<PAGE>
Filed Pursuant to Rule 424(B)(1)
Registration File No.: 333-77667
================================================================================
PROSPECTUS
Jordan Industries, Inc.
[GRAPHIC OMITTED]
OFFER TO EXCHANGE ITS
10 3/8% SERIES D SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT FOR ANY AND ALL
OUTSTANDING 10 3/8% SERIES C SENIOR NOTES
DUE 2007
- --------------------------------------------------------------------------------
THE COMPANY:
o We are a diverse company comprised of 30 businesses which are divided into
five strategic business units.
o Jordan Industries, Inc.
1751 Lake Cook Road
Deerfield, Illinois 60015
(847) 945-5591
MATERIAL TERMS OF THE EXCHANGE OFFER:
o This exchange offer expires at 5:00 p.m., New York City time, on June 11,
1999, unless extended.
o Tenders of the series C senior notes may be withdrawn any time before the
expiration of the exchange offer.
o This exchange offer is subject to customary conditions, which we may waive.
o The terms of the series D senior notes to be issued in this exchange offer
are identical to the series C senior notes, except for transfer
restrictions and registration rights that apply to the series C senior
notes.
o There is no existing market for the series D senior notes offered in this
exchange offer and we do not intend to apply for their listing on any
securities exchange.
Before you tender your series C senior notes, you should consider carefully the
"Risk Factors" beginning on page 11 of this prospectus.
THE SERIES D SENIOR NOTES:
o Maturity: August 1, 2007.
o Interest Payment: semiannually in cash on February 1 and August 1,
commencing on August 1, 1999.
o Redemption: the series D senior notes will be redeemable on or after August
1, 2002. Holders of the series D senior notes may also require us to
redeem all or part of such holder's series D senior notes upon certain
asset sales or changes of control.
o Ranking: the series D senior notes will be general unsecured obligations,
junior to secured obligations and all liabilities of our
subsidiaries.
THE DATE OF THIS PROSPECTUS IS MAY 12, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
Prospectus Summary ......................... 1 Description of Certain
Risk Factors ............................... 11 Indebtedness ............................ 68
Forward-Looking Statements ................. 20 Description of Capital Stock ............. 74
Use of Proceeds ............................ 20 The Exchange Offer ....................... 77
Capitalization ............................. 21 Description of the Senior Notes .......... 83
Selected Financial Data .................... 22 Certain United States Federal Income
Management's Discussion and Tax Considerations ...................... 106
Analysis of Results of Operations Plan of Distribution ..................... 108
and Financial Condition ................... 23 Where You Can Find More
Business ................................... 34 Information ............................ 109
Management ................................. 55 Legal Matters ............................ 109
Principal Stockholders ..................... 58 Experts .................................. 109
Certain Transactions ....................... 60 Index to Financial Statements and
1997 Recapitalization and Information ............................. I-1
Repositioning Plan ........................ 66
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this prospectus. We
urge you to read this prospectus in its entirety. References to our business
and pro forma financial information give effect to transactions described in
the Unaudited Pro Forma Financial Information and the related notes, unless the
context indicates otherwise. Unless otherwise indicated or the context
otherwise requires, as used in this prospectus, "we," "us," "our," "Jordan
Industries" or the "Company" means or refers to Jordan Industries, Inc. and its
subsidiaries. The term "Restricted Group" includes subsidiaries in the Consumer
and Industrial Products group ("Consumer and Industrial Products"), SPL
Holdings, Inc. and its subsidiaries ("Specialty Printing and Labeling") and
Jordan Specialty Plastics, Inc. and its subsidiaries ("Specialty Plastics"), as
well as the parent entity, which maintains no operations. The "Nonrestricted
Group" includes Jordan Telecommunication Products, Inc. and its subsidiaries
("Telecommunication Products") and Motors and Gears Holdings, Inc. and its
subsidiaries ("Motors and Gears"). Each individual entity that comprises
Telecommunication Products and Motors and Gears is a Nonrestricted Subsidiary,
as defined in the Indenture, under the Indenture. The Restricted Group is the
primary source of cash flow to service the Senior Notes, as our ability to
access cash from the Nonrestricted Group is limited.
THE COMPANY
Jordan Industries was organized to acquire and operate a diverse group of
businesses on a decentralized basis, with a corporate staff providing strategic
direction and support. We comprise 30 businesses, which are divided into five
strategic business units: Consumer and Industrial Products, Specialty Printing
and Labeling, Specialty Plastics, Telecommunication Products and Motors and
Gears. We believe that our businesses are characterized by leading positions in
niche industries, high operating margins, strong management, minimal working
capital and capital expenditure requirements, and low sensitivity to
technological change and economic cycles.
Our business strategy is to enhance the growth and profitability of each
business unit and to build upon the strengths of those units through product
line and other strategic acquisitions. Key elements of this strategy have been
the acquisition and growth of related businesses, increased focus on
international markets, facilities expansion and the acquisition of
complementary product lines. Consistent with this strategy, on March 22, 1999,
we acquired the Alma Products division ("Alma Products") of Alma Piston
Company. As a result of this acquisition, we significantly increased our
presence in the automotive aftermarket industry.
The operations of the Restricted Group consist of:
o Consumer and Industrial Products, which represented 54.4% of pro forma
net sales of the Restricted Group for the year ended December 31, 1998.
o Specialty Printing and Labeling, which represented 27.8% of pro forma
net sales of the Restricted Group for the year ended December 31, 1998.
o Specialty Plastics, which represented 17.8% of pro forma net sales of
the Restricted Group for the year ended December 31, 1998.
Consumer and Industrial Products serves several product segments. It is
the leading supplier of remanufactured torque converters to the automotive
aftermarket industry. Consumer and Industrial Products also (1) publishes and
markets Bibles, religious books and audio materials, (2) manufactures
hot-formed titanium materials for the aerospace and other industries and (3)
manufactures and imports gift items. The companies that comprise Consumer and
Industrial Products have provided their customers with products and services
for an average of over 40 years.
Specialty Printing and Labeling manufactures and markets (1) promotional
and specialty advertising products for corporate buyers, (2) labels, tapes and
printed graphic panel overlays for electronics and other manufacturing
companies and (3) printed folding cartons and boxes and other
1
<PAGE>
shipping materials. The companies that comprise Specialty Printing and Labeling
have provided their customers with products and services for an average of over
40 years.
Specialty Plastics serves a broad range of wholesale and retail markets
within the highly fragmented specialty plastics industry. The group designs,
manufactures and sells (1) "take-one" point of purchase brochure, folder and
application display holders, (2) modular storage systems ("Tilt-Bins(TM)"), (3)
plastic injection-molded hardware and office supply products, (4) extruded
vinyl chairmats, (5) safety reflectors for bicycle and commercial truck
manufacturers and (6) colorants to the thermoplastics industry. The companies
that comprise Specialty Plastics have provided their customers with products
and services for an average of over 35 years.
THE ALMA PRODUCTS ACQUISITION
At the same time as the closing of the offering of the series C senior
notes, we acquired Alma Products for a purchase price consisting of $84.1
million in cash and the assumption of $2.1 million in long-term liabilities.
Alma Products is comprised of three primary product lines: (1) high quality
remanufactured torque converters (approximately 48% of 1998 net sales) used to
supply warranty replacements for automatic transmissions originally sold to
Ford, Chrysler, John Deere and Caterpillar, (2) remanufactured and new air
conditioning compressors (approximately 34% of 1998 net sales) for original
equipment manufacturers ("OEMs") including Ford, Chrysler and GM and (3) new
and remanufactured clutch and disc assemblies (approximately 18% of 1998 net
sales) used in standard transmissions sold primarily to Ford. As a premium
remanufacturer of torque converters, Alma Products has earned ISO-9002 status
and supplies Ford with 100% and Chrysler with approximately 70% of their
remanufactured torque converter requirements. For a more detailed description
of Alma Products' business, please read "Business--Consumer and Industrial
Products."
We believe the strategic acquisition of Alma Products complements our
existing subsidiary, Dacco, Incorporated ("Dacco"), and will result in
significant cost and revenue synergies. Alma Products is a leading
remanufacturer to the OEMs and has benefited from the trend among OEMs to
reduce warranty costs through the use of remanufactured parts and assemblies.
Dacco, on the other hand, has been successful in remanufacturing and marketing
torque converters to the independent automotive aftermarket sector, which is
not governed by OEM standards. Through the combination of Alma Products and
Dacco, we believe we can achieve operating synergies through:
o Decreasing cost of sales at Dacco by using torque converter cores
previously discarded by Alma Products, thereby reducing Dacco's need to
purchase these cores in the scrap market.
o Increasing sales at Dacco by providing access to the large inventory of
Alma Products' torque converter cores, since Dacco currently loses
significant sales due to inadequate supplies of available cores in the
scrap market.
o Increasing sales of Alma Products' air conditioning compressor products
and clutch and disc assemblies through Dacco's nationwide retail store
network.
2
<PAGE>
The following chart depicts our five strategic business units, together
with the pro forma net sales of each of the five groups for the year ended
December 31, 1998. Pro forma net sales, as set forth below, give effect to the
Alma Products acquisition and certain other transactions described in the
Unaudited Pro Forma Financial Information and the related notes. The boxes in
bold represent the Restricted Group.
<TABLE>
<CAPTION>
---------------------------------------------------------------
JORDAN INDUSTRIES INC.
RESTICTED
GROUP CONSOLIDATED
----- ------------
(Dollars in millions)
NET SALES $431.9 $1,024.2
---------------------------------------------------------------
|
|
|
--------------------------------------------------------------------------------------------------
| | | | |
------------------- -------------------- ------------------- -------------------- -------------------
CONSUMER AND
INDUSTRIAL SPECIALTY PRINTING SPECIALTY TELECOMMUNICATION MOTORS AND
PRODUCTS AND LABELING PLASTICS (2) PRODUCTS (1) GEARS (1)
<S> <C>
o Dacco o Sales Promotion o Beemak
o Alma Products Associates Plastics
o Riverside Book o Valmark o Sate-Lite
and Bible Industries Manufacturing
o Parsons o Pamco Printed o Deflecto
Precision Tape and Label o Rolite Plastics
Products o Seaboard
o Cape Craftsmen Folding Box
o Cho-Pat
$234.7 MILLIOM OF $120.2 MILLION OF $77.0 MILLION OF $296.1 MILLION OF $296.2 MILLION
NET SALES NET SALES NET SALES NET SALES NET SALES
------------------- -------------------- ------------------- -------------------- -------------------
- ----------
(1) Telecommunication Products and Motors and Gears are Nonrestricted
Subsidiaries, as defined in the Indenture, the common stock of which is
owned by stockholders and affiliates of Jordan Industries and management
of the respective companies. Jordan Industries' ownership in these
subsidiaries is solely in the form of JTP junior preferred stock and M&G
junior preferred stock. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--General," "Risk
Factors--Ability to Service Debt" and "Description of Capital Stock."
(2) Specialty Products is a Restricted Subsidiary, as defined in the
Indenture, the common stock of which is owned by stockholders and
affiliates of Jordan Industries and management of the respective
companies. Jordan Industries' ownership in these subsidiaries is solely
in the form of JSP junior preferred stock. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--General,"
"Risk Factors--Ability to Service Debt" and "Description of Capital
Stock."
</TABLE>
3
<PAGE>
RECENT DEVELOPMENTS
On March 31, 1999, our Dura-Line subsidiary in Telecommunication Products,
purchased substantially all of the assets of Integral Corporation. Integral is
a manufacturer of high-density polyethylene conduit for the installation and
protection of cables used in the electrical telecommunications, and cable
television industries. Integral has locations in Dallas, Texas, England and
Malaysia.
The purchase price of $17.0 million, which does not include related
transaction costs, has not been allocated at this time. The acquisition was
financed with four-month promissory notes for
$9.9 million and borrowings from JTP Industries' revolving credit agreement of
$7.1 million.
For the three months ended March 31, 1999 our unaudited consolidated net
sales and operating income were $239.3 million and $24.2 million, respectively,
compared with $207.7 million and $18.4 million, respectively, for the same
period in 1998.
4
<PAGE>
SUMMARY OF THE EXCHANGE OFFER
THE INITIAL OFFERING
The currently outstanding series C senior notes were issued on March 22,
1999 in a private placement. We are party to a registration rights agreement
with the initial purchasers in that private offering pursuant to which we
agreed, among other things, to file a registration statement with respect to
the series D senior notes on or before June 20, 1999, to use our best efforts
to have the registration statement declared effective on or before August 19,
1999. We must pay liquidated damages to the holders of the series C senior
notes if we do not meet these deadlines. For information on the sources and
uses of funds in connection with the original offering, you should see the "Use
of Proceeds" section of this prospectus.
THE EXCHANGE OFFER
The Exchange Offer.......... We are offering to exchange $155,000,000
principal amount of 10 3/8% series D senior notes
due 2007 which have been registered under the
Securities Act of 1933 for $155,000,000 of our
outstanding 10 3/8% series C senior notes due
2007 which were issued in March 1999.
The series D senior notes are substantially
identical to the series C senior notes, except
that some of the transfer restrictions and
registration rights relating to the series C
senior notes do not apply to the series D senior
notes. You may tender your series C senior notes
by following the procedures described in this
prospectus under the heading "The Exchange
Offer."
Expiration Date............. The exchange offer will expire at 5:00 p.m.,
New York City time, on June 11, 1999, unless we
extend it.
Withdrawal Rights........... You may withdraw your tender of your notes at
any time before 5:00 p.m., New York City time, on
the expiration date of the exchange offer.
Conditions of the
Exchange Offer............... The exchange offer is subject to customary
conditions, which we may waive. Please read "The
Exchange Offer--Conditions" section of this
prospectus for more information regarding
conditions of the exchange offer.
Procedures for Tendering
Series C Senior Notes........ If you are a holder of series C senior notes
and wish to accept the exchange offer, you must
either:
(a) complete, sign and date the accompanying
Letter of Transmittal, or a facsimile
thereof and mail or otherwise deliver the
document together with your series C senior
notes, to the exchange agent at the address
shown under "The Exchange Offer--Exchange
Agent;" or
5
<PAGE>
(b) arrange for The Depository Trust Company to
transmit the required information to the
exchange agent for this exchange offer in
connection with a book-entry transfer.
By tendering your series C senior notes in
this manner, you will be representing, among
other things, that:
o the series D senior notes you acquire in
the exchange offer are being acquired in
the ordinary course of your business;
o you are not participating, do not intend
to participate, and have no arrangement or
understanding with any person to
participate in the distribution of the
series D senior notes issued to you in the
exchange offer; and
o you are not our "affiliate".
Certain United States Federal
Income Tax Consequences..... Your exchange of series C senior notes for
series D senior notes in the exchange offer will
not result in any gain or loss to you for federal
income tax purposes. See the "Certain United
States Federal Income Tax Consequences" section
of this prospectus.
Consequences of Failure
to Exchange................. Series C senior notes that are not tendered or
that are tendered, but not accepted, will be
subject to the existing transfer restrictions on
the notes after the exchange offer. We will have
no further obligation to register the series C
senior notes. If you do not participate in the
exchange offer, the liquidity of your series C
senior notes could be adversely affected.
Procedures for
Beneficial Owners............ If you are the beneficial owner of series C
senior notes registered in the name of a broker,
dealer or other nominee and you wish to tender
your notes, you should contact the person in
whose name your series C senior notes are
registered and promptly instruct the person to
tender on your behalf.
Guaranteed Delivery
Procedures................... If you wish to tender your series C senior notes
and time will not permit your required documents
to reach the exchange agent by the expiration
date, or the procedure for book-entry transfer
cannot be completed on time, you may tender your
series C senior notes according to the guaranteed
delivery procedures. See "The Exchange Offer."
Acceptance of Series C Senior
Notes; Delivery of Series D
Senior Notes................. Subject to certain conditions, we will accept
series C senior notes which are properly tendered
in the exchange offer and not withdrawn, before
5:00 p.m., New York City time, on the
6
<PAGE>
expiration date of the exchange offer. The
series D senior notes will be delivered as
promptly as practicable following the expiration
date.
Use of Proceeds............. We will receive no proceeds from the exchange
offer.
Exchange Agent.............. U.S. Bank Trust National Association is the
exchange agent for the exchange offer.
SUMMARY OF THE SERIES D SENIOR NOTES
Total Amount of
Securities Offered.......... We will issue $155,000,000 principal amount of
103/8% series D senior notes due 2007.
Maturity.................... August 1, 2007.
Interest Rate and
Payment Dates................ The series D senior notes will bear interest at a
rate of 103/8% per year. We will pay interest
every six months, on August 1 and February 1. The
first interest payment will be August 1, 1999.
Optional Redemption......... On or after August 1, 2002, we may redeem the
series D senior notes at the redemption prices
listed in "Description of the Senior
Notes--Redemption of Senior Notes."
Mandatory Redemption........ If we sell certain assets or experience
specific kinds of changes of control, we must
offer to repurchase the senior notes at the
prices listed in "Description of the Senior
Notes--Mandatory Offers to Purchase Senior
Notes."
Ranking..................... The series D senior notes will be senior
unsecured obligations
of the Company, will rank equal in right of
payment with all other senior indebtedness of
the Company (including the series B senior
notes) and senior to all subordinated
indebtedness of the Company (including the
Discount Debentures). The series D senior notes
will effectively rank junior to any secured
indebtedness to the extent of the assets
securing that indebtedness, including
indebtedness incurred under the Credit Agreement
(as defined), and to the indebtedness and claims
of creditors of our subsidiaries. See
"Description of the Senior Notes--Certain
Covenants" and "Description of Certain
Indebtedness."
Certain Covenants........... The Indenture, among other things, restricts
our ability to:
o pay dividends or make certain other
restricted payments;
o borrow money;
o sell certain assets or merge with or into
other companies;
o enter into transactions with affiliates;
o make certain guarantees of indebtedness; and
7
<PAGE>
o make certain investments.
See "Description of the Senior Notes--Certain
Covenants" and "--Mandatory Offers to Purchase
Senior Notes--Asset Sales."
Use of Proceeds............. We will not receive any proceeds from the
exchange offer. The net proceeds we received from
the sale of the series C senior notes were used
to:
o acquire Alma Products;
o repay existing indebtedness; and
o pay fees and expenses incurred in connection
with the Transactions.
RISK FACTORS
An investment in the series D senior notes involves a high degree of risk.
For a discussion of certain matters that should be considered by prospective
investors in connection with the exchange offer, please read "Risk Factors."
8
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary (1) historical financial data of the
Company for the years ended December 31, 1996, 1997 and 1998, (2) pro forma
financial data of the Company for the year ended December 31, 1998, (3) pro
forma financial data of the Restricted Group for the year ended December 31,
1998 and (4) balance sheet data as of December 31, 1998 on a historical and pro
forma basis for the Company and on a pro forma basis for the Restricted Group.
The historical financial data of the Company as of and for the years ended
December 31, 1996, 1997 and 1998 were derived from the audited consolidated
financial statements of the Company. The pro forma data are unaudited, and the
pro forma statement of operations and other data give effect to certain
transactions as set forth in the Unaudited Pro Forma Financial Information and
the related notes included elsewhere in this prospectus as if such transactions
had occurred at the beginning of the period. Pro forma balance sheet data give
effect to such transactions at the date indicated. The unaudited summary pro
forma consolidated financial data do not purport to project the consolidated
financial position or the consolidated results of operations of the Company or
the Restricted Group for any future period. The Company has acquired a diverse
group of operating Companies over the periods presented, which signficantly
affects the comparability of the information presented. The financial data set
forth below should be read in conjunction with the historical consolidated
financial statements of the Company and the related notes, "Selected Financial
Data," "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and "Unaudited Pro Forma Financial Information," all
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL CONSOLIDATED (1)(2) CONSOLIDATED (1)(3) PRO FORMA
--------------------------------------- --------------------- RESTRICTED GROUP (4)
YEARS ENDED DECEMBER 31, YEAR ENDED YEAR ENDED
--------------------------------------- --------------------- ---------------------
1996 1997 1998 DECEMBER 31, 1998 DECEMBER 31 1998
----------- ----------- ----------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Net sales ........................ $ 601,567 $ 707,112 $ 943,607 $1,024,160 $ 431,851
Gross profit, excluding
depreciation .................... 225,822 260,532 342,222 366,145 149,277
Net loss ......................... (55,690) (45,618) (31,586) (31,160) (16,441)
OTHER FINANCIAL DATA:
Depreciation and amortization..... 30,438 35,321 45,047 49,154 17,739
Adjusted operating income (5)..... 29,367 56,551 91,696 108,210 36,193
Capital expenditures ............. 17,395 14,179 21,477 22,378 7,085
Interest expense (6) ............. 60,339 78,655 105,254 118,752 46,527
Cash interest expense ............ 48,352 60,200 78,450 91,948 30,585
Ratio of earnings to fixed
charges (7) ..................... -- -- -- -- --
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY (1)(2) RESTRICTED GROUP(4)
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1998
------------------------------ ------------------------
HISTORICAL PRO FORMA (3) PRO FORMA (3)
------------ --------------- ------------------------
(Dollars in thousands)
BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash and cash equivalents ............................. 23,008 25,031 8,886
Working capital ....................................... 189,065 203,871 91,411
Total assets .......................................... 1,043,888 1,156,364 512,737
Total debt ............................................ 1,065,555 1,165,316 442,972
Preferred stock (8) ................................... 25,649 25,649 --
Stockholders' equity (net capital deficiency) ......... (208,144) (208,144) (8,580)
</TABLE>
- ----------
(1) The Company consolidates the results of Telecommunication Products and
Motors and Gears and their respective subsidiaries, all of which
constitute the Nonrestricted Group, the common stock of which is owned by
stockholders and affiliates of the Company and management of the
respective companies. The Company's ownership in these subsidiaries is in
the form of JTP Junior Preferred Stock and M&G Junior Preferred Stock.
(2) The Company has acquired a diverse group of operating companies over the
periods presented, which significantly affects the comparability of the
information presented.
(3) The pro forma data reflect the consummation of the Offering and the Alma
Products acquisition, as well as all other acquisitions and dispositions
completed during the period for purposes of the operating data, assuming
such transactions had occurred at the beginning of the period, and for
purposes of the balance sheet data, assuming such transactions had
occurred at the date indicated. See the Unaudited Pro Forma Financial
Information at page P-1.
(4) The Restricted Group consists of Jordan Industries, Inc., Consumer and
Industrial Products, Specialty Printing and Labeling and Specialty
Plastics. The statement of operations and other data for the Restricted
Group give effect to the allocation of corporate overhead.
(5) Adjusted operating income represents operating income excluding the
results of Welcome Home, which filed for bankruptcy on January 21, 1997
and is no longer consolidated with the Company.
(6) Does not include amortization of deferred financing fees of $3.0 million,
$3.8 million and $4.5 million for the years ended December 31, 1996, 1997
and 1998, respectively, on a historical basis, and $6.1 million for the
year ended December 31, 1998 on a pro forma basis for the consolidated
Company. Does not include amortization of deferred financing fees of $3.3
million for the year ended December 31, 1998 on a pro forma basis for the
Restricted Group.
(7) On a historical basis, earnings were insufficient to cover fixed charges
by $47.4 million, $6.2 million and $22.6 million for the years ended
December 31, 1996, 1997 and 1998. On a pro forma basis for the Company,
earnings were insufficient to cover fixed charges by $22.2 million, and on
a pro forma basis for the Restricted Group, earnings were insufficient to
cover fixed charges by $13.1 million for the year ended December 31, 1998.
(8) Includes $25.0 million initial liquidation preference of the Senior
Preferred Stock of Jordan Telecommunication Products, Inc. and $1.5
million initial liquidation preference of the Senior Preferred Stock of
Motor and Gears Holdings, Inc., which preferred stock is owned, in each
case, by persons other than the Company.
10
<PAGE>
RISK FACTORS
An investment in the senior notes involves a high degree of risk. You
should consider carefully the following risk factors, in addition to the other
information set forth in this prospectus.
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE
SENIOR NOTES.
We have a significant amount of indebtedness. Assuming we had completed
the offering of series C senior notes and related transactions as of December
31, 1998, the total consolidated indebtedness, consolidated total assets and
stockholders' equity for the Restricted Group as of December 31, 1998 would
have been $443.0 million, $512.7 million and $(8.6) million, respectively,
while those same financial measures would have been $1,165.3 million, $1,156.4
million and $(208.1) million, respectively, for Jordan Industries and all
subsidiaries. Earnings before fixed charges for the Company would have been
inadequate to cover fixed charges by $22.2 million for the year ended December
31, 1998.
Our substantial indebtedness could have important consequences to you. For
example, it could:
o make it more difficult for us to satisfy our obligations with respect
to the senior notes;
o increase our vulnerability to general adverse economic and industry
conditions;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes;
o limit our flexibility in planning for, or reacting to, changes in our
businesses and the industries in which we operate;
o place us at a competitive disadvantage compared to our competitors
that have less debt; and
o limit, along with the financial and other restrictive covenants of our
indebtedness, among other things, our ability to borrow additional
funds.
Failing to comply with those covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on us. See
"Use of Proceeds," "Capitalization," "Description of the Senior Notes--Certain
Covenants" and "Description of Certain Indebtedness--Credit Agreements."
ADDITIONAL BORROWINGS AVAILABLE--DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND
OUR SUBSIDIARIES MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT.
We and our subsidiaries may be able to incur substantial additional
indebtedness (including secured indebtedness) in the future. The terms of the
indenture governing the series D senior notes do not fully prohibit us or our
Restricted Group from doing so, and do not in any way prohibit our
Nonrestricted Group from doing so. Our Credit Agreement currently permits
additional borrowings up to $51.5 million, and all of those borrowings would be
effectively senior to the series D senior notes to the extent of the assets
securing such additional indebtedness under the Credit Agreement. If new debt
is added to our and our subsidiaries' current debt levels, the related risks
that we and they now face could intensify. See "Capitalization," "Selected
Financial Data," "Description of the Senior Notes--Certain Covenants" and
"Description of Certain Indebtedness--Credit Agreements."
ABILITY TO SERVICE DEBT--TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY
FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness,
including the series D senior notes, and to fund planned capital expenditures
and research and development efforts will depend on our ability to generate
cash in the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control.
11
<PAGE>
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe that our cash flow from operations,
available cash and available borrowings under our Credit Agreement will be
adequate to meet our liquidity needs for at least the next 12 months. The
Restricted Group is the primary source of cash flow to service the series D
senior notes, as our ability to access cash from Telecommunication Products and
Motors and Gears is limited. We can access cash flow through loans from
Specialty Plastics and repayment of loans made by us to Specialty Plastics. We
are able to do this because the Indenture and our other indebtedness do not
prohibit intercompany loans within the Restricted Group, however, we cannot
assure you that future financings by Specialty Plastics will continue to permit
such intercompany loans.
Our investment in Telecommunication Products and Motors and Gears (which
comprise the Nonrestricted Group) and Specialty Plastics (which is part of the
Restricted Group) is solely through our ownership of junior preferred stock. As
discussed under "Description of Capital Stock," the junior preferred stock is
mandatorily redeemable upon certain events and redeemable at the option of each
company, in whole or in part, at any time. Following any such redemption, that
company would no longer be our subsidiary, and the cash flow generated by that
company would no longer be available to us.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations, that we will realize currently anticipated cost
savings and operating improvements on schedule or at all or that future
borrowings will be available to us under the Credit Agreement in an amount
sufficient to enable us to pay our debt, including the series D senior notes,
or to fund our other liquidity needs. To the extent that cash flow from
operations is insufficient to cover our fixed charges and fund our capital
expenditure requirements, we, in order to pay such expenses, may obtain funds
from additional borrowings, if permitted, sell a portion of our business or
other assets, engage in sale/leaseback transactions, raise additional equity
capital and/or acquire other businesses that would provide additional positive
cash flow. We cannot assure you as to the availability or accessibility of
these or other similar transactions, or that these or other similar
transactions could be accomplished on terms favorable to us. We cannot assure
you that we will be able to refinance any of our indebtedness, including our
Credit Agreement and the series D senior notes, on commercially reasonable
terms or at all.
RANKING--YOUR RIGHT TO RECEIVE PAYMENTS ON THE SERIES D SENIOR NOTES IS
EFFECTIVELY JUNIOR TO SOME OF OUR EXISTING INDEBTEDNESS AND POSSIBLY ALL OF OUR
FUTURE BORROWINGS.
The series D senior notes effectively rank behind all of our secured
indebtedness, to the extent of the assets which secure such indebtedness, and
all of the indebtedness of our subsidiaries, including future borrowings under
the Credit Agreement. As a result, upon any distribution to our creditors or
the creditors of our subsidiaries in a bankruptcy, liquidation or
reorganization or similar proceeding relating to us, our subsidiaries or our
respective property, the holders of our secured debt and any creditors of our
subsidiaries will be entitled to be paid in full in cash before any payment may
be made with respect to the series D senior notes.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us, our subsidiaries or our respective properties,
holders of the series D senior notes will participate with trade creditors of
the parent company and all other holders of our senior unsecured indebtedness
in the assets remaining. In any of these cases, we may not have sufficient
funds to pay all of our creditors, and holders of the series D senior notes may
receive less, ratably, than the holders of secured debt. At December 31, 1998,
on a pro forma basis, the aggregate amount of indebtedness of the Restricted
Group would have been approximately $443.0 million, and the aggregate amount of
indebtedness of the Nonrestricted Group would have been approximately $722.3
million.
RESTRICTIVE COVENANTS--THE RESTRICTIVE COVENANTS CONTAINED IN OUR CREDIT
AGREEMENT, THE INDENTURE AND INDENTURES COVERING OUR OTHER DEBT SECURITIES MAY
LIMIT OUR ABILITY TO REPAY THE SERIES D SENIOR NOTES.
The Credit Agreement contains restrictive covenants and prohibits us and
our subsidiaries from prepaying other indebtedness, including the series D
senior notes. The Credit Agreement also requires
12
<PAGE>
us to maintain specified financial ratios and satisfy certain financial
condition tests. Our ability to meet those financial ratios and tests can be
affected by events beyond our control, and there can be no assurance that we
will meet those ratios and tests. A breach of any of these covenants could
result in a default under the Credit Agreement, the Indenture and/or indentures
with respect to our other debt securities. Upon the occurrence of an event of
default under the Credit Agreement, the lenders thereunder could elect to
declare all amounts outstanding under the Credit Agreement, together with
accrued interest, to be immediately due and payable. If we were unable to repay
those amounts, such lenders could proceed against the collateral granted to
them to secure that indebtedness. If the indebtedness under the Credit
Agreement were to be accelerated, there can be no assurance that our assets
would be sufficient to repay in full all of our indebtedness, including the
series D senior notes. The indebtedness of JII, Inc., our wholly-owned
subsidiary and the borrower under the Credit Agreement, is secured by a pledge
of substantially all of the assets of, and is guaranteed by, the Restricted
Group. See "Description of Certain Indebtedness--Credit Agreement" and
"Description of the Senior Notes."
HOLDERS OF SERIES C SENIOR NOTES THAT FAIL TO EXCHANGE THEIR NOTES MAY BE
UNABLE TO RESELL THEIR NOTES.
We did not register the series C senior notes under the federal or any
state securities laws, nor do we intend to register them following the exchange
offer. As a result, the series C senior notes may only be transferred in
limited circumstances under the securities laws. If the holders of series C
senior notes do not exchange their notes in the exchange offer, they lose their
right to have the series C senior notes registered under the federal securities
laws, subject to certain limitations. As a result, a holder of series C senior
notes after the exchange offer may be unable to sell their notes.
Your series C senior notes will not be accepted for exchange if you fail
to follow the exchange offer procedures.
The series D senior notes will be issued to you in exchange for your
Series C senior notes only after timely receipt by the exchange agent of:
o your series C senior notes; and
o either:
o a properly completed and executed Letter of Transmittal and all other
required documentation; or
o a book-entry delivery by transmittal of an agent's message through
The Depository Trust Company.
If you want to tender your series C senior notes in exchange for series D
senior notes, you should allow sufficient time to ensure timely delivery.
None of the exchange agent nor the issuer or any of its affiliates are
under any duty to give you notification of defects or irregularities with
respect to tenders of series C senior notes for exchange. series C senior notes
that are not tendered or are tendered but not accepted will, following the
exchange offer, continue to be subject to their existing transfer restrictions.
In addition, if you tender your series C senior notes in the exchange offer to
participate in a distribution of the series C senior notes, you will be
required to comply with the registration and prospectus delivery requirements
of the federal securities laws in connection with any resale transaction. For
additional information, please refer to "The Exchange Offer" and "Plan of
Distribution" sections of this prospectus.
STRUCTURE--OUR HOLDING COMPANY STRUCTURE MAKES US DEPENDENT ON THE EARNINGS OF
OUR SUBSIDIARIES AND THE DISTRIBUTIONS OF THOSE EARNINGS IN ORDER TO MEET OUR
DEBT SERVICE AND OTHER OBLIGATIONS. THE TERMS OF OUR OTHER INDEBTEDNESS MAY
LIMIT OUR ACCESS TO CASH FLOW OF OUR SUBSIDIARIES. IN ADDITION, THE SERIES D
SENIOR NOTES ARE NOT GUARANTEED BY OUR SUBSIDIARIES.
We are structured as a holding company which owns the Restricted Group
companies. Our current operations are conducted exclusively through our
subsidiaries, and our only significant assets
13
<PAGE>
are the capital stock of our subsidiaries. As a holding company, we are
dependent on dividends or other intercompany transfers of funds from our
subsidiaries to meet our debt service and other obligations. The series D
senior notes will be our obligations exclusively and will not be guaranteed by
any of our subsidiaries. Each subsidiary's management is given broad discretion
in conducting the day-to-day operations of such subsidiary, and the performance
of the subsidiaries is largely dependent upon their individual efforts.
Consequently, our cash flow and ability to service our debt, including the
series D senior notes, are dependent upon the earnings of our subsidiaries and
the distribution of those earnings to us, or upon loans, advances or other
payments made by our subsidiaries to us. Furthermore, the terms of our
permitted indebtedness and other agreements and those of our Restricted Group
may limit the ability of our subsidiaries to pay dividends to us. See
"Description of the Senior Notes--Certain Covenants."
CONSEQUENCES OF SUBSIDIARY DECONSOLIDATION--OUR CONSOLIDATION OF
TELECOMMUNICATION PRODUCTS, SPECIALTY PLASTICS AND MOTORS AND GEARS FOR
FINANCIAL REPORTING PURPOSES MAY NOT CONTINUE IN THE FUTURE. IN ADDITION, OUR
CONSOLIDATION OF TELECOMMUNICATION PRODUCTS AND MOTORS AND GEARS FOR TAX
PURPOSES MAY NOT CONTINUE IN THE FUTURE, WHICH COULD RESULT IN A SUBSTANTIAL
TAX LIABILITY.
Our ownership interest in Telecommunication Products, Specialty Plastics
and Motors and Gears is represented solely by the Telecommunication Products
junior preferred stock, the Specialty Plastics cumulative preferred stock and
the Motors and Gears cumulative preferred stock, respectively. The common stock
of those entities is held by our stockholders and affiliates and management of
the respective companies. So long as we hold the JTP junior preferred stock,
the JSP junior preferred stock and the M&G junior preferred stock, we expect to
continue to consolidate Telecommunication Products, Specialty Plastics and
Motors and Gears for financial reporting purposes as our subsidiaries. This
financial consolidation and any continuing investment by us in
Telecommunication Products, Specialty Plastics or Motors and Gears will be
discontinued upon the redemption of the JTP junior preferred stock, the JSP
junior preferred stock or the M&G junior preferred stock, as the case may be,
or at such time as the JTP junior preferred stock, JSP junior preferred stock
or M&G junior preferred stock ceases to represent at least a majority of the
voting power and a majority share in the earnings of the relevant company. As
long as the junior preferred stock is outstanding, we expect the vote test to
be satisfied as to each subsidiary. Until March 31, 2002 for Motors and Gears,
August 1, 2002 for Telecommunication Products and March 31, 2003 for Specialty
Plastics, when we discontinue our participation in the earnings of the
companies, so long as the junior preferred stock of those entities is
outstanding, we expect the earnings test to be satisfied as to each subsidiary.
The JTP junior preferred stock, the JSP junior preferred stock and the M&G
junior preferred stock are each mandatorily redeemable upon certain events and
are redeemable at the option of each company, in whole or in part, at any time.
We also expect to include Telecommunication Products and Motors and Gears
in our consolidated group for Federal income tax purposes. This consolidation
would be discontinued as to Telecommunication Products or Motors and Gears upon
the redemption of the junior preferred stock of each company, as applicable,
which could in turn trigger our recognition of substantial income tax
liabilities which were deferred in connection with previous recapitalizations.
If such deconsolidation had occurred at December 31, 1998, we believe that the
amount of taxable income to us resulting from the deconsolidation of
Telecommunication Products would have been approximately $110.4 million (or
approximately $44.2 million of tax liabilities, assuming a 40% combined
Federal, state and local income tax rate), and the amount of taxable income to
us resulting from the deconsolidation of Motors and Gears would have been
approximately $51.2 million (or approximately $20.5 million of tax liabilities,
assuming a 40% combined Federal, state and local income tax rate). We currently
expect to offset these tax liabilities arising from deconsolidation by using
net loss carry-forwards (approximately $131.6 million at December 31, 1998),
and to pay any remaining liability with redemption proceeds from the respective
junior preferred stock of each company; however, there can be no assurance that
at the time of deconsolidation we would have enough net loss carry-forwards or
redemption proceeds from junior preferred stock to offset the tax liabilities.
Deconsolidation would also occur with respect to each of these companies if the
junior preferred stock
14
<PAGE>
issued by such company ceased to represent at least 80% of the voting power and
80% of the stock value of the outstanding junior preferred stock and common
stock combined of such company. As long as the junior preferred stock of each
company is outstanding, we expect the vote test to be satisfied with respect to
such company. The value test depends on the relative values of the junior
preferred stock and common stock of each company, as applicable. It is likely
that by March 31, 2002 for Motors and Gears and August 1, 2002 for
Telecommunication Products the junior preferred stock of each company would
cease to represent 80% of the relevant total combined stock value of such
company. It is entirely possible, however, that the 80% value test could fail
well prior to these dates. In the event that deconsolidation occurs without a
redemption of the junior preferred stock, the tax liabilities discussed above
would be incurred without us receiving the proceeds of a redemption. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--General," "Certain Transactions" and "Description of Capital
Stock--Subsidiary Securities."
ACQUISITION AND REORGANIZATION STRATEGIES--WE MAY NOT BE ABLE TO IMPLEMENT OUR
BUSINESS STRATEGY IF MARKET CONDITIONS, FINANCING ALTERNATIVES AND OTHER
FACTORS ARE NOT CONDUCIVE TO THE STRATEGY.
Our business strategy is to enhance the growth and profitability of each
business unit, and to build upon the strengths of those units through product
line and other strategic acquisitions. Key elements of this strategy have been
the consolidation and reorganization of acquired businesses, increased focus on
international markets, facilities expansion and the acquisition of
complementary product lines. When, through such activities, we believe that
critical mass is attained in a particular industry segment, the related
companies are organized as a discrete business unit.
We are currently exploring a broad range of alternatives in connection
with recapitalizing, refinancing and extending the cash payment obligations and
maturities of our indebtedness, which may include selling, financing,
recapitalizing, reclassifying, spinning-off or similar transactions involving
our subsidiaries and involving third party, Company or affiliate, investors or
purchasers. In structuring these transactions, we believe that some of our
subsidiaries may strategically and financially benefit from being partly or
wholly separated from us on a stand-alone, industry-focused basis. The timing
and our determination of 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. We are also constantly exploring, reviewing, discussing and
negotiating acquisition and divestiture opportunities, which may, from time to
time, result in understandings, letters of intent or agreements. There can be
no assurances as to the timing or our determination or ability to proceed with
or close such recapitalization, refinancing, extension, acquisitions,
divestitures or transactions. See "Risk Factors--Consequences of Subsidiary
Deconsolidation," "1997 Recapitalization and Repositioning Plan," "Certain
Transactions" and "Description of Capital Stock--Subsidiary Securities."
FINANCING CHANGE OF CONTROL OFFER--WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURE.
Upon the occurrence of specific kinds of change of control events, we will
be required to offer to repurchase all outstanding series D senior notes.
However, it is possible that we will not have sufficient funds at the time of
the change of control to make the required repurchase of series D senior notes
or that restrictions in the Credit Agreement will not allow such repurchases.
In addition, certain important corporate events, such as a leveraged
recapitalization that would increase the level of our indebtedness, would not
constitute a "change of control" under the Indenture. See "Description of the
Senior Notes--Mandatory Offers to Purchase Senior Notes."
Prepayment of the series D senior notes pursuant to a change of control
event would constitute a default under the Credit Agreement. In the event that
a change of control occurs, we will likely be required to refinance the
indebtedness outstanding under the Credit Agreement and the series D senior
notes. There can be no assurance that we would be able to refinance such
indebtedness or, if such refinancing were to occur, that such refinancing would
be on terms favorable to us. See "Description of the Senior Notes--Mandatory
Offers to Purchase Senior Notes."
15
<PAGE>
The change of control purchase feature of the series D senior notes may in
certain circumstances discourage or make more difficult our sale or takeover
and, thus, the removal of incumbent management.
DEPENDENCE ON MANAGEMENT--OUR SUCCESS IS SIGNIFICANTLY TIED TO THE CONTINUED
SERVICES OF CERTAIN OF OUR OFFICERS AND OTHER KEY PERSONNEL.
Our success depends, in part, upon the continued services of Thomas H.
Quinn, our president and chief operating officer, and certain other key
personnel. Although incentives exist for these individuals to remain with us,
the loss of the services of any one of them could have a material adverse
effect on our business. We maintain a $5.0 million "key man" insurance policy
on Mr. Quinn under which we are the beneficiary. We are also dependent upon
John W. Jordan II, our chairman and chief executive officer and one of our
principal stockholders, and certain of his affiliates, for strategic planning
and advice, the loss of which could have a material adverse effect on our
business. See "Management."
PRIVATE OWNERSHIP--OUR STOCK IS LARGELY OWNED BY PRINCIPALS, PARTNERS,
OFFICERS, EMPLOYEES AND AFFILIATES OF THE JORDAN COMPANY, AND WE PARTICIPATE IN
AFFILIATE TRANSACTIONS WITH JORDAN-RELATED ENTITIES ON A REGULAR BASIS.
The principals, partners, officers, employees and affiliates of The Jordan
Company and their respective family members (collectively, the "Jordan Group")
own substantially all of our common stock. Although our Articles of
Incorporation provide for cumulative voting of common stock in the election of
directors, these stockholders collectively have sufficient votes to elect all
of our directors and control our management policy and financing decisions. We
have paid and will continue to pay advisory fees to TJC Management Corporation,
an affiliate of ours and The Jordan Company, and to pay financial consulting
fees to TJC Management Corporation, including financial consulting fees in
connection with the Offering. The Jordan Company is not obligated to provide us
with any acquisition opportunities, and there may be conflicts of interest in
allocating various investment or acquisition opportunities among us, The Jordan
Company and the Jordan Group. Further, certain of our subsidiaries have entered
into a number of affiliate transactions with us and The Jordan Company,
including the TJC Management Consulting Agreement, the Subsidiary Advisory
Agreements, the Subsidiary Consulting Agreements, the JI Properties Services
Agreement and the Tax Sharing Agreement and certain other agreements and
transactions. See "Certain Transactions."
PREFERRED STOCK OWNERSHIP OF CERTAIN SUBSIDIARIES--THE OWNERS OF THE COMMON
STOCK OF SOME OF OUR SUBSIDIARIES MAY HAVE INTERESTS THAT CONFLICT WITH OUR
OWN.
Our ownership in Telecommunication Products, Specialty Plastics and Motors
and Gears consists of ownership of junior preferred stock. The common stock of
Telecommunication Products, Specialty Plastics and Motors and Gears is owned by
members of the Jordan Group and other affiliates of the Company and management
of the respective companies. As a matter of corporate law, the directors and
majority stockholders of Telecommunication Products, Specialty Plastics and
Motors and Gears will owe fiduciary and other duties to the minority common
stockholders of Telecommunication Products, Specialty Plastics and Motors and
Gears, which may conflict with our interests.
ORIGINAL ISSUE DISCOUNT--THE SERIES D SENIOR NOTES WILL HAVE ORIGINAL ISSUE
DISCOUNT.
The series C senior notes were issued with original issue discount for
United States federal income tax purposes and thus the series D senior notes
will also have original issued discount for United States federal income tax
purposes. Please read "Certain United States Federal Income Tax
Considerations--Tax Consequences of Issuance at a Discount." Holders of the
series D senior notes will be required to include amounts in gross income for
United States federal income tax purposes before they receive the cash payments
to which the income relates.
If a bankruptcy case were commenced by or against us under the Bankruptcy
Code of 1978 (the "Bankruptcy Code") after the issuance of the series D senior
notes, the claim of a holder with respect
16
<PAGE>
to the principal amount thereof may be limited to the initial offering price
plus that portion of the original issue discount that is not deemed to
constitute "unmatured interest" for purposes of the Bankruptcy Code. Any
original issue discount that was not amortized as of the date of any such
bankruptcy filing would constitute "unmatured interest."
FRAUDULENT CONVEYANCE MATTERS--FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER
SPECIFIC CIRCUMSTANCES, TO VOID CERTAIN OBLIGATIONS AND/OR SUBORDINATE CERTAIN
OBLIGATIONS, SUCH AS THE SERIES D SENIOR NOTES, TO OTHER INDEBTEDNESS.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a court could void all or a portion of our
obligations under the series D senior notes or subordinate our obligations
under the series D senior notes to other existing, and future indebtedness if,
among other things, we, at the time we incurred the indebtedness evidenced by
the series D senior notes:
o received less than reasonably equivalent value or fair consideration
for the incurrence of such indebtedness;
o were insolvent or rendered insolvent by reason of such incurrence;
o were engaged in a business or transaction for which our remaining
assets constituted unreasonably small capital; or
o intended to incur, or believed that we would incur, debts beyond our
ability to pay such debts as they mature.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a debtor would be
considered insolvent if:
o the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets, or
o if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become
absolute and mature, or
o it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, we believe that we will not be insolvent, will not have
unreasonably small capital for the business in which we are engaged and will
not have incurred debts beyond our ability to pay such debts as they mature.
There can be no assurance, however, as to what standard a court would apply in
making such determinations or that a court would agree with our conclusions in
this regard.
FAILURE BY US OR CERTAIN THIRD PARTIES TO BE YEAR 2000 COMPLIANT POSES CERTAIN
RISKS
The inability of business processes to continue to function correctly
after the beginning of the Year 2000 could have serious adverse effects on
companies and entities throughout the world. Our business operations are also
dependent on the Year 2000 readiness of our customers and infrastructure
suppliers in areas such as utilities, communications, transportation and other
services.
We commissioned a review of our subsidiaries to determine their Year 2000
readiness. The results of the review indicated that less than half of the
subsidiaries surveyed had a formal Year 2000 readiness plan or contingency plan
for mission critical inventory items and business partners who may have Year
2000 issues. As a result of the review, we developed a Year 2000 plan for us
and our subsidiaries. We cannot assure you that our Year 2000 plan will be
effective, that our estimates about the timing and cost of completing our plan
will be accurate or that our third party suppliers will timely resolve any or
all Year 2000 problems with their systems. Any failure of the third party
suppliers or us to timely resolve Year 2000 issues could result in a material
disruption of our business. Such a disruption could have a material adverse
effect on our business, financial condition and results of operations. Please
read "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Year 2000."
17
<PAGE>
WE FACE ENVIRONMENTAL REGULATION OF OUR REAL ESTATE AND OPERATIONS
Our businesses are subject to a variety of federal, state and local
governmental regulations relating to the use, storage, discharge, emission and
disposal of hazardous substances and wastes, remediation of contamination
associated with releases of hazardous substances at our facilities and at
off-site disposal locations, and worker health and safety. These regulations
are complex, change frequently and have tended to become more stringent over
time.
Based on our experience to date, we believe that the future cost of
compliance with existing environmental regulations and the future cost of
necessary investigation or remediation of contamination will not have a
material adverse effect on our business, financial conditions and results of
operations. Nevertheless, future events, such as discovery of unknown
contamination, compliance with more stringent regulations, or more vigorous
enforcement policies by regulatory agencies or stricter or different
interpretations of existing regulations could require us to make material
expenditures. Please read "Business--Environmental Regulations."
INTERNATIONAL OPERATIONS--THERE ARE NUMEROUS RISKS ASSOCIATED WITH CONDUCTING
OPERATIONS IN INTERNATIONAL MARKETS.
Our subsidiaries manufacture and assemble products at numerous facilities,
some of which are outside the United States. Although we have not experienced
significant problems conducting operations in these areas, changes in local
economic or political conditions could impact our manufacturing, assembly and
distribution capabilities and have a material adverse effect on our business,
financial condition and results of operations. Additional risks inherent in our
international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, changes in local
economic or political conditions, longer accounts receivable payment cycles,
difficulties in managing international operations, potentially adverse tax
consequences, restrictions on repatriation of earnings and the burdens of
complying with a wide variety of foreign laws. In 1998, the Restricted Group
derived less than 1% of its pro forma net sales from customers outside the
United States; however, the Company as a whole derived approximately 12% of its
pro forma net sales from customers outside the United States in 1998. We intend
to continue to expand our operations outside the United States and to enter
additional international markets.
Most of our international sales are currently denominated in foreign
currencies. Decreases in the value of foreign currencies relative to the U.S.
dollar could result in losses from foreign currency translations. We do not
currently hedge our foreign exchange exposure. With respect to our sales that
are U.S. dollar-denominated, decreases in the value of foreign currencies
relative to the U.S. dollar could make our products less price competitive.
COMPETITION--OUR SUBSIDIARIES OPERATE IN HIGHLY COMPETITIVE BUSINESS SECTORS
AND COMPETE WITH MANY LARGER AND BETTER CAPITALIZED COMPANIES.
Generally, our subsidiaries are subject to competition from a substantial
number of national, international and regional competitors, many of which have
greater financial, manufacturing, engineering and other resources than our
subsidiaries. Many of these competitors can be expected to continue to improve
the design and performance of their products and to introduce new products with
competitive price and performance characteristics. Although we believe that our
subsidiaries have certain advantages over their competitors, realizing and
maintaining such advantages will require continued investment by our
subsidiaries in manufacturing, research and development, quality standards,
marketing and customer service and support. There can be no assurance that our
subsidiaries will have sufficient resources to continue to make such
investments or that they will be successful in maintaining such advantages.
Failure to make such investments or to maintain such advantages could have a
material adverse effect on our business, financial condition and results of
operations. Except for SILICORE polymer pipe products, certain cable television
components and fiber optic connector technology in Telecommunication Products,
our subsidiaries' products are generally not protected by any proprietary
rights such as patents.
18
<PAGE>
PRICE FLUCTUATIONS OF RAW MATERIALS--AN INCREASE IN THE PRICE OF RAW MATERIALS
COULD ADVERSELY AFFECT OUR SUBSIDIARIES.
Our subsidiaries purchase most of the raw materials for their products on
the open market, and our subsidiaries' sales may be affected by changes in the
market price of such raw materials. We do not generally engage in commodity
hedging transactions for raw materials. Although our subsidiaries have
generally been able to pass on increases in the price of raw materials to their
customers, there have been delays in the subsidiaries' ability to pass on such
increases in the past and there can be no assurance that they will be able to
do so in the future on a timely basis or at all. The results of operations for
our subsidiary, Dura-Line, have in the past been affected by fluctuations in
the price of its primary raw material, high density polyethylene. Other
subsidiaries have been affected by the fluctuations in the prices of copper and
paper. Additionally, significant increases in the price of our subsidiaries'
products due to increases in the cost of raw materials could have a negative
effect on demand for their respective products and a material adverse effect on
our business, financial condition and results of operations.
NO PRIOR MARKET FOR THE SERIES D SENIOR NOTES--YOU CANNOT BE SURE THAT AN
ACTIVE TRADING MARKET WILL DEVELOP FOR THE SERIES D SENIOR NOTES.
The series D senior notes are being offered to holders of the series C
senior notes. The series C senior notes were issued to a small number of
institutional investors and the series C senior notes are eligible for trading
in the Private Offering, Resale and Trading through Automated Linkage (PORTAL)
Market, the National Association of Securities Dealers' screenbased, automated
market for trading of securities eligible for resale under Rule 144A. The
series D senior notes are new securities for which there currently is not
market. We have been informed by the Initial Purchasers that they intend to
make a market in the series D senior notes. However, the Initial Purchasers may
cease their market-making at any time. In addition, the liquidity of the
trading market in the series D senior notes, and the market price quoted for
the series D senior notes, may be adversely affected by changes in the overall
market for high yield securities and by changes in our financial performance or
prospects or in the prospects for companies in our industry generally. As a
result, you cannot be sure that an active trading market will develop for the
series D senior notes. Depending on prevailing interest rates, the market for
similar securities and other factors, including our financial condition, the
series D senior notes may trade at a discount from their principal amount.
19
<PAGE>
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus.
Forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Forward-looking statements are statements, other than statements of
historical facts, that address activities, events or developments that we
expect or anticipate will or may occur in the future, including such items as
business strategy and measures to implement strategy, competitive strengths,
goals, growth of our business and operations, plans and references to future
success.
Forward-looking statements also include any other statements that include
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend"
and other similar expressions.
Forward-looking statements are based on certain assumptions and analyses
we have made in light of our experience and our perception of historical
trends, current conditions, expected future developments and other factors we
believe are appropriate. Whether actual results and developments will conform
with our expectations and predictions is subject to a number of risks and
uncertainties, including, among others, the following:
o general economic and capital market conditions;
o the cyclical nature of our business;
o foreign currency movements;
o our access to credit and our customers' access to credit;
o political uncertainty and civil unrest in various areas of the world;
o pricing;
o product initiatives and other actions taken by competitors;
o disruptions in production capacity;
o excess inventory levels;
o the effect of changes in laws and regulations (including government
subsidies and international trade regulations);
o changes in environmental laws; and
o employee relations.
All of the forward-looking statements made in this prospectus are
qualified by these cautionary statements, and there can be no assurance that
the actual results or developments we have anticipated will be realized. Even
if the results and developments in our forward-looking statements are
substantially realized, there is no assurance that they will have the expected
consequences to or effects on us or our business or operations.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the series D
senior notes. The net proceeds from the sale of the series C senior notes were
approximately $149.8 million. We used these net proceeds to
(1) acquire Alma Products for approximately $84.1 million,
(2) repay approximately $52.0 million in existing indebtedness and
(3) pay approximately $13.7 million in fees and expenses incurred in
connection with the offering of the series C senior notes and the related
transactions.
20
<PAGE>
CAPITALIZATION
The following table sets forth the (1) historical consolidated
capitalization of the Company as of December 31, 1998 and (2) (a) the pro forma
consolidated capitalization of the Company as of December 31, 1998 and (b) the
pro forma consolidated capitalization of the Restricted Group as of December
31, 1998, both after giving effect to the offering of the series C senior notes
and certain other transactions as set forth in the Unaudited Pro Forma
Financial Information and the related notes. The table should be read in
conjunction with the historical consolidated financial statements of the
Company and related notes and the Unaudited Pro Forma Financial Information of
the Company and related notes included elsewhere in this prospectus. See "Use
of Proceeds," "Selected Financial Data," "Description of Certain Indebtedness"
and "Unaudited Pro Forma Financial Information."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-------------------------------------------
PRO FORMA
----------------------------
CONSOLIDATED RESTRICTED
ACTUAL COMPANY GROUP
------------ -------------- -----------
(Dollars in millions)
<S> <C> <C> <C>
Cash and cash equivalents ................................... $ 23.0 $ 25.0 $ 8.9
========= ========= ========
Current portion of long-term obligations .................... $ 6.1 $ 6.1 $ 1.8
Long-term obligations (less current portion):
Credit Agreements (1):
Credit Agreement .......................................... $ 50.0 $ -- $ --
JTP Credit Agreement ...................................... 73.0 73.0 --
M&G Credit Agreement ...................................... 41.0 41.0 --
Debt Securities (2):
Series C senior notes ..................................... -- 149.8 149.8
Series B senior notes ..................................... 120.0 120.0 120.0
Discount Debentures (3) ................................... 147.7 147.7 147.7
Telecommunication Products senior notes ................... 188.7 188.7 --
Telecommunication Products discount
debentures (3) ........................................... 100.1 100.1 --
Motors and Gears senior notes ............................. 274.0 274.0 --
Seller promissory notes (4) ................................ 33.3 33.3 15.4
Capital leases and other debt (5) .......................... 31.6 31.6 8.3
--------- --------- --------
Total long-term debt (less current portion) ................ 1,059.4 1,159.2 441.2
Redeemable preferred stock (6):
Telecommunication Products senior
preferred stock ........................................... 23.9 23.9 --
Motors and Gears senior preferred stock .................... 1.7 1.7 --
--------- --------- --------
Total redeemable senior preferred stock .................. 25.6 25.6 --
Total shareholders' equity (net capital deficiency) ......... (208.1) (208.1) (8.6)
--------- --------- --------
Total capitalization .................................... $ 876.9 $ 976.7 $ 432.6
========= ========= ========
</TABLE>
- ----------
(1) For additional information, see "Description of Certain
Indebtedness--Credit Agreements."
(2) For additional information, see "Description of Certain Indebtedness."
(3) The amounts shown represent accreted value at the date shown.
(4) For additional information, see "Description of Certain
Indebtedness--Seller Promissory Notes."
(5) For additional information, see "Description of Certain
Indebtedness--Capital Leases."
(6) For additional information, see "Description of Capital Stock--Subsidiary
Securities."
21
<PAGE>
SELECTED FINANCIAL DATA
The following table presents summary historical financial data of the
Company as of and for the years ended December 31, 1994, 1995, 1996, 1997 and
1998. The historical financial data of the Company as of and for the years
ended December 31, 1994, 1995, 1996, 1997 and 1998 were derived from the
audited consolidated financial statements of the Company. The financial data
set forth below should be read in conjunction with the historical consolidated
financial statements of the Company and the related notes, "Selected Financial
Data," "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and "Unaudited Pro Forma Financial Information," all
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
CONSOLIDATED
-------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (1)
Net sales ........................................... $424,391 $ 507,311 $ 601,567 $ 707,112 $ 943,607
Cost of sales, excluding depreciation ............... 262,730 320,653 375,745 446,580 601,385
Gross profit, excluding depreciation ................ 161,661 186,658 225,822 260,532 342,222
Selling, general and administrative
expenses, excluding depreciation ................... 97,428 121,371 150,951 148,921 193,426
Depreciation and amortization ....................... 19,099 21,684 30,438 35,321 45,047
Operating income .................................... 42,944 32,360 13,392 55,444 91,696
Interest expense .................................... 40,887 46,974 63,340 82,455 109,705
Interest (income) ................................... (1,471) (2,841) (2,538) (2,713) (2,178)
(Loss) income before income taxes, minority interest,
extraordinary items and equity in investee ......... 27,689 (11,773) (47,410) (6,173) (22,550)
(Loss) income before extraordinary items ............ 23,741 (7,470) (51,884) (14,260) (31,407)
OTHER FINANCIAL DATA: (1)
Adjusted operating income (2) ....................... $ 35,868 $ 42,426 $ 29,367 $ 56,551 $ 91,696
Capital expenditures ................................ 12,112 15,276 17,395 14,179 21,477
Ratio of earnings to fixed
charges (3) ........................................ 1.6x -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED
----------------------------------------------------------------
AS OF DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (1)
Cash and cash equivalents ............................. $ 56,386 $ 41,253 $ 32,797 $ 52,500 $ 23,008
Working capital ....................................... 123,395 115,387 123,479 176,508 189,065
Total assets .......................................... 398,474 532,384 681,885 930,231 1,043,888
Total debt ............................................ 382,862 525,395 696,688 931,418 1,065,555
Preferred stock ....................................... 1,875 1,875 1,875 21,835 25,649
Shareholders' equity (net capital deficiency) ......... (68,742) (76,354) (130,281) (175,285) (208,144)
</TABLE>
- ----------
(1) We have acquired a diverse group of operating companies over the periods
presented, which significantly affects the comparability of the
information presented. Please read "Management's Discussion and Analysis
of Results of Operations and Financial Condition." Results shown include
both the Restricted Group and the Nonrestricted Group.
(2) Adjusted operating income represents operating income excluding the
results of Welcome Home, which is no longer consolidated with the
Company.
(3) On a historical basis, earnings were insufficient to cover fixed charges
by $11.8 million, $47.4 million, $6.2 million, and $22.6 million for the
years ended December 31, 1995, 1996, 1997 and 1998.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
GENERAL
Jordan Industries was organized to acquire and operate a diverse group of
businesses on a decentralized basis, with a corporate staff providing strategic
direction and support. We comprise 30 businesses, which are divided into five
strategic business units: Consumer and Industrial Products, Specialty Printing
and Labeling, Specialty Plastics, Telecommunication Products and Motors and
Gears. We believe that our businesses are characterized by leading positions in
niche industries, high operating margins, strong management, minimal working
capital and capital expenditure requirements, and low sensitivity to
technological change and economic cycles. For the year ended December 31, 1998,
we generated combined pro forma net sales of $1,024.2 million.
Our business strategy is to enhance the growth and profitability of each
business group, and to build upon the strengths of those groups through product
line and other strategic acquisitions. Key elements of this strategy have been
the acquisition and growth of related businesses, increased focus on
international markets, facilities expansion and the acquisition of
complementary product lines. When, through such activities, we believe that
critical mass is attained in a particular industry segment, the related
companies are organized as a discreet business group. For example, we acquired
Imperial in 1988 and made a series of complementary acquisitions, which
resulted in the formation of Motors and Gears, a leading domestic manufacturer
of electric motors, gears and motion control systems. Similarly, we acquired
Dura-Line in 1985, and expanded its presence in the telecommunications industry
through 11 complementary acquisitions. The organization of these companies as
Telecommunication Products created a leading global supplier of products and
equipment serving the telecommunications industry. We acquired Alma Products in
order to expand our presence in the automotive aftermarket industry.
Through the implementation of this strategy, we have demonstrated
significant and consistent growth in net sales. We generated consolidated net
sales of $943.6 million for the year ended December 31, 1998 as compared to
$358.6 million for the year ended December 31, 1993, representing a compound
annual growth rate of 21.3%.
Our subsidiaries are operated and managed on a decentralized basis. As a
result, our net sales and gross profit generally equal the sum of the financial
results generated by our subsidiaries. Our general and administrative expense
equals the administrative expense generated at each of our subsidiaries plus
corporate overhead. The purpose of the corporate administrative staff is to
provide strategic, financial and business support, which has enhanced the
ability of our subsidiaries to grow beyond their historical means.
The results of each of our strategic business units are consolidated into
our financial results. Consumer and Industrial Products, Specialty Printing and
Labeling and Specialty Plastics, together with the parent company which
maintains no operations, comprise the Restricted Group. Telecommunication
Products and Motor and Gears comprise the Nonrestricted Group. The common stock
of Telecommunication Products, Motors and Gears and Specialty Plastics is owned
by stockholders and affiliates of Jordan Industries and management of the
respective companies. Our ownership in these subsidiaries is in the form of JTP
junior preferred stock, M&G junior preferred stock and JSP junior preferred
stock. See "Risk Factors--Consequences of Subsidiary Deconsolidation," "Certain
Transactions" and "Description of Capital Stock--Subsidiary Securities."
RESULTS OF OPERATIONS
Summarized below are the historical net sales, operating income (loss) and
operating margin (deficit) for each of our business groups for the fiscal years
ended December 31, 1996, 1997 and 1998. This discussion should be read in
conjunction with the historical consolidated financial statements and the
related notes appearing elsewhere in this prospectus.
23
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997(2) 1998
----------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
NET SALES (1):
Consumer and Industrial Products ......... $ 140,842 $155,593 $ 166,018
Specialty Printing and Labeling .......... 109,587 119,346 120,160
Specialty Plastics ....................... 20,120 24,038 71,568
Telecommunication Products ............... 131,592 257,010 310,028
Motors and Gears ......................... 117,571 148,669 275,833
Welcome Home ............................. 81,855 2,456 --
--------- -------- ---------
Total ................................... $ 601,567 $707,112 $ 943,607
========= ======== =========
OPERATING INCOME (LOSS) (1)(3):
Consumer and Industrial Products ......... $ 13,222 $ 16,012 $ 17,105
Specialty Printing and Labeling .......... 5,540 8,540 8,259
Specialty Plastics ....................... (592) 2,490 4,654
Telecommunication Products ............... 13,828 13,258 30,791
Motors and Gears ......................... 23,229 27,684 42,324
--------- -------- ---------
Adjusted operating income ................ 55,227 67,984 103,133
Welcome Home ............................. (15,975) (1,107) --
--------- -------- ---------
Total ................................... $ 39,252 $ 66,877 $ 103,133
========= ======== =========
OPERATING MARGIN (DEFICIT):
Consumer and Industrial Products ......... 9.4% 10.3% 10.3%
Specialty Printing and Labeling .......... 5.1 7.2 6.9
Specialty Plastics ....................... (2.9) 10.4 6.5
Telecommunication Products ............... 10.5 5.2 9.9
Motors and Gears ......................... 19.8 18.6 15.3
Welcome Home ............................. (19.5) (45.1) --
Combined ................................. 6.5 9.5 10.9
</TABLE>
- ----------
(1) In 1998, Sate-Lite and Beemak were reclassified from Consumer and
Industrial Products to Speciality Plastics. Prior period results were
restated to reflect the reclassification in order to provide accurate
comparisons between periods.
(2) Incudes the results of Welcome Home for the period from January 1, 1997
to January 21, 1997, the date of its Chapter 11 filing. See Note 3 to the
Company's financial statements.
(3) Before corporate overhead of $11,437 and $11,433, for the years ended
December 31, 1998 and 1997, respectively. The Telecommunication Products
operating income includes expense of $15,871 related to compensation
agreements in 1997. The operating income for the year ended December 31,
1996 is before corporate overhead of $17,500, the write-off of $4,488 in
notes receivable resulting from the Cape Craftsmen acquisition and the
charge of $3,872 for a compensation agreement. Telecommunication
Products' operating income includes the AIM and Cambridge SARA expense of
$3,411 for the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Consolidated Operating Results. Net sales increased $236.5 or 33.5% and
operating income increased $36.3 million or 65.4%. The increase in sales was
primarily due to the 1998 acquisitions of Deflecto and Rolite Plastics in
Specialty Plastics, Advanced DC Motors in Motors and Gears, and K&S Sheet Metal
in Telecommunication Products. Sales also increased due to a full year of sales
from the following companies which were acquired in 1997: Arnon-Caine in
Specialty Plastics, Fir, Electrical Design and Control, and Motion Control in
Motors and Gears, Telephone Services, LoDan, and Engineered Endeavors in
Telecommunication Products, and Cho-Pat in Consumer and Industrial Products. In
addition, sales increased due to higher sales of advertising specialty products
and
24
<PAGE>
calendars at Sales Promotion Associates, increased sales of membrane switches
at Valmark, higher sales of warning triangles and colorants at Sate-Lite,
higher sales of sub-fractional motors at Merkle-Korff, increased sales of
fractional/integral motors at Imperial, higher sales of books at Riverside, and
increased sales of wooden furniture at Cape Craftsmen. Partially offsetting
these increases were decreased sales of shielding devices at Valmark, lower
sales of folding boxes at Seaboard, decreased sales of plastic injection-molded
products at Beemak, lower sales of gears and gearboxes at Gear, and lower sales
of aircraft parts at Parsons. In addition, sales decreased due to the
divestiture in 1998 of Diversified in Telecommunication Products and the
divestitures in 1997 of Hudson and Paw Print in Consumer and Industrial
Products.
Operating income increased primarily due to the 1998 acquisitions, a full
year of operations at the companies acquired in 1997, more favorable pricing at
Valmark, decreased corporate expenses in Specialty Printing and Labeling, a
reduction in stock appreciation rights as the Dura-Line stock appreciation
rights was expensed in 1997, and increased sales of higher gross margin product
at Cape Craftsmen. Partially offsetting these increases were decreased
operating income due to the addition of salespeople to promote the advertising
specialty segment at Sales Promotion Associates, increased operating expenses
related to the expansion of Sate-Lite manufacturing into China, higher
depreciation and amortization related to the 1998 and 1997 acquisitions, and
initial expenses incurred to combine the manufacturing and sales and marketing
functions of the Connector companies. In addition, the divestitures of
Diversified, Hudson, and Paw Print reduced operating income. Operating margin
increased 1.9%, from 7.8% in 1997 to 9.7% in 1998 due to the reasons mentioned
above.
Interest expense increased $27.3 million or 33.1% due to our refinancing
in July 1997, the tack-on bond offering at Motors and Gears in December 1997,
and higher outstanding revolver balances in 1998 due to financing of the 1998
acquisitions.
Consumer and Industrial Products. As of December 31, 1998, Consumer and
Industrial Products consisted of Dacco, Riverside, Parsons, Cape Craftsmen,
Cho-Pat and Dura-Line Retube.
Net sales increased $10.4 million or 6.7% and operating income increased
$1.1 million or 6.8%. Net sales increased primarily due to increased sales of
rebuilt converters at Dacco, $4.2 million, higher sales of Bibles, books,
videos, music and gifts at Riverside, $0.5 million, $3.9 million, $0.9 million,
$0.9 million and $0.4 million, respectively, increased sales of wooden
furniture and other accessories at Cape Craftsmen, $9.7 million, higher sales
of orthopedic supports and other pain-reducing devices at Cho-Pat, $1.1
million, and increased sales of plastic pipe at Dura-Line Retube, $3.4 million.
Partially offsetting these increases were decreased sales of audio tapes at
Riverside, $0.5 million, lower sales of aircraft parts at Parsons, $1.9
million, and decreased sales at Hudson and Paw Print, $6.7 million and $5.5
million, respectively, due to the divestitures of those companies in May and
July 1997. Sales increased at Dacco due to additional market share and the
addition of eight retail stores in 1998, and sales increased at Cape Craftsmen
due to management's success at broadening Cape Craftsmen's customer base.
Cho-Pat, which was purchased in September 1997, contributed sales of $0.4
million in 1997 compared to sales of $1.5 million in 1998.
Operating income increased due to higher operating income at Dacco,
Parsons, Cape Craftsmen, Cho-Pat, and Dura-Line Retube, $1.5 million, $0.3
million, $2.5 million, $0.2 million, and $0.3 million, respectively. Partially
offsetting these increases was decreased operating income at Hudson and Paw
Print, $2.2 million and $1.5 million, respectively, due to the divestitures of
those companies, as mentioned above. The increased operating income at Cape
Craftsmen was due to increased sales of higher gross margin product, primarily
wooden furniture, the increased operating income at Cho-Pat was due to the
acquisition of the company in September 1997, and decreased operating income at
Parsons was due to the lower absorption of fixed overhead due to lower sales of
aircraft parts. Operating margin remained consistent with 1997.
Specialty Printing & Labeling. As of December 31, 1998, Specialty Printing
and Labeling consisted of Sales Promotion Associates, Valmark, Pamco, and
Seaboard.
Net sales increased $0.8 million or 0.7% and operating income decreased
$0.3 million or 3.3%. Sales increased primarily due to higher sales of
advertising specialty products and calendars at Sales
25
<PAGE>
Promotion Associates, $1.5 million and $0.2 million, respectively, increased
sales of graphic panel overlays and membrane switches at Valmark, $1.3 million,
and higher sales of labels at Pamco, $0.4 million. Partially offsetting these
increases were lower sales of school annuals at Sales Promotion Associates,
$0.2 million, decreased sales of labels and shielding devices at Valmark, $0.6
million and $1.0 million, respectively, and lower sales of folding boxes at
Seaboard, $0.8 million. The increased advertising specialty sales at Sales
Promotion Associates were due to management's focus on the higher growth
corporate program business, while decreased sales of shielding devices at
Valmark reflect a major customer's decision to reduce production of laptop
computers that require the shields.
Operating income decreased due to lower operating income at Sales
Promotion Associates, Pamco, and Seaboard, $0.1 million, $0.3 million, and $0.7
million, respectively. Partially offsetting these decreases was increased
operating income at Valmark, $0.5 million, and decreased corporate expenses,
$0.3 million. The decreased operating income at Sales Promotion Associates was
due to the hiring of additional salespeople to focus on continued growth in the
corporate program advertising specialty segment, and the lower operating income
at Seaboard was due to pricing pressure in the packaging industry. The improved
operating income at Valmark is due to Valmark negotiating more favorable
pricing with customers, while the decreased corporate expenses are due to lower
bank fees as bank debt was repaid in 1997. Operating margin remained consistent
with 1997.
Specialty Plastics. As of December 31, 1998, Specialty Plastics consisted
on Sate-Lite, Beemak, Deflecto and Rolite.
Net sales increased $47.5 million of 197.7% and operating income increased
$2.2 million or 86.9%. Net sales increased primarily due to the acquisition of
Deflecto and Rolite in February 1998. Deflecto contributed sales in 1998 of
$45.2 million while Rolite contributed sales of $3.2 million. In addition,
sales of warning triangles and colorants increased at Sate-Lite, $0.2 million
and $0.3 million, respectively. Partially offsetting these increases were lower
sales of bike reflectors and custom molded products at Sate-Lite, $0.2 million
and $0.4 million, respectively, and decreased sales of molded and fabricated
product at Beemak, $0.6 million and $0.2 million, respectively.
Operating income increased primarily due to the acquisition of Deflecto
and Rolite, as discussed above. These companies contributed operating income in
1998 of $5.3 million and $0.6 million, respectively. Partially offsetting these
increases was lower operating income at Sate-Lite and Beemak, $2.0 million and
$1.5 million, respectively. In addition, corporate overhead of $0.2 million was
incurred in 1998 related to the formation of Specialty Plastics. Operating
income decreased at Sate-Lite due to operating expenses incurred related to the
expansion of manufacturing operations into China and operating income at Beemak
decreased due to lower absorption of fixed operating expenses at a lower sales
level, as well as additional costs associated with Beemak's expansion into a
larger facility. Operating margin decreased 3.9%, from 10.4% in 1997 to 6.5% in
1998, due to the reasons mentioned above.
Telecommunication Products. As of December 31, 1998, Telecommunication
Products consisted of Dura-Line, Electronic Connectors and Components,
Viewsonics, Bond Technologies, K & S Sheet Metal, Northern Technologies, LoDan,
Engineered Endeavors and Telephone Services. Due to the similarity of many of
the Telecommunication Products subsidiaries' product lines, management
evaluates, oversees and manages the companies based on three product group
segments: Infrastructure Products and Equipment which includes Dura-Line,
Viewsoncis, Northern Technologies and Engineered Endeavors; Electronic
Connectors and Components; and Custom Cable Assemblies and Specialty Wire and
Cable which includes Bond Technologies, K & S Sheet Metal, LoDan and Telephone
Services.
Net sales increased $53.0 million or 20.6% and operating income increased
$17.5 million or 132.2%. The increase in sales was due to the 1998 acquisition
of K&S Sheet Metal and the 1997 acquisitions of Telephone Services, LoDan, and
Engineered Endeavors. These companies contributed net sales in 1998 of $12.0
million, $45.7 million, $28.8 million, and $17.3 million, respectively,
compared to net sales in 1997 of $4.4 million, $14.7 million, and $7.5 million
for Telephone Services,
26
<PAGE>
LoDan, and Engineered Endeavors, respectively. Partially offsetting these
increases were decreased sales at Diversified Wire & Cable of $15.2 million due
to the divestiture of that company in July 1998. In addition, sales decreased
due to a slowdown of business at Bond Technologies and in the Connectors group.
Operating income increased primarily due to a $15.9 million stock
appreciation rights expense incurred in April 1997 related to our acquisition
of Dura-Line in 1988. Excluding the effects of the stock appreciation rights
expense, operating income in 1998 increased $5.3 million or 18.2%. This
increase was due to the acquisition of K&S Sheet Metal in 1998 and Telephone
Services and LoDan in 1997, as mentioned above. These companies contributed
operating income in 1998 of $2.8 million, $7.5 million, and $3.1 million,
respectively, compared to operating income in 1997 of $0.1 million and $1.0
million for Telephone Services and LoDan, respectively. Partially offsetting
these increases was decreased operating income at Diversified Wire & Cable,
$0.8 million, due to the sale of that company in 1998. Operating income also
decreased in the Connectors group due to the initial costs incurred of
centralizing manufacturing, sales and marketing, and headquarters at Johnson
Components' facility in Minnesota. In addition, corporate expenses increased
due to a full year of overhead in 1998 compared to five months in 1997, as
Telecommunication Products was formed in August 1997.
Operating margin increased 4.7%, from 5.2% in 1997 to 9.9.% in 1998,
primarily due to the reduction of stock appreciation rights expense in 1998.
Excluding stock appreciation rights expense, operating margin would have been
11.3% in 1997. The decrease in operating margin excluding stock appreciation
rights expense is due to the reasons mentioned above.
Motors and Gears. As of December 31, 1998, Motors and Gears consisted of
Imperial, Gear, Merkle-Korff, Fir, Electrical Design and Control, Motion
Control, and Advanced DC Motors. Effective January 1997, Barber-Colman became a
fully integrated division of Merkle-Korff. Motors and Gears operates in three
separate business segments; sub-fractional motors, fractional/integral motors,
and controls. Motors and Gears entered the controls business segment through
the acquisitions of Electrical Design and Control and Motion Control during
1997.
Net sales increased $127.2 million or 85.5% and operating income increased
$14.6 million or 52.9%. The increase in net sales was primarily due to the 1998
acquisition of Advanced DC Motors and the 1997 acquisitions of Fir, Electrical
Design and Control, and Motion Control. These companies contributed net sales
in 1998 of $27.2 million, $42.1 million, $10.3 million, and $51.3 million,
respectively, compared to net sales in 1997 of $14.8 million, $1.8 million, and
$1.2 million for Fir, Electrical Design and Control, and Motion Control,
respectively. Sales of sub-fractional motors increased 13.0% in 1998 due to
continued strength in the vending and appliance markets and sales of
fractional/integral motors increased 6.6% in 1998 (excluding acquisitions)
reflecting market share gains in the floor care market and stronger sales in
the elevator market. Partially offsetting these increases, were decreased sales
of gears and gearboxes, 8.4%, due to a weaker floor care market after stronger
than expected sales in 1997.
Operating income increased primarily due to the increased sales discussed
above. Advanced DC Motors, Fir, and Motion Control contributed operating income
in 1998 of $5.2 million, $5.9 million, and $6.9 million, respectively, compared
to operating income in 1997 of $1.6 million and $0.1 million for Fir and Motion
Control, respectively. Partially offsetting these increases were additional
selling, general, and administrative expenses as well as higher depreciation
and amortization arising from the 1998 and 1997 acquisitions. Operating margin
decreased 3.3%, from 18.6% in 1997 to 15.3% in 1998, due to these additional
operating expenses.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Consolidated Operating Results. Net sales increased $105.5 million or
17.6%, and operating income increased $42.1 million or 314.0%. The increase was
primarily due to the 1997 acquisitions of Cho-Pat in Consumer and Industrial
Products; Arnon-Caine in Specialty Plastics; Northern Technologies, LoDan,
Engineered Endeavors and Telephone Services in Telecommunication Products; and
Fir, Electrical Design and Control and Motion Control in Motors and Gears.
Sales also increased
27
<PAGE>
from the benefit of a full year of sales at Cape Craftsmen in Consumer and
Industrial Products; Seaboard in Specialty Printing and Labeling; Johnson
Components, Diversified Wire and Cable, Viewsonics, Vitelec and Bond
Technologies in Telecommunication Products; and Barber-Colman in Motors and
Gears. In addition, sales increased due to increased sales of titanium aircraft
parts at Parsons, higher sales of advertising specialty products at Sales
Promotion Associates, increased sales of cable conduit at Dura-Line, increased
sales of subfractional motors at Merkle-Korff and higher sales of planetary
gears at Gear. Partially offsetting these increases were lower sales of
shielding devices at Valmark, decreased sales of fractional/integral motors at
Imperial and Scott, and lower sales at Welcome Home due to its deconsolidation
from our financial statements.
Operating income increased primarily due to the 1997 acquisitions, a full
year of operations at the companies acquired in 1996, higher gross profit at
Parsons, lower medical and commissions expenses at Sales Promotion Associates,
increased gross profit at Sate-Lite from sales of custom molded products, and
lower compensation expenses at Aim Electronics, as its stock appreciation
rights were expensed in 1996. In addition, operating income increased due to
the deconsolidation of Welcome Home. Partially offsetting these increases were
lower sales and slightly higher material prices at Dacco, decreased operating
income at Hudson due to the divestiture of that company in May 1997, decreased
gross profit at Pamco stemming from lower sales of custom labels, higher
operating expenses at Dura-Line stemming from the stock appreciation rights
expense, decreased gross profit at Fir and increased operating expenses
attributed to the Motors and Gears' acquisitions. Consolidated operating margin
increased 5.6%, from 2.2% in 1996 to 7.8% in 1997, due to the above factors.
Interest expense increased $19.1 million or 30.2% primarily due to the
increase in long-term debt stemming from our refinancing in July 1997.
Consumer and Industrial Products. As of December 31, 1997, Consumer and
Industrial Products consisted of Dacco, Riverside, Parsons, Cape Craftsmen,
Cho-Pat and Dura-Line Retube.
Net sales increased $14.8 million or 10.5%. The increase in net sales was
partially due to the acquisitions of Cape Craftsmen in July 1996, Paw Print in
November 1996 and Cho-Pat in September 1997. These companies contributed net
sales of $12.8 million, $5.5 million and $0.4 million, respectively, in 1997
compared to net sales in 1996 of $1.3 million for Cape Craftsmen and $1.6
million for Paw Print. Further contributing to the rise in 1997 net sales were
increased sales of soft parts and scrap at Dacco, $0.6 million and $0.2
million, respectively, higher sales of Bibles, books, audio tapes, and music
products at Riverside, $0.9 million, $1.4 million, $1.0 million and $0.8
million respectively, increased sales of aircraft parts at Parsons, $7.6
million, and higher sales of plastic pipe at Dura-Line Retube, $0.2 million.
Partially offsetting these increases were decreased sales of rebuilt converters
at Dacco, $1.8 million, lower contract distribution sales at Riverside, $3.1
million, and lower sales at Hudson, $8.8 million, due to the sale of that
Company. The sales increases were primarily due to the increased focus on sales
of soft parts through an expanded line of retail stores at Dacco, the
resolution of computer system problems at Riverside which negatively impacted
the fourth quarter of 1996 and strong sales of aircraft parts to Boeing at
Parsons. The decrease in net sales of rebuilt converters at Dacco was primarily
due to good weather in the Northeastern United States, while the lower sales to
contract distribution customers at Riverside were due to less focus on the
lower margin contract distribution business and more focus on the higher margin
publishing and distribution business.
Operating income increased $2.4 million or 13.7%. The increase in
operating income was partially due to the acquisitions of Cape Craftsmen and
Paw Print. These companies contributed $0.4 million and $1.6 million,
respectively, in 1997, compared to operating income in 1996 of ($0.2) million
for Cape Craftsmen. In addition, the increase was due to higher operating
income at: Riverside, $0.6 million, and Parsons, $2.8 million. These increases
were partially offset by decreased operating income at Dacco of $2.1 million
and Hudson of $1.1 million, due to the divestiture of Hudson. The increase in
operating income was primarily due to improved product mix at Riverside and
increased gross profit at Parsons due to higher sales of titanium hot formed
products. The offsetting decrease to operating income at Dacco was primarily
due to lower sales and slightly higher material prices. Operating margin
increased to 13.0% in 1997 from 12.7% in 1996, due to the reasons mentioned
above.
28
<PAGE>
Specialty Printing and Labeling. As of December 31, 1997, Specialty
Printing and Labeling consisted of Sales Promotion Associates, Valmark, Pamco
and Seaboard.
Net sales increased $9.8 million or 8.9%. Sales increased due to higher
sales of advertising specialty products at Sales Promotion Associates, $2.2
million, increased sales of rollstock and membrane switches at Valmark, $1.0
million and $0.6 million, respectively, higher sales of labels at Pamco, $0.3
million, and increased sales of folding boxes at Seaboard, $7.3 million, due to
the acquisition of Seaboard in May 1996. Partially offsetting these increases
were decreased sales of calendars and school annuals at Sales Promotion
Associates, $0.1 million and $0.2 million, respectively, and lower sales of
shielding devices at Valmark, $1.3 million.
Operating income increased $3.0 million or 41.7%. Operating income
increased due to higher operating income at Sales Promotion Associates, $0.6
million, increased operating income at Valmark, $0.1 million, and higher
operating income at Seaboard, $2.6 million. Partially offsetting these
increases was decreased operating income at Pamco, $0.3 million. The higher
operating income at Sales Promotion Associates was due to lower selling,
general and administrative costs, primarily medical insurance and commissions,
while the increase at Valmark was due to higher sales and lower operating
costs. The decrease in operating income at Pamco was attributed to lower gross
profit stemming from decreased sales of custom-made labels. Operating margin
increased 1.9%, from 6.5% in 1996 to 8.4% in 1997, primarily due to higher
sales and lower operating costs as discussed above.
Specialty Plastics. As of December 31, 1997, Specialty Plastics consisted
of Sate-Lite and Beemak.
Net sales increased $3.9 million or 19.5%. The increase in net sales was
partially due to the acquisition of Arnon-Caine by Beemak in January 1997.
Arnon-Caine contributed net sales of $3.9 million in 1997. Further contributing
to the increase in 1997 net sales were increased sales of bicycle reflectors
and custom molded products at Sate-Lite, $0.5 million and $0.2 million,
respectively. Partially offsetting these increases were decreased sales of
plastic injection molded products at Beemak, $0.7 million. The increase in
bicycle reflector sales at Sate-Lite was primarily due to the extension of
sales of bicycle reflectors into Asian markets.
Operating income increased $3.1 million or 2,939.6%. The increase in
operating income was partially due to the acquisition of Arnon-Caine which
contributed operating income of $1.4 million in 1997. In addition, operating
income increased at Sate-Lite and Beemak (excluding Arnon-Caine), $1.1 million
and $0.6 million, respectively. The increase in operating income was primarily
due to higher gross profit at Sate-Lite stemming from increased sales of custom
molded products and decreased operating expenses at Beemak due to a focused
cost cutting program.
Operating margin increased to 13.4% in 1997 from 0.5% in 1996 due to the
reasons mentioned above.
Telecommunication Products. As of December 31, 1997, Telecommunication
Products consisted of Dura-Line, Aim Electronics, Cambridge, Johnson
Components, Diversified Wire and Cable, Viewsonics, Vitelec, Bond Technologies,
Northern Technologies, LoDan, Engineered Endeavors and Telephone Services. Due
to the similarity of many of the Telecommunication Products subsidiaries'
product lines, we evaluate, oversee and manage the companies based on three
product group segments: Infrastructure Products and Equipment which includes
Dura-Line, Viewsonics, Northern Technologies and Engineered Endeavors;
Electronic Connectors and Components which includes Aim Electronics, Cambridge,
Johnson Components and Vitelec; and Custom Cable Assemblies and Specialty Wire
and Cable which includes Bond Technologies, Diversified Wire and Cable, LoDan
and Telephone Services.
Net sales increased $125.4 million or 95.3% and operating income increased
$4.9 million or 36.1%. The increase in net sales was primarily due to the
acquisitions of Johnson Components, Diversified Wire and Cable, Viewsonics,
Vitelec and Bond Technologies in 1996 and Northern, LoDan, Engineered Endeavors
and Telephone Services in 1997. These companies contributed net sales of $19.8
million, $31.3 million, $12.4 million, $5.4 million, $21.8 million, $23.3
million, $14.7 million,
29
<PAGE>
$7.5 million and $4.4 million, respectively, in 1997 compared to net sales in
1996 of $16.9 million for Johnson Components, $13.9 million for Diversified
Wire and Cable, $5.1 million for Viewsonics, $2.4 million for Vitelec and $3.6
million for Bond Technologies. In addition, net sales increased $26.7 million
due to higher sales of infrastructure products and equipment, particularly
cable conduit. This increase was primarily due to higher international sales
resulting from the addition of new manufacturing facilities in Mexico and
China.
Operating income increased primarily due to the acquisitions discussed
above. These companies contributed operating income in 1997 of $3.6 million,
$1.4 million, $3.7 million, $1.0 million, $2.7 million, $4.3 million, $1.1
million, $1.0 million and $0.1 million, respectively, compared to operating
income in 1996 of $2.9 million for Johnson Components, $0.7 million for
Diversified Wire and Cable, $0.5 million for Vitelec and $0.3 million for Bond
Technologies. In addition, operating income at Aim Electronics increased $4.1
million due to stock appreciation rights expense of $5.2 million in 1996.
Operating income at Aim Electronics, excluding stock appreciation rights
expense, decreased $1.1 million in 1997 primarily due to lower domestic sales
and gross profit. In addition, operating income at Dura-Line decreased $13.7
million due to stock appreciation rights expense of $15.9 million in 1997
related to the acquisition of Dura-Line in 1988. Operating income at Dura-Line,
excluding stock appreciation rights, increased $2.2 million in 1997 primarily
due to higher sales of cable conduit in Europe, particularly in the Czech
Republic.
Operating margin decreased 3.2%, from 10.3% in 1996 to 7.1% in 1997.
Excluding the stock appreciation rights expenses, operating margins would have
decreased 0.9%, from 14.2% in 1996 to 13.3% in 1997. The decrease in operating
margin was primarily due to international market development costs in 1997 not
incurred in 1996 and lower operating margins at Aim Electronics.
Motors and Gears. As of December 31, 1997, Motors and Gears consisted of
Imperial, Scott, Gear, Merkle-Korff, Fir, Electrical Design and Control and
Motion Control. Effective January 1997, Barber-Colman became a fully integrated
division of Merkle-Korff. Motors and Gears operates in two separate business
segments: electric motors ("motors") and electronic motion control systems
("controls"). Motors and Gears entered the controls business segment through
the acquisitions of Electrical Design and Control and Motion Control during
1997.
Net sales increased $31.1 million or 26.5% and operating income increased
$4.9 million or 18.7%. Sales increased partially due to the acquisitions of Fir
in June 1997, Electrical Design and Control in October 1997 and Motion Control
in December 1997. These companies contributed $14.8 million, $1.8 million and
$1.2 million, respectively, in 1997, or 57.2% of the total increase in net
sales. In addition, net sales increased due to an 18.3% increase in sales of
subfractional motors at Merkle-Korff and a 24.0% increase in sales of planetary
gears at Gear. Partially offsetting these increases was a 6.6% decrease in
sales of fractional/integral motors at Imperial and Scott The sales increases
were primarily due to strong sales of subfractional motors in the vending and
appliance markets and strong sales of planetary gears in the floor care market.
The decrease in net sales of fractional/integral motors was primarily due to
strong sales in the first half of 1996 resulting from the unusually high
backlog of orders accumulated in the fourth quarter of 1995.
The increase in operating income was primarily due to the increase in
sales of subfractional motors and planetary gears as discussed above. Partially
offsetting these increases were slightly decreased gross margins in the
fractional/integral motors group due to Fir operating at slightly lower gross
margins than the rest of the group, and increased operating expenses attributed
to the acquisitions of Barber-Colman in 1996, and Fir, Electrical Design and
Control and Motion Control in 1997. Operating margin decreased 1.4% from 22.3%
in 1996 to 20.9% in 1997, due to the decreased gross margins and increased
operating expenses discussed above.
Welcome Home. Net sales decreased $79.4 million or 97.0%, while the
operating loss increased $14.9 million or 93.1%. These fluctuations are the
direct result of Welcome Home's Chapter 11 bankruptcy filing on January 21,
1997. As a result of the filing, we no longer have the ability to control the
operations and financial affairs of Welcome Home. Accordingly, the results of
operations
30
<PAGE>
of Welcome Home from January 21, 1997 to December 31, 1997, are not included in
the consolidated results of the Company. Since January 21, 1997, we have
accounted for our investment in Welcome Home under the equity method of
accounting. Please read Note 3 to the Company's Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
We had approximately $189.1 million in working capital at December 31,
1998, compared to $176.5 million at the end of 1997, representing an increase
of $12.6 million or 7.1%. This increase was due to increased net trade
receivables, higher inventory, and other current assets. The increase in
working capital can also be attributed to lower accrued expenses and a lower
current portion of long term debt. Partially offsetting these increases in
working capital were increased accounts payable balances.
We have acquired businesses through leveraged buyouts and, as a result,
have significant debt in relation to total capitalization. See "Business." Most
of this acquisition debt was initially financed through the issuance of bonds
which were subsequently refinanced in 1997. See Note 5 to the Consolidated
Financial Statements.
In connection with each acquisition of a subsidiary, the subsidiary enters
into intercompany notes, and intercompany management and tax sharing
agreements, which permit each subsidiary, including the majority-owned
subsidiaries, substantial flexibility in moving funds from each subsidiary to
us.
We expect continued growth in net sales and operating income in 1999.
Capital spending levels in 1999 are anticipated to be consistent with 1998
levels and operating margins and operating cash flow are expected to be
favorably impacted by ongoing cost reduction programs, improved efficiencies
and sales growth. We believe that our cash on hand and anticipated funds from
operations will be sufficient to cover our working capital, capital
expenditures, debt service requirements and other fixed charges obligations for
at least the next 12 months.
None of the subsidiaries require significant amounts of capital spending
to sustain their current operations or to achieve projected growth.
Net cash provided by operating activities for the year ended December 31,
1998 was $29.4 million compared to $17.5 million provided by operating
activities during 1997. The increase is primarily attributed to increased
operating income resulting from the Company's recent acquisitions and is
partially offset by increases in working capital requirements. Net cash
provided by operating activities for the year ended December 31, 1997 was $17.5
million, compared to $23.1 million provided by operating activities during
1996. The decrease was attributed to increases in accounts receivable and
inventories due to revenue growth and was partially offset by increases in
accounts payable and accrued expenses.
Net cash used in investing activities for the year ended December 31, 1998
was $140.5 million compared to $180.6 million used in investing activities
during 1997. The decrease is due primarily to a reduction in both the number of
acquisitions and the aggregate purchase price of these acquisitions in 1998.
Partially offsetting these decreases are higher capital expenditures in 1998 as
well as a new investment in an affiliate. Net cash used in investing activities
for the year ended December 31, 1997 was $180.6 million, compared to $167.2
million used in investing activities during 1996. Increased acquisition of
subsidiaries was partially offset by net proceeds from sale of subsidiaries,
redemption of investment in affiliate, decreased capital expenditures, and
decreased notes receivable from affiliate.
Net cash provided by financing activities for the year ended December 31,
1998 was $79.1 million compared to $184.7 million provided by financing
activities during 1997. The decrease is primarily due to debt issuances from
the Company, Motors and Gears Inc., and Jordan Telecommunication Products, Inc.
and the Jordan Telecommunication Products, Inc. preferred stock issuance which
were completed in 1997. Net cash provided by financing activities for the year
ended December 31, 1997 was $184.7 million, compared to $136.0 million provided
by financing activities during 1996. Proceeds from the Jordan Industries,
Motors and Gears and Telecommunication Products debt issuances and
31
<PAGE>
the Telecommunication Products preferred stock issuance were partially offset
by the increase in repayment of long-term debt and lower borrowings under
revolving credit facilities.
On March 22, 1999, we issued $155.0 million of series C senior notes due
2007. The net proceeds of $149.8 million from the note issuance were used to
purchase Alma Products for approximately $84.1 million, pay approximately $13.7
million in fees and expenses and repay approximately $52.0 million of
outstanding borrowings on our revolving line of credit. At March 31, 1999, we
had approximataely $65.0 million of available borrowings under our revolving
line of credit agreement.
IMPACT OF INFLATION
General inflation has had only a minor effect on our operations and our
internal and external sources for liquidity and working capital, as we have
been able to increase prices to reflect cost increases, and expect to be able
to do so in the future.
YEAR 2000
We have assembled an internal project team that is addressing the issue of
computer programs and embedded computer chips being unable to distinguish
between the year 1900 and the Year 2000. The project team has developed and is
in the process of implementing a three-step plan intended to result in our
operations continuing with minimal interruption through the Year 2000.
For purposes of this discussion, "Year 2000 compatible" means that the
computer hardware, software or device in question will function in 2000 without
modification or adjustment or will function in 2000 with a one-time manual
adjustment. However, there can be no assurance that any such Year 2000
compatible hardware, software or device will function properly when interacting
with any Year 2000 noncompatible hardware, software or device.
Process Overview. The first step in our plan is to inventory all of our
computer hardware and software and all of our devices having embedded computer
technology. The Year 2000 project team is focusing on five areas: (i) business
systems; (ii) production (e.g., desktop computers); (iii) financial management
(e.g., banking software, postage equipment and time clocks); (iv) facilities
(e.g., heating and air conditioning systems, elevators, telephones, and fire
and security systems); and (v) significant vendors and customers.
In the second step, the project team is determining whether each
inventoried system, device, customer or vendor is Year 2000 compatible. In the
third step, those that are not compatible will be upgraded or replaced.
Business Systems. Our subsidiaries are in the process of assessing whether
their business systems are Year 2000 compatible and what remediation may be
required to make them compatible where they are not.
Production, Financial Management and Facilities. Once they have been
inventoried, each device and each piece of hardware and non-business system
software (a "Non-System Item") that can be tested by us is being tested for
Year 2000 compatibility. In the case of any Non-System Items that cannot be
tested, the vendor is being asked for a certification regarding compatibility.
Each Non-System Item that is noncompatible will be either upgraded or replaced.
Approximately 20% of the Non-System Items that have been inventoried to date
have been tested or certified by the vendor. We expect substantially all of our
Non-System Items will have been tested or certified and upgraded or replaced by
the end of the third quarter of 1999.
Customers and Vendors. The project team is contacting each of our
significant customers and vendors and requesting that they apprise us of the
status of their Year 2000 compliance programs. We have targeted the end of the
first quarter of 1999 as the date for receiving substantially all customer and
vendor responses, although minimal responses have been received to date. There
can be no assurance as to when this process will be completed.
Costs. The total cost associated with us becoming Year 2000 compatible is
not expected to be material to our financial position. We have a preliminary
estimate of the cost to upgrade or replace
32
<PAGE>
Non-System Items, and we expect to develop a more definitive estimate once the
inventory has been completed and the testing/certification process is further
advanced.
Risks. The failure to correct a material Year 2000 problem could result in
an interruption in or failure of certain normal business activities or
operations. Such failures could have a material adverse effect on us. Due to
the general uncertainty inherent in the Year 2000 issue, resulting in part from
the uncertainty of Year 2000 compliance by our significant customers and
vendors, we are unable to determine at this time whether the consequences of
Year 2000 noncompliance will have a material adverse effect on us, although our
Year 2000 project is expected to significantly reduce that uncertainty.
We believe that the areas that present the greatest risk to us are (i)
disruption of our business due to Year 2000 incompatibility of one of our
critical business systems and (ii) disruption of the business of certain of our
significant customers and venders due to their noncompliance. At this time, we
believe that all of our business systems will be Year 2000 compatible before
the end of 1999. Whether disruption of a customer's or vendor's business due to
noncompliance will have a material adverse effect on us will depend on several
factors including the nature and duration of the disruption, the significance
of the customer or vendor and, in the case of vendors, the availability of
alternate sources for the vendor's products.
We are in the process of developing a contingency plan to address material
Year 2000 noncompliance issues and expect to have the plan completed before the
end of 1999.
33
<PAGE>
BUSINESS
Jordan Industries was organized to acquire and operate a diverse group of
businesses on a decentralized basis, with a corporate staff providing strategic
direction and support. We comprise 30 businesses which are divided into five
strategic business units:
o Consumer and Industrial Products;
o Specialty Printing and Labeling;
o Specialty Plastics;
o Telecommunication Products; and
o Motors and Gears.
We believe that our businesses are characterized by leading positions in niche
industries, high operating margins, strong management, minimal working capital
and capital expenditure requirements and low sensitivity to technological
change and economic cycles.
Our business strategy is to enhance the growth and profitability of each
business unit and to build upon the strengths of those units through product
line and other strategic acquisitions. Key elements of this strategy have been
the acquisition and growth of related businesses, increased focus on
international markets, facilities expansion and the acquisition of
complementary product lines. Consistent with this strategy, we purchased Alma
Products on March 22, 1999. As a result, we significantly increased our
presence in the automotive aftermarket industry.
Through the implementation of this strategy, we have demonstrated
significant and consistent growth in net sales. We have generated combined pro
forma net sales of $1,024.2 million for the year ended December 31, 1998 as
compared to historical net sales of $358.6 million for the year ended December
31, 1993, representing a pro forma compound annual growth rate of 23.4%.
34
<PAGE>
The following chart depicts the operating subsidiaries which comprise our
five strategic business units, together with the pro forma net sales for each
of the five groups for the year ended December 31, 1998. Pro forma net sales,
as set forth below, give effect to the Alma Products acquisition and certain
other transactions described in the Unaudited Pro Forma Financial Information
and the related notes. The boxes in bold represent the Restricted Group.
<TABLE>
---------------------------------------------------------------
JORDAN INDUSTRIES INC.
RESTRICTED
GROUP CONSOLIDATED
----- ------------
(Dollars in millins)
NET SALES $431.9 $1,024.2
---------------------------------------------------------------
|
|
|
--------------------------------------------------------------------------------------------------
| | | | |
------------------- -------------------- ------------------- -------------------- -------------------
CONSUMER AND
INDUSTRIAL SPECIALTY PRINTING SPECIALTY TELECOMMUNICATION MOTORS AND
PRODUCTS AND LABELING PLASTICS (2) PRODUCTS GEARS
<S> <C> <C> <C> <C>
o Dacco o Sales Promotion o Beemak o Dura-Line o Merkle-Korff
o Alma Products Associates Plastics o Viewsonics o Imperial
o Riverside Book o Valmark o Sate-Lite o Northern Electric
and Bible Industries Manufacturing Technologies o Gear
o Parsons o Pamco Printed o Deflecto o Engineered Research
Precision Tape and Label o Rolite Plastics Endeavors o Fir Elettro-
Products o Seaboard o Electronic meccanica
o Cape Craftsmen Folding Box Connectors and o Advanced DC
o Cho-Pat Components Motors
o Bond Technogies o Motion
o K&S Sheet Metal Control
o LoDan Engineering
o Telephone o Electrical Design
Services, Inc and Control
$234.7 MILLIOM OF $120.2 MILLION OF $77.0 MILLION OF $296.1 MILLION OF $296.2 MILLION
NET SALES NET SALES NET SALES NET SALES NET SALES
------------------- -------------------- ------------------- -------------------- -------------------
</TABLE>
35
<PAGE>
CONSUMER AND INDUSTRIAL PRODUCTS
Consumer and Industrial Products serves several product segments. It is
the leading supplier of remanufactured torque converters to the automotive
aftermarket industry. With the purchase of Alma Products, we expect to
significantly expand our presence in this industry. Consumer and Industrial
Products also (1) publishes and markets Bibles, religious books and audio
materials, (2) manufactures hot-formed titanium parts for the aerospace and
other industries and (3) manufactures and imports gift items. The companies
that are part of Consumer and Industrial Products have provided their customers
with products and services for an average of over 40 years. For the year ended
December 31, 1998, Consumer and Industrial Products generated combined pro
forma net sales of $234.7 million. Each of the Consumer and Industrial Products
subsidiaries is discussed below.
Dacco, Incorporated. 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 Jordan
Industries in 1988. Dacco's net sales for the year ended December 31, 1998 were
$65.4 million.
Approximately 75% 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 comes from 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. With the acquisition of Alma
Products, Dacco will have access to a substantial amount of used torque
converters that Alma Products is not able to use. Dacco purchases other hard
parts, such as clutch plates and fly wheels, from outside suppliers.
Approximately 25% of Dacco's products are classified as "soft" products,
such as sealing rings, bushings, washers, filter kits and rubber components.
Dacco purchases approximately 11,000 soft products from a number of vendors,
which Dacco resells 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 50 independent sales
representatives who accounted for approximately 57% of its 1998 net sales.
These sales representatives sell nationwide to independent warehouse
distributors and transmission repair shops. Dacco also owns and operates 35
distribution centers which sell directly to transmission shops. Dacco
distribution centers average 4,000 square feet, cover a 50 to 100-mile selling
radius and sell approximately 41% hard products and 59% soft products. No
single customer accounted for more than 2% of Dacco's net sales in 1998.
The domestic market for Dacco's hard products is fragmented and its
competitors primarily consist of a number of small regional and local
rebuilders. Dacco believes that it competes effectively against these
rebuilders by offering a broader product line, quality products, and lower
prices, all of which are made possible by its 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.
Alma Products Company. Founded in 1944, Alma Products uses a combination
of remanufacturing and new production to produce torque converters,
approximately 48% of 1998 sales, air conditioning compressors, approximately
34% of 1998 sales, and clutch and disc assemblies, approximately 18% of 1998
sales, for major automotive and equipment OEMs such as Ford, Chrysler, GM, John
Deere, Caterpillar, and Case, as well as numerous other direct aftermarket
customers. Jordan Industries acquired Alma Products on March 22, 1999. For the
year ended December 31, 1998, Alma Products had pro forma net sales of $73.6
million.
36
<PAGE>
Alma Products manufactures its products to customer specifications, and
its engineering department works closely with the customer's engineers to
ensure that specifications are met. Torque converters are remanufactured and
sold to major automotive OEMs such as Ford and Chrysler, typically for warranty
replacement. Alma Products does not sell torque converters in the independent
aftermarket, which is the primary market for Dacco's torque converters. Air
conditioning compressors are both remanufactured and produced new for the
automotive aftermarket. Alma Products' compressors are sold to the service arms
of major automotive manufacturers, such as Ford, Chrysler, GM, John Deere, and
Caterpillar. Alma Products supplies the majority of the compressors purchased
by these customers in the aftermarket. Clutch and disc assemblies are both
remanufactured and produced new and are sold primarily to repackagers who then
resell the products to automotive parts distributors. Alma Products has
long-term contracts with several customers, and has developed strong
relationships with all of its major customers. Alma Products was selected by
Ford to remanufacture, distribute, and fully merchandise Ford's first two Ford
Quality Renewal programs for torque converters and clutch and disc assemblies.
The use of Alma Products' remanufactured Ford Quality Renewal products in new
vehicle warranty repair is indicative of Alma Products' engineering,
manufacturing, and quality expertise. Approximately 47% of Alma Products' 1998
sales were to Ford and approximately 17% were to Chrysler.
Alma Products' market is somewhat captive in that any supplier selling to
the major automotive and equipment OEMs must adhere to the same quality
standards with which Alma Products complies. Alma Products' primary competitors
in the torque converter market are Dynamic and Aftermarket Technologies, while
Four Seasons is the primary competitor in the air conditioning compressor
market. Alma Products competes based on quality, price, and customer service.
We expect that our acquisition of Alma Products will build on our presence
in the automotive aftermarket industry. Further, through the combination of
Alma Products and Dacco, we believe that we can achieve operating synergies
through:
o Decreasing cost of sales at Dacco by using torque converter cores
previously discarded by Alma Products, thereby reducing Dacco's need to
purchase these cores in the scrap market.
o Increasing sales at Dacco by providing access to the large inventory of
Alma Products torque converter cores, since Dacco currently loses
significant sales due to inadequate supplies of available cores in the
scrap market.
o Increasing sales of Alma Products' air conditioning compressor products
and clutch and disc assemblies through Dacco's nationwide retail store
network.
Riverside Book and Bible. Riverside is a publisher of Bibles and a
distributor of Bibles, religious books and music recordings. Riverside was
founded in 1943 and acquired by Jordan Industries in 1988. Approximately 75% of
Riverside's business consists of products published by other companies.
Riverside sells world-wide to more than 12,000 wholesale, religious and trade
book store customers, using 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 net
sales in 1998. For the year ended December 31, 1998, Riverside had net sales of
$58.6 million.
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 and Ingram Book Company (which owns Spring Arbor). Competition
is based on price, product selection and customer service.
Parsons Precision Products. 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 Jordan
Industries in 1988. Approximately 70% of Parsons' 1998 net sales were 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 it to participate in the aerospace market for
precision titanium components. Parsons' net sales for the year ended December
31, 1998 were $13.1 million.
37
<PAGE>
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 aerospace and military customers,
relying on longstanding associations and its reputation for high quality
products and service. Although the titanium hot forming market is not very
competitive, Parsons is striving to lower its costs to enhance its competitive
advantage.
Cape Craftsmen. Founded in 1966 and purchased by Jordan Industries in
1996, Cape Craftsmen is a manufacturer and importer of gifts, wooden furniture,
framed art and other accessories. Cape Craftsmen manufactures products in North
Carolina and imports from Mexico and the Far East. Cape Craftsmen sells its
products through one in-house salesperson and 40 independent sales
representatives. Approximately 64% of Cape Craftsmen's 1998 net sales were to
Welcome Home, an affiliated entity. Cape Craftsmen competes in a highly
fragmented industry and has therefore found it most effective to compete on the
basis of price with most wood manufacturers and importers. Cape Craftsmen also
strives to deliver better quality and service than its competitors. Cape
Craftsmen's net sales for the year ended December 31, 1998 were $22.5 million.
Cho-Pat. Acquired by Jordan Industries in 1997, Cho-Pat is a leading
designer and manufacturer of orthopedic supports and preventative and pain
reducing medical devices. For the year ended December 31, 1998, Cho-Pat had net
sales of $1.5 million.
Cho-Pat produces approximately nine different products for the reduction
of pain from injuries and the prevention of injuries resulting from the overuse
of the major joints. Cho-Pat's largest selling product is the patented Cho-Pat
knee strap, designed to reduce the pain from patellar tendinitis in the knee.
Cho-Pat manufactures all of its products in-house. Cho-Pat sells its products
to professional, college, and high school athletic trainers, medical products
distributors, and independent retail drug and sporting goods stores.
SPECIALTY PRINTING AND LABELING
Specialty Printing and Labeling manufactures and markets (1) promotional
and specialty advertising products for corporate buyers, (2) labels, tapes and
printed graphic panel overlays for electronics and other manufacturing
companies and (3) printed folding cartons and boxes and other shipping
materials.
The companies that are part of Specialty Printing and Labeling have
provided their customers with products and services for an average of over 40
years. For the year ended December 31, 1998, Specialty Printing and Labeling
generated net sales of $120.2 million. Each of the Specialty Printing and
Labeling subsidiaries is discussed below.
Sales Promotion Associates. Jordan Industries' former subsidiaries, The
Thos. D. Murphy Co., which was founded in 1889, and Shaw-Barton, Inc., which
was founded in 1940, merged to form Jordan Industries/Sales Promotion
Associates in March 1989. That company was renamed Sales Promotion Associates,
Inc. in August 1995. Sales Promotion Associates is a producer and distributor
of calendars and is a distributor of corporate recognition, promotion and
specialty advertising products for corporate buyers.
Sales Promotion Associates' net sales for the year ended December 31, 1998
were $62.2 million. For 1998, approximately 60% of its net sales were 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 30% of Sales Promotion
Associates' net sales for 1998 were derived from the sale of a broad variety of
calendars, including hanging, desktop and pocket calendars that are used
internally
38
<PAGE>
by corporate customers and distributed by them to their clients and customers.
Sales Promotion Associates distributes high-quality artistic calendars and also
manufactures and distributes softcover school yearbooks for kindergarten
through eighth grade.
Sales Promotion Associates 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 2,000
suppliers.
Sales Promotion Associates sells its calendars and specialty advertising
products through an 850-person sales force, most of whom are independent
contractors. We believe that Sales Promotion Associates 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, we believe
that Sales Promotion Associates is a strong competitor in its market. This
market is very fragmented and most of the competition comes from smaller
producers and distributors.
Valmark Industries. Valmark, which was founded in 1976 and purchased by
Jordan Industries 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 shielding devices. In 1998,
approximately 33% of Valmark's net sales were derived from the sale of graphic
panel overlays and membrane switches, approximately 64% were from labels and
approximately 3% were from shielding devices. Valmark's net sales for the year
ended December 31, 1998 were $17.2 million.
The specialty screen products sold in the electronics industry encounter
limited 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 1,200 is located in the Northern
California area.
Valmark sells to four primary markets: (1) personal computers, (2) general
electronics, (3) turn-key services and (4) medical instrumentation. Sales to
the hospital and telecommunication industries have grown the most over recent
years due to Valmark's membrane switch and graphic panel overlay capabilities.
Valmark is able to provide OEMs with a broader range of products than many
of its competitors. Valmark's markets are very competitive in terms of price,
and accordingly we believe that Valmark's advantage over its competitors is
derived from its diverse product line and excellent quality ratings.
Pamco Printed Tape and Label. Pamco, which was founded in 1953 and
purchased by Jordan Industries 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. All of Pamco's products are made to customer specifications, and
approximately 90% of all sales were manufactured in-house during 1998. The
remaining 10% of sales are purchased printed products, including business cards
and stationery. Pamco's net sales for the year ended December 31, 1998 were
$16.5 million.
Pamco's products are marketed by a team of 18 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
customers accounting for approximately 20% of net sales for 1998.
Pamco competes in a highly fragmented industry. Pamco emphasizes its
24-hour turnaround and its ability to accommodate rush orders that other
printers cannot handle. Pamco's ability to deliver a quality product with quick
turnaround is its key competitive advantage.
Seaboard Folding Box. Seaboard, which was founded in 1954 and purchased by
Jordan Industries in 1996, is a manufacturer of printed folding cartons and
boxes, insert packaging and blister pack cards. Seaboard's net sales for the
year ended December 31, 1998 were $24.3 million.
39
<PAGE>
Seaboard sells directly to a broad customer base, located primarily east
of the Mississippi River, operating in a variety of industries including
hardware, personal hygiene, toys, automotive supplies, food and drugs.
Seaboard's top 10 customers accounted for approximately 37% of its net sales
for 1998.
Seaboard has exhibited consistent sales growth and high profit margins and
has gained a reputation for exceeding industry standards, primarily due to its
superior operating capabilities. Seaboard has historically been highly
successful in buying and profitably integrating smaller businesses.
Seaboard's markets are very competitive in terms of price, and accordingly
we believe that Seaboard's advantage over its competitors is derived from its
high quality products and excellent service.
SPECIALTY PLASTICS
Specialty Plastics serves a broad range of wholesale and retail markets
within the highly-fragmented specialty plastics industry. The group designs,
manufactures and sells (1) "take-one" point of purchase brochure, folder and
application display holders, (2) modular storage systems ("Tilt-Bins (Trade
Mark) "), (3) plastic injection-molded hardware and office supply products, (4)
extruded vinyl chairmats, (5) safety reflectors for bicycle and commercial
truck manufacturers and (6) colorants to the thermoplastics industry. The
companies that are part of Specialty Plastics have provided their customers
with products and services for an average of over 35 years. For the year ended
December 31, 1998, the Specialty Plastics subsidiaries generated combined pro
forma net sales of $77.0 million. Each of the Specialty Plastics subsidiaries
is discussed below.
Beemak Plastics. Beemak, which was founded in 1951 and acquired by Jordan
Industries in July 1989, is an integrated manufacturer of specialty "take-one"
point-of-purchase brochure, folder and application display holders, and modular
storage systems ("Tilt-Bins (Trade Mark) ") for storage and display of small
items such as fasteners and bolts. Beemak added modular storage systems to its
product line though the 1997 acquisition of Arnon-Caine, Inc. Beemak sells its
proprietary holders and displays, which accounted for approximately 66% of
Beemak's business in 1998, to approximately 21,000 customers around the world.
It sells its modular storage systems, which accounted for approximately 34% of
Beemak's business in 1998, to wholesale home centers and hardware stores. In
addition, Beemak produces a small amount of custom injection-molded plastic
parts for customers on a contract manufacturing basis. Beemak's net sales for
the year ended December 31, 1998 were $9.4 million.
Beemak's products are both injection-molded and custom fabricated.
Beemak's molds are 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 sells its products through a direct sales force, independent
representatives, an extensive on-going advertising campaign and by reputation.
Beemak sells to distributors, major companies, and competitors which resell the
product under a different name. Beemak has been successful in providing
excellent service on orders of all sizes, especially small orders. Beemak's
average order size was approximately $450 for display holders and $1,000 for
modular storage systems in 1998.
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 benefitted 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.
Beemak's modular storage systems compete in the retail storage bin/hardware
store market. Its main competitor in that market is Quantum Storage Systems.
Sate-Lite Manufacturing. 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 Jordan Industries in 1988.
40
<PAGE>
Bicycle reflectors and plastic bicycle parts accounted for approximately 40% of
Sate-Lite's net sales in 1998. Sales of triangular flares and specialty
reflectors and lenses to commercial truck customers accounted for approximately
36% of net sales in 1998. The remaining 24% of Sate-Lite's 1998 net sales were
derived primarily from the sale of colorants to the thermoplastics industry.
Sate-Lite's net sales for the year ended December 31, 1998 were $13.8 million.
Sate-Lite's bicycle products are sold directly to a number of OEMs. The
three largest OEM customers for bicycle products are the Huffy Corporation,
Roadmaster and Tandem (China), which together accounted for approximately 17%
of Sate-Lite's net sales in 1998. 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
1998, Sate-Lite's ten largest customers accounted for approximately 44% 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. Sate-Lite's export net
sales accounted for approximately 17% of its total 1998 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. In the fourth quarter of 1998, Sate-Lite opened a
facility in China. Sate-Lite will be selling to Tandem, Giant, China Bike and
other Chinese bicycle manufacturers who have recently been increasing their
share of bicycles sold in the domestic market.
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.
Deflecto Corporation. Founded in 1960 and acquired by Jordan Industries in
1998, Deflecto designs, manufactures and markets plastic injection-molded
products for mass merchandisers, major retailers and large wholesalers.
Deflecto sells its products in three product categories: hardware products,
office supply products and houseware products. Hardware products, which
comprised approximately 56% of Deflecto's net sales in 1998, include heating
and cooling air deflectors, clothes dryer vents and ducts, kitchen vents and
ducts, sheet metal pipes and elbows, exhaust fittings and other
widely-recognized products. Office supply products, many of which have patents
and trademarks, represented approximately 36% of pro forma net sales in 1998
and include such items as wall pockets, literature displays, file and chart
holders, business card holders and other top-branded office supply products.
The remaining sales were primarily from houseware products such as bath towel
holders, spice racks, paper towel holders and other such items. Deflecto's pro
forma sales for the year ended December 31, 1998 were $50.6 million.
Deflecto manufactures approximately 90% of its products in-house, with the
remainder outsourced to other injection molders. Deflecto is able to
efficiently manage the mix between manufactured and outsourced product by
relying on its ability to accurately project pricing, cost and capacity
constraints. This strategy enables Deflecto to grow without being constrained
by capacity issues.
Deflecto sells its products through an in-house salaried sales force and
the use of independent sales representatives. Deflecto has the critical mass to
command strong positions and significant shelf space with the major mass
merchandisers and retailers. In the hardware products line, Deflecto sells to
major national retailers such as Ace Hardware, Wal-Mart and Home Depot, as well
as to heating, ventilating and air conditioning ("HVAC") and appliance parts
wholesalers. Deflecto sells its office supply products line to major office
supply retailers such as Office Depot, Office Max and Staples, as well as
national wholesalers, such as United Wholesalers and S.P. Richards. Houseware
products are sold primarily to smaller customers, although Deflecto does sell
to Wal-Mart, K-Mart and other retail chains. Deflecto has established strong
relationships with its customers and is known for delivering high quality,
well-packaged products in a timely manner.
41
<PAGE>
Competition in the hardware, office supplies and housewares products
businesses is increasing due to the consolidation of companies serving the
market. The increased competition has prevented price increases and has forced
manufacturers to improve production efficiency, product quality and
distribution capabilities. We believe that Deflecto's mix of manufactured and
outsourced product, and its management of this process, allows it to maintain
high production efficiency, keeping costs down and product quality high.
Rolite Plastics. Founded in 1978 and acquired by Jordan Industries in
1998, Rolite manufactures and sells extruded vinyl chairmats for the office
products industry. During 1998, Rolite sold its products to plastics
distributors, aproximately 33%, foreign-based office products companies,
approximately 29%, office products dealers, approximately 25%, and office
superstores, approximately 13%. Rolite produces three types of standard-size
chairmats, as well as custom-size chairmats. Standard-size chairmats, which
comprised approximately 92% of 1998 net sales, consist of: (1) regular, which
is Rolite's largest seller, (2) anti-static, which reduces static electricity
and is used by computer operators, and (3) glass clear, which is nearly
transparent. Rolite's emphasis on technology helps to ensure excellent product
quality, and all of Rolite's products are backed by a lifetime warranty against
breakage. Rolite's pro forma net sales for the year ended December 31, 1998
were $3.2 million.
Rolite produces its products with a small staff of personnel. Each shift
consists of an extruder, a mixer who compounds the raw materials, and two or
three finishers who rout chairmats to their finished shape and pack them for
shipment.
Rolite's products are sold through nine independent manufacturers'
representatives who sell to over 600 dealers and six regional wholesalers.
Merchandising chairmats is difficult given their bulky composition. To address
this problem, Rolite developed a freestanding merchandise display and a counter
top display that make the chairmats more accessible to customers while
consuming a small amount of retail space. These displays are sold to dealers,
who can then recoup the cost via discounts on future chairmat purchases. In
addition to the independent sales representative network, Rolite's products
will be sold as a separate product line through Deflecto.
Rolite is one of four manufacturers of vinyl chairmats in the United
States and one of only seven worldwide. The estimated $80 million domestic
market is dominated by Rubbermaid and Tenex; however, Rolite believes that its
superior product quality and customer service, coupled with a lack of loyalty
in the marketplace among dealers, will enable it to gain market share. Rolite
has also been successful internationally, with over one-third of sales going to
customers outside of the United States. The superior quality of Rolite's
products compared with those of foreign manufacturers, coupled with Rolite's
price-competitiveness and customer service, represents an opportunity to
continue strong international growth.
TELECOMMUNICATION PRODUCTS
Telecommunication Products is a leading supplier of infrastructure
products and equipment (approximately 50% of 1998 sales), custom cable
assemblies and accessories (approximately 35% of 1998 sales) and electronic
connectors and components (approximately 15% of 1998 sales) to the
telecommunications industry. It has provided its customers with products and
services for an average of over 20 years. For the year ended December 31, 1998,
Telecommunication Products generated combined pro forma net sales of $296.1
million. Each of the Telecommunication Products subsidiaries is discussed
below.
Infrastructure Products and Equipment
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
was founded in 1971, and acquired by Jordan Industries in 1985.
Almost all of Dura-Line's 1998 net sales were from sales of its Innerduct
product. Dura-Line sells Innerduct to major telecommunications companies such
as SPT Telecom, GTE, Bell South and Pacific
42
<PAGE>
Telesis, each of which accounted for less than 12% of Dura-Line's net sales in
1998. Innerduct is marketed worldwide by Dura-Line's management, 10
manufacturing representatives and 40 in-house sales representatives. Dura-Line
negotiates long-term contracts with major telecommunications companies for its
Innerduct product line. Dura-Line's net sales for the year ended December 31,
1998 were $91.5 million.
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 44% of Dura-Line's 1998 net
sales were 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
wholly-owned subsidiaries in Mexico and China to manufacture and supply high
density polyethylene plastic conduit systems to Central and South American
markets as well as China and other Asian markets. 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 manufactures and
supplies high density polyethylene plastic conduit systems to India and
neighboring countries. Dura-Line opened a facility in Pryor, Oklahoma in 1998
and foreign facilities in Malaysia and Spain in 1997. The Pryor, Oklahoma
facility was opened to supply high density polyethylene plastic conduit systems
in support of Dura-Line's contracts as part of Level 3 Communications, Inc.'s
nationwide buildout of its telecommunications infrastructure, as well as to
increase general domestic capacity. The facilities in Malaysia and Spain were
opened to manufacture and supply high density polyethylene plastic conduit
systems in those markets.
The cable conduit market is highly competitive. Dura-Line faces
competition from a wide range of companies including national, international
and regional suppliers of cable conduit. Competition within the industry is
based primarily on quality, price, production capacity, field support,
technical capabilities, service and reputation.
Viewsonics. Viewsonics was founded in 1974 and purchased by Jordan
Industries in 1996. Viewsonics designs, manufactures and markets branded cable
television, electronic network components, and electronic security components
mainly for the "drop" or home connection portion of the cable television
infrastructure. Viewsonics develops, warehouses and sells its products out of
its Florida facility. Viewsonics sources 80% of its products from China, 50% of
which are manufactured in Viewsonics' Shanghai facility, and the remaining 50%
are 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 cable television component markets as they develop.
Viewsonics sold approximately 50% of its products in 1998 to multisystem
operations 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 1998 net sales. For the year
ended December 31, 1998, Viewsonics generated net sales of $14.2 million.
Competition in the industry is focused on quality service, engineering support
and price.
Northern Technologies. Northern Technologies was founded in 1985 and was
purchased by Telecommunication Products in 1996. Northern Technologies designs,
manufactures and markets power conditioning and power protection equipment
primarily for telecommunication applications, such as cellular and personal
communication system networks. Northern Technologies also offers a variety of
products including voltage regulators, uninterruptible power suppliers,
isolation transformers, and grounding devices to protect power-critical
applications.
Northern Technologies sells directly 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 Technologies sells
to such large telecommunication OEMs as Sprint, Motorola,
43
<PAGE>
Lucent Technologies, Ericsson and Nokia. Northern's largest customer, Sprint,
accounted for approximately 50% of 1998 net sales, while its 10 largest
customers accounted for approximately 76%. Northern Technologies' net sales for
the year ended December 31, 1998 were $26.4 million.
Engineered Endeavors. Founded in 1987 and acquired by Telecommunication
Products in 1997, Engineered Endeavors designs complete cellular and personal
communication system towers, and manufactures monopole antenna mount platforms,
and other towers and accessories. Engineered Endeavors also distributes
ancillary products used in the construction of cellular and personal
communication system towers. Approximately 51% of its 1998 net sales were from
personal communication system towers, while approximately 24% were from
cellular towers. The remaining 25% were from packagers and others. Engineered
Endeavors' net sales for the year ended December 31, 1998 were $18.4 million.
Engineered Endeavors' manufacturing facility links a computer aided design
drawing system directly to the production lines where the antenna support,
monopole and ancillary equipment is manufactured. Once manufactured, the
products are shipped to a New Orleans subcontractor where they are galvanized,
packaged and shipped directly to the telecommunication tower construction site.
Engineered Endeavors uses a direct sales force consisting of one lead
salesman, six computer aided design engineers and five structural engineers. It
also uses one manufacturers' representative. Engineered Endeavors' largest
customer is Nextel Communications, Inc., which comprised approximately 16% of
revenues in 1998. Other top customers include Airtouch Cellular, Bell South
PCS, Southwestern Bell, Sprint, AT&T Wireless and Alltell. Its sales are
primarily to the domestic market.
The market for communications towers is expected to continue to grow for
the next several years, and Engineered Endeavors provides Telecommunication
Products with an entrance into that market. It also complements
Telecommunication Products' Northern Technologies subsidiary, which specializes
in surge protection devices for cellular and personal communication systems.
Engineered Endeavors' competition is primarily regional, with Valmont, Fort
Worth Tower, Summit Manufacturing, Piro and UNR Roan being its main
competitors. Engineered Endeavors will also benefit from Telecommunication
Products' strong international presence.
Electronic Connectors and Components. Effective December 1998,
Telecommunication Products reorganized the operations of its connectors
subsidiaries, Johnson Components, Aim Electronics, Cambridge Products and
Vitelec Electronics. The reorganization consisted of centralizing
manufacturing, sales and marketing, and headquarters operations at Johnson's
Waseca, Minnesota facility. Aim Electronics' Sunrise Florida facility and
Vitelec's Bordon, England facility are still used for assembly, distribution
and sales operations. Electric Connectors and Components still sells and
markets its products under the Johnson Components, Aim Electronics, Cambridge
Products and Vitelec Electronics tradenames.
Electronic Connectors and Components is a leading designer, developer,
manufacturer and distributor of standard, sub-miniature and micro-miniature
radio frequency and other connectors and related products for use in cable
assemblies, mobile communications, voice/data communications, testing
instruments, computers, security equipment and other applications. Electronic
Connectors and Components has a reputation for delivering high-quality products
with a high degree of service and expedited delivery. Of its 1998 net sales,
radio frequency connectors/adaptors represented approximately 59%, voice/data
products accounted for approximately 15%, cable assemblies comprised
approximately 9%, and electronic hardware and other electronic components were
responsible for approximately 17%. Electronic Connectors and Components' net
sales for the year ended December 31, 1998 were $43.0 million.
Electronic Connectors and Components manufactures, assembles and
distributes its products in a timely and cost-effective manner worldwide. Its
manufactured radio frequency connectors (including sub-miniature and
micro-miniature) are made 98% from brass bar and rod stock. The brass bar is
machined to specification and then plated. Manufactured hardware and other
electronic components
44
<PAGE>
are produced from various metals as well as injection-molded parts, and often
require manual assembly. Electronic Connectors and Components' efficient,
fully-integrated manufacturing system and warehouse operations allow 26% of its
manufactured product orders to be shipped within 24 hours. The industry's
average lead time is six to eight weeks. The assembly operations import
materials from Taiwan, Hong Kong and the United Kingdom. The operations are
fully automated and have excellent order processing and warehouse systems.
These systems allow Electronic Connectors and Components to ship assembled
product within 24 hours of receipt of an order 90% of the time, on average.
Electronic Connectors and Components' products are sold to OEMs
(approximately 18% of 1998 sales) and general line distributors (approximately
82% of 1998 sales). Its OEM customers include Hewlett-Packard, Nokia, Motorola,
Ericsson and Tandy. Electronic Connectors and Components sells its products
through a direct sales force of 11 and a coordinated effort with over 100
manufacturing representatives belonging to over 20 independent representative
organizations. Sales to North America and South America are coordinated out of
Electronic Connectors and Components' headquarters, while European sales are
managed by a United Kingdom-based sales manager. International sales comprised
approximately 23% of 1998 revenues. Electronic Connectors and Components'
customer base is large and diverse, and no one customer accounted for more than
5% of sales. The top 10 customers accounted for approximately 18% of sales in
1998.
The electronic connector and components industry is highly fragmented with
over 1,500 manufacturers competing worldwide. Electronic Connectors and
Components competes with different suppliers in each of the various categories
of the overall market, as well as with large national suppliers such as
Amphenol, M-A/COM (a division of AMP), Radiall and Pan-Pacific. Electronic
Connectors and Components focuses on the customer niche that values high
quality products with a quick turnaround time and superior customer service.
Cable Assemblies
Bond Technologies. In 1996 Jordan Industries purchased 80% of the
outstanding common stock of Bond Technologies, which was founded in 1988. Bond
Technologies designs, engineers and manufacturers high-quality custom
electronic cables and connector sub-assemblies for computer-related and
telecommunications customers. All of Bond Technologies' products are
custom-made. Bond Technologies has three fully integrated, independent
manufacturing facilities. Bond Technologies has rapidly become an industry
leader due to its commitment to high quality and its competitively priced
products offered in conjunction with outstanding and dependable service.
Bond Technologies has established two sales agencies in Northern and
Southern California. Bond Technologies is continuing to actively solicit new
strategic customers located throughout the United States via an independent
sales representative network. Bond Technologies' single-largest customer
accounted for approximately 31% of its net sales in 1998, while its top five
customers accounted for approximately 53%. Bond Technologies' net sales for the
year ended December 31, 1998 were $13.9 million.
K&S Sheet Metal. In January 1998, Bond Technologies purchased K&S Sheet
Metal, a manufacturer of precision metal electronic enclosures and box-build
assemblies for electronic OEMs. Box-build assemblies consist of precision metal
enclosures outfitted with power supplies, fans, cable assemblies and other
electronic and mechanical components. All of K&S Sheet Metal's products are
customized according to customer specifications. Approximately 96% of K&S Sheet
Metal's 1998 revenues are derived from the sale of precision metal enclosures,
while the remaining 4% are derived from box-build assemblies. K&S Sheet Metal's
pro forma net sales for the year ended December 31, 1998 were $12.0 million.
K&S Sheet Metal has carved a niche as a supplier of short to medium run
complicated boxes where it can demand a premium price for good product quality
and service. It sells directly to many of the largest data storage, computer
and telecommunication product OEMs in Southern California. Its top five
customers are Kingston Technologies Corporation, MGE -UPS Systems, Gateway
2000, OLEC and Cherokee International.
45
<PAGE>
LoDan. LoDan, founded in 1967 and acquired by Jordan Industries in May
1997, designs, engineers, manufactures, and distributes high-quality, custom
electronic cable assemblies, sub-assemblies, and electro-mechanical assemblies
to OEMs in the data and telecommunications segments of the electronics
industry. LoDan manufactures approximately 49% of the products it sells
in-house at an ISO-9001 certified manufacturing facility, with the remaining
51% being distributed products. LoDan's net sales were $28.8 million for the
year ended December 31, 1998.
The acquisition of LoDan has bolstered Telecommunication Products'
presence in the custom cable assembly business. LoDan's customer base, which
complements Bond Technologies', was built based on providing innovative
solutions to customers' needs. LoDan's largest customer, Cisco Systems (43% of
1998 revenues), is the world's pre-eminent networking company and provides
LoDan with access to international markets. LoDan's products are sold through
internal and external sales forces.
Bond Technologies and LoDan supply the custom cable assembly market and
encounter competition from a broad range of companies, several of which are
much larger and have greater financial resources than either Bond Technologies
or LoDan. In addition to other independent manufacturers of cable assemblies,
offshore manufacturers compete in this market, primarily on the basis of price.
Competition within the industry is based on quality, production, capacity,
breadth of product line, engineering support capability, price, local support
capability, systems support and financial strength.
Telephone Services, Inc. In 1997, Telecommunication Products acquired 70%
of the outstanding common stock of Telephone Services, which was founded in
1984. Telephone Services designs, manufacturers and distributes custom cable
assemblies (approximately 82% of 1998 net sales), terminal strips and terminal
blocks (approximately 8% of 1998 net sales), and other connecting devices
(approximately 10% of 1998 net sales), primarily to the telephone operating
companies and major telecommunications OEMs. Telephone Services has established
a reputation for high-quality products, on-time delivery and dependable
service. For the year ended December 31, 1998, its net sales were $45.7
million.
Telephone Services designs its products on an engineer-to-engineer basis
for specific telecommunication applications. Its manufacturing equipment
consists of numerous crimping and stripping devices used to manufacture cable
assemblies and test equipment for quality control purposes. Its manufacturing
process is extremely efficient, enabling it to finish prototype and
pre-production assemblies within one week. After pre-production, general
production lead times average one to three weeks. Telephone Services' technical
expertise and efficient production process have enabled it to establish strong
relationships with many of the largest telecommunication companies.
Telephone Services manufactures cable assemblies for approximately 100
telecommunication OEMs. It sells its products through a direct sales force of
eight regional salespeople who are supported internally by a staff of
engineering and technical application engineers. The direct salesperson also
functions as an application engineer and interacts directly with the customer's
design engineers. Telephone Services' largest customer is Pacific Bell, which
represented approximately 24% of net sales in 1998. The next four largest
customers in 1998 were Tekontrol, approximately 17%, GTE, approximately 15%,
Sprint, approximately 9%, and A.D.C., approximately 6%. Other top customers
include Southwestern Bell, Nynex, World Com and M.F.S. Communications.
The cable assembly business is highly fragmented, but is experiencing
strong growth as telecommunication companies continue to outsource this
subcomponent. Telephone Services' competition is regional by product line, and
cable assembly competitors include Majestic Management, Inc., Varitronics and
Telect, while terminal block competitors include Thomas & Betts and Lucent
Technologies.
A key component of Telephone Services' growth involves acquisitions of
smaller companies with product line and/or customer synergies. As part of this
strategy, in July 1998, Telephone Services acquired Opto-Tech Industries, Inc.,
a manufacturer of a variety of filters, attenuaters and other
46
<PAGE>
miscellaneous equipment for the telecommunications industry. Most of
Opto-Tech's sales are to Regional Bell Operating Companies. Opto-Tech
Industries is a good fit for Telephone Services because of their overlapping
customer base. Opto-Tech's operations have been fully integrated into those of
Telephone Services.
MOTORS AND GEARS
Motors and Gears is a leading domestic manufacturer of specialty purpose
electric motors and gears, serving a diverse customer base. Its products are
used in a broad range of applications, including vending machines, refrigerator
ice dispensers, commercial floor care equipment, elevators and photocopy
machines. The Motors and Gears subsidiaries have sold their brand name products
to their customers for an average of over 70 years. For the year ended December
31, 1998, Motors and Gears' subsidiaries generated combined pro forma net sales
of $296.2 million. Each of Motors and Gears' subsidiaries is discussed below.
Motors and Gears' three primary product lines are subfractional motors
(approximately 38% of 1998 sales), fractional/integral motors (approximately
40% of 1998 sales) and controls (approximately 22% of 1998 sales).
Subfractional Motors
Merkle-Korff. Merkle-Korff was founded in 1911. Jordan Industries
purchased Merkle-Korff, along with its wholly owned subsidiaries, Elmco
Industries, Inc. and Mercury Industries, Inc., in September 1995. Merkle-Korff
is a custom manufacturer of Alternating Current ("AC") and Direct Current
("DC") subfractional horsepower 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, and
its Coleman Motors product line is used in copiers, printers, ATM machines,
currency changers, x-ray machines, peristatic pumps, HVAC activators, medical
equipment and other applications. Approximately 67% of Merkle-Korff's 1998 net
sales were derived from the home appliance and vending machine market.
Merkle-Korff's products are primarily sold to OEMs, and prominent customers
include General Electric Company, Whirlpool Corporation and Dixie-Narco, Inc.
Merkle-Korff's top 10 customers represented approximately 60% of net sales in
1998. Merkle-Korff's net sales for the year ended December 31, 1998 were $103.1
million.
Merkle-Korff experiences limited competition across its product lines.
Competitors, such as Molon Motors and ECM, are generally much smaller in terms
of revenues and also produce a much more limited product line.
Fractional/Integral Motors
Imperial Electric Company. Founded in 1889 and acquired by Jordan
Industries in 1988, Imperial manufactures elevator motors, floor care equipment
motors and automatic hose reel motors under its Imperial trade name, and floor
care, silicone controlled rectifier motors (variable speed motors used in
treadmills, conveyers, machine tools and mixing and transferring pumps), and
low voltage DC motors under its Scott trade name. Scott was acquired by
Imperial in 1988 and was merged into Imperial in early 1997.
Imperial designs, manufactures and distributes its specialty electric
motors for industrial and commercial use. It manufactures its products with
steel, magnets, copper wire, castings and other components supplied by a
variety of firms. Its products, AC and DC motors, generators and permanent
magnet motors, are sold principally in the United States and Canada and to a
limited extent in Europe and Australia. In 1998, approximately 54% of
Imperial's net sales were derived from permanent magnet motors sold primarily
to domestic manufacturers of floor care equipment, 26% were derived from
elevator motors sold to major domestic elevator manufacturers, 8% from hose
reels and 12% from other products. Imperial's net sales for the year ended
December 31, 1998 were $37.4 million (before the elimination of intercompany
sales).
47
<PAGE>
Otis Elevator Company, Westinghouse Corporation and other leading elevator
manufacturers have in recent years ceased manufacturing motors and have turned
to Imperial and other independent manufacturers to supply motors. Imperial's
largest customer accounted for approximately 9% of its 1998 net sales, while
the top 10 customers accounted for approximately 50%. Imperial's products are
marketed domestically by its management and one independent sales
representatives, and internationally by management.
In the elevator motor market, Imperial competes with several firms of
varying size. The other markets in which Imperial competes are also highly
competitive. Imperial believes that it competes effectively with these firms on
the basis of product reliability, price and customer service.
In December 1998, Imperial acquired Euclid Universal, Inc., a designer and
manufacturer of gear drives for special applications where stock items will not
fit or meet performance requirements. Euclid's products include speed reducers,
custom gearing, right angle gearboxes and transaxles. Its customized products
are used in an array of industries, including materials handling, healthcare,
agriculture, floor care and food processing. Euclid's technical expertise lies
in the areas of worm, spur and helical gearing.
Euclid maintains a flexible engineering and production process that yields
a rapid response in design, prototype and production. All gearing is
manufactured in-house to industry standards and housings are made of high
strength, heat treated aluminum alloys, cast iron or steel. Euclid is able to
produce food grade finishes to its products, as well as hard coating for the
stringent wash down equipment requirements. We believe that the addition of
Euclid provides cross selling opportunities with Imperial, Gear and Advanced DC
Motors. Currently, Euclid is working with Imperial to develop a transaxle
product for the floor care industry. We believe that the ability to provide
this product will enable Imperial to broaden its product line and to defend its
market share in the floor care industry.
Gear Research Company. Founded in 1952 and acquired by Imperial in October
1988, Gear manufactures precision gears and gear boxes for OEMs requiring
high-precision commercial gears. 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 salesman and one
independent sales representative. Gear precision machines its products from
steel forgings and castings. Gear's net sales for the year ended December 31,
1998 were $7.7 million.
The gear industry is very fragmented and competitive. Gear competes
primarily on the basis of quality. In addition, the ability of Imperial and
Gear to offer both electric motors and gear boxes as a package, and to custom
design these items for customers, may allow both companies to gain greater
market penetration.
Fir Elettromeccanica. Founded in 1925 and acquired by Jordan Industries in
June 1997, Fir is a leading European manufacturer of AC and DC motors and pumps
for special-end applications such as pumps for commercial dishwashers, motors
for industrial sewing machines, motors for industrial fans and ventilators,
explosion-proof motors for gasoline pumps and the oil industry, and
asynchronous and brushless motors for elevator doors. With the exception of
motors for industrial sewing machines, Fir produces custom products only after
receiving specific customer orders. Motors for industrial sewing machines,
which comprised approximately 9% of Fir's 1998 net sales, are fairly
standardized and are manufactured and stocked based on internal forecasts.
Fir's net sales for the year ended December 31, 1998 were $42.1 million.
Fir sells directly to customers and through two non-exclusive independent
sales representatives located in France and Germany. Fir enjoys long-term
relationships with its customers, some of which have been customers of Fir for
over 20 years. The successful development of long-term customer relationships
is a direct result of Fir's reputation for high-quality products and on-time
delivery. Within Fir's customer base of over 450, no single customer accounted
for more than 5% of 1998 net sales. Fir's top 10 customers accounted for
approximately 32% of 1998 net sales.
48
<PAGE>
Fir has many competitors across a very fragmented European motor market.
However, Fir distinguishes itself by providing highly engineered custom
products for small markets.
Fir provides Motors and Gears with a strong foundation upon which to
expand its overseas market. Through Fir, Motors and Gears has access to
established European markets, including Italy, Germany, France, Spain and Great
Britain, as well as emerging Eastern European markets such as Poland, the Czech
Republic and Russia. Through Fir's European market presence and established
brand name, we believe Fir will enable Motors and Gears to further develop
leadership positions within market niches and to expand globally.
Advanced DC Motors. Founded in 1989 and purchased by Motors and Gears in
1998, Advanced DC Motors is a designer and manufacturer of DC permanent magnet
motors and starters (generators) which range from 4.5 inches to 9 inches in
size. Advanced DC Motors sells special purpose custom designed motors for use
in electric lift trucks, power sweepers, electric utility vehicles, golf carts,
electric boats and other niche products. Advanced DC Motors also manufactures
and sells commutators, which are motor components used to reverse the direction
of electric current in motors, as well as special purpose production equipment.
Special purpose motors comprised approximately 95% of Advanced DC Motors' net
sales in 1998, while commutators and production equipment accounted for
approximately 5%. Advanced DC Motors' pro forma net sales for the year ended
December 31, 1998 were $44.3 million.
Advanced DC Motors is a fully-integrated manufacturer, with nearly 100% of
its products manufactured to custom specifications developed through direct
engineer-to-engineer design. Advanced DC Motors is capable of producing
high-volume orders, none of which are for stock. As a result, Advanced DC
Motors carries virtually no finished goods inventory. Advanced DC Motors has
several production facilities, each specializing in some aspect of its
business, such as motor production, commutator production for internal and
external use, manufacturing of production equipment for internal and some
external use, production of field coils and armature coils used primarily for
internal production and research and development of electronic control
products. Advanced DC Motors also has a warehouse facility in Germany used to
service its European customers.
Advanced DC Motors primarily sells directly to OEMs through its executive
team, due to the technical nature of the sale. Advanced DC Motors uses one
independent representative. Advanced DC Motors also sells to distributors who
serve the on-road electric vehicle market. Advanced DC Motors' largest customer
accounted for approximately 28% of sales and the top five customers accounted
for approximately 72% in 1998.
Controls
Motion Control Engineering. Founded in 1983 and acquired by Motors and
Gears in 1997, Motion Control is a leading supplier of electronic motion and
logic control products to the elevator industry. Motion Control designs,
engineers and assembles custom microprocessor-based control systems primarily
used in modernizing and upgrading existing cable traction and hydraulic
elevators (approximately 90% of 1998 net sales), and also provides systems for
elevators installed in new building construction (approximately 10% of 1998 net
sales). Motion Control fits closely with Motors and Gears' Imperial subsidiary,
which supplies motor products to the elevator industry. The addition of Motion
Control enables Motors and Gears to provide the elevator industry with a
complete value-added motor and control package. Motion Control had net sales of
$51.3 million for the year ended December 31, 1998.
Motion Control's production process consists primarily of assembling
electronic components in a cabinet and testing the final product. Virtually all
component parts, such as personal computer boards, switches, resistors,
drivers, transformers, wire and cabinets are supplied through a network of
wholesalers and distributors, none of which Motion Control is reliant on.
Motion Control's production process is designed to accommodate flexibility and
efficiency in a custom-production environment. Motion Control's engineers
design most of Motion Control's products in a modular format to accommodate
customization.
49
<PAGE>
Motion Control sells through a direct sales force to major elevator
manufacturers (approximately 32% of 1998 sales), large and small independent
contractors (approximately 62% of 1998 sales), and international companies
(approximately 6% of 1998 sales). Motion Control's sales and marketing staff of
approximately 20 consists of eight sales representatives, seven of whom cover
the domestic market and one Australia-based employee who serves the Australian
market and all international customers. Motion Control also engages in
marketing and promotional activities such as presentations at trade shows and
industry conventions; development of brochures; articles and advertisements in
trade magazines; direct mailings to customers; and a quarterly newsletter
distributed to over 3,000 existing and potential customers.
Elevator modernization projects represent Motion Control's primary market.
Motion Control focuses on the high-end domestic elevator modernization market,
a niche which represents approximately 5% of the entire worldwide elevator
control market. Elevator modernization primarily involves cosmetic, structural,
or performance enhancements to an existing elevator system. While an elevator
may last 30-40 years, its controls are typically replaced two-to-three times
during its life. Further, while the worldwide elevator market is growing at
approximately 4% annually, the elevator modernization niche is growing at
approximately 20% annually. This growth is expected to continue as new
electronic control technology is developed. Motion Control's technology is also
transferrable to other non-elevator motion control and drive markets, such as
factory automation, commercial equipment and appliances.
Electrical Design and Control. Founded in 1958 and purchased by Motors and
Gears in 1997, Electrical Design and Control designs, engineers, and
manufactures electrical control systems and panels for material handling
systems and similar applications. Electrical Design and Control's products
regulate the speed and movement of conveyor systems used in a variety of
automotive plants and other industrial applications. Electrical Design and
Control's net sales for the year ended December 31, 1998 were $10.3 million.
Electrical Design and Control provides its customers with two distinct
types of product/service. The first type consists of designing, programming,
manufacturing, and commissioning the control system. These types of orders,
which represented approximately 65% of 1998 orders, are value-added to the
customer and therefore earn higher margins. The second type of product/service
consists of manufacturing only, in which the customer provides Electrical
Design and Control with control panel designs and specifications and Electrical
Design and Control manufactures and assembles the product. These projects
comprised approximately 35% of 1998 orders.
Electrical Design and Control obtains the majority of its revenues through
repeat business, referrals from its current customer base, and requests for
proposals brought to Electrical Design and Control due to its reputation for
high quality design. Approximately 98% of 1998 net sales were to the automobile
industry. Auto manufacturers have very stringent requirements regarding their
material handling systems, and Electrical Design and Control has gained
significant expertise from servicing these demanding automotive OEMs. This
expertise provides Electrical Design and Control with a competitive advantage
in less technically demanding markets. The company's largest customer accounted
for approximately 35% of revenues, while the top five customers accounted for
approximately 70% in 1998.
BACKLOG
As of December 31, 1998, we had a backlog of approximately $134.4 million
(approximately $28.3 million of which was attributed to the Restricted Group),
compared with approximately $109.6 million as of December 31, 1997
(approximately $25.2 million of which was attributed to the Restricted Group).
The backlog is primarily due to titanium hot formed sales at Parsons, motor
sales at Merkle-Korff and cable assembly sales at LoDan. We believe that the
backlog may not be indicative of future sales.
Our aggregate business has a certain degree of seasonality. Sales
Promotion Associates' and Riverside's sales are somewhat stronger toward
year-end due to the nature of their products. Calendars at Sales Promotion
Associates have an annual cycle, while Bibles and religious books at Riverside
are popular as holiday gifts.
50
<PAGE>
RESEARCH AND DEVELOPMENT
As a general matter, we operate 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
Jordan Industries.
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
We rely on a combination of patent, copyright, trademark and trade secret
laws and contractual agreements to protect our proprietary technology and
know-how. For example, Dura-Line has a U.S. patent for producing a form of
Innerduct sold under the trademark SILICORE which is lubricated to permit
easier installation of fiber optic cable.
We own and use trademarks and brandnames to identify ourself as a source
of certain goods and services, including the DURA-LINE and SILICORE trademarks,
both of which are registered in the United States and various foreign
countries, and the VIEWSONICS brandname, in which we have common law rights.
There can be no assurance that we will be granted additional patents or that
our patents either will be upheld as valid if ever challenged or will prevent
the development of competitive products. The U.S. patent with respect to the
SILICORE lubricant lining expires in 2007. We have not sought foreign patents
for most of our technologies, including technologies which have been patented
in the United States, which may adversely affect our ability to protect our
technologies and products in foreign countries. We also own and license other
patents, trademarks and copyrights. We protect our confidential, proprietary
information as trade secrets.
Except for the SILICORE polymer pipe products, certain of our cable
television components and our fiber optic connector technology, our products
are generally not protected by virtue of any proprietary rights such as
patents. There can be no assurance that the steps taken by us to protect our
proprietary rights will be adequate to prevent misappropriation of our
technology and know-how or that our competitors will not independently develop
technologies that are substantially equivalent to or superior to our
technology. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States. In
our opinion, the loss of any intellectual property asset, other than the
DURA-LINE or SILICORE trademarks, or the patent or manufacturing trade secret
covering the solid co-extruded polymer lubricant lining used in connection with
the SILICORE technology, would not have a material adverse effect on the
conduct of our business.
We are also subject to the risk of adverse claims and litigation alleging
infringement of the proprietary rights of others. From time to time, we have
received notice of infringement claims from other parties. Although we do not
believe we infringe the valid proprietary rights of others, there can be no
assurance against future infringement claims by third parties with respect to
our current or future products. The resolution of any such infringement claims
may require us to enter into license arrangements or result in protracted and
costly litigation, regardless of the merits of such claims.
EMPLOYEES
As of December 31, 1998, we and our subsidiaries employed approximately
7,092 people. Approximately 1,189 of these employees were members of labor
unions at Sate-Lite, Gear, Imperial, Sales Promotion Associates, 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. We
believe that our subsidiaries' relations with their respective employees are
good.
Alma Piston Company is a party to a collective bargaining agreement with
the Oil, Chemical and Atomic Workers' Union covering 475 of Alma Piston's 595
employees. The collective bargaining agreement expires on May 1, 1999. At the
end of the term of the preceding collective bargaining agreement in 1996, Alma
Piston and its employees were initially unable to agree on the terms of a new
agreement, and Alma Piston's employees went on strike for a period of 30 days.
We cannot
51
<PAGE>
assure you that Alma Piston will be able to negotiate a new collective
bargaining agreement prior to the end of the current agreement or that Alma
Piston's employees will not go on strike.
ENVIRONMENTAL REGULATIONS
We are subject to voluminous and complex foreign, federal, state and local
environmental laws and regulations ("Environmental Laws") which regulate, among
other things, air and water emission, the generation, storage, treatment,
transportation, and disposal of hazardous substances and, in some
circumstances, the condition of industrial property prior to transfer or sale.
The content of these Environmental Laws is ever-changing, as are the
interpretations and priorities of those who enforce them. Because we operate
numerous manufacturing facilities, our operations are heavily subject to these
Environmental Laws, and we periodically make capital expenditures to meet their
requirements and periodically are required to contribute to the remediation of
contamination at sites at which our waste has been disposed. While historically
these expenditures have not been material, we cannot assure you that we will
not incur material expenses for environmental compliance in the future.
Furthermore, pursuant to Environmental Laws, current and past owners and
"operators" of real estate (including lessees) may be liable for the costs of
removal and/or remediation of certain hazardous substances on, in or about such
properties. The liability imposed by such laws is often joint and several, and
without regard to whether the owner/operator knew of, or was responsible for,
the presence of such hazardous substances. Because we own and lease numerous
properties in connection with our operations, we periodically incur costs to
investigate and remediate environmental contamination. While historically these
expenditures have not been material, we cannot assure you that we will not
incur material expenses for environmental remediation in the future.
Based on our pre-acquisition diligence, from time to time we have
determined that certain of our acquisitions are or may be subject to
environmental liabilities that may be material. In those circumstances we
endeavor to protect ourselves with contractual indemnities and, where
appropriate, escrowed funds. We believe that we are adequately protected by
these indemnities and escrowed funds, but there can be no assurance that the
liabilities will not exceed the funds in the escrow and/or the ability of the
sellers to indemnify us.
In October 1997, the Tennessee Department of Environmental Control (DEC)
requested information from Dacco about a contaminated spring adjacent to its
Cookeville, Tennessee property. The spring is reportedly contaminated with
materials which Dacco does not believe it ever used at the facility, and Dacco
therefore does not believe that it caused the contamination or that it will be
responsible for the cleanup. In September 1998, the DEC informed Dacco that the
spring requires further investigation, and that the Cookeville property meets
the criteria for designation as a state Superfund cleanup site. The DEC has
subsequently agreed to examine the potential liability of other companies in
the area before pursuing Dacco for cleanup costs. While we do not believe that
Dacco will be liable for the cost of any further investigation or cleanup,
there can be no assurance that the DEC will not attempt to impose such
liability, or that, if the DEC is successful in doing so, that such liability
would not be material.
PROPERTIES
We lease approximately 31,700 square feet of office space for our
headquarters in Illinois. The principal properties of each subsidiary at
December 31, 1998, and the location, the primary use, the capacity, and
ownership status thereof, are set forth in the table below:
<TABLE>
<CAPTION>
SQUARE OWNED
COMPANY LOCATION USE FEET LEASED
- ---------------------------- -------------------- ------------------------------ -------- -------
<S> <C> <C> <C> <C>
Advanced DC Motors ......... Dewitt, NY Manufacturing/Administration 49,600 Owned
Syracuse, NY Manufacturing 45,000 Leased
Carrollton, TX Manufacturing/Administration 29,000 Leased
Dewitt, NY Manufacturing 18,500 Leased
Eternoz, France Manufacturing/Administration 10,000 Leased
Putzbrunn, Germany Warehouse 1,200 Leased
Palo Alto, CA R&D 1,000 Leased
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
SQUARE OWNED
COMPANY LOCATION USE FEET LEASED
- ------------------------------ --------------------------- --------------------------------------- --------- -----------
<S> <C> <C> <C> <C>
Alma Products ................ Alma, Michigan Manufacturing/Administration 369,000 Owned
(2 buildings) 90,000 Owned
Warehouse (3 buildings) 12,000 Leased
Beemak ....................... Rancho Dominguez, CA Manufacturing/Administration 110,000 Leased
Bond Technologies ............ Huntington Beach, CA Manufacturing/Administration 150,000 Leased
Austin, TX Manufacturing/Administration 13,000 Leased
Anaheim, CA Manufacturing/Administration 22,000 Leased
Cape Craftsmen ............... Elizabethtown, NC Manufacturing 230,200 Leased
Wilmington, NC Administration 8,500 Leased
Cho-Pat ...................... Hainesport, NJ Manufacturing/Administration 7,000 Leased
Dacco ........................ Cookeville, TN Administration/Manufacturing 140,000 Owned
Huntland, TN Manufacturing 65,000 Owned
Rancho Cucamonga, CA Administration/Manufacturing 40,000 Owned
Deflecto ..................... Indianapolis, IN Manufacturing/Administration 200,000 Leased
Indianapolis, IN Manufacturing 38,100 Leased
Indianapolis, IN Manufacturing 25,600 Leased
St. Catherines, Ontario Manufacturing 30,000 Owned
St. Catherines, Ontario Manufacturing 30,000 Leased
Dura-Line .................... Pryor, OK Manufacturing/Administration 33,750 Owned
Beranang, Malaysia Manufacturing/Administration 64,000 Leased
Ciudad Real, Spain Manufacturing/Administration 3,000 Leased
Sao Paolo, Brazil Sales 600 Leased
Middlesboro, KY Manufacturing/Administration 80,000 Owned
Grimbsby, U.K. Manufacturing/Administration 35,000 Owned
Sparks, NV Manufacturing 35,000 Owned
Zlin, Czech Republic Manufacturing/Administration 40,000 Owned
Knoxville, TN Administration 10,000 Leased
Tel Aviv, Israel Manufacturing/Administration 10,000 Leased
Queretaro, Mexico Manufacturing/Administration 43,000 Leased
Mexico City, Mexico Sales Office/Administration 2,000 Leased
Shanghai, China Manufacturing/Administration 50,000 Owned
Shanghai, China Sales Office/Administration 1,000 Leased
Goa, India Manufacturing/Administration 48,000 Owned
New Delhi, India Sales Office/Administration 2,000 Leased
Electrical Design and Control Troy, MI Manufacturing/Administration 29,400 Leased
Electronic Connectors and
Components .................. Bordon, U.K. Distribution/Administration/Assembly 16,500 Owned
Sunrise, FL Distribution/Administration/ Assembly 28,000 Leased
Waseca, MN Manufacturing/Administration 70,000 Subleased
Paris, France Sales 1,000 Leased
Engineered Endeavors ......... Mentor, OH Manufacturing/Administration 48,000 Leased
Belle Chasse, LA Warehouse 195,000 Leased
Fir .......................... Casalmaggiore, Italy Manufacturing/Administration 100,000 Owned
Varano, Italy Manufacturing 30,000 Owned
Bedonia, Italy Manufacturing 8,000 Owned
Genova, Italy Manufacturing 33,000 Leased
Reggio Emilia, Italy Manufacturing 35,000 Leased
Reggio Emilia, Italy Manufacturing 30,000 Leased
Gear ......................... Grand Rapids, MI Manufacturing/Administration 39,00 0 Owned
Imperial ..................... Alamogordo, NM Manufacturing 15,000 Leased
Akron, OH Manufacturing/Administration 43,000 Owned
Stow, OH Administration 7,000 Leased
Middleport, OH Manufacturing 85,000 Owned
Cuyahoga Falls, OH Manufacturing 63,000 Leased
Bedford, OH Manufacturing/Administration 25,000 Leased
LoDan ........................ San Carlos, CA Manufacturing/Administration 22,500 Leased
San Carlos, CA Manufacturing 13,500 Leased
Merkle-Korff ................. Des Plaines, IL Manufacturing/Administration 38,000 Leased
Des Plaines, IL Manufacturing/Administration 45,000 Leased
Richland Center, WI Manufacturing/Administration 45,000 Leased
Darlington, WI Manufacturing 68,000 Leased
Des Plaines, IL Manufacturing/Administration 112,000 Leased
Motion Control ............... Rancho Cordova, CA Manufacturing/Administration 40,000 Leased
Northern ..................... Liberty Lake, WA Manufacturing/Administration 22,600 Leased
Pamco ........................ Des Plaines, IL Manufacturing/Administration 24,500 Owned
Parsons ...................... Parsons, KS Manufacturing/Administration 97,500 Owned
Riverside .................... Iowa Falls, IA Distribution/Administration 65,900 Leased
Sparks, NV Distribution 35,000 Leased
Rolite ....................... Midvale, OH (3 buildings) Manufacturing/Administration 20,500 Owned
Sate-Lite .................... Niles, IL Manufacturing/Administration 120,000 Leased
Shunde, China Manufacturing/Administration 9,282 Sub-leased
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
SQUARE OWNED
COMPANY LOCATION USE FEET LEASED
- ------------------------------------ ------------------------ --------------------------------- --------- -------
<S> <C> <C> <C> <C>
Seaboard ........................... Fitchburg, MA Manufacturing/Administration 260,000 Owned
Miami, FL Manufacturing 90,000 Owned
Brentwood, NY Manufacturing 35,000 Leased
Brooklyn, NY Manufacturing 35,000 Leased
Sales Promotion Associates ......... Red Oak, IA Manufacturing/Administration 136,500 Owned
Coshocton, OH (four buildings) 240,000 Leased
Manufacturing/Administration
Telephone Services ................. Grand Prairie, TX Manufacturing/Administration 15,000 Leased
Riverview, FL Manufacturing 75,000 Leased
Tampa, FL Manufacturing 20,000 Leased
Shasta Lake, CA Manufacturing 5,000 Leased
Valmark ............................ Fremont, CA Manufacturing/Administration 46,000 Leased
Fremont, CA Manufacturing/Administration 15,000 Leased
Viewsonics ......................... Boca Raton, FL Administration/Distribution/R&D 14,500 Leased
Shanghai, China Manufacturing/Administration 25,000 Leased
St. Petersburg, Russia Manufacturing/Administration 10,000 Leased
</TABLE>
Dacco also owns or leases 35 distribution centers, which average 4,000
square feet in size. Dacco maintains four distribution centers in Florida, five
distribution centers in Tennessee, two distribution centers in each of
Illinois, Arizona, Michigan, Texas, Alabama, California, Ohio, Virginia; and
the remaining distribution centers are located in Pennsylvania, Indiana,
Minnesota, Missouri, Nebraska, West Virginia, Oklahoma, South Carolina, Nevada,
and Kentucky.
Merkle-Korff's facilities are leased from the chairman of Merkle-Korff and
Northern Technologies' Liberty Lake, Washington, facility is leased from a
general partnership consisting of the former owners. We believe that the terms
of these leases are comparable to those which would have been obtained by us
had these leases been entered into with an unaffiliated third party.
We also have sales representatives in field offices in Florida, Illinois,
Ohio, Oregon, Virginia and internationally in Brazil, Bulgaria, Germany,
Malaysia, Romania, Russia and Slovakia.
To the extent that any of our existing leases expire in 1999, we believe
that we will be able to renegotiate them on acceptable terms. We believe that
our existing leased facilities are adequate for our and our subsidiaries'
operations.
LEGAL PROCEEDINGS
On January 21, 1997, Welcome Home filed for Chapter 11 bankruptcy
protection. As a result of the Chapter 11 filing, the results of Welcome Home
are not consolidated with Jordan Industries' results for periods subsequent to
January 21, 1997. As of December 31, 1998, Jordan Industries' aggregate
investment in Welcome Home was approximately $2.0 million. See note 3 to the
Company's financial statements.
Our subsidiaries are parties to various other legal actions arising in the
normal course of their business. We believe that the disposition of such
actions individually or in the aggregate will not have a material adverse
effect on our consolidated financial position.
54
<PAGE>
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the names and ages of each of the Company's
directors and executive officers and the positions they hold at the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------ ----- --------------------------------------------------
<S> <C> <C>
John W. Jordan II ............ 51 Chairman of the Board of Directors and Chief
Executive Officer.
Thomas H. Quinn .............. 51 Director, President and Chief Operating Officer.
Joseph S. Steinberg .......... 55 Director.
David W. Zalaznick ........... 43 Director.
Jonathan F. Boucher .......... 42 Director, Vice President and Assistant Secretary.
G. Robert Fisher ............. 59 Director, General Counsel and Secretary.
</TABLE>
Each of the directors and executive officers of the Company will serve
until the next annual meeting of the stockholders 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
Company's board of directors (the "Board of Directors").
Set forth below is a brief description of the business experience of each
director and executive officers of the Company.
MR. JORDAN has served as Chairman of the Board of Directors and Chief
Executive Officer of the Company since 1988. Mr. Jordan is a managing partner
of The Jordan Company, a private merchant banking firm which he founded in
1982. Mr. Jordan is also a director of American Safety Razor Company,
AmeriKing, Inc., Carmike Cinemas, Inc., Archibald Candy Corporation, GFSI,
Inc., GFSI Holdings, Inc., Jordan Telecommunication Products, Inc., Motors and
Gears, Inc., Rockshox, Inc. and Apparel Ventures, Inc., as well as other
privately held companies. In December 1996, Mr. Jordan resigned as a director
and officer of Welcome Home. In January 1997, Welcome Home filed a voluntary
petition for bankruptcy.
MR. QUINN has served as a director, President and Chief Operating Officer
of the Company since 1988. From November 1985 to December 1987, Mr. Quinn was
Group Vice President and a corporate officer of Baxter International. From
September 1970 to November 1985, Mr. Quinn was employed by American Hospital
Supply Corporation, where he was a Group Vice President and a corporate officer
when American Hospital was acquired by Baxter. Mr. Quinn is also the Chairman
of the Board and Chief Executive Officer of American Safety Razor Company and
Archibald Candy Corporation, Chairman of the Board of Motors and Gears, Inc.
and Jordan Telecommunication Products, Inc. and a director of AmeriKing, Inc.
and Welcome Home, as well as other privately held companies. In January 1997,
Welcome Home filed a voluntary petition for bankruptcy.
MR. STEINBERG has served as a director of the Company since 1988. Since
1979, Mr. Steinberg has been the President and a director of Leucadia National
Corporation, a bank holding company. He is also a Trustee of New York
University.
MR. ZALAZNICK has served as a director of the Company since June 1997.
Since 1982, Mr. Zalaznick has been a managing partner of The Jordan Company.
Mr. Zalaznick is also a director of Carmike Cinemas, Inc., AmeriKing, Inc.,
Marisa Christina, Inc., Motors and Gears, Inc., Apparel Ventures, Inc.,
American Safety Razor Company, Jackson Products, Inc., GFSI, Inc., GFSI
Holdings, Inc. and Jordan Telecommunication Products, Inc., as well as other
privately held companies.
MR. BOUCHER has served as a Vice President, Assistant Secretary and a
director of the Company since 1988. Since 1983, Mr. Boucher has been a partner
of The Jordan Company. Mr. Boucher is also a director of American Safety Razor
Company, Jordan Telecommunication Products, Inc. and Motors and Gears, Inc., as
well as other privately held companies. In December 1996, Mr. Boucher resigned
as a director and officer of Welcome Home. In January 1997, Welcome Home filed
a voluntary petition for bankruptcy.
55
<PAGE>
MR. FISHER has served as a director, General Counsel and Secretary since
1988. Since February 1999, Mr. Fisher has been a member of the law firm of
Sonnenschein Nath & Rosenthal, a firm that represents the Company in various
legal matters. From June 1995 until February 1999, Mr. Fisher was a member of
the law firm of Bryan Cave LLP. For 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.
EXECUTIVE COMPENSATION
The following table shows the cash compensation paid by the Company, for
the three years ended December 31, 1998, for services in all capacities to the
Chief Executive Officer and the President and Chief Operating Officer of the
Company.
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------ ------ ----------- ------------- ----------------
<S> <C> <C> <C> <C>
John W. Jordan, II, 1998 -- -- --
Chief Executive Officer (2) 1997 -- -- --
1996 -- -- --
Thomas H. Quinn 1998 $600,000 $1,402,950 $ 36,685
President and Chief 1997 500,000 2,392,524 870,000(3)
Operating Officer 1996 500,000 1,850,750 --
</TABLE>
- ----------
(1) The aggregate number of shares of restricted common stock held by the
Company's executive officers and directors at December 31, 1998 was 5,000
shares, consisting of 4,000 shares held by Mr. Quinn and 1,000 shares
held by Mr. Boucher. The value of the restricted shares is not able to be
calculated because there is no market price for shares of the Company's
unrestricted common stock. Dividends will be paid on the restricted
shares to the same extent paid on unrestricted shares. See
"Management--Restricted Stock Agreements."
(2) Mr. Jordan derived his compensation from the Jordan Company and
Jordan/Zalaznick Capital Company for his services to the Company and its
subsidiaries. He received no compensation from the Company or its
subsidiaries for his services as Chief Executive Officer.
(3) Represents the difference between the amount paid for 1,500 shares of
common stock and the related market value of the stock.
Employment Agreement. Mr. Quinn has an employment agreement with the
Company which provides for his 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 $600,000 per year, and he is provided with a
guaranteed bonus of $100,000 per year, 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 Messrs. Quinn and
Boucher, 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 and Boucher were issued 3,500 and
1,870.7676 Group 1 shares, respectively, and 4,000 and 1,000 Group 2 Shares,
respectively, at $4.00 per share. The Group 1 Shares are not subject to
repurchase or contractual restrictions on transfer pursuant to the Restricted
Stock Agreements. The Group 2 Shares are subject to repurchase at cost, in the
event that Messrs. Quinn or Boucher ceases to be employed (as a partner,
officer or employee) by the Company, The Jordan Company, Jordan/Zalaznick
Capital Company or any reconstitution thereof conducting
56
<PAGE>
similar business activities in which they are a partner, officer or employee.
If such person ceases to be so employed 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 or disability of any of the partners of The Jordan Company or
Jordan/Zalaznick Capital Company, the death or disability of such person, or
the sale of the Company. On January 1, 1992, the Company issued Messrs. Quinn
and Boucher 600 and 533.8386 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, 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. In June 1997, the Company issued an
additional 1,500 shares to Mr. Quinn for approximately $86.67 per share
pursuant to a similar Restricted Stock Agreement, under which such shares were
effectively treated as "Group 1 Shares." 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.
Directors' Compensation. We compensate our directors quarterly, at the
rate of $20,000 per year for each director. The Indenture permits director fees
of up to $250,000 per year in the aggregate. In addition, we reimburse
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.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table furnishes information, as of March 31, 1999, as to the
beneficial ownership of the Company's common stock by (i) each person known by
the Company to beneficially own more than 5% of the outstanding shares of
common stock, (ii) each director and executive officer of the Company, and
(iii) all officers and directors of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL OWNERSHIP
------------------------------
NUMBER OF PERCENTAGE
SHARES OWNED (1)
EXECUTIVE OFFICER AND DIRECTORS: ---------------- -----------
<S> <C> <C>
John W. Jordan II (2)(3)(4) ................................... 41,820.9087 42.5%
David W. Zalaznick (3)(5)(6) .................................. 19,965.0000 20.3%
Thomas H. Quinn (7) ........................................... 10,000.0000 10.2%
Jonathan F. Boucher (8) ....................................... 5,533.8386 5.6%
G. Robert Fisher (4)(9) ....................................... 624.3496 0.6%
Joseph S. Steinberg (10) ...................................... 0.0000 0.0%
All directors and officers as a group (6 persons) (3) ......... 87,914.0968 89.3%
OTHER PRINCIPAL STOCKHOLDERS:
Leucadia Investors, Inc. (3) .................................. 9,969.9999 10.1%
</TABLE>
- ----------
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purposes of calculating the number and percentage
owned by such person, but not deemed outstanding for the purpose of
calculating the percentage owned by each other person listed. As of
December 31, 1998, there were 98,501.0004 shares of common stock issued
and outstanding.
(2) Includes 1 share held personally and 41,819.9087 shares held by John W.
Jordan II Revocable Trust. 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 sister of Mr. Jordan or 309.2933 shares
held by George Cook Jordan, Jr., the brother of Mr. Jordan.
(3) Does not include 100 shares held by Jordan/Zalaznick Capital Company or
3,500 shares of Common Stock held by JZ Equity Partners PLC, a publicly
traded U.K. investment trust advised by an Affiliate of The Jordan
Company (controlled by Messrs. Jordan and Zalaznick). Mr. Jordan, Mr.
Zalaznick and Leucadia, Inc. are the sole partners of Jordan/Zalaznick
Capital Company. Mr. Jordan and Mr. Zalaznick own and manage the advisor
to JZ Equity Partners PLC.
(4) 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.
(5) Does not include 82.1697 shares held by Bruce Zalaznick, the brother of
Mr. Zalaznick.
(6) 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.
(7) Includes 4,000 shares which are treated as "Group 2 Shares" pursuant to
the terms of a Restricted Stock Agreement between Mr. Quinn and the
Company. See "Management--Restricted Stock Agreements."
(8) Includes 1,000 shares which are treated as "Group 2 Shares" pursuant to
the terms of a Restricted Stock Agreement between Mr. Boucher and the
Company. See "Management--Restricted Stock Agreements."
(9) Includes 624.3496 shares held by G. Robert Fisher, as Trustee of the G.
Robert Fisher Irrevocable Gift Trust, U.T.I., dated December 26, 1990.
(10) Excludes 9,969.9999 shares held by Leucadia Investors, Inc., of which
Joseph S. Steinberg is President and a director.
58
<PAGE>
The following table furnishes information, as of March 31, 1999, as to the
beneficial ownership of the common stock of Jordan Telecommunication Products,
Inc. ("JTP"), Motors and Gears, Inc. ("M&G") and Jordan Specialty Plastics
("JSP") by (i) each director and executive officer of Jordan Industries, and
(ii) all officers and directors of Jordan Industries as a group.
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL OWNERSHIP
----------------------------------------------------------------------------------------
JTP M&G JSP
------------------------------ ---------------------------- ----------------------------
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
SHARES OWNED(1) SHARES OWNED(1) SHARES OWNED(1)
----------------- ------------ --------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS:
John W. Jordan II (2)(3)(4) .......... 379,349.1691 38.2 7,136.8809 36.2 36,088.7050 37.2
David W. Zalaznick (3)(5)(6) ......... 183,073.2676 18.4 3,531.2473 17.9 17,228.4800 17.8
Thomas W. Quinn ...................... 89,804.6030 9.0 1,799.7294 9.1 8,629.3700 8.9
Jonathan F. Boucher .................. 52,935,1436 5.3 1,116.5587 5.7 4,775.3850 4.9
G. Robert Fisher (4)(6) .............. 5,606.9406 * 103.0008 * 538.8150 *
Joseph S. Steinberg (7) .............. 0.0000 * 0.0000 * 0.0000 *
All directors and officers as a
group (6 persons)(3) ................ 710,769.1239 71.6 13,687.4171 69.5 67,260.7550 69.3
</TABLE>
- ----------
* Represents less than 1% of the outstanding shares of common stock.
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under rule
13d-3(d), shares not outstanding, which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage
owned by such person, but not deemed outstanding for the purpose of
calculating the percentage owned by each other person listed. As of March
31, 1999, JTP, M&G and JSP had 983,916.6667, 19,700 and 97,000,
respectively, shares of common stock issued and outstanding.
(2) Includes 8.9820 shares of JTP, 0.1650 shares of M&G and 0.85 shares of
JSP held personally and 379,340.1871 shares of JTP, 7,136.7159 shares of
M&G and 36,087.850 shares of JSP held by the John W. Jordan II Revocable
Trust. Does not include 2,777.5927 shares of JTP , 51.025 shares of M&G
and 266.9 shares of JSP held by Daly Jordan O'Brien the sister of Mr.
Jordan, 2,777.5927 shares of JTP, 51.025 shares of M&G and 266.9 shares
of JSP held by Elizabeth O'Brien Jordan, the sister of Mr. Jordan, or
2,777.5927 shares of JTP, 51.025 shares of M&G and 266.9 shares of JSP
held by George Cook Jordan, Jr., the brother of Mr. Jordan.
(3) Does not include 898.0451 shares of JTP, 16.4973 shares of M&G and 86.275
shares of JSP held by the Jordan/Zalaznick Capital Company or 31,431.5758
shares of JTP, 577.4053 shares of M&G and 3,020.3050 shares of JSP held
by JZ Equity Partners PLC.
(4) Does not include 29,171.4943 shares of JTP, 535.8871 shares of M&G and
2,803.13 shares of JSP held by The Jordan Family Trust.
(5) Does not include 737,8205 shares of JTP, 13.5558 shares of M&G and 70.89
shares of JSP held by Bruce Zalaznick, the brother of Mr. Zalaznick.
(6) Includes 5,606.9406 shares of JTP, 103.0008 shares of M&G and 538.815
shares of JSP held by G. Robert Fisher, as the Trustee of the G. Robert
Fisher Irrevocable Gift Trust, U.T.I., dated December 26, 1990
(7) Does not include 95,566.3378 shares of JTP, 2,019.7802 shares of M&G and
8,603.445 of JSP held by Leucadia Investors, Inc., of which Joseph S.
Steinberg is President and a director.
Stockholder Agreement. Each holder of our outstanding shares of common
stock is a party to a Stockholder Agreement, dated as of June 1, 1988 (the
"Stockholder Agreements"), by and among such stockholders and us. The
Stockholder Agreements subject the transfer of shares of common stock by such
stockholders to our right of first refusal 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.
59
<PAGE>
CERTAIN TRANSACTIONS
1997 Recapitalization and Repositioning Plan. In 1997, we recapitalized
our investment in Motors and Gears and Telecommunication Products. In
connection with Motors and Gears' recapitalization, Motors and Gears issued
16,250 shares of Motors and Gears common stock (representing approximately
82.5% of the outstanding shares of Motors and Gears common stock) to the Jordan
Group and Motors and Gears management for total consideration of $2.2 million
(of which $1.1 million was paid in cash and $1.1 million was paid through the
delivery of 8% zero coupon notes due 2007). Also in connection with Motors and
Gears' recapitalization, $1,500,000 of senior, non-voting 8.0% cumulative
preferred stock was issued to the Jordan Group and Motors and Gears management.
In connection with Telecommunication Products' recapitalization,
Telecommunication Products issued 959,638.8889 shares of Telecommunication
Products common stock (representing approximately 96.5% of the outstanding
shares of Telecommunication Products common stock after consummation of the
plan) to the Jordan Group and Telecommunication Products management for total
cash consideration of approximately $1.9 million (of which $1.0 million was
loaned to them by us pursuant to 8% zero coupon notes due 2007). In 1998, we
repurchased 10,722.2222 shares of Telecommunication Products common stock at
$2.00 per share from a Telecommunication Products executive who left the
Company. As a result of each of these recapitalizations, the Jordan Group and
such management own substantially all of the Motors and Gears common stock and
the Telecommunication Products common stock and our investment in Motors and
Gears and Telecommunication Products is evidenced only by the M&G junior
preferred stock and the JTP junior preferred stock. As a matter of corporate
law, the directors and majority stockholders of Motors and Gears and
Telecommunication Products will owe fiduciary and other duties to Motors and
Gears' and Telecommunication Products' common stockholders, which may conflict
with our interests.
In connection with Motors and Gears' recapitalization, Leucadia Investors,
Inc. and Messrs. Quinn, Jordan, Zalaznick and Boucher purchased 1,644.7802,
1,649.7294, 6,899.3184 (which includes 6,899.1534 shares purchased by the John
W. Jordan II Revocable Trust, but does not include 51.0250 shares purchased by
Daly Jordan O'Brien, the sister of Mr. Jordan, 51.0250 shares purchased by
Elizabeth O'Brien Jordan, the sister of Mr. Jordan, 51.0250 shares purchased by
George C. Jordan, Jr., the brother of Mr. Jordan, 16.4973 shares purchased by
The Jordan/Zalaznick Capital Company, 535.8871 shares purchased by The Jordan
Family Trust, of which Mr. Jordan is a trustee and 577.41 shares purchased by
JZ Equity Partners PLC, a publicly traded U.K. investment trust advised by an
affiliate of The Jordan Company (controlled by Messrs. Jordan and Zalaznick)),
3,293.6848 (which does not include 13.5558 shares purchased by Bruce Zalaznick,
the brother of Mr. Zalaznick, 16.4973 shares purchased by The Jordan/Zalaznick
Capital Company, 6,899.1534 shares purchased by the John W. Jordan II Revocable
Trust and 577.41 shares purchased by JZ Equity Partners PLC) and 912.9337
shares of Motors and Gears common stock, respectively, from the Company for a
purchase price of $135.38 per share.
Also in connection with Motors and Gears' recapitalization, Leucadia
Investors, Inc., Messrs. Quinn, Jordan, Zalaznick and Boucher were issued
Motors and Gears non-voting preferred shares with initial liquidation values of
$163,043.48, $65,217.39, $103,288.04 (which includes $103,288.04 issued to the
John W. Jordan II Revocable Trust, but does not include $652,173.91 issued to
JII Partners), $103,288.04 (which does not include $103,288.04 issued to the
John W. Jordan II Revocable Trust or $652,173.91 issued to JII Partners) and
$88,532.61, respectively.
In connection with Telecommunication Products' recapitalization, Leucadia
Investors, Inc., Messrs. Quinn, Jordan, Zalaznick and Boucher purchased
95,566.34, 89,804.60, 379,349.17 (which includes 379,340.19 shares purchased by
the John W. Jordan II Revocable Trust, but does not include 2,777.59 shares
purchased by Daly Jordan O'Brien, the sister of Mr. Jordan, 2,777.59 shares
purchased by Elizabeth O'Brien Jordan, the sister of Mr. Jordan, 2,777.59
shares purchased by George C. Jordan, Jr., the brother of Mr. Jordan, 898.05
shares purchased by The Jordan/Zalaznick Capital Company, 29,171.49 shares
purchased by The Jordan Family Trust, of which Mr. Jordan is a trustee,
40,208.33 shares purchased by JII Partners and 31,431.58 shares purchased by JZ
Equity Partners PLC), 183,073.27 (which does not include 737.82 shares
purchased by Bruce Zalaznick, the brother of Mr.
60
<PAGE>
Zalaznick, 898.05 shares purchased by The Jordan/Zalaznick Capital Company,
379,340.19 shares purchased by the John W. Jordan II Revocable Trust, 40,208.33
shares purchased by JII Partners and 31,431.58 shares purchased by JZ Equity
Partners PLC) and 52,935.14 shares of Telecommunication Products common stock,
respectively, from us for a purchase price of $2.00 per share.
Formation of Specialty Plastics. On February 9, 1998, we completed the
formation of Specialty Plastics, Inc. as a Restricted Subsidiary under our
indentures. We sold the stock of Beemak and Sate-Lite to Specialty Plastics for
$11.5 million of preferred stock, which will accrete at plus or minus 97.5% of
the cumulative net income or net loss, as the case may be, of Specialty
Plastics through the earlier of an Early Redemption Event (as defined) or March
31, 2003. We will also keep our intercompany notes with Sate-Lite ($1.2 million
at January 31, 1998) and Beemak ($9.8 million at January 31, 1998).
Specialty Plastics Recapitalization Plan. In 1998, we recapitalized our
investment in Specialty Plastics. In connection with Specialty Plastics'
recapitalization, Specialty Plastics issued 97,000 shares of Specialty Plastics
common stock (representing 97.0% of the Specialty Plastics common stock after
consummation of the plan) to the Jordan Group for total cash consideration of
$97,000. As a result of this recapitalization, the Jordan Group and management
own substantially all of the Specialty Plastics common stock, and our
investment in Specialty Plastics is evidenced only by the JSP junior preferred
stock. As a matter of corporate law, the directors and majority stockholders of
Specialty Plastics will owe fiduciary and other duties to Specialty Plastics'
common stockholders, which may conflict with our interests.
In connection with Specialty Plastics' recapitalization, Leucadia
Investors, Inc., Messrs. Quinn, Jordan, Zalaznick and Boucher purchased
8,603.4450, 8,629.3700, 36,087.8550 (which includes 36,087.8550 shares
purchased by the John W. Jordan II Revocable Trust, but does not include
266.9000 shares purchased by Daly Jordan O'Brien, the sister of Mr. Jordan,
266.9000 shares purchased by Elizabeth O'Brien Jordan, the sister of Mr.
Jordan, 266.9000 shares purchased by George C. Jordan, Jr., the brother of Mr.
Jordan, 86.2750 shares purchased by The Jordan/Zalaznick Capital Company,
2,803.1300 shares purchased by The Jordan Family Trust, of which Mr. Jordan is
a trustee, 11,000.0000 shares purchased by JII Partners and 3,020.3050 shares
purchased by JZ Equity Partners PLC), 17,228.4800 (which does not include
70.8900 shares purchased by Bruce Zalaznick, the brother of Mr. Zalaznick,
86.2750 shares purchased by The Jordan/Zalaznick Capital Company, 36,087.8550
shares purchased by the John W. Jordan II Revocable Trust, 11,000.0000 shares
purchased by JII Partners and 3,020.3050 shares purchased by JZ Equity Partners
PLC) and 4,775.3850 shares of Specialty Plastics common stock, respectively,
from us for a purchase price of $1.00 per share.
Each of those recapitalizations permit the Jordan Group, the Company's
stockholders and management of Motors and Gears, Telecommunication Products and
Specialty Plastics, to invest directly in Motors and Gears, Telecommunication
Products and Specialty Plastics, respectively. If, in the future, the M&G
junior preferred stock or the JTP junior preferred stock is redeemed, as well
as under certain other circumstances, we could be required to pay substantial
income tax liabilities resulting from the deconsolidation of these subsidiaries
from the Company's consolidated group for Federal income tax purposes. See
"Risk Factors--Consequences of Subsidiary Deconsolidation," "Risk
Factors--Acquisition and Reorganization Strategies" and "1997 Recapitalization
and Repositioning Plan."
Motors and Gears Holdings, Inc. Discount Notes. In December 1997, we made
an investment through the purchase of $20.0 million initial accreted value of
13 1/2% senior discount notes issued by Motors and Gears Holdings, Inc. These
notes were issued at a deep discount, accrue interest at the rate of 13 1/2%
per annum and are non-cash pay through December 15, 2002. These notes are
redeemable at the option of Motors and Gears Holdings, Inc., in whole or in
part, at anytime. These notes mature on December 15, 2007.
Service Agreements. Each of our subsidiaries (other than certain of the
subsidiaries of Bond Technologies and Dura-Line) are parties to advisory
agreements with us (the "Subsidiary Advisory Agreements"), pursuant to which
such subsidiaries will pay to us (i) investment banking and
61
<PAGE>
sponsorship fees of up to 2.0% of the purchase price of acquisitions, joint
ventures, minority investments or sales involving such subsidiaries or their
respective businesses or properties; (ii) financial advisory fees of up to 1.0%
of any debt, equity or other financing or refinancing involving such
subsidiary, in each case, arranged with the assistance of the Company or its
affiliates; and (iii) reimbursement for our out-of-pocket costs in connection
with providing such services. The Subsidiary Advisory Agreements contain
customary indemnities in favor of the Company, The Jordan Company and TJC
Management Corporation (an affiliate of the Jordan Company) in connection with
such services. Pursuant to the TJC Management Consulting Agreement, we, in
turn, will also pay to TJC Management Corporation one-half of such investment
banking, sponsorship and financial advisory fees and its portion of such cost
reimbursements, unless otherwise determined by our Board of Directors. The
Subsidiary Advisory Agreements will expire in December 2007, but are
automatically renewed after such date for successive one-year terms, unless any
party provides written notice of termination 60 days prior to the scheduled
renewal date. We received fees of $4.6 million for 1997 pursuant to the
Subsidiary Advisory Agreements and $1.2 million in 1998. No such fees or cost
reimbursements were accrued or unpaid in 1997 or 1998.
We have entered into a consulting services agreement with TJC Management
Corporation (the "TJC Management Consulting Agreement"), pursuant to which we
will pay to TJC Management Corporation (i) annual consulting fees of $3.0
million, payable quarterly; (ii) one-half of the investment banking sponsorship
and financing advisory fees paid to us pursuant to the Subsidiary Advisory
Agreements, unless otherwise determined by our Board of Directors; (iii) (A)
investment banking and sponsorship fees of up to 2.0% of the purchase price of
acquisitions, joint ventures and minority investments or sales involving us or
our subsidiaries (other than Motors and Gears, Specialty Plastics,
Telecommunication Products and other subsidiaries that are a party to any of
the Subsidiary Advisory Agreements) and (B) financial advisory fees of up to
one-half of 1.0% of any debt, equity or other financing or refinancing
involving us or such subsidiaries, in each case, arranged with the assistance
of TJC Management Corporation or its affiliates, unless otherwise determined by
the Board of Directors of TJC Management Corporation; and (iv) reimbursement
for TJC Management Corporation's and The Jordan Company's out-of-pocket costs
incurred in connection with providing such services. The TJC Management
Consulting Agreement also contains customary indemnities in favor of TJC
Management Corporation and The Jordan Company in connection with such services.
In consideration for these fees, the services of Mr. Jordan and the investment
banking, sponsorship and advisory services of The Jordan Company will be
provided to us. The TJC Management Consulting Agreement will expire in December
2007, but is automatically renewed after such date for successive one-year
terms, unless either party provides written notice of termination 60 days prior
to the scheduled renewal date. Pursuant to this Agreement, we paid, on our
behalf and that of our subsidiaries, to TJC Management Corporation and The
Jordan Company fees and cost reimbursements of approximately $7.3 million in
1997 and approximately $6.0 million in 1998. In addition, $4.9 million of such
fees and cost reimbursements are accrued and unpaid in respect of 1997 and $4.1
million are accrued and unpaid in respect of 1998.
Each of our subsidiaries (other than certain of the subsidiaries of Bond
Technologies and Dura-Line) are parties to consulting agreements with us (the
"Subsidiary Consulting Agreements"), pursuant to which they will pay to us
annual consulting fees of 1.0% of such subsidiary's net sales for such
services, payable quarterly, and will reimburse us for our out-of-pocket costs
related to its services. In the Subsidiary Consulting Agreements relating to
Motors and Gears, Specialty Plastics and Telecommunication Products, we (but
not our affiliates, including The Jordan Company) are obligated to present all
acquisition, business and investment opportunities that relate to
manufacturing, assembly, distribution or marketing of products and services in
the motors and gears and telecommunications and data communications industries
to Motors and Gears, Specialty Plastics and Telecommunication Products,
respectively, and we are not permitted to pursue such opportunities or present
them to third parties unless Motors and Gears, Specialty Plastics or
Telecommunication Products, as applicable, determine not to pursue such
opportunities or Motors and Gears, Specialty Plastics or Telecommunication
Products, as applicable, consent thereto. The Subsidiary Consulting Agreements
do not prohibit our affiliates from pursuing such opportunities or offering
them to third
62
<PAGE>
parties without Motors and Gears', Specialty Plastics' or Telecommunication
Products' consent, as the case may be. The Subsidiary Consulting Agreements
expire in December 2007, but are automatically renewed for successive one year
terms, unless either party to the agreement provides written notice of
termination 60 days prior to the scheduled renewal date. We received $14.5
million in connection with the Subsidiary Consulting Agreements in 1997 and
$22.8 million in 1998. In addition $6.3 million of such fees and cost
reimbursements are accrued and unpaid in respect of 1997 and $2.9 million are
accrued and unpaid in respect of 1998.
Our Nonrestricted Subsidiary, JI Properties, Inc., entered into a services
agreement (the "JI Properties Services Agreement") with us and each of our
other subsidiaries (other than certain subsidiaries of Bond Technologies and
Dura-Line), pursuant to which JI Properties will provide certain real estate,
other assets, transportation and related services to us and such subsidiaries.
JI Properties' current capital leases are guaranteed by us. Pursuant to the JI
Properties Services Agreement, our subsidiaries will be charged their allocable
portion of such services and related costs based upon their usage of such
services and their relative revenues as compared with other subsidiaries. The
JI Properties Services Agreement will expire in December 2007, but is
automatically renewed for successive one year terms, unless either party
provides written notice of termination 60 days prior to the scheduled renewal
date. We received $0.3 million pursuant to the JI Properties Services Agreement
in 1997 and $1.6 million in 1998. In addition, $0.6 million of such fees and
cost reimbursements are accrued and unpaid in respect of 1997 and $0.9 million
are accrued and unpaid in respect of 1998.
We also allocate overhead, general and administrative charges and expenses
among us and our subsidiaries based on the respective revenues and usage of
corporate overhead by us and our subsidiaries. We received $1.8 million in 1997
and $4.1 million in 1998 in respect of overhead allocation reimbursement.
Three companies that are not our subsidiaries -- Healthcare Holdings,
Sourcelink, Inc. and Saldon Holdings, Inc. -- are also party to service and fee
agreements with us, pursuant to which such companies will pay to us (i)
investment banking and sponsorship fees of up to 2.0% of the purchase price of
acquisitions, joint ventures, minority investments or sales involving such
subsidiaries or their respective businesses or properties; (ii) financial
advisory fees of up to 1.0% of any debt, equity or other financing or
refinancing involving such company, in each case, arranged with our assistance
or that of our affiliates; (iii) fees of 3.0% of EBITDA (as defined); and (iv)
reimbursement for our out-of-pocket costs in connection with providing such
services. These fee agreements contain customary indemnities in favor of the
Company, The Jordan Company and TJC Management Corporation in connection with
such services. Pursuant to the TJC Management Consulting Agreement, we, in
turn, will also pay to TJC Management Corporation one-half of such investment
banking, sponsorship and financial advisory fees and its portion of such cost
reimbursements, unless otherwise determined by our Board of Directors. These
fee agreements will expire in either 2007 or 2008, but are automatically
renewed after such date for successive one-year terms, unless any party
provides written notice of termination 60 days prior to the scheduled renewal
date. We received fees of $1.0 million for 1997 pursuant to these fee
agreements and $3.3 million in 1998. In addition, $0.2 million of such fees and
cost reimbursements are accrued and unpaid in respect of 1997 and $1.0 million
are accrued and unpaid in respect of 1998.
Transaction Fees. We will pay $0.8 million of investment banking,
sponsorship and financial advisory fees to TJC Management Corporation in
connection with the offering of the series C senior notes and the acquisition
of Alma Products.
Tax Sharing Agreements. Each of our subsidiaries and we are parties to a
tax sharing agreement. Pursuant to these tax sharing agreements, each of our
consolidated subsidiaries pays to us, on an annual basis, an amount determined
by reference to the separate return tax liability of the subsidiary as defined
in Treasury Regulation Section 1.1552-1(a)(2)(ii). We received payments of $5.3
million and $3.9 million, respectively, from our subsidiaries pursuant to the
tax sharing agreements in the year ended December 31, 1997 and the year ended
December 31, 1998, respectively. These income tax payments reflected a Federal
income tax rate of approximately 34% of each subsidiary's pre-tax income.
63
<PAGE>
Upon redemption of the junior preferred stock of Motors and Gears,
Specialty Plastics or Telecommunication Products, or upon other circumstances
that cause Motors and Gears, Specialty Plastics or Telecommunication Products
and their respective subsidiaries to cease to be our tax-consolidated
subsidiaries, Motors and Gears, Specialty Plastics or Telecommunication
Products, as the case may be, and their respective subsidiaries will be
released from making any further payments under the tax sharing agreements.
While the release will discharge Motors and Gears, Specialty Plastics or
Telecommunication Products and their respective subsidiaries from making future
income tax payments to us, Motors and Gears, Specialty Plastics or
Telecommunication Products and their respective subsidiaries, as the case may
be, will remain contingently liable to us under the tax sharing agreements in
respect of any increases in their separate return tax liability for periods
prior to such deconsolidations.
Fannie May. On July 2, 1997, Fannie May Holdings, Inc. ("Fannie May")
engaged in a refinancing of substantially all its indebtedness. After the 1997
refinancing, we held approximately 15.1% of the outstanding common stock of
Fannie May as well as preferred stock with a liquidation value of $1.5 million.
Fannie May's Chief Executive Officer is Mr. Quinn, and its stockholders include
Messrs. Jordan, Quinn, Zalaznick and Boucher, who are our directors and
stockholders, as well as other partners, principals and associates of The
Jordan Company who are also our stockholders. Fannie May, which is also known
as "Fannie May Candies," is a manufacturer and marketer of kitchen-fresh,
high-end boxed chocolates through its 337 company-owned retail stores and
through third party retail and non-retail sales channels. Its products are
marketed under both the "Fannie May" and "Fanny Farmer" brand names.
JIR. On June 23, 1998, we made approximately $0.8 million of unsecured
advances to JIR, Inc., 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 our directors and
stockholders, as well as other partners, principals and associates of The
Jordan Company who are also our stockholders. These companies are engaged in
the development of businesses in Russia, including in the broadcast and paging
sectors.
JZ International, Ltd. In November, 1998, Motors and Gears invested $5.6
million in the Class A Preferred Stock and $1.7 million in Class B Preferred
Stock of JZ International, Ltd. Motors and Gears expects to make an additional
$5.0 million of investments in JZ International's Class A Preferred Stock. JZ
International's Chief Executive Officer is David W. Zalaznick, and its
stockholders include Messrs. Jordan, Quinn, Zalaznick and Boucher, who are our
directors and stockholders, as well as other partners, principals and
associates of The Jordan Company who are also our stockholders. JZ
International is a merchant bank located in London, England that is focused on
making European and other international investments.
CBD Networks, Inc. During 1998, we made approximately $1.4 million of
unsecured advances to CBD Networks, Inc. We expect to form a new, Nonrestricted
Subsidiary to acquire all or substantially all of the business and assets of
CBD Networks in the near future, pursuant to which we will invest $3.5 million
in a five-year unsecured note, bearing interest at 10% per annum, and a
warrant, exercisable for 10% of the issued and outstanding common stock of CBD
Networks. We expect that substantially all of the issued and outstanding common
stock of the company that acquires the business of CBD Networks will be owned
by our stockholders and the management of CBD Networks. CBD Networks is a
provider of Internet access for approximately 10,000 customers.
Healthcare Products Holdings, Inc. During 1998, we made approximately $1.0
million of unsecured advances to Healthcare Products Holdings, Inc. Healthcare
Products Holdings' Chief Executive Officer is Thomas H. Quinn, and its
stockholders include Messrs. Jordan, Quinn, Zalaznick and Boucher, who are our
directors and stockholders, as well as other partners, principals and
associates of The Jordan Company who are also our stockholders.
Employment Agreements; Stock Transactions. On February 25, 1988, we
entered into an employment agreement with Thomas H. Quinn, pursuant to which
Mr. Quinn became our President and Chief Operating Officer, effective January
1, 1988. See "Management--Executive Compensation--Employment Agreement."
64
<PAGE>
Legal Counsel. Mr. G. Robert Fisher, one of our directors, and our general
counsel and secretary, is also a partner of Sonnenschein Nath & Rosenthal, and
was a partner of Bryan Cave LLP, and was a partner of Smith, Gill, Fisher &
Butts which merged into Bryan Cave LLP. Mr. Fisher and his law firms have
represented us and The Jordan Company in the past, and we expect them to
continue representing each of us in the future. In 1997 and 1998, while Mr.
Fisher was a partner of Bryan Cave LLP, we paid Bryan Cave LLP approximately
$1.8 million and $1.1 million, respectively, in fees and expenses.
Stock Appreciation Rights Payments. In connection with acquiring our
subsidiaries, the sellers of the subsidiaries, who usually included the
subsidiary's management, often receive seller notes, stock, stock appreciation
rights and special bonus plans in respect of those subsidiaries. In April 1997,
we paid and purchased stock appreciation rights and related interests at three
companies. At Dura-Line, we agreed to pay $15.4 million to purchase Dura-Line
stock appreciation rights from the president and chief financial officer of
Dura-Line (of which $9.4 million was paid in April 1997, $1.0 million was paid
in March 1998, and $5.0 million is payable in annual installments through
2002), and redeemed $1.9 million of Dura-Line preferred stock held by the
president and chief financial officer of Dura-Line in April 1998. At Aim
Electronics and Cambridge, we paid a total of $6.2 million to purchase Aim
Electronics and Cambridge stock appreciation rights (based upon 20% of Aim
Electronics' and Cambridge's appreciation from 1989 to 1996) from the estate of
the former president of Aim Electronics and Cambridge. Each of these payments
and purchases in respect of the stock appreciation rights was expensed for
financial reporting purposes.
Sale of Telecommunication Products Common Stock. Telecommunication
Products has agreed to sell 10,000 shares of its common stock to Harold Bevis,
the Chief Executive Officer of Telecommunication Products, for $2.00 per share.
Directors and Officers Indemnification. We have entered into
indemnification agreements with each member of our Board of Directors whereby
we have agreed, subject to certain exceptions, to indemnify and hold harmless
each director from liabilities incurred as a result of such person's status as
one of our directors. See "Management--Our Directors and Executive Officers."
Future Arrangements. We have adopted a policy that future transactions
between us and our officers, directors and other affiliates (including the
Motors and Gears, the Specialty Plastics and the Telecommunication Products
subsidiaries) must (i) be approved by a majority of the members of our Board of
Directors and by a majority of the disinterested members of our Board of
Directors and (ii) be on terms no less favorable to us than could be obtained
from unaffiliated third parties.
65
<PAGE>
1997 RECAPITALIZATION AND REPOSITIONING PLAN
In 1997, we implemented a plan to recapitalize and reposition our
subsidiaries in order to establish them as more independent, stand-alone,
industry-focused companies, to provide us with additional financial and
operational flexibility and to allow our stockholders and the management of
Telecommunication Products and Motors and Gears to invest directly in those
entities.
The principal elements of this plan included the following:
The Series B Senior Notes Offering. We issued the series B senior notes on
October 3, 1997 in a registered exchange offer for our 103/8% series A senior
notes which were issued and sold on July 25, 1997 for net proceeds of
approximately $113 million.
Jordan Telecommunication Products Recapitalization. We formed Jordan
Telecommunication Products, Inc., which acquired all of the Telecommunication
Products subsidiaries from Jordan Industries in a series of transactions for
aggregate consideration of $294.0 million, consisting of $284.0 million of cash
proceeds and $10.0 million of assumed obligations. As part of that
recapitalization, we purchased $20.0 million of aggregate initial liquidation
preference of JTP junior preferred stock, resulting in net cash proceeds to us
of $264.0 million. See "Risk Factors--Consequences of Subsidiary
Deconsolidation," "Certain Transactions--1997 Recapitalization and
Repositioning Plan" and "Description of Capital Stock--Subsidiary
Securities--JTP Junior Preferred Stock."
Jordan Telecommunication Products Offering. Jordan Telecommunication
Products, Inc. sold $190.0 million of senior notes, $85.0 million of initial
accreted value of senior discount notes and units consisting of senior
preferred stock with an aggregate liquidation preference of $25.0 million and
shares of common stock, which was completed concurrently with the offering of
series B senior notes.
Fannie May Refinancing. Fannie May refinanced its indebtedness, including
the notes held by us in an aggregate principal amount (together with accrued
interest) of $14.4 million at June 30, 1997. We received net cash proceeds of
approximately $17.4 million from the Fannie May refinancing. See "Certain
Transactions--Fannie May."
Credit Agreement. JII, Inc., one of our subsidiaries, established the
Credit Agreement by amending and restating the prior JII Credit Agreement. The
Credit Agreement provides us and certain of our subsidiaries with a revolving
credit and letter of credit facility of up to $75.0 million, of which $50.0
million was drawn on as of December 31, 1998. See "Description of Certain
Indebtedness--Credit Agreements."
Reclassification of Subsidiaries. We reclassified the Specialty Printing
and Labeling subsidiaries as Restricted Subsidiaries for purposes of our
indentures, which subjects Specialty Printing and Labeling subsidiaries to the
restrictive covenants of those indentures, and we reclassified JI Properties as
a Nonrestricted Subsidiary for the purposes of the indentures. Following this
reclassification, Jordan Industries continues to guaranty JI Properties'
current capital leases.
The net proceeds from the foregoing were used as follows:
Repayment of the Old Credit Agreements. We repaid in full approximately
$78.0 million aggregate principal amount of indebtedness under our prior credit
agreements.
Tender Offer and Consent Solicitation for the Series B Senior Notes. We
completed a tender offer for substantially all of our series B 103/8% senior
notes due 2003 and an accompanying consent solicitation to amend the related
indenture, and paid related fees and expenses.
Consent Solicitation for the Discount Debentures. We completed a consent
solicitation for the discount debentures which included (1) the adoption of
certain amendments to the indenture governing the discount debentures and (2)
the payment of fees and expenses relating to the consent solicitation.
In addition, as part of our strategy to make complementary acquisitions
and to divest non-core businesses, we have executed the following transactions
as additional elements of this plan:
66
<PAGE>
Motors and Gears Recapitalization. In May 1997, we recapitalized our
investment in Motors and Gears through the amendment and restatement of our
preferred stock investment in Motors and Gears involving, among other things,
increasing to $42.0 million of the initial aggregate liquidation preference of
the M&G junior preferred stock. In connection with that recapitalization,
Motors and Gears issued 16,250 shares of Motors and Gears common stock
(representing approximately 82.5% of the outstanding shares of Motors and Gears
common stock) to the Jordan Group and Motors and Gears management for total
consideration of $2.2 million (of which $1.1 million was paid in cash and $1.1
million was paid through the delivery of 8% zero coupon notes due 2007). See
"Risk Factors--Consequences of Subsidiary Deconsolidation," "Certain
Transactions" and "Description of Capital Stock--Subsidiary Securities--M&G
Junior Preferred Stock."
Acquisitions. The acquisition by Telecommunication Products of the assets
of LoDan for approximately $17.0 million in May 1997, and the acquisition by
Motors and Gears of the stock of Fir for approximately $51.3 million in June
1997.
Dispositions. The sale of Hudson in May 1997 for approximately $35.0
million, and the sale of Paw Print to an affiliate in July 1997 for
approximately $10.0 million in net cash proceeds and approximately $2.5 million
of assumed debt.
67
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of certain terms of our indebtedness.
CREDIT AGREEMENTS
Credit Agreement. On July 25, 1997, JII, Inc., one of our subsidiaries,
entered into a credit agreement (the "Credit Agreement") under which JII, Inc.
is able to borrow, on behalf of Jordan Industries, to fund acquisitions,
provide working capital and for other general corporate purposes. The Credit
Agreement provides for a revolving line of credit of $75.0 million over a term
of five years. Outstanding borrowings carry a floating rate, at JII, Inc.'s
option, equal to the Eurodollar rate +2.00% or the Base Rate +.50%. The
indebtedness of JII, Inc. is secured by a pledge of substantially all of the
assets of the Restricted Group, and is guaranteed by the Restricted Group. At
March 31, 1999, there were no amounts outstanding under the Credit Agreement.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Other Credit Facilities. On July 25, 1997, JTP Industries, Inc., a
subsidiary of Jordan Telecommunication Products, Inc., entered into an
agreement (the "JTP Credit Agreement"), under which Telecommunication Products
is able to borrow to fund acquisitions, provide working capital and for other
general corporate purposes. The JTP Credit Agreement provides for a revolving
line of credit of $110.0 million over a term of five years. Outstanding
borrowings carry a floating rate, at Jordan Telecommunication Products, Inc.'s
option, equal to the Eurodollar rate +2.50% or the Base Rate +1.00%. The JTP
Credit Agreement is secured by a first priority security interest in
substantially all of the assets of the operating subsidiaries of
Telecommunication Products, including a pledge of the stock of the
subsidiaries, and is guaranteed by those subsidiaries. At March 31, 1999, $80.0
million was outstanding under the JTP Credit Agreement.
On November 7, 1996, M&G Industries, Inc., a subsidiary of Motors and
Gears, Inc., entered into an agreement (the "M&G Credit Agreement"), under
which Motors and Gears is able to borrow to fund acquisitions, provide working
capital and for other general corporate purposes. The M&G Credit Agreement
provides for a revolving line of credit of $75.0 million over a term of five
years. Outstanding borrowings carry a floating rate, at Motors and Gears'
option, equal to the Eurodollar rate +2.25% or the Base Rate +1.25%. The M&G
Credit Agreement is secured by a first priority security interest in
substantially all of the assets of the operating subsidiaries of Motors and
Gears, including a pledge of the stock of the subsidiaries, and is guaranteed
by those subsidiaries. At March 31, 1999, $36.0 million was outstanding under
the M&G Credit Agreement.
Motors and Gears' Fir subsidiary has a number of unsecured short-term
borrowing facilities available from approximately 25 banks in the form of
overdraft coverage. The total amount available under the overdraft facilities
is $3.5 million at interest rates ranging from 9.5% to 10.5% at March 31, 1999.
No amounts under these arrangements were outstanding at March 31, 1999.
Dura-Line has available a line of credit from ABN-Amro Bank N.V. of
Prague, Czech Republic in the amount of $0.8 million. The line of credit
matures on April 23, 1999, if not renewed. At March 31, 1999, no amounts were
outstanding under this line of credit. Outstanding borrowings under the line of
credit carry an interest rate of 1.25% above PRIBOR (Prague Inter-Bank Offered
Rate). The applicable rate at December 1, 1998 was 14.0%. 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 issued by Dura-Line.
TERM LOANS
Pamco. Pamco, a Specialty Printing and Labeling subsidiary, has a $1.3
million, 8.2% seven year mortgage with First Chicago Bank payable in monthly
installments through October 2003. At March 31, 1999, $1.2 million was
outstanding under the mortgage.
Deflecto. Deflecto, a Specialty Plastics subsidiary, has a $2.4 million,
.25% below prime rate, 30 year mortgage outstanding with BancOne. At March 31,
1999, $2.2 million was outstanding under the mortgage.
68
<PAGE>
Dura-Line. Dura-Line, a Telecommunication Products subsidiary, has (1) a
$1.5 million term loan from Heller Financial, Inc. at 10.2% maturing in 2001,
(2) a term loan with ABN-Amro Bank N.V. for $0.9 million at 5.49% maturing in
2000 and (3) a term loan with Oriental Bank (India) for $1.5 million at 17.0%
maturing in 2005.
CAPITAL LEASES
Interest rates on capital leases range from 8.3% to 14.5%. The future
minimum lease payments as of December 31, 1998 under capital leases (certain of
which are capital leases of Nonrestricted Group guaranteed by the Company)
consist of the following:
<TABLE>
<S> <C>
1999 ................................................... $ 6,434,000
2000 ................................................... 12,482,000
2001 ................................................... 4,307,000
2002 ................................................... 3,620,000
2003 ................................................... 9,531,000
Thereafter ............................................. 852,000
-----------
Total ................................................ $37,226,000
Less amount representing interest ...................... 6,893,000
-----------
Present value of future minimum lease payments ......... $30,333,000
===========
</TABLE>
The present value of the future minimum lease payments approximates the
book value of property, plant and equipment under capital leases at December
31, 1998.
SELLER PROMISSORY NOTES
In connection with the acquisition of Parsons, a Consumer and Industrial
Products company, Parsons issued to the seller a $0.6 million 9.0% subordinated
promissory note. This note matured in 1991. As of March 31, 1999, no payments
have been made and no interest has been accrued by the Company in respect of
the note.
In connection with the acquisition of Deflecto, a Specialty Plastics
company, Deflecto issued to a certain seller a $5.0 million 8.5% subordinated
promissory note. This note is a general unsecured obligation of Deflecto, and
is subordinated to borrowings under the Credit Agreement. Interest is payable
annually in arrears and Deflecto is scheduled to pay installments of principal
on the note of $2.5 million in 2003 and $2.5 million in 2004.
In connection with the acquisition of Rolite, a Specialty Plastics
company, Rolite issued to the seller a $0.9 million 8.5% subordinated
promissory note. This note is a general unsecured obligation of Rolite, and is
subordinated to borrowings under the Credit Agreement. Interest is payable
annually in arrears and Rolite is scheduled to pay the entire principal amount
of the note in 2002.
In connection with the acquisition of Valmark, a Specialty Printing and
Labeling company, Valmark issued to the seller a $4.0 million, 8.0% note. This
note is a general unsecured obligation of Valmark, subordinated to borrowings
under the Credit Agreement. Interest under the note is payable annually in
arrears and Valmark is scheduled to pay installments of principal on the note
of $2.0 million in 1999 and $2.0 million in 2000.
In connection with the acquisition of Pamco, a Specialty Printing and
Labeling company, Pamco issued to the sellers a $1.8 million, 8.0% note and a
$2.1 million, 8.0% note. These notes are general unsecured obligations of
Pamco, subordinated to borrowings under the Credit Agreement. Interest is
payable annually in arrears and Pamco is scheduled to pay the principal on
these notes in 2001.
In connection with the acquisition of Seaboard, a Specialty Printing and
Labeling company, Seaboard issued to the seller a $1.5 million 8.0%
subordinated promissory note. This note is a general unsecured obligation of
Seaboard, subordinated to borrowings under the Credit Agreement. Interest is
payable annually in arrears and Seaboard is required to pay the entire
principal amount of the note in 2001.
69
<PAGE>
In connection with the acquisition of LoDan, a Telecommunication Products
company, LoDan issued to the Seller a $1.5 million 8.0% subordinated promissory
note. This note is a general unsecured obligation of LoDan and is subordinated
to borrowings under the JTP Credit Agreement. Interest is payable annually in
arrears and the principal amount of the note is payable in full in 1999.
In connection with the acquisition of Telephone Services, a
Telecommunication Products company, Telephone Services issued to the sellers an
aggregate of $5.0 million 8% subordinated promissory notes. These notes are
general unsecured obligations of Telephone Services, and are subordinated to
borrowings under the JTP Credit Agreement. Telephone Services is scheduled to
pay installments of principal on the notes of $1.275 million in 2002, $2.5
million in 2003 and $1.225 million in 2004.
In connection with the acquisition of K&S Sheet Metal, a Telecommunication
Products company, K&S Sheet Metal issued to the sellers an aggregate of $1.5
million 8% subordinated promissory notes. These notes are general unsecured
obligations of K&S Sheet Metal, and are subordinated to borrowings under the
JTP Credit Agreement. Interest is payable annually in arrears and K&S Sheet
Metal is scheduled to pay installments of principal on the notes of $0.75
million in 2004 and $0.75 million in 2005.
In connection with the acquisition of Opto-Tech, a subsidiary of Telephone
Services (a Telecommunication Products company), Opto-Tech issued to the seller
a $1.25 million 8% subordinated promissory note. This note is secured by a
limited guaranty from Jordan Telecommunication Products, Inc. Interest is
payable annually in arrears and Opto-Tech is required to pay installments of
principal on the note in equal increments of $0.25 million each year beginning
in 1999 and ending in 2003.
In connection with the acquisition of Merkle-Korff, a Motors and Gears
company, Merkle-Korff issued to the seller a $5.0 million 9% seller note due
December 31, 2003. This note is a general unsecured obligation of Merkle-Korff,
subordinated to borrowings under the M&G Credit Agreement. Interest under this
note is payable annually in arrears and Merkle-Korff is required to pay
installments of principal on the note as follows: (i) $1.0 million on December
31, 2000; (ii) $1.25 million on December 31, 2001; (iii) $1.25 million on
December 31, 2002; and (iv) the entire then outstanding principal amount on
December 31, 2003.
In connection with the acquisition of Electrical Design and Control, a
Motors and Gears company, Electrical Design and Control issued to the sellers
an aggregate of $4.0 million 9% subordinated promissory notes. Upon agreement
between the sellers and Electrical Design and Control, the aggregate principal
amount due on these notes has been reduced to $3.85 million. These notes are
general unsecured obligations of Electrical Design and Control, and are
subordinated to borrowings under the M&G Credit Agreement. Interest is payable
annually in arrears and Electrical Design and Control is scheduled to pay the
entire $3.85 million principal amount of the note in 2002.
STOCK APPRECIATION RIGHTS AGREEMENTS
Dura-Line Preferred Stock and Stock Appreciation Rights Redemption
Agreement. Pursuant to a redemption agreement entered into with certain former
stockholders of Dura-Line on March 9, 1997, Dura-Line, a Telecommunication
Products subsidiary, redeemed from the stockholders $1.9 million of outstanding
7% cumulative preferred stock on March 9, 1998. In addition, on April 30, 1998,
we paid the stockholders a "special bonus" of $0.5 million, which represented
25% of Dura-Line's 1997 gross profit in excess of $30.0 million. Further
pursuant to the redemption agreement, Dura-Line agreed to pay the stockholders
$15.4 million in exchange for the stockholders' stock appreciation rights. Of
the $15.4 million, $9.4 million was paid in cash on March 9, 1997, and $1.0
million was paid on March 31, 1998. The remaining $5.0 million is due in the
following installments: (i) $1.1 million on March 31, 1999; (ii) $1.2 million
on March 31, 2000; (iii) $1.3 million on March 31, 2001; and (iv) $1.4 million
on March 31, 2002. As consideration for signing the redemption agreement, the
stockholders received total non-compete payments of $0.4 million over the
thirteen month period ended May 1998.
70
<PAGE>
Aim Electronics and Cambridge Stock Appreciation Rights. In April 1997, we
entered into an agreement to purchase Aim Electronics and Cambridge stock
appreciation rights (based upon 20% appreciation of Aim Electronics and
Cambridge from 1989 to 1996) from the estate of the former president of Aim
Electronics and Cambridge for total consideration of $6.2 million. Of this
amount, $3.1 million was paid in April 1997, and the remaining $3.1 million was
paid in April 1998.
OTHER SUBSIDIARY AGREEMENTS
Deflecto Additional Purchase Price. In connection with the acquisition of
Deflecto, a Specialty Plastics company, Deflecto entered into an additional
purchase price agreement with the sellers of Deflecto as participants. The
additional purchase price agreement calls for payments to be made to the
participants based upon a specific formula, the basis of which is the average
EBIT (as defined) for the years ended December 31, 2006 and December 31, 2007.
A different formula applies if Deflecto is sold to a third party prior to
December 31, 2007.
Motion Control Earn-Out Rights. In connection with the acquisition of
Motion Control, a Motors and Gears company, Motion Control entered into an
earn-out rights plan with the sellers (the "participants") of Motion Control.
This plan calls for payments to be made to the participants upon exercise of
the earned-out rights, such exercise being a one-time election during the first
four months of each calendar year beginning with the year 2003 through and
including 2008. The amount payable to the participants is based upon a specific
formula, the basis of which is the average EBIT (as defined) for the two
calendar years preceding the year of exercise. When exercised, the rights are
payable on or before September 30th of that year.
Advanced DC Motors Contingent Purchase Price. In connection with the
acquisition of Advanced DC Motors, a Motors and Gears company, Advanced DC
Motors entered into a contingent purchase price plan with the sellers (or the
"participants") of Advanced DC Motors. This plan calls for two separate
payments to be made to the participants based on the EBIT (as defined) achieved
(1) for the year ended December 31, 1998 and (2) for the year ended December
31, 1999. It is payable on or before the April 1st immediately following the
respective year in which each such contingent payment is earned. A payment of
$3.1 million was made on March 30, 1999.
Fir Additional Purchase Price. Pursuant to the purchase agreement entered
into between Motors and Gears and the sellers of Fir, Fir agreed to pay the
sellers, as additional purchase price, an amount based upon the Annual Net
Sales (as defined) achieved for the 12-month period ended July 31, 2000. It is
payable within 60 days after July 31, 2000.
Viewsonics Contingent Purchase Price. In connection with the acquisition
of Viewsonics, a Telecommunication Products company, Viewsonics entered into a
contingent purchase price plan with the seller of Viewsonics. That plan called
for two payments to be made to the seller based upon the EBIT achieved for (1)
the 12-month period ended July 31, 1997 ("first payment period") and (2) the
12-month period ended July 31, 1998 ("second payment period"). Pursuant to the
terms of that plan, Viewsonics paid the seller $1.4 million on January 2, 1998
to satisfy the first payment period, and accrued $1.1 million to satisfy the
second payment period.
Engineered Endeavors Stock Appreciation Rights Agreement. In connection
with the acquisition of Engineered Endeavors, a Telecommunication Products
company, Engineered Endeavors entered into a stock appreciation rights
agreement with the sellers of Engineered Endeavors (the "participants"). The
stock appreciation rights agreement calls for payments to be made to the
participants upon exercise of the stock appreciation rights, such exercise
being a one-time election during the calendar years 2003 through and including
2008. The sellers must exercise the stock appreciation rights within 30 days
after the receipt of the audited financial statements. The amount payable to
the participants is based upon a specific formula, the basis of which is the
average EBIT (as defined) for the two calendar years preceding the exercise
date. A different formula applies if Engineered Endeavors is sold before
December 31, 2008. When exercised, the stock appreciation rights are payable
one-fourth on or before September 30th of the year of exercise, and the
remaining three-fourths payable in equal installments on each of the following
three anniversaries of the first delivery date.
71
<PAGE>
Telephone Services Additional Purchase Price and Bonus Plan. In connection
with the acquisition of Telephone Services, a Telecommunication Products
company, Telephone Services entered into an additional purchase price agreement
and a 1998 bonus plan agreement with the sellers of Telephone Services. Those
agreements called for additional purchase price and payments to be made to the
sellers based upon the EBIT (as defined) achieved for the 12-month period ended
October 31, 1998. The estimated combined value of those agreements is $5.8
million. The amounts were paid to the sellers on March 1, 1999.
K&S Sheet Metal Additional Purchase Price. In connection with the
acquisition of K&S Sheet Metal, a Telecommunication Products company, K&S Sheet
Metal entered into an additional purchase price agreement with the sellers of
K&S Sheet Metal. That agreement was entered into in order to induce the sellers
to enter into the purchase agreement and consummate the transactions
contemplated therein. That agreement calls for seven annual payments to be paid
to the sellers based upon the EBIT (as defined) achieved for the calendar years
1998 through and including 2004.
JORDAN INDUSTRIES, INC. 103/8% SENIOR NOTES DUE 2007 AND 113/4% DISCOUNT
DEBENTURES DUE 2009
As part of the 1997 plan, we issued $120.0 million 103/8% series B senior
notes due 2007 at 100% of par. Interest on the series B senior notes is payable
in arrears on February 1 and August 1 of each year, commencing February 1,
1998. The series B senior notes are redeemable at our option, in whole or in
part, at any time on or after August 1, 2002.
As part of the 1997 plan, we repurchased substantially all of the
then-outstanding $275.0 million 103/8% senior notes due 2003 pursuant to a
tender offer. At December 31, 1998, none of those notes were outstanding. See
"1997 Recapitalization and Repositioning Plan."
In April 1997, we exchanged $133.1 million 113/4% senior subordinated
discount debentures due 2005 for $214.0 million 113/4% senior subordinated
discount debentures due 2009 (the "Discount Debentures"). The discount
debentures were issued at a deep discount and are non-cash pay through April 1,
2002. Semi-annual cash interest payments begin October 1, 2002. The discount
debentures are redeemable at our option, in whole or in part, at any time on or
after April 1, 2002.
The indentures relating to the series B senior notes and the discount
debentures contain certain covenants which restrict (i) the payment of
dividends, (ii) the repurchase of stock and the making of certain other
restricted payments, (iii) certain mergers or consolidations and (iv) the
assumption of certain levels of indebtedness.
The series B senior notes and the discount debentures are not secured by
the assets of either our Restricted or Nonrestricted Groups.
JORDAN TELECOMMUNICATION PRODUCTS, INC. 97/8% SENIOR NOTES DUE 2007 AND 113/4%
SENIOR DISCOUNT NOTES DUE 2007
As part of the 1997 plan, Telecommunication Products was formed to create
a stand-alone, industry focused company. As part of that plan, Jordan
Telecommunication Products, Inc. issued $190.0 million 97/8% senior notes due
2007. Interest on those senior notes is due on February 1 and August 1 of each
year, commencing February 1, 1998. In addition, as part of that plan, Jordan
Telecommunication Products, Inc. issued $120.0 million 113/4% senior discount
notes. Those senior discount notes were issued at a deep discount and are
non-cash pay through August 1, 2000. Semi-annual cash interest payments begin
February 1, 2001.
Each of the above issues are redeemable at the option of Telecommunication
Products, in whole or in part, at any time on or after August 1, 2002. Jordan
Telecommunication Products, Inc. may also redeem up to one-third of the
aggregate principal amount of each of those on or prior to August 1, 2000,
under certain circumstances.
The indentures relating to those senior notes and those senior discount
notes contain certain covenants which restrict (i) the payment of dividends,
(ii) the repurchase of stock and the making of certain other restricted
payments, (iii) certain mergers or consolidations and (iv) the assumption of
certain levels of indebtedness.
72
<PAGE>
Those senior notes and senior discount notes are not secured by the assets
of Telecommunication Products or by our assets. Telecommunication Products is a
Nonrestricted Subsidiary for purposes of the Indenture.
MOTORS AND GEARS, INC. 103/4% SENIOR NOTES
In November 1996, Motors and Gears, Inc. issued $170.0 million in
aggregate principal amount of 103/4% series B senior notes. In December 1997,
in order to finance the acquisition of Motion Control and repay indebtedness
under Motors and Gears' Revolving Credit Facility, Motors and Gears, Inc.
privately placed an additional $100.0 million in aggregate principal amount of
103/4% series C senior notes. The Tack-On Senior Notes had the same
characteristics as the original senior notes. On February 23, 1998, Motors and
Gears completed a registered exchange offer pursuant to which the holders of
the series B senior notes and the series C senior notes received 103/4% series
D senior notes having the same terms. Interest on those senior notes is payable
in arrears on May 15 and November 15 of each year.
Those 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 may also redeem up to 35% of the aggregate principal amount of those
senior notes on or prior to November 15, 1999, under certain circumstances.
The indenture relating to those senior notes contain covenants which
restrict (i) the payment of dividends, (ii) the repurchase of stock and the
making of certain other restricted payments, (iii) certain mergers or
consolidations and (iv) the assumption of certain levels of indebtedness.
Those senior notes are not secured by the assets of Motors and Gears, Inc.
or by our assets. Motors and Gears is a Nonrestricted Subsidiary for purposes
of the Indenture.
73
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summarizes certain provisions of our Articles of
Incorporation and those of our subsidiaries.
GENERAL
Our authorized capital stock consists of 100,000 shares of common stock,
par value $0.01 per share. As of December 31, 1998, 98,501.0004 shares were
issued and outstanding.
Common Stock. Each holder of shares of common stock is entitled to one
vote per share on all matters to be voted on by stockholders. The holders of
common stock are entitled to dividends and other distributions if, as and when
declared by our Board of Directors out of assets legally available therefor,
subject to the restrictions, if any, imposed by other indebtedness outstanding
from time to time. Upon our liquidation, dissolution or winding up, the holders
of shares of common stock would be entitled to share ratably in the
distribution of all of our assets. The holders of common stock have certain
preemptive and other subscription rights to purchase shares of our capital
stock. See "Principal Stockholders--Stockholder Agreements." As of December 31,
1998, there were 19 beneficial owners of common stock.
SUBSIDIARY SECURITIES
We own all of the common stock of each of our subsidiaries except for Bond
Technologies, of which we own 80% and Telephone Services, of which we own 70%,
and Telecommunication Products, Specialty Plastics and Motors and Gears, the
common stock of which is owned by our stockholders and affiliates and
management of the respective companies. Our ownership of the capital stock of
Telecommunication Products, Specialty Plastics and Motors and Gears is strictly
through our ownership of junior preferred stock. In addition, our stockholders,
their affiliates and third parties hold capital stock of certain of our
subsidiaries, the terms of which may have a significant impact on our
operations. A description of the terms of such capital stock is set forth
below.
JTP Junior Preferred Stock. We purchased JTP junior preferred stock which
initially had a liquidation preference of $20.0 million plus or minus 95% of
Telecommunication Products' net income or losses through August 1, 2002.
Following August 1, 2002, or the failure by Telecommunication Products to
redeem the JTP junior preferred stock following the sale of Telecommunication
Products or a public equity offering by Telecommunication Products, dividends
will accrue on any outstanding JTP junior preferred stock at a rate of 10% per
annum of the Initial JTP Junior Preferred Liquidation Value. Absent such an
event, the Company does not anticipate receiving any cash distributions in
respect of the JTP junior preferred stock prior to August 1, 2002. The JTP
junior preferred stock has voting rights equal to 95% of the total combined
voting power of the JTP junior preferred stock and the Telecommunication
Products common stock.
The JTP junior preferred stock is mandatorily redeemable on August 1, 2010
and, if and to the extent permitted by the covenants of Telecommunication
Products' then outstanding indebtedness, on the earliest to occur of (x) August
1, 2002, (y) the sale of Telecommunication Products or (z) a public equity
offering by Telecommunication Products. In the event the JTP junior preferred
stock is redeemed prior to August 1, 2002, the redemption price will be equal
to (i) $20.0 million, plus or minus (ii) 95% of Telecommunication Products' net
income or losses through the redemption date (collectively, the "Initial JTP
Junior Preferred Liquidation Value"), plus or minus (iii) the present value of
the projected net income or losses of Telecommunication Products from the
redemption date through August 1, 2002. In the event the JTP junior preferred
stock is redeemed on or after August 1, 2002, the redemption price will be
equal to the Initial JTP Junior Preferred Liquidation Value plus accrued and
unpaid dividends through the Redemption Date.
The redemption of the JTP junior preferred stock could result in the
recognition by the Company of substantial income tax liabilities arising out of
the Telecommunication Products Recapitalization. See "Risk
Factors--Consequences of Subsidiary Deconsolidation."
74
<PAGE>
JTP Senior Preferred Stock. Telecommunication Products issued units
consisting of senior exchangeable preferred stock due 2009 and common stock of
Telecommunication Products to qualified institutional buyers for net cash
proceeds to Telecommunication Products of approximately $25.0 million. The JTP
senior preferred stock ranks senior, with respect to dividend distributions and
distributions upon the liquidation, winding-up and dissolution of
Telecommunication Products, to the JTP junior preferred stock which is held by
us. Accordingly, upon a sale of Telecommunication Products, which would
otherwise require the mandatory redemption of the JTP junior preferred stock,
the proceeds of such sale would be applied first to pay the liquidation
preference and accrued dividends with respect to the JTP senior preferred
stock. The JTP senior preferred stock is mandatorily redeemable on the twelfth
anniversary of the date of issuance. The holders of the JTP senior preferred
stock do not have voting rights, except under limited circumstances.
M&G Junior Preferred Stock. In connection with Motors and Gears'
recapitalization, we amended and restated our preferred stock investment in
Motors and Gears resulting in the M&G junior preferred stock, which initially
had an increased liquidation preference of $42.0 million plus or minus 80% of
Motors and Gears' net income or losses through March 31, 2002. Following March
31, 2002 or the failure by Motors and Gears to redeem the M&G junior preferred
stock following the sale of Motors and Gears or a public equity offering by
Motors and Gears, dividends will accrue on any outstanding M&G junior preferred
stock at a rate of 10% per annum of the Initial M&G Junior Preferred
Liquidation Value. Absent such an event, we do not anticipate receiving any
cash distributions in respect of the M&G junior preferred stock prior to March
31, 2002. The M&G junior preferred stock has voting rights equal to 82.5% of
the total combined voting power of the M&G junior preferred stock and the
Motors and Gears common stock.
The M&G junior preferred stock will be mandatorily redeemable on March 31,
2008 and, if and to the extent permitted by the covenants of Motors and Gears'
then outstanding indebtedness, on the earliest to occur of (x) March 31, 2002,
(y) the sale of Motors and Gears or (z) a public equity offering by Motors and
Gears. In the event the M&G junior preferred stock is redeemed prior to March
31, 2002, the redemption price will be equal to (i) $42.0 million, plus or
minus (ii) 80% of Motors and Gears' net income or losses through the redemption
date (collectively, the "Initial M&G Junior Preferred Liquidation Value"), plus
or minus (iii) the present value of the projected net income or losses of
Motors and Gears from the redemption date through March 31, 2002. In the event
the M&G junior preferred stock is redeemed on or after March 31, 2002, the
redemption price will be equal to the Initial M&G Junior Preferred Liquidation
Value plus accrued and unpaid dividends through the Redemption Date.
The redemption of the M&G junior preferred stock could result in the
recognition by the Company of substantial income tax liabilities arising out of
the Motors and Gears Recapitalization. See "Risk Factors--Consequences of
Subsidiary Deconsolidation."
Motors and Gears Senior Preferred Stock. In connection with Motors and
Gears' recapitalization, Motors and Gears issued to the Jordan Group and
management of Motors and Gears 8% cumulative non-voting preferred stock, which
initially had a liquidation preference of $1.5 million. Dividends will accrue
on this outstanding non-voting preferred stock at a rate of 8% per annum of the
liquidation value.
The non-voting preferred stock will be mandatorily redeemable on March 31,
2008 or, if and to the extent permitted by the covenants of Motors and Gears'
then outstanding indebtedness, on the earliest to occur of (x) March 31, 2002,
(y) the sale of Motors and Gears or (z) a public equity offering by Motors and
Gears. In the event the non-voting preferred stock is redeemed prior to March
31, 2008, the redemption price will be equal to the then liquidation value plus
any accrued and unpaid dividends through the redemption date. The non-voting
preferred stock is redeemable on any date provided that all accrued and unpaid
dividends have either been paid or accrued and added to the liquidation value,
any consent required for redemption has been obtained.
JSP Junior Preferred Stock. We amended and restated our preferred stock
investment in Specialty Plastics resulting in the JSP junior preferred stock
which initially had an increased
75
<PAGE>
liquidation preference of $11.5 million plus or minus 97.5% of Specialty
Plastics' net income or losses through March 31, 2003. Following March 31, 2003
or the failure by Specialty Plastics to redeem the JSP junior preferred stock
following the sale of Specialty Plastics or a public equity offering by
Specialty Plastics, dividends will accrue on any outstanding JSP junior
preferred stock at a rate of 10% per annum of the Initial JSP Junior Preferred
Liquidation Value. Absent such an event, we do not anticipate receiving any
cash distributions in respect of the JSP junior preferred stock prior to March
31, 2003. The JSP junior preferred stock will have voting rights equal to 97.5%
of the total combined voting power of the JSP junior preferred stock and the
Specialty Plastics common stock.
The JSP junior preferred stock will be mandatorily redeemable on March 31,
2011 and, if and to the extent permitted by the covenants of Specialty
Plastics' then outstanding indebtedness, on the earliest to occur of (x) March
31, 2003, (y) the sale of Specialty Plastics or (z) a public equity offering by
Specialty Plastics. In the event the JSP junior preferred stock is redeemed
prior to March 31, 2003, the redemption price will be equal to (i) $11.5
million, plus or minus (ii) 97.5% of Specialty Plastics's net income or losses
through the redemption date (collectively, the "Initial JSP Junior Preferred
Liquidation Value"), plus or minus (iii) the present value of the projected net
income or losses of Specialty Plastics from the redemption date through March
31, 2003. In the event the JSP junior preferred stock is redeemed on or after
March 31, 2003, the redemption price will be equal to the Initial JSP Junior
Preferred Liquidation Value plus accrued and unpaid dividends through the
Redemption Date.
The redemption of the JSP junior preferred stock could result in our
recognition of substantial income tax liabilities arising out of the Specialty
Plastics Recapitalization. See "Risk Factors--Consequences of Subsidiary
Deconsolidation."
76
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We sold $155.0 million of series C senior notes on March 22, 1999 in a
private placement. Those notes were not registered under the Securities Act of
1933. The initial purchasers of the series C senior notes were Donaldson,
Lufkin & Jenrette Securities Corporation, Jefferies & Company, Inc. and
BancBoston Robertson Stephens Inc. They have advised us that they promptly
resold the series C senior notes to "qualified institutional buyers" in
reliance on Rule 144A under the Securities Act. When we sold the series C
senior notes to the initial purchasers, we entered into the registration rights
agreement, which requires that we file a registration statement under the
Securities Act of 1933 with respect to the series D senior notes to be issued
in the exchange offer and, upon the effectiveness of the registration
statement, offer to you and all other holders of the series C senior notes the
opportunity to exchange your series C senior notes for a like principal amount
of series D senior notes. These series D senior notes will be issued without a
restrictive legend and, except as set forth below, may be reoffered and resold
without restrictions or limitations under the Securities Act of 1933. After we
complete the exchange offer, our obligations with respect to the registration
of the series C senior notes will terminate, except as provided in the last
paragraph of this section. As a result of the timely filing and effectiveness
of the registration statement of which this prospectus is a part, assuming we
complete the exchange offer by September 18, 1999, certain prospective
increases in the interest rate on the series C senior notes that were provided
for in the registration rights agreement will not occur.
Under existing interpretations of the staff of the Securities and Exchange
Commission contained in several no action letters to third parties, we believe
that the series D senior notes to be issued in the exchange offer will be
freely transferable by a holder who receives them in exchange for series C
senior notes, without further registration under the Securities Act of 1933,
provided that the holder represents to us that:
(1) it is not an "affiliate" of our company (such as a director,
executive officer or controlling stockholder of our company or our parent
company),
(2) it will be acquiring the series D senior notes in the ordinary
course of its business, and
(3) it has not engaged in, does not intend to engage in, and has no
arrangement or understanding with any other person to participate in, a
distribution of the series D senior notes.
However, we have not sought a no-action letter from the Securities and
Exchange Commission with respect to this exchange offer and we cannot assure
you that the Securities and Exchange Commission's staff would make a similar
determination with respect to this exchange offer. Any holder of series C
senior notes who is an "affiliate" of our company or who intends to participate
in the exchange offer for the purpose of distributing the series D senior
notes,
(1) will not be able to validly tender its series C senior notes in the
exchange offer,
(2) will not be able to rely on the interpretations of the staff of the
Securities and Exchange Commission, and
(3) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any offer or sale of
its series C senior notes, unless such offer or sale is made pursuant to an
exemption from those requirements.
In addition, each broker-dealer that receives series D senior notes for
its own account in the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of those notes. The letter of
transmittal accompanying this prospectus states that, by so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is acting in the capacity of an "underwriter" within the meaning of Section
2(11) of the Securities Act of 1933. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of series D senior notes received in exchange for series C senior
notes that
77
<PAGE>
had been acquired by that broker-dealer as a result of market-making or other
trading activities. Pursuant to the registration rights agreement, we have
agreed to make this prospectus available to any broker-dealer for use in
connection with any such resale.
If you are not eligible to participate in the exchange offer, you can
elect, by so indicating on the letter of transmittal and providing certain
additional necessary information, to have your series C senior notes included
within the coverage of a shelf registration statement pursuant to Rule 415
under the Securities Act of 1933. If we have to file a shelf registration
statement, we will be required to keep it effective for a period of two years
or such shorter period that will terminate when all of the series C senior
notes covered by that shelf registration statement have been resold. Other than
as set forth in this paragraph, holders of series C senior notes will not have
the right to require us to register their series C senior notes under the
Securities Act.
TERMS OF THE EXCHANGE OFFER
Upon satisfaction or waiver of the conditions of the exchange offer set
forth in this prospectus and in the accompanying letter of transmittal, we will
accept all series C senior notes that are validly tendered and not withdrawn
prior to 5:00 p.m. New York City time, on the expiration date. After
authentication of the series D senior notes by the trustee, we will issue and
deliver $1,000 principal amount of series D senior notes in exchange for each
$1,000 principal amount of outstanding series C senior notes accepted in the
exchange offer. You may tender some or all of your series C senior notes
pursuant to the exchange offer in denominations of $1,000 and integral
multiples thereof.
By tendering series C senior notes in exchange for series D senior notes
and by executing the letter of transmittal, you will be required to represent
that:
(1) you are not an "affiliate" of our company,
(2) any series D senior notes that you receive in the exchange offer
will be acquired by you in the ordinary course of your business, and
(3) you have no intention to distribute, and have no arrangement or
understanding with any person to participate in the distribution of, the
series D senior notes you acquire.
The form and terms of the series D senior notes will be identical in all
material respects to the form and terms of the series C senior notes, except
that:
(1) the offering of the series D senior notes has been registered under
the Securities Act,
(2) the series D senior notes will not be subject to restrictions on
resale, and
(3) certain provisions in the registration rights agreement relating to
an increase in the stated interest rate on the series C senior notes
provided for under certain circumstances will become ineffective.
The series D senior notes will evidence the same debt as the series C
senior notes and will be issued under and entitled to the benefits of the same
indenture as the series C senior notes.
As of the date of this Prospectus, $155,000,000 aggregate principal amount
of series C senior notes is outstanding. In connection with the issuance of the
series C senior notes, we arranged for the series C senior notes to be issued
and transferable in book-entry form through the facilities of DTC, acting as a
depositary. The series D senior notes will also be issuable and transferable in
book-entry form through DTC.
This prospectus, together with the accompanying letter of transmittal, is
initially being sent to all registered holders of the series C senior notes as
of the close of business on May 12, 1999. The exchange offer is not conditioned
upon any minimum aggregate principal amount of series C senior notes being
tendered. However, the exchange offer is subject to certain customary
conditions which may be waived by us, and to the terms and provisions of the
registration rights agreement. See "--Conditions to the Exchange Offer" for a
detailed description of those conditions.
78
<PAGE>
We will be deemed to have accepted validly tendered series C senior notes
when, as and if we have given oral or written notice thereof to the exchange
agent. The exchange agent will receive the series D senior notes from us and
deliver them to the tendering holders.
If we do not accept any tendered series C senior notes for exchange
because of an invalid tender or because the conditions to the exchange offer
have not been met, certificates for any such unaccepted series C senior notes
will be returned, at our cost, to the tendering holder thereof as promptly as
practicable after the expiration date.
Holders who tender series C senior notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the letter of transmittal, transfer taxes with respect to the exchange of
their series C senior notes pursuant to the exchange offer. We will pay all
charges and expenses, other than certain applicable taxes, in connection with
the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date," as used in this prospectus, means 5:00 p.m.,
New York City time, on June 11, 1999, unless we, in our sole discretion, extend
the exchange offer, in which case the term "expiration date" shall mean the
latest date to which the exchange offer is extended. We may extend the exchange
offer at any time and from time to time by giving oral or written notice to the
exchange agent and by timely public announcement.
We reserve the right, in our sole discretion,
(1) to delay accepting any series C senior notes for exchange,
(2) to extend the exchange offer,
(3) to terminate the exchange offer if the conditions set forth below
under "--Conditions to the Exchange Offer" shall not have been satisfied,
or
(4) to amend the terms of the exchange offer in any manner.
We will notify the exchange agent of any delay, extension, termination or
amendment by oral or written notice. In addition, we will promptly notify each
registered holder of series C senior notes of any amendment. We will give to
the exchange agent written confirmation of any oral notice.
We acknowledge and undertake to comply with the provisions of Rule
14e-1(c) under the Securities Exchange Act of 1934, which requires us to pay
the consideration offered, or return the series C senior notes surrendered for
exchange, promptly after the termination or withdrawal of the exchange offer.
INTEREST ON THE SERIES D SENIOR NOTES
Interest on the series D senior notes will accrue from the last interest
payment date on which interest was paid on the series C senior notes
surrendered in exchange therefor or, if no interest has been paid on the series
C senior notes, from February 1, 1999.
PROCEDURES FOR TENDERING
If you wish to accept the exchange offer, you must complete, sign and date
the letter of transmittal, or a facsimile thereof, in accordance with the
instructions contained herein and therein. You must then mail or otherwise
deliver the letter of transmittal, or facsimile, together with the series C
senior notes to be exchanged and any other required documentation, to U.S. Bank
Trust National Association, as exchange agent, at the address set forth herein
and therein. You may also effect a tender of series C senior notes pursuant to
the procedures for book-entry transfer as provided for herein and therein.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of its series C senior
notes by causing DTC to transfer those series C senior
79
<PAGE>
notes into the exchange agent's account in accordance with DTC's procedure for
such transfer. Although delivery of series C senior notes may be effected
through book-entry transfer into the exchange agent's account at DTC, the
letter of transmittal, or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the exchange agent at its address set forth herein under "--
Exchange Agent" prior to 5:00 p.m., New York City time, on the expiration date.
Delivery of documents to DTC in accordance with its procedures does not
constitute delivery to the exchange agent.
Only a holder in whose name series C senior notes are registered may
tender those series C senior notes in the exchange offer. To tender in the
exchange offer, a holder must:
(1) complete, sign and date the letter of transmittal or a facsimile
thereof,
(2) have the signatures thereof guaranteed if required by the letter of
transmittal, and
(3) unless the tender is being effected pursuant to the procedure for
book-entry transfer, mail or otherwise deliver the letter of transmittal or
facsimile thereof, together with the series C senior notes and other
required documents, to the exchange agent, prior to 5:00 p.m., New York
City time, on the expiration date.
If less than all of the series C senior notes are tendered, a tendering
holder should fill in the amount of series C senior notes being tendered in the
appropriate box on the letter of transmittal. The entire amount of series C
senior notes delivered to the exchange agent will be deemed to have been
tendered unless otherwise indicated.
The method of delivery of series C senior notes and the letter of
transmittal and all other required documents to the exchange agent is at the
election and risk of the holders. Instead of delivery by mail, it is
recommended that holders use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to ensure delivery to the exchange
agent prior to the expiration date. No letter of transmittal or series C senior
notes should be sent to us. You may request that your broker, or a commercial
bank, trust company or nominee, effect the tender on your behalf, as set forth
herein and in the letter of transmittal.
If your series C senior notes are registered in the name of a broker,
commercial bank, trust company or other nominee and you wish to tender, you
should contact the registered holder promptly and instruct the registered
holder to tender on your behalf. If you wish to tender on your own behalf,
prior to completing and executing the letter of transmittal and delivering your
series C senior notes, you must either make appropriate arrangements to
register ownership of the series C senior notes in your name or obtain a
properly completed bond power from the registered holder. The transfer of
record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Securities Exchange Act of 1934 (each an "Eligible
Institution"), unless the series C senior notes tendered pursuant thereto are
tendered by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instruction" of the letter of
transmittal or for the account of an Eligible Institution. If the letter of
transmittal is signed by a person other than the registered holder listed
therein, the series C senior notes that are the subject of that letter of
transmittal must be endorsed or accompanied by appropriate bond powers that
authorize that person to tender the series C senior notes on behalf of the
registered holder. The endorsement or bond powers must be signed in the name of
the registered holder as it appears on the series C senior notes.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance and withdrawal of the tendered series C senior notes will
be determined by us in our sole discretion, and that determination will be
final and binding. We reserve the absolute right to reject any and all
80
<PAGE>
series C senior notes not properly tendered and to waive any irregularities or
conditions of tender as to particular series C senior notes. Our interpretation
of the terms and conditions of the exchange offer, including the instructions
in the letter of transmittal, will be final and binding on all parties.
Any series C senior notes received by the exchange agent that we determine
are not properly tendered or as to which the defects or irregularities have not
been cured or waived, will be returned by the exchange agent to the tendering
holder, as soon as practicable following the expiration date.
In addition, we reserve the right, in our sole discretion,
(1) to purchase or make offers for any series C senior notes that remain
outstanding subsequent to the expiration date, and
(2) to the extent permitted by applicable law, to purchase series C
senior notes in the open market, in privately negotiated transactions or
otherwise.
The terms of any such purchases or offers may differ from the terms of the
exchange offer.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the exchange offer, we will not be
required to accept any series C senior notes for exchange, or to exchange new
registered notes for any series C senior notes, and we may terminate or amend
the exchange offer before the acceptance of the series C senior notes if:
(1) the exchange offer, or the making of any exchange by a holder,
violates any applicable law or any applicable interpretation of the staff
of the Securities and Exchange Commission, or
(2) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or body to enjoin or obtain damages in
respect of the exchange offer, or that can reasonably be expected to impair
our ability to proceed with the exchange offer.
If we determine that either of these events or circumstances has occurred
or exists, we may:
(1) refuse to accept any series C senior notes and return to the holders
any series C senior notes that have been tendered, or
(2) extend the exchange offer and retain all series C senior notes
tendered prior to the original expiration date of the exchange offer,
subject to the rights of the holders of those notes to withdraw them, or
(3) waive the condition and accept all properly tendered series C senior
notes that have not been withdrawn.
The exchange offer is not conditioned on any minimum aggregate principal
amount of series C senior notes being tendered for exchange. Any extension of
the exchange offer shall be for not more than 60 days, and in no event shall
the exchange offer be extended beyond August 19, 1999.
EXCHANGE AGENT
U.S. Bank Trust National Association, f.k.a. First Trust National
Association, the trustee under the indenture, has been appointed as exchange
agent for the exchange offer. In that capacity, the exchange agent has no
fiduciary duties and will be acting solely on the basis of our directions.
Requests for assistance and requests for additional copies of this prospectus
or of the letter of transmittal should be directed to the exchange agent
addressed as follows:
By registered or certified mail
or by overnight courier U.S. Bank Trust National Association
or by hand delivery: 180 East Fifth Street
St. Paul, Minnesota 55101
Attn: Specialized Finance Corporate Trust
Department,
Fourth Floor
81
<PAGE>
Facsimile transmission: (651) 244-1537
Information or confirmation by telephone: (651) 244-5011 or (800) 934-6802
Delivery to an address or facsimile number other than those listed above will
not constitute a valid delivery.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the
series C senior notes, as reflected in our accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by our company as a result of the consummation of the exchange
offer. The expenses of the exchange offer will be amortized by us over the
remaining term of the notes issued in the exchange offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of series C senior notes who do not tender their notes in the
exchange offer will continue to hold those series C senior notes and will be
entitled to all the rights, and subject to the limitations applicable thereto,
under the indenture. All series C senior notes that are not tendered will
continue to be subject to the restrictions on resale set forth in the
indenture. Accordingly, prior to the later of March 22, 2001 (two years from
the date of original issue of the notes) or two years after those series C
senior notes were last sold by us or one of our affiliates, those series C
senior notes may be offered and resold only
(1) to us,
(2) pursuant to a registration statement that has been declared
effective under the Securities Act of 1933,
(3) in the United States to a "qualified institutional buyer" within the
meaning of Rule 144A in reliance upon the exemption from the registration
requirements of the Securities Act of 1933 provided by Rule 144A,
(4) in the United States to an "Institutional Accredited Investor", as
defined in Rule 501(a)(1), (2), (3) or (7) promulgated under the Securities
Act of 1933, in a transaction that is exempt from the registration
requirements of the Securities Act of 1933,
(5) outside the United States to a foreign person in a transaction that
complies with the provisions of Regulation S under the Securities Act of
1933, or
(6) pursuant to any other available exemption from the registration
requirements of the Securities Act of 1933, in each case in accordance with
applicable state securities laws.
To the extent that series C senior notes are tendered and accepted in the
exchange offer, the liquidity of the trading market for untendered series C
senior notes will be adversely affected.
82
<PAGE>
DESCRIPTION OF THE SENIOR NOTES
GENERAL
The series C senior notes were issued and the series D senior notes will
be issued pursuant to an indenture (the "Indenture") between the Company and
U.S. Bank Trust National Association, f.k.a. First Trust National Association,
as trustee (the "Trustee"). A copy of the Indenture has been filed as an
exhibit to the registration statement which includes this prospectus. The terms
of the series D senior notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
in effect on the date of original issuance of the series C senior notes. The
series D senior notes are subject to all such terms, and holders of the series
D senior notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. The series D senior notes and series C senior notes are sometimes
collectively referred to as the "Senior Notes."
Principal of, premium, if any, interest and Liquidated Damages, if any, on
the series D senior notes will be payable, and the series D senior notes may be
presented for registration of transfer or exchange, at the respective offices
of the Paying Agent and Registrar in New York, New York. Holders of series D
senior notes must surrender their series D senior notes to the Paying Agent to
collect principal payments, and we may pay principal, premium, if any,
Liquidated Damages, if any, and interest by check and may mail checks to a
holder's registered address; provided that all payments with respect to Global
Securities and Certificated Securities, the holders of whom have given wire
transfer instructions to us, will be required to be made by wire transfer of
immediately available funds to the accounts specified by those holders. The
Registrar may require payment of a sum sufficient to cover any transfer tax or
similar governmental charge payable in connection with certain transfers or
exchanges. See "--Transfer and Exchange." The Trustee is initially acting as
Paying Agent and Registrar. We may change the Paying Agent or Registrar without
prior notice to holders of series D senior notes, and, subject to certain
exceptions, we or any of our subsidiaries may act as Paying Agent or Registrar
under the Indenture.
Our operations are conducted exclusively through our subsidiaries. As a
consequence, our ability to service our Indebtedness (including the series D
senior notes) is dependent upon our receipt of funds from our Subsidiaries. See
"Risk Factors--Structure."
TERMS OF THE SENIOR NOTES
The series C senior notes were and the series D senior notes will be
general unsecured senior obligations, will rank senior in right of payment to
all of our subordinated Indebtedness, and will rank equal in right of payment
with all senior Indebtedness (including the Series B Senior Notes). The series
D senior notes will effectively rank junior to any of our secured senior
Indebtedness to the extent of the value of the assets securing such
Indebtedness and to any Indebtedness of our Subsidiaries, including borrowings
under the Credit Agreement. The senior notes will be limited to $155,000,000 in
aggregate principal amount. The series D senior notes will bear interest at the
rate of 103/8% per year. Interest on the series D senior notes is payable
semi-annually in cash on February 1 and August 1 of each year to holders of
record of series D senior notes at the close of business on the January 15 and
July 15 immediately prior to the interest payment date. Interest will initially
accrue from February 1, 1999 and the first interest payment date will be August
1, 1999. Interest will be computed on the basis of a 360-day year of twelve
30-day months. The series D senior notes will mature on August 1, 2007 and will
be issued in denominations of $1,000 and integral multiples thereof.
REDEMPTION OF SENIOR NOTES
Optional Redemption. The Senior Notes may not be redeemed at our option
prior to August 1, 2002. During the 12-month period beginning August 1 of the
years indicated below, the Senior Notes
83
<PAGE>
will be redeemable, at our option, in whole or in part, on at least 30 but not
more than 60 days' notice to each holder of Senior Notes to be redeemed, at the
redemption prices (expressed as percentages of the principal amount) set forth
below, plus any accrued and unpaid interest and Liquidated Damages, if any, to
the redemption date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------------- -------------
<S> <C>
2002 ......................... 105.188%
2003 ......................... 102.594%
2004 and thereafter .......... 100.000%
</TABLE>
The restrictions on optional redemptions contained in the Indenture do not
limit our right to separately make open market, privately negotiated or other
purchases of Senior Notes from time to time.
Mandatory Redemption. Except as set forth below under "Mandatory Offers to
Purchase Senior Notes--Change of Control" and "--Asset Sales," we are not
required to make any mandatory redemption, purchase or sinking fund payments
with respect to the Senior Notes.
MANDATORY OFFERS TO PURCHASE SENIOR NOTES
Change of Control. Upon the occurrence of a Change of Control (such date
being the "Change of Control Trigger Date"), each holder of Senior Notes shall
have the right to require us to purchase all or any part (equal to $1,000 or an
integral multiple thereof) of such holder's Senior Notes pursuant to an Offer
(as defined herein) at a purchase price equal to 101% of the aggregate
principal amount of the Senior Notes, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase. Prepayment of the Senior
Notes pursuant to a Change of Control would constitute a default under the
Credit Agreement. In the event a Change of Control occurs, the Company will
likely be required to refinance the Indebtedness outstanding under the Credit
Agreement and the Senior Notes.
Asset Sales. The Indenture provides that we may not, and may not permit
any Restricted Subsidiary to, directly or indirectly, consummate an Asset Sale
(including the sale of any of the Capital Stock of any Restricted Subsidiary)
providing for Net Proceeds in excess of $2,500,000 unless at least 75% of the
Net Proceeds from such Asset Sale are applied to one or more of the following
in such combination as we shall elect: (a) an investment in another asset or
business in the same line of business as, or a line of business similar to that
of, the line of business of the Company and its Restricted Subsidiaries at that
time; provided, that such investment occurs on or prior to the 365th day
following the date of such Asset Sale (the "Asset Sale Disposition Date"), (b)
the purchase, redemption or other prepayment or repayment of outstanding senior
Indebtedness on or prior to the Asset Sale Disposition Date or (c) an Offer
expiring on or prior to the Purchase Date (as defined herein). The Indenture
also provides that we may not, and may not permit any Restricted Subsidiary to,
directly or indirectly consummate an Asset Sale unless at least 50% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash, cash equivalents or marketable securities. Any Net
Proceeds from any Asset Sale that are not applied or invested as provided in
clauses (a) or (b) shall constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10,000,000 under the
Indenture (such date being an "Asset Sale Trigger Date"), we shall make an
Offer to purchase the maximum principal amount of the Senior Notes and the
Series B Senior Notes then outstanding under the Indenture and the indenture
governing the Series B Senior Notes that may be purchased out of Excess
Proceeds, at an offer price in cash in an amount equal to 100% of principal
amount thereof plus any accrued and unpaid interest and Liquidated Damages, if
any, to the Purchase Date, in accordance with the procedures set forth in those
indentures.
Notwithstanding the foregoing, to the extent that any or all of the Net
Proceeds of an Asset Sale is prohibited or delayed by applicable local law from
being repatriated to the United States, the portion of such proceeds so
affected will not be required to be applied as described in this or the
preceding paragraph, but may be retained for so long, but only for so long, as
the applicable local law prohibits repatriation to the United States.
84
<PAGE>
To the extent that any Excess Proceeds remain after completion of an
Offer, may use such remaining amount for general corporate purposes.
Procedures for Offers. Within 30 days following any Change of Control or
Asset Sale Trigger Date, we shall mail to each holder of Senior Notes at such
holder's registered address a notice stating: (a) that an offer ("Offer") is
being made pursuant to a Change of Control or an Asset Sale, as the case may
be, the length of time the Offer shall remain open and the Change of Control
Offer amount or the Asset Sale Offer amount, as the case may be, and the
maximum principal amount of Senior Notes that will be accepted for payment
pursuant to such Offer, (b) the purchase price, the amount of accrued and
unpaid interest and Liquidated Damages, if any, as of the Purchase Date, and
the purchase date (which shall be no earlier than 30 days or later than 40 days
from the date such notice is mailed (the "Purchase Date")), and (c) such other
information required by the Indenture and applicable law and regulations.
On the Purchase Date for any Offer, we will, to the extent lawful and
required by the Indenture and such Offer, (1) in the case of an Offer resulting
from a Change of Control, accept for payment all Senior Notes and Series B
Senior Notes or portions thereof tendered pursuant to such Offer and, in the
case of an Offer resulting from an Asset Sale, accept for payment the maximum
principal amount of Senior Notes and Series B Senior Notes or portions thereof
tendered pursuant to such Offer that can be purchased out of Excess Proceeds
from such Asset Sale, (2) deposit with the Paying Agent the aggregate purchase
price of all Senior Notes and Series B Senior Notes or portions thereof
accepted for payment and any accrued and unpaid interest and Liquidated
Damages, if any, on such Senior Notes and Series B Senior Notes as of the
Purchase Date and (3) deliver or cause to be delivered to the Trustee the
Senior Notes and Series B Senior Notes so accepted pursuant to the Offer. The
Paying Agent shall promptly mail to each holder of Senior Notes and Series B
Senior Notes so accepted, payment in an amount equal to the purchase price for
such Senior Notes or Series B Senior Notes and any accrued and unpaid interest
and Liquidated Damages, if any, on such Senior Notes or Series B Senior Notes
as of the purchase date, and the Trustee shall promptly authenticate and mail
(or cause to be transferred by book-entry) to such holder replacement Senior
Notes or Series B Senior Notes equal in principal amount to any unpurchased
portion of the Senior Notes or Series B Senior Notes surrendered; provided that
such replacement Senior Notes or Series B Senior Notes shall be in principal
amounts of $1,000 or integral multiples thereof. The Company will publicly
announce the results of the Offer on or as soon as practicable after the
purchase date.
We will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations to the extent such laws and regulations are
applicable to any Offer. To the extent that the provisions of the securities
laws or regulations conflict with provisions of the Indenture, we shall comply
with any such securities laws and regulations and shall not be deemed to have
breached its obligations under the Indenture by virtue thereof.
Selection and Notice. In the event of a redemption or purchase of less
than all of the Senior Notes and Series B Senior Notes, the Senior Notes and
Series B Senior Notes to be redeemed or purchased will be chosen by the Trustee
pro rata, by lot or any other method that the Trustee considers fair and
appropriate and, if the Senior Notes or the Series B Senior Notes are listed on
any securities exchange, by a method that complies with the requirements of
such exchange, provided that, if less than all of a holder's Senior Notes and
Series B Senior Notes are to be redeemed or accepted for payment, only
principal amounts of $1,000 or multiples thereof may be selected for redemption
or accepted for payment. For purposes of selection, the Trustee will consider
the Senior Notes and the Series B Senior Notes together as one series. Notice
of any redemption or offer to purchase will be mailed at least 30 days but not
more than 60 days before the redemption or purchase date to each holder of
Senior Notes and Series B Senior Notes to be redeemed or purchased at such
holder's registered address.
RANKING
The Senior Notes will rank senior in right of payment to all senior
subordinated Indebtedness of the Company (including the 113/4% Senior
Subordinated Discount Debentures due 2009) and all
85
<PAGE>
subordinated Indebtedness of the Company. The Senior Notes will rank equal to
all senior Indebtedness of the Company (including the Series B Senior Notes).
CERTAIN COVENANTS
The Indenture contains, among other things, the following covenants:
Limitation on Restricted Payments. The Indenture provides that we will
not, and will not permit any Restricted Subsidiary to, directly or
indirectly, (i) declare or pay any dividend or make any distribution on
account of the Company's or such Restricted Subsidiary's Capital Stock or
other Equity Interests (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or a
Restricted Subsidiary and other than dividends or distributions payable by
a Restricted Subsidiary to another Restricted Subsidiary or to the
Company), (ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Company or any of its Restricted Subsidiaries
(other than any such Equity Interest purchased from the Company or any
Restricted Subsidiary), (iii) voluntarily prepay Indebtedness that is
subordinated to the Senior Notes, whether any such subordinated
Indebtedness is outstanding on, or issued after, July 25, 1997, or (iv)
make any Restricted Investment (all such dividends, distributions,
purchases, redemptions or other acquisitions, retirements, prepayments and
Restricted Investments being collectively referred to as "Restricted
Payments"), if, at the time of such Restricted Payment:
(a) a Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof; or
(b) immediately after such Restricted Payment and after giving effect
thereto on a Pro Forma Basis, the Company shall not be able to issue
$1.00 of additional Indebtedness pursuant to the first sentence of the
"Limitation on Incurrence of Indebtedness" covenant; or
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made after July 25, 1997, exceeds the sum, without
duplication, of (1) 50% of the aggregate Consolidated Net Income
(including, for this purpose, gains from Asset Sales and, to the extent
not included in Consolidated Net Income, any gain from a Restricted
Investment) of the Company (or, in case such aggregate is a loss, 100%
of such loss) for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing immediately after July
25, 1997 and ended as of the Company's most recently ended fiscal
quarter at the time of such Restricted Payment, plus (2) 100% of the
aggregate net cash proceeds and the fair market value of any property or
securities (as determined by the Board of Directors in good faith)
received by the Company from the issue or sale of Equity Interests or
warrants, options or rights to acquire Equity Interests of the Company
or any Restricted Subsidiary subsequent to July 25, 1997 (other than
Equity Interests issued or sold to a Restricted Subsidiary and other
than Disqualified Stock), plus (3) $5,000,000, plus (4) the amount by
which the principal amount of and any accrued interest on either (a)
senior Indebtedness of the Company or (b) any Indebtedness of the
Restricted Subsidiaries (not held by the Company or any Restricted
Subsidiary) is reduced on the Company's consolidated balance sheet upon
the conversion or exchange subsequent to July 25, 1997 of such
Indebtedness for Equity Interests (other than Disqualified Stock) of the
Company or any Restricted Subsidiary (less the amount of any cash, or
the fair market value of any other property or securities (as determined
by the Board of Directors in good faith), distributed by the Company or
any Restricted Subsidiary (to persons other than the Company or any
other Restricted Subsidiary) upon such conversion or exchange), plus (5)
if any Nonrestricted Subsidiary is redesignated as a Restricted
Subsidiary, the fair market value (as determined by the Board of
Directors in good faith) of such Nonrestricted Subsidiary as of the date
it is redesignated; provided, however, that for purposes of this clause
(5), the fair market value of any redesignated Nonrestricted Subsidiary
shall be reduced by the amount that any such redesignation replenishes
or increases the amount of Restricted Investments permitted to be made
pursuant to clause (3) of the next sentence.
86
<PAGE>
Notwithstanding the foregoing, the Indenture does not prohibit as
Restricted Payments:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
comply with all covenants of the Indenture (including, but not limited to,
the "Limitation on Restricted Payments" covenant);
(2) the retirement of any of the Company's Capital Stock or subordinated
Indebtedness in exchange for, or out of the net proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary) of,
other Capital Stock (other than Disqualified Stock) and neither such
retirement nor the proceeds of any such sale or exchange shall be included
in any computation made pursuant to the preceding sentence;
(3) making Restricted Investments at any time, and from time to time, in
an aggregate outstanding amount of $50,000,000 after July 25, 1997 (it
being understood that if any Restricted Investment acquired with a
Restricted Payment after July 25, 1997 pursuant to this clause (3) is sold,
transferred or otherwise conveyed to any person other than the Company or a
Restricted Subsidiary, the portion of the net cash proceeds or fair market
value of securities or properties paid or transferred to the Company and
its Restricted Subsidiaries in connection with such sale, transfer or
conveyance that relates or corresponds to the repayment or return of the
original cost of such a Restricted Investment will replenish or increase
the amount of Restricted Investments permitted to be made pursuant to this
clause (3), so that up to $50,000,000 of Restricted Investments may be
outstanding under this clause (3) at any given time);
(4) the repurchase or redemption of the Company's common stock upon the
death of Thomas H. Quinn, pursuant to the terms of an employment agreement,
dated as of February 25, 1988, between the Company and Thomas H. Quinn;
provided, however, that the funds necessary to satisfy the Company's
obligation to repurchase or redeem such common stock shall be fully
reimbursed by insurance;
(5) the repurchase or redemption of the Company's common stock pursuant
to the terms of the several restricted stock agreements, each dated as of
February 25, 1988, between the Company and each of Thomas H. Quinn,
Jonathan F. Boucher and John R. Lowden, the restricted stock agreement,
dated as of January 1, 1992, between the Company and Thomas Quinn, the
restricted stock agreements, each dated as of January 1, 1992, between the
Company and each of Jonathan F. Boucher, Adam Max and Thomas Quinn, and the
restricted stock agreement, dated as of May 16, 1997, between the Company
and Thomas Quinn, in each case as amended or supplemented, up to an
aggregate amount not to exceed $7,500,000;
(6) any loans, advances, distributions or payments from the Company to
its Restricted Subsidiaries, or any loans, advances, distributions or
payments by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary, pursuant to intercompany Indebtedness, intercompany management
agreements, intercompany tax sharing agreements, and other intercompany
agreements and obligations;
(7) the payment of directors' fees in an annual aggregate amount not to
exceed $250,000;
(8) to the extent constituting Restricted Payments, if no Default or
Event of Default shall have occurred and be continuing or shall occur as a
consequence thereof, the payment of consulting, financial and investment
banking fees (but not limiting the payment of indemnities, expenses and
other amounts) under the TJC Management Consulting Agreement, provided,
that the obligation of the Company to pay such fees under the TJC
Management Consulting Agreement shall be subordinated expressly to the
Company's Obligations on the Senior Notes;
(9) the purchase, redemption, retirement or other acquisition of the
Discount Debentures required by their terms to be purchased, redeemed,
retired or acquired with the net proceeds from asset sales (as defined in
the instrument evidencing such subordinated Indebtedness) or upon a change
of control (as defined in the instrument evidencing such subordinated
Indebtedness);
87
<PAGE>
(10) the exchanging, refinancing or refunding of subordinated
Indebtedness through the issuance of subordinated Indebtedness so long as
the subordinated Indebtedness to be issued is Refinancing Indebtedness
permitted under the "Limitation on Incurrence of Indebtedness" covenant;
(11) to the extent constituting Restricted Payments, any payments made in
connection with the Plan, the Prior Offering and the Offering described in
this prospectus;
(12) Restricted Investments received as consideration for the sale,
transfer or disposition of any business, properties or assets of the
Company or any Restricted Subsidiary, provided, that the Company complies
with the "Asset Sale" covenant;
(13) any Restricted Investment constituting securities or instruments of
a person issued in exchange for trade or other claims against such person
in connection with a financial reorganization or restructuring of such
person;
(14) any Restricted Investment constituting an equity investment in a
Receivables Subsidiary; provided, that the aggregate amount of such equity
investments does not exceed $1,000,000; and
(15) guarantees by the Company of capital lease obligations of its
Nonrestricted Subsidiaries in an aggregate principal or face amount not
exceeding the aggregate principal or face amount of capital leases of the
Nonrestricted Subsidiaries guaranteed by the Company on July 25, 1997.
Limitation on Incurrence of Indebtedness. The Indenture provides that we
will not, and will not permit any Restricted Subsidiary to, issue any
Indebtedness (other than the Indebtedness represented by the Senior Notes)
unless our Cash Flow Coverage Ratio for the four full fiscal quarters next
preceding the date such additional Indebtedness is issued would have been at
least: (a) 1.7 to 1, if such date is between the Issue Date and June 30, 1999,
(b) 1.85 to 1, from July 1, 1999 through June 30, 2001, or (c) 2.0 to 1, from
July 1, 2001 and thereafter, in each case determined on a Pro Forma Basis as if
such additional Indebtedness and any other Indebtedness issued since the end of
such four-quarter period had been issued at the beginning of such four-quarter
period.
The foregoing limitations do not apply to the issuance of:
(1) Indebtedness of the Company and/or its Restricted Subsidiaries up to
the greater of (A) $75.0 million in aggregate principal amount pursuant to
the Credit Agreement, and (B) an aggregate principal amount up to the sum
of: (x) 85% of the book value of the Company and its Restricted
Subsidiaries' Receivables on a consolidated basis, and (y) 65% of the book
value of the Company and its Restricted Subsidiaries' inventories on a
consolidated basis;
(2) Indebtedness of the Company and its Restricted Subsidiaries pursuant
to any Receivables Financing;
(3) Indebtedness of the Company and its Restricted Subsidiaries in
connection with capital leases, sale and leaseback transactions, purchase
money obligations, capital expenditures or similar financing transactions
relating to: (A) their properties, assets and rights as of the Issue Date
up to $20,000,000 in aggregate principal amount, or (B) their properties,
assets and rights acquired after the Issue Date, provided that such
Indebtedness under this clause (3)(B) does not exceed 100% of the cost of
such properties, assets and rights;
(4) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount up to $25,000,000 (all or any
portion of which may be issued as additional Indebtedness under the Credit
Agreement); and
(5) Other Permitted Indebtedness.
Limitation on Liens. The Indenture provides that the Company shall not,
and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or suffer to exist any Lien (other than
Permitted Liens) upon any asset now owned or hereafter acquired by them, or any
income or profits therefrom or assign or convey any right to receive income
therefrom; provided,
88
<PAGE>
however, that in addition to creating Permitted Liens on its properties or
assets, the Company and any of its Restricted Subsidiaries may create any Lien
upon any of their properties or assets (including, but not limited to, any
Capital Stock of its Subsidiaries) if the Senior Notes are equally and ratably
secured.
Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective, any
encumbrance or restriction on the ability of any Restricted Subsidiary to: (a)
pay dividends or make any other distributions on its Capital Stock or any other
interest or participation in, or measured by, its profits, owned by the Company
or any Restricted Subsidiary, or pay any Indebtedness owed to, the Company or
any Restricted Subsidiary, (b) make loans or advances to the Company, or (c)
transfer any of its properties or assets to the Company, except for such
encumbrances or restrictions existing under or by reason of: (i) applicable
law, (ii) Indebtedness permitted (A) under the first sentence of the
"Limitation on Incurrence of Indebtedness" covenant, (B) under clauses (1), (2)
and (4) of the second sentence of the "Limitation on Incurrence of
Indebtedness" covenant and clauses (1), (7) and (9) of the definition of Other
Permitted Indebtedness, or (C) Restricted Payments and agreements or
instruments evidencing Restricted Payments permitted under the "Limitation on
Restricted Payments" covenant, (iii) customary provisions restricting
subletting or assignment of any lease or license of the Company or any
Restricted Subsidiary, (iv) customary provisions of any franchise, distribution
or similar agreement, (v) any instrument governing Indebtedness or any other
encumbrance or restriction of a person acquired by the Company or any
Restricted Subsidiary at the time of such acquisition, which encumbrance or
restriction is not applicable to any person, or the properties or assets of any
person, other than the person, or the property or assets of the person, so
acquired, (vi) Indebtedness or other agreements existing on the Issue Date,
(vii) any Refinancing Indebtedness of Indebtedness described in clauses (1),
(2), (3), and (4) of the second sentence of the "Limitation on Incurrence of
Indebtedness" covenant and clauses (1), (6), and (9) of the definition of Other
Permitted Indebtedness; provided that the encumbrances and restrictions created
in connection with such Refinancing Indebtedness are no more restrictive in any
material respect with regard to the interests of the holders of Senior Notes
than the encumbrances and restrictions in the refinanced Indebtedness, (viii)
any restrictions, with respect to a Restricted Subsidiary, imposed pursuant to
an agreement that has been entered into for the sale or disposition of the
stock, business, assets or properties of such Restricted Subsidiary, (ix) the
terms of any Indebtedness of the Company incurred in connection with the
"Limitation on Incurrence of Indebtedness" covenant, provided that the terms of
such Indebtedness constitute no greater encumbrance or restriction on the
ability of any Restricted Subsidiary to pay dividends or make distributions,
make loans or advances or transfer properties or assets than is permitted by
this covenant, and (x) the terms of purchase money obligations, but only to the
extent such purchase money obligations restrict or prohibit the transfer of the
property so acquired.
Nothing contained in this covenant prevents us from entering into any
agreement or instrument providing for the incurrence of Permitted Liens or
restricting the sale or other disposition of property or assets of the Company
or its Restricted Subsidiaries that are subject to Permitted Liens.
Limitation on Transactions With Affiliates. The Indenture provides, except
as otherwise set forth in the Indenture, that neither the Company nor any of
its Restricted Subsidiaries may make any loan, advance, guarantee or capital
contribution to, or for the benefit of, or sell, lease, transfer or dispose of
any properties or assets to, or for the benefit of, or purchase or lease any
property or assets from, or enter into any or amend any contract, agreement or
understanding with, or for the benefit of, an Affiliate (each such transaction
or series of related transactions that are part of a common plan an "Affiliate
Transaction"), except in good faith and on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction on an arm's-length basis from an
unrelated person.
The Indenture further provides that neither the Company nor any of its
Restricted Subsidiaries may engage in any Affiliate Transaction involving
aggregate payments or other transfers by the
89
<PAGE>
Company and its Restricted Subsidiaries in excess of $5.0 million (including
cash and non-cash payments and benefits valued at their fair market value by
the Board of Directors in good faith) unless the Company delivers to the
Trustee (i) a resolution of the Board of Directors stating that the Board of
Directors (including a majority of the disinterested directors, if any) has, in
good faith, determined that such Affiliate Transaction complies with the
provisions of the Indenture, and (ii) an opinion as to the fairness of such
Affiliate Transaction to the Company or such Restricted Subsidiary and the
holders of Senior Notes, in each case, from a financial point of view by an
investment banking firm of national prominence that is not an Affiliate of the
Company.
Notwithstanding the foregoing, this covenant does not apply to: (i)
transactions between the Company and any Restricted Subsidiary or between
Restricted Subsidiaries, (ii) any Restricted Payments permitted pursuant to the
"Limitation on Restricted Payments" covenant, (iii) payments of fees and other
amounts due under any Stock Appreciation Right agreements, the Subsidiary
Advisory Agreements, the Subsidiary Consulting Agreements, the Tax Sharing
Agreement, the JI Properties Services Agreement, the Transition Agreement and
the TJC Management Consulting Agreement, provided, that any amendments,
supplements, modifications, substitutions, renewals or replacements of the
foregoing agreements are approved by a majority of the Board of Directors
(including a majority of the disinterested directors, if any) as fair to the
Company and the holders of the Senior Notes, (iv) the payment of reasonable and
customary directors' fees to directors of the Company and its Restricted
Subsidiaries, (v) transactions in connection with a Receivables Financing or
(vi) payments and transactions in connection with the Offering as described in
this prospectus.
Limitation on Guarantees of Company Indebtedness by Restricted
Subsidiaries. The Company will not permit any Restricted Subsidiary, directly
or indirectly, to guarantee any Indebtedness of the Company other than the
Senior Notes (the "Other Indebtedness") unless (A) such Restricted Subsidiary
contemporaneously executes and delivers a supplemental indenture to the
Indenture providing for a guarantee of payment of the Senior Notes then
outstanding by such Restricted Subsidiary to the same extent as the guarantee
(the "Other Indebtedness Guarantee") of the Other Indebtedness (including
waiver of subrogation, if any) and (B) if the Other Indebtedness guaranteed by
such Restricted Subsidiary is (i) senior Indebtedness, the guarantee for the
Senior Notes shall be equal in right of payment with the Other Indebtedness
Guarantee and (ii) subordinated Indebtedness, the guarantee for the Senior
Notes shall be senior in right of payment to the Other Indebtedness Guarantee,
provided that the foregoing will not limit or restrict guarantees issued by any
Restricted Subsidiary in respect of Indebtedness of other Restricted
Subsidiaries.
Each guarantee of the Senior Notes created by a Restricted Subsidiary
pursuant to the provisions described in the foregoing paragraph shall be in
form and substance satisfactory to the Trustee and shall provide among other
things, by its terms that it shall be automatically and unconditionally
released and discharged upon (i) any sale, exchange or transfer permitted by
the Indenture to any person not an Affiliate of the Company of (a) all of the
Company's Capital Stock in such Restricted Subsidiary, or (b) the sale of all
or substantially all of the assets of the Restricted Subsidiary and upon the
application of the Net Proceeds from such sale in accordance with the
requirements of the "Asset Sales" provisions described herein, or (ii) the
release or discharge of the Other Indebtedness Guarantee that resulted in the
creation of such guarantee of the Senior Notes, except a discharge or release
by or as a result of payment under such Other Indebtedness Guarantee.
MERGER OR CONSOLIDATION
The Indenture provides that the Company shall not consolidate or merge
with or into, or sell, lease, convey or otherwise dispose of all or
substantially all of its assets to, any person (any such consolidation, merger
or sale being a "Disposition") unless: (a) the successor entity of such
Disposition or the person to which such Disposition shall have been made is a
corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia; (b) the successor corporation of
such Disposition or the corporation to which such Disposition shall have been
made expressly assumes the Obligations of the Company, pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee; (c)
immediately after such Disposition, no Default or
90
<PAGE>
Event of Default shall exist; and (d) the corporation formed by or surviving
any such Disposition, or the corporation to which such Disposition shall have
been made, shall (i) have Consolidated Net Worth (immediately after the
Disposition but prior to any purchase accounting adjustments resulting from the
Disposition) equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the Disposition, (ii) be permitted immediately after the
Disposition by the terms of the Indenture to issue at least $1.00 of additional
Indebtedness determined on a Pro Forma Basis pursuant to the first sentence
under "Limitation on Incurrence of Indebtedness," and (iii) have a Cash Flow
Coverage Ratio, for the four fiscal quarters immediately preceding the
applicable Disposition, determined on a Pro Forma Basis, equal to or greater
than the actual Cash Flow Coverage Ratio of the Company for such four-quarter
period. The limitations in the Indenture on the Company's ability to make a
Disposition described in this paragraph do not restrict the Company's ability
to sell less than all or substantially all of its assets, such sales being
governed by the "Asset Sales" provisions of the Indenture as described in this
propsectus.
Prior to the consummation of any proposed Disposition, the Company shall
deliver to the Trustee an officers' certificate to the foregoing effect and an
opinion of counsel stating that the proposed Disposition and such supplemental
indenture comply with the Indenture.
PROVISION OF FINANCIAL INFORMATION TO HOLDERS OF SENIOR NOTES
So long as the Senior Notes are outstanding, whether or not we are subject
to the reporting requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, we shall submit for filing with the Commission the annual reports,
quarterly reports and other documents that we would have been required to file
with the Commission pursuant to Section 13 or 15(d) if we were subject to such
reporting requirements. We will also provide to all holders of Senior Notes and
file with the Trustee copies of such annual reports, quarterly reports and
other documents required to be furnished to stockholders generally under the
Securities Exchange Act of 1934. In addition, we have agreed that, for so long
as any Senior Notes remain outstanding, we will furnish to the holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act of 1933.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that an Event of Default is: (a) a default for 30
days in payment of interest on the Senior Notes; (b) a default in payment when
due of principal or premium, if any; (c) the failure of the Company to comply
with any of its other agreements or covenants in, or provisions of, the
Indenture or the Senior Notes outstanding under the Indenture and the Default
continues for the period, if applicable, and after the notice specified in the
next paragraph; (d) a default by the Company or any Restricted Subsidiary under
any mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness for money borrowed by
the Company or any Restricted Subsidiary (or the payment of which is guaranteed
by the Company or any Restricted Subsidiary), whether such Indebtedness or
guarantee now exists or shall be created hereafter, if (1) either (A) such
default results from the failure to pay principal of or interest on any such
Indebtedness and such default continues for 30 days beyond any applicable grace
period, or (B) as a result of such default the maturity of such Indebtedness
has been accelerated prior to its expressed maturity, and (2) the principal
amount of such Indebtedness, together with the principal amount of any other
such Indebtedness in default for failure to pay principal or interest thereon,
or the maturity of which has been accelerated, aggregates in excess of
$15,000,000; (e) a failure by the Company or any Restricted Subsidiary to pay
final judgments (not covered by insurance) aggregating in excess of $7,500,000
which judgments a court of competent jurisdiction does not rescind, annul or
stay within 45 days after their entry and the Default continues for the period
and after the notice specified in the next paragraph; and (f) certain events of
bankruptcy or insolvency involving the Company or any Significant Subsidiary.
A Default under clause (c) (other than an Event of Default arising under
the "Merger or Consolidation," "Asset Sales" or "Change of Control" provisions
described herein or the covenants
91
<PAGE>
described under "Certain Covenants," any of which shall be an Event of Default
with the notice but without the passage of time specified in this paragraph) or
clause (e) is not an Event of Default under the Indenture until the Trustee or
the holders of at least 25% in principal amount of the Senior Notes outstanding
under the Indenture then outstanding notify the Company of the Default and the
Company does not cure the Default within 30 days after receipt of the notice.
Upon the occurrence of an Event of Default, the Trustee or the holders of
at least 25% in aggregate principal amount of the then outstanding Senior Notes
may declare all Senior Notes to be due and payable immediately and, upon such
declaration, the principal of, premium, if any, and any accrued and unpaid
interest and Liquidated Damages, if any, on all Senior Notes shall be due and
payable immediately. The holders of a majority in aggregate principal amount of
the Senior Notes then outstanding under the Indenture, by notice to the
Trustee, may rescind any declaration of acceleration of the Senior Notes and
its consequences (if the rescission would not conflict with any judgment or
decree) if all existing Events of Default (other than the nonpayment of
principal of or interest on the Senior Notes that shall have become due by such
declaration) shall have been cured or waived. Holders of the Senior Notes may
not enforce the Indenture, except as provided therein. The Trustee may withhold
from holders of the Senior Notes notice of any continuing Default or Event of
Default (except a Default or an Event of Default in payment of principal,
premium, if any, or interest) if the Trustee determines that withholding notice
is in their interest.
The holders of a majority in aggregate principal amount of the Senior
Notes then outstanding under the Indenture may on behalf of all holders of the
Senior Notes waive any existing Default or Event of Default under the Indenture
and its consequences, except a continuing Default in the payment of the
principal of, or premium, if any, or interest on, such Senior Notes, which may
only be waived with the consent of each holder of the Senior Notes affected.
We are required to deliver to the Trustee annually a statement regarding
compliance with the Indenture and, upon one of our officers becoming aware of
any Default or Event of Default, a statement specifying such Default or Event
of Default.
NO PERSONAL LIABILITY OF OFFICERS, DIRECTORS, EMPLOYEES AND STOCKHOLDERS
None of our officers, employees, directors or stockholders shall have any
liability for any Obligations of the Company under the Senior Notes or the
Indenture, or for any claim based on, in respect of, or by reason of, such
Obligations or the creation of any such Obligation. Each holder of the Senior
Notes by accepting a Senior Note waives and releases all such liability, and
such waiver and release are part of the consideration for issuance of the
Senior Notes. The foregoing waiver may not be effective to waive liabilities
under the Federal securities laws, and the Commission is of the view that such
a waiver is against public policy.
SATISFACTION AND DISCHARGE OF THE INDENTURE
We may at any time terminate all of our obligations under the Senior Notes
and the Indenture (the "legal defeasance option"), except for certain
obligations (including those with respect to the defeasance trust (as defined
herein) and obligations to register the transfer or exchange of the Senior
Notes, to replace mutilated, destroyed, lost or stolen Senior Notes and to
maintain a registrar and paying agent in respect of the Senior Notes). We may
at any time terminate (1) our obligations under the "Change of Control" and
"Asset Sales" provisions and the covenants described under "Certain Covenants,"
and certain other covenants in the Indenture, (2) the operation of clauses (c),
(d), (e), and (f) contained in the first paragraph of the "Events of Default
and Remedies" provisions and (3) the limitations contained in clauses (c) and
(d) under the "Merger or Consolidation" provisions (collectively, a "covenant
defeasance option").
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the Senior Notes may not be accelerated because of an Event
of Default with respect thereto. If we exercise our covenant defeasance option,
payment of the Senior Notes shall not be accelerated because of an Event of
92
<PAGE>
Default specified in clauses (c), (d), (e) or (f) in the first paragraph under
the "Events of Default and Remedies" provisions described herein or because of
our failure to comply with clauses (c) and (d) under the "Merger or
Consolidation" provisions.
To exercise either the legal or covenant defeasance option with respect to
the Senior Notes outstanding under the Indenture, we must irrevocably deposit
in trust (the "defeasance trust") with the Trustee money or U.S. government
obligations for the payment of principal of, and premium, if any, and interest
on, and Liquidated Damages, if any, on such Senior Notes to redemption or
maturity, as the case may be, and must comply with certain other conditions,
including the passage of 91 days and delivering to such Trustee an opinion of
counsel to the effect that holders of such Senior Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and defeasance and will be subject to federal income tax on the same
amount and in the same manner and at the same time as would have been the case
if such deposit and defeasance had not occurred (and, in the case of legal
defeasance only, such opinion of counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable federal income tax law).
TRANSFER AND EXCHANGE
Holders of Senior Notes may transfer or exchange their Senior Notes in
accordance with the Indenture, but the Registrar may require a holder, among
other things, to furnish appropriate endorsements and transfer documents, and
to pay any taxes and fees required by law or permitted by the Indenture, in
connection with any such transfer or exchange. The Registrar is not required to
issue, register the transfer or exchange (i) any Senior Notes selected for
redemption or purchase, or (ii) any Senior Notes for a period of 15 days before
a selection of such Senior Notes to be redeemed or purchased or between a
record date and the next succeeding interest payment date.
The registered holder of a Senior Note is treated as its owner for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture may be amended or
supplemented with the consent of the holders of at least a majority in
aggregate principal amount of the Senior Notes then outstanding under the
Indenture and any existing Default or Event of Default or compliance with any
provision may be waived with the consent of the holders of a majority in
aggregate principal amount of the Senior Notes then outstanding under such the
Indenture. Without the consent of any holder of Senior Notes, we and the
Trustee may amend or supplement the Indenture or the Senior Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated securities in
addition to or in place of certificated securities, to provide for the
assumption of our obligations in the case of a Disposition, to comply with the
Trust Indenture Act, or to make any change that does not materially adversely
affect the rights of any holder of Senior Notes.
Without the consent of each holder of Senior Notes affected, we may not
(1) reduce the principal amount of Senior Notes whose consent is
necessary to effect the amendment to or waiver under the Indenture;
(2) reduce the rate of or change the interest payment time of such
Senior Notes, or alter the redemption provisions with respect thereto
(other than the provisions relating to the covenants described above under
the caption "--Mandatory Offers to Purchase Senior Notes--Change of
Control" and "--Asset Sales") or the price at which the Company is required
to offer to purchase such Senior Notes;
(3) reduce the principal of or change the fixed maturity of such Senior
Notes;
(4) make such Senior Notes payable in money other than stated in such
Senior Notes;
(5) make any change in the provisions concerning waiver of Defaults or
Events of Default by holders of such Senior Notes, or rights of holders of
such Senior Notes to receive payment of principal or interest; or
93
<PAGE>
(6) waive any default in the payment of principal of, premium, if any,
or interest on, or Liquidated Damages, if any, with respect to such Senior
Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
if it becomes a creditor of the Company, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Trust Indenture Act) it must eliminate such conflict or resign.
The holders of a majority in principal amount of the Senior Notes then
outstanding under the Indenture will have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy available to
the Trustee, subject to certain exceptions. The Indenture provides that if an
Event of Default occurs (and has not been cured), the Trustee will be required,
in the exercise of its power, to use the degree of care of a prudent person in
similar circumstances in the conduct of its own affairs. Subject to the
provisions of the Indenture, the Trustee is under no obligation to exercise any
of its rights or powers under the Indenture at the request of any of the
holders of the Senior Notes issued under the Indenture, unless such holders
shall have offered to the Trustee security and indemnity satisfactory to it.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the series D senior notes will
initially be issued in the form of one or more registered global securities
(the "Global Securities"), each of which will be deposited on the Closing Date
with, or on behalf of, DTC and registered in the name of the Global Holder. The
following are summaries of certain rules and operating procedures of DTC which
affect the Global Securities.
The series D senior notes that are issued as described under "Certificated
Securities," will be issued in registered form (the "Certificated Securities").
For a description of the restrictions on the transfer of Certificated
Securities, see "Notice to Investors."
DTC has advised us that a limited-purchase trust company was created to
hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in such securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers
and dealers, banks and trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to the other entities
such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who are
not Participants may beneficially own securities held by or on behalf of DTC
only through the Participants or the Indirect Participants.
We expect that pursuant to procedures established by DTC (i) upon deposit
of the Global Securities, DTC will credit the accounts of Participants with
portions of the Global Securities; and (ii) ownership of the Senior Notes will
be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC (with respect to the interests of the
Participants), the Participants and the Indirect Participants. The laws of some
states require that certain persons take physical delivery in definitive form
of securities that they own. Consequently, the ability to transfer Senior Notes
will be limited to such extent. For certain other restrictions on the
transferability of the Senior Notes, see "Notice to Investors."
So long as the Global Holder is the registered owner of any Senior Notes,
the Global Holder will be considered the sole owner of such Senior Notes
outstanding under the Indenture. Except as provided below, owners of beneficial
interests in a Global Security will not be entitled to have Senior Notes
represented by such Global Securities registered in their names, will not
receive or be entitled to receive physical delivery of Certificated Securities,
and will not be considered the owners or holders
94
<PAGE>
thereof under the Indenture for any purpose. As a result, the ability of a
person having a beneficial interest in Senior Notes represented by a Global
Security to pledge such interest to persons or entities that do not participate
in the DTC's system or to otherwise take actions in respect of such interest,
may be affected by the lack of a physical certificate evidencing such interest.
Accordingly, each QIB owning a beneficial interest in a Global Security must
rely on the procedures of DTC and, if such QIB is not a Participant or an
Indirect Participant, on the procedures of the Participant through which such
QIB owns its interest, to exercise any rights of a holder under such Global
Security or the Indenture.
Neither the Trustee nor we will have any responsibility or liability for
any aspect of the records relating to or payments made on account of Senior
Notes by DTC, or for maintaining, supervising or reviewing any records of DTC
relating to such Senior Notes.
Payments in respect of the principal of, premium, if any, and interest and
Liquidated Damages, if any, on any Senior Notes registered in the name of a
Global Holder on the applicable record date will be payable by the Trustee to
or at the direction of such Global Holder in its capacity as the registered
holder under the Indenture. Under the terms of the Indenture, we and the
Trustee may treat the persons in whose names the Senior Notes, including the
Global Securities, are registered as the owners thereof for the purpose of
receiving such payments and for any and all other purposes whatsoever.
Consequently, neither the Trustee nor we have or will have any responsibility
or liability for the payment of such amounts to beneficial owners of Senior
Notes (including principal, premium, if any, and interest), or to immediately
credit the accounts of the relevant Participants with such payment, in amounts
proportionate to their respective interests in the Global Securities in
principal amount of beneficial interests in the relevant security as shown on
the records of the Depository. Payments by the Participants and the Indirect
Participants to the beneficial owners of Senior Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Participants or the Indirect Participants.
We have been informed by DTC that its management is aware that some
computer applications, systems, and the like for processing data ("Systems")
that are dependent upon calendar dates including dates before, on, and after
January 1, 2000, may encounter "Year 2000 problems." We have also been informed
by DTC that is has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payments of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. According to DTC, this program includes a technical
assessment and a remediation plan, each of which is complete. Additionally, DTC
has informed us that its plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, we have been informed by DTC that its ability to perform properly
its services is also dependent upon other parties, including but not limited to
issuers and their agents, as well as third party vendors from whom DTC licenses
software and hardware, and third-party vendors on whom DTC relies for
information or the provision of services, including telecommunications and
electrical utility service providers, among others. DTC has informed us that it
is contacting (and will continue to contact) third-party vendors from whom DTC
acquires services to: (1) impress upon them the importance of such services
being Year 2000 compliant; and (2) determine the extent of their efforts for
Year 2000 remediation (and, as appropriate, testing) of their services. In
addition, DTC has informed us that it is in the process of developing such
contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
CERTIFICATED SECURITIES
If (i) we notify the Trustee in writing that DTC is no longer willing or
able to act as a depository and we are unable to locate a qualified successor
within 90 days or (ii) we, at our option, notify the Trustee in writing that we
elect to cause the issuance of the Senior Notes in definitive form under the
95
<PAGE>
Indenture, then, upon surrender by the relevant Global Holder of its Global
Security, Senior Notes in such form will be issued to each person that such
Global Holder and the Depository identifies as the beneficial owner of the
related Senior Notes. In addition, subject to certain conditions, any person
having a beneficial interest in the Global Security may, upon request to the
Trustee, exchange such beneficial interest for Certificated Securities. Upon
any such issuance, the Trustee is required to register such Senior Notes in the
name of, and cause the same to be delivered to, such person or persons (or the
nominee of any thereof). Such Senior Notes would be issued in fully registered
form.
SAME-DAY SETTLEMENT AND PAYMENT
With respect to certificated securities, the Company will make all
payments of principal, premium and interest by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address.
CERTAIN DEFINITIONS
Set forth below are certain of the defined terms used in the Indenture.
Reference is made to the Indenture for the definition of all other terms.
"Affiliate" means any of the following: (i) any person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the Company, (ii) any spouse, immediate family member or other
relative who has the same principal residence as any person described in clause
(i) above, (iii) any trust in which any such person described in clause (i) or
(ii) above has a beneficial interest, and (iv) any corporation or other
organization of which any such persons described above collectively own 50% or
more of the equity of such entity.
"Asset Sale" means the sale, lease, conveyance or other disposition by the
Company or a Restricted Subsidiary of assets or property (other than (i) the
sale or disposition of any Restricted Investment, (ii) the sale or lease of
inventory, equipment, receivables or other assets in the ordinary course of
business, (iii) Receivables Financings, (iv) any sale or transfer of properties
or assets by the Company or a Restricted Subsidiary to the Company or any other
Restricted Subsidiary, (v) the sale, lease, conveyance or other disposition of
all or substantially all of the assets of the Company as permitted under
"Merger or Consolidation," or (vi) Restricted Payments permitted by the
"Limitations on Restricted Payments" covenant).
"Board of Directors" means the Company's board of directors or any
authorized committee of such board of directors.
"Capital Stock" means any and all shares, interests, participations or
other equivalents (however designated) of corporate stock, including any
preferred stock.
"Cash Flow" means, for any given period and person, the sum of, without
duplication, Consolidated Net Income, plus (a) the portion of Net Income
attributable to the minority interests in its Subsidiaries, to the extent not
included in calculating Consolidated Net Income, plus (b) provision for taxes
based on income or profits to the extent such income or profits were included
in computing Consolidated Net Income, plus (c) Consolidated Interest Expense,
to the extent deducted in computing Consolidated Net Income, plus (d) the
amortization of all intangible assets, to the extent such amortization was
deducted in computing Consolidated Net Income (including, but not limited to,
inventory write-ups, goodwill, debt and financing costs, and Incentive
Arrangements), plus (e) non-capitalized transaction costs incurred in
connection with financings, acquisitions or dispositions (including, but not
limited to, financing and refinancing fees, to the extent deducted in computing
Consolidated Net Income), plus (f) all depreciation and all other non-cash
charges (including without limitation, those charges relating to purchase
accounting adjustments to the extent deducted in computing Consolidated Net
Income), plus (g) interest income, to the extent such income was not included
in computing Consolidated Net Income, plus (h) all dividend payments on
preferred stock (whether or not paid in cash) to the extent deducted in
computing Consolidated Net Income, plus (i) any extraordinary or non-recurring
charge or expense arising out of the implementation of SFAS 106
96
<PAGE>
or SFAS 109 to the extent deducted in computing Consolidated Net Income,
provided, however, that if any such calculation includes any period during
which an acquisition or sale of a person or the incurrence or repayment of
Indebtedness occurred, then such calculation for such period shall be made on a
Pro Forma Basis.
"Cash Flow Coverage Ratio" means, for any given period and person, the
ratio of: (i) Cash Flow, divided by (ii) the sum of Consolidated Interest
Expense and the amount of all dividend payments on any series of preferred
stock of such person (except for dividends paid or payable in additional shares
of Capital Stock (other than Disqualified Stock)), in each case, without
duplication; provided, however, that if any such calculation includes any
period during which an acquisition or sale of a person or the incurrence or
repayment of Indebtedness occurred, then such calculation for such period shall
be made on a Pro Forma Basis.
"Change of Control" means the occurrence of any of the following: (i) the
Jordan Stockholders shall fail to be the beneficial owners, directly or
indirectly, of at least 22% of the outstanding shares of Common Stock of the
Company on a fully-diluted basis; (provided, that the issuance of any shares of
the Company's Common Stock pursuant to a primary public offering shall not be
considered to have diluted such percentage ownership); or (ii) the Company is
merged or consolidated with another corporation, or all or substantially all of
the assets of the Company are sold, leased or conveyed to another person, and
the Jordan Stockholders are not the beneficial owners, directly or indirectly,
immediately following such transaction, of at least 22% of the Equity Interests
(which are entitled to vote in the election of directors or other governing
body) of the corporation surviving any such consolidation or merger, or the
person to which such sale, lease or conveyance shall have been made; or (iii)
the Company is liquidated or dissolved.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the Company's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Senior Notes to require the Company to repurchase such Senior Notes
as a result of a sale, lease, transfer, conveyance or other disposition of less
than all of the assets of the Company and its Subsidiaries to another person
may be uncertain. Furthermore, an acquisition of the Company by the Jordan
Stockholders would not constitute a Change of Control.
"Commission" means the Securities and Exchange Commission.
"Consolidated Interest Expense" means, for any given period and person,
the aggregate of the interest expense in respect of all Indebtedness of such
person and its Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP (including amortization of original issue
discount on any such Indebtedness, all non-cash interest payments, the interest
portion of any deferred payment obligation and the interest component of
capital lease obligations, but excluding amortization of deferred financing
fees if such amortization would otherwise be included in interest expense);
provided, however, that for the purpose of the Cash Flow Coverage Ratio (with
respect to the covenants limiting the incurrence of additional Indebtedness,
mergers, consolidations and sales of assets), Consolidated Interest Expense
shall be calculated on a Pro Forma Basis; provided further, any premiums, fees
and expenses (including the amortization thereof) payable in connection with
the Offering, the Prior Offering and the Plan and the application of the net
proceeds therefrom or any other refinancing of Indebtedness will be excluded.
"Consolidated Net Income" means, for any given period and person, the
aggregate of the Net Income of such person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided,
however, that: (i) the Net Income of any person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded, and (ii) Consolidated Net Income of any person will not
include, without duplication, any deduction for: (A) increased amortization or
depreciation resulting from the write-up of assets pursuant to Accounting
Principles Board Opinion Nos. 16 and 17, as amended or supplemented from time
to time, (B) the amortization of all intangible assets (including amortization
attributable to inventory
97
<PAGE>
write-ups, goodwill, debt and financing costs, and Incentive Arrangements), (C)
non-capitalized transaction costs incurred in connection with financings,
acquisitions or divestitures (including, but not limited to, financing and
refinancing fees), (D) any extraordinary or nonrecurring charges relating to
any premium or penalty paid, write-off of deferred financing costs or other
financial recapitalization charges in connection with redeeming or retiring any
Indebtedness prior to its stated maturity, and (E) any non-recurring charge
arising out of the restructuring or consolidation of the operations of any
person(s) or business either alone or together with the Company or any
Restricted Subsidiary, incurred within 18 months following the acquisition of
such person(s) or business by the Company or any Restricted Subsidiary;
provided, however, that for purposes of determining the Cash Flow Coverage
Ratio (with respect to the covenants and provisions in the Indenture limiting
the incurrence of additional Indebtedness, mergers or consolidations, and sales
of assets), Consolidated Net Income shall be calculated on a Pro Forma Basis.
"Consolidated Net Worth" with respect to any person means, as of any date,
the consolidated equity of the common stockholders of such person (excluding
the cumulated foreign currency translation adjustment), all determined on a
consolidated basis in accordance with GAAP, but without any reduction in
respect of the payment of dividends on any series of such person's preferred
stock if such dividends are paid in additional shares of Capital Stock (other
than Disqualified Stock); provided, however, that Consolidated Net Worth shall
also include, without duplication: (a) the amortization of all write-ups of
inventory, (b) the amortization of all intangible assets (including
amortization of goodwill, debt and financing costs, and Incentive
Arrangements), (c) non-capitalized transaction costs incurred in connection
with financings, acquisitions or divestitures (including, but not limited to,
financing and refinancing fees), (d) increased amortization or depreciation
resulting from the write-up of assets pursuant to Accounting Principles Board
Opinion Nos. 16 and 17, as amended and supplemented from time to time, (e) any
extraordinary or nonrecurring charges or expenses relating to any premium or
penalty paid, write-off of deferred financing costs or other financial
recapitalization charges incurred in connection with redeeming or retiring any
Indebtedness prior to its stated maturity, (f) any non-recurring charge arising
out of the restructuring or consolidation of the operations of any person(s) or
business either alone or together with the Company or any Restricted
Subsidiary, incurred within 18 months following the acquisition of such
person(s) or business by the Company or any Restricted Subsidiary, and (g) any
extraordinary or non-recurring charge arising out of the implementation of SFAS
106 or SFAS 109; provided, however, that for purposes of determining
Consolidated Net Worth (with respect to the covenants and provisions in the
Indenture limiting the incurrence of additional Indebtedness, mergers or
consolidations, and sales of assets) Consolidated Net Worth shall be calculated
on a Pro Forma Basis.
"Credit Agreement" means the credit agreement, dated July 25, 1997,
entered into by JII, Inc. and certain Subsidiaries and the lenders party
thereto in their capacities as lenders thereunder and Bank Boston, N.A., as
agent, together with all loan documents and instruments thereunder (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including, without limitation, increasing the amount of
available borrowings thereunder, and all Obligations with respect thereto, in
each case, to the extent permitted by the "Limitation on Incurrence of
Indebtedness" covenant, or adding Subsidiaries of the Company as additional
borrowers or guarantors thereunder) all or any portion of the Indebtedness
under such agreement or any successor or replacement agreement and whether by
the same or any other agent, lender or group of lenders.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that by its terms (or by the
terms of any security into which its is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part on, or
prior to, the maturity date of the Senior Notes.
98
<PAGE>
"Equity Interests" means Capital Stock or partnership interests or
warrants, options or other rights to acquire Capital Stock or partnership
interests (but excluding (i) any debt security that is convertible into, or
exchangeable for, Capital Stock or partnership interests, and (ii) any other
Indebtedness or Obligation); provided, however, that Equity Interests will not
include any Incentive Arrangements or obligations or payments thereunder.
"GAAP" means generally accepted accounting principles, consistently
applied, as of the Issue Date. All financial and accounting determinations and
calculations under the Indenture will be made in accordance with GAAP.
"Global Holder" means Cede & Co., as nominee of DTC.
"Hedging Obligations" means, with respect to any person, the Obligations
of such persons under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) foreign exchange
contracts, currency swap agreements or similar agreements, and (iii) other
agreements or arrangements designed to protect such person against fluctuations
in, or otherwise to establish financial hedges in respect of, exchange rates,
currency rates or interest rates.
"Incentive Arrangements" means any earn-out agreements, stock appreciation
rights, "phantom" stock plans, employment agreements, non-competition
agreements, subscription and stockholders agreements and other incentive and
bonus plans and similar arrangements made in connection with acquisitions of
persons or businesses by the Company or the Restricted Subsidiaries or the
retention of executives, officers or employees by the Company or the Restricted
Subsidiaries.
"Indebtedness" means, with respect to any person, any indebtedness,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures or similar instruments or letters of credit (or reimbursement
agreements in respect thereof) or representing the deferred and unpaid balance
of the purchase price of any property (including pursuant to capital leases),
except any such balance that constitutes an accrued expense or a trade payable,
and any Hedging Obligations, if and to the extent such indebtedness (other than
a Hedging Obligation) would appear as a liability upon a balance sheet of such
person prepared on a consolidated basis in accordance with GAAP, and also
includes, to the extent not otherwise included, the guarantee of items that
would be included within this definition; provided, however, that
"Indebtedness" will not include any Incentive Arrangements or obligations or
payments thereunder.
"Insolvency or Liquidation Proceeding" means (i) any insolvency or
bankruptcy or similar case or proceeding, or any reorganization, receivership,
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, or (ii) any assignment for the benefit of creditors or any other
marshaling of assets and liabilities of the Company.
"issue" means create, issue, assume, guarantee, incur or otherwise become
directly or indirectly liable for any Indebtedness or Capital Stock, as
applicable; provided, however, that any Indebtedness or Capital Stock of a
person existing at the time such person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition or otherwise) shall be deemed to
be issued by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary. For this definition, the terms "issuing," "issuer," "issuance and
"issued" have meanings correlative to the foregoing.
"Issue Date" means March 22, 1999.
"Jordan Stockholders" means John W. Jordan, II, and/or his heirs,
executors and administrators, and/or The John W. Jordan, II Revocable Trust,
The Jordan Family Trust and/or any other trust established by John W. Jordan,
II whose beneficiaries are John W. Jordan, II and/or his lineal descendants or
other relatives.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell and any filing of
or agreement to give any financing statement under the Uniform Commercial Code
(or equivalent statutes) of any jurisdiction).
99
<PAGE>
"Net Income" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP, excluding, however, any gain
or loss, together with any related provision for taxes, realized in connection
with any Asset Sale (including, without limitation, dispositions pursuant to
sale and leaseback transactions).
"Net Proceeds" means, with respect to any Asset Sale, the aggregate amount
of cash proceeds (including any cash received by way of deferred payment
pursuant to a note receivable issued in connection with such Asset Sale, other
than the portion of such deferred payment constituting interest, and including
any amounts received as disbursements or withdrawals from any escrow or similar
account established in connection with any such Asset Sale, but, in either such
case, only as and when so received) received by the Company or any of its
Restricted Subsidiaries in respect of such Asset Sale, net of: (i) the cash
expenses of such Asset Sale (including, without limitation, the payment of
principal, premium, if any, and interest on Indebtedness required to be paid as
a result of such Asset Sale (other than the Series B Senior Notes and the
Senior Notes) and legal, accounting, management, advisory and investment
banking fees and sales commissions), (ii) taxes paid or payable as a result
thereof, (iii) any portion of cash proceeds that the Company determines in good
faith should be reserved for post-closing adjustments, it being understood and
agreed that on the day that all such post-closing adjustments have been
determined, the amount (if any) by which the reserved amount in respect of such
Asset Sale exceeds the actual post-closing adjustments payable by the Company
or any of its Restricted Subsidiaries shall constitute Net Proceeds on such
date, (iv) any relocation expenses and pension, severance and shutdown costs
incurred as a result thereof and (v) any deduction or appropriate amounts to be
provided by the Company or any of its Restricted Subsidiaries as a reserve in
accordance with GAAP against any liabilities associated with the asset disposed
of in such transaction and retained by the Company or such Restricted
Subsidiary after such sale or other disposition thereof, including, without
limitation, pension and other post-employment benefit liabilities and
liabilities related to environmental matters or against any indemnification
obligations associated with such transaction.
"Nonrestricted Subsidiary" means Motors and Gears Holdings, Inc. and its
Subsidiaries, Telecommunication Products and its Subsidiaries, JI Properties,
Inc. and its Subsidiaries and any other Subsidiary of the Company other than a
Restricted Subsidiary.
The covenants in the Indenture do not generally restrict the Nonrestricted
Subsidiaries, including their incurrence of Indebtedness.
"Obligations" means, with respect to any Indebtedness, all principal,
interest, premium, penalties, fees, indemnities, expenses (including legal fees
and expenses), reimbursement obligations and other liabilities payable to the
holder of such Indebtedness under the documentation governing such
Indebtedness, and any other claims of such holder arising in respect of such
Indebtedness.
"Offering" means the offer and sale of the series C senior notes which
occurred on March 22, 1999.
"Offering Memorandum" means the offering memorandum, dated March 17, 1999,
relating to the Company's offering and placement of the series C senior notes.
"Other Permitted Indebtedness" means:
(i) Indebtedness of the Company and its Restricted Subsidiaries existing
as of the Issue Date and all related Obligations as in effect on such date
(including Senior Notes, Series B Senior Notes and 113/4% Senior
Subordinated Discount Debentures due 2009);
(ii) Indebtedness of the Company and its Restricted Subsidiaries in
respect of bankers' acceptances and letters of credit (including, without
limitation, letters of credit in respect of workers' compensation claims)
issued in the ordinary course of business, or other Indebtedness in respect
of reimbursement-type obligations regarding workers' compensation claims;
(iii) Refinancing Indebtedness, provided that: (A) the principal amount
of such Refinancing Indebtedness shall not exceed the outstanding principal
amount of Indebtedness (including
100
<PAGE>
unused commitments) so extended, refinanced, renewed, replaced, substituted
or refunded plus any amounts incurred to pay premiums, fees and expenses in
connection therewith, (B) the Refinancing Indebtedness shall have a
Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of the Indebtedness being extended, refinanced,
renewed, replaced, substituted or refunded, and (C) in the case of
Refinancing Indebtedness for subordinated Indebtedness, such Refinancing
Indebtedness shall be subordinated to the Senior Notes at least to the same
extent as the Indebtedness being extended, refinanced, renewed, replaced,
substituted or refunded;
(iv) intercompany Indebtedness of and among the Company and its
Restricted Subsidiaries (excluding guarantees by Restricted Subsidiaries of
Indebtedness of the Company not issued in compliance with "Limitation on
Guarantees of Company Indebtedness by Restricted Subsidiaries" covenant);
(v) Indebtedness of the Company and its Restricted Subsidiaries incurred
in making permitted Restricted Payments under clauses (iv) or (v) of the
second sentence of the "Limitation on Restricted Payments" covenant and
guarantees by the Company of capital leases of the Company's Nonrestricted
Subsidiaries up to the aggregate amount permitted by clause (xv) of the
second sentence of the "Limitation and Restricted Payments" covenant;
(vi) Indebtedness of any Nonrestricted Subsidiary; provided that such
Indebtedness is nonrecourse to the Company and its Restricted Subsidiaries
and the Company and its Restricted Subsidiaries have no Obligations with
respect to such Indebtedness;
(vii) Indebtedness of the Company and its Restricted Subsidiaries under
Hedging Obligations;
(viii) Indebtedness of the Company and its Restricted Subsidiaries
arising from the honoring by a bank or other financial institution of a
check, draft or similar instrument inadvertently (except in the case of
daylight overdrafts, which will not be, and will not be deemed to be,
inadvertent) drawn against insufficient funds in the ordinary course of
business;
(ix) Indebtedness of any person at the time it is acquired as a
Restricted Subsidiary; provided that such Indebtedness was not issued by
such person in connection with or in anticipation of such acquisition and
that such Indebtedness is nonrecourse to the Company and any other
Restricted Subsidiary and the Company and such other Restricted
Subsidiaries have no Obligations with respect to such Indebtedness;
(x) guarantees by Restricted Subsidiaries of Indebtedness of any
Restricted Subsidiary if the Indebtedness so guaranteed is permitted under
the Indenture;
(xi) guarantees by a Restricted Subsidiary of Indebtedness of the Company
if the Indebtedness so guaranteed is permitted under the Indenture and the
Senior Notes are guaranteed by such Restricted Subsidiary to the extent
required by the "Limitation on Guarantees of Company Indebtedness by
Restricted Subsidiaries" covenant;
(xii) guarantees by the Company of Indebtedness of any Restricted
Subsidiary if the Indebtedness so guaranteed is permitted under the
Indenture;
(xiii) Indebtedness of the Company and its Restricted Subsidiaries in
connection with performance, surety, statutory, appeal or similar bonds in
the ordinary course of business; and
(xiv) Indebtedness of the Company and its Restricted Subsidiaries in
connection with agreements providing for indemnification, purchase price
adjustments and similar obligations in connection with the sale or
disposition of any of their business, properties or assets.
"Permitted Liens" means: (a) with respect to the Company and the
Restricted Subsidiaries, (1) Liens for taxes, assessments, governmental charges
or claims which are being contested in good faith by appropriate proceedings
promptly instituted and diligently conducted and if a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made
101
<PAGE>
therefor; (2) statutory Liens of landlords and carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens arising
in the ordinary course of business and with respect to amounts not yet
delinquent or being contested in good faith by appropriate proceedings, if a
reserve or other appropriate provision, if any as shall be required in
conformity with GAAP shall have been made therefor; (3) Liens incurred on
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (4)
Liens incurred on deposits made to secure the performance of tenders, bids,
leases, statutory obligations, surety and appeal bonds, government contracts,
performance and return of money bonds and other obligations of a like nature
incurred in the ordinary course of business (exclusive of obligations for the
payment of borrowed money); (5) easements, rights-of-way, zoning or other
restrictions, minor defects or irregularities in title and other similar
charges or encumbrances not interfering in any material respect with the
business of the Company or any of its Restricted Subsidiaries incurred in the
ordinary course of business; (6) Liens (including extensions, renewals and
replacements thereof) upon property acquired (the "Acquired Property") after
the Issue Date, provided that: (A) any such Lien is created solely for the
purpose of securing Indebtedness representing, or issued to finance, refinance
or refund, the cost (including the cost of construction) of the Acquired
Property, (B) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of the cost of the Acquired Property, (C) such Lien does
not extend to or cover any property other than the Acquired Property and any
improvements on such Acquired Property, and (D) the issuance of the
Indebtedness to purchase the Acquired Property is permitted by the "Limitation
on Incurrence of Indebtedness" covenant; (7) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (8) judgment and attachment
Liens not giving rise to an Event of Default; (9) leases or subleases granted
to others not interfering in any material respect with the business of the
Company or any of its Restricted Subsidiaries; (10) Liens encumbering customary
initial deposits and margin deposits, and other Liens incurred in the ordinary
course of business and that are within the general parameters customary in the
industry, in each case securing Indebtedness under Hedging Obligations; (11)
Liens encumbering deposits made to secure obligations arising from statutory,
regulatory, contractual or warranty requirements of the Company or its
Restricted Subsidiaries; (12) Liens arising out of consignment or similar
arrangements for the sale of goods entered into by the Company or its
Restricted Subsidiaries in the ordinary course of business; (13) any interest
or title of a lessor in property subject to any Capital Lease Obligation or
operating lease; (14) Liens arising from filing Uniform Commercial Code
financing statements regarding leases; (15) Liens existing on the Issue Date
and any extensions, renewals or replacements thereof; and (16) any Lien granted
to the Trustee under the Indenture and any substantially equivalent Lien
granted to any trustee or similar institution under any indenture for senior
Indebtedness permitted by the terms of the Indenture;
(b) with respect to the Restricted Subsidiaries, (1) Liens securing
Restricted Subsidiaries' reimbursement Obligations with respect to letters of
credit that encumber documents and other property relating to such letters of
credit and the products and proceeds thereof; (2) Liens securing Indebtedness
issued by Restricted Subsidiaries if such Indebtedness is permitted by (A) the
first sentence of the "Limitation on Incurrence of Indebtedness" covenant, (B)
clauses (i), (ii), (iii) or (iv) of the second sentence of the "Limitation on
Incurrence of Indebtedness" covenant, or (C) clauses (i), (iii) (to the extent
the Indebtedness subject to such Refinancing Indebtedness was subject to Liens)
(vii), (ix) or (x) of the definition of Other Permitted Indebtedness; (3) Liens
securing intercompany Indebtedness issued by any Restricted Subsidiary to the
Company or another Restricted Subsidiary; (4) additional Liens at any one time
outstanding with respect to assets of the Restricted Subsidiaries the aggregate
fair market value of which does not exceed $10,000,000 (the fair market value
of any such asset is to be determined on the date such Lien is granted on such
asset); and (5) Liens securing guarantees by Restricted Subsidiaries of
Indebtedness issued by the Company if such guarantees are permitted by clause
(xi) (but only in respect of the property, rights and assets of the Restricted
Subsidiaries issuing such guarantees) of the definition of Other Permitted
Indebtedness; and
(c) with respect to the Company, (1) Liens securing Indebtedness issued by
the Company under the Credit Agreement if such Indebtedness is permitted by the
"Limitation on Incurrence of
102
<PAGE>
Indebtedness" covenant (including, but not limited to, Indebtedness issued by
the Company under the Credit Agreement pursuant to clause (i) and/or clause
(iv) of the second sentence of "Limitation on Incurrence of Indebtedness"
covenant), (2) Liens securing Indebtedness of the Company if such Indebtedness
is permitted by clauses (i), (iii) (to the extent the Indebtedness subject to
such Refinancing Indebtedness was subject to Liens) or (vii) of the definition
of Other Permitted Indebtedness, and (3) Liens securing guarantees by the
Company of Indebtedness issued by Restricted Subsidiaries if such Indebtedness
is permitted by the "Limitation on Incurrence of Indebtedness" covenant
(including, but not limited to, Indebtedness issued by Restricted Subsidiaries
under the Credit Agreement pursuant to clause (i) and/or clause (v) of the
second sentence of the "Limitation on Incurrence of Indebtedness" covenant) and
if such guarantees are permitted by clause (xii) (but only in respect of
Indebtedness issued by the Restricted Subsidiaries under the Credit Agreement
pursuant to "Limitation on Incurrence of Indebtedness" covenant) of the
definition of Other Permitted Indebtedness;
provided, however, that, notwithstanding any of the foregoing, the Permitted
Liens referred to in clause (c) of this definition shall not include any Lien
on Capital Stock of Restricted Subsidiaries held by the Company (as
distinguished from Liens on Capital Stock of Restricted Subsidiaries held by
other Restricted Subsidiaries) other than Liens securing (A) Indebtedness of
the Company issued under the Credit Agreement pursuant to the "Limitation on
Incurrence of Indebtedness" covenant and any permitted Refinancing Indebtedness
of such Indebtedness, and (B) guarantees by the Company of Indebtedness issued
by Restricted Subsidiaries under the Credit Agreement pursuant to the
"Limitation on Incurrence of Indebtedness" covenant and any permitted
Refinancing Indebtedness of such Indebtedness.
"Plan" means the Company's 1997 Recapitalization and Repositioning Plan
referenced in the prospectus and all agreements, instruments and transactions
pursuant thereto.
"Prior Offering" means the offer and sale of the Series B Senior Notes.
"Pro Forma Basis" means, for purposes of determining Consolidated Net
Income, Cash Flow, and Consolidated Interest Expense in connection with the
Cash Flow Coverage Ratio (including in connection with the "Limitation on
Restricted Payments" covenant, the incurrence of Indebtedness pursuant to the
first sentence of the "Limitation on Incurrence of Indebtedness" covenant and
Consolidated Net Worth for purposes of the "Merger or Consolidation" covenant),
giving pro forma effect to (x) any acquisition or sale of a person, business or
asset, related incurrence, repayment or refinancing of Indebtedness or other
related transactions, including any related restructuring charges in respect of
restructurings, consolidations, compensation or headcount reductions or other
cost savings which would otherwise be accounted for as an adjustment permitted
by Regulation S-X under the Securities Act of 1933 or on a pro forma basis
under GAAP, or (y) any incurrence, repayment or refinancing of any Indebtedness
and the application of the proceeds therefrom, in each case, as if such
acquisition or sale and related transactions, restructurings, consolidations,
cost savings, reductions, incurrence, repayment or refinancing were realized on
the first day of the relevant period permitted by Regulation S-X under the
Securities Act of 1933 or on a pro forma basis under GAAP. Furthermore, in
calculating the Cash Flow Coverage Ratio, (1) interest on outstanding
Indebtedness determined on a fluctuating basis as of the determination date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the determination date; (2) if interest on any
Indebtedness actually incurred on the determination date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate,
a eurocurrency interbank offered rate, or other rates, then the interest rate
in effect on the determination date will be deemed to have been in effect
during the relevant period; and (3) notwithstanding clause (1) above, interest
on Indebtedness determined on a fluctuating basis, to the extent such interest
is covered by agreements relating to interest rate swaps or similar interest
rate protection Hedging Obligations, shall be deemed to accrue at the rate per
annum resulting after giving effect to the operation of such agreements.
"Receivables" means, with respect to any person, all of the following
property and interests in property of such person, whether now existing or
existing in the future or hereafter acquired or
103
<PAGE>
arising: (i) accounts, (ii) accounts receivable (including, without limitation,
all rights to payment created by or arising from sales of goods, leases of
goods or leased or the rendition of services rendered no matter how evidenced,
whether or not earned by performance), (iii) all unpaid seller's or lessor's
rights including without limitation, recession, replevin, reclamation and
stoppage in transit, relating to any of the foregoing or arising therefrom,
(iv) all rights to any goods or merchandise represented by any of the foregoing
(including, without limitation, returned or repossessed goods), (v) all
reserves and credit balances with respect to any such accounts receivable or
account debtors, (vi) all letters of credit, security or guarantees of any of
the foregoing, (vii) all insurance policies or reports relating to any of the
foregoing, (viii) all collection or deposit accounts relating to any of the
foregoing, (ix) all proceeds of any of the foregoing, and (x) all books and
records relating to any of the foregoing.
"Receivables Financing" means (i) the sale or other disposition of
Receivables that arise in the ordinary course of business, or (ii) the sale or
other disposition of Receivables arising in the ordinary course of business to
a Receivables Subsidiary followed by a financing transaction in connection with
such sale or disposition of such Receivables.
"Receivables Subsidiary" means a Subsidiary of the Company that is
exclusively engaged in Receivables Financings and activities reasonably related
thereto.
"Refinancing Indebtedness" means (i) Indebtedness of the Company and its
Restricted Subsidiaries issued or given in exchange for, or the proceeds of
which are used to extend, refinance, renew, replace, substitute or refund, any
Indebtedness permitted under the Exchange Indentures or any Indebtedness issued
to so extend, refinance, renew, replace, substitute or refund such
Indebtedness, (ii) any refinancings of Indebtedness issued under the Credit
Agreement, and (iii) any additional Indebtedness issued to pay premiums and
fees in connection with clauses (i) and (ii).
"Restricted Investment" means any capital contribution to, or other debt
or equity investment in (other than certain investments in marketable
securities and other negotiable instruments permitted by the Indenture) any
Nonrestricted Subsidiary or any person other than a Restricted Subsidiary or
the Company; provided, that Restricted Investments will not include Incentive
Arrangements. The amount of any Restricted Investment shall be the amount of
cash and the fair market value at the time of transfer of all other property
(as determined by the Board of Directors in good faith) included in the
original Restricted Investment, plus all additions thereto, without any
adjustments for increases or decreases in value or write-ups, write-downs or
write-offs with respect to such Restricted Investment. Notwithstanding the
foregoing, the assignment by the Company and the assumption by a Nonrestricted
Subsidiary of all or any portion of an operating lease of the Company shall not
be deemed a Restricted Investment, so long as the obligations of the Company
under any such lease are not increased by the terms of such assignment or
assumption.
"Restricted Subsidiary" means: (i) any Subsidiary of the Company existing
on the Issue Date other than a Nonrestricted Subsidiary, and (ii) any other
Subsidiary of the Company formed, acquired or existing after the Issue Date
that is designated as a "Restricted Subsidiary" by the Company pursuant to a
resolution approved by a majority of the Board of Directors, provided that any
Restricted Subsidiary that is organized under the laws of a foreign
jurisdiction and whose stock or ownership interests are sold or transferred to
a Nonrestricted Subsidiary may, by resolution approved by a majority of the
Board of Directors, be thereafter designated and considered as a Nonrestricted
Subsidiary.
"Restructuring Charges" means any charges or expenses in respect of
restructuring or consolidating any business, operations or facilities, any
compensation or headcount reduction, or any other cost savings, of any persons
or businesses either alone or together with the Company or any Restricted
Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act of
1933.
"Senior Notes" means Series C Senior Notes and Series D Senior Notes.
"Series B Senior Notes" means the 103/8% Series B Senior Notes due 2007 of
the Company which were issued on October 3, 1997 in a registered exchange offer
for the Company's 103/8% Series A Senior Notes due 2007.
104
<PAGE>
"Series D Senior Notes" means the 103/8% Series D Senior Notes due 2007 of
the Company to be issued pursuant to this prospectus in a registered exchange
offer for the Company's 103/8% Series C Senior Notes due 2007.
"SFAS 106" means Statement of Financial Accounting Standards No. 106.
"SFAS 109" means Statement of Financial Accounting Standards No. 109.
"Significant Subsidiary" means (i) any Restricted Subsidiary of the
Company that would be a "significant subsidiary" as defined in clause (2) of
the definition of such term in Rule 1-02 of Regulation S-X under the Securities
Act of 1933 and the Exchange Act, and (ii) any other Restricted Subsidiary of
the Company that is material to the business, earnings, prospects, assets or
condition, financial or otherwise, of the Company and its Restricted
Subsidiaries taken as a whole.
"Stated Maturity" means with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" of any person means any entity of which the Equity Interests
entitled to cast at least a majority of the votes that may be cast by all
Equity Interests having ordinary voting power for the election of directors or
other governing body of such entity are owned by such person (regardless of
whether such Equity Interests are owned directly by such person or through one
or more Subsidiaries).
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the then
outstanding principal amount of such Indebtedness into (ii) the sum of the
product(s) obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other requirement payment of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
105
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States
federal income tax considerations relevant to the acquisition, ownership and
disposition of the series D senior notes acquired in and under the terms of the
exchange offer by holders of series C senior notes who acquired such series C
senior notes at their initial issuance, but does not purport to be a complete
analysis of all potential tax effects. The discussion is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations,
Internal Revenue Service rulings and pronouncements and judicial decisions all
in effect as of the date of this propsectus, all of which are subject to change
at any time, and any such change may be applied retroactively in a manner that
could adversely affect a holder of the series D senior notes. The discussion
does not address all of the federal income tax consequences that may be
relevant to a holder in light of such holder's particular circumstances or to
holders subject to special rules, such as certain financial institutions,
insurance companies, dealers in securities, foreign corporations, nonresident
alien individuals and persons holding the series D senior notes as part of a
"straddle," "hedge" or "conversion transaction." Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed. The discussion
deals only with series D senior notes held as "capital assets" within the
meaning of Section 1221 of the Code.
The Company has not sought and will not seek any rulings from the IRS with
respect to any position of the Company discussed below. There can be no
assurance that the IRS will not take a different position from the Company
concerning aspects of the tax consequences of the acquisition, ownership or
disposition of the series D senior notes or that any such position would not be
sustained.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS.
CONSEQUENCES OF THE EXCHANGE OFFER TO EXCHANGING AND NONEXCHANGING HOLDERS
The exchange of a series C senior note for a series D senior note pursuant
to the exchange offer will not be taxable to an exchanging holder for Federal
income tax purposes. As a result (i) an exchanging holder will not recognize
any gain or loss on the exchange, (ii) the holding period for the series D
senior note will include the holding period for the series C senior note, and
(iii) the basis of the series D senior note will be the same as the basis for
the series C senior note.
The exchange offer will result in no Federal income tax consequences to a
nonexchanging holder of series C senior notes.
LIQUIDATED DAMAGES
The treatment of interest described below with respect to the series D
senior notes is based in part upon the Company's determination that, as of the
date of issuance of the series C senior notes, the possibility that Liquidated
Damages would be paid to holders of the series C senior notes pursuant to a
Registration Default was remote. See "Description of Senior Notes--Registration
Rights; Exchange Offer." The IRS may take a different position, which could
affect the timing and character of interest income reported by holders of the
series D senior notes.
PRE-ISSUANCE ACCRUED INTEREST
The Company intends to treat the amount of interest accrued prior to the
issue date on the series C senior notes (the "Accrued Interest") in a manner
consistent with Treasury Regulation Section 1.1273-2(m) with the result that
the Company will exclude the Accrued Interest from the initial purchase price
of the series C senior notes and thus will also exclude the Accrued Interest
from the initial purchase price of the series D senior notes. Accordingly,
unless an election to use an alternative method is made, a holder similarly
will exclude the Accrued Interest from the initial
106
<PAGE>
purchase price of the series D senior notes. As a result, the portion of the
first interest payment attributable to the Accrued Interest will be treated as
a return of the Accrued Interest and not as an amount includable in income. A
holder may desire to contact its own tax advisor regarding the manner of
electing to include the Accrued Interest in the initial purchase price of the
series C senior notes and the tax consequences of such election.
INTEREST INCOME
Interest on a series D senior note which constitutes the 103/8% current
mandatory payment of interest is "qualified stated interest" as defined below
under "--Tax Consequences of Issuance at a Discount," and will be taxable to a
holder as ordinary income at the time it is received or accrued in accordance
with the holder's method of accounting for tax purposes. The original issue
discount ("OID") on a series D senior note will be included in income by a
holder under the rules described below under "--Tax Consequences of Issuance at
a Discount."
TAX CONSEQUENCES OF ISSUANCE AT A DISCOUNT
Each series C senior note was issued with OID and thus each series D
senior note will also have OID. OID is equal to the excess of the series D
senior note's "stated redemption price at maturity" over its "issue price." The
stated redemption price at maturity of a series D senior note is the total of
all payments provided by the series D senior note that are not payments of
"qualified stated interest." A qualified stated interest payment is generally
any one of a series of stated interest payments on a series D senior note that
are unconditionally payable at least annually at a single fixed rate applied to
the outstanding principal amount of the series D senior note. Accordingly, the
103/8% current mandatory interest payable on a series D senior note will
constitute "qualified stated interest." All other amounts payable on the series
D senior notes will be included in the series D senior note's stated redemption
price at maturity.
Holders of a series D senior note must generally include OID in income
calculated on a constant-yield method before the receipt of cash attributable
to such income, and generally will have to include in income increasingly
greater amounts of OID over the life of the series D senior note. The amount of
OID includible in income by a holder of a series D senior note is the sum of
the daily portions of OID with respect to the series D senior note for each day
during the taxable year or portion of the taxable year on which the holder
holds such series D senior note ("accrued OID"). The daily portion is
determined by allocating to each day in any "accrual period" a pro rata portion
of the OID allocable to that accrual period. Accrual periods with respect to a
series D senior note may be of any length selected by the holder and may vary
in length over the term of the series D senior note as long as (i) no accrual
period is longer than one year and (ii) each scheduled payment of interest or
principal on the series D senior note occurs on either the final or first day
of an accrual period. The amount of OID allocable to an accrual period equals
the excess of (a) the product of the series D senior note's adjusted issue
price at the beginning of the accrual period and such series D senior note's
yield to maturity (determined on the basis of compounding at the close of each
accrual period and properly adjusted for the length of the accrual period) over
(b) the sum of the payments of qualified stated interest on the series D senior
note allocable to the accrual period. The "adjusted issue price" of a series D
senior note at the beginning of any accrual period is the issue price of the
series D senior note increased by (x) the amount of accrued OID for each prior
accrual period and decreased by (y) the amount of any payments previously made
on the series D senior note that were not payments of qualified stated
interest. The amount of OID allocable to an initial short accrual period may be
computed using any reasonable method if all other accrual periods other than a
final short accrual period are of equal length. The amount of OID allocable to
the final accrual period is the difference between (x) the amount payable at
the maturity of the series D senior note (other than any payment of qualified
stated interest) and (y) the series D senior note's adjusted issue price as of
the beginning of the final accrual period.
107
<PAGE>
SALE, REDEMPTION OR RETIREMENT
If a series D senior note is redeemed, sold or otherwise disposed of, a
holder generally will recognize gain or loss equal to the difference between
the amount realized on the sale or other disposition of such series D senior
note (to the extent such amount does not represent accrued but unpaid interest)
and such holder's tax basis in the series D senior note. A holder's tax basis
in a series D senior note will equal the initial purchase price of a series C
senior note by such holder, increased by the amount of any OID previously
included in income by such holder, and reduced by any payments of amounts on
the series D senior notes not constituting "qualified stated interest." Such
gain or loss generally will be capital gain or loss, provided that the holder
has held the series D senior note as a capital asset. A capital gain or loss
will be a long-term capital gain or loss if the holder's holding period is more
than 12 months. For individual holders, long-term capital gains are subject to
a maximum Federal income tax rate of 20 percent. The deduction of capital
losses may be subject to limitation. In addition, a holder will recognize
interest income to the extent of any accrued but unpaid interest on the series
D senior notes not previously recognized by the holder at the time of the
redemption or sale.
BACKUP WITHHOLDING
A holder may be subject, under certain circumstances, to backup
withholding at a 31% rate with respect to "reportable payments" on the series D
senior notes. This withholding generally applies only if the holder (i) fails
to furnish his or her social security or other taxpayer identification number
("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he
or she has failed to report properly payments of interest and dividends and the
IRS has notified the Company that the holder is subject to backup withholding,
or (iv) fails, under certain circumstances, to provide a certified statement,
signed under penalty of perjury, that the TIN provided is his or her correct
number and that he or she is not subject to backup withholding. Any amount
withheld from payment to a holder under the backup withholding rules is
allowable as a credit against such holder's federal income tax liability,
provided that the required information is furnished to the IRS. Certain holders
(including, among others, corporations) are not subject to backup withholding.
Holders should consult their tax advisors as to their qualifications for
exemption from backup withholding and the procedure for obtaining such an
exemption.
INFORMATION REPORTING
The Company is required to furnish certain information to the IRS and will
furnish annually to record holders of the series D senior notes information
with respect to interest paid (and OID accrued) on the series D senior notes
during the calendar year.
PLAN OF DISTRIBUTION
Each broker-dealer that receives series D senior notes for its own account
as a result of market-making activities or other trading activities in
connection with the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such series D senior notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of series D senior notes received
in exchange for series C senior notes where such series C senior notes were
acquired as a result of market-making activities or other trading activities.
We have agreed that for a period of 120 days after the Expiration Date, we will
make this prospectus, as it may be amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of series D senior notes by
broker-dealers. series D senior notes received by broker-dealers for their own
account pursuant to the exchange offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the series D senior notes or a combination of
such methods of resale, at market prices prevailing at the time of resale, at
prices related to
108
<PAGE>
prevailing market prices or at negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such selling
broker-dealer or the purchasers of any such series D senior notes. Any
broker-dealer that resells series D senior notes that it received for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of those series D senior notes may be deemed to
be an "underwriter" within the meaning of the Securities Act of 1933 and any
profit on any such resale of those series D senior notes and any commissions or
concessions received by any participating broker or dealer may be deemed to be
underwriting compensation under the Securities Act of 1933. The Letter of
Transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act of 1933.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission. Our Securities and Exchange Commission
filings are also available over the Internet at the Securities and Exchange
Commission's web site at http://www.sec.gov. You may also read and copy any
document we file at the Securities and Exchange Commission's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 to obtain information on
the operation of the public reference room.
We have filed with the Securities and Exchange Commission the registration
statement pursuant to the Securities Act of 1933, and the rules and regulations
promulgated thereunder, covering the series D senior notes. This prospectus
does not contain all the information set forth in the registration statement,
and certain parts of the registration statement are omitted in accordance with
the rules and regulations of the Securities and Exchange Commission. For
further information with respect to us and the series D new senior notes,
please read the registration statement. Statements made in this prospectus
relating to the contents of any contract, agreement or other document referred
to in the registration statement are not necessarily complete. For each
contract, agreement or other document filed as an exhibit to the registration
statement, we make reference to the exhibit for a complete description of the
matter involved.
LEGAL MATTERS
The validity of the series D senior notes will be passed upon for the
Company by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements included in this prospectus and registration statement as
set forth in their report which, as to 1996 is based in part on the reports of
Mellen, Smith & Pivoz, P.C., independent auditors; as to 1997 is based in part
on the reports of Mellen, Smith & Pivoz, P.C., independent auditors, Moss Adams
LLP, independent auditors, Arthur Andersen LLP, independent public accountants,
and Coopers & Lybrand S.p.A., independent auditors; and as to 1998 is based in
part on the reports of Moss Adams LLP, independent auditors, Arthur Andersen
LLP, independent public accountants, and Coopers & Lybrand S.p.A., independent
auditors. We have included our financial statements in the prospectus and
elsewhere in the registration statement, in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
The financial statements of Alma Products included in this prospectus and
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, to the extent and for the period indicated as set forth in
their report. The financial statements included in the prospectus and elsewhere
in the registration statement are included in reliance on Arthur Andersen LLP's
report given on their authority as experts in accounting and auditing.
109
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Balance Sheet as of December 31, 1998 ........................... P-2
Unaudited Pro Forma Statement of Operations for the year ended December 31, 1998 .... P-3
JORDAN INDUSTRIES, INC.
Report of Independent Auditors ...................................................... F-1
DIVERSIFIED WIRE & CABLE, INC.
Independent Auditors' Report ................................................... F-2
FIR GROUP
Independent Auditor's Report ................................................... F-3
MOTION CONTROL ENGINEERING, INC.
Report of Independent Public Accountants ....................................... F-4
NORTHERN TECHNOLOGIES HOLDINGS, INC.
Independent Auditor's Report ................................................... F-5
Consolidated Balance Sheets as of December 31, 1998 and 1997 ........................ F-6
Consolidated Statements of Operations for the three years in the period ended
December 31, 1998 ................................................................. F-7
Consolidated Statements of Changes in Shareholders' Equity (Net Capital Deficiency)
for the three years in the period ended December 31, 1998 ......................... F-8
Consolidated Statements of Cash Flows for the three years in the period ended
December 31, 1998 ................................................................. F-9
Notes to Consolidated Financial Statements .......................................... F-11
ALMA PRODUCTS
Report of Independent Public Accountants ............................................ F-37
Statements of Net Assets as of December 31, 1998 and 1997 ........................... F-38
Statements of Income for the three years in the period ended December 31, 1998 ...... F-39
Statements of Cash Flows for the three years in the period ended December 31, 1998 .. F-40
Notes to Financial Statements ....................................................... F-41
</TABLE>
I-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
We have prepared the following financial information (the "Unaudited Pro
Forma Financial Information") based on pro forma adjustments to our historical
consolidated financial statements. The Unaudited Pro Forma Financial
Information gives effect to (i) the results of the Offering, (ii) the
acquisition of Alma Products, (iii) the full year impact of the acquisitions of
Deflecto, Rolite, Advanced DC Motors, Euclid, K&S Sheet Metal and Opto-Tech
(collectively, the "Company Acquisitions"), and (iv) the disposition of
Diversified Wire and Cable (the "Disposition"). The pro forma adjustments are
described in the accompanying notes. The Unaudited Pro Forma Financial
Information is presented for informational purposes only and does not purport
to represent what our financial position or results of operations would
actually have been if the aforementioned events had occurred on the dates
specified or to project our financial position or results of operations at any
future date or for any future periods. The Unaudited Pro Forma Financial
Information should be read in conjunction with our historical consolidated
financial statements, and the related notes.
P-1
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL ACQUISITION (1)
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 23,008 $ --
Accounts receivable, net .......................... 160,586 9,565
Inventories ....................................... 139,720 12,790
Prepaid expenses and other current
assets .......................................... 17,724 1,053
---------- -------
Total current assets ............................... 341,038 23,408
Property and equipment, net ........................ 139,578 7,925
Other assets ....................................... 563,272 --
---------- -------
Total assets ....................................... $1,043,888 $31,333
========== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities ................................ $ 145,837 $ 9,035
Current portion of long-term obligations ........... 6,136 --
Long-term obligations:
Credit Agreements ................................. 164,000 --
Senior Notes ...................................... -- --
Other debt ........................................ 895,419 --
---------- -------
Total long-term obligations ........................ 1,059,419 --
Other non-current liabilities and deferred
income taxes ...................................... 14,991 2,706
Jordan Telecommunication Products
Senior Preferred Stock .......................... 23,943 --
Motors and Gears Senior Preferred
Stock ........................................... 1,706 --
Stockholders' equity (net capital
deficiency) ....................................... (208,144) 19,592
---------- -------
Total liabilities and stockholders' equity ......... $1,043,888 $31,333
========== =======
<CAPTION>
PRO FORMA
ADJUSTMENTS (2) OFFERING (3) PRO FORMA
----------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $(84,077) $ 86,100 $ 25,031
Accounts receivable, net .......................... -- -- 170,151
Inventories ....................................... -- -- 152,510
Prepaid expenses and other current
assets .......................................... -- -- 18,777
-------- ---------- ----------
Total current assets ............................... (84,077) 86,100 366,469
Property and equipment, net ........................ -- -- 147,503
Other assets ....................................... 65,459 13,661 642,392
-------- ---------- ----------
Total assets ....................................... $(18,618) $ 99,761 $1,156,364
======== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities ................................ $ 1,590(4) $ -- $ 156,462
Current portion of long-term obligations ........... -- -- 6,136
Long-term obligations:
Credit Agreements ................................. -- (50,000) 114,000
Senior Notes ...................................... -- 149,761 149,761
Other debt ........................................ -- -- 895,419
--------- ---------- ----------
Total long-term obligations ........................ -- 99,761 1,159,180
Other non-current liabilities and deferred
income taxes ...................................... (616)(5) -- 17,081
Jordan Telecommunication Products
Senior Preferred Stock .......................... -- -- 23,943
Motors and Gears Senior Preferred
Stock ........................................... -- -- 1,706
Stockholders' equity (net capital
deficiency) ....................................... (19,592) -- (208,144)
--------- ---------- ----------
Total liabilities and stockholders' equity ......... $(18,618) $ 99,761 $1,156,364
========= ========== ==========
</TABLE>
- ----------
(1) Reflects the historical balance sheet of Alma Products as of December 31,
1998.
(2) Reflects the acquisition price and certain preliminary purchase
accounting adjustments related to the Alma Products acquisition.
(3) Reflects the offering including the issuance of $155.0 million of senior
notes, less a discount of $5.2 million, the repayment of the Credit
Agreement of $50.0 million, and the payment of fees and expenses related
to the offering related transactions of $13.7 million.
(4) Reflects a $2.0 million accrual for the payment of transaction related
fees and the elimination of $0.4 million for an environmental accrual
that was not assumed by the Company.
(5) Reflects the elimination of certain officer employment contract and
retirement benefit liabilities that were not assumed by the Company.
P-2
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------
ALMA
HISTORICAL ACQUISITION(1) ACQUISITIONS(2)
STATEMENT OF OPERATIONS DATA: ------------ ---------------- -----------------
<S> <C> <C> <C>
Net Sales ............................................. $ 943,607 $73,608 $28,012
Cost of sales, excluding depreciation ................. 601,385 55,998 15,900
Selling, general and administrative expenses,
excluding depreciation ............................... 193,426 3,603 4,649
Depreciation and amortization ......................... 45,047 2,879 1,573
Advisory fees and other, net .......................... 12,053 -- 50
--------- ------- -------
Operating income ...................................... 91,696 11,128 5,840
Interest expense, net ................................. 107,527 -- 2,232
Other (income) expense ................................ 6,719 (43) 124
--------- ------- -------
Income (loss) before income taxes, minority interest
and extraordinary items .............................. (22,550) 11,171 3,484
Income taxes (credits) ................................ 8,162 179 --
Minority interest ..................................... 695 -- --
--------- ------- -------
Net income (loss) before extraordinary items .......... (31,407) 10,992 3,484
Extraordinary items ................................... 179 -- --
--------- ------- -------
Net income (loss) ..................................... $ (31,586) $10,992 $ 3,484
========= ======= =======
OTHER DATA:
Adjusted operating income ............................. $ 91,696 $11,128 $ 5,840
Capital expenditures .................................. 21,477 1,131 837
Cash interest expense, net ............................ 78,450 -- 1,292
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------------------
OFFERING PRO
DISPOSITION(3) AND OTHER FORMA
STATEMENT OF OPERATIONS DATA: ---------------- ----------------- -------------
<S> <C> <C> <C>
Net Sales ............................................. $ (21,067) $ -- $1,024,160
Cost of sales, excluding depreciation ................. (15,268) -- 658,015
Selling, general and administrative expenses,
excluding depreciation ............................... (5,709) -- 195,969
Depreciation and amortization ......................... (345) -- 49,154
Advisory fees and other, net .......................... 709 -- 12,812
--------- ---------- ----------
Operating income ...................................... (454) -- 108,210
Interest expense, net ................................. (66) 13,879 (4) 123,572
Other (income) expense ................................ -- -- 6,800
--------- ---------- ----------
Income (loss) before income taxes, minority interest
and extraordinary items .............................. (388) (13,879) (22,162)
Income taxes (credits) ................................ (38) -- 8,303
Minority interest ..................................... -- -- 695
--------- ---------- ----------
Net income (loss) before extraordinary items .......... (350) (13,879) (31,160)
Extraordinary items ................................... -- (179)(5) --
--------- ---------- ----------
Net income (loss) ..................................... $ (350) $ (13,700) $ (31,160)
========= ========== ==========
OTHER DATA:
Adjusted operating income ............................. $ (454) $ -- $ 108,210
Capital expenditures .................................. (92) (975) 22,378
Cash interest expense, net ............................ (66) 12,272 91,948
</TABLE>
- -------
(1) Represents the results of operations of Alma Products for the year ended
December 31, 1998. The results of operations also include purchase price
accounting adjustments for additional amortization related to the excess
of purchase price over the value of the net assets acquired (goodwill) of
$1.7 million, as well as the elimination of $0.6 million of selling,
general and administrative expenses relating to liabilities for certain
officer employment benefits which were not assumed by the Company.
(2) Represents the results of operations of Deflecto, Rolite, Advanced DC
Motors, Euclid, K&S Sheet Metal and Opto-Tech prior to their acquisition
by us or our subsidiaries. The results of operations also include
purchase accounting adjustments for additional depreciation and
amortization related to the write up of property and equipment and the
excess of purchase price over the value of the net assets acquired
(goodwill).
(3) Reflects the results of operations of Diversified Wire and Cable prior to
its sale in July 1998.
(4) Reflects (i) additional interest expense of $16.1 million related to the
offering, (ii) the elimination of $3.8 million of interest expense
incurred on the Company's outstanding borrowings under its revolving
credit facility, and (iii) $1.6 million of incremental amortization of
deferred financing fees related to costs incurred in connection with the
offering.
(5) Reflects the write-off of deferred financing fees recorded in connection
with a portion of the Company's long-term debt.
P-3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Jordan Industries, Inc.
We have audited the accompanying consolidated balance sheets of Jordan
Industries, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity (net capital deficiency), and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of certain
subsidiaries whose statements reflect total assets constituting 15% and 19% as
of December 31, 1998 and 1997, respectively, and net sales constituting 12%,
10%, and 3% for each of the three years in the period ended December 31, 1998,
of the related consolidated totals. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to data included for these subsidiaries, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Jordan Industries, Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 31, 1999
F-1
<PAGE>
[GRAPHIC]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Diversified Wire & Cable, Inc.
Troy, Michigan
We have audited the balance sheets of Diversified Wire & Cable, Inc. as of
December 31, 1997 and 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for the year ended December 31, 1997 and
for the period June 25, 1996 (Commencement of Operations) through December 31,
1996, respectively, (not separately presented herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosure in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position of Diversified Wire & Cable,
Inc. as of December 31, 1997 and 1996, and the results of its operations, the
changes in stockholders' equity and its cash flows for the year ended December
31, 1997 and for the period June 25, 1996 through December 31, 1996,
respectively, in conformity with generally accepted accounting principles.
Mellen, Smith & Pivoz, P.C.
Bingham Farms, Michigan
January 22, 1998
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
Fir Group
We have audited the consolidated balance sheet of Fir Group (the
"Company") composed of FIR Elettromeccanica S.p.A., CIME S.p.A., Selin Sistemi
S.p.A. and TEA S.r.1. as of October 31, 1998 and 1997, and the related
consolidated statements of income, retained earnings, and cash flows for the
year and for the five months then ended, respectively. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of October 31, 1998 and 1997, and the results of its operations and its cash
flows for the year and for the five months then ended, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND S.p.A.
Bologna, 5 February 1999
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Motion Control Engineering, Inc.:
We have audited the balance sheets of MOTION CONTROL ENGINEERING, INC. (a
California corporation and a wholly-owned subsidiary of Motors & Gears, Inc.)
as of December 31, 1998 and 1997, and the related statements of income,
shareholders' equity and cash flows for the year ended December 31, 1998 and
for the 13 days ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Motion Control Engineering,
Inc. as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the year ended December 31, 1998 and for the 13 days ended
December 31, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Sacramento, California
February 9, 1999
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Northern Technologies Holdings, Inc.
Deerfield, Illinois
We have audited the accompanying balance sheets of Northern Technologies
Holdings, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of income, stockholder's equity, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosure in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Northern
Technologies Holdings, Inc. as of December 31, 1998 and 1997, and the results
of its operations and cash flows for the year then ended in conformity with
generally accepted accounting principles.
Moss Adams LLP
Spokane, Washington
January 22, 1999
F-5
<PAGE>
JORDAN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 23,008 $ 52,500
Accounts receivable, net of allowance of $4,493 and $3,645 in 1998
and 1997, respectively ......................................... 160,586 134,177
Inventories ...................................................... 139,720 124,000
Prepaid expenses and other current assets ........................ 17,724 12,706
---------- ----------
Total current assets ........................................... 341,038 323,383
Property, plant and equipment, net ................................ 139,578 105,070
Investments in and advances to affiliates ......................... 1,722 1,722
Goodwill, net ..................................................... 491,510 433,294
Other assets ...................................................... 70,040 66,762
---------- ----------
Total Assets ................................................... $1,043,888 $ 930,231
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Notes payable .................................................... $ 737 $ 2,650
Accounts payable ................................................. 70,798 58,781
Accrued liabilities .............................................. 68,722 70,473
Advance deposits ................................................. 5,580 5,424
Current portion of long-term debt ................................ 6,136 9,547
---------- ----------
Total current liabilities ...................................... 151,973 146,875
Long-term debt .................................................... 1,059,419 921,871
Other noncurrent liabilities ...................................... 12,762 13,403
Deferred income taxes ............................................. 1,444 1,444
Minority interest ................................................. 785 88
Preferred stock ................................................... 25,649 21,835
Shareholders' equity (net capital deficiency):
Common stock $.01 par value:
authorized - 100,000 shares
issued and outstanding - 98,501 shares ......................... 1 1
Additional paid-in capital ....................................... 2,116 2,116
Accumulated other comprehensive income ........................... 2,038 (504)
Accumulated deficit .............................................. (212,299) (176,898)
---------- ----------
Total shareholders' equity (net capital deficiency) ............ (208,144) (175,285)
---------- ----------
Total Liabilities and Shareholders' Equity
(Net Capital Deficiency) ...................................... $1,043,888 $ 930,231
========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE>
JORDAN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales .............................................. $ 943,607 $ 707,112 $ 601,567
Cost of sales, excluding depreciation .................. 601,385 446,580 375,745
Selling, general and administrative expense ............ 193,426 148,921 150,951
Depreciation ........................................... 23,180 19,612 18,939
Amortization of goodwill and other intangibles ......... 21,867 15,709 11,499
Stock appreciation right and compensation
agreements ............................................ -- 15,871 9,822
Loss on purchase of an affiliated company .............. -- -- 4,488
Management fees and other .............................. 9,033 4,975 4,489
Loss on foreign currency transactions .................. 3,020 -- --
Restructuring charges .................................. -- -- 8,106
Other non-recurring charges ............................ -- -- 4,136
--------- --------- ---------
Operating income ...................................... 91,696 55,444 13,392
Other (income) and expenses:
Interest expense .................................... 109,705 82,455 63,340
Interest income ..................................... (2,178) (2,713) (2,538)
Loss (gain) on sale of subsidiaries ................. 6,299 (17,081) --
Other ............................................... 420 (1,044) --
--------- --------- ---------
Total other expenses ............................... 114,246 61,617 60,802
--------- --------- ---------
Loss before income taxes, minority interest, equity in
investee and extraordinary items ...................... (22,550) (6,173) (47,410)
Provision for income taxes ............................. 8,162 6,575 4,415
--------- --------- ---------
Loss before minority interest, equity in investee and
extraordinary items ................................... (30,712) (12,748) (51,825)
Minority interest ...................................... 695 (1,874) 59
Equity in losses of investee ........................... -- 3,386 --
--------- --------- ---------
Loss before extraordinary items ........................ (31,407) (14,260) (51,884)
Extraordinary loss ..................................... 179 31,358 3,806
--------- --------- ---------
Net loss .............................................. $ (31,586) $ (45,618) $ (55,690)
========= ========= =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
JORDAN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK NOTE ACCUMULATED
-------------------- ADDITIONAL RECEIVABLE OTHER
NUMBER PAID-IN FROM COMPREHENSIVE ACCUMULATED
OF SHARES AMOUNT CAPITAL OFFICER INCOME DEFICIT TOTAL
----------- -------- ------------ ------------ --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 .......... 93,501 $ 1 $ 1,097 $ -- $ (778) $ (76,674) $ (76,354)
Common stock issuance ............ 1,500 -- 1,460 (1,460) -- -- --
Cumulative translation
adjustment ...................... -- -- -- -- 1,763 -- 1,763
Net Loss ......................... -- -- -- -- -- (55,690) (55,690)
----------
Comprehensive income ............. -- -- -- -- -- -- (53,927)
------ --- -------- -------- -------- ---------- ----------
Balance at December 31, 1996 ........ 95,001 1 2,557 (1,460) 985 (132,364) (130,281)
Purchase of common stock ......... (1,500) -- (1,460) 1,460 -- -- --
Issuance of common stock ......... 5,000 -- 1,019 -- -- -- 1,019
Sales of subsidiary to Related
party ........................... -- -- -- -- -- 1,084 1,084
Cumulative translation
adjustment ...................... -- -- -- -- (1,489) -- (1,489)
Net Loss ......................... -- -- -- -- -- (45,618) (45,618)
----------
Comprehensive income ............. -- -- -- -- -- -- (47,107)
------ --- -------- -------- -------- ---------- ----------
Balance at December 31, 1997 ........ 98,501 1 2,116 -- (504) (176,898) (175,285)
Non-cash dividends to third
parties ......................... -- -- -- -- -- (3,815) (3,815)
Cumulative translation
adjustment ...................... -- -- -- -- 2,542 -- 2,542
Net loss ......................... -- -- -- -- -- (31,586) (31,586)
----------
Comprehensive income ............. -- -- -- -- -- (29,044)
------ -------- -------- -------- ---------- ----------
Balance at December 31, 1998 ........ 98,501 $ 1 $ 2,116 $ -- $ 2,038 $ (212,299) $ (208,144)
====== === ======== ======== ======== ========== ==========
</TABLE>
See accompanying notes.
F-8
<PAGE>
JORDAN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $ (31,586) $ (45,618) $ (55,690)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Restructuring charges .............................. -- -- 8,106
Amortization of deferred financing costs ........... 4,451 3,622 3,001
Depreciation and amortization ...................... 45,047 35,321 30,438
Provision for deferred income taxes ................ -- -- 2,184
Equity in losses of investee ....................... -- 3,386 --
Loss (gain) on sale of subsidiary .................. 6,299 (17,081) --
Loss on acquisition of affiliated company .......... -- -- 4,488
Minority interest .................................. 696 (1,874) 59
Extraordinary loss ................................. 179 31,358 3,806
Non-cash interest .................................. 26,303 18,456 11,987
Changes in operating assets and liabilities (net of
acquisitions):
Accounts receivable ................................ (16,025) (15,942) 13,894
Inventories ........................................ (4,241) (5,695) 796
Prepaid expenses and other current assets .......... (4,441) 796 (851)
Non-current assets ................................. (4,024) (602) (1,071)
Accounts payable, accrued liabilities, and other
current liabilities .............................. 6,526 3,713 2,560
Advance deposits ................................... 156 3,524 69
Non-current liabilities ............................ 378 3,799 (526)
Other .............................................. (335) 345 (146)
---------- ---------- ----------
Net cash provided by operating activities .............. 29,383 17,508 23,104
Cash flows from investing activities:
Capital expenditures, net of dispositions ............. (21,477) (14,179) (17,395)
Notes receivable from affiliates ...................... -- -- (5,263)
Acquisitions of subsidiaries .......................... (129,065) (229,807) (150,360)
Net cash acquired in purchase of subsidiaries ......... 2,292 4,972 5,869
Acquisitions of minority interests and other .......... -- -- (81)
Net proceeds from sale of subsidiary .................. 15,000 45,954 --
Redemption of investment in affiliate ................. -- 12,500 --
Investment in affiliate ............................... (7,285) -- --
---------- ---------- ----------
Net cash used in investing activities .................. (140,535) (180,560) (167,230)
</TABLE>
(Continued on following page.)
See accompanying notes.
F-9
<PAGE>
JORDAN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds of debt issuance - SPL Holdings, Inc. .......... $ -- $ -- $ 13,000
Proceeds of debt issuance - MK Holdings, Inc. ........... -- -- 20,000
Proceeds of debt issuance - JII, Inc. ................... -- 120,000 --
Proceeds from preferred stock issuance - Jordan
Telecommunications Products, Inc. ..................... -- 25,000 --
Proceeds of debt issuance - Motors and Gears, Inc. -- 105,692 170,000
Proceeds of debt issuance - Jordan
Telecommunications, Inc. .............................. -- 273,545 --
Proceeds from revolving credit facilities, net .......... 96,000 21,500 40,909
Payment of financing costs .............................. -- (29,514) (11,858)
Repayment of long-term debt ............................. (19,192) (331,560) (98,143)
Other borrowing ......................................... 2,310 -- 2,107
--------- ---------- ---------
Net cash provided by financing activities ................ 79,118 184,663 136,015
Foreign currency translation ............................. 2,542 (1,908) (345)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents ..... (29,492) 19,703 (8,456)
Cash and cash equivalents at beginning of year ........... 52,500 32,797 41,253
--------- ---------- ---------
Cash and cash equivalents at end of year ................. $ 23,008 $ 52,500 $ 32,797
========= ========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .............................................. $ 74,715 $ 56,957 $ 45,563
========= ========== =========
Income taxes, net ..................................... $ 3,714 $ 4,617 $ 2,603
========= ========== =========
Noncash investing activities:
Capital leases ........................................ $ 15,489 $ 2,318 $ 5,543
========= ========== =========
</TABLE>
See accompanying notes.
F-10
<PAGE>
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 Jordan Specialty Plastics
group consists of Beemak Plastics Inc. ("Beemak"), Sate-Lite Manufacturing
Company ("Sate-Lite"), Deflecto Corporation ("Deflecto"), and Rolite Plastics
("Rolite"). The Motors and Gears group consists of The Imperial Electric
Company ("Imperial") and its subsidiaries, Gear Research, Inc. ("Gear") and
Euclid Universal Corporation ("Euclid"), Merkle-Korff Industries, Inc.
("Merkle-Korff"), FIR Group Companies ("FIR"), Electrical Design & Control
("ED&C"), Motion Control Engineering ("Motion Control")and Advanced D.C. Motors
("Advanced DC"). The Telecommunication Products Group consists of Dura-Line
Corporation ("Dura-Line"), Electronic Connectors and Components ("Connectors"),
Viewsonics, Inc. ("Viewsonics"), Bond Holdings, Inc. ("Bond"), LoDan West, Inc.
("LoDan"), Northern Technologies, Inc. ("Northern"), Engineered Endeavors, Inc.
("EEI") Telephone Services, Inc. ("TSI")and K&S Sheet Metal ("K&S"). Welcome
Home, Inc. ("Welcome Home") is managed on a stand-alone basis and is no longer
consolidated in the Company's results of operations. (See note 3). The
remaining businesses comprise the Company's Consumer and Industrial Products
group. This group consists of DACCO, Incorporated ("DACCO"), Riverside Book and
Bible House, Inc. ("Riverside"), Parsons Precision Products, Inc. ("Parsons"),
Cape Craftsmen, Inc. ("Cape"), Cho-Pat Inc. ("Cho-Pat") and Dura-Line Retube
("Retube"). 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. Operations of FIR are included for the period ended two months
prior to the Company's year end to ensure timely preparation of the
consolidated financial statements.
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.
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.
Depreciation and amortization
Property, plant and equipment -- Depreciation and amortization of property,
plant and equipment is calculated using estimated useful lives, or over the
lives of the underlying leases, if less, using the straight-line method.
F-11
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
The useful lives of plant and equipment for the purpose of computing book
depreciation are as follows:
<TABLE>
<S> <C>
Machinery and equipment ............ 3-10 years
Buildings and improvements ......... 7-35 years
Furniture & fixtures ............... 5-10 years
</TABLE>
Goodwill -- Goodwill is being amortized on the straight-line basis over periods
ranging from 15 to 40 years. Goodwill at December 31, 1998 and 1997 is net of
accumulated amortization of $47,651, and $32,380, respectively. The Company
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of certain long-lived assets are not sufficient to
recover the carrying value of such assets, the assets are adjusted to their
fair values. Based on these evaluations, there were no material adjustments to
the carrying value of long-lived assets in 1998 or 1997.
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 $34,201 and $38,568, net of accumulated amortization of
$14,533 and $9,939 at December 31, 1998 and 1997, 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
$10,314 and $12,121, net of accumulated amortization of $51,487 and $47,632 at
December 31, 1998 and 1997, respectively, are amortized on the straight-line
basis over their estimated useful lives, ranging from three to ten years.
Income taxes
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that are expected to be in effect
when the differences reverse. 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.
Revenue recognition
Revenues are primarily recognized when products are shipped to customers.
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 prior years financial statements have been reclassified to
conform with the presentation in 1998.
Realignment of segment reporting
In 1996, Dura-Line was moved from the Consumer and Industrial Products segment
to the Telecommunication Products segment. In 1997, the Retube product line of
Dura-Line was moved from
F-12
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
the Telecommunication Products segment to the Consumer and Industrial Products
segment. In 1998 Sate-Lite and Beemak were reclassified from the Consumer and
Industrial Products segment to the Jordan Specialty Plastics segment. Prior
period results were also realigned into these new groups in order to provide
accurate comparisons between periods.
New pronouncements
The Company has adopted Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 130 ("Statement 130"),
Reporting Comprehensive Income. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires the Company's foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130.
The Company has adopted SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 supersedes
FASB Statement No. 14, Financial Reporting for Segments of a Business
Enterprise. Statement 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of Statement 131 is solely
a reporting requirement and therefore did not have an effect on the Company's
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("Statement 133"), which is required to be
adopted in fiscal years beginning after June 15, 1999. Statement 133 requires
all derivatives to be recognized in the balance sheet as either assets or
liabilities at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. In addition, all hedging relationships must be
designated, reassessed and documented pursuant to the provisions of Statement
133. Management believes the adoption of this Statement will not have a
material effect on the Company.
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.
Foreign currency translation
In accordance with SFAS No. 52, Foreign Currency Translation, assets and
liabilities of the Company's foreign operations are translated from foreign
currencies into U.S. dollars at year-end rates while income and expenses are
translated at the weighted-average exchange rates for the year. Gains or losses
resulting from the translations of foreign currency financial statements are
deferred and classified as a separate component of shareholders' equity. Gains
or losses resulting from the remeasurement of financial statements of foreign
entities located in highly inflationary economies have
F-13
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
been included in the determination of net income or loss in the current period.
The Company recognized a $3,020 charge in 1998 related to remeasurement of the
financial statements of Dura-Line's Mexican operations as of December 31, 1998.
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 has continued to manage its affairs and
operate its business as a debtor-in-possession. 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. The Company
expects Welcome Home to emerge from Chapter 11 within the next 90 days. Upon
emergence from Chapter 11, the Company will own approximately 94% of the then
outstanding common stock of Welcome Home, for consideration paid to creditors
of approximately $1,100.
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 October 29, 2003.
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 no longer consolidates Welcome Home in its financial
statements from January 21, 1997, the date of the filing. For the period ended
January 21, 1997, the Company recorded a net loss of $1,195 related to Welcome
Home.
The operating results of Welcome Home included in the consolidated results of
the Company over the last three years are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
------ ----------- ------------
<S> <C> <C> <C>
Net sales ........................ $ -- $ 2,456 $ 81,855
Operating loss ................... -- (1,107) (15,975)
Loss before income taxes ......... $ -- $ (1,195) $ (18,154)
</TABLE>
From January 21, 1997, the Company accounted for its investment in Welcome Home
under the equity method of accounting and recognized a $3,386 loss on its
investment.
In 1998, Cape's sales to Welcome Home were $14,420, or 64% of Cape's total
sales for the year. The Company's receivable outstanding related to these sales
was $1,965 at December 31, 1998.
NOTE 4 -- RESTRUCTURING CHARGES
In the fourth quarter of 1995, Welcome Home adopted a restructuring plan which
continued through 1996. The major elements of the plan included a change in
Welcome Home's merchandising strategy and the liquidation of merchandise which
was not consistent with that strategy, closure of unprofitable stores, and
strengthening the company's executive management team and information systems
as necessary to successfully implement the above strategies.
F-14
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
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.
NOTE 5 -- FINANCIAL RECAPITALIZATION AND BUSINESS REPOSITIONING PLAN ("THE
PLAN")
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 sub-fractional
motors and gear motors primarily to customers located throughout the United
States.
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 ended December 31, 1996, through
December 31, 2000, will be paid to the Company. Payments, if any, under the
contingent earnout agreement will be determined and made on April 30, 2001.
As a result of this sale to M&G, the Company recognized approximately $62,700
of deferred gain at the time of sale for U.S. Federal income tax purposes, as
adjusted for the value of the earnout, once finally determined. A portion of
this deferred gain is reported as the M&G group 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 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 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. In
connection with the recapitalization, M&G issued 16,250 shares of M&G common
stock (representing approximately 82.5% of the outstanding shares of M&G common
stock) to certain stockholders and affiliates of the Company and M&G management
for a total consideration of $2,200 (of which $1,110 was paid in cash and
$1,090 was paid through the delivery of 8.0% zero coupon notes due 2007). As a
result of the Recapitalization, certain of the Company's affiliates and M&G
management own substantially all of the M&G common stock and the Company's
investment in M&G is represented solely by the Cumulative Preferred Stock of
M&G (the "M&G Junior Preferred Stock"). The M&G Junior Preferred Stock
represents 82.5% of M&G's stockholder voting rights and 80% of M&G's net income
or loss is accretable to the Junior Preferred Stock. The Company has obtained
an independent opinion as to the fairness, from a financial point of view, of
the recapitalization to the Company and its public bondholders. The Company
continues to consolidate M&G and its subsidiaries, for financial reporting
purposes, as subsidiaries of the Company. The M&G Junior Preferred Stock
discontinues its participation in M&G's earnings on the fifth anniversary of
issuance. This financial consolidation and a continuing Company investment in
M&G will be discontinued upon the redemption of the M&G Junior Preferred Stock,
or at such time as the M&G Junior Preferred Stock ceases to represent at least
a majority of the voting power and a majority share in the earnings of the
relevant company. As
F-15
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
long as the M&G Junior Preferred Stock is outstanding, the Company expects the
vote test to be satisfied. The M&G Junior Preferred Stock is mandatorily
redeemable upon certain events and is redeemable at the option of M&G, in whole
or in part, at any time.
The Company also expects to continue to include the subsidiaries of M&G in its
consolidated group for U.S. Federal income tax purposes. This consolidation
would be discontinued, however, upon the redemption of the M&G 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 December 31, 1998, the Company believes that the amount of
taxable income to the Company attributable to M&G would have been approximately
$51,200 (or approximately $20,480 of tax liabilities, assuming a 40.0% combined
Federal, state and local income tax rate). The Company currently expects to
offset these tax liabilities arising from deconsolidation by using net
operating loss carryforwards (approximately $131,600 at December 31, 1998), and
to pay any remaining liability with redemption proceeds from the M&G Junior
Preferred Stock. Deconsolidation would also occur with respect to M&G if the
M&G 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 Junior
Preferred Stock and common stock of M&G. As long as the M&G 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 Junior Preferred Stock and
common stock of M&G. It is likely that by the fifth anniversary of their
issuances, the M&G Junior Preferred Stock would cease to represent 80.0% of the
relevant total combined stock value. It is entirely possible, however, that the
80.0% value test could fail well prior to the fifth anniversary after issuance.
In the event that deconsolidation for U.S. Federal income tax purposes occurs
without a redemption of the M&G Junior Preferred Stock, the tax liabilities
discussed above would be incurred without the Company receiving the proceeds of
the redemption.
On July 25, 1997, the Company recapitalized its investment in Jordan
Telecommunication Products, Inc. ("JTP") and JTP acquired the Company's
telecommunications and data communications products business from the Company
for total consideration of approximately $294,027, consisting of $264,027 in
cash, $10,000 of assumed indebtedness and preferred stock, and the issuance to
the Company of $20,000 aggregate liquidation preference of JTP Junior Preferred
Stock. The Company's stockholders and affiliates and JTP management invested in
and acquired the JTP common stock. As a result of the recapitalization, certain
of the Company's affiliates and JTP management own substantially all of the JTP
common stock. The Company's investment in JTP is represented solely by the JTP
Junior Preferred Stock. The JTP Junior Preferred Stock represents 95% of JTP's
stockholder voting rights and 95% of JTP's net income or loss is accretable to
the Junior Preferred Stock. The Company has obtained an independent opinion as
to the fairness, from a financial point of view, of the recapitalization to the
Company and its public bondholders.
The Company continues to consolidate JTP and its subsidiaries, for financial
reporting purposes, as subsidiaries of the Company. The JTP Junior Preferred
Stock discontinues its participation in JTP's earnings on the fifth anniversary
of issuance. This financial consolidation and any continuing Company investment
in JTP will be discontinued upon the redemption of the JTP Junior Preferred
Stock, or at such time as the JTP Junior Preferred Stock ceases to represent at
least a majority of the voting power and a majority share in the earnings of
the relevant company. As long as the JTP Junior Preferred Stock is outstanding,
the Company expects the vote test to be satisfied. The JTP Junior Preferred
Stock is mandatorily redeemable upon certain events and is redeemable at the
option of JTP, in whole or in part, at any time.
The Company also expects to continue to include the subsidiaries of JTP in its
consolidated group for U.S. Federal income tax purposes. This consolidation
would be discontinued, however, upon the redemption of the JTP Junior Preferred
Stock, which could result in recognition by the Company of
F-16
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
substantial income tax liabilities arising out of the recapitalization. If such
deconsolidation had occurred at December 31, 1998, the Company believes that
the amount of taxable income to the Company attributed to JTP would have been
approximately $110,400 (or approximately $44,160 of tax liabilities, assuming a
40.0% combined Federal, state and local income tax rate). The Company currently
expects to offset these tax liabilities arising from deconsolidation by using
net operating loss carryforwards (approximately $131,600 at December 31, 1998),
and to pay any remaining liability with redemption proceeds from the JTP Junior
Preferred Stock. Deconsolidation for federal income tax purposes would also
occur with respect to JTP if the JTP 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 JTP Junior Preferred Stock and common stock. It is likely that by
the fifth anniversary of their issuances, the JTP Junior Preferred Stock would
cease to represent 80.0% of the relevant total combined stock value. It is
entirely possible, however, that the 80.0% value test could fail well prior to
the fifth anniversary after issuance. In the event that deconsolidation for
federal income tax purposes occurs without a redemption of the JTP Junior
Preferred Stock, the tax liabilities discussed above would be incurred without
the Company receiving the proceeds of a redemption.
JTP financed the cash portion of this total consideration through JTP's private
placement of $190,000 of JTP Senior Notes due 2007, $85,000 of cash proceeds of
JTP Senior Discount Debentures due 2007, and $25,000 of JTP Senior Preferred
Stock due 2009.
In conjunction with the recapitalization of JTP, the Company privately placed
$120,000 of the Company's Senior Notes due 2007, and used the net proceeds from
this private placement, as well as the net proceeds received by the Company in
connection with the JTP recapitalization, to repay approximately $78,000 of
bank borrowings by the Company's subsidiaries under their credit agreements and
repurchase $271,600 of the Company's 103/8% Senior Notes due 2003 pursuant to a
tender offer and related consent solicitation. The Company also conducted a
consent solicitation with regard to its 113/4% Senior Subordinated Discount
Debentures due 2009 in order to conform their covenant structure to those in
the Company's Senior Notes due 2007.
NOTE 6 -- INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Raw materials ........... $ 59,350 $ 45,324
Work-in-process ......... 17,098 15,897
Finished goods .......... 63,272 62,779
-------- --------
$139,720 $124,000
======== ========
</TABLE>
F-17
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
NOTE 7 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consists of:
<TABLE>
<CAPTION>
DEC. 31, DEC. 31,
1998 1997
------------- -----------
<S> <C> <C>
Land .............................................. $ 8,282 $ 7,488
Machinery and equipment ........................... 162,437 126,265
Buildings and improvements ........................ 39,350 34,360
Furniture and fixtures ............................ 45,312 34,418
---------- ---------
$ 255,381 $ 202,531
========== =========
Accumulated depreciation and Amortization ......... (115,803) (97,461)
---------- ---------
$ 139,578 $ 105,070
========== =========
</TABLE>
NOTE 8 -- INVESTMENT IN AFFILIATE
On July 2, 1997, the Company received from Fannie May Holdings, Inc. ("Fannie
May"), $14,348 in exchange for its investments of: $5,500 aggregate principal
amount of Subordinated Notes and $7,000 aggregate principal amount of
participation in outstanding term loans of Archibald Candy Corporation, a
wholly-owned subsidiary of Fannie May. The amount received also included $1,573
of accrued interest and a $275 premium on the above Subordinated Notes and term
loans. On July 7, 1997, the Company received $3,013 as a return of the $3,000
certificate of deposit held by the Company as security for an obligation to
purchase additional participation in the above-mentioned term loans, plus $13
of accrued interest thereon.
The Company holds 75.6133 shares of Class A PIK Preferred Stock of Fannie May
at face value of $1,571. The Company also holds 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) at $151.
Fannie May'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.
Fannie May, which is also known as "Fannie May Candies", is a manufacturer and
marketer of kitchen-fresh, high-end boxed chocolates through its 337
company-owned retail stores and through specialty sales channels. Its products
are marketed under both the "Fannie May Candy" and "Fanny Farmer Candy" names.
F-18
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
NOTE 9 -- ACCRUED LIABILITIES
Accrued liabilities consist of:
<TABLE>
<CAPTION>
DEC. 31, DEC. 31,
1998 1997
---------- ---------
<S> <C> <C>
Accrued vacation .............................. $ 2,803 $ 2,559
Accrued income taxes .......................... 4,284 3,609
Accrued other taxes ........................... 2,448 1,454
Accrued commissions ........................... 2,529 2,797
Accrued interest payable ...................... 19,523 18,175
Accrued payroll and payroll taxes ............. 5,334 4,344
Accrued stock appreciation rights and preferred
stock payments ............................... 4,823 8,051
Insurance reserve ............................. 2,789 2,461
Accrued management fees ....................... -- 3,125
Accrued deferred financing fees ............... 4,091 3,455
Accrued other expenses ........................ 20,098 20,443
------- -------
$68,722 $70,473
======= =======
</TABLE>
NOTE 10 -- OPERATING LEASES
Certain subsidiaries lease land, buildings, and equipment under noncancellable
operating leases.
Total minimum rental commitments under non-cancellable operating leases at
December 31, 1998 are:
<TABLE>
<S> <C>
1999 ................. $10,276
2000 ................. 9,019
2001 ................. 7,466
2002 ................. 6,236
2003 ................. 4,747
Thereafter ........... 12,929
-------
$50,673
=======
</TABLE>
Rental expense amounted to $12,172, $7,996 and $14,808 for 1998, 1997 and 1996,
respectively. Rental expense increased in 1998 due to the acquisitions in 1997
and 1998. Rental expense decreased in 1997 primarily due to the exclusion in
1997 of rental expense incurred at Welcome Home, as the Company no longer
consolidates Welcome Home in its financial statements (see note 3). Rental
expense at Welcome Home was $8,650 in 1996.
NOTE 11 -- BENEFIT PLANS
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 $1,870, $1,119 and $450 in 1998, 1997 and 1996,
respectively.
F-19
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
NOTE 12 -- DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DEC. 31, DEC. 31,
1998 1997
------------ -----------
<S> <C> <C>
Revolving Credit Facilities (A) ..................... $ 164,000 $ 68,000
Notes payable (B) ................................... 2,738 3,388
Subordinated promissory notes (C) ................... 33,500 26,500
Capital lease obligations (D) ....................... 30,333 24,660
Bank Term Loans (E) ................................. 4,439 1,229
Senior Notes (F) .................................... 582,724 586,475
Senior Subordinated Discount Debentures (F) ......... 247,821 221,166
---------- --------
1,065,555 931,418
Less current portion ................................ 6,136 9,547
---------- --------
$1,059,419 $921,871
========== ========
</TABLE>
Aggregate maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 .................. $ 6,136
2000 .................. 20,042
2001 .................. 9,579
2002 .................. 10,705
2003 .................. 12,944
Thereafter ............ $1,006,149
----------
$1,065,555
==========
</TABLE>
A. At December 31, 1998, the Company had borrowings outstanding on lines of
credit totaling $164,000.
On July 25, 1997, the Company amended and restated its revolving credit
facility with BankBoston, N.A. (formerly the First National Bank of
Boston) and other banks, decreasing the facility from $85,000 to $75,000.
Interest on borrowings is at BankBoston's base rate plus an applicable
margin or, at the Company's option, the rate at which BankBoston's
eurodollar lending office is offered dollar deposits (Eurodollar Rate)
plus an applicable margin (8.25% and 7.0%, respectively, at December 31,
1998). The facility, which matures on June 29, 2002, is used for working
capital and acquisitions. At December 31, 1998, Jordan Industries, Inc.
had outstanding borrowings of $50,000 (no outstanding borrowings at
December 31, 1997). The facility is secured by substantially all of the
assets of the Restricted Subsidiaries. The Company must comply with
certain financial covenants as specified in the revolver agreement, and at
December 31, 1998, the Company is in compliance with such covenants.
On July 25, 1997, JTP entered into a revolving credit agreement with
certain parties thereto, and BankBoston, N.A., as agent, under which JTP
is able to borrow up to approximately $110,000 in the form of a revolving
credit facility over a term of five years. Interest on borrowings is at
BankBoston's base rate plus an applicable margin or, at the Company's
option, the rate at which BankBoston's eurodollar lending office is
offered dollar deposits (Eurodollar Rate) plus an applicable margin (7.84%
and 8.06%, respectively, at December 31, 1998). The credit agreement is
secured by a first priority security interest in substantially all of
JTP's assets, including a pledge of all of the stock of JTP's
subsidiaries. JTP had $73,000 of outstanding borrowings and a $2,319
F-20
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
standby letter of credit under this credit agreement at December 31, 1998.
JTP had $34,681 of additional borrowings available under the revolving
credit agreement at December 31, 1998. Unused commitments are subject to
an availability fee equal to 0.5% per annum.
Motors and Gears, Inc. has available a long-term line of credit from
Bankers Trust Company in the amount of $75,000. Outstanding borrowings
carry a floating note of Libor plus 2.5% (8.125% at December 31, 1998) or
base rate plus 1.5% (9.0% at December 31, 19998). M&G had $41,000 of
outstanding borrowings under this credit agreement at December 31, 1998.
SPL was obligated under a Revolving Credit Facility which provided for
borrowings of up to $27,000. The facility bore interest at the Libor rate
plus 2.75% payable on a 30, 60, or 90 day basis and was secured by all of
the assets of SPL. All outstanding borrowings under this facility were
repaid during 1997 and the facility was terminated in conjunction with the
Company's issuance of $120,000 of Senior Notes.
B. Notes payable are due in monthly or quarterly installments and bear
interest at rates ranging from 3.0% to 17.0%. 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 certain subsidiaries in annual
installments through 2004, and bear interest ranging from 8% to 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, 1998 under capital
leases consist of the following:
<TABLE>
<S> <C>
1999 ........................................ $ 6,434
2000 ........................................ 12,482
2001 ........................................ 4,307
2002 ........................................ 3,620
2003 ........................................ 9,531
Thereafter .................................. 852
-------
Total ....................................... $37,226
Less amount representing interest ........... 6,893
-------
Present value of future minimum lease
payments .................................... $30,333
=======
</TABLE>
The present value of the future minimum lease payments approximates the
book value of property, plant and equipment under capital leases at
December 31, 1998.
E. Bank term loans in 1998 consist of a mortgage on the Pamco facility, which
bears interest at 8.2% and is due in monthly installments through 2003.
The mortgage is secured by the Pamco facility. There is also a mortgage on
the Deflecto facility which bears interest at .25% below prime rate and is
due in 2028.
Bank term loans consisted of certain indebtedness at SPL as of December 31,
1996. All outstanding borrowings under these agreements were repaid in
1997 in connection with the Company's issuance of $120,000 of Senior Notes
and the recapitalization of JTP. In conjunction with this transaction, the
Company recorded an extraordinary loss of $2,538 relating to the write-off
of deferred financing fees and the premium assessed on the new issue.
F-21
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
F. In July of 1993, the Company issued $275,000 103/8% Senior Notes ("Senior
Notes") due 2003. These notes bore interest at a rate of 103/8% per annum,
payable semi-annually in cash on February 1 and August 1 of each year.
During 1997, $271,545 of the principal balance, plus all accrued interest
thereon, was repaid in connection with the Company's issuance of $120,000
new Senior Notes and the recapitalization of JTP. In conjunction with this
transaction, the Company recorded an extraordinary loss of $19,232
relating to the write-off of deferred financing fees and the related
prepayment penalty. The remaining $3,455 of outstanding Senior Notes was
repaid in 1998. The Company recorded an extraordinary loss of $179 related
to the prepayment penalty.
In July 1993 the Company issued $133,075 113/4% 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 would have been payable in
cash semi-annually on February 1 and August 1 of each year beginning in
1999.
In April of 1997, the Company refinanced substantially all of the $133,075
aggregate principal amount of its Discount Debentures and issued $214,036
aggregate principal amount of 113/4% Senior Subordinated Discount
Debentures due 2009 ("2009 Debentures"). The 2009 Debentures were issued
at a substantial discount from the principal amount. The interest on the
2009 Debentures will be payable in cash semi-annually on April 1 and
October 1 of each year beginning October 1, 2002. In conjunction with this
transaction, the Company recorded an extraordinary loss of $8,898 relating
to the write-off of deferred financing fees and the accreted premium on
the new issue.
The 2009 Debentures are redeemable for 105.875% of the accreted value from
April 1, 2002 to March 31, 2003, 102.937% from April 1, 2003 to March 31,
2004 and 100% from April 1, 2004 and thereafter plus any accrued and
unpaid interest from April 1, 2002 to the redemption date if such
redemption occurs after April 1, 2002. The fair value of the 2009
Debentures was $132,700 at December 31, 1998. The fair value was
calculated using the 2009 Debentures' December 31, 1998 market price
multiplied by the face amount. The 2009 Debentures are not secured by the
assets of the Company.
In July 1997, the Company issued $120,000 103/8% Senior Notes due 2007
("2007 Seniors"). These notes bear interest at a rate of 103/8% per annum,
payable semi-annually in cash on February 1 and August 1 of each year.
The 2007 Seniors are redeemable for 105.188% of the principal amount from
August 1, 2002 to July 31, 2003, 102.594% from August 1, 2003 to July 31,
2004, and 100% from August 1, 2004 and thereafter plus any accrued and
unpaid interest to the date of redemption.
The fair value of the 2007 Seniors was $122,400 at December 31, 1998. The
fair value was calculated using the Senior Notes' December 31, 1998 market
price multiplied by the face amount. The 2007 Seniors are not secured by
the assets of the Company.
On July 25, 1997, a majority owned subsidiary of the Company, Jordan
Telecommunications Products ("JTP") issued and sold $190,000 principal
amount of 9.875% Senior Notes due August 1, 2007 ("JTP Senior Notes") and
$120,000 principal amount at maturity ($85,034 initial accreted value) of
11.75% Senior Discount Notes due August 1, 2007 ("JTP Senior Discount
Notes"). The JTP Senior Notes bear interest at a rate of 9.875% per annum,
payable semi-annually in cash in arrears on February 1 and August 1 of
each year, commencing on February 1, 1998. The JTP Senior Discount Notes
will accrete at a rate of 11.75%, compounded semi-annually, to par by
August 1, 2000. Commencing August 1, 2000, the JTP Senior Discount Notes
bear interest at a rate of 11.75% per annum, payable semi-annually in cash
in arrears on February 1 and August 1 of each year.
F-22
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
The JTP Senior Notes are redeemable for 104.9375% of the principal amount
from August 1, 2002 to July 31, 2003, 102.4688% from August 1, 2003 to
July 31, 2004, and 100% on or after August 1, 2004, plus any accrued and
unpaid interest to the date of redemption.
The JTP Senior Discount Notes are redeemable for 105.8750% of the accreted
value from August 1, 2002 to July 31, 2003, 102.9375% from August 1, 2003
to July 31, 2004, and 100% on or after August 1, 2004, plus any accrued
and unpaid interest from August 1, 2000 to the redemption date, if such
redemption occurs after August 1, 2000.
The fair value of the JTP Senior Notes and JTP Senior Discount Notes was
$188,724 and $92,400, respectively, at December 31, 1998. The fair values
were calculated by multiplying the face amount by the market prices of
each security at December 31, 1998.
The Company incurred approximately $16,093 of costs related to the issuance
and sale of the JTP Senior Notes, JTP Senior Discount Notes, and the JTP
Senior Preferred Stock Units, $9,885 of which was allocated to deferred
financing fees and $6,208 of which was allocated to stockholders' equity.
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.
On December 10, 1997, Motors and Gears issued $100,000 aggregate principal
amount of 103/4% Senior Notes ("C Notes"). Interest on the Notes is
payable in arrears on May 15 and November 15 of each year. The C Notes
were issued at a premium of 4.5% which is being amortized over the
remaining term of the Notes.
In conjunction with the consummation of the C Note offering, the Company
used a portion of the net proceeds to repay existing indebtedness under
the new credit agreement, acquire Motion Control, provide additional
working capital and pay fees and expenses incurred in connection with the
offering.
On January 9, 1998, Motors and Gears completed an exchange offer under
which $270,000 of 103/4% Series D Senior Notes ("D Notes") were exchanged
for the $170,000 of Senior Notes and the $100,000 of Senior Notes. The
terms of the new Motors and Gears Notes are substantially identical to the
terms of the old Motors and Gears Notes.
The fair value of the M&G Senior Notes at December 31, 1998, was $275,400.
The fair value was calculated using the M&G Senior Notes' December 31,
1998 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.
The Indentures relating to the Senior Notes, the Discount Debentures, the 2007
Seniors and the 2009 Debentures restrict the ability of the Company to incur
additional indebtedness at its restricted subsidiaries. The Indentures also
restrict: 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 Indentures also require the Company to
redeem the Senior Notes, the Discount Debentures, the 2007 Seniors and the 2009
Debentures upon a change of control and to offer to purchase a specified
percentage of the Senior Notes, the Discount Debentures, the 2007 Seniors and
the 2009 Debentures if the Company fails to maintain a minimum level of capital
funds (as defined).
The indentures governing the JTP Senior Notes and the JTP Senior Discount Notes
contain certain covenants which limit JTP's ability to (i) incur additional
indebtedness; (ii) make restricted payments (including dividends); (iii) enter
into certain transactions with affiliates; (iv) create certain liens; (v) sell
certain assets; and (vi) merge, consolidate or sell substantially all of JTP's
assets.
F-23
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
The Indenture governing the Motors and Gears Senior Notes contains certain
covenants which, among other things, restricts the ability of Motors and Gears
to incur additional indebtedness, to pay dividends or make other restricted
payments, engage in transaction with affiliates, to complete certain mergers or
consolidations, or to enter into certain guarantees of indebtedness.
The Company is, and expects to continue to be, in compliance with the
provisions of these Indentures.
Included in interest expense is $4,594, $3,622 and $3,001 of amortization of
debt issuance costs for the years ended December 31, 1998, 1997 and 1996,
respectively.
NOTE 13 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal ................. $ 1,049 $ -- $ --
Foreign ................. 5,732 2,818 1,753
State and local ......... 1,176 3,757 478
------- ------- -------
7,957 6,575 2,231
Deferred ................ 205 -- 2,184
------- ------- -------
Total ................ $ 8,162 $ 6,575 $ 4,415
======= ======= =======
</TABLE>
Deferred income taxes consist of:
<TABLE>
<CAPTION>
DEC. 31, DEC. 31,
1998 1997
---------- ---------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Intangibles ..................................... $ 6,966 $ 4,393
Tax over book depreciation ...................... 8,016 7,260
Basis in subsidiary ............................. 798 798
LIFO reserve .................................... -- 83
Intercompany tax gain ........................... 14,435 7,289
Other ........................................... 600 531
------- -------
Total deferred tax liabilities ................. 30,815 20,354
DEFERRED TAX ASSETS:
NOL carryforwards ............................... 50,806 37,482
Stock Appreciation Rights Agreements ............ 2,264 3,772
Accrued interest on discount debentures ......... 13,510 13,510
Pension obligation .............................. 601 444
Vacation accrual ................................ 1,109 891
Uniform capitalization of inventory ............. 2,147 1,501
Investment in partnership ....................... 282 --
Allowance for doubtful accounts ................. 1,257 1,125
Foreign NOL's ................................... 3,230 2,132
Deferred financing fees ......................... 742 814
</TABLE>
F-24
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEC. 31, DEC. 31,
1998 1997
------------ ------------
<S> <C> <C>
Intangibles ........................................... 1,573 1,242
Tax asset basis over book basis at subsidiary ......... 14,435 7,289
Other ................................................. 2,755 484
------ -----
Total deferred tax assets ............................ 94,711 70,686
Valuation allowance for deferred tax assets ........... (65,340) (51,776)
------- -------
Net deferred tax assets .............................. 29,371 18,910
------- -------
Net deferred tax liabilities ......................... $ 1,444 $ 1,444
========= =========
</TABLE>
The increase in the valuation allowance during 1998 and 1997 was $13,564 and
$13,212, 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
(loss) income before income taxes, including the extraordinary loss. A
reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Computed statutory tax benefit ............... $ (7,667) $ (12,760) $ (17,413)
Increase (decrease) resulting from:
Foreign subsidiary losses ................... (655) 1,906 1,465
Amortization of goodwill .................... 1,873 1,404 903
Disallowed meals and entertainment .......... 265 295 645
State and local tax ......................... 1,176 772 478
Increase in valuation allowance ............. 13,564 14,368 18,548
Other items, net ............................ (394) 590 (211)
-------- --------- ---------
Provision (benefit) for income taxes ......... $ 8,162 $ 6,575 $ 4,415
======== ========= =========
</TABLE>
As of December 31, 1998, the consolidated loss carry forwards are approximately
$131,600 and $104,000 for regular tax and alternative minimum tax purposes,
respectively, and expire in various years through 2012.
NOTE 14 -- PAYMENT OF STOCK APPRECIATION RIGHTS
In March 1992, the former shareholders of a wholly-owned subsidiary, were
granted Stock Appreciation Rights ("SARs") exercisable in full or in part on
the occurrence of the disposition by voting power and/or value of the capital
stock of the subsidiary. The value of the SARs was based on the ultimate sales
price of the stock or assets of the subsidiary, and is essentially 15.0% of the
ultimate sales price of the stock or assets sold, less $15,625.
On April 10, 1997, the Company paid the former shareholders pursuant to an
agreement ("The Redemption Agreement"), as if the subsidiary was sold for
$110,000. The former shareholders received $9,438 in cash and a deferred
payment of $5,980 over five years including interest. The Redemption Agreement
also required that $1,875 of remaining preferred stock be redeemed one year
from the date of the agreement. The Company recorded a charge of $15,418
related to this agreement during 1997. The Company paid $1,020 on the deferred
payment amount and $1,875 on the preferred stock redemption amount during 1998
and has a remaining liability of $4,960 at December 31, 1998.
In connection with the Company's acquisitions of AIM and Cambridge in 1989, the
seller of these companies was granted SARs. The formula used to value these
rights was calculated by determining
F-25
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
20% of a multiple of average cash flow of these companies for the two years
preceding the date when these rights were exercised, less the indebtedness of
these companies. The seller passed away during the third quarter of 1996 and
the seller's estate exercised these rights. The Company accrued $6,260 for its
obligation related to these SARs during 1996. In 1997, the Company entered into
an agreement to purchase and redeem the Estate's and Decedent's interest in the
SAR for $3,111 in cash and a deferred payment, including interest at 9% per
annum, of $3,391 payable on May 2, 1998. The Company paid the remaining
liability of $3,391 on May 2, 1998.
NOTE 15 -- SALE OF SUBSIDIARIES
On July 9, 1998, JTP sold its stock of Diversified Wire and Cable for $15,000.
Including expenses related to the sale, the Company recorded a loss of $6,299.
The proceeds from the sale were used to pay $1,500 in subordinated seller notes
to the original owners of Diversified and $13,500 to pay down JTP's revolving
credit facility.
On May 15, 1997, the Company sold its subsidiary, Hudson Lock, Inc. ("Hudson"),
for approximately $39,100. Hudson is a leading designer, manufacturer, and
marketer of highly engineered medium-security custom and specialty locks for
original equipment manufacturer customers. A gain of $17,081 was recorded in
1997 relating to this sale.
On July 31, 1997, the Company sold its subsidiary, Paw Print Mailing List
Services, Inc. ("Paw Print"), for approximately $12,500 to an affiliate. Paw
Print is a value-added provider of direct mail services.
NOTE 16 -- 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.
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 $1,078, $1,812 and $1,462 in fees and expenses in 1998, 1997 and 1996,
respectively. The rates charged to the Company were at arms-length.
On July 25, 1997, a previous agreement with TJC Management Corporation ("TJC")
was amended and restated. Under the new agreement, the Company pays TJC a $750
quarterly fee. Under these agreements the Company accrued fees to TJC of
$3,000, $2,955 and $2,530 in 1998, 1997 and 1996, respectively.
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 the Jordan Company, plus the reimbursement of out-of-pocket and other
expenses. The Company paid $3,000, $5,075, and $2,610 in 1998, 1997, and 1996,
respectively, to the Jordan Company for their fees in relation to acquisition
and refinancing activities.
On June 23, 1998, the Company made approximately $0.8 million of unsecured
advances to JIR, Inc., JIR Broadcast, Inc. and JIR Paging, Inc. Each of these
company's Chief Executive Officer is Mr.
F-26
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
Quinn, and its stockholders include Messrs. Jordan, Quinn, Zalaznick and
Boucher, who are our 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.
In November 1998, the Company, through Motors and Gears, invested $5,600 in
Class A Preferred Stock and $1,700 in Class B Preferred Stock of JZ
International, Ltd. The Company expects to make an additional $5,000 of
investments in JZ International's Class A Preferred Stock. JZ International's
Chief Executive Officer is David W. Zalaznick, 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. JZ
International is a merchant bank located in London, England that is focused on
making European and other international investments. The Company is accounting
for the investment under the cost method. At December 31, 1998, the cost of the
investment approximates market value.
During 1998, the Company made approximately $1.4 million of unsecured advances
to CBD Networks, Inc. The Company expects to form a new, Nonrestricted
Subsidiary to acquire all or substantially all of the business and assets of
CBD Networks in the near future, pursuant to which we will invest $3.5 million
in a five-year unsecured note, bearing interest at 10% per annum, and a
warrant, exercisable for 10% of the issued and outstanding common stock of CBD
Networks. The Company expects that substantially all of the issued and
outstanding common stock of the company that acquires the business of CBD
Networks will be owned by The Company's Stockholders and the management of CBD
Networks. CBD Networks is a provider of Internet access for approximately
10,000 customers.
During 1998 the Company made approximately $1.0 million of unsecured advances
to Healthcare Products Holdings, Inc. Healthcare Products Holdings' Chief
Executive Officer is Thomas 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.
NOTE 17 -- 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"), which has been renamed JZ Equity
Partners PLC ("JZEP"), 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
exercised in 1997.
On April 3, 1997, the Company issued an additional 1,500 shares of stock for
$135 cash to an employee. An independent appraiser valued the common stock at
$1,005, therefore a charge of $870 has increased the Company's loss before
income taxes, minority interest, equity in investee and extraordinary items.
F-27
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
NOTE 18 -- PREFERRED STOCK
In May 1997, Motors and Gears Holdings, Inc., a majority-owned subsidiary of
the Company, issued $1,500 of senior, non-voting 8.0% cumulative preferred
stock to its minority shareholders.
On July 25, 1997, JTP issued and sold twenty-five thousand units, each
consisting of (i) $1 aggregate liquidation preference of 13.25% Senior
Exchangeable Preferred Stock due August 1, 2009 ("JTP Senior Preferred Stock"),
and (ii) one share of JTP Common Stock.
Holders of the JTP Senior Preferred Stock are entitled to receive dividends at
a rate of 13.25% per annum of the liquidation preference. All dividends are
cumulative, whether or not earned or declared, and are payable on February 1,
May 1, August 1, and November 1 of each year. On or before August 1, 2002, JTP
may, at its option, pay dividends in cash or in additional shares of JTP Senior
Preferred Stock having an aggregate liquidation preference equal to the amount
of such dividends. After August 1, 2002, dividends may be paid only in cash. On
November 1, 1997, JTP issued 889.3836 of additional shares of JTP Senior
Preferred Stock, as payment of dividends through that date.
The JTP Senior Preferred Stock has no voting rights and is mandatorily
redeemable on August 1, 2009.
NOTE 19 -- BUSINESS SEGMENT INFORMATION
The Company's business operations are classified into five business segments:
Specialty Printing and Labeling, Jordan Specialty Plastics, Motors and Gears,
Telecommunication Products, and Consumer and Industrial Products. As of January
21, 1997, Welcome Home is no longer consolidated in the Company's results of
operations and is therefore no longer considered a separate business segment.
(See note 3)
Specialty Printing and Labeling includes production and distribution of
calendars and distribution of corporate recognition, promotion, and specialty
advertising products by SPAI; manufacture of pressure sensitive label products
for the electronics OEM market by Valmark; manufacture of a wide variety of
printed tape and labels by Pamco; and manufacture of printed folding cartons
and boxes, insert packaging and blister pack cards at Seaboard.
Jordan Specialty Plastics includes the manufacturing of point-of-purchase
advertising displays by Beemak; manufacture and marketing of safety reflectors,
lamp components, bicycle reflector kits, colorants and emergency warning
triangles by Sate-Lite; design, manufacture, and marketing of plastic
injection-molded products for mass merchandisers, major retailers, and large
wholesalers by Deflecto; and manufacture of extruded vinyl chairmats for the
office products industry by Rolite.
Motors and Gears includes the manufacture of specialty purpose electric motors
for both industrial and commercial use by Imperial; precision gears and gear
boxes by Gear; AC and DC gears and gear motors and sub-fractional AC and DC
motors and gear motors for both industrial and commercial use by Merkle-Korff
and FIR; and electronic motion control systems for use in industrial and
commercial processes such as conveyor systems, packaging systems, elevators and
automated assembly operations by ED&C and Motion Control.
Telecommunication 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, switches, RF coaxial connectors and electronic hardware by
Connectors; cable TV electronic network components and electronic security
components by Viewsonics; custom electronic cables and connectors for high
technology, computer related applications by Bond; custom electronic cable
assemblies, sub-assemblies and electro-mechanical assemblies for the data and
F-28
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
telecommunications markets by LoDan; design and installation of cellular
personal communications systems and radio/broadcasting towers by EEI; custom
cable assemblies and other correcting devices by TSI; and power conditioning
and power protection equipment by Northern. Vitelec is an importer, packager,
and master distributor of over 400 RF connectors and other electronic
components.
Consumer and Industrial Products includes the remanufacturing of transmission
sub-systems for the U.S. automotive aftermarket by DACCO; 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; decorative home furnishing accessories by Cape;
manufacture of plastic pipe by Dura-Line Retube; and manufacture of orthopedic
supports and pain reducing medical devices at Cho-Pat.
Measurement of Segment Operating Income and Segment Assets
The Company evaluates performance and allocates resources based on operating
income. The accounting policies of the reportable segments are the same as
those described in Note 2 -- Significant Accounting Policies.
Inter-segment sales exist between Cape and Welcome Home, a specialty retailer
of decorative home furnishings, and a former subsidiary of the Company (see
note 3). These sales were eliminated in consolidation prior to January 22,
1997, and were not presented in segment disclosures. 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.
Factors Used to Identify the Enterprise's Reportable Segments
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute distinct products with different production
processes.
F-29
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
Summary financial information by business segment is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:
Specialty Printing & Labeling ........................ $ 120,160 $ 119,346 $ 109,587
Jordan Specialty Plastics ............................ 71,568 24,038 20,120
Motors and Gears ..................................... 275,833 148,669 117,571
Telecommunications Products .......................... 310,028 257,010 131,592
Welcome Home ......................................... -- 2,456 81,855
Consumer and Industrial Products ..................... 166,018 155,593 140,842
--------- --------- ---------
Total ............................................... $ 943,607 $ 707,112 $ 601,567
========= ========= =========
Operating income:
Specialty Printing & Labeling ........................ $ 8,259 $ 8,540 $ 5,540
Jordan Specialty Plastics ............................ 4,654 2,490 (592)
Motors and Gears ..................................... 42,324 27,684 23,229
Telecommunication Products ........................... 30,791 13,258 13,828
Welcome Home ......................................... -- (1,107) (15,975)
Consumer and Industrial Products ..................... 17,105 16,012 13,222
--------- --------- ---------
Total business segment operating Income ............. 103,133 66,877 39,252
Corporate expenses ................................... (11,437) (11,433) (25,860)
--------- --------- ---------
Total consolidated operating Income ................. $ 91,696 $ 55,444 $ 13,392
========= ========= =========
Depreciation and amortization (including the
amortization of goodwill and intangibles):
Specialty Printing & Labeling ........................ $ 4,949 $ 5,284 $ 4,800
Jordan Specialty Plastics ............................ 4,693 2,291 2,245
Motors and Gears ..................................... 12,727 9,015 7,078
Telecommunication Products ........................... 14,885 10,938 7,204
Welcome Home ......................................... -- 119 2,096
Consumer and Industrial Products ..................... 3,550 4,168 3,540
--------- --------- ---------
Total business segment depreciation and
amortization ...................................... 40,804 31,815 26,963
Corporate ............................................ 4,243 3,506 3,475
--------- --------- ---------
Total consolidated depreciation and amortization..... $ 45,047 $ 35,321 $ 30,438
========= ========= =========
Capital expenditures:
Specialty Printing & Labeling ........................ $ 1,886 $ 1,906 $ 2,801
Jordan Specialty Plastics ............................ 3,607 1,172 804
Motors and Gears ..................................... 5,175 1,649 1,407
Telecommunication Products ........................... 9,848 9,864 6,872
Welcome Home ......................................... -- -- 1,638
Consumer and Industrial Products ..................... 1,667 1,354 966
Corporate ............................................ 2,542 1,346 2,652
--------- --------- ---------
Total consolidated capital expenditures ............. $ 24,725 $ 17,291 $ 17,140
========= ========= =========
</TABLE>
F-30
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEC 31, DEC 31, DEC 31,
1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Identifiable assets:
Specialty Printing & Labeling ....................... $ 101,916 $104,979 $107,056
Jordan Specialty Plastics ........................... 88,142 21,707 15,669
Motors and Gears .................................... 389,997 336,558 173,565
Telecommunication Products .......................... 326,424 328,509 175,796
Welcome Home ........................................ -- -- 26,263
Consumer and Industrial Products .................... 98,932 106,243 129,682
---------- -------- --------
Total identifiable business segment assets ......... 1,005,411 897,996 628,031
Corporate assets .................................... 38,477 32,235 53,854
---------- -------- --------
Total consolidated identifiable Assets ............. $1,043,888 $930,231 $681,885
========== ======== ========
</TABLE>
Summary financial information by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales to unaffiliated customers:
United States ..................... $ 840,461 $630,418 $565,937
Foreign ........................... 103,146 76,694 35,630
--------- -------- --------
Total ............................ $ 943,607 $707,112 $601,567
========= ======== ========
Identifiable assets:
United States ..................... $ 112,700 $ 82,942 $ 97,022
Foreign ........................... 26,878 22,128 14,018
--------- -------- --------
Total ............................ $ 139,578 $105,070 $111,040
========= ======== ========
</TABLE>
NOTE 20 -- ACQUISITIONS AND FORMATION OF SUBSIDIARIES
On January 20, 1998, Jordan Telecommunication Products, Inc. ("JTP") through a
newly created subsidiary K&S Sheet Metal Holdings ("K&S Holdings"), a
subsidiary of 80% owned Bond Technologies, purchased the stock of K&S Sheet
Metal ("K&S"). K&S is a manufacturer of precision metal enclosures for
electronic original equipment manufacturers. K&S is located in Huntington
Beach, California.
The purchase price of $15,930, including estimated costs incurred directly
related to the transaction, has been preliminarily allocated to working capital
of $2,666, property, plant and equipment of $1,002, non-compete agreements of
$1,545 and other assets of $91 resulting in an excess purchase price over net
identifiable assets of $10,626. The acquisition was financed with $14,000 of
borrowings from JTP's revolving credit agreement and $1,500 of a subordinated
seller note.
On February 9, 1998, the Company completed the formation of Jordan Specialty
Plastics, Inc. ("JSP"). JSP was formed as a Restricted Subsidiary under the
Company's Indenture. The Company sold the stock of Beemak and Sate-Lite to JSP
for $11,500 of Preferred Stock, which will accrete 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 end of year five. The
Company will also keep its intercompany notes with Sate-Lite ($1.2 million at
January 31, 1998) and Beemak ($9.8 million at January 31, 1998). The Company
has sold these subsidiaries in order to establish them as more independent,
stand-alone, industry-focused companies, and to allow the Company's
stockholders and employees to invest directly in JSP.
F-31
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
On February 11, 1998, JSP purchased all of the common stock of Deflecto
Corporation ("Deflecto"). Deflecto designs, manufactures and markets plastic
injection molded products such as office supplies, hardware products and
houseware products.
The purchase price of $43,000, including costs directly related to the
transaction, was allocated to working capital of $8,598, property, plant and
equipment of $6,346, other long term assets and liabilities of $(1,942), and
resulted in an excess purchase price over net identifiable assets of $29,998.
The acquisition was financed with cash from the Jordan Industries, Inc. credit
line and a $5,000 subordinated seller note.
On February 26, 1998, JSP purchased all of the net assets of Rolite Plastics,
Inc. Rolite is a manufacturer of extruded vinyl chairmats for the office
products industry.
The purchase price of $6,000 including costs directly related to the
transaction, was allocated to working capital of $483, property, plant, and
equipment of $754, and resulted in an excess purchase price over net
identifiable assets of $4,763. The acquisition was financed with cash and a
$900 subordinated seller note.
On May 15, 1998, Motors and Gears Industries, Inc. ("Motors and Gears")
acquired all of the outstanding stock of Advanced D.C. Motors, Inc. and its
affiliated corporations (collectively "ADC") for $55,500. The purchase price,
including costs incurred directly related to the transaction, was allocated to
working capital of $9,345; property and equipment of $4,088; covenants not to
compete of $662; other long-term assets and liabilities of $54; and resulted in
an excess purchase price over net identifiable assets of $41,456. ADC designs
and manufactures special purpose, custom designed motors for use in electric
lift trucks, power sweepers, electric utility vehicles, golf carts, electric
boats, and other niche products. ADC also designs and manufactures its own
production equipment as well as electric motor components known as commutators.
On July 14, 1998, JTP, though its 70% owned subsidiary, TSI, purchased the net
assets of Opto-Tech Industries, Inc. ("Opto-Tech"). Opto-Tech assembles and
sells radio frequency interference products, attenuators and message waiting
indicators to Regional Bell Operating Companies, independent phone operators
and distributors of telecommunications products. The purchase price of $6,632,
including costs incurred directly related to the transaction, has been
allocated to working capital of $261, property, plant, and equipment of $42,
and non-current assets of $100, resulting in an excess purchase price over net
identifiable assets of $6,229. The acquisition was financed with $5,150 of
borrowings from JTP's revolving credit agreement and $1,250 of subordinated
seller notes.
On December 31, 1998, Motors and Gears, through its wholly-owned subsidiary
Imperial, acquired all of the outstanding stock of Euclid Universal Corporation
("Euclid") for $2,100. The purchase price, including costs incurred directly
related to the transaction, was preliminarily allocated to working capital of
$772, property, plant, and equipment of $953, and other non-current assets and
liabilities of ($498), resulting in an excess purchase price over net
identifiable assets of $873. Euclid designs and manufactures speed reducers,
custom gearing, right angle gearboxes and transaxles for use in a wide array of
industries including material handling, healthcare and floor care. Euclid has
strong technical expertise in the areas of worm, spur and helical gearing.
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 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.
F-32
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
On May 30, 1997, JTP purchased the assets of LoDan West, Inc. ("LoDan"), which
designs, engineers and manufactures high-quality custom electronic cable
assemblies, sub-assemblies and electro-mechanical assemblies for original
equipment manufacturers in the data and telecommunications markets of the
electronics industry.
The purchase price of $17,000, including estimated costs incurred directly
related to the transaction, was allocated to working capital of $5,066,
property, plant and equipment of $783, non-competition agreement of $250,
noncurrent assets of $41, and resulted in an excess purchase price over net
identifiable assets of $10,860. The acquisition was financed with cash and a
$1,500 subordinated seller note.
On June 12, 1997, Motors and Gears Industries, Inc., through its newly formed
wholly-owned subsidiary, FIR Group Holdings, Inc. and its wholly-owned
subsidiaries, Motors and Gears Amsterdam, B.V. and FIR Group Holdings Italia,
SrL, purchased all of the common stock of the FIR Group Companies, consisting
of CIME S.p.A., SELIN S.p.A., and FIR S.p.A. The FIR Group Companies are
manufacturers of electric motors and pumps for niche applications such as pumps
for catering dishwashers, motors for industrial sewing machines, and motors for
industrial fans and ventilators.
The purchase price of $50,496, including costs directly related to the
transaction, was preliminarily allocated to working capital of $16,562,
property, plant, and equipment of $4,918, other long term assets and
liabilities of ($3,442), and resulted in an excess of purchase price over net
identifiable assets of $32,458. The cash was provided from borrowings under the
Motors and Gears Industries, Inc. Credit Agreement established on November 7,
1996 among Motors and Gears Industries, Inc., various banks, and Bankers Trust
Company, as agent.
On September 2, 1997 JTP purchased the assets of Engineered Endeavors Inc.
("EEI"). EEI designs, manufactures and installs custom cellular personal
communication systems and radio/broadcasting towers.
The purchase price of $41,500, including estimated costs incurred directly
related to the transaction, was allocated to working capital of $2,068,
property, plant, and equipment of $799, non-competition agreement of $2,500,
other long-term assets of $14, and resulted in an excess purchase price over
net identifiable assets of $36,119. The acquisition was financed with $21,500
of cash and $20,000 of borrowings under the JTP credit facility.
On September 11, 1997 the Company purchased the net assets of Cho-Pat, Inc.
("Cho-Pat"). Cho-Pat is a leading designer and manufacturer of orthopedic
supports and patented preventative and pain reducing medical devices. Cho-Pat
currently produces nine different products primarily for reduction of pain from
injuries and the prevention of injuries resulting from overuse of the major
joints.
The purchase price of $1,200, including estimated costs incurred directly
related to the transaction, was allocated to working capital of $17, property,
plant and equipment of $23, and other long-term assets of $34 which resulted in
an excess purchase price over net identifiable assets of $1,126. The
acquisition was financed with cash.
On October 27, 1997 Motors and Gears Industries, Inc. ("Motors and Gears")
acquired all of the outstanding stock of Electronic Design and Control Company
("ED&C"). ED&C is a full service electrical engineering company which designs,
engineers and manufactures electrical control systems and panels for material
handling systems and other like applications. ED&C provides comprehensive
design, build and support services to produce electronic control panels which
regulates the speed of movement of conveyor systems used in a variety of
automotive plants and other industrial applications.
F-33
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
The purchase price of $20,000, including costs incurred directly related to the
transaction, has been preliminarily allocated to working capital of $3,514,
property, plant, and equipment of $132, covenants not to compete of $120, and
resulted in an excess purchase price over net identifiable assets of $16,234.
The acquisition was financed through a $16,000 borrowing on the Motors and
Gears line of credit and a $4,000 subordinated seller note.
On October 31, 1997 JTP purchased the stock of Telephone Services, Inc. of
Florida ("TSI"). TSI designs, manufactures and provides custom cable
assemblies, terminal strips and terminal blocks and other connecting devices
primarily to the telephone operating companies and major telecommunication
manufacturers.
The purchase price of $53,303, including estimated costs incurred directly
related to the transaction, has been preliminarily allocated to working capital
of $3,864, property, plant, and equipment of $1,528, non-compete agreement of
$2,000, and non current assets of $107, resulting in an excess purchase price
over net identifiable assets of $45,804. The acquisition was financed with a
$48,000 borrowing under the JTP credit facility, a $5,000 subordinated seller
note and the assumption of a $303 deferred purchase agreement.
On December 10, 1997, Motors and Gears Industries, Inc., through its newly
formed wholly-owned subsidiary, Motion Holdings, Inc., purchased all of the
common stock of Motion Control Engineering, Inc. ("MCE"). MCE is the leading
independent supplier of electronic motion and logic control products to the
elevator industry.
The purchase price of $53,600, including costs directly related to the
transaction, was preliminarily allocated to working capital of $10,071,
property and equipment of $1,428, non-competes and other of $1,005, and
resulted in an excess of purchase price over net identifiable assets of
$41,108. The cash was provided from the issuance of $100 million of 103/4%
bonds by Motors and Gears, Inc.
Unaudited pro forma information with respect to the Company as if the 1998
acquisitions had occurred on January 1, 1998 and 1997 and as if the 1997
acquisitions had occurred on January 1, 1997, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C>
Net sales ............................................ $ 955,483 $ 902,244
Net (loss) income before extraordinary items ......... (18,139) 2,471
Net (loss) income .................................... $ (27,034) $ (30,314)
</TABLE>
NOTE 21 -- COMPENSATION AGREEMENTS
Effective October 1, 1996, the Company voluntarily agreed to pay to an
executive $3,876 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 accrued
for this compensation agreement in 1996. The Company paid the executive $860
during 1998, $867 during 1997, and $1,300 during 1996, with the remaining $905
payable in two equal semi-annual installments payable on April 1, and October
1, 1999.
NOTE 22 -- ADDITIONAL PURCHASE PRICE AGREEMENTS
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 April 30, 2008, the plan is payable 120 days after
the transaction.
F-34
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
The terms of the Company's Advanced DC purchase price agreement provides for
additional consideration to be paid if the acquired entity's results of
operations exceed certain targeted levels. Targeted levels are set
substantially above the historical experience of the acquired entity at the
time of acquisition. Subject to the terms and conditions of the agreement, the
Company will make payments to the sellers on or before April 1st immediately
following the respective fiscal year during which each such contingent payment
is earned. The contingent payments apply to operations of fiscal years 1998 and
1999. The Company made a payment of $3,100 to the previous shareholders of
Advanced DC in March 1999.
The Company has a contingent purchase price agreement relating to its
acquisition of Viewsonics in 1996. The plan is based on Viewsonics achieving
certain earnings before interest and taxes and can pay a minimum of $0 and a
maximum of $2,000 for the year ended July 31, 1997 and $3,000 for the year
ending July 31, 1998. On January 2, 1998, the Company paid $1,388 for the plan
year ended July 31, 1997. At December 31, 1998, $1,081 was accrued for the plan
year ended July 31, 1998.
The Company also has a contingent purchase price agreement relating to its
acquisition of Motion Control on December 18, 1997. The terms of the Company's
Motion Control acquisition agreement provides for additional consideration to
be paid if the acquired entity's results of operations exceed certain targeted
levels. Targeted levels are set substantially above the historical experience
of the acquired entity at the time of acquisition. The agreement becomes
exercisable in 2003 and payments, if any, under the contingent agreement will
be placed in a trust and paid out in cash in equal annual installments over a
four year period.
In addition, the Company has an agreement to make an additional purchase price
payment of up to $4,000 to the former owners of TSI if certain earnings
projections are met on or before March 1, 1999. At December 31, 1998, $3,742
was accrued related to this agreement.
NOTE 23 -- CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. The Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
NOTE 24 -- SUBSEQUENT EVENTS
On March 22, 1999, the Company completed a $155,000 "tack-on" bond offering at
a 103/8% coupon. The bonds were sold at 96.62% of par and mature on August 1,
2007. The net cash to the Company was $149,761.
On the same day, the Company purchased Alma Products ("Alma") for $86,300. Alma
is comprised of three primary business segments: (i) high quality
remanufactured torque converters used to supply warranty replacements for
automotive transmissions originally sold to Ford, Chrysler, John Deere and
Caterpillar, (ii) new and remanufactured air conditioning compressors for
original equipment manufacturers including Ford, Chrysler and General Motors,
and (iii) new and remanufactured clutch and disc assemblies used in standard
transmissions sold primarily to Ford. As a premium remanufacturer of torque
converters, Alma has earned ISO-9002 status and supplies Ford with 100% and
Chrysler with approximately 70% of their remanufactured torque converter
requirements. The purchase price of $86,300 is made up of cash of $84,000 and
the assumption of $2,300 in long-term liabilities related to retiree healthcare
benefits, and has not been allocated at this time.
The Company also used the proceeds from the offering described above to pay
down its Revolving Credit Facility. As of March 31, 1999, the Company has no
borrowings outstanding under its $75,000 Revolving Credit Facility.
F-35
<PAGE>
JORDAN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS)
On March 31, 1999, JTP, through a newly created subsidiary, Integral Holdings,
Inc. ("Integral Holdings"), a subsidiary of Dura-Line Corporation, purchased
the assets of Integral Corporation ("Integral"). Integral is a manufacturer of
high-density polyethylene conduit for the installation and protection of cables
used in the electrical, telecommunications, and cable TV industries. Integral
has locations in Dallas, Texas; England; and Malaysia.
The purchase price of $17,000, which does not include related transaction
costs, has not been allocated at this time. The acquisition was financed with
four-month promissory notes for $9,937 and borrowings from JTP's revolving
credit agreement of $7,063.
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Alma Piston Company:
We have audited the accompanying statement of net assets of ALMA PRODUCTS, (as
defined in Note 1), as of December 31, 1998 and 1997, and the related
statements of income and cash flows for the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alma Products as of December
31, 1998 and 1997, and the results of its operations and its cash flows for the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Detroit, Michigan,
February 8, 1999.
F-37
<PAGE>
ALMA PRODUCTS
STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Receivables--
Trade receivables, less allowances for doubtful accounts of
$10,000 and $5,800, respectively.......................... $ 9,056,300 $ 9,719,400
Other receivables ......................................... 508,800 116,700
Inventories (Note 1) ........................................ 12,789,500 11,111,200
Prepaids and other .......................................... 1,053,200 957,500
------------- -------------
Total current assets ..................................... 23,407,800 21,904,800
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land and improvements ....................................... 731,400 662,500
Buildings and improvements .................................. 7,238,500 7,218,600
Machinery and equipment ..................................... 17,412,700 16,625,700
Construction in progress .................................... 43,700 23,200
------------- -------------
25,426,300 24,530,000
Less--Accumulated depreciation ............................ (17,501,200) (16,459,300)
------------- -------------
Total property, plant and equipment ...................... 7,925,100 8,070,700
------------- -------------
$ 31,332,900 $ 29,975,500
============= =============
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Accounts payable ............................................ $ 6,586,000 $ 4,124,200
Accrued liabilities (Note 4) ................................ 2,449,200 2,305,100
------------- -------------
Total current liabilities ................................ 9,035,200 6,429,300
------------- -------------
LONG TERM LIABILITIES:
Accrued post-retirement benefits and other .................. 2,705,500 2,286,400
------------- -------------
CONTINGENCIES (Note 7)
NET ASSETS ................................................... 19,592,200 21,259,800
------------- -------------
$ 31,332,900 $ 29,975,500
============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-38
<PAGE>
ALMA PRODUCTS
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES .......................................... $73,607,900 $61,899,300 $64,696,000
COST OF SALES ...................................... 57,061,100 48,466,700 51,770,200
----------- ----------- -----------
Gross margin .................................... 16,546,800 13,432,600 12,925,800
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .......................................... 4,531,900 3,329,800 3,461,500
----------- ----------- -----------
Operating profit ................................ 12,014,900 10,102,800 9,464,300
OTHER INCOME, NET .................................. 43,100 16,600 66,800
----------- ----------- -----------
Income before provision for state taxes ......... 12,058,000 10,119,400 9,531,100
PROVISION FOR STATE TAXES .......................... 179,500 181,200 311,600
----------- ----------- -----------
NET INCOME ......................................... $11,878,500 $ 9,938,200 $ 9,219,500
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-39
<PAGE>
ALMA PRODUCTS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................. $ 11,878,500 $ 9,938,200 $ 9,219,500
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation ............................................. 1,217,400 1,200,000 1,164,900
Gain (loss) on sale of property .......................... 45,600 58,000 (2,200)
Decrease (increase) in--
Receivables ............................................. 271,000 3,599,200 (2,934,600)
Inventories ............................................. (1,678,300) 2,336,400 2,368,800
Prepaids and other ...................................... (69,500) (150,300) (451,500)
Increase (decrease) in--
Accounts payable ........................................ 2,461,800 (712,200) (2,942,800)
Accrued liabilities ..................................... 144,100 (1,117,400) 658,600
Accrued taxes ........................................... (26,200) -- --
Accrued post-retirement benefits and other .............. 419,100 138,500 175,000
------------- ------------- ------------
Net cash provided by operating activities ............. 14,663,500 15,290,400 7,255,700
------------- ------------- ------------
CASH FLOWS FOR INVESTING ACTIVITIES:
Capital expenditures ....................................... (1,131,100) (1,094,500) (1,223,100)
Proceeds from sale of property ............................. 13,700 97,900 2,200
------------- ------------- ------------
Net cash used in investing activities ................... (1,117,400) (996,600) (1,220,900)
------------- ------------- ------------
CASH USED FOR FINANCING ACTIVITIES--
Net transfers to parent .................................... (13,546,100) (14,293,800) (6,034,800)
------------- ------------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ..................... -- -- --
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR ....................................................... -- -- --
------------- ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ -- $ -- $ --
============= ============= ============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-40
<PAGE>
ALMA PRODUCTS
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Basis of Presentation
Alma Products (the Company), located in Alma, Michigan, is an operating
division of Alma Piston Company (the Parent). The accompanying financial
statements have been derived from the historical statements of the Parent.
The Company has received certain administrative and operational support
from the Parent. Management has allocated its estimate of the costs of these
services to the Company.
The Company primarily manufactures original equipment automotive parts and
service replacement automotive products. The Company manufactures three primary
product lines: (i) high quality remanufactured torque converters used to supply
warranty replacements for automatic
transmissions, (ii) remanufactured and new air conditioning compressors for
original equipment manufacturers, and (iii) new and remanufactured clutch and
disc assemblies used in standard transmissions. The Company sells primarily to
domestic automobile manufacturers.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories are valued at the lower of cost or market. Cost includes
material, labor and manufacturing overhead. Approximately 76%, 71%, and 67%, of
inventories as of December 31, 1998, 1997, and 1996, respectively, are valued
using the last-in, first-out (LIFO) method of inventory valuation. This method
assigns the costs of the latest inventory purchases to cost of sales.
The components of inventories are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Materials .............................................. $ 11,415,700 $ 10,323,100
Finished goods ......................................... 3,859,200 3,155,100
------------ ------------
Total inventories at FIFO ........................... 15,274,900 13,478,200
Less -- Reserve to reduce FIFO inventories to LIFO value (2,485,400) (2,367,000)
------------ ------------
Total inventories at LIFO ........................... $ 12,789,500 $ 11,111,200
============ ============
</TABLE>
Property, Plant and Equipment
The Company provides for depreciation of property, plant and equipment
based upon the acquisition cost and the estimated service lives of depreciable
assets. For financial reporting purposes, depreciation is computed using the
straight-line method. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Land and improvements ............... 15-40
Buildings and improvements .......... 15-40
Machinery and equipment ............. 5-12
</TABLE>
F-41
<PAGE>
ALMA PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(2) EMPLOYEE BENEFIT PLANS AND POST-RETIREMENT BENEFITS
Employee Benefit Plans
The Company has two defined benefit pension plans which cover
substantially all employees. The Company's policy is generally to fund the
maximum tax deductible amounts allowable under the Employee Retirement Income
Security Act of 1974.
The following table sets forth the funded status of the pension plans as
of December 31,:
<TABLE>
<CAPTION>
CHANGE IN BENEFIT OBLIGATION 1998 1997
- ----------------------------------------------------- -------------- --------------
<S> <C> <C>
Benefit obligation at beginning of year .......... $ 12,769,500 $10,521,100
============ ===========
Service cost ................................... 508,000 465,300
Interest cost .................................. 853,300 800,000
Actuarial (gain)/loss .......................... (65,400) 1,482,900
Benefits paid .................................. (1,018,500) (499,800)
------------ -----------
Benefit obligations at end of year ............... 13,046,900 12,769,500
============ ===========
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN PLAN ASSETS
- -----------------------------------------------------------
<S> <C> <C>
Fair value of plan assets at beginning of year ......... 13,065,400 11,461,700
========== ==========
Actual return on assets .............................. 1,509,300 1,673,200
Contributions received ............................... -- 430,800
Benefits paid ........................................ (1,018,500) (500,300)
---------- ----------
Fair value of plan assets at end of year ............... 13,556,200 13,065,400
---------- ----------
Funded Status ........................................ 509,400 295,900
Unrecognized net actuarial loss ...................... 85,300 656,200
Unrecognized prior service cost ...................... 276,800 299,000
Unrecognized net transition asset .................... (1,032,100) (1,135,300)
---------- ----------
Prepaid (accrued) benefit cost ....................... $ (160,600) $ 115,800
============ ============
</TABLE>
Net periodic pension expense included the following components for the
year ended December 31:
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
Components of net periodic benefit cost--
Service cost .......................................... $ 508,000 $ 465,300
Interest cost ......................................... 853,300 800,000
Expected return on plan assets ........................ (1,003,800) (846,800)
Amortization of unrecognized transition asset ......... (102,900) (103,200)
Amortization of prior service cost .................... 22,200 22,200
------------ ----------
Net periodic benefit cost ............................. $ 276,800 $ 337,500
============ ==========
</TABLE>
F-42
<PAGE>
ALMA PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(2) EMPLOYEE BENEFIT PLANS AND POST-RETIREMENT BENEFITS (CONTINUED)
Net periodic pension expense included the following components for the
year ended December 31, 1996:
<TABLE>
<S> <C>
Service cost (benefits earned during the year) ......... $ 385,300
Interest cost on projected benefit obligation .......... 700,700
Return on plan assets .................................. (826,500)
Net amortization and deferral .......................... (88,900)
----------
Net periodic pension expense ........................ $ 170,600
==========
</TABLE>
The following assumptions were used in determining the actuarial present
value of the projected benefit obligations as of December 31,:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Discount rate ............................................. 7.0% 7.5% 7.5%
Rate of increase in future compensation levels ............ 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets .......... 8.0% 7.5% 7.5%
</TABLE>
The Company also has a profit sharing plan. The profit sharing plan for
salaried employees receives annual contributions equal to at least two percent
of the Company's profits (as defined in the plan document).
The Company's contributions under the plan were approximately $373,900,
$369,600, and $399,900 for the years ended December 31, 1998, 1997, and 1996,
respectively.
Post-Retirement Benefits
The Company provides health care and life insurance benefits for certain
retired employees and their dependents. Employees become eligible to
participate after completing retirement at age 62 and 20 years of service with
benefits ceasing upon attainment of age 65.
The following table sets forth the accumulated post-retirement benefit
obligation as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Change in benefit obligation--
Benefit obligation at beginning of year ......... $2,117,500 $1,839,400
Service cost .................................... 103,600 94,000
Interest cost ................................... 144,000 142,200
Actuarial (gain) loss ........................... (114,800) 147,200
Benefits paid ................................... (99,200) (105,300)
---------- ----------
Benefit obligation at end of year ................. $2,151,100 $2,117,500
========== ==========
</TABLE>
Net periodic benefit cost included the following components for the year
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Components of net periodic benefit cost--
Service cost .......................... $103,600 $ 94,000 $123,000
Interest cost ......................... 144,000 142,200 140,000
-------- -------- --------
Net periodic benefit cost ............. $247,600 $236,200 $263,000
======== ======== ========
</TABLE>
F-43
<PAGE>
ALMA PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(2) EMPLOYEE BENEFIT PLANS AND POST-RETIREMENT BENEFITS (CONTINUED)
The following table reconciles the status of the accumulated
post-retirement benefits obligation as reflected on the statement of net assets
as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Active employees ....................... $1,939,800 $1,899,800
Retirees and eligible spouses .......... 211,200 217,700
---------- ----------
Unfunded status ........................ $2,151,000 $2,117,500
========== ==========
</TABLE>
The following measurement assumptions were used for measurement purposes:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Discount rate ............................ 7.0% 7.0% 7.5%
Health care cost rate .................... 7.1% 7.4% 8.0%
Prescription coverage cost rate .......... 8.5% 9.0% 10.0%
</TABLE>
The rates were assumed to gradually decrease to 5% by the year 2005 and
remain at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported.
To illustrate, increasing the assumed health care cost trend rate by one
percentage point would increase the accumulated post retirement benefits
obligation as of December 31, 1998 and 1997
by $280,000 and $284,000, respectively, and the aggregate of the service and
interest cost components of net post retirement benefits cost for each of the
three years then ended December 31, 1998 by $36,000, $34,800, and $43,800,
respectively.
(3) INCOME TAXES
The shareholders of the Parent have elected, under the provisions of
Subchapter S of the Internal Revenue Code, to have the income of the Company
included in the taxable income of the shareholders. As a result, the Company
and Parent are not liable for Federal or certain state income taxes unless the
S Corporation election is subsequently revoked. Accordingly, no provision for
Federal income taxes is included in the accompanying financial statements.
The accompanying statement of income reflects a provision for Michigan
Single Business tax and Michigan Intangible tax.
(4) ACCRUED LIABILITIES
Accrued liabilities consists of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Payroll, payroll taxes and fringe benefits .......... $1,377,000 $ 894,000
Warranties .......................................... 192,400 259,800
Workers' compensation ............................... 271,400 363,700
Environmental ....................................... 410,000 425,000
Other accrued liabilities ........................... 198,400 362,600
---------- ----------
$2,449,200 $2,305,100
========== ==========
</TABLE>
F-44
<PAGE>
ALMA PRODUCTS
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(5) TRANSACTIONS WITH RELATED PARTIES
The Company had sales of approximately $337,100, $1,302,200 and $3,639,000
during 1998, 1997 and 1996 to GPD, Inc., an affiliated company. The Company
also had a net payable with GPD, Inc. of approximately $54,600 as of December
31, 1998 and net receivables of $15,700 in 1997.
(6) SIGNIFICANT CUSTOMERS
The Company had two customers, which individually accounted for 10% or
more of net sales, with net sales of approximately $20,596,900 and $12,579,900,
respectively, in 1998, and $23,917,600 and $7,772,900, respectively, in 1997.
The Company also had receivables from these two customers amounting to
$2,361,100 and $2,387,929, respectively, at December 31, 1998 and $4,060,300
and $2,112,100, respectively, at December 31, 1997. In 1996, the Company had
one customer, which individually accounted for 10% or more of net sales, with
net sales of approximately, $36,650,000.
(7) CONTINGENCIES
Environmental Matters
The Company has received notices from the Michigan Department of Natural
Resources and the U.S. Environmental Protection Agency in connection with
environmental contamination at sites located in Michigan. As of December 31,
1998 and 1997 the Company has accrued approximately $410,000 and $425,000,
respectively, for costs yet to be incurred in connection with the cleanup of
the sites. While the Company believes it has made adequate provision for these
costs, changes in future cost estimates may nevertheless occur. In the opinion
of management, based upon its experience with these sites to date, the outcome
of these matters will not have a material adverse effect on the Company's
financial statements.
(8) OFFICER EMPLOYMENT CONTRACT AND RETIREMENT BENEFITS
The Company entered into an employment agreement with one of its officers
on December 20, 1997. The agreement provides for employment through December
31, 1998 as well as for pension and health care benefits continuing after the
end of the employment term. These benefits are earned and vested over the
duration of the employment contract. The present value of these benefits as of
December 31, 1998 is estimated at $616,000 and is included in accrued
post-retirement benefits and other in the accompanying balance sheet.
(9) SALE OF ALMA PRODUCT'S DIVISION
On March 22, 1999, Alma Piston Company sold the net operating assets of
the Alma Product's Division to Jordan Industries, Inc. for $84 million in cash
and the assumption of approximately $2 million in long term liabilities,
subject to certain future possible adjustments provided for in the related
contract.
F-45
<PAGE>
================================================================================
[GRAPHIC]
Jordan Industries, Inc.
$155,000,000
OFFER TO EXCHANGE SERIES D 103/8% SENIOR NOTES DUE 2007
FOR ALL OUTSTANDING SERIES C 103/8% SENIOR NOTES DUE 2007
-------------------------
PROSPECTUS
-------------------------
MAY 12, 1999
================================================================================
