ITEM 1. DESCRIPTION OF BUSINESS.
(a) General Development of the Business.
The JPM Company (the "Company") was organized September 30, 1968 as a recapitalization of a company originally founded in 1949 by Jay P. Mathias, father of the current Chairman of the Board of Directors and Chief Executive Officer, John H. Mathias and the current Vice Chairman, James P. Mathias. The Company is an independent manufacturer of cable assemblies and wire harnesses for original equipment manufacturers ("OEMs") and contract manufacturers ("CMs") in the telecommunications, networking, computer and business automation sectors of the global electronics industry.
The Company is headquartered in Lewisburg, Pennsylvania and operates facilities in Lewisburg and Beaver Springs, Pennsylvania; San Jose, California; Leuchtenberg, Germany; Bela, Czech Republic; Guadalajara, Mexico; Toronto and Calgary, Canada; and Sao Paulo, Brazil.
In June 1997, the Company merged with Denron, Inc. ("Denron"), a manufacturer of cable assemblies and wire harnesses in San Jose, California, in a transaction accounted for as a pooling of interests, by issuing 791,170 shares of Common Stock in exchange for all of the outstanding stock of Denron. This 10-K reflects all historical and current information of the combined companies.
In August 1997, the Company, through its subsidiaries JPM Deutschland and JPM Czech Republic, acquired substantially all of the assets of Corma Elektrotechnische Productions GmbH, Leuchtenberg, Germany and Corma spol s. r. o., Bor, the Czech Republic (collectively "Corma") for cash in the amount of approximately $1,700,000.
In June 1998, the Company purchased all of the outstanding common stock of Antrum Interface 725, Ltd. ("Antrum"), a manufacturer of cable assemblies and wire harnesses with facilities in Toronto and Calgary, Canada for cash consideration of approximately $16,500,000. Additional cash consideration of $4,500,000 was paid in September 2000 pursuant to an earn out arrangement in the stock purchase agreement.
In November 1998, the Company purchased 60% of AF Datalink Equipmentos de Telecomunicacaoes, Ltda., a manufacturer of cable assemblies and wire harnesses in Sao Paulo, Brazil for $6,000,000 in cash, $2,000,000 notes payable in one year and 256,000 shares of JPM stock worth $2,500,000 at the time of purchase.
(b) Financial Information About Industry Segments.
All revenue of the Company is generated from a single business segment: the manufacture of cable assemblies and wire harnesses.
(c) Narrative Description of Business.
The Company is a leading independent manufacturer of cable assemblies and wire harnesses for OEMs and CMs in the telecommunications, networking, computer and business automation sectors of the global electronics industry. The Company manufactures a wide spectrum of products which transfer power or transmit voice, data or video within the OEMs' or CMs' equipment or to external connections. Principal applications of the Company's products include computers, computer peripherals, network routers and switches, self-service terminals (including automatic teller machines), PBX switching equipment, cellular digital switching equipment, industrial controls and medical electronic equipment. Substantially all of the Company's business is contract manufacture of cable assemblies and wire harnesses. By integrating its design and engineering capabilities with its customers' product development activities, the Company customizes its products to satisfy its customers' particular needs in a price-competitive manner.
Consistent with its marketing strategy, a substantial portion of the Company's products are sold to a limited number of customers. The Company's strategy is to focus on industry leaders in the telecommunications, networking, computer and business automation markets with whom it can develop mutually beneficial relationships. The Company continuously seeks to expand the number of products it supplies to existing customers, as well as to develop similar relationships with selected new OEM or CM customers within its targeted markets. Because of the complexity of these relationships, sales cycles can be long, sometimes taking up to 18 months or more to develop. The Company's operating results can fluctuate significantly both annually and quarterly because of customers' product life cycles and new product introductions by new and existing customers.
To reduce costs, enhance responsiveness to customers and improve manufacturing processes and systems, the Company streamlined its management structure and achieved ISO 9002 certification in its Pennsylvania, and California manufacturing facilities during fiscal 1993 and 1994. In addition, in those years the Company implemented a training program designed to provide technical, quality and problem-solving skills to all employees and to upgrade and to expand the Company's management information systems. All of the Company's subsequent acquisitions have also been ISO 9001 or 9002 certified and implemented training programs as described above.
(d) Manufacturing.
The Company manufactures substantially all of its products on a build-to-order basis and to the forecasts of its customers. The Company operates manufacturing facilities in Lewisburg and Beaver Springs, Pennsylvania; Toronto and Calgary, Canada; San Jose, California; Guadalajara, Mexico; Sao Paulo, Brazil; and Bela, Czech Republic and has manufacturing services arrangements with companies in Taipei, Taiwan; Northern Ireland and in the People's Republic of China. In October 2000, the Company closed its manufacturing facility in Columbus, Ohio. In November 2000, the Company made the decision to cease manufacturing at the San Jose facility and convert that site to a sales, distribution and product development facility. Also in November 2000, the Company entered into a lease agreement to expand its manufacturing space in Toronto from 45,000 sq. ft. to 120,000 sq. ft. The new facility is expected to be operational in January 2001. During 1999, the Company increased its manufacturing capacity with the construction of new production facilities in Bela, Czech Republic (40,000 sq. ft.) and Guadalajara, Mexico (60,000 sq. ft.). Each of the Company's manufacturing facilities is capable of producing most of the Company's products. During 1999, the Company initiated projects to add new production capabilites at its Beaver Springs and Guadalajara manufacturing facilities. In Beaver Springs, the Company installed equipment for the production of single mode fiber optic cable. This project was operational during fiscal 2000. In Guadalajara, the Company implemented the production of high performance copper cable. This project was completed during 2000 and the Company commenced the process of obtaining UL and customer approvals. This program is expected to be operational during the year ended September 30, 2001. The Company maintains rapid prototype capabilities at each of its plants for designing and developing customized products for its customers.
The vast majority of the Company's products are manufactured by cross-trained, customer-focused teams working in cells or on continuous flow manufacturing lines. This team approach enhances quality, responsiveness and flexibility, permitting the Company to meet customer requirements for shorter lead times and greater scheduling flexibility. The teams support customer just-in-time inventory shipment requirements, including bin replenishment programs, and allow direct shipments to installation sites with cables packed in order of use for ease of installation. Each team prioritizes its own workload, balancing issues of set-up, economic lot sizing, operator skills availability, equipment scheduling and material availability with customer delivery requirements. Cross-training of employees is an integral feature of this team approach. All members of the production teams receive quality skills training focusing on the benefits of statistical process control techniques that may be applied on critical processes in their respective work areas. Manufacturing engineering teams also evaluate process capabilities through statistical data analysis and capability studies.
The Company emphasizes quality assurance systems throughout its operations. Each facility is Underwriters' Laboratory listed, approved by the Canadian Standards Association and ISO 9000 certified by an independent accreditation organization. ISO 9000 is part of a standard developed by the International Organization for Standardization, a worldwide federation of national standards bodies which establishes a framework for structuring and documenting operations.
The Company is subject to a variety of foreign, federal, state and local laws, rules and regulations relating to, among other things, the health and safety of its work force, and the environmental standards pertaining to air emissions, discharges, handling, storage, and transportation of waste and other materials. The Company believes that it is currently in compliance in all material respects with such laws, rules and regulations.
(e) Marketing.
The Company's sales and marketing efforts are focused on identifying and satisfying customer needs and supporting the customer relationship on an ongoing basis. The Company's sales and marketing efforts are focused on its major customers through its Global Business Development Group and its Global Business Directors. The Company seeks to develop extensive working relationships with its customers through customer focus teams comprised of sales, quality assurance, engineering, purchasing, and manufacturing personnel and customer service specialists working collectively to focus on customer satisfaction. To strengthen its market penetration and customer relationships in key geographic regions, the Company establishes customer support teams, consisting of sales personnel, design engineers and production planners. The teams enable the Company to assist customers in the design and redesign of cable assemblies and wire harnesses and provide additional production planning and control services at the customer's site, thereby reinforcing and enhancing the Company's responsiveness to the customer's needs and providing a greater level of support.
The Company's sales cycle with respect to new customers normally is an extended process pursuant to which the OEM or CM qualifies the Company as a supplier. This process typically involves exchanges of information through written surveys, presentations, site visits, formal audits, sample quotations and first piece builds. At the same time, the Company conducts research regarding the OEM's and CM's organization and seeks to establish contacts at multiple levels within that organization. This cycle can take 18 months or more from the initial contact to the first production order. For existing customers, the Company seeks to expand its sales through multi-level relationships with design engineers and other decision-makers within the OEM's or CM's organization. During 1999 and 2000, the Company increased its engineering staff and expanded its product development efforts to provide solutions to customer requirements and maximize use of the Company's intellectual property. The Company filed its first patent application in October 1999.
The Company's sales and marketing programs are directed by Senior Vice Presidents of Global Business Development who are responsible for the growth of the customer base and acquisition of new customers. They manage sales executives who are responsible for the growth and support of individual customers or industry segments. The sales executives are supported by customer service specialists in the Company's nine manufacturing facilities and application and design engineers who provide product development and design engineering support locally to the Company's customers.
During the fiscal year ended September 30, 2000, sales of the Company's products to Nortel, IBM, Hewlett-Packard and Lucent represented 35%, 13%, 10% and 10%, respectively, of the Company's total sales. During the fiscal year ended September 30, 1999, sales of the Company's products to Nortel, IBM, Hewlett-Packard and Lucent represented 28%, 14%, 11% and 11%, respectively, of the Company's total sales. During the fiscal year ended September 30, 1998, sales of the Company's products to Nortel, IBM, Hewlett-Packard and Diebold represented 21%, 16%, 13% and 11% respectively, of the Company's total sales.
During the last three fiscal years, sales to customers in the telecommunications, networking, computer and business automation sectors of the global electronics industry represented the following percentages of the Company's net sales:
(f) Competition.
The Company operates in an international market characterized by intense competition. While the Company does not believe that any of its competitors provides the breadth of product line and services with the quality and at the prices offered by the Company, competition within particular portions of the Company's business comes from a broad range of companies. Several of the Company's competitors are much larger and have greater financial, management and marketing resources than the Company. In addition to other independent manufacturers of cable assemblies and wire harnesses, the Company's competitors include contract manufacturers and manufacturers who are primarily connector manufacturers and who compete primarily on the basis of having certain proprietary connector technology. Competition within the industry is primarily based on the combination of price, quality, production capacity, breadth of product line, engineering support capability, local support capability, delivery, packaging, systems support and financial strength.
(g) Backlog.
The Company estimates its backlog at September 30, 2000 and 1999 was approximately $85,469,001 and $68,718,000 respectively. In addition to firm orders, the Company includes in its backlog non-binding, extended purchase orders and contractual arrangements in which final authorization and shipment dates have not yet been specified. Substantially all of the September 30, 2000 backlog is expected to be shipped during the following six months. Because of customers' and the industry's movement to just-in-time and pull systems, the Company's backlog at any particular date is not necessarily representative of the Company's level of business to be expected in the ensuing period.
(h) Employees.
As of September 30, 2000, the Company had approximately 3,692 full-time employees, including approximately 2,876 production operators, 403 in engineering and other manufacturing support functions, 145 in executive, finance and administrative functions, 75 in sales and customer service functions, and 193 in materials management functions. The Lewisburg, Guadalajara, Beaver Springs, Columbus, Toronto, Calgary, San Jose, Bela, Leuchtenberg and Sao Paulo facilities have approximately 591, 1,641, 329, 65, 509, 81, 212, 162, 15 and 85 full-time employees, respectively. At the Guadalajara facility, approximately 108 full-time and 642 temporary production employees are members of Confederacion de Trabajadores Mexicanos (the Confederation of Mexican Workers) and are covered by a collective bargaining agreement that is negotiated annually. None of the Company's other employees are union members or are covered by a collective bargaining agreement. The Columbus facility was closed in October 2000. The Company has never experienced a labor strike or other labor-related work stoppage. Periodically, during times of increased production, the Company employs temporary employees, who may constitute 10-25% of the total employees at a facility. The Company considers its relations with its employees to be good.
(i) Proprietary Information.
The Company relies on trade secrets and other unpatented proprietary information in its operations. While the Company believes that it has developed certain proprietary production methods, there can be no assurance that others will not develop similar or better methods. The Company's senior management and all employees involved in product design and development have entered into confidentiality agreements, and the Company seeks to enter into such agreements with its customers and suppliers as it deems appropriate. There can be no assurance, however, that such agreements will effectively prevent disclosure of the Company's confidential information.
ITEM 2.
ITEM 2. PROPERTIES
The Company's facilities are ISO 9002 certified with the exception of the Germany and Czech Republic facilities which are ISO 9001 certified and the Columbus, OH facility, which was closed in December 2000. In January 2001, the Company ceased manufacturing operations at its San Jose facility and converted the location to a sales, distribution and product development facility. Although management of the Company believes that its facilities are currently adequate to meet its requirements, the Company may require additional manufacturing capacity depending upon its future rate of growth.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings nor, to the Company's knowledge, is any material legal proceeding threatened.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS COMMON STOCK PRICE RANGE
The Company's Common Stock is listed on The NASDAQ Stock Market's National Market ("NASDAQ") and trades under the symbol "JPMX". The following table presents the high and low closing prices for the Common Stock for the fiscal year ended September 30, 2000 and for the fiscal year ended September 30, 1999, as reported by NASDAQ.
On December 11, 2000 there were approximately 251 holders of record of the Company's Common Stock and approximately 2,707 beneficial holders.
DIVIDEND POLICY
The Company has never paid dividends on shares of its Common Stock. The Company intends to retain future earnings for use in its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The payment of dividends in the future, if any, will be determined by the Board of Directors of the Company and will depend on the Company's financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data of the Company for each fiscal year of the five year period ended September 30, 2000, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements included elsewhere herein.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading independent manufacturer of cable assemblies and wire harnesses for OEMs and CMs in the telecommunications, networking, computer and business automation sectors of the global electronics industry. The Company manufactures a wide variety of products which transfer power or transmit voice, data or video within the customers' equipment or to external connections. Principal applications of the Company's products include computers, computer peripherals, network routers and switches, self-service terminals (including automatic teller machines), PBX switching equipment, cellular digital switching equipment, industrial controls and medical electronic equipment. Substantially all of the Company's business is contract manufacture of cable assemblies and wire harnesses. By integrating its design and engineering capabilities with its customers' product development activities, the Company customizes its products to satisfy its customers' particular needs in a price-competitive manner.
Consistent with its marketing strategy, a substantial portion of the Company's products are sold to a limited number of customers. The Company's strategy is to focus on industry leaders in the telecommunications, networking, computer and business automation markets with whom it can develop mutually beneficial relationships. The Company continuously seeks to expand the number of products it supplies to existing customers, as well as to develop similar relationships with selected new OEM and CM customers within its targeted markets. Because of the complexity of these relationships, sales cycles can be extremely long, sometimes taking up to 18 months or more to develop. The Company's operating results can fluctuate significantly both annually and quarterly because of customers' product life cycles and new product introductions by new and existing customers.
The Company's gross margins are mainly impacted by new customer and new product start-up costs, raw material acquisition costs, product mix and manufacturing productivity. New customer and product start-up costs, which are typically incurred and expensed prior to the recognition of associated revenue, include engineering costs related to product and process development, manufacture and approval of prototypes and training of production employees.
The following table presents, in thousands of dollars and as a percentage of net sales, certain selected consolidated financial data for each of the three fiscal years completed September 30, 2000, 1999 and 1998:
COMPARISON OF FISCAL YEAR 2000 WITH FISCAL YEAR 1999 (Amounts in thousands)
Net sales for fiscal 2000 increased by $7,371, or 4.4%, as compared to fiscal 1999. The increase was attributable to increased sales to customers in the telecommunications market partially offset by reduced sales to customers in the computer market. The amount of the Company's sales to its customers in the computer market is directly affected by the timing of the introduction of new products by the customers and the product life cycle of the customers' products.
Gross profit decreased by $15,106, or 54.3% in fiscal 2000 as compared to fiscal 1999. Gross profit was 7.3% and 16.7% of net sales in 2000 and 1999, respectively.
The decrease in gross profit as a percentage of sales was attributable to a number of factors including: (a) the commencement of operations at new plants in Mexico and the Czech Republic; (b) management transitions at several significant plants during fiscal 2000; (c) implementation of enterprise resource planning systems in Mexico and San Jose, and (d) a change in significant customer programs from a build-to-order to build-to-forecast supply replenishment model. These factors resulted in operational inefficiencies contributing to lower gross margins. The combination of new computer systems, new operational management and a rapidly changing supply chain process caused inventory and accounts receivable levels to increase during the year. The Company recorded expenses of $3,573 in 2000 associated with increased inventory valuation reserves. Increased sales to contract manufacturers rather than original equipment manufacturers resulted in pricing pressures further reducing the gross margins.
In addition, the market and customer demand shift resulted in increased demand at the Company's higher cost Canadian and United States operations and available capacity at the Company's lower cost Mexican facilities. As a result of the capacity imbalance, the Company incurred costs associated with product transfer, hiring and training new employees, increased overtime and expedited logistics expenses that had a negative impact on gross profit during 2000.
Selling, general and administrative ("SG&A") expenses for fiscal 2000 increased $4,789, or 32.5%, as compared to fiscal 1999. The increase in dollars in fiscal 2000 was primarily attributable to increased accounts receivable reserves of $1,268, and increased professional fees and personnel costs.
Fiscal 2000 included a charge of $2,530 for the write-down of the Company's investment in the PeopleSoft Global Manufacturing System implementation costs as a result of the decision to cease manufacturing at its San Jose facility. Fiscal 1999 included a charge of $178 for additional plant shutdown expense related to the South Carolina manufacturing facility.
Interest expense for fiscal 2000 increased $3,071, or 78.5%, as compared to fiscal 1999. The increase is primarily attributable to the borrowings related to funding the operating losses and increases in working capital during the year, combined with higher interest rates in fiscal 2000.
The Company had an income tax provision of $1,342 despite a loss before income taxes of $16, 746 due to tax provisions required on certain profitable foreign operations and the provision of a valuation allowance against certain deferred tax assets.
COMPARISON OF FISCAL YEAR 1999 WITH FISCAL YEAR 1998
Net sales for fiscal 1999 increased by $37,963, or 29.6%, as compared to fiscal 1998. This increase was primarily the result of the inclusion of sales of Antrum Interface 725, Ltd. ("Antrum")for the whole year in fiscal 1999 as compared to the period in fiscal 1998 subsequent to its acquisition in June 1998; the inclusion of 11 months of sales of AF Datalink Equipamentos de Telecomunicacao, Ltda. ("Datalink"), which was acquired in November 1998; and increased sales growth from increased volumes with existing customers. The additional sales of the acquisitions amounted to $26,806 in fiscal 1999. However, since the Company determines the site to manufacture products for its customers on a worldwide basis, this increase in sales also reflects a portion of sales, and gross margins, transferred to the acquired operations from pre-existing JPM operations.
Gross profit increased by $6,664, or 31.5%, in fiscal 1999 as compared to fiscal 1998. Gross profit was 16.7% and 16.5% of net sales in 1999 and 1998, respectively.
Gross profit as a percentage of net sales in 1999 was negatively impacted by costs associated with product realignment between the Company's manufacturing facilities during the fiscal year and reduced revenues during the fourth quarter. The Company maintained personnel and other costs during the fourth quarter despite the reduced revenues, to maintain production capacity for increased demand in the first quarter of fiscal 2000.
Selling, general and administrative ("SG&A") expenses for fiscal 1999 increased $1,394, or 10.4%, as compared to fiscal 1998. The increase in dollars in fiscal 1999 was primarily attributable to increased goodwill amortization and personnel costs. The decrease in SG&A as a percentage of net sales was primarily due to greater absorption of SG&A as a result of increased sales.
SG&A expenses for fiscal 1999 include a charge of $178 for additional plant shutdown expense related to the South Carolina manufacturing facility. The plant shutdown expense for fiscal 1998 was $1,412. SG&A expenses in fiscal 1998 also include $400 in expenses related to the Company's cancelled secondary offering of common stock.
Interest expense for fiscal 1999 increased $2,159, or 123.2%, as compared to fiscal 1998. The increase is primarily attributable to borrowings for the acquisitions of Antrum in June 1998 and Datalink in November 1998, construction financing for new manufacturing facilities in the Czech Republic and Mexico, new ERP system and borrowings related to increases in accounts receivable and inventory.
The Company's effective income tax rate for fiscal 1999 was 36.1% as compared to 40.2% for fiscal 1998. The decrease in the effective tax rate was primarily attributable to increased profits from the Company's foreign operations which are taxed at rates lower than combined federal and state income tax rates in the United States, partially offset by an increase in non-deductible charges for goodwill amortization.
Net income for fiscal 1999 increased $2,726, or 106.1%, to $5,296, or $0.70 per diluted share, as compared to net income of $2,570, or $0.35 per diluted share, in fiscal 1998. The increase is the result of the increased revenues in fiscal 1999 and pre-tax charges of $1,812 in fiscal 1998 related to the closing of the South Carolina manufacturing facility and cancelled secondary offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities during 2000, primarily to fund losses, was $13,593. Net cash provided by operating activities in 1999 was $6,259. Working capital at September 30, 2000 was $36,642, as compared to $36,292 at September 30, 1999. During 2000 and 1999, the Company expended $6,391 and $10,610, respectively, for capital expenditures mostly for new facilities and machinery and equipment in Mexico and the Czech Republic.
Effective September 16, 2000, the Company amended its bank revolving line of credit to increase the facility by $5,000 to a total of $75,000. This amendment also waived any loan defaults existing at the time and accelerated the due date of all outstanding funds to December 31, 2000. Borrowings are collateralized by substantially all of the Company's assets. The interest rate on the line is the bank's prime lending rate, 9.5% at September 30, 2000, plus 3.0% or a LIBOR based rate, approximately 6.62% at September 30, 2000, plus 3.75%. The commitment fee on the unused portion of the line is 0.5%. At September 30, 2000, the Company had $4,540 available under the bank agreement and was in compliance with all provisions of its loan agreement. The weighted average interest rate at September 30, 2000, on outstanding borrowings under the line of credit was 10.66%.
On December 22, 2000 and January 23, 2001, the Company further amended its loan agreement. These amendments extend the due date of all outstanding funds to December 31, 2001, and include an interest rate at the banks' prime lending rate plus 1.0% or, at the Company's election, a LIBOR based rate plus 3.0%. The commitment fee on the unused portion of the line is 0.5%. The amendment requires mandatory principal payments of $50 per month for January through March 2001 and $150 per month for April through December 2001. In addition, there are certain other principal payments required should the Company sell certain assets or collect certain accounts receivable. The amendment includes a number of reporting requirements and financial covenants commencing January 2001, based on monthly net income or net loss projections and three-month rolling earnings before interest, taxes, depreciation and amortization ("EBITDA") projections. Because the financial convenants are based on monthly computations with look-back and look-forward provisions, the Company believes there is doubt that it will be able to remain in compliance with the debt covenants through October 1, 2001, and as a result, substantially all of the Company's debt would be callable. If the Company does not remain in compliance with the debt covenants, it would expect to negotiate with its bank group to amend the loan agreement. At December 31, 2000, the Company had $1,878 available under the bank agreement.
Debt issuance costs to be paid in fiscal 2001, relating to the December 22, 2000 and other earlier fiscal 2000 amendments total $1,800 and are payable as follows: $100 increments on December 22, 2000 and June 30, and September 30, 2001; $250 on September 30, 2001; and $1,250 on December 31, 2001. The $100 increments due on June 30, and September 30, 2001 are to be waived if the bank line of credit is paid in full prior to those dates.
The Company expects to refinance its bank line of credit by December 31, 2001. Should the Company not successfully refinance its bank line of credit by December 31, 2001, the Company would not be able to make the debt payment terms and would expect to negotiate with its bank group to amend and extend the loan agreement.
The Company believes its cash flow from operations and funds available from its line of credit will be sufficient to satisfy working capital requirements and capital expenditure needs through at least October 1, 2001. The Company expects capital expenditures to be approximately $3,600 for the fiscal year ended September 30, 2001.
The Company remains highly leveraged and as a result, access to additional funding sources is limited. If the Company's operating results deterioriate, or product sales and margins do not improve, or the Company is not in compliance with its covenants, or the Company is not successful in refinancing its bank line of credit, the Company could be in default under its loan agreement and any such default, not resolved, could lead to curtailment of certain of its business operations, sale of certain assets or the commencement of insolvency proceedings by its creditors.
In July 2000, the company engaged Lehman Brothers, Inc., an investment banking firm, to review strategic alternatives for financing and partnership. This process has resulted in expressions of interest but there are no assurances that such efforts will result in a financing or sales transaction.
RISK FACTORS
The industry segment in which the Company competes is subject to intense competitive pressures. The following sets forth some of the risks and uncertainties which the Company faces.
Highly Leveraged and Debt Compliance
The Company expects to refinance its bank line of credit by December 31, 2001. However, the Company is highly leveraged and as a result, access to additional funding sources is limited. Also, the loan agreement as amended contains financial covenants based on monthly computations with look-back and look-forward provisions. The Company believes there is doubt that it will remain in compliance with the debt covenants through October 1, 2001. See discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources.
Concentration of Revenues from Major Customers
The Company's top four customers account for 68% of the Company's 2000 consolidated revenues. Loss or disruption of business with any one of these customers could have a material adverse effect on the Company's business, financial condition and results of operations.
Possible Fluctuations in Future Operating Results
The Company continuously seeks to expand the number of products it supplies to existing customers, as well as to develop similar relationships with new customers. Because of the complexity of these relationships, sales cycles can be long, sometimes taking up to 18 months or more to develop. As the Company becomes a qualified supplier for new products and as its customers' products progress through their life cycles, the Company's operating results can fluctuate significantly both annually and quarterly.
Limited Number of Suppliers
Historically, the Company has purchased a significant portion of its wire, cable and connectors from a limited number of suppliers. Although the Company believes that its raw materials are generally available from several domestic and international sources, customers often specify that the Company purchase certain components from particular manufacturers. Accordingly, the loss of any of the Company's key suppliers could have a material adverse impact on the Company.
International Operations
Much of the Company's operations are conducted outside of the United States and a large percentage of costs of manufacturing is transacted in local currencies. As a result, the Company's international results of operations are subject to local economic environments and foreign exchange rate fluctuations.
New ERP Computer Software System
On January 7, 1999, the Company announced the selection of PeopleSoft version 7.5 Global Manufacturing System(the "ERP system") which was intended to facilitate the integration of its worldwide manufacturing facilities as well as remote sales, engineering, and distribution locations. The ERP system includes Manufacturing, Distribution, Financial, and Human Resource Management modules, including Performance Measurement functionality.
Through September 30, 2000, the Company has incurred and capitalized costs of approximately $5,700 in connection with the implementation of the ERP system. During the fourth quarter of fiscal 2000, the Company recorded a $2,530 write-down of its investment in ERP implementation due to the decision to cease manufacturing at its San Jose facility. The Company has no current plans for further implementation of the ERP manufacturing module.
Market Risk Discussion
The Company's financial results are affected by foreign currency exchange rate fluctuations. The Company operates manufacturing facilities in four foreign countries and has a number of non-owned foreign manufacturing relationships. The Company's sales and raw material purchases are generally denominated in U.S. dollars, or are related to the U.S. dollar through formula pricing. Since certain foreign manufacturing costs, principally labor, are in foreign currencies, a strengthening U.S. dollar causes the Company's foreign currency denominated costs to decrease while a weakening U.S. dollar has an unfavorable effect on costs denominated in foreign currencies.
This foreign exchange effect cannot be precisely isolated since many other factors affect the Company's overall sales and earnings. These factors include product offerings and pricing policies of the Company and its competition, whether the competition is foreign or U.S. based, changes in technology and local and worldwide economic conditions.
The Company has not historically engaged in foreign currency hedging activities. However, as the Company continues to grow, it expects to utilize hedging techniques, including the use of foreign currency forward contracts and options, designed to mitigate the effect of foreign currency fluctuations on its international operations and net investments. The Company does not speculate in foreign currencies or derivative financial instruments and designed hedging techniques do not increase the Company's exposure to foreign exchange rate fluctuations.
The Company is exposed to changes in interest rates primarily due to its borrowing and investing activities which include primarily short and long-term debt used to maintain liquidity and fund its business operations. The Company has two interest rate swap agreements with commercial banks to effectively fix its interest rates, under certain conditions, on LIBOR based borrowings to the fixed swap rates plus 3.75% at September 30, 2000, or 3.0% after giving effect to the December 22, 2000 loan agreement amendment. The first swap agreement, dated August 18, 1999 is for a notional $7,500, has a fixed swap rate of 5.65% and expires August, 20, 2004. The swap is applicable when LIBOR based rates are less than 6.75%. The second swap agreement, dated April 4, 2000, is for a notional $20,000, has a fixed swap rate of 6.55% and expires April 6, 2005, unless terminated by the counterparty on April 8, 2002. At September 30, 2000 the swaps require the counterparty to make payments to the Company and the approximate termination value of the swaps is a benefit to the Company of $63.
Recent Accounting Pronouncements
On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and if it is, the type of hedge transaction. The Company has adopted SFAS 133 effective October 1, 2000. There are no transactions that qualify for or will receive hedge accounting. Accordingly, the Company expects to record a non-cash charge to income of approximately $800 in the first quarter of fiscal 2001 related to the change in fair value of its interest rate swap agreements. In addition, if further reductions in interest rates occur in fiscal 2001, the Company expects to record additional non-cash losses on the swaps.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101, as amended, summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company expects that the adoption of SAB 101 will not have a material impact on its financial position or results of operations.
In March 2000, FASB issused FASB Interpretation (FIN) 44, "Accounting for Certain Transactions involving Stock Compensation", which clarifies the application of Accounting Principles Board Opinion 25 for certain issues. The interpretation was generally effective July 1, 2000, except for certain provisions which were effective after December 15, 1998. The adoption of FIN 44 did not have a material impact on the Company's financial statements.
In October 2000, the Emerging Issues Task Force (EITF) of FASB issued EITF 00-10, "Accounting for Shipping and Handling Fees and Costs", and EITF 00-14, "Accounting for Certain Sales Incentives". EITF 00-10 addresses the income statement classification for shipping and handling fees and costs. EITF 00-14 addresses recognition, measurement, and income statement classification for certain sales incentives including discounts, coupons, rebates, and free products or services. The Company is currently examining its practices in light of this interpretive guidance and does not expect a material impact from the application of EITF 00-10 and EITF 00-14.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto listed in the accompanying index to financial statements (Item 14) are filed as part of this Annual Report and incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in the Company's 2001 Proxy Statement under the caption "Election of Directors" and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in the Company's 2001 Proxy Statement under the caption "Compensation of Executive Officers and Directors" and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is contained in the Company's 2001 Proxy Statement under the caption "Beneficial Ownership of Capital Stock" and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The response to this item is contained in the Company's 2001 Proxy Statement under the caption "Certain Relationships and Related Party Transactions" and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
-Report of Independent Accountants
-Consolidated Balance Sheet as of September 30, 2000 and 1999.
-Consolidated Statement of Operations for the years ended September 30, 2000, 1999 and 1998.
-Consolidated Statement of Shareholders' Equity for the years ended September 30, 2000, 1999 and 1998.
-Consolidated Statement of Cash Flows for the years ended September 30, 2000, 1999 and 1998.
-Notes to Consolidated Financial Statements
2. Financial Statement Schedules
-Schedule II-Valuation and Qualifying Accounts.
Schedules other than those listed above have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
3. Exhibits Required to be Filed by Item 601 of Regulation S-K.
The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Annual Report on Form 10-K unless incorporated by reference as indicated.
(b) Reports on Form 8-K:
On September 21, 2000, the Company announced the Company had secured an additional $5 million in credit availability under its bank revolving credit facility. The Company had been operating under a temporary waiver of loan convenants. With the new funds, the banks extended the waiver until December 31, 2000, which is also the termination of the revised credit facility.
SIGNATURES
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE JPM COMPANY (Registrant)
BY: /s/ Kevin J. Bratton BY: /s/ John H. Mathias ----------------------------- -------------------------- Kevin J. Bratton John H. Mathias Chief Financial Officer Chairman of the Board and (Principal Financial Officer) Chief Executive Officer (Principal Executive Officer)
Date January 24, 2001 January 24, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of The JPM Company
In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a) (1) on page 15 present fairly, in all material respects, the financial position of The JPM Company and its subsidiaries (the "Company") at September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14 (a) (2) on page 16 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company modified its debt agreement on December 22, 2000 and January 23, 2001. The Company has concluded it may not be able to remain in compliance through October 1, 2001, with certain of the covenants included in the modified debt agreement, and as a result, substantially all of the Company's debt would be callable. Accordingly, substantial doubt exists about the Company's ability to continue as a going concern. Management's plans in regard to this matter are also discussed in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Philadelphia, PA January 24, 2001
THE JPM COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THE JPM COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands except per share data)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The JPM Company (the "Company") is an independent manufacturer of cable assemblies and wire harnesses for original equipment manufacturers in the telecommunications, networking, computer and business automation sectors of the global electronics industry.
A substantial portion of the Company's products are sold to a limited number of customers. Accordingly, a significant decrease in business from, or the loss of, any major customer would have a material adverse effect on the Company. The Company continuously seeks to expand the number of products it supplies to existing customers, as well as to develop similar relationships with new customers. Because of the complexity of these relationships, sales cycles can be long, sometimes taking up to 18 months or more to develop. As the Company becomes a qualified supplier for new products and as its customers' products progress through their life cycles, the Company's operating results can fluctuate significantly both annually and quarterly.
A summary of the Company's significant accounting policies follows:
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
Cash and cash equivalents
Cash and cash equivalents represent cash and highly liquid short-term investments with original maturities of three months or less.
Inventories
Inventories are valued at the lower of cost or market as determined on the first-in, first-out basis. Cost includes raw materials, direct labor and manufacturing overhead. The Company generally provides reserves for inventory considered to be in excess of the previous 12 months of usage or sale, as well as inventory in excess of forecasted future demand.
Property, plant and equipment
Property, plant and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the respective assets.
Revenue recognition policy
Sales are recorded upon shipment of product. Provision is made for returns and allowances, and for estimated warranty costs, in the period of sale.
Long-lived and intangible assets
Assets and liabilities acquired in connection with business combinations accounted for under the purchase method are recorded at their respective fair values. Deferred taxes have been recorded to the extent of differences between the fair value and the tax basis of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of the net assets acquired is amortized on a straight-line basis over 20 years. Intangible assets include the ISO 9002 certification of an acquired plant, which is being amortized on a straight-line basis over five years.
The carrying value of long-lived assets and certain identifiable intangible assets will be evaluated whenever changes in circumstances indicate the carrying amount of such assets may not be recoverable. In performing such review for recoverability, the Company will compare the expected future cash flows to the carrying value of long-lived assets and identifiable intangibles. In addition, on a quarterly basis, the carrying value of the excess of cost over fair value of net assets acquired is subject to a separate evaluation.
Foreign currency translation
The Company has determined that the U.S. dollar is the functional currency of its Mexican operations. Foreign currency inventories and property, plant and equipment are remeasured into U.S. dollars at historical rates; all other foreign currency assets and liabilities are remeasured at year-end exchange rates. Income and expenses are remeasured at average rates prevailing during the year, except for expenses related to inventories and property, plant and equipment, which are remeasured at historical rates. Exchange gains and losses resulting from remeasurement are included in earnings and amounted to gains of $281, $17, and $52 for fiscal 2000, 1999 and 1998, respectively.
For all other foreign subsidiaries the Company has determined the local currency is the functional currency. Therefore, assets and liabilities are translated into U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates prevailing during the year. Translation adjustments for these subsidiaries are accumulated in a separate component of shareholders' equity.
Earnings per common share
The difference between the basic average number of shares outstanding and the diluted average number of shares outstanding is due to the treasury stock method calculation of the impact of unexercised stock options granted under the Company's stock option plans.
Stock based compensation
Statement of Financial Accounting Standards No.123, "Accounting for Stock Based Compensation" ("SFAS 123") defines a fair value based method of accounting for employee stock options or other similar equity instruments. Companies must either adopt the fair value method or disclose the pro forma income statement effects in their financial statements. The Company has elected to disclose the pro forma income statement effects of SFAS 123; therefore, SFAS 123 does not affect the Company's financial position or results of operations.
Recent accounting pronouncements
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (October 1, 2000 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and if it is, the type of hedge transaction. The Company has adopted SFAS 133 effective October 1, 2000. There are no transactions that qualify for or will receive hedge accounting. Accordingly, the Company expects to record a non-cash charge to income of approximately $800 in the first quarter of fiscal 2001 related to the change in fair value of its interest rate swap agreements. In addition, if further reductions in interest rates occur in fiscal 2001, the Company expects to record additional non-cash losses on the swaps.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101, as amended, summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company expects that the adoption of SAB 101 will not have a material effect on its financial position or results of operations.
In March 2000, FASB issused FASB Interpretation (FIN) 44, "Accounting for Certain Transactions involving Stock Compensation", which clarifies the application of Accounting Principles Board Opinion 25 for certain issues. The interpretation was generally effective July 1, 2000, except for certain provisions which were effective after December 15, 1998. The adoption of FIN 44 did not have a material impact on the Company's financial statements.
In October 2000, the Emerging Issues Task Force (EITF) of FASB issued EITF 00-10, "Accounting for Shipping and Handling Fees and Costs", and EITF 00-14, "Accounting for Certain Sales Incentives". EITF 00-10 addresses the income statement classification for shipping and handling fees and costs. EITF 00-14 addresses recognition, measurement, and income statement classification for certain sales incentives including discounts, coupons, rebates, and free products or services. The Company is currently examining its practices in light of this interpretive guidance and does not expect a material impact from the application of EITF 00-10 and EITF 00-14.
Reclassifications
Certain prior year balances have been reclassified for comparative purposes.
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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS
In November 1998, the Company acquired 60% of the stock of AF Datalink Equipamentos de Telecomunicacao, Ltda. ("Datalink"), a Sao Paulo, Brazil based manufacturer of wire harnesses and cable assemblies for $6,000 in cash, $2,500 in stock (256,000 shares of JPM stock)and one-year notes for $2,000 with interest at 8.75%. The transaction has been accounted for as a purchase in accordance with APB 16.
In June 1998, the Company acquired all of the stock of Antrum Interface 725, Ltd. ("Antrum"), manufacturers and assemblers of cable and wire harnesses, for cash consideration of approximately $16,500. The stock purchase agreement also provided for contingent cash consideration of up to $4,500 based on achievement of operating profit targets, as defined, for the period from June 1, 1997 through November 30, 2000. The contingent cash consideration of $4,500 was paid in September 2000 and has been treated as additional purchase price. The transaction has been accounted for as a purchase in accordance with APB 16.
The results of operations on an unaudited pro forma basis as if Datalink and Antrum had been acquired on October 1, 1997 are as follows:
Information with respect to these acquisitions is presented below:
2000 1999 1998 ---- ---- ---- Cash paid (net of cash acquired) .............. $ 4,500 $ 5,535 $ 15,267 Issuance of common stock and notes payable..... - 4,500 - Transaction and other costs ................... - 379 148 ------- ------- -------- 4,500 10,414 15,415 Fair value of tangible assets acquired ........ - 275 (4,262) ------- ------- -------- Excess of cost over fair value of net assets acquired and other intangible assets ........ $ 4,500 $10,689 $ 11,153 ======= ======= =======
Excess of cost over fair value of net assets acquired and other intangible assets comprise the following:
SEPTEMBER 30, ------------- 2000 1999 ------- ------- Excess of cost over fair value of net assets acquired .... $ 31,572 $27,072 Other .................................................... 250 250 ------- ------- 31,822 27,322 Accumulated amortization ................................. (4,028) (2,549) ------- ------- $ 27,794 $24,773 ======= =======
Amortization expense was $1,479, $1,361 and $515 for fiscal 2000, 1999 and 1998, respectively.
3. WRITE-DOWN OF LONG-LIVED ASSETS
The Company accounts for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121, ("SFAS 121") "Accounting for the Impairement of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable.
During the year ended September 30, 2000, the Company recorded a $2,530 write-down of its investment in ERP implementation due to the decision to cease manufacturing at its San Jose facility and suspend implementation of the ERP manufacturing model at the Company's other facilities.
4. CLOSING OF SOUTH CAROLINA MANUFACTURING FACILITY
On March 27, 1998, the Company announced plans to cease operations at its Winnsboro, S.C. manufacturing location and subsequently transfer all business to other plants in Pennsylvania, California and Mexico.
The plant ceased production on June 26, 1998. Supervisory and breakdown crews remained at the facility until July 17, 1998. The Company accrued expenses totaling $1,412 and $178 in 1998 and 1999, respectively, for closing and severance costs. These costs are reflected in the income statement as a separate line item described as "Plant shutdown costs." All activity has ceased and the Company is seeking a buyer for the physical facility.
5. MAJOR CUSTOMERS AND SUPPLIERS
Net sales to Nortel, IBM, Hewlett-Packard and Lucent amounted to 35%, 13%, 10% and 10% of total sales, respectively, for fiscal 2000. Net sales to Nortel, IBM, Hewlett-Packard and Lucent amounted to 28%, 14%, 11% and 11% of total sales, respectively, for fiscal 1999. Net sales to Nortel, IBM, Hewlett-Packard and Diebold amounted to 21%, 16%, 13% and 11% of total sales, respectively, for fiscal 1998. Aggregate net sales to major customers, each of which exceeded 10% of total net sales were 68%, 64%, and 61%, of total net sales in 2000, 1999 and 1998, respectively. At September 30, 2000 and 1999, aggregate accounts receivable from these customers represented 71% and 63% of total accounts receivable, respectively. To reduce its credit risk, the Company reviews its customers' financial position before extending credit and periodically thereafter.
Historically, the Company has purchased a significant portion of its wire, cable and connectors from a limited number of suppliers. Although the Company believes that its raw materials are generally available from several domestic and international sources, customers often specify that the Company purchase certain components from particular manufacturers. Accordingly, the loss of any of the Company's key suppliers could have a material adverse impact on the Company.
6. INVENTORIES SEPTEMBER 30, ------------- 2000 1999 -------- --------- Finished goods ............................. $ 10,604 $ 10,392 Work-in-process ............................ 4,323 5,134 Raw materials and supplies ................. 26,718 23,039 Valuation reserve .......................... (4,593) (1,338) -------- -------- $ 37,052 $ 37,227 ======== ========
7. PROPERTY, PLANT AND EQUIPMENT, NET SEPTEMBER 30, ------------------- ESTIMATED 2000 1999 USEFUL LIVES ------ ------ ------------ Land ............................... $ 343 $ 400 Buildings and improvements ......... 12,500 13,511 10-25 years Machinery and equipment ............ 15,733 13,867 5-10 years Furniture and fixtures ............. 10,384 7,953 5-10 years Vehicles ........................... 394 451 3- 5 years Construction in progress ........... 2,606 6,371 -------- -------- 41,960 42,553 Less: Accumulated depreciation ..... (14,518) (11,389) --------- -------- $ 27,442 $ 31,164 ======== ========
Depreciation expense was $3,224, $2,587 and $2,212 for fiscal 2000, 1999, and 1998, respectively.
The Company leases certain equipment under capital leases. Property, plant and equipment includes $2,119 and $1,898 of capital leases at September 30, 2000 and 1999. Accumulated depreciation includes $375 and $152 at September 30, 2000 and 1999 respectively, related to these capital leases. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of net minimum lease payments:
Year ending September 30: 2001 $ 514 2002 453 2003 364 2004 182 ------ Total net minimum lease payments 1,513 Less amount representing interest (129) ------ Present value of net minimum lease payments $1,384 ======
The Company also leases certain office and manufacturing facilities, office equipment and vehicles under operating leases. Rent expense under operating leases was $2,063, $1,054 and $1,116 for fiscal 2000, 1999 and 1998 respectively. Future minimum lease payments under operating leases are:
2001 $2,203 2002 1,863 2003 1,264 2004 979 2005 939 Thereafter 1,521 ----- Total minimum payments required $8,769 =====
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES SEPTEMBER 30, ----------------- 2000 1999 ------ ------ Salaries and benefits ........................ $ 3,532 $3,523 Other ........................................ 4,406 1,230 ------- ------ Total accrued expenses ....................... $ 7,938 $4,753 ======= ======
Included in accounts payable at September 30, 2000 and 1999 are book overdrafts totaling $2,544 and $2,906 respectively.
9. FINANCING ARRANGEMENTS
Maturities of long-term debt, subsequent to September 30, 2000 are as follows:
Interest paid in fiscal 2000, 1999 and 1998 on short-term borrowings and long-term debt totaled $5,965, $4,003, and $1,440 respectively.
Effective September 16, 2000, the Company amended its bank revolving line of credit to increase the facility by $5,000 to a total of $75,000. This amendment also waived any loan defaults existing at the time and accelerated the due date of all outstanding funds to December 31, 2000. Borrowings are collateralized by substantially all of the Company's assets. The interest rate on the line is the bank's prime lending rate, 9.5% at September 30, 2000, plus 3.0% or a LIBOR based rate, approximately 6.62% at September 30, 2000, plus 3.75%. The commitment fee on the unused portion of the line is 0.5%. At September 30, 2000, the Company had $4,540 available under the bank agreement and was in compliance with all provisions of its loan agreement. The weighted average interest rate at September 30, 2000 on outstanding borrowings under the line of credit was $10.66%.
On December 22, 2000 and January 23, 2001, the Company further amended its loan agreement. These amendments extended the due date of all outstanding funds to December 31, 2001, and include an interest rate at the banks' prime lending rate plus 1.0% or, at the Company's election, a LIBOR based rate plus 3.0%. The commitment fee on the unused portion of the line is 0.5%. The amendment requires mandatory principal payments of $50 per month for January through March 2001 and $150 per month for April through December 2001. In addition, there are certain other principal payments required should the Company sell certain assets or collect certain accounts receivable. The amendment includes a number of reporting requirements and financial covenants commencing January 2001 based on monthly net income or net loss projections and three-month rolling EBITDA projections. Because the financial covenants are based on monthly computations with look-back and look-forward provisions, the Company believes there is doubt that it will be able to remain in compliance with the debt covenants through October 1, 2001, and as a result, substantially all of the Company's debt would be callable. If the Company does not remain in compliance with the debt covenants, it would expect to negotiate with its bank group to amend the loan agreement. At December 31, 2000, the Company had $1,878 available under the bank agreement.
The Company remains highly leveraged and as a result, access to additional funding sources is limited. If the Company's operating results deterioriate, or product sales and margins do not improve, or the Company is not in compliance with its covenants, or the Company is not successful in refinancing its bank line of credit, the Company could be in default under its loan agreement and any such default, not resolved, could lead to curtailment of certain of its business operations, sale of certain assets or the commencement of insolvency proceedings by its creditors.
The Company has two interest rate swap agreements with commercial banks to effectively fix its interest rates, under certain conditions, on LIBOR based borrowings to the fixed swap rates plus 3.75% at September 30, 2000, or 3.0% after giving effect to the December 22, 2000 loan agreement amendment. The first swap agreement, dated August 18, 1999 is for a notional $7,500, has a fixed swap rate of 5.65% and expires August, 20, 2004. The swap is applicable when LIBOR based rates are less than 6.75%. The second swap agreement, dated April 4, 2000, is for a notional $20,000, has a fixed swap rate of 6.55% and expires April 6, 2005, unless terminated by the counterparty on April 8, 2002. At September 30, 2000 the swaps require the counterparty to make payments to the Company and the approximate termination value of the swaps is a benefit to the Company of $63.
10. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
11. INCOME TAXES
Provision for income taxes in the consolidated statement of operations:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2000 and 1999 are presented below:
An analysis of the Company's effective income tax rate is as follows:
Cash paid for income taxes totaled $4,060, $4,203, and $3,504 in fiscal 2000, 1999 and 1998, respectively.
Pre-tax earnings of foreign subsidiaries were $62, $15,287 and $5,895 in fiscal 2000, 1999 and 1998, respectively. Unremitted earnings of such foreign subsidiaries of $18,281 were deemed to be permanently invested at September 30, 2000. No deferred tax liability has been recorded related to future remittance of these earnings. It is not practicable to estimate the income tax liability that might be incurred upon remittance of such earnings to the United States.
12. EMPLOYEE BENEFIT PLANS
The Company maintains a tax-qualified defined contribution employee profit sharing plan (the "Profit Sharing Plan"). All full-time U.S. employees, except for employees of Denron in 1997, who are 18 years of age or older and who have completed one year of service with the Company are eligible to participate. The Company may make discretionary profit sharing contributions to the Profit Sharing Plan for any plan year. A participant is entitled to receive a distribution of the vested interest in his or her account upon retirement, death, permanent disability or termination of employment. The Company's contribution to the employee vests immediately. The Company contributed $0, $177, and $193 for fiscal 2000, 1999 and 1998, respectively.
The Profit Sharing Plan also contains provisions that are intended to satisfy the tax qualification requirements of Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). All full-time U.S. employees, except for employees of Denron in 1997, who are 18 years of age or older and who have completed 90 days of service with the Company are eligible to participate in the 401(k) Plan. Under the 401(k) Plan, an employee may elect to defer up to 15% of his or her current compensation. Employee contributions to the 401(k) Plan are invested according to the direction of the employee. The Company makes matching contributions of up to 2% of an employee's total compensation. A participant is entitled to receive a distribution of the vested interest in his or her account upon retirement, death, permanent disability or termination of employment. The Company's matching contribution vests immediately. Employee contributions are fully vested and non-forfeitable at all times. The Company contributed $278, $89, and $69 for fiscal 2000, 1999, 1998, respectively.
The Company maintains a deferred compensation plan for certain management and highly compensated employees. Under the provisions of the plan, each participant may defer up to 25% of annual compensation, and the Company will contribute up to 2.5% of each participant's annual salary on a quarterly basis (10% annually). Deferred compensation, under the plan, is invested by the Company, at the discretion of the Board; however, each participant's account is allocated the actual income, gains and losses that would have been earned if their deferred compensation had been invested in accordance with their personal investment selections.
At September 30, 2000 and 1999, the Company had assets related to deferred compensation of $1,687 and $1,405, respectively, which balances are included in other assets in the accompanying consolidated balance sheet. Compensation expense for deferred compensation arrangements aggregated $278, $165, and $161 in fiscal 2000, 1999, 1998, respectively.
In accordance with statutory requirements in Mexico, the Company is required to make annual profit sharing distributions to the employees of Pantera. These distributions are determined based on 10% of Pantera's taxable income. A provision of $0, $60, and $503 was recorded as of September 30, 2000, 1999, and 1998, respectively, for anticipated profit sharing distributions.
13. STOCK OPTION PLANS
In April 1993, the Board of Directors approved adoption of the Stock Option Plan of 1993 that authorized incentive stock options and non-qualified stock options of 300,000 shares. Under the Plan, any salaried or supervisory employees of the Company, as selected by the Board, are eligible to be granted options. The options have ten-year terms with exercise prices equal to the fair market value of the Company's Common Stock at the date of grant, as determined by the Board. The options are exercisable from the date of grant. At September 30, 1995, all such options had been granted and were exercisable.
The Company's 1995 Stock Option Plan (the "1995 Plan") was approved by the Board of Directors on August 1, 1995 and by the shareholders of the Company on November 21, 1995. Under the 1995 Plan, options may be granted to employees and consultants for the purchase of up to an aggregate of 475,000 shares of Common Stock. The 1995 Plan was amended at the January 28, 1997 Shareholders' Meeting to provide for the authorization to issue an additional 525,000 shares under the plan. The 1995 Plan provides for grants of both incentive stock options and non-qualified stock options. The 1995 Plan is administered by the Board which determines, at its discretion, the number of shares subject to each option granted and the related purchase price and vesting period.
Under the 1995 Plan, no incentive stock option may be granted to an employee who owns more than 10% of the total combined voting power of all classes of outstanding stock. Each option expires on the date specified by the Compensation Committee, but not more than 10 years from its date of grant. All incentive options granted under the 1995 Plan will have an exercise price of not less than 100% of the closing price of the Common Stock on the grant date, 85% for non-qualified options. Options shall be exercisable as specified by the Compensation Committee. Generally, options are exercisable in cumulative annual installments of 25% per year beginning one year after the date of grant.
Pursuant to the 1995 Outside Directors Stock Option Plan ("Outside Directors Plan") adopted by the Board of Directors on August 1, 1995, and the shareholders of the Company on November 21, 1995, options are granted to members of the Board of Directors who are not employees or 10% owners of the Company (an "Outside Director"). An aggregate of 125,000 shares of Common Stock are reserved for issuance under the Outside Directors Plan. All options granted under the Outside Directors Plan are exercisable in full beginning sixty days after date of grant of the option. The Outside Directors Plan requires that options granted thereunder will expire not later than ten years after the date of grant.
The Company applies APB 25 and related Interpretations in accounting for its option plans. Accordingly, no compensation cost has been recognized for options granted under its option plans. Had compensation cost for the Company's option plans been determined based on the fair value at the grant dates for awards under the option plans consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated as follows:
Under SFAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumption:
A summary of the status of the Company's stock option plans as of September 30, 2000, 1999 and 1998, and changes during the years ending on those dates is presented below:
Included in the cancelled options above are 119,125 options with exercise prices of $8.50-$31.50 and 50,950 options with exercise prices of $30.75 - $33.00 which were cancelled and reissued at a lower exercise price during fiscal 1999 and 1998, respectively. In conjunction with the changes in exercise price, the vesting schedule for all such options was revised to begin as of the new issuance date.
During 2000 and 1999, the Company issued 35,966 and 48,112 shares of common stock, respectively, pursuant to exercises of options granted under its qualified stock option plans. Such shares were issued at an average price of $1.95 and $4.87 per share and a total of $70 and $246 in 2000 and 1999, respectively. Such exercises also gave rise to tax benefits of $114, included in equity in 1999.
The following table summarizes information about stock options outstanding at September 30, 2000:
14. GEOGRAPHIC INFORMATION
Certain geographic information follows:
15. QUARTERLY FINANCIAL DATA (Unaudited)
The amounts disclosed above do not agree with previously reported results due to the reclassification of certain expenses between cost of sales and selling, general and administrative expenses.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED SEPTEMBER 30, 1998, 1999, 2000 (dollars in thousands)
THE JPM COMPANY
EXHIBIT INDEX
Exhibits marked with a single asterisk are filed herewithin. The other exhibits listed have previously been filed with the Commission and are incorporated herein by reference.
(A) Incorporated by reference from Registrant's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 9, 1996, as amended.
(B) Incorporated by reference from Registrant's Proxy Statement for a Special Meeting of Shareholders dated and filed with the Securities and Exchange Commission on May 5, 1997.
(C) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed with the Securities and Exchange Commission on August 14, 1998.
(D) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, filed with the Securities and Exchange Commission on February 12, 1998.
(E) Incorporated by reference from the Regitrant's Annual Report on Form 10-K for the year ended September 30, 1998, filed with the Securities and Exchange Commission on December 22, 1998.
(F) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998, filed with the Securities and Exchange Commission on February 10, 1999.
(G) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed with the Securities and Exchange Commission on August 13, 1999.
(H) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed with the Securities and Exchange Commission on August 22, 2000.