-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QYFQbzBPEerXwWvHtezYpIhYl6tGGxQf/QbJqDmup/AzbXfi+V71Wzs/ohL3gkgc EcbfaRLBMV4u5pn0SeUUrQ== 0000902561-02-000573.txt : 20021114 0000902561-02-000573.hdr.sgml : 20021114 20021114144732 ACCESSION NUMBER: 0000902561-02-000573 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JORDAN INDUSTRIES INC CENTRAL INDEX KEY: 0000839484 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 363598114 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-24317 FILM NUMBER: 02824490 BUSINESS ADDRESS: STREET 1: ARBORLAKE CENTRE STE 550 STREET 2: 1751 LAKE COOK RD CITY: DEERFIELD STATE: IL ZIP: 60015 BUSINESS PHONE: 8479455591 MAIL ADDRESS: STREET 1: 1751 LAKE COOK ROAD STREET 2: SUITE 550 CITY: DEERFIELD STATE: IL ZIP: 60015 10-Q 1 jordan10q3.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended September 30, 2002 Commission File Number 33-24317 JORDAN INDUSTRIES, INC. (Exact name of registrant as specified in charter) Illinois 36-3598114 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) ArborLake Centre, Suite 550 60015 1751 Lake Cook Road (Zip Code) Deerfield, Illinois (address of Principal Executive Offices) Registrant's telephone number, including Area Code: (847) 945-5591 Former name, former address and former fiscal year, if changed since last report: Not applicable. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No ------- ------- The aggregate market value of voting stock held by non-affiliates of the Registrant is not determinable as such shares were privately placed and there is currently no public market for such shares. The number of shares outstanding of Registrant's Common Stock as of November 14, 2002: 98,501.0004. JORDAN INDUSTRIES, INC. INDEX Part I. Page No. - ------- -------- Condensed Consolidated Balance Sheets at September 30, 2002 (Unaudited), and December 31, 2001 3 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2002 and 2001 (Unaudited), and the Nine Months Ended September 30, 2002 and 2001 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Part II. - -------- Other Information 22 Signatures 23 Officer Certificates 24 2
JORDAN INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (ALL DOLLAR AMOUNTS IN THOUSANDS) September 30, December 31, 2002 2001 ---- ---- (unaudited) ASSETS Current Assets: Cash and cash equivalents $28,434 $26,050 Accounts receivable, net 124,873 109,384 Inventories 132,102 122,528 Income tax receivable - 12,245 Deferred income taxes 19,335 8,100 Prepaid expenses and other current assets 22,880 19,030 ------- ------- Total Current Assets 327,624 297,337 Property, plant and equipment, net 105,976 99,602 Investments in and advances to affiliates 41,278 36,443 Goodwill, net 242,441 358,970 Other assets 32,425 37,044 -------- -------- Total Assets $749,744 $829,396 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY (NET CAPITAL DEFICIENCY) Current Liabilities: Accounts payable $57,356 $47,848 Accrued liabilities 94,753 71,372 Advance deposits 1,578 1,853 Current portion of long-term debt 32,007 17,137 ------- ------- Total Current Liabilities 185,694 138,210 Long-term debt, less current portion 731,999 819,406 Other non-current liabilities 11,064 8,668 Minority interest 201 4 Preferred stock 2,296 2,164 Shareholder's Equity (net capital deficiency): Common stock $.01 par value: 100,000 shares authorized and 98,501 shares issued and outstanding 1 1 Additional paid-in capital 2,116 2,116 Accumulated other comprehensive loss (10,728) (15,249) Accumulated deficit (172,899) (125,924) --------- --------- Total Shareholder's Equity (net capital deficiency) (181,510) (139,056) --------- --------- Total Liabilities and Shareholder's Equity (net capital deficiency) $749,744 $829,396 ========= ========= See accompanying notes to condensed consolidated financial statements. 3 JORDAN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) THREE MONTHS ENDED NINE MONTHS ENDED September 30, September 30, ------------------- -------------------- 2002 2001 2002 2001 ------ ------ ---- ---- Net sales $186,942 $180,026 $544,074 $547,605 Cost of sales, excluding depreciation 119,949 115,218 346,636 350,013 Selling, general and administrative expenses, excluding depreciation 44,239 45,492 128,914 131,140 Depreciation 5,599 5,890 16,426 17,765 Amortization of goodwill and other intangibles 397 3,945 1,181 11,826 Management fees and other 165 5,736 8,601 6,612 -------- -------- --------- -------- Operating income 16,593 3,745 42,316 30,249 Other (income) expenses: Interest expense 20,752 22,559 66,916 68,622 Interest income (798) (210) (964) (735) Gain on deconsolidation of liquidated subsidiary (1,888) - (1,888) - Other 331 545 (5,840) 931 -------- --------- ---------- -------- 18,397 22,894 58,224 68,818 -------- ---------- ---------- -------- Loss before income taxes, minority interest, extraordinary items and cumulative effect of change in accounting principle (1,804) (19,149) (15,908) (38,569) (Benefit from) provision for income taxes (580) 5,913 (5,405) 1,452 -------- ---------- --------- -------- Loss before minority interest, extraordinary gain and cumulative effect of change in accounting principle (1,224) (25,062) (10,503) (40,021) Minority interest 91 (200) 197 (365) -------- ---------- --------- --------- Loss before extraordinary items and cumulative effect of change in accounting principle (1,315) (24,862) (10,700) (39,656) Extraordinary loss (gain), net of tax 161 - (52,523) - Cumulative effect of change in accounting principle, net of tax - - 89,139 - -------- --------- --------- --------- Net loss $(1,476) $(24,862) $(47,316) $(39,656) ======== ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 4 JORDAN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) NINE MONTHS ENDED September 30, 2002 2001 ------ ------ Cash flows from operating activities: Net loss $(47,316) $(39,656) Adjustments to reconcile net loss to net cash provided by operating activities: Cumulative effect of accounting change 89,139 - Extraordinary gain on early retirement of debt (52,523) - Gain on deconsolidation of liquidated subsidiary (1,888) - Depreciation and amortization 17,607 29,591 Amortization of deferred financing fees 4,652 3,189 Minority interest 197 (365) Non-cash interest 5,887 16,516 Other (4,640) - Changes in operating assets and liabilities, net of effects from acquisitions: Decrease (increase) in current assets 26 (12,799) Increase in current liabilities 1,693 1,239 Increase in non-current assets (3,017) (959) Increase in non-current liabilities 2,749 7,016 -------- -------- Net cash provided by operating activities 12,566 3,772 Cash flows from investing activities: Proceeds from sale of subsidiary - 16,663 Proceeds from sale of fixed assets 2,170 - Capital expenditures (10,420) (9,345) Acquisitions of subsidiaries (9,503) (13,238) Additional purchase price payments (1,002) - Net cash acquired in purchase of subsidiaries 788 14 Other (204) (11) -------- -------- Net cash used in investing activities (18,171) (5,917) Cash flows from financing activities: Proceeds from revolving credit facilities, net 21,449 9,594 Proceeds from issuance of long-term debt - Kinetek 20,456 - Repayment of long-term debt (7,416) (7,039) Repurchase of Series A Debentures (31,354) - Other borrowing 2,766 - -------- -------- Net cash provided by financing activities 5,901 2,555 Effect of exchange rate changes on cash 2,088 461 -------- -------- Net increase in cash and cash equivalents 2,384 871 Cash and cash equivalents at beginning of period 26,050 21,713 -------- -------- Cash and cash equivalents at end of period $28,434 $22,584 ======== ======== See accompanying notes to condensed consolidated financial statements. 5 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) A. Organization The unaudited condensed consolidated financial statements, which reflect all adjustments that management believes necessary to present fairly the results of interim operations and are of a normal recurring nature, should be read in conjunction with the Notes to the Consolidated Financial Statements (including the Summary of Significant Accounting Policies) included in the Company's audited consolidated financial statements for the year ended December 31, 2001, which are included in the Company's Annual Report filed on Form 10-K for such year (the "2001 10-K"). Results of operations for the interim periods are not necessarily indicative of annual results of operations. B. Accounting Policies - New Pronouncements The Company adopted the non-amortization provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, which resulted in a decrease of approximately $2,700 to the third quarter's net loss and a decrease of approximately $8,100 to the nine month's net loss. This provision is expected to decrease the full-year net loss by approximately $10,800. The Company completed the transitional impairment review of its reporting units during the second quarter and recorded a non-cash pretax charge of $112,239 ($89,139 after-tax). This charge has been recorded as a cumulative effect of a change in accounting principle retroactive to January 1, 2002 and therefore increased the previously reported first quarter 2002 net loss of $9,140 to a net loss of $98,279. The impaired goodwill relates to the acquisitions of JII Promotions, Valmark, and Pamco in the Specialty Printing and Labeling group, Sate-Lite and Beemak in the Jordan Specialty Plastics group, Alma in the Jordan Auto Aftermarket group, FIR and the L'Europa product line in the Kinetek group and Online Environs in the Consumer and Industrial Products group. The Company determined the fair value of each reporting unit using a discounted cash flow approach taking into consideration projections based on the individual characteristics of the reporting units, historical trends and market multiples for comparable businesses. The resulting impairment is primarily attributable to a change in the evaluation criteria for goodwill utilized under previous accounting guidance, to the fair value approach stipulated in SFAS No. 142. The following table provides comparative results had the non-amortization provisions of SFAS No. 142 been adopted for all periods presented: Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Net loss $(1,476) $(24,862) $(47,316) $(39,656) Goodwill amortization - 2,723 - 8,099 --------- --------- --------- --------- Adjusted net loss $(1,476) $(22,139) $(47,316) $(31,557) ========= ========== ========= ========== 6
JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) The changes in the carrying amount of goodwill for the nine months ended September 30, 2002 were as follows: Specialty Jordan Consumer & Printing Specialty Jordan Auto Industrial & Labeling Plastics Aftermarket Kinetek Products Consolidated ---------- -------- ----------- ------- -------- ------------ Balance as of January 1, 2002 $43,389 $41,253 $64,737 $194,622 $14,969 $358,970 Acquisition of Subsidiary - - - 2,552 - 2,552 Additional Purchase Price Payments - 902 - - - 902 Foreign exchange - - - 2,118 - 2,118 Sale of a subsidiary - - - - (9,498) (9,498) Impairment loss (31,653) (6,694) (47,800) (21,300) (4,792) (112,239) Other 8 - - - (372) (364) --------- -------- --------- --------- -------- ----------- Balance at September 30, 2002 $11,744 $35,461 $16,937 $177,992 $307 $242,441 ======== ======== ========= ========= ======== ===========
As of September 30, 2002, the Company had no indefinite-lived intangible assets. The Company had $973 of other intangible assets, net of accumulated amortization of $26,683, which will continue to be amortized over their remaining useful lives ranging from 1 to 10 years. These other intangible asset amounts are included in other assets in the Company's balance sheets. On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. There was no impact to the Company's operating results or financial position related to the adoption of this standard. 7 C. Inventories Inventories are summarized as follows: September 30, December 31, 2002 2001 ------------ ------------ Raw materials $49,865 $ 52,493 Work-in-process 21,443 17,329 Finished goods 60,794 52,706 -------- -------- $132,102 $122,528 ======== ======== D. Comprehensive Income (Loss) Total comprehensive income (loss) for the quarters and nine months ended September 30, 2002 and 2001 is as follows: Three Months ended Nine Months ended September 30, September 30, ----------------------- ------------------- 2002 2001 2002 2001 ------- -------- ------ ------ Net loss $(1,476) $(24,862) $(47,316) $(39,656) Foreign currency translation 3,806 (795) 4,521 741 ------ --------- --------- --------- Comprehensive income (loss) $2,330 $(25,657) $(42,795) $(38,915) ====== ========= ========= ========= 8 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) E. Sale of Subsidiaries Effective on January 1, 2002, the Company sold its subsidiary, Flavorsource, Inc, ("Flavorsource") to Flavor & Fragrance Group Holdings, Inc. ("FFG") for a $10,100 note. FFG's Chief Executive Officer is Mr. Quinn, and its stockholders include 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. As the transaction was among entities under common control, the difference between the note received and the net assets of Flavorsource of $473 has been reflected as a credit to retained earnings. Flavorsource is a developer and compounder of flavors for use in beverages of all kinds, including coffee, tea, juices, and cordials, as well as bakery products and ice cream and dairy products. Flavorsource was a part of the Consumer & Industrial Products segment prior to its disposal. On February 2, 2001, the Company sold the assets of Riverside to a third-party for cash proceeds of $16,663. Riverside is a publisher of Bibles and a distributor of Bibles, religious books and music recordings. The Company recognized a loss on the sale of $2,798, which was recorded in the fourth quarter of 2000. F. Liquidation of Online Environs On March 14, 2000 the Company purchased Online Environs, Inc. ("Online Environs"), an Internet business solutions developer and consultant. Online Environs sales deteriorated sharply from the acquisition date through September 20, 2002. On September 20, 2002, the Company shut down the operations of Online Environs and liquidated the entity. At the time of its liquidation, the liabilities of Online Environs exceeded its assets by $1,888 which, upon deconsolidation, are no longer liabilities of the consolidated group. Accordingly, the Company has recorded a gain of $1,888 classified as other income, to remove the net liabilities from the consolidated financial statements. G. Acquisition and Formation of Subsidiaries On April 11, 2002, Kinetek, Inc. formed a cooperative joint venture with Shunde De Sheng Electric Motor Group Co., Ltd. ("De Sheng Group"), which is named Kinetek De Sheng (Shunde) Motor Co., Ltd (the "JV"). Kinetek Inc. initially contributed approximately $9,503, including costs associated with the transaction, for 80% ownership of the JV, with an option to purchase the remaining 20% in the future. The JV acquired all of the net assets of Shunde De Sheng Electric Motor Co., Ltd. ("De Sheng"), a subsidiary of De Sheng Group. The JV also assumed approximately $7,198 of outstanding debt. On July 23, 2001, the Company purchased the customer lists of The George Kreisler Corporation ("Kreisler") for $204 in cash. Kreisler has been fully integrated into Pamco. On July 3, 2001, the Company purchased the assets of Pioneer Paper Corp. ("Pioneer"). Pioneer is a manufacturer of printed folding paperboard boxes, insert packaging, and blister pack cards. The Company paid $3,134 in cash for the assets. The purchase price was allocated to accounts receivable of $1,343, inventory of $298, property plant and equipment of $1,000, net operating liabilities of $(303), and resulted in an excess purchase price over identifiable assets of $796. Pioneer has been fully integrated into Seaboard. On June 30, 2001, the Company purchased Atco Products ("Atco"). Atco is a manufacturer of air-conditioning components for the automotive aftermarket, heavy duty truck OEs and international markets. The Company paid $7,344 in cash for the assets of 9 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) Atco. The purchase price was allocated to working capital of $4,264 and property, plant and equipment of $3,080. On April 6, 2001, Kinetek, through its wholly-owned subsidiary Merkle-Korff, acquired substantially all of the assets, properties, and business of Koford Engineering, Inc. for $690. The purchase price has been allocated to working capital of $121, property, plant and equipment of $130, and resulted in an excess purchase price over identifiable assets of $439. On March 7, 2001, the Company purchased the assets of J.A. Larson Company ("JA Larson"). JA Larson is a flexographic printer of pressure sensitive labels, tags and seals, which are manufactured in a wide variety of shapes and sizes. The Company paid $433 in cash for the assets. The purchase price was allocated to inventory of $100, property and equipment of $20 and resulted in an excess purchase price over identifiable assets of $313. JA Larson has been fully integrated into Pamco. The above acquisitions have been accounted for as purchases and their operating results have been consolidated with the Company's results since the respective dates of acquisition. Pro forma information with respect to the Company as if the above acquisitions and divestitures had occurred at the beginning of the respective period is not materially different than reported results. H. Investments in JAAI, JSP, and M&G Holdings JAAI During 1999, the Company completed the recapitalization of Jordan Auto Aftermarket, Inc. ("JAAI"). As a result of the recapitalization, certain of the Company's affiliates and JAAI management own substantially all of the JAAI common stock and the Company's investment in JAAI is represented solely by the Cumulative Preferred Stock of JAAI. The JAAI Cumulative Preferred Stock controls over 97.5% of the combined voting power of JAAI capital stock outstanding and accretes at plus or minus 97.5% of the cumulative JAAI net income or net loss, as the case may be, through the earlier of an Early Redemption Event (as defined) or the fifth anniversary of issuance (unless redemption is prohibited by a JAAI or Company debt covenant). The Company recapitalized JAAI in order to establish JAAI as a more independent, stand-alone, industry-focused company. The Company continues to consolidate JAAI and its subsidiaries, for financial reporting purposes, as subsidiaries of the Company. The Company's consolidation of the results of JAAI will be discontinued upon redemption of the JAAI Cumulative Preferred Stock, or at such time as the JAAI Cumulative Preferred Stock ceases to represent at least a majority of the voting power and a majority share in the earnings of JAAI and its subsidiaries. The JAAI Cumulative Preferred Stock is mandatorily redeemable upon certain events and is redeemable at the option of JAAI, in whole or in part, at any time. JSP During 1998, the Company recapitalized Jordan Specialty Plastics, Inc. ("JSP"). As a result of the recapitalization, certain of the Company's affiliates and JSP management own substantially all of the JSP common stock and the Company's investment in JSP is represented solely by the Cumulative Preferred Stock of JSP. The JSP Cumulative Preferred Stock controls over 97.5% of the combined voting power of JSP capital stock outstanding and accretes at plus or minus 97.5% of the cumulative JSP net income or net loss, as the case may be, through the earlier of an Early Redemption Event (as defined) or the fifth anniversary of issuance (unless redemption is prohibited by a JSP or Company debt covenant). 10 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) The Company continues to consolidate JSP and its subsidiaries, for financial reporting purposes, as subsidiaries of the Company. The Company's consolidation of the results of JSP will be discontinued upon redemption of the JSP Cumulative Preferred Stock, or at such time as the JSP Cumulative Preferred Stock ceases to represent at least a majority of the voting power and a majority share in the earnings of JSP and its subsidiaries. The JSP Cumulative Preferred Stock is mandatorily redeemable upon certain events and is redeemable at the option of JSP, in whole or in part, at any time. M&G Holdings Motors and Gears Holdings, Inc., ("M&G Holdings" or "M&G") along with its wholly-owned subsidiary, Kinetek, Inc. ("Kinetek") (formerly Motors and Gears, Inc.), was formed to combine a group of companies engaged in the manufacturing and sale of fractional and sub-fractional motors and gear motors primarily to customers located throughout the United States and Europe. At the end of 1996, M&G was 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 by M&G in September 1995 and the net assets of Barber-Colman were purchased by Merkle-Korff in March 1996. Barber-Colman was legally merged into Merkle-Korff as of January 1, 1997 and now operates as a division of Merkle-Korff. 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. 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 from December 31, 1996, through December 31, 2000, was paid to the Company. The Company was paid $174 for this agreement in the second quarter of 2001. As a result of this sale to M&G, the Company recognized approximately $67,400 of deferred gain at the time of sale for U.S. Federal income tax purposes. A portion of this deferred gain is recognized as M&G reports depreciation and amortization over approximately 15 years on the step-up in basis of those purchased assets. As long as M&G remains in the Company's affiliated group, the gain recognized and the depreciation on the step-up in basis should exactly offset each other. Upon any future de-consolidation of M&G from the Company's affiliated group for U.S. Federal income tax purposes, any unreported gain would be fully reported and subject to tax. On May 16, 1997, the Company participated in a recapitalization of M&G Holdings. In connection with the recapitalization, M&G Holdings issued 16,250 shares of M&G Holdings common stock (representing approximately 82.5% of the outstanding shares of M&G Holdings common stock) to certain stockholders and affiliates of the Company and M&G Holdings management for total consideration of $2,200 (of which $1,110 was paid in cash and $1,090 was paid through delivery of 8.0% zero coupon notes due 2007). As a result of the recapitalization, certain of the Company's affiliates and M&G Holdings management own substantially all of the M&G Holdings common stock and the Company's investment in M&G Holdings is represented solely by the Cumulative Preferred Stock of M&G Holdings (the "M&G Holdings Junior Preferred Stock"). The M&G Holdings Junior Preferred Stock represents 82.5% of M&G Holdings' stockholder voting rights and 80% of M&G Holdings' net income or loss is accretable to the M&G Holdings Junior Preferred Stock. The Company has obtained an independent opinion as to the fairness, from a 11 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) financial point of view, of the recapitalization to the Company and its public bondholders. The Company continues to consolidate M&G Holdings and its subsidiaries, for financial reporting purposes, as subsidiaries of the Company. The M&G Holdings Junior Preferred Stock discontinues its participation in M&G Holdings' earnings on March 31, 2003. The Company's consolidation of the results of M&G Holdings will be discontinued upon redemption of the M&G Holdings Junior Preferred Stock, or at such time as the M&G Holdings Junior Preferred Stock ceases to represent at least a majority of the voting power and a majority share in the earnings of M&G Holdings and its subsidiaries. As long as the M&G Holdings Junior Preferred Stock is outstanding, the Company expects the vote test to be satisfied. The M&G Holdings Junior Preferred Stock is mandatorily redeemable upon certain events and is redeemable at the option of M&G Holdings, in whole or in part, at any time. The Company expects to continue to include M&G Holdings and its subsidiaries in its consolidated group for U.S. Federal income tax purposes. This consolidation would be discontinued, however, upon the redemption of the M&G Holdings Junior Preferred Stock, which could result in recognition by the Company of substantial income tax liabilities arising out of the recapitalization. If such deconsolidation had occurred at September 30, 2002, the Company believes that the amount of taxable income to the Company attributable to M&G Holdings would have been approximately $53,600 (or approximately $21,440 of tax liabilities, assuming a 40.0% combined Federal, state, and local tax rate). The Company currently expects to offset these tax liabilities arising from deconsolidation with redemption proceeds from the M&G Holdings Junior Preferred Stock. Deconsolidation would also occur with respect to M&G Holdings if the M&G Holdings Junior Preferred Stock ceased to represent at least 80.0% of the voting power and 80.0% of the combined stock value of the outstanding M&G Holdings Junior Preferred Stock and common stock of M&G Holdings. As long as the M&G Holdings Junior Preferred Stock is outstanding, the Company expects the vote test to be satisfied. The value test depends on the relative values of the M&G Holdings Junior Preferred Stock and common stock of M&G Holdings. The Company believes the value test is satisfied at September 30, 2002. It is possible that on or before March 31, 2003, the M&G Holdings Junior Preferred Stock would cease to represent 80.0% of the relevant total combined stock value. In the event that deconsolidation for U.S. Federal income tax purposes occurs without redemption of the M&G Holdings Junior Preferred Stock, the tax liabilities discussed above would be incurred without the Company receiving the proceeds of the redemption. I. Additional Purchase Price Agreements The Company had a deferred purchase price agreement relating to its acquisition of Yearntree in December 1999. The agreement was based on Yearntree achieving certain agreed upon cumulative net income before interest and taxes for the 24 months beginning January 1, 2000 and ending December 31, 2001. On March 8, 2002, the Company paid $574 related to the above agreement. The Company also has a deferred purchase price agreement relating to its acquisition of Teleflow in July 1999. The agreement is based upon Teleflow achieving certain agreed upon earnings before interest, taxes, depreciation, and amortization for each year through the year ended December 31, 2002. The Company paid $328 and $260 related to this agreement in April 2002 and 2001, respectively. The Company has a contingent purchase price agreement relating to its acquisition of Deflecto in 1998. The plan is based on Deflecto achieving certain earnings before interest and taxes and is payable on April 30, 2008. If Deflecto is sold prior to 12 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) April 30, 2008, the plan is payable 120 days after the transaction. The terms of Kinetek's 1997 Motion Control Engineering ("MCE") acquisition agreement provide for additional consideration to be paid to the sellers. The agreement is exercisable at the seller's option during a five-year period beginning in 2003. When exercised, the additional consideration will be based on MCE's operating results over the two preceding fiscal years. Payments, if any, under the contingent agreement will be placed in a trust and paid from the trust over a four-year period. Based on MCE's projections for 2002, Kinetek would have to pay approximately $4,600 to the trust in September 2003, if exercised. These payments will be recorded as an addition to goodwill. J. Related Party Transactions An individual who is 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 $977 and $534 in fees and expenses in the first nine months of 2002 and 2001, respectively. The rates charged to the Company were at arms-length. Certain shareholders of TJC Management Corporation ("TJC") are also shareholders of the Company. On July 25, 1997, a previous agreement with TJC was amended and restated. Effective January 1, 2000, the Company owes TJC a $250 quarterly fee for management services. The Company accrued and paid fees to TJC of $500 in the first nine months of 2002 and accrued fees of $750 and paid fees of $1,000 in the first nine months of 2001 related to this agreement. The Company does not expect to accrue or pay any more money related to this agreement. These expenses are classified in "management fees and other" in the Company's statements of operations. On July 25, 1997, a previous agreement with TJC was amended and restated. Under the new agreement, the Company pays TJC an investment banking fee of up to 1%, based on the aggregate consideration paid, for its assistance in acquisitions undertaken by the Company or its subsidiaries, and a financial consulting fee not to exceed 0.5% of the aggregate debt and equity financing that is arranged by TJC, plus the reimbursement of out-of-pocket and other expenses. The Company made no payments in either the first nine months of 2002 or 2001 to TJC for their assistance in relation to acquisition and refinancing activities. At September 30, 2002, $8,429 was accrued related to this agreement and is included in "accrued liabilities" on the Company's balance sheet. The Company has agreements to provide management and consulting services to various entities whose shareholders are also shareholders of the Company. The Company also has agreements to provide investment banking and financial consulting services to these entities. Fees for management and consulting services are typically a percentage of the entity's net sales or earnings before interest, taxes, depreciation and amortization. Fees for investment banking and financial consulting services are based on the aggregate consideration paid for acquisitions or the aggregate debt and equity financing that is arranged by the Company, plus the reimbursement of out-of-pocket and other expenses. Amounts due from affiliated entities as a result of providing the services described above were $4,987 and $3,810 as of September 30, 2002 and December 31, 2001, respectively, and are classified in "prepaid expenses and other current assets" in the Company's balance sheets. The Company also made unsecured advances to these entities for the purpose of funding operating expenses and working capital needs. These advances totaled $14,434 and $13,318 as of September 30, 2002 and December 31, 2001, respectively, and are classified in "prepaid expenses and other current assets" in the Company's balance sheets The Company had reserves of $10,700 and $10,400 at September 30, 2002 and December 31, 2001, respectively, related to these management and consulting services and advances. The increase of $300 in the nine months 13 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) ended September 30, 2002 is reflected in "management fees and other" in the Company's statements of operations. K. Investments in and advances to affiliates The Company has unsecured advances totaling $15,906 and $15,382 as of September 30, 2002 and December 31, 2001, due from JIR Broadcast, Inc. and JIR Paging, Inc. Each of these company's Chief Executive Officer is Mr. Quinn and its stockholders include Messrs. Jordan, Quinn, Zalaznick, and Boucher, who are the Company's directors and stockholders, as well as other partners, principals and associates of The Jordan Company who are also the Company's stockholders. These companies are engaged in the development of businesses in Russia, including the broadcast and paging sectors. The Company receives notes in exchange for these advances, which bear interest at a range from 10.75% to 12.0%. In November 1998, the Company, through Kinetek, invested $5,585 in Class A Preferred Units and $1,700 in Class B Preferred Units of JZ International, LLC. In April 2000, the Company, through Kinetek, invested an additional $5,059 in Class A Preferred Units of JZ International, LLC. This increased the Company's investment in JZ International to $12,344 at September 30, 2002 and December 31, 2001. JZ International's Chief Executive Officer is David W. Zalaznick, and its members include Messrs. Jordan, Quinn, Zalaznick and Boucher, who are the Company's directors and stockholders, as well as other members. JZ International and its subsidiaries are focused on making European and other international investments. The Company is accounting for this investment under the cost method. The Company has made unsecured advances totaling $11,201 and $11,331 as of September 30, 2002 and December 31, 2001, respectively, to Internet Services Management Group ("ISMG") an Internet service provider with approximately 93,000 customers. ISMG's stockholders include 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. The Company receives notes in exchange for these advances, which bear interest at 10.75%. The Company also holds a 5% ownership interest in ISMG's common stock and $1,000 of ISMG's 5% mandatorily redeemable cumulative preferred stock. The Company is accounting for these investments under the cost method. The Company made aggregate investments of $200 and $1,550 in the capital stock of three different businesses in technology-related industries in 2001 and 2000, respectively. The Company's ownership in these businesses ranges from 1-15% on a fully diluted basis. The Company is accounting for these investments under the cost method. 14 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) The Company has a 20% limited partnership interest in a partnership that was formed during 2000 for the purpose of making equity investments primarily in datacom/telecom infrastructure and software, e-commerce products and services, and other Internet-related companies. The Company has a $10,000 capital commitment, of which $2,665 and $2,230 had been contributed through September 30, 2002 and December 31, 2001, respectively. The Company is accounting for this investment using the equity method of accounting. Certain stockholders of the Company are also stockholders in the general partner of the partnership. The Company has an agreement with the partnership's general partner to provide management services to the partnership for annual fees of $1,250. Effective on January 1, 2002, the Company sold the stock of Flavorsource to FFG for a $10,100 note. The note accrues interest at 8% annually and has no stated maturity date. FFG's stockholders include 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. The Company had reserves of $15,700 and $8,800 at September 30, 2002 and December 31, 2001, respectively, related to the above investments in affiliates. The increase of $6,900 in the nine months ended September 30, 2002 is reflected in "management fees and other" in the Company's statements of operations. L. Business Segment Information See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the Company's business segment disclosures. There have been no changes from the Company's December 31, 2001 consolidated financial statements with respect to segmentation or the measurement of segment profit or loss. M. Income taxes The benefit from income taxes differs from the amount of income tax benefit computed by applying the United States federal income tax rate to loss before income taxes, minority interest, extraordinary gain and cumulative effect of change in accounting principle. A reconciliation of the differences is as follows: Nine Months ended Nine Months ended September 30, 2002 September 30, 2001 ------------------- ------------------ Computed statutory tax benefit $(5,568) $(13,499) Increase (decrease) resulting from: Increase in valuation allowance - 10,953 Amortization of goodwill - 2,223 Disallowed meals and entertainment 72 323 State and local tax and other 91 1,452 -------- -------- (Benefit) provision from income taxes $(5,405) $1,452 ======== ======== N. Kinetek Credit Agreement On December 18, 2001, Kinetek, Inc. entered into a new Loan and Security Agreement with Fleet Bank (the "Kinetek Agreement"). On April 12, 2002, the Kinetek Agreement was amended and restated. The Kinetek Agreement now provides for borrowings of up to $35,000 based on the value of certain assets, including inventory, accounts receivable, machinery and equipment, and real estate. Kinetek had $1,396 of outstanding borrowings, $7,554 of outstanding letters of credit, and $22,554 of excess availability under this agreement at September 30, 2002. 15 JORDAN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) O. Jordan Industries Credit Agreement On August 16, 2001, the Company entered into a new Loan and Security Agreement with Congress Financial Corporation and First Union National Bank. The new facility provides for borrowings up to $110,000 based on the value of certain assets including inventory, accounts receivable and fixed assets. As of September 30, 2002 the Company had borrowings of $50,462, $3,595 of outstanding letters of credit, and $23,890 of excess availability under this facility. P. Kinetek Senior Secured Notes On April 12, 2002, Kinetek Industries, Inc., a wholly-owned subsidiary of Kinetek, Inc., issued $15,000 principal amount of 5% Senior Secured Notes and $11,000 principal amount of 10% Senior Secured Notes for net proceeds of $20,456. The notes are due in 2007 and are guaranteed by Kinetek, Inc. and substantially all of its domestic subsidiaries. The notes are also secured by a second priority lien on substantially all of the assets of the issuer and the guarantors, which lien is subordinate to the existing lien securing Kinetek, Inc.'s credit facility. Interest on the notes is payable semi-annually on May 1 and November 1 of each year. Q. Retirement of Debt Between May 29, 2002 and June 5, 2002, the Company repurchased $119,000 principal amount of its $213,886 11.75% Series A Senior Subordinated Discount Debentures due 2009 (the "Series A Debentures"), for total consideration of $31,354, including expenses. The Series A Debentures were purchased from an institutional investor. After the purchase, $94,886 principal amount of Series A Debentures were outstanding. The Company has reported an extraordinary gain, net of taxes, of $52,523 in the statement of operations related to this purchase. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) The following discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the 2001 10-K and the financial statements and the related notes thereto. Results of Operations Summarized below are the net sales, operating income (loss) and operating margins (as defined) for each of the Company's business segments for the quarters and nine month periods ended September 30, 2002 and 2001. This discussion reviews the following segment data and certain of the consolidated financial data for the Company. Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 2002 2001 2002 2001 ----- ------ ------ ----- Net Sales: Specialty Printing and Labeling $25,732 $28,841 $73,747 $80,823 Jordan Specialty Plastics 28,778 25,179 81,388 75,475 Jordan Auto Aftermarket 40,742 37,408 124,644 115,165 Kinetek 74,463 70,309 216,904 222,850 Consumer and Industrial Products 17,227 18,289 47,391 53,292 -------- -------- -------- -------- Total $186,942 $180,026 $544,074 $547,605 ======== ======== ======== ========= Operating Income (Loss): Specialty Printing and Labeling $819 $(2,126) $2,816 $(2,099) Jordan Specialty Plastics 2,469 (106) 6,779 1,740 Jordan Auto Aftermarket 6,006 4,704 17,643 15,783 Kinetek 11,450 9,643 33,029 30,833 Consumer and Industrial Products 191 (869) (1,696) (5,423) ------- -------- -------- --------- Total (a) $20,935 $11,246 $58,571 $40,834 ======= ======== ======== ======== Operating Margin (b) Specialty Printing and Labeling 3.2% (7.4)% 3.8% (2.6)% Jordan Specialty Plastics 8.6% (0.4)% 8.3% 2.3% Jordan Auto Aftermarket 14.7% 12.6% 14.2% 13.7% Kinetek 15.4% 13.7% 15.2% 13.8% Consumer and Industrial Products 1.1% (4.8)% (3.6)% (10.2)% Total (b) 11.2% 6.3% 10.8% 7.5% - ---------------------------- (a) Before corporate overhead of $4,167 and $501 and advisory fees and other of $175 and $7,000 for the three months ended September 30, 2002 and 2001, respectively, and corporate overhead of $9,080 and $3,585 and advisory fees and other of $7,175 and $7,000 for the nine months ended September 30, 2002 and 2001, respectively. (b) Operating margin is operating income (loss) divided by net sales. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) Specialty Printing and Labeling. As of September 30, 2002, the Specialty Printing and Labeling group ("SPL") consisted of JII Promotions, Valmark, Pamco, and Seaboard. Net sales for the third quarter of 2002 decreased $3.1 million, or 10.8%, from the same period in 2001. This decrease is primarily due to lower sales of calendars, school annuals, and outside specialties at JII Promotions, $0.6 million, $0.1 million, and $0.5 million, respectively, lower sales of screen printed products and membrane switches at Valmark, $0.8 million and $0.1 million, respectively, decreased sales of labels at Pamco, $0.3 million, and lower sales of folding boxes at Seaboard, $0.7 million. Net sales for the first nine months of 2002 decreased $7.1 million, or 8.8%, from the same period in 2001. This decrease is primarily due to lower sales of calendars and outside specialties at JII Promotions, $1.9 million and $1.4 million, respectively, decreased sales of screen printed products, membrane switches, shrouds and rollstock at Valmark, $2.6 million, $0.8 million, $0.1 million, and $0.3 million, respectively, and lower sales of labels at Pamco, $0.6 million. Partially offsetting these decreases are higher sales of school annuals at JII Promotions, $0.3 million, and increased sales of folding boxes at Seaboard, $0.3 million. Operating income for the third quarter of 2002 increased $2.9 million over the same period in 2001. This increase is due to higher operating income at JII Promotions, $1.0 million, Valmark, $0.3 million, and Pamco, $1.8 million, partially offset by lower operating income at Seaboard, $0.2 million. Operating income for the first nine months of 2002 increased $4.9 million over the same period in 2001. This increase is due to higher operating income at JII Promotions, $2.0 million, Pamco, $3.5 million, and Seaboard, $0.2 million, partially offset by lower operating income at Valmark, $0.8 million. The increase in operating income at Pamco is due to the closing of Pamco's East Coast facility in October 2001. Jordan Specialty Plastics. As of September 30, 2002, the Jordan Specialty Plastics group ("JSP") consisted of Beemak, Sate-Lite, and Deflecto. Net sales for the third quarter of 2002 increased $3.6 million, or 14.3%, over the same period in 2001. This increase is primarily due to increased sales of tooling at Sate-Lite, $0.4 million, higher sales of molded and fabricated products at Beemak, $0.1 million each, and increased sales of hardware and office products at Deflecto, $2.6 million and $0.9 million, respectively. Partially offsetting these increases are decreased sales of bike and truck reflectors and warning triangles at Sate-Lite, $0.3 million and $0.2 million, respectively. Net sales for the first nine months of 2002 increased $5.9 million, or 7.8%, over the same period in 2001. This increase is primarily due to higher sales of tooling, truck reflectors, and miscellaneous truck parts at Sate-Lite, $0.3 million, $0.2 million, and $0.2 million, respectively, increased sales of fabricated products at Beemak, $0.3 million, and higher sales of hardware products at Deflecto, $6.8 million. These increases are partially offset by lower sales of Tilt Bins and thermoplastic colorants at Sate-Lite, $0.5 million and $0.7 million, respectively, and decreased sales of office products at Deflecto, $0.7 million. Operating income for the third quarter of 2002 increased $2.6 million over the same period in 2001. This increase is due to higher operating income at Deflecto, $3.0 million, partially offset by lower operating income at Sate-Lite, $0.4 million. Operating income for the first nine months of 2002 increased $5.0 million, or 289.6%, over the same period in 2001. This increase is due to higher operating income at Beemak, $0.1 million, and Deflecto $5.4 million, partially offset by lower operating income at Sate-Lite, $0.5 million. The increase in operating income at Deflecto is due to increased sales, ongoing headcount reductions and continued focus on operational efficiencies. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) Jordan Auto Aftermarket. As of September 30, 2002, the Jordan Auto Aftermarket group ("JAAI") consisted of Dacco, Alma and Atco. Net sales for the third quarter of 2002 increased $3.3 million, or 8.9%, over the same period in 2001. This increase is primarily due to higher sales of air conditioning compressors at Alma coupled with increased sales of remanufactured torque converters and drive train components at Dacco and Alma. Net sales for the first nine months of 2002 increased $9.5 million, or 8.2%, over the same period in 2001. This increase is primarily due to the acquisition of Atco in June 2001. Atco contributed net sales of $12.3 million in the first nine months of 2002 compared with net sales of $4.1 million in the same period in 2001. In addition, sales of air conditioning compressors increased at Alma. Operating income for the third quarter of 2002 increased $1.3 million, or 27.7%, over the same period in 2001. Operating income for the first nine months increased $1.9 million, or 11.8%, over the same period in 2001. This higher operating income can primarily be attributed to the acquisition of Atco and increased air compressor sales at Alma, partially offset by increased corporate expenses. Kinetek. As of September 30, 2002, the Kinetek group consisted of Imperial, Gear, Merkle-Korff, FIR, ED&C, Motion Control, Advanced DC and DeSheng. Net sales for the third quarter of 2002 increased $4.2 million, or 5.9%, over the same period in 2001. Net sales for the first nine months of 2002 decreased $5.9 million, or 2.7%, from the same period in 2001. The acquisition of DeSheng resulted in $3.0 million in added sales during the third quarter of 2002 and $4.7 million for the year to date. The increase in sales for the third quarter is mainly attributable to the inclusion of DeSheng results. The decline in total year to date sales resulted from general softness in substantially all of Kinetek's principal markets, partially offset by the DeSheng sales. The motors segment delivered a 5.1% increase in third quarter sales versus 2001, with year to date sales 3.8% below the same period in 2001. Net sales of subfractional motors increased 5.1% for the third quarter and increased 0.1% year to date, led by increased demand for refrigeration appliance motors and by Kinetek's new product introductions, but offset by protracted weakness in vending motor markets. Net sales of fractional and integral motors increased 8.4% for the third quarter and decreased 4.4% year to date, compared with the same periods in 2001. The increase in third quarter sales was led by the inclusion of DeSheng and from share gains and new products introduced in the floor care and elevator motor product lines. These increases more than offset sharp declines in sales of DC products used in material handling applications, and moderately reduced demand for AC and DC products used in the floor care end market, as well as a weak European market. Net sales in the controls segment rose 8.0% in the third quarter and 0.3% for the year to date compared with 2001 performance. The elevator modernization market that drives this segment has experienced general softness and moderate pricing pressure throughout 2002. Operating income for the third quarter of 2002 increased $1.8 million, or 18.7%, over the same period in 2001. Operating income for the first nine months of 2002 increased $2.2 million, or 7.1%, over the same period in 2001. These increases are due to higher operating income in the motors segment, 14.6% and 5.2%, for the third quarter and nine months respectively, and increased operating income in the controls segment, 15.4% and 2.0%, for the third quarter and first nine months, respectively. These increases are due to Kinetek's continued emphasis on cost reduction through productivity and sourcing initiatives, partially offset by price competition in several key markets and a shift in sales toward less profitable product lines. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) Consumer and Industrial Products. As of September 30, 2002, the Consumer and Industrial Products group consisted of Cape, Welcome Home, Cho-Pat, ISMI and GramTel. Online Environs was formally shutdown during the third quarter. (See Footnote F). Net sales for the third quarter of 2002 decreased $1.1 million, or 5.8%, from the same period in 2001. This decrease is primarily due to the divestiture of Flavorsource in January 2002, $1.3 million. In addition, sales of Internet connection services at ISMI decreased $0.3 million, sales of orthopedic supports at Chopat decreased $0.1 million, retail sales at Welcome Home decreased $0.8 million, and sales of web site development services at Online Environs decreased $0.2 million. Partially offsetting these decreases are increased sales of home accessories at Cape, $1.4 million, and higher sales of information technology outsourcing services at GramTel, $0.2 million. Net sales for the first nine months of 2002 decreased $5.9 million, or 11.1%, from the same period in 2001. This decrease is also primarily due to the divestiture of Flavorsource, $4.4 million, as well as the divestiture of Riverside in February 2001, $4.1 million. In addition, sales decreased due to lower sales of Internet connection services at ISMI, $0.7 million, lower sales of orthopedic supports at Chopat, $0.1 million, and decreased sales of web site development services at Online Environs, $0.5 million. Partially offsetting these decreases are increased sales of home accessories at Cape, $2.7 million, higher retail sales at Welcome Home, $0.6 million, and increased sales of information technology outsourcing services at GramTel, $0.6 million. Cape and Welcome Home have been helped by the consumers' inclination to "nest" and decorate their homes, and Welcome Home has been helped by lower gas prices, which accounts for higher traffic in outlet malls. GramTel sales increased due to the increase in customers requiring web hosting and e-mail hosting. Operating income for the third quarter increased $1.1 million over the same period in 2001. This increase is due to higher operating income at Cape, $0.4 million, lower operating loss at Welcome Home, $0.1 million, and higher operating income at GramTel, $0.6 million. Operating loss for the first nine months of 2002 decreased $3.7 million, over the same period in 2001. This decrease is due to the divestiture of Riverside, as mentioned above, as Riverside had an operating loss of $0.4 million for the first nine months of 2001. In addition, operating income increased at Cape, $1.2 million, Welcome Home, $1.5 million, Chopat, $0.1 million, Online Environs, $0.4 million, and GramTel, $0.6 million. Partially offsetting these increases is decreased operating income at ISMI, $0.1 million and Flavorsource, $0.4 million, due to the divestiture of Flavorsource in January 2002. The increased operating income at Cape and Welcome Home is due to higher gross margins in addition to the higher sales mentioned above. Consolidated Results: (See Condensed Consolidated Statement of Operations). Net sales for the third quarter of 2002 increased $6.9 million, or 3.8%, over the same period in 2001. This increase is primarily due to higher sales of tooling at Sate-Lite, increased sales of hardware and office products at Deflecto, higher sales of air conditioning compressors, remanufactured torque converters and drive trains at Alma and Dacco, increased sales of motors and controls at Kinetek, and higher sales of home accessories at Cape. In addition, net sales increased due to the acquisitions of Atco in June 2001 and DeSheng in April 2002. Partially offsetting these increases are lower sales of calendars and outside specialties at JII Promotions, decreased sales of screen printed products at Valmark, lower sales of labels at Pamco, decreased sales of folding boxes at Seaboard, lower sales of bike and truck reflectors at Sate-Lite, and decreased retail sales at Welcome Home. In addition, net sales decreased due to the divestiture of Flavorsource in January 2002. Net sales for the first nine months of 2002 decreased $3.5 million, or 0.6%, from the same period in 2001. This decrease is primarily due to the 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) divestitures of Flavorsource in January 2002 and Riverside in February 2001. In addition, net sales decreased due to lower sales of calendars and outside specialties at JII Promotions, decreased sales of screen printed products and membrane switches at Valmark, lower sales of labels at Pamco, decreased sales of Tilt Bins and thermoplastic colorants at Sate-Lite, lower sales of office products at Deflecto, decreased sales of fractional and integral motors at Kinetek, lower sales of Internet connection services at ISMI, and decreased sales of web site development services at Online Environs. Partially offsetting these decreases are higher sales due to the acquisitions of Atco and DeSheng, as mentioned above. In addition, net sales increased due to higher sales of school annuals at JII Promotions, increased sales of folding boxes at Seaboard, higher sales of tooling at Sate-Lite, increased sales of hardware products at Deflecto, higher sales of air conditioning compressors at Alma, increased sales of home accessories at Cape, higher retail sales at Welcome Home, and increased sales of information technology outsourcing services at GramTel. Operating income for the third quarter increased $12.8 million over the same period in 2001. This increase is primarily due to higher operating income at JII Promotions, Pamco, Deflecto, Jordan Auto Aftermarket, the motors and controls segments of Kinetek, Cape, and GramTel, as well as the acquisitions mentioned above. Partially offsetting these increases is lower operating income at Seaboard and Sate-Lite, in addition to lower operating income due to the divestiture of Flavorsource. Operating income for the first nine months of 2002 increased $12.1 million, or 39.9%, over the same period in 2001. This increase is primarily due to higher operating income at JII Promotions, Pamco, Deflecto, the motors and controls segments of Kinetek, Cape, Welcome Home, and GramTel. In addition, operating income increased due to the acquisitions of Atco and DeSheng. Partially offsetting these increases is lower operating income at Valmark and Sate-Lite. The increased operating income at Pamco is due to the closure of Pamco's East Coast facility in October 2001, the increase in operating income at Deflecto is due to increased sales, ongoing headcount reductions, and continued focus on operational efficiencies, and the higher operating income at Kinetek is due to continued emphasis on cost reduction through productivity and sourcing initiatives. Liquidity and Capital Resources. In general, the Company requires liquidity for working capital, capital expenditures, interest, taxes, debt repayment and its acquisition strategy. Of primary importance are the Company's working capital requirements, which increase whenever the Company experiences strong incremental demand or geographical expansion. The Company had approximately $141.9 million of working capital at September 30, 2002 compared to approximately $159.1 million at the end of 2001. Operating activities. Net cash provided by operating activities for the nine months ended September 30, 2002 was $12.6 million compared to net cash provided by operating activities of $3.8 million during the same period in 2001. The increase in cash provided is primarily due to favorable working capital variances compared with the same period in 2001. Investing activities. Net cash used in investing activities for the nine months ended September 30, 2002 was $18.2 million compared to net cash used in investing activities of $5.9 million during the same period in 2001. The increase in cash used is primarily due to the proceeds from the sale of a subsidiary in the prior year. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) Financing activities. Net cash provided by financing activities for the nine months ended September 30, 2002 was $5.9 million compared to net cash provided by financing activities of $2.6 million during the same period in 2001. This change is primarily due to net revolver borrowings of $21.4 million in the current year as compared to $9.6 million in the prior year and the issuance of long-term debt at one of the Company's subsidiaries, Kinetek, of $20.5 million, partially offset by the retirement of debt in the current year of $31.4 million. The Company is party to two credit agreements under which the Company is able to borrow up to $160.0 million to fund acquisitions, provide working capital and for other general corporate purposes. The credit agreements mature in 2005 and 2006. The agreements are secured by a first priority security interest in substantially all of the Company's assets. As of November 14, 2002, the Company had approximately $33.4 million of available funds under these arrangements. The Company may, from time to time, use cash, including cash generated from borrowings under its credit agreements, to purchase either its 11 3/4% Senior Subordinated Discount Debentures due 2009 or its 10 3/8% Senior Notes due 2007, or any combination thereof, through open market purchases, privately negotiated purchases or exchanges, tender offers, redemptions or otherwise, and may, from time to time, pursue various refinancing or financial restructurings, including pursuant to current solicitations and waivers involving those securities, in each case, without public announcement or prior notice to the holders thereof, and if initiated or commenced, such purchases or offers to purchase may be discontinued at any time. The Company's aggregate business has a certain degree of seasonality. JII Promotions and Welcome Home's sales are somewhat stronger toward year-end due to the nature of their products. Calendars at JII Promotions have an annual cycle and home furnishings and accessories at Welcome Home are popular holiday gifts. Quantitative And Qualitative Disclosures About Market Risks The Company's debt obligations are primarily fixed-rate in nature and, as such, are not sensitive to changes in interest rates. At September 30, 2002, the Company had $51.9 million of variable rate debt outstanding. A one percentage point increase in interest rates would increase the annual amount of interest paid by approximately $0.5 million. The Company does not believe that its market risk financial instruments on September 30, 2002 would have a material effect on future operations or cash flows. The Company is exposed to market risk from changes in foreign currency exchange rates, including fluctuations in the functional currency of foreign operations. The functional currency of operations outside the United States is the respective local currency. Foreign currency translation effects are included in accumulated other comprehensive income in shareholder's equity. Controls and Procedures The Company's CEO and Principal Financial Officer have concluded, based on an evaluation within 90 days of the filing date of this report, that the Company's disclosure controls and procedures are effective for gathering, analyzing and disclosing information required to be disclosed in the Company's reports filed under the Securities Exchange Act of 1934. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the foregoing evaluation. 22 OTHER INFORMATION Item 1. Legal Proceedings ----------------- None Item 2. Changes in Securities --------------------- None Item 3. Defaults upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- 8-K filed on May 29, 2002 regarding the purchase of $110,000,000 principal amount of the Company's Series A Debentures. 8-K filed on June 5, 2002 regarding the purchase of $9,000,000 principal amount of the Company's Series A Debentures. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JORDAN INDUSTRIES, INC. November 14, 2002 By: /s/ Thomas C. Spielberger --------------------------- Thomas C. Spielberger Senior Vice President, Finance and Accounting 24 CERTIFICATE I, John W. Jordan II, certify that: 1) I have reviewed this quarterly report on Form 10-Q of Jordan Industries, Inc; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 ---------------------- /s/ John W. Jordan II ------------------------------ Name: John W. Jordan II Title: Chairman and CEO 25 CERTIFICATE I, Thomas C. Spielberger, certify that: 1) I have reviewed this quarterly report on Form 10-Q of Jordan Industries, Inc; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material nformation relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 ---------------------- /s/ Thomas C. Spielberger ------------------------------ Name: Thomas C. Spielberger Title: SVP, Finance & Accounting Principal Financial Officer 26 -----END PRIVACY-ENHANCED MESSAGE-----