries
On January 23, 1996, the Company purchased the net assets of Johnson Components, Inc. ("Johnson"), a manufacturer of RF coaxial connectors and electronic hardware.
The purchase price of $16,098, including costs incurred directly related to the transaction, was allocated to working capital of $1,616, property, plant and equipment of $4,660, and non-compete agreements of $1,050, and resulted in an excess purchase price over net identifiable assets of $8,772. The acquisition was financed with cash.
On March 8, 1996, Merkle-Korff, then owned by a non-restricted subsidiary, M-K Holdings, Inc., acquired the net assets of Barber-Colman Motors Division, a division of Barber-Colman Company, which was wholly owned by Siebe, plc. This division consisted of Colman OEM and Colman Motor Products, wholly owned subsidiaries of Barber-Colman Company, and the motors division of Barber-Colman Company, collectively Barber-Colman Motors ("BCM"), and is a vertically integrated manufacturer of sub-fractional horsepower AC and DC motors and gear motors, with applications in such products as vending machines, copiers, printers, ATM machines, currency changers, X-ray machines, peristaltic pumps, HVAC actuators and other products. BCM was subsequently merged into Merkle- Korff in January 1997.
The purchase price of $21,700, including costs incurred directly related to the transaction, was allocated to working capital of $4,882, property, plant and equipment of $5,843, non-compete agreements of $1,000, and other non-current assets of $810, and resulted in an excess purchase price over net identifiable assets of $9,165. The acquisition was financed with $21,700 of new and existing credit facilities.
On May 1, 1996, the Company through its non-restricted subsidiary, SPL Holdings, Inc., acquired the net assets of Seaboard Folding Box Corporation ("Seaboard"), a manufacturer of printed folding cartons and boxes, insert packaging, and blister pack cards.
The purchase price of $27,847, including costs incurred directly related to the transaction, was allocated to working capital of $8,745, property, plant and equipment of $6,965, non-compete agreements of $1,000, other non-current assets of $10, long term liabilities of $1,663, and resulted in an excess purchase price over net identifiable assets of $12,790. The acquisition was financed with cash of $2,000 from the Company, a $1,500 subordinated seller note, a new $13,000 term loan, and $11,000 from the existing SPL Holdings, Inc. revolving credit facility.
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
On June 25, 1996, the Company purchased the stock of Diversified Wire and Cable, Inc. ("Diversified"), a provider and value added re-seller of wire, cable and custom cable assemblies.
The purchase price of $18,978, including costs incurred directly related to the transaction, was allocated to working capital of $3,058 property, plant and equipment of $607, non-compete agreements of $500, other assets of $27, capital leases and minority interest of $388, and resulted in an excess purchase price over net identifiable assets of $15,174. The acquisition was financed with cash and a $1,500 subordinated seller note. Immediately after Diversified was purchased by the Company, the seller acquired a 12.5% interest in Diversified.
On August 1, 1996, the Company purchased the net assets of Viewsonics, Inc. and Shanghai Viewsonics Electric Co., Ltd. ("Viewsonics"), a designer and manufacturer of cable TV electronic network components and electronic security components.
The purchase price of $15,319, including costs incurred directly related to the transaction was allocated to working capital of $6,697, property, plant and equipment of $446, and resulted in an excess purchase price over net identifiable assets of $8,176. The acquisition was financed with cash.
On August 5, 1996, the Company purchased the stock of Vitelec Electronics, Limited ("Vitelec"), a United Kingdom based importer, packager, and master distributor of over 400 RF connectors sold to commercial and consumer electronic markets.
The purchase price of $14,040, including costs incurred directly related to the transaction was allocated to working capital of $1,496, property, plant and equipment of $1,053, and resulted in an excess purchase price over net identifiable assets of $11,491. The acquisition was financed with cash.
On September 20, 1996, the Company, through its wholly-owned subsidiary Bond Holdings, Inc., purchased 80% of the outstanding common stock of Bond Technologies, Inc. ("Bond"). The remaining 20% ownership has been retained by the sellers. Bond designs, engineers and manufactures custom electronic cables and connectors for high technology, computer related and telecommunication customers.
The purchase price of $8,627, which included costs incurred directly related to the transaction, was allocated to working capital of $2,099, property, plant and equipment of $902, non compete agreements of $800, other assets of $52, a
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
minority interest and debt assumed of $53, and resulted in an excess purchase price over net identifiable assets of $4,827. The purchase price includes $700 of cash held in escrow which will be paid to the sellers at a pre-determined date if certain levels of EBIT (as defined) are achieved. The acquisition was financed with cash.
On November 8, 1996, the Company purchased the net assets of Paw Print Mailing List Services, Inc. ("Paw Print"), a value-added provider of direct mail services.
The purchase price of $11,751, including costs incurred directly related to the acquisition, was allocated to working capital of $679, property, plant, and equipment of $511, non-competition agreements of $900, and resulted in excess purchase price over net identifiable assets of $9,661. The acquisition was financed with cash of $9,250 and a $2,500 subordinated seller note.
On December 31, 1996, the Company purchased 100% of the stock of Northern Technologies, Inc. ("Northern"), a manufacturer of power conditioning and power protection equipment for telecommunications applications such as cellular and personal communication system networks.
The purchase price of $21,500, including estimated costs incurred directly related to the transaction, was allocated to working capital of $4,661, property, plant, and equipment of $571, non-competition agreements of $500, long-term assets of $425, long-term liabilities of $115, and resulted in an excess purchase price over net identifiable assets of $15,458. The acquisition was financed with cash.
On January 8, 1997, Beemak purchased the net assets of Arnon-Caine, Inc. ("ACI"), a designer and distributor of modular storage systems primarily for sale to wholesale home centers and hardware stores. ACI subcontracts its production to third party injection molders located primarily in Southern California, which use materials and machines similar to those used by Beemak. By early 1998, Beemak will serve as ACI's primary supplier. The integration of ACI into Beemak's operations will provide for future manufacturing cost savings as well as synergistic marketing efforts.
The purchase price of $4,600, including costs incurred directly related to the acquisition, was allocated to working capital of $300, property, plant and equipment of $82, and excess purchase price over net identifiable assets of $4,218. The acquisition was financed with cash.
On September 22, 1995, the Company, through its newly-formed subsidiary, M-K Holdings, Inc., acquired all of the common stock of Merkle-Korff Industries, Inc., Mercury Industries, Inc. and Elmco Industries, Inc. ("Merkle-Korff"), a manufacturer of fractional horsepower motors and gear motors. The motors are currently used in vending machines, ice makers in refrigerators, washing machines and treadmills. M-K Holdings, Inc., Merkle-Korff, and their
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
subsidiaries, were designated as non-restricted subsidiaries for purposes of the Company's Indentures relating to its Senior Notes and Senior Subordinated Discount Debentures.
The purchase price of $107,406, including costs incurred directly related to the transaction, was allocated to working capital of $8,201, property, plant and equipment of $3,652, non-compete agreements of $500, deferred financing fees of $3,791, and resulted in an excess purchase price over net identifiable assets of $91,262. The acquisition was financed with cash of $29,625 from the Company, $281 of cash from affiliates, a $5,000 subordinated note issued by M-K Holdings, Inc., and a $72,500 drawdown of a newly established credit facility.
Unaudited pro forma information with respect to the Company as if the 1995 and 1996 acquisitions had occurred on January 1, 1996 and 1995 is as follows:
Year Ended December 31, 1996 1995 (unaudited) (dollars in millions)
Net sales $693,092 $704,723 Net income (loss) before extraordinary items (12,873) 8,066 Net (loss) income $(16,679) $ 8,066
Note 19 - SPL Holdings, Inc.
On August 30, 1995, the Company sold on an arms length basis, the net assets of Sales Promotion Associates, Inc. ("SPAI"), formerly a wholly-owned subsidiary of the Company, and a specialty printer and distributor of calendars, advertising specialty products and soft cover year books to SPL Holdings, Inc. ("SPL", formerly known as J2, Inc.) a majority owned subsidiary of the Company. SPL and its subsidiaries were designated as non-restricted subsidiaries for purposes of the Company's Indentures relating to its Senior Notes and Senior Subordinated Discount Debentures.
SPL was formed to combine a group of companies engaged in the design, manufacture and marketing of specialty printing and label products. SPL is comprised of Valmark Industries, Inc. ("Valmark"), Pamco Printed Tape and Label Co., Inc. ("Pamco"), Sales Promotion Associates, Inc. ("SPAI"), and Seaboard Folding Box Corporation ("Seaboard").
Concurrent with the sale of the net assets of SPAI, SPL was recapitalized with (i) an equity investment of $22,300 by the Company and $160 from certain affiliated investors, (ii) subordinated debt of $11,000, and (iii) a new $45,000 senior secured bank financing comprised of a $20,000 Revolver and a $25,000 Term Loan A. At December 31, 1996, $21,890 of the Term Loan A, and $12,500 of the Revolver, was outstanding.
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
On May 1, 1996, concurrent with the acquisition of Seaboard, SPL entered into an Amended and Restated Revolving Credit and Term Loan Agreement. This agreement extended the above Revolver facility to $27,000 and added a Term Loan B in the amount of $13,000. At December 31, 1996, $12,903 of Term Loan B was outstanding.
Following the sale of the net assets and recapitalization transactions, SPL is 83.3% owned by the Company and 16.7% owned by certain affiliates of the Company, including partners and affiliates of The Jordan Company, including Mr. Jordan, Mr. Quinn, Mr. Zalaznick, and Mr. Boucher.
Note 20 - Motors and Gears Holdings, Inc.
Motors and Gears Holdings, Inc., along with its wholly-owned subsidiary, Motors and Gears, Inc. ("M&G"), were formed in September 1995 to combine a group of companies engaged in the manufacture and sale of fractional and subfractional motors and gear motors primarily to customers located throughout the United States.
M&G is comprised of Merkle-Korff and its wholly-owned subsidiary, Barber-Colman, and Imperial and its wholly-owned subsidiaries, Scott and Gear. All of the outstanding shares of Merkle-Korff were purchased in September 1995 and the net assets of Barber-Colman were purchased by Merkle-Korff in March 1996. The net assets of Imperial, Scott and Gear were purchased by M&G, from the Company, at an arms length basis on November 7, 1996, with the proceeds from a debt offering (see Note 11). The purchase price was $75,656, which included the repayment of $6,008 in Imperial liabilities owed to the Company, and a contingent payment payable pursuant to a contingent earnout agreement. Under the terms of the contingent earnout agreement, 50% of Imperial, Scott and Gear's cumulative earnings before interest, taxes, depreciation and amortization, as defined, exceeding $50,000 during the five fiscal years ended December 31, 1996, through December 31, 2000, will be paid to an affiliate of the Company. Payments, if any, under the contingent earnout agreement will be determined and made on April 30, 2001.
As a result of this purchase, the Company recognized $62.7 million of deferred gain at the time of purchase for Federal income tax purposes, as adjusted for the value of the earnout, once finally determined. This deferred gain will be reduced as the M&G group reports depreciation and amortization over approximately 15 years on most of the step-up in basis of those purchased assets. As long as M&G remains in the Company's affiliated group, the gain reported and the depreciation on the step-up in basis should exactly offset each other. Upon any future deconsolidation of M&G from the Company's affiliated group for Federal income tax purposes, any unreported gain would be fully reported and subject to tax. If such deconsolidation were to occur in 1997, the Company would report up to approximately $62 million of gain for Federal income taxes (without giving effect to any of the Company's net
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
operating loss carry forwards), which would result in an income tax liability up to approximately $25 million (assuming a combined 40% Federal, state and local income tax rate, and without giving effect to any of the Company's net operating loss carry forwards).
At December 31, 1996, Motors and Gears Holdings, Inc. is owned 86.3% by the Company and 13.7% by certain affiliates of the Company, including partners and affiliates of The Jordan Company, including Mr. Jordan, Mr. Quinn, Mr. Zalaznick, and Mr. Boucher.
Note 21 - Stock Appreciation Right and Compensation Agreements
In connection with the Company's acquisitions of AIM and Cambridge in 1989, the seller of these companies was granted stock appreciation rights in respect of the appreciation of these companies. The formula used to value these rights is calculated by determining 20% of a multiple of average cash flow of these companies for the two years preceding the date when these rights are exercised less the indebtedness of these companies. The seller passed away during the third quarter of 1996. The seller's estate has exercised these rights. The total amount owed under these rights is approximately $6,200. AIM has fully accrued for these rights as of December 31, 1996. Payment of these rights is amortized over five years, such that one-third is payable upon exercise, and two-thirds is payable in five equal installments over 5 years.
Effective October 1, 1996, the Company voluntarily agreed to pay to an executive $3.9 million in view of his contributions to the Company, including identifying and analyzing acquisition candidates for the Company and providing strategic advice to the Board of Directors of the Company. The Company has fully accrued for this compensation agreement as of December 31, 1996. The Company agreed to pay the executive as follows: (i) one-third (or $1.3 million) was paid to the executive in October 1996 and (ii) the remaining two-thirds (or $2.6 million) will be paid to the executive in six equal, semi-annual installments payable on each October 1 and April 1, commencing on April 1, 1997.
Note 22 - Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places cash and cash equivalents with high quality financial institutions, and is restricted by its revolving credit facilities as to its investment instruments. Concentration of credit risk relating to accounts receivable is limited due to the large number of customers from many different industries and locations. The Company believes that its allowance for doubtful accounts is adequate to cover potential credit risk.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The names, ages and principal occupations during the past five years of each director or executive officer of the Company are as set forth below:
Name Age Principal Occupations
John W. Jordan II 49 Chairman of the Board of Directors and Chief Executive Officer since 1988. Mr. Jordan is also managing partner of The Jordan Company. Mr. Jordan is a Director of Leucadia National Corporation ("Leucadia"), Carmike Cinemas, Inc. ("Carmike"), American Safety Razor Company ("ASR"), Welcome Home, Inc. ("Welcome Home"), and Motors and Gears, Inc. ("M&G").
Thomas H. Quinn 49 Director, President and Chief Operating Officer since 1988. From November 1985 to December 1987, Mr. Quinn was Group Vice President and a corporate officer of Baxter International ("Baxter"). From September 1970 to November 1985, Mr. Quinn was employed by American Hospital Supply Corporation ("American Hospital"), where he was a Group Vice President and a corporate officer when American Hospital was acquired by Baxter. Mr. Quinn is also a Director of ASR, Welcome Home, and M&G.
Joseph S. Steinberg 53 Director since 1988. President and a Director of Leucadia, where he has been employed since 1979. He is also a Trustee of New York University.
David W. Zalaznick 42 Director since 1988. Mr. Zalaznick is a managing partner of The Jordan Company. Mr. Zalaznick is a Director of ASR, Carmike, Marisa Christina Incorporated, and M&G.
Name Age Principal Occupations
Jonathan F. Boucher 40 Director and Vice President since 1988. Since June 1983, Mr. Boucher has also been a partner of The Jordan Company. Mr. Boucher is a Director of ASR and M&G.
G. Robert Fisher 57 Director, General Counsel and Secretary since 1988. Since June 1995, Mr. Fisher has been a member of the law firm of Bryan Cave LLP, a firm that represents the Company in various legal matters. For the prior 27 years, Mr. Fisher was a member of the law firm of Smith, Gill, Fisher & Butts, P.C., which combined with Bryan Cave LLP in June 1995. See Item 13 -- "Legal Counsel".
Each of the directors and executive officers of the Company will serve until the next annual meeting of the shareholders or until their death, resignation or removal, whichever is earlier. Directors are elected annually and executive officers hold office for such terms as may be determined by the Board of Directors.
The Presidents of the Subsidiaries are significant employees of the Company.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The following table shows the cash compensation paid by the Company, for the three years ended December 31, 1996, for services in all capacities to the President and Chief Operating Officer of the Company.
(1) In connection with the acquisitions completed in 1994, and the signing of the credit facility, this amount has been capitalized in the Company's financial statements.
Employment Agreement. Thomas H. Quinn has an employment agreement with the Company which provides for Mr. Quinn's employment as President and Chief Operating Officer of the Company. The employment agreement can be terminated at any time by the Company. His base salary is $500,000 per annum, and he is provided with a guaranteed bonus of $100,000 per annum, which amounts are inclusive of any compensation, fees, salary, bonuses or other payments to Mr. Quinn by any of the Subsidiaries or affiliates of the Company or affiliates of The Jordan Company. Under the employment agreement, if Mr. Quinn's employment is terminated for reasons other than voluntary termination, cause, disability or death, he will be paid a severance payment equal to the greater of $350,000 or the sum of his most recent base annual salary plus $100,000. If employment is terminated for reasons of cause or voluntary termination, no severance payment is made. The Company maintains a $5.0 million "key man" life insurance policy on Mr. Quinn under which the Company is the beneficiary.
Restricted Stock Agreements. The Company is a party to restricted stock agreements, dated as of February 25, 1988 with each of Thomas H. Quinn, Jonathan F. Boucher and John R. Lowden (a member of the Jordan Group), pursuant to which they were issued shares of Common Stock which, for purposes of such restricted stock agreements, were classified as "Group 1 Shares" or "Group 2 Shares". Messrs. Quinn, Boucher and Lowden were issued 4,500, 1,870.7676 and 629.2324 Group 1 Shares, respectively, and 4,000, 1,000 and 1,000 Group 2 Shares, respectively at $4.00 per share. The Group 1 Shares are not subject to repurchase. The Group 2 Shares are subject to repurchase, in the event that Messrs. Quinn, Boucher or Lowden ceases to be employed (as a partner, officer or employee) by the Company, The Jordan Company, Jordan/Zalaznick Capital Company ("JZCC"), or any reconstitution thereof conducting similar business activities in which they are a partner, officer or employee. If such person ceases to be so employed after January 1, 1993 and prior to January 1, 2003, the Group 2 Shares can also be repurchased at cost, unless such person releases and terminates such repurchase option by making a payment of $300.00 per share to the Company. Certain adjustments to the foregoing occur in the event of the death of any of the partners of The Jordan Company or JZCC, the death or disability of such person, or the sale of the Company. On January 1, 1992, the Company issued Messrs. Quinn, Boucher and Max, 600, 533.8386 and 500 shares, respectively, at $107.00 per share, pursuant to similar Restricted Stock Agreements, dated as of January 1, 1992, under which such shares were effectively treated as "Group 1" shares. On December 31, 1992, the Company issued an additional 400 shares to Mr. Quinn for $107.00 per share pursuant to similar Restricted Stock Agreements, dated as of December 31, 1992, under which such shares were effectively treated as "Group 1" shares. The purchase price per share was based upon an independent appraiser's valuation of the shares of Common Stock at the time of their issuance. These shares were issued by the Company to provide a long-term incentive to the recipients to advance the Company's business and financial interest. In each case, the proceeds from the sale of the shares of Restricted Stock were used by the Company for general corporate purposes.
Director's Compensation. The Company compensates its directors. Such compensation is paid quarterly, at the rate of $140,000 per year for all of the directors. The Indenture permits director fees of up to $250,000 per year. In addition, the Company reimburses directors for their travel and other expenses incurred in connection with attending Board meetings (and committees thereof) and otherwise performing their duties as directors of the Company.
Phantom Stock Plan. The Board of Directors of the Company (the "Board of Directors") has adopted a Phantom Share Plan (the "Plan") which is administered by the Compensation Committee of the Board of Directors which determines awards to be made under the Plan to the Company's management and highly compensated employees. Awards under the Plan vest ratably over a five- year period beginning at the end of the employee's sixth year of employment with the Company with an employee being fully vested at the end of 10 years of employment with the Company. An employee also becomes fully vested upon the sale of substantially all of the Company's capital stock or assets to any person or group of persons other than to John W. Jordan II or any entity in which he owns, directly or indirectly, 10% or more of the beneficial interest, but not including a sale pursuant to a registered public offering (a "Change of Control"). After (i) an employee becomes fully vested or (ii) an employee's employment relationship with the Company is terminated (other than for cause) (the "Settlement Date"), the Company will pay to such employee in five equal installments beginning 90 days after the Settlement Date and on each of the next four anniversaries of the Settlement Date an aggregate amount equal to the product of the number of units awarded to such employee in which the employee has become vested and the Unit Value (as defined herein) plus interest. Unit Value is defined as 2.5% of (i) the average Stockholder Value (as defined in the Plan) for the last three fiscal years ending on or before such date (or the fair market value of the Common Stock in the event of a Change of Control), divided by (ii) 1,000,000 (subject to adjustment to reflect changes in the Company's capitalization). The Plan consists of 1,000,000 units, of which 180,000 have been granted. The Company believes that the Plan provides the Company with a means of attracting, retaining and motivating executive personnel by offering them performance-related incentives which coincide with the interest of the stockholders. Although the Company has not historically experienced any material difficulties in attracting, retaining or motivating its executive personnel, there can be no assurances that the Company will not experience any such difficulties in the future.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At March 31, 1997 there were 95,001.0004 issued and outstanding shares of Common Stock. The following table furnishes information, as of March 31, 1997, as to the beneficial ownership of the Common Stock by (i) each person known by the Company to beneficially own more than five percent of the outstanding shares of Common Stock, (ii) each director of the Company, and (iii) all officers and directors of the Company as a group.
Name & Address of Amount Percent Beneficial Owner of Beneficial Ownership of Class
John W. Jordan II (1)(4)(5) 44,362.3324 46.7% The Jordan Company, 9 West 57th Street, 40th Floor New York, New York 10019
David W. Zalaznick (2)(3)(4) 17,423.5763 18.3% The Jordan Company, 9 West 57th Street, 40th Floor New York, New York 10019
Leucadia Investors, Inc. (4) 9,969.9999 10.5% 315 Park Avenue South, New York, New York 10010
Thomas H. Quinn (6) 10,000.0000 10.5% Jordan Industries, Inc., ArborLake Centre, 1751 Lake Cook Road, Deerfield, Illinois 60015
Jonathan F. Boucher (7) 5,533.8386 5.8% The Jordan Company, 9 West 57th Street, 40th Floor New York, New York 10019
G. Robert Fisher (5) (9) 624.3496 .7% Bryan Cave, LLP One Kansas City Place, 1200 Main Street, Kansas City, Missouri 64105
All Directors and Officers 87,914.0968 92.5% as a group (5 persons) (4)(8)
(1) Includes 1 share held personally and 44,361.3324 shares held by John W. Jordan II Revocable Trust which includes 2,541.4237 shares that are subject to an agreement dated as of October 27, 1988, between Mr. Jordan and Mr. Zalaznick described in Note (3) below. Does not include 309.2933 shares held by Daly Jordan O'Brien, the sister of Mr. Jordan, 309.2933 shares held by Elizabeth O'Brien Jordan, the mother of Mr. Jordan, and 309.2933 shares held by George Cook Jordan, Jr., the brother of Mr. Jordan.
(2) Does not include 82.1697 shares held by Bruce Zalaznick, the brother of Mr. Zalaznick.
(3) Excludes 2,541.4237 shares that are held by John W. Jordan II Revocable Trust, but which may be purchased by Mr. Zalaznick, and must be purchased by Mr. Zalaznick, under certain circumstances, pursuant to an agreement, dated as of October 27, 1988, between Mr. Jordan and Mr. Zalaznick.
(4) Does not include 100 shares held by JZCC. Mr. Jordan, Mr. Zalaznick and Leucadia, Inc. are the sole partners of JZCC.
(5) Does not include 3,248.3332 shares held by The Jordan Family Trust, of which John W. Jordan II, George Cook Jordan, Jr. and G. Robert Fisher are the trustees.
(6) All of Mr. Quinn's shares are subject to the terms of a Restricted Stock Agreement between Mr. Quinn and the Company. See Item 11 -- "Restricted Stock Agreements".
(7) Includes 2,870.7676 shares which are the subject of a Restricted Stock Agreement between Mr. Boucher and the Company. See Item 11 -- "Restricted Stock Agreements".
(8) Includes 9,969.9999 shares held by Leucadia Investors, Inc., of which Joseph S. Steinberg is President and a director.
(9) Includes 624.3496 shares held by G. Robert Fisher, Trustee of the G. Robert Fisher Irrevocable Gift Trust, U.T.I., dated December 26, 1990.
Stockholder Agreements. Each holder of outstanding shares of Common Stock of the Company is a party to a Stockholder Agreement, dated as of June 1, 1988 (the "Stockholder Agreement"), by and among the Company and such stockholders. The Stockholder Agreement subjects the transfer of shares of Common Stock by such stockholders to a right of first refusal in favor of the Company and "co-sale" rights in favor of the other stockholders, subject to certain restrictions. Under certain circumstances, stockholders holding 60% or more of the outstanding shares of Common Stock, on a fully diluted basis, have certain rights to require the other stockholders to sell their shares of Common Stock.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Consulting Agreement. On June 1, 1988, the Company and The Jordan Company entered into a Management Consulting Agreement which was amended and restated on June 29, 1994 (the "Consulting Agreement"). Under the Consulting Agreement, TJC renders to the Company certain consulting services regarding the Company and its subsidiaries, their financial and business affairs and their relationships with their lenders and stockholders and the operation and expansion of their businesses. Such services include Mr. Jordan's services as chief executive officer of the Company, strategic planning, and advice and analysis regarding financing, potential acquisitions and current operations. For such services, the Company pays TJC a quarterly fee equal to three quarters of one percent of the Company's Cash Flow for the four full fiscal quarters next preceding the date of payment of such quarterly fee. Under the Consulting Agreement, such quarterly fee could not in any event exceed $500,000 in the aggregate for the quarters in 1990, and $1.5 million in the aggregate for the quarters in 1991 and 1992; plus (i) an investment banking and sponsorship fee of up to 2% of the aggregate consideration paid by the Company in connection with an acquisition by the Company of other businesses, and (ii) an investment banking and financial consulting fee not to exceed 1% of the aggregate debt and/or equity financing, in each case, that is arranged by TJC or The Jordan Company, plus the reimbursement of out-of-pocket and other expenses. The Company paid The Jordan Company $3,500,000 in 1993 as an investment banking fee relating to the Company's refinancing. For the years ended December 31, 1996 and 1995, the Company accrued a total of $2,530,000 and $2,691,000 respectively, in quarterly fees and paid $2,610,000 and $2,055,000 respectively, in investment banking fees to TJC pursuant to the Consulting Agreement. TJC has advised the Company that it intends to continue making acquisitions for its own account. There are no commitments or understandings as to how acquisition opportunities would be allocated between the Company and The Jordan Company. The Consulting Agreement expires on June 1, 1998, unless extended or terminated earlier. Messrs. Jordan, Zalaznick and Boucher, directors and officers of the Company, are partners of The Jordan Company. Messrs. Jordan and Zalaznick also serve as directors of TJC. The Company believes that the terms of the Consulting Agreement are comparable to those which could have been obtained from an unaffiliated third party.
Employment Agreement. On February 25, 1988, the Company entered into an employment agreement with Thomas H. Quinn, pursuant to which Mr. Quinn became the President and Chief Operating Officer of the Company, effective January 1, 1988. See "Management -- Employment Agreement." The Company believes that the terms of the employment agreement are comparable to those that could have been obtained from an unaffiliated third party.
Restricted Stock Agreements. On February 25, 1988, the Company entered into restricted stock agreements with each of Jonathan F. Boucher, John R. Lowden and Mr. Quinn, which subject sales of shares of Common Stock of the Company owned by each of the stockholders to the Company's right to repurchase such shares under certain conditions and which also restrict the transfer of any shares of Common Stock of the Company other than pursuant to an option by the Company to repurchase such shares. The Company entered into substantially similar additional restricted stock agreements with Messrs. Quinn and Boucher and Mr. Adam Max, a principal of The Jordan Company, on January 1 1992, and with Mr. Quinn on December 31, 1992. See "Management -- Restricted Stock Agreements." The Company believes that the terms of the restricted stock agreements are comparable to those that could have been obtained from an unaffiliated third party.
Common Stock. On January 1, 1992, the Company issued Messrs. Quinn, Boucher and Max, 600, 533.8386, and 500 shares of Common Stock, respectively, for total consideration of $174,820.73. On December 31, 1992, the Company issued an additional 400 shares to Mr. Quinn for $42,800.00. The consideration received by the Company for the Common Stock amounted to $107.00 per share, determined to be the then fair market value of the Common Stock for the shares of Common Stock issued during 1992 as determined by an independent appraiser's valuation of the shares of Common Stock at the time of issuance. The proceeds from the sale of Common Stock were used by the Company for general corporate purposes. On November 17, 1996, the Company issued Quinn 1,500 common shares for $146,000 cash and a promissory note of $1,314,000. As of December 31, 1996, the Company has recorded a note receivable from officer for the purchase price of $1,460,000 in the stockholders' equity section of the balance sheet.
Legal Counsel. Mr. G. Robert Fisher, a Director of, and the General Counsel and Secretary to, the Company, is also a partner of Bryan Cave, a Limited Liability Partnership (formerly known as Smith, Gill, Fisher & Butts), Kansas City, Missouri. Mr. Fisher and his law firm have represented the Company and The Jordan Company in the past, and expect to continue representing them in the future. In 1996, Bryan Cave LLP was paid approximately $1,462 in fees and expenses by the Company. The rates charged to the Company were determined at arms-length.
MCIT Warrants. In January of 1989, the Company privately placed warrants to acquire 3,500 shares of its Common Stock, at an exercise price of $4.00 per share, to Mezzanine Capital & Income Trust 2001, PLC, a publicly- Traded U.K. investment trust ("MCIT"), for a total of $14,000 in connection with the purchase by MCIT of $7,000,000 of the Old Notes. The estimated per share value of the Common Stock on the date of issuance of the warrants was $200.00 as determined by an independent appraiser. The warrants are transferrable subject to certain restrictions on transfer relating to the availability of an exemption of such transaction from registration under the Securities Act. MCIT sold the Old Notes in October, 1991, but still holds the warrants. John W. Jordan II, David W. Zalaznick and Leucadia Investors, Inc. hold in the aggregate approximately 5.6% of the MCIT capital shares, and approximately 2.8% of the aggregate MCIT capital and income shares. MCIT is advised by Jordan/Zalaznick Advisers, Inc., a corporation owned by John W. Jordan II and David W. Zalaznick.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements appearing at Item 8, which Index is incorporated herein by reference.
(2) Financial Statement Schedule
The following financial statement schedule for the years ended December 31, 1996, 1995 and 1994 is submitted herewith:
Item Page Number
Schedule II - Valuation and qualifying accounts S-1
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are not applicable and therefore have been omitted, or the information has been included in the consolidated financial statements.
(3) Exhibits
An index to the exhibits required to be listed under this Item 14(a)(3) follows the "Signatures" section hereof and is incorporated herein by reference.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ John W. Jordan II John W. Jordan II Dated: March 28, 1997 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/ John W. Jordan II John W. Jordan II Chairman of the Board of Directors Dated: March 28, 1997 and Chief Executive Officer
By /s/ Thomas H. Quinn Thomas H. Quinn Director, President and Chief Dated: March 28, 1997 Operating Officer
By /s/ Jonathan F. Boucher Jonathan F. Boucher Director and Vice President Dated: March 28, 1997 (Principal Financial Officer)
By /s/ G. Robert Fisher G. Robert Fisher Director, General Counsel and Dated: March 28, 1997 Secretary
By /s/ David W. Zalaznick David W. Zalaznick Dated: March 28, 1997 Director
By /s/ Joseph S. Steinberg Joseph S. Steinberg Dated: March 28, 1997 Director
By /s/ Thomas C. Spielberger Thomas C. Spielberger Dated: March 28, 1997 Vice President, Controller and Principal Accounting Officer
Schedule II
JORDAN INDUSTRIES, INC. VALUATION AND QUALIFYING ACCOUNTS (dollars in thousands)
Uncollect- ible Additions balances Balance at charged to written off Balance at beginning of costs and net of end of period expenses recoveries Other period
December 31, 1994: Allowance for doubtful accounts 1,131 580 (790) 137 1,058
Valuation allowances for deferred tax assets (25,782) (2,354) - - (23,428)
December 31, 1995: Allowance for doubt- ful accounts 1,058 884 (636) - 1,306
Valuation allowance for deferred tax assets (23,428) (1,962) - - (21,466)
December 31, 1996: Allowance for doubt- ful accounts 1,306 1,343 (731) 765 2,683
Valuation allowance for deferred tax assets (21,466) 18,548 - - (40,014)
S-1 Sequential EXHIBIT INDEX Page No.
2(a)4 -- Agreement and Plan of Merger between the Thos. D. Murphy Company and Shaw-Barton, Inc. 3(a)1 -- Articles of Incorporation of the Registrants. 3(b)1 -- By-Laws of the Registrant. 4(a)3 -- Indenture, dated as of December 15, 1989, between the Registrant and First Bank National Association, Trustee, relating to the Registrant's Notes. 10(a)1,2 -- Intercompany Notes, dated June 1, 1988, by and among the Registrant and the Subsidiaries. 10(b)1,2 -- Intercompany Management Agreement, dated June 1, 1988, by and among the Registrant and the Subsidiaries. 10(c)1,2 -- Intercompany Tax Sharing Agreement, dated June 1, 1988, by and among the Registrant and the Subsidiaries. 10(d)1 -- Management Consulting Agreement, dated as of June 1, 1988, between the Registrant and The Jordan Company. 10(e)3 -- First Amendment to Management Consulting Agreement, dated as of January 3, 1989, between the Registrant and The Jordan Company. 10(f)7 -- Amended and Restated Management Consulting Agreement, dated September 30, 1990, between the Company and The Jordan Company. 10(g)1 -- Stockholders Agreement, dated as of June 1, 1988, by and among the Registrant's holders of Common Stock. 10(h)1 -- Employment Agreement, dated as of February 25, 1988, between the Registrant and Thomas H. Quinn. 10(i)1 -- Restricted Stock Agreement, dated February 25, 1988, between the Registrant and Jonathan F. Boucher. 10(j)1 -- Restricted Stock Agreement, dated February 25, 1988, between the Registrant and John R. Lowden. 10(k)1 -- Restricted Stock Agreement, dated February 25, 1988, between the Registrant and Thomas H. Quinn. 10(l)1 -- Stock Purchase Agreement, dated June 1, 1988, between Leucadia Investors, Inc. and John W. Jordan, II. 10(m)1 -- Zero Coupon Note, dated June 1, 1988, issued by John W. Jordan, II to Leucadia Investors, Inc. 10(n)1 -- Pledge, Security and Assignment Agreement, dated June 1, 1988 by John W. Jordan, II. 10(o)5 -- Revolving Credit and Term Loan Agreement, dated August 18, 1989, between the Company and The First National Bank of Boston. 10(p)7 -- Second Amendment to Revolving Credit Agreement, dated September 1, 1990 between the Company and The First National Bank of Boston. 10(q)5 -- Supplemental Indenture No. 2, dated as of August 18, 1989, between the Company and the First Bank National Association, as Trustee. 10(r)8 -- Supplemental Indenture No. 3, dated as of December 15, 1990, between the Company and the First Bank National Association, as Trustee. 10(s)5 -- Guaranty, dated as of August 18, 1989, from DACCO, Incorporated in favor of First Bank National Association, as Trustee. The Company has also entered into similar guarantees with other Restricted subsidiaries and will furnish the above guarantees upon request. 10(t)9 -- Amended and Restated Revolving Credit Agreement dated December 10, 1991 between the Company and The First National Bank of Boston. 10(u)(10) -- Revolving Credit Agreement dated as of June 29, 1994 among JII, Inc., a wholly-owned subsidiary of the Company, and The First National Bank of Boston and certain other Banks. 22 -- Subsidiaries of the Registrant. 286 -- Phantom Share Plan.
9911 -- Other Exhibits - None
1 Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-24317). 2 The Company has entered into Intercompany Notes, Intercompany Management Agreements and Intercompany Tax Sharing Agreements with Riverside, AIM, Cambridge, Beemak, Hudson, Scott and Gear which are identical in all material respects with the notes and agreement incorporated by reference in this Report. Copies of such additional notes and agreements have therefore not been included as exhibits to this filing, in accordance with Instruction 2 to Item 601 of Regulation S-K. 3 Incorporated by reference to the Company's 1988 Form 10-K. 4 Incorporated by reference to the Company's 1989 First Quarter Form 10-Q. 5 Incorporated by reference to the Company's Second Quarter Report on Form 10-Q Amendment No. 1, filed September 19, 1989. 6 Incorporated by reference to the Company's 1989 Form 10-K. 7 Incorporated by reference to the Company's 1990 Third Quarter Form 10-Q. 8 Incorporated by reference to the Company's 1990 Form 10-K. 9 Incorporated by reference to the Company's Form 8-K filed December 16, 1991. 10 Incorporated by reference to the Company's 1994 Second Quarter Form 10-Q. 11 Incorporated by reference to the Company's 1995 Form 10-K.