Item 1. BUSINESS
Jordan Industries, Inc. ("the Company") was organized to acquire and operate a diverse group of businesses with a corporate staff providing strategic direction and support. The Company's continuing operations are comprised of four businesses, Deflecto, Sate-Lite, Beemak and GramTel. The Company manages Deflecto, Sate-Lite and Beemak as a separate business unit referred to as Jordan Specialty Plastics.
As of December 31, 2006, the Company also owned two businesses, Valmark and Welcome Home LLC, which have been classified as discontinued operations in the Company's financial statements. (See Note 5 to the financial statements).
The Company believes that its businesses are characterized by leading positions in niche industries, strong management, minimal working capital and capital expenditure requirements and low sensitivity to technological change and economic cycles.
The Company's business strategy is to enhance the growth and profitability of each business, and to build upon the strengths of those businesses 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, the Company believes that critical mass is attained in a particular industry segment, the related companies are organized as a discreet business unit.
The following chart depicts the operating subsidiaries which comprise the net sales of continuing operations of the Company for the year ended December 31, 2006.
Jordan Industries, Inc. $256.7 Million of Net Sales from Continuing Operations (1)
JORDAN SPECIALTY PLASTICS - Beemak $135.1 Million of Net Sales - Sate-Lite - Deflecto
GRAMTEL $2.9 Million of Net Sales
JORDAN AUTO AFTERMARKET (2) - Dacco $118.7 Million of Net Sales - Alma - Atco
(1) Not included in the net sales from continuing operations were the results of Kinetek, Seaboard and Pamco, which were sold during the year, and, due to the nature of each transaction, are classified as discontinued operations. Also excluded are the operating results of Valmark and Welcome Home LLC, which, while still owned at December 31, 2006, qualify for treatment as discontinued operations in the Company's financial statements.
(2) The Jordan Auto Aftermarket group was sold on December 29, 2006. The nature of this transaction does not qualify for treatment as discontinued operations. Therefore, the results of operations for this segment are included in the consolidated results through the date of sale.
The Company's continuing operations were conducted through the following businesses as of December 31, 2006:
JORDAN SPECIALTY PLASTICS
Jordan Specialty Plastics serves a broad range of wholesale and retail markets within the highly-fragmented specialty plastics industry. The group primarily designs, manufactures and sells (1) "take-one" point of purchase brochure, folder and application display holders, (2) plastic injection-molded hardware and office supply products, (3) extruded vinyl chairmats, and (4) safety reflectors for bicycles and commercial truck manufacturers. The companies that are part of Jordan Specialty Plastics have provided their customers with products and services for an average of over 35 years. For the year ended December 31, 2006, the Jordan Specialty Plastics subsidiaries generated consolidated net sales of $135.1 million. Each of the Jordan Specialty Plastics subsidiaries is discussed below:
Beemak Plastics. Beemak, which was founded in 1951 and acquired by the Company in July 1989, is a manufacturer and distributor of custom point-of-purchase displays, brochure holders and sign holders. Beemak sells its proprietary holders and displays to approximately 3,000 customers around the world. Beemak's net sales for 2006 were $6.9 million.
Beemak's products are both injection-molded and custom fabricated. Injection molded products consist primarily of polystyrene plastic with production being outsourced to affiliated companies. Custom fabrication consists primarily of heat bent acrylic plastic sheets with processing performed in-house. Beemak also provides silk screening of decals and logos onto the final product.
Beemak sells its products through a direct sales force 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.
The display holder industry is very fragmented, consisting of a few other known holder and display firms and regionally-based sheet fabrication shops.
Sate-Lite Manufacturing. Sate-Lite specializes in safety reflectors for bicycles and heavy duty commercial vehicles. Sate-Lite was founded in 1968 and acquired by the Company in 1988. Reflectors and plastic bicycle parts accounted for 42% of Sate-Lite's net sales in 2006. An additional 58% of 2006 net sales were derived from other miscellaneous plastic injection molded products. Sate-Lite's net sales for 2006 were $10.3 million, excluding sales to Deflecto and Beemak, related parties, of $11.9 million and $1.6 million, respectively.
Sate-Lite's bicycle and truck/auto products are sold directly to a number of OEMs. The two largest OEM customers are Shunliu and Giant Phoenix (China) which accounted for approximately 14% of Sate-Lite's net sales in 2006.
The markets for bicycle and truck/auto parts are highly competitive. Sate-Lite competes in these markets by being a low cost producer, offering innovative products and by relying on its established reputation for producing high quality plastic components in the industries served. Sate-Lite's principal competitors in the bicycle parts market consist primarily of foreign companies and Cortina, James King, and Accutek in the truck/auto markets.
Deflecto Corporation. Founded in 1960 and acquired by the Company in 1998, Deflecto designs, manufactures and markets plastic injection-molded products for mass merchandisers, major retailers and large wholesalers. Deflecto sells the majority of its products in four product categories: hardware products, office supply products, safety reflectors and disposable health care products. Hardware products, which comprised approximately 52% of Deflecto's net sales in 2006, include heating and cooling air deflectors, clothes dryer vents and ducts, kitchen vents and ducts, sheet metal pipes and elbows, exhaust fittings, heating ventilation and air conditioning registers and other widely recognized products. Office supply products, many of which have patents and trademarks, represented approximately 42% of net sales in 2006 and include such items as wall pockets, literature displays, file and chart holders, business card holders, chairmats and other top-branded office supply products. The remaining 6% of net sales are for bicycle reflectors sold directly to a number of OEMs and commercial truck companies and disposable health care products sold to a single distributor. Deflecto's consolidated net sales for 2006 were $117.9 million.
Deflecto manufactures approximately 90% of its products in-house, with the remainder outsourced to other injection molders. Deflecto efficiently manages the mix of manufactured and outsourced product due to 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, Lowes and Home Depot, as well as to heating, ventilating and air conditioning ("HVAC") and appliance part wholesalers. Deflecto sells its office supply products line to major office supply retailers such as Office Max and Staples, as well as to national wholesalers, such as United Stationers and S.P. Richards. Deflecto has established strong relationships with its customers and is known for delivering high quality, well packaged products in a timely manner.
Competition in the hardware and office supplies business is increasing due to the consolidation of companies serving the market. The increased competition has forced manufacturers to improve production efficiency, product quality and delivery. The Company believes 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.
GRAMTEL
Gramtel. GramTel USA, Inc. was started by the Company in December 2000. GramTel is an information technology infrastructure and disaster recovery company. It owns and operates a state-of-the-art data center that houses clients' business-critical computer systems, applications, and data. The facility provides alternate sites for companies to continue operations in the event of a disaster or emergency. GramTel leverages its infrastructure and technical staff to support the data storage needs of businesses at a fraction of the cost that businesses would incur to perform these tasks in-house or with higher-priced providers. It provides the facilities, technical personnel and network connectivity to keep the critical operations of businesses available 24 hours a day. GramTel had net sales of $2.9 million for the year ended December 31, 2006.
BACKLOG
As of December 31, 2006 the Company had a backlog of approximately $4.1 million compared with a backlog of $7.7 million as of December 31, 2005. The backlog consists mainly of plastic products at Deflecto which management believes will ship during 2007.
RESEARCH AND DEVELOPMENT
As a general matter, the Company operates businesses that do not require substantial capital or research and development expenditures. However, development efforts are targeted at certain subsidiaries as market opportunities are identified.
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
The Company protects its confidential, proprietary information as trade secrets. With some exceptions noted in the business descriptions above, the Company's products are generally not protected by virtue of any proprietary rights such as patents. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology and know-how or that the Company's competitors will not independently develop technologies that are substantially equivalent to or superior to the Company's technology. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. In the Company's opinion, the loss of any intellectual property asset would not have a material adverse effect on the Company's business, financial condition, or results of operations.
The Company is also subject to the risk of adverse claims and litigation alleging infringement of proprietary rights of others. From time to time, the Company has received notice of infringement claims from other parties. Although the Company does not believe it infringes on the valid proprietary rights of others, there can be no assurance against future infringement claims by third parties with respect to the Company's current or future products. The resolution of any such infringement claims may require the Company to enter into license arrangements or result in protracted and costly litigation, regardless of the merits of such claims.
EMPLOYEES
As of December 31, 2006, the Company and its subsidiaries employed approximately 1,393 people. The Company believes that its subsidiaries' relations with their respective employees are good.
ENVIRONMENTAL REGULATIONS
The Company is subject to numerous U.S. and foreign, federal, state, provincial and local laws and regulations relating to the storage, handling, emissions and discharge of materials into the environment, including the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Clean Water Act, the Clean Air Act, the Emergency Planning and Community Right-to-Know Act, and the Resource Conservation and Recovery Act. Under CERCLA and analogous state laws, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under, or in such property. Such laws frequently impose cleanup liability, regardless of whether the owner or operator knew of or was responsible for the presence of such hazardous or toxic substances and regardless of whether the release or disposal of such substances was legal at the time it occurred. Regulations of particular significance to the Company's ongoing operations include those pertaining to handling and disposal of solid and hazardous waste, discharge of process wastewater and storm water and the
handling or release of hazardous chemicals. The Company believes it is in substantial compliance with such laws and regulations.
The Company generally conducts an assessment of compliance and the equivalent of a Phase I environmental survey on each acquisition candidate prior to purchasing a company to assess the potential for the presence of hazardous or toxic substances that may lead to cleanup liability with respect to such properties. The Company does not currently anticipate any material adverse effect on its operations, financial condition or competitive position as a result of compliance with federal, state, provincial, local or foreign environmental laws or regulations. However, some risk of environmental liability and other costs is inherent in the nature of the Company's business, and there can be no assurance that material environmental costs will not arise. Moreover, it is possible that future developments such as the obligation to investigate or cleanup hazardous or toxic substances at the Company's property for which indemnification is not available, could lead to material costs of environmental compliance and cleanup by the Company.
In December of 2006, the Company sold its interests in Jordan Auto Aftermarket, Inc. ("JAAI"). Alma Products I ("Alma"), a subsidiary of JAAI, owns two properties in Alma, Michigan that are contaminated by chlorinated solvent and oil contamination, the main plant on Michigan Avenue and a satellite plant on North Court Street. When Alma acquired the two properties and other assets in April 1999, the seller, Tracy Industries, retained full responsibility for the continued investigation and remediation of the contaminated groundwater and soil at the properties. The Michigan Avenue property has been the subject of investigation by the Michigan Department of Environmental Quality, ("MDEQ"), since 1982. By 1985, the former owner had cleaned out, closed and capped the lagoons that were the source of the contamination and in 1992, installed a groundwater remediation system which remains in operation. The second property is contaminated with petroleum constituents and chlorinated solvents and the former owner, under the supervision of the MDEQ, is investigating the scope and extent of the contamination. In May 2003, the former owner also submitted a remediation plan for the removal of contaminated soils deemed to be the source of contamination. In 2004, contaminated soils were excavated and removed in accordance with the plan.
Prior to the sale of JAAI, Alma also had received two claims for contribution to the investigation and cleanup of waste materials at offsite locations. One is the notice letter from the USEPA regarding the Lake Calumet Cluster site. USEPA sent a follow-up information request letter in December 2004. The other is a claim by TPI Petroleum for the removal or remediation of asbestos-containing clutch plates allegedly discarded in the 1950s or 1960s at TPI's property in Alma.
In connection with its 1999 acquisition Alma and the Company obtained indemnification and a $1.5 million environmental escrow from the seller. Claims for losses against the environmental escrow were to be filed by March 2004. Prior to the deadline, Alma filed claims for the Michigan Avenue contamination, the North Court Street contamination, the TPI Petroleum claim and the proposed Lake Calumet Cluster site. The $1.5 million remains in escrow to cover the outstanding claims.
Through the agreement through which it sold Alma, the Company indemnified the new owners for any losses which they may incur for the claims filed against the environmental escrow which are not reimbursed through the environmental escrow or by Tracy Industries. The indemnity remains in place through December 29, 2011. The Company does not expect this indemnity to have a material impact on its results of operations.
Item 1A.
Item 1A. RISK FACTORS
CERTAIN PRINCIPALS, PARTNERS, OFFICERS, EMPLOYEES AND AFFILIATES OF THE JORDAN COMPANY CONTROL ALL FUNDAMENTAL MATTERS AFFECTING THE COMPANY.
Certain principals, partners, officers, employees and affiliates of The Jordan Company and their respective family members, collectively referred to as the Jordan Group, own a majority of the outstanding common and other voting stock of the Company. The Jordan Group has sufficient votes to elect all of the Company's directors and control the management and financing decisions of the Company. In addition, as owner of a majority of the outstanding common stock and other voting stock of the Company, the Jordan Group is able to approve any action requiring the approval of its shareholders, including the adoption of amendments to its certificate of incorporation and the approval of mergers or sales of all or substantially all of its assets.
THE COMPANY, THROUGH ITS RESPECTIVE SUBSIDIARIES, OPERATES IN HIGHLY COMPETITIVE INDUSTRIES AND COMPETES WITH MANY LARGER AND BETTER CAPITALIZED COMPANIES.
Each of the business lines that the Company operates compete with a substantial number of national, regional and local competitors, many of which have greater financial and other resources than the Company. 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 the Company believes that it has certain advantages over its competitors, realizing and maintaining those advantages will require continued investment by it in research and development, quality standards, marketing and customer service and support. There can be no assurance that the Company will have sufficient resources to continue to make those investments or that they will be successful in maintaining those advantages. Failure to make those investments or to maintain those advantages could have a material adverse effect on each of its respective businesses, financial conditions and results of operations and the Company's ability to generate cash flow to service its obligations.
THE COMPANY'S OPERATIONS ARE SUBJECT TO SUBSTANTIAL ENVIRONMENTAL REGULATION.
The Company and its respective operating subsidiaries are subject to federal, state, provincial, local and foreign laws, regulations and ordinances related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous materials used in their respective manufacturing processes. Under applicable environmental laws, the Company's subsidiaries may be responsible for the remediation of environmental conditions and may be subject to associated liabilities relating to the facilities and the land on which their facilities are situated, regardless of whether they lease or own the facilities in question, and regardless of whether such environmental conditions were created by the Company, any of their respective subsidiaries, by a prior owner or tenant or by any other person. Moreover, we anticipate that such laws and regulations will become increasingly stringent in the future. We cannot assure you that the need to comply with environmental laws and regulations or that environmental conditions relating to prior, existing or future facilities and operations of the Company's subsidiaries will not have a material adverse effect on their respective businesses, financial conditions and results of operations.
INCREASES IN THE PRICES OF RAW MATERIALS COULD ADVERSELY AFFECT OUR SUBSIDIARIES' OPERATIONS.
The Company's subsidiaries purchase most of the raw materials for their products on the open market, and their 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 the Company's subsidiaries attempt 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. Additionally, significant increases in the prices of the Company's 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 their respective businesses, financial conditions and results of operations.
WE ARE HIGHLY DEPENDENT ON OUR KEY PERSONNEL.
The Company is highly dependent on a small number of executive officers and key employees, both individually and as a group. The Company's future performance will be substantially dependent on their ability to retain and motivate these individuals and to attract and retain additional qualified personnel in the future. The loss of the services of any of the Company's executive officers or key employees or the inability to identify, hire and retain other highly qualified technical and managerial personnel could have a material adverse effect on their respective businesses, financial conditions and results of operations.
WE ARE SUBJECT TO THE RISKS OF DOING BUSINESS IN FOREIGN COUNTRIES.
The Company has significant operations outside the United States. The risks of doing business in foreign countries include:
- Adverse changes or greater volatility in the economies of those countries;
- Adverse effects of currency exchange controls;
- Adverse changes to the regulatory environment of those countries;
- Adverse changes to the tax laws and regulations of those countries;
- Restrictions on the withdrawal of foreign investment and earnings;
- The nationalization of our businesses;
- The potential instability of foreign governments, including from domestic insurgency movements; and
- The challenge of managing culturally and geographically diverse operations.
Operations in foreign countries are also subject to economic uncertainties, including, among others, risk or renegotiation or modification of existing agreements or arrangements with governmental authorities, exportation and transportation tariffs, foreign exchange restrictions and changes in taxation structure.
THE COMPANY HAS A SUBSTANTIAL AMOUNT OF DEBT MATURING IN 2007.
The Company has Exchange Notes with a principal amount of $173.3 million, maturing in April of 2007 and Senior Notes with a principal amount of $27.4 million, maturing in August of 2007. While the Company is currently evaluating multiple scenarios for either the repayment or refinancing of that debt prior to its maturity date, there can be no assurance that the Company will complete the necessary transactions prior to that date. Should the Company be unable to repay or refinance this debt prior to its maturity date, the Company would risk a default of its debt covenants and significant stress on its access to cash for ongoing operations. Such defaults or reduction in available cash could have a material adverse effect on the Company's business and financial condition and results of operations.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable to the Company.
Item 2.
Item 2. Properties
The Company leases approximately 13,411 square feet of office space for its headquarters in Illinois. The principal properties of each subsidiary of the Company at December 31, 2006, and the location, the primary use, the capacity, and ownership status thereof, are set forth in the table below.
- ---------- (1) These companies have been classified as discontinued operations in our financial statements ending December 31, 2006, however at year end, the Company still occupied these locations and had remaining lease obligations related to these sites.
To the extent that any of the Company's existing leases expire in 2007, the Company believes that its existing leased facilities are adequate for the operations of the Company and its subsidiaries.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company's subsidiaries are parties to various legal actions arising in the normal course of their businesses. The Company believes that the disposition of such actions individually or in the aggregate will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal year ended December 31, 2006.
Part II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
At December 31, 2006, the only authorized, issued and outstanding class of capital stock of the Company is Common Stock. There is no established public trading market for the Company's Common Stock.
(a) At December 31, 2006, there were 22 holders of record of the Company's Common Stock.
(b) The Company has not declared any cash dividends on its Common Stock since the Company's formation in May 1988. The Indentures, dated as of February 18, 2004 and February 16, 2005, by and between the Company and U.S. Bank National Association, as Trustee, (the "Trustee") with respect to the 13% Senior Secured Notes, the Indentures dated as of July 25, 1997 and March 22, 1999, by and between the Company and the Trustee with respect to the 10 3/8% Senior Notes and the Indenture dated as of April 2, 1997, by and between the Company and the Trustee with respect to the 11 3/4% Senior Subordinated Discount Debentures (collectively the "Indentures") contain restrictions on the Company's ability to declare or pay dividends on its capital stock. The Indentures each prohibit the declaration or payment of any dividends or the making of any distribution by the Company or any Restricted Subsidiary (as defined in the Indentures) other than dividends or distributions payable in stock of the Company or a Subsidiary and other than dividends or distributions payable to the Company.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table presents selected operating, balance sheet and other data of the continuing operations of the Company and its subsidiaries as of and for the five years ended December 31, 2006. The financial data has been derived from the consolidated financial statements of the Company and its subsidiaries. As a result of the sale of JII Promotions in January 2004, the sale of Pamco in July 2006, the sale of Seaboard in October 2006 and the Company's intent to sell Valmark during 2007, the entire Specialty Printing and Labeling segment has been reported as discontinued operations. Due to the sale of Kinetek in November 2006, this segment has also been reported as discontinued operations. In December 2006, Welcome Home LLC, a wholly owned subsidiary of the Company, sold certain assets and ceased all other operations which caused it to also be reported as a discontinued operation. The guidelines set forth in Statement of Financial Accounting Standards ("SFAS") No. 144 were used to determine the proper classification of these entities. All subsidiaries and business segments classified as discontinued, have been excluded from the information shown below.
(1) Interest expense decreased in 2004, 2005 and 2006 primarily due to the treatment of the Company's Exchange Offer as a troubled debt restructuring pursuant to SFAS No. 15. In addition, certain of the Company's 2009 Debenture note holders entered into Modification and Waiver Agreements which provide for either a reduction in their stated maturity value and a reduction of their applicable interest rate or a waiver of their right to receive current interest payments. See Note 12 to the financial statements.
(2) Income from continuing operations before income taxes in 2002 includes a gain on the extinguishment of long-term debt of $88,882, a gain on the liquidation of a subsidiary of $1,888, a gain on the sale of a facility of $1,431, and the write-down of certain assets held for sale of $1,800. Loss from continuing operations before income taxes in 2003 includes a loss on the sale of a division of a subsidiary of $401. Loss from continuing operations before income taxes in 2004 includes income from the sale of three affiliates of $7,954. Loss from continuing operations before income taxes in 2005 includes income from the sale of an affiliate of $4,410, income from the refinancing of an affiliate of $8,584, gain on sale of a subsidiary of $251, and $14,727 of income related to the sale of affiliates. Offsetting these gains was a goodwill impairment loss of $20,862. Loss from continuing operations before income taxes in 2006 includes income from the sale of fixed assets of $8,863.
(3) No cash dividends on the Company's Common Stock have been declared or paid.
(4) The negative working capital in 2006 is the result of the reclassification of $27.4 million of Jordan Industries' Senior Notes and $179.0 million of JII Holdings Exchange Notes from long-term to current based on their maturity date. Working capital excludes the assets and liabilities of discontinued operations.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HISTORICAL RESULTS OF OPERATIONS
Summarized below are the historical net sales, operating income and operating margin (as defined below) for each of the Company's businesses and business units for the fiscal years ended December 31, 2006, 2005, and 2004. As a result of the sale of JII Promotions in January 2004, the sale of Pamco in July 2006, the sale of Seaboard in October 2006 and the Company's intent to sell Valmark during 2007, the entire Specialty Printing and Labeling segment has been reported as discontinued operations. Due to the sale of Kinetek in November 2006, this segment has also been reported as discontinued. In December 2006, Welcome Home LLC, a wholly owned subsidiary of the Company, sold certain assets and ceased all other operations which caused it to also be reported as a discontinued operation. The guidelines set forth in Statement of Financial Accounting Standards ("SFAS") No. 144 were used to determine the proper classification of these entities. All subsidiaries and business segments classified as discontinued, have been excluded from the information shown below. This discussion should be read in conjunction with the historical consolidated financial statements and the related notes thereto contained elsewhere in this Annual Report.
(1) Before corporate income of $3,235, $29,726, and $1,897 for the years ended December 31, 2006, 2005, and 2004, respectively.
(2) Operating margin is operating income divided by net sales.
(3) The Jordan Auto Aftermarket group was sold on December 29, 2006. The nature of this transaction does not qualify for treatment as discontinued operations. Therefore, the results of operations for this segment are included in the consolidated results of continuing operations.
CONSOLIDATED OPERATING RESULTS. (See Consolidated Statements of Operations).
For the purpose of discussing the continuing consolidated results of operations, the following businesses are included in the Company's income statement during 2006. Jordan Specialty Plastics includes Deflecto, Sate-Lite and Beemak and is included in continuing operations for all periods presented. Jordan Automotive Aftermarket was sold on December 29, 2006 and does not meet the qualifications of a discontinued business segment under Statement of Financial Accounting Standards ("SFAS") No. 144, therefore, the results of operations for the three operating companies in this segment, Dacco, Alma and Atco, are included in the Company's results from continuing operations in all periods presented up to their sale date of December 29, 2006. GramTel is included in continuing operations for all periods presented.
2006 Compared to 2005. Net sales from continuing operations decreased $22.2 million or 8.0%, to $256.7 million for 2006 from $278.9 million for 2005. The decrease in sales was primarily due to reduced sales in the Jordan Specialty Plastics segment and to a lesser extent, declines in the Jordan Auto Aftermarket segment. The sales decline at Jordan Specialty Plastics was driven by reduced sales of certain hardware products to the wholesale distribution channel due to the limited availability of insulation material used in the products, offset partially by sales growth in office products and reflector products. Jordan Specialty Plastics had improved success with passing along raw material inflation through increased selling prices, most of which did not become effective until the second half of the year. Sales decline at Jordan Automotive Aftermarket is primarily the result of a 27% decrease in the sales of torque converters to original equipment manufacturers. In addition, better warranty experience on new vehicles has also reduced demand for torque converter replacements.
Operating income from continuing operations decreased $10.6 million, to a loss of $2.5 million for 2006 from income of $8.1 million for 2005. The most significant decrease in operating income was due to income related to the refinancing of an affiliate of $8.0 million in 2005 and income of $14.7 million in 2005 from the reversal of reserves previously recorded against the receivables from JIR Broadcast and JIR Paging which were recorded in previous years and were no longer necessary at December 31, 2005 as these receivables were deemed fully collectible. This decrease was offset by increased operating income at Jordan Automotive Aftermarket due to improved results at Alma Products operations, the impact of Atco's Coolstar acquisition and a non-cash charge of $8.0 million in 2006 related to the write down of certain air conditioning compressor inventory due to the company's decision to exit this product line compared to the goodwill impairment charge of $20.9 million in 2005. The increased operating income at Jordan Auto Aftermarket was partially offset by increased operating costs associated with recently opened DACCO stores and charges associated with the closing of DACCO's Huntland facility. In addition, increased operating income at Jordan Specialty Plastics benefited from selling price increases and charges of approximately $1.0 million recorded in the second quarter of 2005 for increased accruals and reserves in foreign operations. These increases in operating income at Jordan Specialty Plastics were offset by the reduced operating income associated with lower hardware product sales.
2005 Compared to 2004. Net sales from continuing operations decreased $14.5 million, or 4.9%, to $278.9 million for 2005 from $293.4 million for 2004. The decrease in sales was primarily due to a 16.0% decline in the Jordan Automotive Aftermarket segment. The discontinuation of business with a large customer in the Automotive Aftermarket segment represented $18.3 million of the sales decrease and was the primary reason for the precipitous sales decline in this segment. The decrease in sales was partially offset by solid growth at Jordan Specialty Plastics, which grew 6.0%. The improved economy helped the Jordan Specialty Plastics segment, but most of the growth in this segment continues to
come from the introduction of new products and market share gains in several niche markets.
Operating income from continuing operations decreased $7.3 million, or 47.3%, to $8.1 million for 2005 from $15.4 million for 2004. Operating income, excluding the impact of the goodwill impairment charges of $20.9 million for 2005, income from the sale of affiliates of $4.4 million for 2005 and $8.0 million for 2004, proceeds from the refinancing of an affiliate of $8.6 million for 2005 and income in 2005 of $14.7 million from the reversal of reserves previously recorded against the receivables from JIR Broadcast and JIR Paging would have decreased $6.1 million to $1.3 million in 2005 compared with similarly adjusted operating income of $7.4 million for 2004.
The decrease in operating income, excluding goodwill impairment charges and income from affiliate transactions, was primarily due to decreases at Jordan Auto Aftermarket and Jordan Specialty Plastics. Raw material inflation continued to challenge product margins at Jordan Specialty Plastics although to a lesser degree than in the prior year. The operating income related to the Jordan Auto Aftermarket climate control product line was adversely impacted by the much lower sales volume described above. The Automotive Aftermarket segment management team worked diligently to reduce the cost structure in the climate control product lines in response to significantly lower sales volume. Operating income for 2005 was also adversely impacted by costs associated with product transitions and plant rationalizations at Jordan Specialty Plastics.
Income taxes - See Note 14 of to the financial statements.
JORDAN SPECIALTY PLASTICS. As of December 31, 2006 the Jordan Specialty Plastics group consisted of Sate-Lite, Beemak, and Deflecto.
2006 Compared to 2005. Net sales decreased $21.5 million, or 13.7%, to $135.1 million for 2006 from $156.6 million for 2005. The decrease in sales was driven by reduced sales of hardware products through the wholesale distribution channel due to the limited availability of insulation material used in its products. This decline was partially offset by the impact of a stronger economy, the introduction of several new products, market share gains, and selling price increases. Sales were up significantly at several of the large office products distributors. Continued sales growth in Asia also contributed to the increased sales of office products. Sales of bike related products and safety reflectors for commercial trucks also increased from prior year. Throughout the year, Jordan Specialty Plastics has experienced improved success with passing along raw material inflation through increased selling prices, particularly in the second half of the year.
Operating income increased $0.1 million, or 4.8%, to $2.8 million for 2006 from $2.7 million for 2005. Operating income increased as a result of increased selling prices and improved operational performance. Also reflected in the improved operating income are charges recorded in the second quarter of 2005 of approximately $1.0 million for increased accruals and reserves in foreign operations. Inefficiencies associated with the transition of the Niles manufacturing operations to Indianapolis and China continued through most of the first quarter and negatively impacted 2006 results. The Company continues to pursue cost reduction initiatives and price increases to overcome the increased raw material costs.
2005 Compared to 2004. Net sales increased $8.9 million, or 6.0%, to $156.6 million for 2005 from $147.7 million for 2004. The increased sales were the result of a stronger economy, the introduction of several new products, market share gains, and selling price increases which only partially offset the increase in raw material costs. Increased sales of Office Products, Reflectors and Hardware Products were the largest contributors to the 2005 sales increase.
Revenues were up significantly at several of the superstore retailers for both hardware and office products as a result of market share gains and the introduction of several new products. Chairmat sales increased over 16% for 2005 with increased market shares at superstores, distributors, and international distributors. Increased sales of bike related products and safety reflectors for commercial trucks also contributed to the overall sales growth. Sales of certain hardware products to the wholesale distribution channel were negatively impacted by the limited availability of insulation material used in the product. The increased sales of office products continue to be partially offset by lower selling prices of private label office products as super stores migrate to private labeling strategies. JSP was successful in passing along a much greater percentage of the raw material price increases in 2005 as compared with 2004, largely offsetting the carry-over effect of the significant inflation experienced in the second half of 2004.
Operating income decreased $7.2 million, or 72.9%, to $2.7 million for 2005 from $9.8 million for 2004. The customer sales mix and to a lesser extent raw material inflation experienced in 2005 both contributed to the decrease in operating income. In addition, costs incurred in 2005 include expenses associated with the closing of the Niles manufacturing operations and start up costs in Indianapolis associated with the transferred products. Costs associated with other product transitions and business reorganizations were also expensed in 2005 and negatively impacted operating income. JSP recorded expenses of approximately $1.0 million in the second quarter of 2005 primarily due to increased accruals and reserves in foreign operations. The Company continues to pursue cost reduction initiatives and price increases to overcome the increased raw material costs.
JORDAN AUTO AFTERMARKET. The Jordan Auto Aftermarket group was sold on December 29, 2006. Operations for this group are included in the financial results of the Company through the date of sale. As of the date of sale, the Jordan Auto Aftermarket group consisted of Dacco, Alma, and Atco.
2006 Compared to 2005. Net sales decreased $0.5 million, or 0.4%, to $118.7 million for 2006 from $119.2 million for 2005. The primary reason for the decrease in sales was a 27% decrease in sales of torque converters to original equipment manufacturers. Special sales incentives offered by our largest customer to their customers in the fourth quarter of 2005 negatively impacted 2006 sales by increasing demand abnormally in 2005. Better warranty experience on new vehicles has also reduced demand for torque converter replacements. In addition, Dacco continues to open new stores in selected geographic regions which have offset a general market decline for 2006. Offsetting these decreases was increased sales of the evaporator product line acquired from Coolstar at the end of the third quarter of 2005. Sales of air compressors increased 9.4% in 2006 primarily as a result of share gains with targeted wholesale distributors. Sales of tubing assemblies and fittings for the truck market were up approximately 27% from prior year due to a stronger economy and many companies updating their fleets in advance of the new emissions standards set to become effective in 2007. Hose assemblies and AC fittings sales were also stronger than prior year due to share gains and a special military order.
Operating income increased $15.5 million to a loss of $8.6 million for 2006 from a loss of $24.1 million for 2005. The most significant reason for the increase in operating income was the result of a non-cash pretax goodwill impairment charge of $20.9 million recorded in 2005. Operating income excluding the impact of the goodwill impairment charge would have decreased $5.4 million to an operating loss of $8.6 million in 2006 compared to an operating loss of $3.2 million in 2005. The decrease from prior year is primarily attributable to a non-cash charge of $8.0 million to write down the value of inventory associated with the remanufacture and production of air conditioning compressor components. The Company decided to exit this line of business due to low profitability margins in the product segment.
2005 Compared to 2004. Net sales decreased $22.7 million, or 16.0%, to $119.2 million for 2005 from $141.9 million for 2004. Alma's discontinuation of business with a large customer in the climate control market represented $18.3 million of the sales decrease and was the primary reason for the precipitous sales decline. Sales of torque converters to original equipment manufacturers decreased only slightly in 2005 as compared with the prior year and were significantly higher in the fourth quarter of 2005 compared with the prior year. Sales of air compressors decreased only slightly as compared with the prior year after excluding the impact of the discontinuation of business with the large retailer as described above. Sales of torque converters to the non-OEM automotive aftermarket declined $3.3 million or 5.8% in 2005 compared with the prior year. The prolific hurricane season and special new car incentive programs from the domestic automotive manufacturers partially drove lower sales of torque converters in the non-OEM aftermarket segment. This decrease was partially offset by the introduction of new torque converter and transmission products and the continued expansion of new DACCO retail distribution centers in targeted locations. Sales of tubing assemblies and fittings for the truck market were up over 30% for 2005 due to a stronger economy and many companies updating their fleets in advance of the new emissions standards set to become effective in 2007.
Operating income decreased $27.9 million to an operating loss of $24.1 million for 2005 from operating income of $3.8 million for 2004. The most significant decrease in operating income was the result of a non-cash pretax goodwill impairment charge of $20.9 million recorded in 2005. Operating income, excluding the impact of the goodwill impairment charge, would have decreased $7.0 million to an operating loss of $3.2 million in 2005 compared with operating income of $3.8 million for 2004.
The sales decline in the torque converter non-OEM aftermarket segment had a significant impact on the decline in operating income specifically due to the high fixed cost nature of the business. In addition, operating income was negatively impacted by a contractual price reduction for a large customer and production inefficiencies resulting from consigned parts shortages in the torque converter business earlier in the year. The operating income related to the climate control product line was adversely impacted by the much lower sales volume described above. Partially in response to the reduced sales volume, management initiated cost reductions through lean manufacturing, headcount reductions and other cost reduction initiatives, positioning the business to pursue growth opportunities. The decreases in operating income for the OE torque converter and climate control segments were nominally offset by increased operating income associated with the sales of tubing assemblies and fittings in the truck market.
GRAMTEL. As of December 31, 2006, GramTel is the only business remaining in what was previously referred to as the Consumer and Industrial Products segment. Cho-Pat was a business previously included in this segment until its sale date in March of 2005. Welcome Home LLC, which was also a business included in this segment, was wound down as of December 31, 2006. The circumstances surrounding the shut down of Welcome Home LLC qualifies for classification as a discontinued operation and has therefore been removed from the Company's continuing operations for all periods presented.
2006 Compared to 2005. Net sales decreased $0.2 million, or 6.4%, to $2.9 million for 2006 from $3.1 million for 2005. Cho-Pat was sold in March of 2005 and represents $0.4 million of the sales decrease. Sales at GramTel increased $0.2 million due to the acquisition of several new customers.
Operating income increased $0.2 million, to break even for 2006 from an operating loss of $0.2 million in 2005. Increased operating income at GramTel of $0.3 million is the result of higher sales volumes and various cost containment measures. Partially offsetting this increase was the loss of $0.1 million of operating income at Cho-Pat in 2005 prior to its sale.
2005 Compared to 2004. Net sales decreased $0.7 million, or 19.3%, to $3.1 million for 2005 from $3.8 million for 2004. Cho-Pat was sold in March of 2005 and represents $1.3 million of the sales decrease in 2005 as compared with prior year. GramTel's sales increased $0.6 million due to new customer contracts for data warehousing services.
Operating income decreased $0.1 million to a loss of $0.2 million for 2005 from an operating loss of $0.1 million for 2004. The sale of Cho-Pat in March of 2005 attributed to the entire decrease of $0.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company had negative working capital of $31.4 million at the end of 2006 compared to positive working capital of $34.7 million at the end of 2005. The negative working capital in 2006 is the result of the reclassification of $27.4 million of Jordan Industries' Senior Notes and $179.0 million of JII Holdings Exchange Notes from long-term to current based on their maturity date. Currently, the Company is contemplating various avenues of repaying and/or refinancing this debt, and management is confident that it will do so prior to its maturity. If the Company is unable to refinance or enter into a transaction that allows it to pay off this debt then there is substantial doubt about the Company's ability to continue as a going concern.
The Company has acquired businesses through leveraged buyouts, and, as a result, has significant debt in relation to total capitalization. See "Item 1 - Business." See Note 12 to the Consolidated Financial Statements.
Management expects modest growth in net sales and operating income of its remaining businesses in 2007. Capital spending levels in 2007 are anticipated to be consistent with 2006 levels and, along with working capital requirements, will be financed internally from operating cash flow. Operating margins and operating cash flow are expected to be favorably impacted by ongoing cost reduction programs, price increases and sales growth. Management believes that the Company's cash on hand and anticipated funds from operations in conjunction with opportunistic sales of assets, refinancings or market transactions will be sufficient to cover its working capital, capital expenditures, debt service requirements and other fixed charge obligations for at least the next 12 months.
The Company is, and expects to continue to be, in compliance with the provisions of its Indentures.
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, 2006 was $17.7 million compared to $14.8 million provided by operating activities in 2005.
Net cash provided by investing activities for the year ended December 31, 2006 was $538.6 million compared to $25.1 million provided by investing activities in 2005. In 2006, net cash provided by investing activities primarily includes $464.3 million of proceeds from sales of discontinued operations, $42.8 million from the sale of a subsidiary, $29.6 million from the sale of
affiliates and $11.4 million from the sale of certain assets, of which $8.9 million related to the sale of non-operating assets. This is compared to $1.0 million of proceeds from the sale of discontinued operations, $6.6 million from the sale of an affiliate, $1.2 million in proceeds from the sale of a subsidiary, $9.4 million from sale of an affiliate promissory note and $15.0 million in proceeds from a refinancing transaction executed by an affiliate in 2005.
Net cash used in financing activities for the year ended December 31, 2006 is $393.7 million compared to $38.0 million used in financing activities in 2005. The increase in cash used in financing activities is primarily due to higher repayments of long-term debt, including $296.9 million of debt related to Kinetek, and net repayments under revolving credit facilities in 2006.
On December 29, 2006, the Company and its subsidiaries extended its credit agreement with Wachovia Capital Finance ("Wachovia"), under which the Company is able to borrow up to $35.0 million, restricted by the value of certain assets, to fund acquisitions, provide working capital and for other general corporate purposes. The credit agreement matures in 2009. The agreement is secured by a first priority security interest in substantially all of the Company's assets. As of December 31, 2006, the Company had approximately $13.7 million of available funds under this arrangement. (See Note 12 to the consolidated financial statements.)
The Company may, from time to time, use cash, including borrowings under its credit agreements, to purchase either its 11 3/4% Senior Subordinated Discount Debentures due 2009, its 10 3/8% Senior Notes due 2007, or its 13% Exchange Notes due 2007, or any combination thereof, through open market purchases, privately negotiated purchases or exchanges, tender offers, redemptions or otherwise. Additionally, the Company may, from time to time, pursue various refinancing or financial restructurings, including pursuant to current solicitations and waivers involving those securities, in each case, without public announcement or prior notice to the holders thereof, and if initiated or commenced, such purchases or offers to purchase may be discontinued at any time. On January 12, 2007, the Company, pursuant to a voluntary redemption, repurchased $125.0 million face value of its 13% Exchange Notes due 2007. The proceeds from the Company's sale of Kinetek in November 2006 was the primary source of funding for this redemption. The Company will record a gain of $4.1 million during the first quarter of 2007 related to this transaction.
The Company has experienced operating losses in recent years and has used cash in operating activities. Additionally, at December 31, 2006, the Company has negative working capital of $31.4 million. This has caused the Company's executive management to evaluate various options to improve the Company's liquidity. To this end, the Company has restructured some of its outstanding debt through the Exchange Offer discussed below and in Note 12 to the financial statements and the Modification and Waiver Agreements also discussed below and in Note 12 to the financial statements. The effect of these transactions has been to reduce cash paid for interest in the current year as well as to provide for further reductions in debt maturity payments if certain financial performance is not achieved. In addition, the Company expects improved operating performance in all remaining businesses as compared to the prior year. Specifically, new product development and the continued shift of manufacturing to China in the Jordan Specialty Plastics group are expected to improve results. Further, the Company has evaluated its holdings of investments in affiliates (See Note 8) and, when appropriate, will sell certain investments, similar to the sale of the Company's investments in DMS Holdings Inc, Mabis Healthcare Holdings Inc., Flavor and Fragrance Holdings Inc. and JIR Broadcast, Inc. as described in Note 16 to the financial statements. The
Company believes that through its efforts discussed above, in conjunction with opportunistic sales of assets, refinancings or market transactions, the Company will have sufficient liquidity to meet its obligations in the coming year.
On February 18, 2004, the Company completed an Exchange Offer, whereby it exchanged $173.3 million of new Senior Notes (the "Exchange Notes") for $104.8 million of 2007 Seniors and $142.8 million of New 2007 Seniors (collectively, "Old Senior Notes"). The Exchange Notes were co-issued by JII Holdings LLC, a wholly owned subsidiary of the Company, and its wholly owned subsidiary, JII Holdings Finance Corporation. The Exchange Notes bear interest at 13% per annum which is payable semi annually on February 1 and August 1 of each year, and mature on April 1, 2007. As discussed above, $125.0 million of these notes were redeemed at their full face value on January 12, 2007. The notes that were exchanged bore interest at 10 3/8% per annum and paid interest semi annually on February 1 and August 1. The remaining Old Senior Notes mature on August 1, 2007.
The Exchange Offer was accounted for as a troubled debt restructuring in conformity with Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings" (SFAS No. 15). SFAS No. 15 requires that, when there is a modification of terms such as this, if the total debt service of the new debt is less than the carrying amount on the balance sheet of the old debt, the carrying amount should be reduced to the total debt service amount. This reduction resulted in a gain of $2.0 million, which was required by SFAS No. 15 to be offset by fees incurred on the transaction. Fees of $7.5 million which were in excess of the gain were recorded as interest expense during 2004. There will be no interest expense recognized on the Exchange Notes, and the cash interest payments made will be accounted for as a reduction of the carrying amount of the Exchange Notes. During 2006, the reduction in interest expense attributable to this treatment was $22.5 million.
On January 31, 2004, the Company and holders of $89.9 million of the Company's 2009 Debentures and $0.2 million of the Company's Discount Debentures (collectively, the "Waived Debentures") entered into a Waiver Agreement which provides that the participating note holders waive any rights to claim an event of default if the Company does not make the scheduled interest payments as required in the applicable indenture. The Company may pay interest on these Waived Debentures only if such payment complies with the restricted payments covenant in the indenture governing the Exchange Notes. Should the Company be prohibited from or elect not to make interest payments on these notes, the interest will continue to accrue on the Waived Debentures at the original rate of 11 3/4% per year and will be due and payable to the holders at the maturity date of the notes. Pursuant to the Waiver Agreement, the maturity date of the participating notes is the earlier of (1) the date on which all of the outstanding principal and interest on the Exchange Notes and the 2009 and Discount Debentures not participating in the Waiver Agreement have been paid in full, (2) the date six months after the original maturity of the participating notes, or (3) the date on which the Company enters into a bankruptcy proceeding.
On February 18, 2004, certain of the Company's 2009 Debenture note holders entered into a Modification Agreement which provides for a reduction in their stated maturity value and a reduction of their applicable interest rate. The aggregate maturity value of the notes held by the parties to the Modification Agreement is $23.0 million which has been reduced to $6.9 million. The interest rate on these notes has been reduced to a stated rate of 1.61% from 11 3/4%. On April 1, 2004 certain holders of an additional $1.7 million of the Company's 2009 Debentures elected to participate in the Modification Agreement.
The maturity value of these notes has been reduced to $0.5 million. The holders of these modified notes retain the right to collect the original maturity value and interest thereon at the original interest rate if the Company meets certain financial tests and ratios including the Available Cash requirements (as defined in the Modification Agreement) and the Fixed Charge Coverage Ratio (as defined in the Indenture to the Exchange Notes). The Available Cash requirements states that the Company must have at least $20 million in cash on hand or available under any credit agreements of the Company or certain subsidiaries after giving effect to a pro forma payment of the interest on the Debentures at the original interest rate, and that cash availability must have existed for all days since the last interest payment date on the Exchange Notes. The Fixed Charge Coverage Ratio measures the ratio between Consolidated Cash Flow (as defined) and Fixed Charges (as defined) and must have been at least 2.0 to 1 for the twelve month period preceding the payment of any contingent principal or contingent interest. Since entering into the Modification Agreement, the Company has not met the Available Cash requirement or the Fixed Charge Ratio as described above. At this time we can not estimate when and if these targets will be met.
Under the Modification Agreement, the modified 2009 Debentures mature on the earlier of (1) the date that all other 2009 Debenture note holders have been paid in full, (2) the date that is six months after the original maturity date, or (3) the date on which the Company enters into a bankruptcy proceeding.
The Company has accounted for this as a troubled debt restructuring as required by SFAS No. 15. The effect of this accounting treatment will not reduce the carrying value of the modified notes; however, the interest expense associated with the modified notes will be calculated using the modified stated interest rate of 1.61% per annum and the reduced maturity amount.
The remaining 2009 and Discount Debentures that are not party to the Modification Agreement will continue to accrue interest at 11 3/4% and represent $70.1 million of the total outstanding principal amount of $94.8 million.
FOREIGN CURRENCY IMPACT
The Company is exposed to fluctuations in foreign currency exchange rates. Decreases in the value of foreign currencies relative to the U.S. dollar have not resulted in significant losses from foreign currency translation. However, there can be no assurance that foreign currency fluctuations in the future would not have an adverse effect on the Company's business, financial condition or results of operations.
IMPACT OF INFLATION
The Company purchases certain raw materials for use in the manufacture of its products, including steel, aluminum, copper, and resin which are generally available from multiple sources with adequate supply. While certain commodities have experienced greater pricing volatility in the past year, the Company has used a number of programs to address this risk such as entering into longer term purchase contracts with suppliers of certain commodities and implementing selling price adjustments over time. The Company believes it is not significantly dependent on a limited number of suppliers and that practices are in place to ensure an adequate supply of raw materials in the future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of this Form 10-K. Our discussion and analysis of financial condition and results from operations are based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an on-going basis, we evaluate the estimates that we have made. These estimates have been based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances. However, actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the more significant judgments and estimates we have used in the preparation of the consolidated financial statements.
Goodwill
Goodwill represents the excess of cost over fair value of identifiable net assets acquired through business purchases. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), goodwill is reviewed for impairment on at least an annual basis by applying a fair-value-based test. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, we must estimate the fair values of our reporting units, as defined under SFAS 142. Our estimate of the fair value of each of our reporting units was based primarily on projected future operating results and cash flows, and other assumptions. Although we believe our projections and resulting fair values are reasonable, our past projections have not always been achieved. The failure of a reporting unit to achieve projected future operating results and cash flows, or adjustments to other valuation assumptions, could change our estimate of reporting unit fair value, in which case we may be required to record an impairment charge related to goodwill and other indefinite-lived intangible assets.
Investments in Affiliates
Periodically, we make strategic investments in debt and/or equity securities of affiliated companies. See Note 8 to the consolidated financial statements for details of these investments. These debt and/or equity securities are not currently publicly traded on any major exchange. Either the cost method or equity method of accounting is used to account for these investments depending on the level of the Company's ownership in these affiliates. Each quarter, we review the carrying amount of these investments and record an impairment charge when we believe an investment has experienced a decline in value below its carrying amount that is other than temporary. Annual review of previously recorded impairment charges may result in a reversal of those charges if the Company has substantial evidence that the value of the investment has increased. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are estimated at the individual operating companies based on estimates of losses on customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though we consider
our allowance for doubtful accounts balance to be adequate, changes in economic conditions in specific markets in which we operate could have a material effect on future reserve balances required.
Excess and Obsolete Inventory
We record reserves for excess and obsolete inventory equal to the difference between the cost of inventory and its estimated market value using assumptions about future product life-cycles, product demand and market conditions. If actual product life-cycles, product demand and market conditions are less favorable than those projected by management, additional inventory reserves may be required.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Increases (decreases) in the valuation allowance are included as an increase (decrease) to our consolidated income tax provision in the statement of operations.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31, 2006 (in thousands):
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's debt obligations are primarily fixed-rate in nature and, as such, are not sensitive to changes in interest rates. At December 31, 2006, the Company had $0.2 million of variable rate debt outstanding. A one percentage point increase in interest rates would increase the annual amount of interest paid by approximately $0.02 million. The Company does not believe that its market risk financial instruments on December 31, 2006 would have a material effect on future operations or cash flows.
The Company is exposed to market risk from changes in foreign currency exchange rates, including fluctuations in the functional currency of foreign operations. The functional currency of operations outside the United States is the respective local currency. Foreign currency translation effects are included in accumulated other comprehensive income in shareholders' deficit.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2006 and 2005 and the related consolidated statements of operations, shareholders' deficit, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jordan Industries, Inc. at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the Consolidated Financial statements, in 2006 the Company adopted the provisions of Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.
The accompanying financial statements have been prepared assuming that Jordan Industries, Inc. will continue as a going concern. As more fully described in Note 12, the Company has substantial debt maturing within the next year, which raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Chicago, Illinois March 16, 2007
JORDAN INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands)
See accompanying notes.
JORDAN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands)
See accompanying notes.
JORDAN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT (dollars in thousands)
See accompanying notes.
JORDAN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
(Continued on following page.)
JORDAN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (continued)
See accompanying notes.
JORDAN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
NOTE 1 - ORGANIZATION
At December 31, 2006, the Company's continuing operations are comprised of the following operating subsidiaries: Beemak Plastics, Inc. ("Beemak"), Sate-Lite Manufacturing Company ("Sate-Lite"), Deflecto Corporation ("Deflecto") and GramTel Communications, Inc. ("GramTel"). Also owned by the Company at December 31, 2006 were Valmark Industries ("Valmark") and Welcome Home LLC ("Welcome Home"). These two subsidiaries are reflected as discontinued operations in the Company's December 31, 2006 financial statements. Beemak, Sate-Lite and Deflecto are collectively referred to as the Jordan Specialty Plastics Group and all of the foregoing corporations are collectively referred to herein as the "Subsidiaries", and individually as a "Subsidiary."
All of the Subsidiaries are classified as Restricted Subsidiaries ("Restricted Subsidiaries") for purposes of certain of the Company's debt instruments.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation ---------------------------
The consolidated financial statements include the accounts of the Company and the Subsidiaries. All significant intercompany balances and transactions have been eliminated.
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.
Accounts Receivable and Allowance for Doubtful Accounts -------------------------------------------------------
The Company carries its accounts receivable at their face amounts less an allowance for doubtful accounts. Allowances for doubtful accounts are estimated at the individual operating companies based on estimates of losses on customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. A receivable is considered past due if payments have not been received within agreed upon invoice terms. Uncollectible receivables are charged against the allowance for doubtful accounts when approved by operating company management after all collection efforts have been exhausted.
Inventories -----------
Inventories are stated at lower of cost or market. Inventories are primarily valued at either average or first-in, first-out (FIFO) cost.
Goodwill and Other Long-Lived Assets ------------------------------------
Goodwill represents the excess of cost over fair value of identifiable net assets acquired through business purchases. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), goodwill is reviewed for impairment on at least an annual basis by applying a fair-value-based test. In evaluating the recoverability of the carrying value of goodwill and other indefinite-lived intangible assets, we must estimate the fair values of our reporting units, as defined under SFAS 142. Our estimate of the fair value of each of our reporting units was
based primarily on projected future operating results and cash flows, and other assumptions. Although we believe our projections and resulting fair values are reasonable, our past projections have not always been achieved. The failure of a reporting unit to achieve projected future operating results and cash flows, or adjustments to other valuation assumptions, could change our estimate of reporting unit fair value, in which case we may be required to record an impairment charge related to goodwill and other indefinite-lived intangible assets. See Note 3 for additional details.
Other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the related asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted cash flows expected to be generated by the asset. If the asset is determined to be impaired, the impairment recognized is measured by the amount by which the carrying value of the asset exceeds its fair value.
Property, Plant and Equipment -----------------------------
Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization of property, plant and equipment is calculated over the estimated useful lives, or over the lives of the underlying leases, if less, using the straight-line method. Amortization of leasehold improvements and assets under capital leases is included in depreciation expense.
The useful lives of plant and equipment for the purpose of computing book depreciation are as follows:
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 determined the U.S. Federal and State income tax liability on undistributed earnings of foreign subsidiaries to the extent the undistributed earnings are considered to be permanently reinvested ($6,596 at December 31, 2006), as such determination is not practical.
Deferred Financing Fees -----------------------
Deferred financing costs amounting to $846 and $4,365 net of accumulated amortization of $27,593 and $24,074 at December 31, 2006 and 2005, respectively, are amortized using the straight-line method, over the terms of the loans or, if shorter, the period such loans are expected to be outstanding. Deferred financing costs are included in "other assets" on the balance sheet.
Revenue recognition -------------------
The Company's revenue is derived primarily from product sales. Revenue is recognized in accordance with the terms of the sale, primarily upon shipment to customers, once the sales price is fixed or determinable, and collectibility is reasonably assured. Estimated discounts and rebates are recorded as a reduction of sales in the same period revenue is recognized. Sales returns and allowances are estimated and recorded based upon historical experience. If actual future sales returns and allowances are higher than
past experience, additional accruals may be required. If any significant obligations to the customer with respect to such sale remain to be fulfilled following shipment, typically involving obligations relating to installation and acceptance by the buyer, revenue recognition is deferred until such obligations have been fulfilled.
Shipping and Handling Costs ---------------------------
Shipping and handling costs are classified in cost of sales in the statement of operations.
Use of estimates ----------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
Concentration of credit risk ----------------------------
Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company deposits 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.
At December 31, 2006 and 2005 the Company had approximately $0 and $23,015, respectively, of investments in Russia and Austria related to unsecured advances, including net interest receivables, made to two affiliates (see Note 8). In 2006, the Company's investments in Russia and Austria were sold to third parties. All amounts invested by the Company were fully recovered.
Foreign currency translation ----------------------------
The functional currencies of the Company's foreign operations are the local currencies. Accordingly, assets and liabilities of the Company's foreign operations are translated from foreign currencies into U.S. dollars at the exchange rates in effect at the balance sheet date while income and expenses are translated at the weighted-average exchange rates for the year. Adjustments resulting from the translation of foreign currency financial statements are classified as a separate component of shareholders' deficit. The accumulated balance in other comprehensive income pertaining to foreign currency translation was $2,967 and $5,953 as of December 31, 2006 and 2005, respectively.
Fair Value of Financial Instruments -----------------------------------
The Company's financial instruments include cash and cash equivalents, accounts receivable, investments in and advances to affiliates and long-term debt. The carrying values of such financial instruments approximate their estimated fair value, except for long-term debt for which the fair value is disclosed in footnote 12.
New Accounting Pronouncements -----------------------------
In June 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and Interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
a company's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is required to adopt FIN 48 effective at the beginning of 2007. The Company is currently evaluating the impact of adopting FIN 48 on its future results of operations and financial condition.
In September 2006, FASB issued Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). SFAS 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also requires the measurement of defined benefit plan assets and obligations as of the date of the employer's fiscal year-end statement of financial position effective for the Company on December 31, 2007. Under SFAS 158, the Company will be required to recognize the funded status of its defined benefit postretirement plan and to provide the required disclosures commencing December 31, 2007. The Company is currently evaluating the impact that SFAS 158 will have on its consolidated financial position and results of operations, but does not believe the effect will be material.
In September 2006, the SEC staff published Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. SAB 108 offers a special "one-time" transition provision for correcting certain prior year misstatements that were uncorrected as of the beginning of the fiscal year of adoption. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company adopted the provisions of SAB 108 for the year ended December 31, 2006. Pursuant to the provisions of SAB 108, the Company recorded a charge directly to retained earnings of $4.2 million as a cumulative effect of adopting SAB 108 at January 1, 2006. The charge was the result of the correction of an error in the Company's previously issued financial statements. The error was the result of under depreciated fixed assets at Dacco, a subsidiary of the Company sold in 2006. The fixed assets were acquired in a 1988 business acquisition accounted for under the purchase method of accounting. Depreciation of the fixed assets in 1988 to 1993 did not include the increase (step up) to the previous historical carrying amount due to purchase accounting. The fixed asset step up should have been depreciated over the years 1988 to 1993 and the Company determined the impact of not depreciating such fixed assets in those years was not material to any given year's results of operations based on the rollover method of analyzing misstatements. However, recording the cumulative catch up in depreciation expense based on the iron curtain method of analyzing misstatements is material as of the adoption date of SAB 108 at January 1, 2006, and therefore the Company recorded the amount as a cumulative effect of adopting SAB 108.
NOTE 3 - GOODWILL
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002 and completed the transitional impairment review of its reporting units during the second quarter of 2002.
The Company determines the fair value of each reporting unit using a discounted cash flow approach taking into consideration projections based on the individual characteristics of the reporting units, historical trends and market multiples for comparable businesses. The Company is required to complete impairment reviews of its subsidiaries on at least an annual basis. In the fourth quarter of 2005, the annual impairment review resulted in a non-cash pre-tax charge of $20,862. These charges are included in "goodwill impairment loss" in the Company's statement of operations.
The changes in the carrying amount of goodwill by operating segment for the year ended December 31, 2006 were as follows:
Goodwill included in the gains and losses on sales of subsidiaries in 2006 were as follows: Pamco Printed Tape and Label Company, $1,990, Seaboard Folding Box Corporation, $2,355 and Kinetek, Inc., $179,077. The results of operations and related financial positions for these companies have been classified as discontinued operations in all periods presented.
NOTE 4 -INVESTMENTS IN JSP
JSP
During 1998, the Company recapitalized Jordan Specialty Plastics, Inc. ("JSP"). As a result of the recapitalization, certain of the Company's affiliates and JSP management own substantially all of the JSP common stock and the Company's investment in JSP was represented solely by the Cumulative Preferred Stock of JSP. The JSP Cumulative Preferred Stock controlled over 97.5% of the combined voting power of JSP capital stock outstanding and accreted at plus or minus 97.5% of the cumulative JSP net income or net loss, as the case may be, through the earlier of an Early Redemption Event (as defined) or the fifth anniversary of issuance (unless redemption is prohibited by a JSP or Company debt covenant).
In December 2004, the Company participated in another recapitalization of JSP. As part of this recapitalization, the JSP Cumulative Preferred Stock discussed above and $33,089 of intercompany debt was exchanged for 388,050 shares of Class A Common Stock. The initial liquidation value of each Class A common share was $85.81. In addition, each Class A share is entitled to a 6.0% cumulative preferred return. Thereafter, each Class A share
participates on an equal basis with each Class B share. The Class A shares hold 100% of the voting rights. In addition, 99,500 of pre-recapitalization common shares were exchanged for 9,950 shares of Class B common stock. The Class B common shares carry no voting rights.
The Company continues to consolidate JSP and its subsidiaries, for financial reporting purposes, as subsidiaries of the Company.
NOTE 5 - DISCONTINUED OPERATIONS
In January 2004, the Company sold the remaining operations of JII Promotions and agreed to wind down all remaining activities of the Company. In July 2006 the Company sold Pamco Printed Tape and Label Company and in October 2006 the Company sold Seaboard Folding Box Company. In addition, as of December 31, 2006, the Company has definitively decided to sell Valmark Industries. Historically, these four subsidiaries were the operating components of the Specialty Printing and Labeling Group. Due to the sale, or the decision to sell, all of the companies in the group, the Specialty Printing and Labeling Group has been classified as discontinued operations in the Company's financial statements in all periods presented.
In November 2006, the Company's wholly owned subsidiary, Motors and Gears Holdings, Inc. sold the operating subsidiaries of its wholly-owned subsidiary, Kinetek, Inc. Kinetek, Inc. was comprised of 6 operating companies in the motors and controls industries. The Kinetek, Inc. operating subsidiaries were sold to the Resolute Fund, a related party for cash proceeds of $445.4 million prior to certain fees and expenses. As the Company has no continuing involvement in Kinetek, Inc., the financials have been classified as discontinued operations in all periods presented. Motors and Gears Holdings, Inc. remained in tact after the sale of Kinetek, Inc., and was liquidated in January of 2007. As a result, the financial statements of Motors and Gears Holdings are included as discontinued operations in the Company's financial statements in all periods presented.
In December of 2006, Welcome Home LLC, a wholly owned subsidiary of the Company sold certain assets including the trade name of Cape Craftsmen ("Cape"), its wholesale division, to Evergreen Enterprises, Inc. for a purchase price of up to $0.75 million. Welcome Home ceased operations under the Cape Craftsmen name and retained certain accounts receivable and real estate obligations related to Cape. As of December 31, 2006, Welcome Home LLC closed all of its retail locations and ceased operations. All retail employees were terminated and remaining fixed assets and other salable assets will be sold or disposed of during the first quarter of 2007. Due to the above factors, Welcome Home LLC and its wholesale division, Cape Craftsmen, have been classified as a discontinued operation in the Company's financial statements in all periods presented.
Each of the above transactions was evaluated using the guidance in Statement of Financial Accounting Standards ("SFAS") No. 144 and in each case was found to meet the criteria of a discontinued operation. As such, prior period amounts have been restated to reflect the above as discontinued operations.
Summarized selected financial information for the combined discontinued operations is as follows (see Note 15 for gain/loss on sale of subsidiaries):
The major classes of assets and liabilities of the combined discontinued operations are as follows:
NOTE 6 - INVENTORIES
Inventories consist of:
NOTE 7- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consists of:
NOTE 8 - INVESTMENTS IN AND ADVANCES TO AFFILIATES
As of December 31, 2006 and 2005 the Company had $0 and $23,015, respectively, of unsecured advances, including net interest receivable, due from JIR Broadcast, Inc. and JIR Paging, Inc. In February and March 2006, the Company sold, to a third party, 100% of its investment in JIR Broadcast, Inc. and JIR Paging, Inc.
On May 18, 2005, JIR Paging, Inc. repurchased from the Company its promissory note in the amount of $9,200. The proceeds to the Company were $9,449 and consisted of the principal amount of the note plus accrued and unpaid interest of $249. As discussed above, JIR Paging was subsequently sold in March 2006 to a third party. At closing, the Company received net cash proceeds of $274 for amounts previously invested in JIR Paging. The Company recorded income of $274 in 2005 as a result of reversing reserves previously recorded against the receivable from JIR Paging.
JIR Broadcast, Inc. was sold on February 28, 2006 and resulted in cash proceeds to the Company of $30,250. The proceeds included repayment of amounts previously loaned to, and paid on behalf of, JIR Broadcast of $15,610, accrued interest of $9,187, accrued and unpaid management fees of $1,679, a fee for the termination of the management fee agreement of $3,400, and reimbursement of expenses incurred by the Company during the sale process of $374. Income of $14,453 was recorded in the Company's financial statements during 2005 related to the JIR Broadcast sale in 2006 due to the reversal of reserves previously recorded by the Company against the loans, interest on its loans, and the recognition of management fee income from JIR Broadcast which was not previously accrued. In 2006, the Company recorded income of $4,620 related to the termination of management fee agreement, interest income and management fees earned by the Company up to the date of sale, and other closing amounts. In March 2007, an escrow, which was established upon the closing of the JIR Broadcast transaction, matured and all funds were disbursed. The Company received an additional $3,000 of proceeds upon final settlement of this escrow. The Company will record income of $3,000 in the first quarter of 2007 related to this transaction.
The Company, through Motors and Gears Holdings, has an investment in the Class A and Class B Preferred Units of JZ International, LLC. These debt securities are not publicly traded and do not have a determinable fair value. The cost method of accounting is used to account for this investment. The Preferred Units have a cumulative 5% annual return. The Class A Preferred Units may be redeemed at any time at the discretion of the Board of Directors of JZ International, but no later than December 31, 2017, whereas the Class B Preferred Units may be redeemed at any time at the discretion of the Board of Directors of JZ International, but no later than December 31, 2018. As a component of the plan to sell Kinetek, Inc. in 2006 and liquidate Motors and Gears Holdings in 2007, the Company has entered into negotiations to sell its investment in JZ International for $8,500. Accordingly, the Company has taken an impairment charge of $3,800 in 2006 to record this investment at its net realizable value of $8,500, and has recorded the investment as a current asset in the Company's balance sheet. JZ International's Chief Executive Officer is David W. Zalaznick, and its members include Messrs. Jordan, Quinn, Zalaznick and Boucher, who are directors and stockholders of the Company. JZ International and its subsidiaries are focused on making European and other international investments. The Company is accounting for this investment under the cost method.
As of December 31, 2006 and 2005, the Company had $66 and $1,700, respectively, of net unsecured advances due from Healthcare Products Holdings, Inc. Healthcare Products Holdings' Chief Executive Officer is Mr. Quinn, and its stockholders include Messrs. Jordan, Quinn, Zalaznick and Boucher, who are the Company's directors and stockholders, as well as other partners, principals and associates of The Jordan Company who are also the Company's stockholders.
The Company has a 20% limited partnership interest in a partnership that was formed during 2000 for the purpose of making equity investments primarily in datacom/telecom infrastructure and software, e-commerce products and services, and other Internet-related companies. The Company has a $10,000 capital commitment, of which $3,110 was contributed as of December 31, 2006 and 2005. In addition, the Company funded $80 in promissory notes to the partnership during 2004 for working capital needs. The Company is accounting for this investment using the equity method of accounting. The Company and certain stockholders of the Company are also members in the general partner of the partnership. The Company has an agreement with the partnership to
provide management services to the partnership for annual fees of 1.25% of total partnership committed capital of $50,000 for 2006 and 2005. The entire 2006 and 2005 management fees were waived by the general partner of JZVP.
Management routinely reviews the realizability of these investments, and when necessary, reserves all or a portion of their value.
See Notes 16 and 18 for additional discussion of affiliated and related party transactions.
NOTE 9 - ACCRUED LIABILITIES
Accrued liabilities consist of:
NOTE 10 - OPERATING LEASES
Certain subsidiaries lease land, buildings, and equipment under non-cancelable operating leases.
Total minimum rental commitments under non-cancelable operating leases at December 31, 2006 are:
Rental expense amounted to $4,285, $5,525, and $5,163 for 2006, 2005, and 2004, respectively.
NOTE 11- BENEFIT PLANS AND PENSION PLANS
Substantially all of the Company's subsidiaries participate in the JII 401(k) Savings Plan (the "Plan"), a defined-contribution plan for salaried and hourly employees. In order to participate in the Plan, employees must be at least 21 years old and have worked at least 1,000 hours during the first 12 months of employment. Each eligible employee may contribute from 1% to 15% of his or her before-tax wages into the Plan. In addition to the JII 401(k) Plan, certain subsidiaries have additional defined contribution plans in which employees may participate. The Company made contributions to these plans totaling approximately $315, $328 and $239 for the years ended December 31, 2006, 2005 and 2004, respectively.
The Company retains a defined benefit pension plan related to JII Promotions (see Note 5) that covers substantially all of the former employees of that subsidiary. Due to the shutdown of JII Promotions during 2004, all active employees were terminated as of February 13, 2004 and curtailment accounting was performed as of that date. In addition, settlement accounting was performed as of July 31, 2004 and again as of December 31, 2005 as a result of the large amount of lump sums paid during both years. One-time charges of
$558 and $53 were recognized immediately due to the settlement accounting in 2004 and 2005, respectively. The following table sets forth the change in benefit obligations, change in plan assets and net amount recognized for this plan as of the measurement dates of December 31, 2006 and 2005.
PENSION PLANS
The funded status of the defined benefit plan was as follows:
The following table provides amounts recognized in the balance sheet as of December 31:
The total accumulated benefit obligation for the defined benefit pension plan was $1,744 and $1,904 at December 31, 2006 and 2005, respectively.
The plan's expected long-term rate of return on plan assets is 7.5% and is based on the aggregate historical returns of the investments that comprise the defined benefit plan portfolio.
The components of net pension costs are as follows:
Assumptions used to determine benefit obligations at the end of the year for the defined benefit plan is as follows:
Assumptions used to determine net costs for the defined benefit plan is as follows:
The Company's strategy is to fund its defined benefit plan obligations. The need for further contributions will be based on changes in the value of plan assets and the movements of interest rates during the year.
The Company's actual pension plan asset allocation, which approximates the target plan allocation, at December 31, 2006 and 2005 by asset category are as follows:
The Company's estimated future benefit payments related to this pension plan are as follows:
As a result of the sale of the Auto Aftermarket Group in December of 2006, the Company does not include the pension related liabilities of Alma (a subsidiary of the group) in its December 31, 2006 balance sheet. However, the operating results of Alma, and the entire Auto Aftermarket group are included in the Company's operating results until their date of sale. Accordingly, the components of Alma's pension cost that is included in the Company's results of operations are outlined below.
The Company had two defined benefit plans at Alma. During the second quarter of 2005, Alma negotiated and approved certain changes to its retirement plan for hourly employees. The effect of these changes resulted in a one-time curtailment charge of $355 to cost of sales in the financial statements as calculated
pursuant to FAS88. The components of Alma's net pension cost are described below:
Assumptions used to determine net costs for Alma's defined benefit plans were as follows:
OTHER POST-RETIREMENT BENEFIT PLANS
The Company had one retiree health care plan at Alma that covered substantially all of the employees of this subsidiary. The plan provided for certain medical and prescription drug benefits for those individuals that choose to participate in the plan. As a result of the sale of the Auto Aftermarket Group in December of 2006, the Company does not include the post retirement related liabilities of Alma (a subsidiary of the group) in its December 31, 2006 balance sheet. However, the operating results of Alma are included in the Company's operating results until their date of sale. Accordingly, the components of Alma's post retirement cost that is included in the Company's results of operations are outlined as follows:
Assumptions used to determine net costs for the Company's post-retirement benefit plans are as follows:
A 7.4% annual rate of increase for medical and a 9.0% annual rate of increase for prescription drugs in the per capita cost of covered post-retirement benefits was assumed for 2006. The rate was assumed to decrease gradually to 5% for 2015 and remain at that level thereafter.
Increasing or decreasing the health care trend rates by one percentage point each year would have the following effect:
NOTE 12 - DEBT
Long-term debt consists of:
The components of the senior note balance above consist of the following at carrying value:
The net amount of amortization of debt discount included in the Company's income statement for the year ended December 31, 2006 and December 31, 2005 was $49.
Aggregate maturities of long-term debt at December 31, 2006, excluding unamortized premiums and discounts, are as follows:
As noted above, 68% of the Company's long-term debt matures within the next year. Currently, the Company is contemplating various avenues of refinancing or repaying this debt and Management is confident that it will do so prior to the maturity.
A. On December 29, 2006, the Company entered into an extension of its Loan and Security Agreement ("JII Agreement") with Wachovia Capital Finance ("Wachovia"). The JII Agreement provides for borrowings of up to $35,000, restricted by the value of certain assets, including inventory, accounts receivable and fixed assets. Interest on borrowings is at the Prime Rate plus an applicable margin, or at the Company's option, the Eurodollar Rate plus an applicable margin (8.5%
and 7.3%), respectively, at December 31, 2006. At December 31, 2006, the Company had outstanding borrowings of $175, outstanding letters of credit of $8,621, and excess availability of $13,689. The JII Agreement is secured by the assets of substantially all of the Company's domestic Subsidiaries. The JII Agreement expires on August 16, 2009.
B. Bank term loans consist of a mortgage on the Deflecto facility, which bears interest at .25% below the prime rate and is due in 2015. The carrying value of the mortgaged facility is $3,569.
The Company, through its wholly owned subsidiary GramTel, has a term loan with 1st Source Bank. The balance on this loan was $889 at December 31, 2006 and bears interest at a rate of 6.6% per year. The term loan matures in 2008.
C. Interest rates on capital leases range from 5.9% to 8.3% and mature in installments through 2010.
The future minimum lease payments as of December 31, 2006 under capital leases consist of the following:
The present value of the future minimum lease payments approximates the book value of property, plant and equipment under capital leases at December 31, 2006.
D. In July 1997, the Company issued $120,000 of 10 3/8% Senior Notes due 2007 ("2007 Seniors"). These notes bear interest at a rate of 10 3/8% per annum, payable semi-annually in cash on February 1 and August 1 of each year and mature on August 1, 2007. The 2007 Seniors are redeemable for 100% of the principal amount from August 1, 2004 and thereafter plus any accrued and unpaid interest to the date of redemption. The 2007 Seniors are unsecured obligations of the parent Company.
In March 1999, the Company issued $155,000 of 10 3/8% Senior Notes due 2007 ("New 2007 Seniors"). These notes have the identical interest and redemption terms as the 2007 Seniors. The New 2007 Seniors are unsecured obligations of the parent Company.
On February 18, 2004, the Company completed an Exchange Offer, whereby it exchanged $173,333 of new Senior Notes (the "Exchange Notes") for $104,781 of 2007 Seniors and $142,838 of New 2007 Seniors (collectively, "Old Senior Notes"). The Exchange Notes were co-issued by JII Holdings LLC, a wholly owned subsidiary of the Company, and its wholly owned subsidiary, JII Holdings Finance Corporation. The Exchange Notes bear interest at 13% per annum which is payable semi annually on February 1 and August 1 of each year, and mature on April 1, 2007. The remaining Old Senior Notes have a fair value of approximately $15,060 at December 31, 2006. The fair value of the Exchange Notes was approximately $173,333 at December 31, 2006. The fair value was calculated using the Old Senior Notes' and Exchange
Notes' respective December 31, 2006 market prices multiplied by the respective face amounts.
The Exchange Offer was accounted for as a troubled debt restructuring in conformity with Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings" (SFAS No. 15). SFAS No. 15 requires that, when there is a modification of terms such as this, if the total debt service of the new debt is less than the carrying amount on the balance sheet of the old debt, the carrying amount should be reduced to the total debt service amount. This reduction resulted in a gain of $2,015 at the time of the Exchange, which was required by SFAS No. 15 to be offset by fees incurred on the transaction. Fees of $7,505, which were in excess of the gain, were recorded as interest expense during 2004. There will be no interest expense recognized on the Exchange Notes, and the cash interest payments made will be accounted for as a reduction of the carrying amount of the Exchange Notes.
In January 2007, $125,000 of Exchange Notes were redeemed at face value. The remaining outstanding notes of $48,333 retain their original interest rate and maturity characteristics. The Company will record a gain of $4,063 in the first quarter of 2007 as a result of this transaction.
In July 1993, the Company issued $133,075 of 11 3/4% Senior Subordinated Discount Debentures ("Discount Debentures") due August 1, 2005. In April 1997, the Company refinanced substantially all of the Discount Debentures and issued the 2009 Debentures. At December 31, 2006, $150 of the Discount Debentures were still outstanding and party to the Waiver Agreement discussed below. As a result of their inclusion in this agreement, the interest and principal payments on the outstanding Discount Debentures are subject to the payment limitations discussed in the following paragraph.
In April 1997, the Company issued $213,636 aggregate principal amount of 11 3/4% Senior Subordinated Discount Debentures due 2009 ("2009 Debentures"). The 2009 Debentures were issued at a substantial discount from the principal amount. Interest on the 2009 Debentures is payable in cash semi-annually on April 1 and October 1 of each year beginning October 1, 2002. The 2009 Debentures are redeemable for 100% of the accreted value from April 1, 2004 and thereafter plus any accrued and unpaid interest. The 2009 Debentures are unsecured obligations of the Company.
Between May 29, 2002 and June 5, 2002, the Company repurchased $119,000 principal amount of its 2009 Debentures, for total consideration of $31,360, including expenses. After the purchase, $94,636 principal amount of 2009 Debentures were outstanding. The Company reported a gain of $52,518, net of taxes of $36,364 in the 2002 statement of operations related to this purchase. The fair value of the remaining 2009 Debentures was approximately $18,957 at December 31, 2006. The fair value was calculated using the 2009 Debentures' December 31, 2006 market price multiplied by the face amount.
On January 31, 2004, the Company and holders of $89,917 of the Company's 2009 Debentures and $150 of the Company's Discount Debentures (collectively, the "Waived Debentures") entered into a Waiver Agreement which provides that the participating note holders waive any rights to claim an event of default if the Company does not make the scheduled interest payments as required in the applicable indenture. The Company
may pay interest on these Waived Debentures only if such payment complies with the restricted payments covenant in the indenture governing the Exchange Notes. Should the Company be prohibited from or elect not to make interest payments on these notes, the interest will continue to accrue on the Waived Debentures at the original rate of 11 3/4% per year and will be due and payable to the holders at the maturity date of the notes. Pursuant to the Waiver Agreement, the maturity date of the participating notes is the earlier of (1) the date on which all of the outstanding principal and interest on the Exchange Notes and the 2009 and Discount Debentures not participating in the Waiver Agreement have been paid in full, (2) the date six months after the original maturity of the participating notes, or (3) the date on which the Company enters into a bankruptcy proceeding.
On February 18, 2004, certain of the Company's 2009 Debenture note holders entered into a Modification Agreement which provides for a reduction in their stated maturity value and a reduction of their applicable interest rate. The aggregate maturity value of the notes held by the parties to the Modification Agreement was $22,978 which was reduced to $6,893. The interest rate on these notes was reduced to a stated rate of 1.61% from 11 3/4%. On April 1, 2004 certain holders of an additional $1,745 of the Company's 2009 Debentures elected to participate in the Modification Agreement. The maturity value of these notes was reduced to $524. The holders of these modified notes retain the right to collect the original maturity value and interest thereon at the original interest rate if the Company meets certain financial tests and ratios. Under the terms of the Modification Agreement, the holders of the modified notes retain the right to collect the original maturity value and interest thereon at the original interest rate if the Company meets the Available Cash requirements (as defined in the Modification Agreement) and the Fixed Charge Coverage Ratio (as defined in the Indenture to the Exchange Notes). The Available Cash requirement states that the Company must have at least $20 million in cash on hand or available under any credit agreements of the Company or certain subsidiaries after giving effect to a pro forma payment of the interest on the Debentures at the original interest rate, and that cash availability must have existed since the last interest payment date on the Exchange Notes. The Fixed Charge Coverage Ratio measures the ratio between Consolidated Cash Flow and Fixed Charges and must have been at least 2.0 to 1 for the twelve month period preceding the payment of any contingent principal or contingent interest. At no time since entering into the Modification Agreement, has the Company met the Available Cash requirement or the Fixed Charge Coverage Ratio as described above. At this time we cannot estimate when and if these targets will be met.
Under the Modification Agreement, these notes mature on the earlier of (1) the date that all other 2009 Debenture note holders have been paid in full, (2) the date that is six months after the original maturity date, or (3) the date on which the Company enters into a bankruptcy proceeding.
The Company accounted for this modification as a troubled debt restructuring as required by SFAS No. 15. The effect of this accounting treatment will not reduce the carrying value of the modified notes; however, the interest expense associated with the modified notes will be calculated using the modified stated interest rate of 1.61% per annum and the reduced maturity amount.
The remaining 2009 and Discount Debentures that are not party to the Modification Agreement will continue to accrue interest at 11 3/4% and represent $70,062 of the total outstanding principal amount of $94,786.
The Indentures relating to the 2009 Debentures, the Discount Debentures, the 2007 Seniors, the New 2007 Seniors, and the Exchange Notes (collectively the "JII Notes") 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; certain dividend payments to the Company by its subsidiaries; significant acquisitions; and certain mergers or consolidations. The Indentures also require the Company to redeem the JII Notes upon a change of control and to offer to purchase a specified percentage of the JII Notes if the Company fails to maintain a minimum level of capital funds (as defined).
The Company is, and expects to continue to be, in compliance with the provisions of these Indentures.
E. Subordinated promissory notes payable are due to former shareholders of certain subsidiaries in installments through 2007, and bear interest ranging from 8% to 9%. The loans are unsecured.
Interest expense includes $3,519, $3,804 and $11,282 of amortization of debt issuance costs for the years ended December 31, 2006, 2005, and 2004, respectively.
NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consists of:
NOTE 14 - INCOME TAXES
Loss from continuing operations before income taxes is as follows:
The provision (benefit) for income taxes from continuing operations consists of the following:
Significant components of the Company's deferred tax liabilities and assets are as follows:
During 2004, the Company realized $90,404 of cancellation of indebtedness income for federal income tax purposes as a result of modifications to certain of its outstanding debt obligations. Such cancellation of indebtedness income was offset by the consolidated group's net operating losses.
The provision for income taxes from continuing operations differs from the amount of income tax benefit computed by applying the United States federal income tax rate to loss before income taxes. A reconciliation of the differences is as follows:
As of December 31, 2006, total consolidated federal net operating loss carryforwards are approximately $8,401 for regular tax purposes and expire in 2025. There are various state net operating loss carryforwards that expire between 2015 and 2025. There is also an AMT credit carryforward of $3,889 which does not expire. A full valuation allowance has been provided against the net operating loss and credit carryforwards.
NOTE 15 - SALE OF SUBSIDIARIES
On March 24, 2005, the Company sold the assets of Cho-Pat, Inc. ("Cho-Pat") to Cho-Pat's management team for proceeds of $1,075. Cho-Pat is a designer and manufacturer of orthopedic related sports medicine devices and was part of the Consumer and Industrial Products segment. The Company recognized a gain of $251 related to the sale of Cho-Pat. In July 2005, the Company received additional purchase price of $134. These additional funds did not alter the amount of the gain recorded on the sale.
On July 31, 2006, the Company sold Pamco Printed Tape & Label Company ("Pamco") to Pamco's management team for net cash proceeds of $19,199. Pamco was a member of the Specialty Printing and Labeling Group and is a manufacturer and distributor of a wide variety of printed tapes and labels. The Company recognized a gain of $14,693, net of tax, related to the sale of Pamco during the third quarter of 2006. The operating results and the gain on the sale of Pamco have been classified as discontinued operations in the Company's financial statements.
On October 2, 2006, the Company sold its ownership in Seaboard Folding Box Corporation ("Seaboard") for net proceeds of $6,750. Seaboard was a member of the Specialty Printing and Labeling group and is a manufacturer of printed folding cartons and boxes, insert packaging and blister pack cards. The Company recognized a loss of $3,165, net of tax, related to the sale of Seaboard during the fourth quarter of 2006. The operating results and the loss on the sale of Seaboard have been classified as discontinued operations in the Company's financial statements.
On November 10, 2006, the Company completed the sale of the operating subsidiaries of Kinetek, Inc. ("Kinetek") to Kinetek Acquisition Corp., a subsidiary of The Resolute Fund, L.P., a related party. The sale price was $445,407 prior to certain fees and expenses. The Resolute Fund is managed and operated by The Jordan Company in New York. The Company recorded a gain on this transaction of $165,134, net of tax, in the fourth quarter of 2006.
The results of operations and the gain on the sale of Kinetek has been classified as discontinued operations in the Company's financial statements.
On December 1, 2006, the Company sold certain operating assets and the trade name of Cape Craftsmen, a division of the Company's wholly owned subsidiary, Welcome Home LLC. The assets were sold to a third party for a final purchase price of up to $750 based on future orders and collections from a previous customer of Cape Craftsmen. The Company received $500 at the time of closing. Based on current estimates, the Company expects to collect an additional $110 in purchase price during the first half of 2007. The sale of Cape Craftsmen, and the subsequent wind down of the retail division of Welcome Home LLC met the criteria of discontinued operations based on the guidance under SFAS No. 144. The results of operations for Welcome Home LLC are included in discontinued operations in the Company's financial statements for all periods presented.
On December 29, 2006, the Company sold the Automotive Aftermarket Group to ETX Holdings, Inc. for $44,000. ETX Holdings, Inc. is owned by The Edgewater Funds; a group of certain shareholders of the Company and management. The operating subsidiaries included in the sale were Dacco, Alma and Atco. According to the provisions of SFAS No. 144, the transaction did not qualify for treatment as a discontinued operation. Therefore, the operating results of the group are included in the Company's results of operations up to the date of sale. The purchase price was comprised of $30,700 in cash, an $11,300 seller subordinated note due on December 29, 2010 and retained liabilities from Alma to the Company of $2,000. This transaction resulted in a gain of $5,594, which has been deferred and has been recorded as an offset to the seller subordinated note receivable. This deferral was recorded due to the uncertainty of improved operating results and sufficient future cash flows to fully service this seller subordinated note by its stated due date.
NOTE 16 - AFFILIATE TRANSACTIONS
On May 4, 2004, two of the Company's affiliates, DMS Holdings, Inc. and Mabis Healthcare Holdings, Inc., ("DMS/Mabis") were sold to a third party. A portion of the proceeds from the sale was used to repay the Company for unsecured advances and operating expenses which the Company paid on behalf of DMS/Mabis in prior periods, as well as accrued and unpaid management fees due the Company. These repayments totaled $806 and $1,069, respectively. Also as a result of the sale, the Company was paid a fee of $1,725 for the termination of its management fee arrangement with DMS/Mabis, and a fee of $1,600 pursuant to certain advisory agreements. The Company recorded income of approximately $4,309 in the second quarter of 2004 as a result of this transaction.
On May 13, 2004, one of the Company's affiliates, Flavor and Fragrance Holdings, Inc., ("FFG") was sold to a third party. A portion of the proceeds was used to repay the principal and accrued interest on the note the Company received when the net assets of Flavorsource were sold to FFG on January 1, 2002. This principal and accrued interest totaled $12,181. In addition, a portion of the proceeds from the sale was used to repay the Company for unsecured advances and operating expenses which the Company paid on behalf of FFG in prior periods, as well as accrued and unpaid management fees due the Company. These repayments totaled $4,509 and $1,672, respectively. Also as a result of the sale, the Company was paid a fee of $1,705 for the termination of its management fee arrangement with FFG, and a fee of $1,940 pursuant to certain advisory agreements. The Company recorded income of approximately $3,645 in the second quarter of 2004 as a result of this transaction.
On May 18, 2005, JIR Paging, Inc. repurchased from the Company its promissory note in the amount of $9,200. The proceeds to the Company were $9,449 and
consisted of the principal amount of the note plus accrued and unpaid interest since the last interest payment date of $249. JIR Paging was subsequently sold in March 2006 to a third party. At closing, the Company received net cash proceeds of $274 for amounts previously invested in JIR Paging. The Company recorded a gain of $274 in 2005 as a result of reversing reserves previously recorded against the receivable from JIR Paging.
On June 10, 2005, the Company's affiliate, Fleet Graphics Holdings, was sold to management of that Company for $6,600. A portion of the proceeds from the sale was used to pay the Company accrued and unpaid management fees and operating expenses which were paid by the Company on behalf of Fleet Graphics Holdings. These repayments totaled $1,577 and $613; respectively. Also as a result of the sale, the Company was paid $1,400 for the termination of its management fee arrangement with Fleet Graphics Holdings and a fee of $1,160 pursuant to certain advisory agreements. The Company also received $1,850 for various fees and charges associated with the transaction. The Company recorded income of $4,410 in the second quarter of 2005 as a result of this transaction.
On July 29, 2005, Healthcare Products Holdings, Inc. ("HPI"), an affiliate of the Company based on partial common ownership, and its operating subsidiary Hoveround, undertook an independent refinancing of its obligations with several new third party lenders. A portion of the proceeds from the refinancing was used to repay obligations to the Company. The Company received proceeds of $15,000 for payment of notes, accrued interest, accrued and unpaid management fees, amounts previously paid by the Company on behalf of HPI and accrued and unpaid financing fees. Due to previous concerns regarding the collectibility of these amounts the Company had reserved against these receivables leaving an unreserved amount of $7,034. As a result, the Company recorded a gain of $7,966 on the transaction. In the fourth quarter of 2005, the Company reversed additional reserves related to HPI resulting in an addition to the previously recorded gain of $618. This gain was recorded as a component of operating income because the original reserves taken by the Company were charged to operating income. At December 31, 2006, the Company was owed $66 from HPI for management fees.
JIR Broadcast was sold on February 28, 2006 and resulted in cash proceeds to the Company of $30,250. The purchase price included repayment of amounts previously loaned to and paid on behalf of, JIR Broadcast of $15,610, accrued interest of $9,187, accrued and unpaid management fees of $1,679, a fee for the termination of the management fee agreement of $3,400, and reimbursement of expenses incurred by the Company during the sale process of $374. Income of $14,453 was recorded in the Company's financial statements during 2005 related to the JIR Broadcast sale due to the reversal of reserves previously recorded by the Company against the loans, interest on its loans, and the recognition of management fee income from JIR Broadcast which was not previously accrued. In 2006, the Company recorded income of $4,620 related to the termination of management fee agreement, interest income, management fees earned by the Company up to the date of sale, and other closing amounts. In March of 2007, the Company received an additional $3,000 of proceeds upon final settlement of an escrow established at the closing of this transaction. The Company will record income of $3,000 in the first quarter of 2007.
The Company, through its wholly owned subsidiary Motors and Gears Holdings, Inc. has an investment in JZ International (See Note 8). During the fourth quarter of 2006, the Company recorded an impairment charge of $3,800 on this investment, which reduced its recorded value from $12,344 to $8,500. This impairment charge was deemed appropriate based on current negotiations involving the sale of this investment and the contemplated sales price.
NOTE 17 - SALE OF ASSETS
In March 2006, the Company sold certain fully depreciated non-operating assets for $6,405 to related parties. The sales price was determined by an independent third party. The proceeds were used to repay long-term debt on these assets of $3,834. After giving consideration to fees associated with the transaction, the Company recorded a gain of $6,306 in the first quarter of 2006.
In October 2006, the Company sold certain fully depreciated non-operating assets for $1,995. The Company recorded a gain of this amount during the fourth quarter of 2006.
In December 2006, the Company sold additional non-operating assets for proceeds of $618. A gain of $562 was recorded in the fourth quarter of 2006 after taking into consideration the asset's net book value at the date of sale of $56.
NOTE 18 - RELATED PARTY TRANSACTIONS
Transaction Advisory Agreement. Each of the Company's subsidiaries are parties to an advisory agreement with the Company, referred to as the Transaction Advisory Agreement, pursuant to which, such subsidiaries pay to the Company (i) investment banking and sponsorship fees of up to 2.0% of the aggregate consideration paid in connection with acquisitions, joint ventures, minority investments or sales by each such subsidiary of all or substantially all of its or its subsidiaries capital stock, businesses or properties; (ii) financial advisory fees of up to 1.0% of the amount obtained or made available pursuant to 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 the Company's out-of-pocket costs in connection with providing such services. Each Transaction Advisory Agreement contains indemnities in favor of the Company and its affiliates, and The Jordan Company and certain of its affiliates, including TJC Management Corporation, in connection with the Transaction Advisory Agreement and such services. The Transaction Advisory Agreement will expire in December 2007, but is 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. The Company recorded fees pursuant to the Transaction Advisory Agreement of $0, $0 and $73 for the years 2006, 2005 and 2004, respectively.
TJC Management Consulting Agreement. JII has entered into a consulting services agreement with TJC Management Corporation, an affiliate of The Jordan Company, referred to as the TJC Management Consulting Agreement, pursuant to which the Company will in turn pay to TJC Management Corporation (i) one-half of the investment banking, sponsorship and financing advisory fees paid to the Company pursuant to the Transaction Advisory Agreement, unless otherwise determined by our Board of Directors; (ii) (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 the Company or its other subsidiaries and (B) financial advisory fees of up to one-half of 1.0% of any debt, equity or other financing or refinancing involving the Company or such subsidiaries, in each case, arranged with the assistance of TJC Management Corporation or its affiliates, unless otherwise
determined by the Company's Board of Directors; and (iii) reimbursement for TJC Management Corporation's and The Jordan Company's out-of-pocket costs incurred in connection with such services. The TJC Management Consulting Agreement also contains indemnities in favor of TJC Management Corporation and its affiliates and The Jordan Company and its affiliates in connection with such services. In consideration for these fees, the services of Mr. Jordan and the investment banking, sponsorship and advisory services of TJC Management Corporation will be provided to the Company. 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. The Company did not pay to TJC Management Corporation or The Jordan Company any fees or cost reimbursements for the years 2006, 2005, and 2004 under this agreement. Approximately, $9,652 of such fees and cost reimbursements are accrued and unpaid under this agreement as of December 31, 2006 and December 31, 2005.
Service and Fee Agreements. Two companies that are not subsidiaries - Healthcare Products Holdings, Inc. and Staffing Consulting Holdings, Inc., - are parties to service and fee agreements or arrangements with the Company and/or TJC Management Corporation, pursuant to which such companies will pay to the Company and/or TJC Management Corporation (i) investment banking and sponsorship fees of up to 2.0% of the aggregate consideration paid in connection with acquisitions, joint ventures, minority investments or sales by such companies of all or substantially all of their or their subsidiaries' capital stock, businesses or properties; (ii) financial advisory fees of up to 1.0% of any amount obtained or made available pursuant to debt, equity or other financing or refinancing involving such company, in each case, arranged with the Company's assistance or that of its affiliates; (iii) fees based upon a percentage of net EBITDA (as defined) or net sales; and (iv) reimbursement for the Company's and/or TJC Management Corporation's out of pocket costs in connection with providing such services. These fee agreements or arrangements contain indemnities in favor of the Company and its affiliates, including TJC Management Corporation, in connection with such services. Pursuant to the TJC Management Consulting Agreement, the Company, 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 the Company's Board of Directors. These fee agreements or arrangements will expire at various times from 2007 through 2009, 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. Pursuant to these services and fee arrangements the Company received approximately $613, $5,378 and $6,648 for the years ended December 31, 2006, 2005 and 2004 respectively, which includes funds received from companies no longer under these agreements.
Legal Counsel. Mr. G. Robert Fisher, a director of, and secretary to, the Company, is a partner of Sonnenschein, Nath & Rosenthal LLP. Mr. Steven L. Rist, the general counsel and assistant secretary to the Company, is also a partner of Sonnenschein, Nath & Rosenthal LLP. Mr. Fisher, Mr. Rist and their law firm have represented the Company and The Jordan Company in the past, and expect to continue representing them in the future. Sonnenschein, Nath & Rosenthal LLP was paid approximately $1,234, $587 and $1,040 in fees and expenses by the Company in 2006, 2005 and 2004, respectively. The Company believes that the fees paid were equivalent to what it would have paid to an unaffiliated third party law firm for similar services.
NOTE 19 - BUSINESS SEGMENT INFORMATION
The Company's continuing business operations are comprised of four operating subsidiaries. Deflecto, Beemak and Sate-Lite which are grouped together and referred to as the Jordan Specialty Plastics group, and GramTel.
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, modular storage units, and emergency warning triangles by Sate-Lite; and design, manufacture, and marketing of plastic injection-molded products for mass merchandisers, major retailers, and large wholesalers and manufacture of extruded vinyl chairmats for the office products industry by Deflecto.
GramTel provides data storage services and access to dedicated Internet connectivity.
The results of the Jordan Auto Aftermarket group are included in continuing operations through their date of sale of December 29, 2006 (See Note 15). Their assets and liabilities are not included in the Company's balance sheet as of December 31, 2006. The Jordan Auto Aftermarket group consisted of Alma, Dacco and Atco and focused primarily on the remanufacture and supply of torque converters to the automotive aftermarket parts industry. These operating subsidiaries also produced newly manufactured torque converters, air conditioning compressors and clutch and disc assemblies for major automotive and equipment OEM's.
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.
Intra-segment sales exist between Sate-Lite, Beemak and Deflecto. These sales were eliminated in consolidation and are not presented in segment disclosures. There is one customer that accounts for more than 10% of the JSP segment net sales. This customer accounted for $20,377 of Deflecto's net sales. No other 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. Included in identifiable assets of discontinued operations are assets of the Specialty Printing and Labeling group, Welcome Home LLC and Motors and Gears Holdings. Corporate assets consist primarily of cash and cash equivalents, equipment, notes receivable from affiliates and deferred financing 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.
Summary financial information by business segment is as follows:
SUMMARY FINANCIAL INFORMATION BY GEOGRAPHIC AREA IS AS FOLLOWS:
NOTE 20 - ACQUISITION AND FORMATION OF SUBSIDIARIES
On September 28, 2005, the Company, through its previously wholly owned subsidiary, Atco, acquired certain assets including inventory and machinery of Coolstar, Inc. for $393 including fees. Coolstar is a manufacturer of evaporators for the automotive climate control market and its operations were fully integrated into Atco.
NOTE 21 - ADDITIONAL PURCHASE PRICE AGREEMENTS/DEFERRED PURCHASE PRICE AGREEMENTS
The Company has a contingent purchase price agreement relating to its acquisition of Deflecto in 1998. The agreement 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 agreement is payable 120 days after the transaction.
The Company also had a deferred purchase price agreement relating to its acquisition of Teleflow in July 1999. This agreement was based upon Teleflow achieving certain agreed upon earnings before interest, taxes, depreciation, and amortization for each year through the year ended December 31, 2003. The Company paid $750 and $328 in 2003 and 2002, respectively, related to this agreement. In 2004, the Company and previous management of Teleflow reached an agreement whereby the recipients of the above payments agreed to repay $950 to the Company over time. The final payment in the repayment schedule was made in December 2005. No other amounts are due by either party in connection with this agreement.
NOTE 22 - 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 23 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(1) Income from continuing operations for the first quarter of 2006 includes income from the sale of an affiliate of $4,612 and gain on sale of fixed assets of $6,306.
(2) Income from continuing operations for the second quarter of 2005 includes income from the sale of an affiliate of $4,410.
(3) Net income for the third quarter of 2006 includes income from the sale of Pamco of $14,693. Income from continuing operations for the third quarter of 2005 includes income from the refinancing of an affiliate for $7,966.
(4) Net income for the fourth quarter of 2006 includes income related to the sale of Kinetek, Inc. of $165,134 partially offset by the loss on the sale of Seaboard of $3,165. Loss from continuing operations for the fourth quarter of 2005 includes income related to the sale of an affiliate of $14,727 offset by a goodwill impairment loss of $20,862.
NOTE 24 - RESEARCH AND DEVELOPMENT COSTS
The Company incurred $146, $292 and $276 of research and development costs during 2006, 2005 and 2004, respectively.
NOTE 25 - MANAGEMENT DISCUSSION OF LIQUIDITY
The Company has experienced operating losses in recent years and has used cash in operating activities. Additionally, at December 31, 2006, the Company had negative working capital of $31.4 million. These factors have caused the Company's executive management to evaluate various options to improve the Company's liquidity. During 2004, the Company restructured some of its outstanding debt through the Exchange Offer discussed in Note 12 to the financial statements and the Modification and Waiver Agreements also discussed in Note 12 to the financial statements. The effect of these transactions has been to reduce cash paid for interest in the current year as well as to provide for further reductions in debt maturity payments if certain financial performance is not achieved. In addition, the Company expects improved operating performance in all segments over the prior year. Specifically, new product development and the continued shift of manufacturing to China in the Jordan Specialty Plastics group is expected to improve results. Further, the Company has evaluated its holdings of investments in affiliates (See Note 8) and, when appropriate, will sell certain investments, similar to the sale of the Company's investments in DMS Holdings Inc, Mabis Healthcare Holdings Inc., Flavor and Fragrance Holdings Inc. and JIR Broadcast, Inc. as described in Note 16 to the financial statements. The Company believes that through its efforts discussed above, in conjunction with opportunistic sales of assets, refinancings or market transactions, the Company will have sufficient liquidity to meet its obligations in the coming year. As noted, the Company has long-term debt that matures within the year. Currently, the Company is contemplating various avenues of repaying or refinancing this debt, and management is confident that it will do so prior to the maturity. If the Company is unable to refinance or enter into a transaction that allows it to pay off this debt, then there is substantial doubt about the Company's ability to continue as a going concern.
NOTE 26 - ISSUANCE OF COMMON STOCK
On December 15, 2006, the Company issued 2,010 shares of $0.01 par common stock to Youming Ye, an employee of an affiliate of the Company. Mr. Ye paid $4 for the shares during the first quarter of 2007.
NOTE 27 - SUBSEQUENT EVENTS
On January 11, 2007, the Company liquidated its wholly-owned subsidiary, Motors and Gears Holdings, Inc. Motors and Gears Holdings, Inc. is the parent of Kinetek, Inc. which sold its operating subsidiaries in November of 2006 (See Note 15). Upon liquidation, cash of $132,482 and an investment in JZ International valued at $8,500 were transferred to the Company in full settlement of all intercompany amounts owed.
On November 16, 2006, the Board of Directors of the Company agreed to amend the Articles of Incorporation to allow for the issuance of additional common stock and a new class of preferred stock of the Company. On January 11, 2007, the amended articles of incorporation were filed and the Company was
authorized to issue up to 110,000 shares of Common Stock having a par value of $0.01 per share and 100,000 shares of preferred stock having a par value of $0.01 per share. On January 11, 2007 52,177.6 shares of preferred stock were issued in exchange for certain Non-Voting Preferred Stock and Class B Common Stock of Motors and Gears Holdings, Inc.
On January 12, 2007, the Company voluntarily redeemed $125,000 of 13% Exchange Notes due April 2007. The notes were redeemed at face value plus accrued interest to the date of redemption. The Company will record a gain of $4,063 during the first quarter of 2007 as a result of this transaction.
On March 13, 2007, the Company received $3,000 of additional proceeds upon final settlement of an escrow established at the time of sale of JIR Broadcast in March of 2006.
NOTE 28 - CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Pursuant to the Exchange Offer described in Note 12, wholly owned subsidiaries of the Company, JII Holdings LLC and JII Holdings Finance Corporation, issued senior secured notes which have been guaranteed by the Company and certain of the Company's subsidiaries. Each of the subsidiary guarantors is "100% owned" (as defined in Rule 3-10 of Regulation S-X) by the Company, and in all cases, the guarantees are full and unconditional and joint and several. The following condensed consolidating financial information is provided in lieu of separate financial statements for the issuers of these notes.
Year ended December 31, 2006
Year ended December 31, 2005 (Restated)
Year ended December 31, 2004 (Restated)
Balance Sheet as of December 31, 2006
Balance Sheet as of December 31, 2005 (Restated)
Year ended December 31, 2006
Year ended December 31, 2005 (Restated)
Year ended December 31, 2004 (Restated)
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. Controls and Procedures
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-15 of the Securities Exchange Act of 1934 ("Exchange Act") promulgated thereunder, we, with the participation of our chairman and our chief financial officer, have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2006. Based on such evaluation, our chairman and our chief financial officer have concluded that our disclosure controls and procedures were effective as of such time.
Since December 31, 2006, there have been no changes in the internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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:
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 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 officer 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 principal of The Jordan Company, a private merchant banking firm which he founded in 1982. Mr. Jordan is also President of Jordan Zalaznick Advisors, Inc. and TJC Management Corporation, Manager of JZ International, LLC, Managing Partner of Jordan Zalaznick Capital Company and Managing Member of Resolute Fund Partners, LLC. Mr. Jordan is also a director of Sensus Metering Systems, Inc., TAL International Group, Inc. and Kinetek, Inc. as well as other privately held companies.
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 a Group Vice President for Baxter International, Inc. ("Baxter"). From September 1970 through 1985, Mr. Quinn was employed by American Hospital Supply Corporation ("American Hospital") in a variety of management capacities, where he was a Group Vice President of the Hospital Group and a corporate officer when American Hospital was acquired by Baxter. Mr. Quinn is also Chairman and a member of the board of directors of a number of privately held companies. He is also a Managing Principal of The Jordan Company LP.
MR. NELSON has served as the Company's Senior Vice President and Treasurer since he joined the Company in 1996.
MS. ONDRULA has served as the Company's Chief Financial Officer since 2006. Previously, Ms. Ondrula was the Company's Vice President and Controller. She joined the Company in 1994.
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 holding company. He is also a Director of Fortescue Metals Group Ltd. and Finova Group, Inc. Mr. Steinberg is also Chairman of the Board of Home Fed Corporation.
MR. ZALAZNICK has served as a director of the Company since 1988. Since 1982, Mr. Zalaznick has been a Partner and Managing Principal of The Jordan Company. Since 2002, Mr. Zalaznick is also a Managing Member of Resolute Fund Partners, LLC. Mr. Zalaznick is a director of Cequel Communications Holdings, LLC, Sensus Metering Systems, Inc., as well as other privately held companies. Mr. Zalaznick received a BA in Economics from Cornell University and a MBA from Columbia University.
MR. FISHER has served as a director and Secretary of the Company since 1988. Mr. Fisher also served as General Counsel of the Company from 1988 until 1996. Since February 1999, Mr. Fisher has been a member of the law firm of Sonnenschein, Nath & Rosenthal LLP, 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 the prior 27 years, Mr. Fisher was a member of the law firm of Smith, Gill, Fisher & Butts, P.C., which combined with Bryan Cave LLP in June 1995.
MR. RIST has served as General Counsel of the Company since 1996 and as an Assistant Secretary of the Company since 1998. Since January 1999, Mr. Rist has been a member of the law firm of Sonnenschein, Nath & Rosenthal LLP, a firm that represents the Company in various legal matters. From June 1995 until January 1999, Mr. Rist was a member of the law firm of Bryan Cave LLP. For the prior 12 years, Mr. Rist was a member of the law firm of Smith, Gill, Fisher & Butts. P.C., which combined with Bryan Cave LLP in June 1995.
MR. NICHOLS has served as a director since 2005. Mr. Nichols is a private investor and from May 1974 through 2000, he was President of Nichols Industries, Inc. Mr. Nichols is also a director of Leucadia National Corporation, a holding company.
Code of Ethics. The Board of Directors has adopted a Code of Ethics for the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, and other senior financial personnel. A copy of the Code is available from the Company upon request. The Company will update the Code of Ethics for any amendments or waivers.
Audit Committee. The Company is not a "listed company" under SEC rules and is therefore not required to have an audit committee comprised of independent directors. The Company does not currently have an audit committee and does not have an audit committee financial expert. The Board of Directors has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member's financial sophistication. Accordingly, the Board of Directors believes that each of its members have the sufficient knowledge and experience necessary to fulfill the duties and obligations that an audit committee would have.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The following table shows the cash compensation paid by the Company, for the three years ended December 31, 2006, for services in all capacities to the Chief Executive Officer, President and Chief Operating Officer, and Chief Financial Officer of the Company.
Summary Compensation Table
- ---------- (1) Mr. Jordan derived his compensation from The Jordan 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.
Employment Agreement. Mr. Quinn has entered into 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 $1,000,000 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 Jordan Company. In 2005, Mr. Quinn, waived $500,000 of his base salary and in 2006 he waived $578,000 of his base salary. All provisions of his employment contract remain in force in 2006 and through the termination date of his contract. 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 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.
Directors Compensation. The Company compensates its directors quarterly at $20,000 per year for each director. The Indenture permits directors fees of up to $250,000 per year in the aggregate. In addition, the Company reimburses directors for their travel and other expenses incurred in connection with attending Board meetings (and committees thereof) and otherwise performing their duties as directors of the Company.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table furnishes information, as of March 30, 2007, 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.
- ---------- (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, and rights of 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 percentages owned by each other person listed. As of December 31, 2006, there were 100,511.2249 shares of Common Stock issued and outstanding.
(2) Includes 1 share held personally and 17,771.9119 shares held by the John W. Jordan II Revocable Trust. Does not include 309.2933 shares held by Daly Jordan O'Brien, a sister of Mr. Jordan, 309.2933 shares held by Elizabeth O'Brien Jordan, also a 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 The Jordan/Zalaznick Capital Company ("JZCC") or 3,500 shares held by JZ Equity Partners PLC ("JZEP"), 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 JZCC. Mr. Jordan and Mr. Zalaznick own and manage the advisor to JZEP.
(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 12,000 shares held by the John W. Jordan II Family Limited Liability Company of which John W. Jordan II is a Manager.
(6) Does not include 82.1697 shares held by Bruce Zalaznick, the brother of Mr. Zalaznick.
(7) Excludes 13,000 shares held by TQF, LLC of which Thomas H. Quinn is the Manager.
(8) 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.
(9) Excludes 9,969.9999 shares held by Leucadia Investors, Inc., of which Joseph S. Steinberg is President and a director.
Stockholder Agreement. Each holder of outstanding shares of Common Stock of the Company is a party to a Stockholder Agreement, dated as of June 1, 1988 (the "Stockholder Agreement"), by and among the Company and such stockholders. The Stockholder Agreement subjects the transfer of shares of Common Stock by such stockholders to a right of first refusal in favor of the Company and "co-sale" rights in favor of the other stockholders, subject to certain restrictions. Under certain circumstances, stockholders holding 60% or more of the outstanding shares of Common Stock, on a fully diluted basis, have certain rights to require the other stockholders to sell their shares of Common Stock.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Employment Agreements; Stock Transactions. On February 25, 1988, the Company entered into an employment agreement with Thomas H. Quinn, pursuant to which Mr. Quinn became the President and Chief Operating Officer of the Company, effective January 1, 1988. See "Item 11 - Employment Agreement".
JZ International, LLC. The Company, through Motors and Gears Holdings, has an investment in the Class A and Class B Preferred Units of JZ International, LLC. These debt securities are not publicly traded and do not have a determinable fair value. The cost method of accounting is used to account for this investment. The Preferred Units have a cumulative 5% annual return. The Class A Preferred Units may be redeemed at any time at the discretion of the Board of Directors of JZ International, but no later than December 31, 2017, whereas the Class B Preferred Units may be redeemed at any time at the discretion of the Board of Directors of JZ International, but no later than December 31, 2018. As a component of the plan to sell Kinetek, Inc. in 2006 and liquidate Motors and Gears Holdings, Inc. in 2007, the Company has entered into negotiations to sell its investment in JZ International for $8.5 million. Accordingly, the Company has taken an impairment charge of $3.8 million in 2006 to record this investment at its net realizable value of $8.5 million. JZ International's Chief Executive Officer is David W. Zalaznick, and its members include Messrs. Jordan, Quinn, Zalaznick and Boucher, who are directors and stockholders of the Company. JZ International and its subsidiaries are focused on making European and other international investments. The Company is accounting for this investment under the cost method.
Healthcare Products Holdings, Inc. As of December 31, 2004, 2005 and 2006, the Company had $2.5 million, $1.7 million and $0.1 million, respectively, of net unsecured advances due from Healthcare Products Holdings, Inc. Healthcare Products Holdings' Chief Executive Officer is Mr. Quinn, and its stockholders include Messrs. Jordan, Quinn, Zalaznick and Boucher, who are the Company's directors and stockholders, as well as other partners, principals and associates of The Jordan Company who are also the Company's stockholders.
Transaction Advisory Agreement. Each of the Company's subsidiaries are parties to an advisory agreement with the Company, referred to as the Transaction Advisory Agreement, pursuant to which, such subsidiaries pay to the Company (i) investment banking and sponsorship fees of up to 2.0% of the aggregate consideration paid in connection with acquisitions, joint ventures, minority investments or sales by each such subsidiary of all or substantially all of its or its subsidiaries capital stock, businesses or properties; (ii) financial advisory fees of up to 1.0% of the amount obtained or made
available pursuant to 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 the Company's out-of-pocket costs in connection with providing such services. Each Transaction Advisory Agreement contains indemnities in favor of the Company and its affiliates, and The Jordan Company and certain of its affiliates, including TJC Management Corporation, in connection with the Transaction Advisory Agreement and such services. The Transaction Advisory Agreement will expire in December 2007, but is 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. The Company recorded fees pursuant to the Transaction Advisory Agreement of $0.1 million, $0 and $0 for the years 2004, 2005 and 2006, respectively.
TJC Management Consulting Agreement. JII has entered into a consulting services agreement with TJC Management Corporation, an affiliate of The Jordan Company, referred to as the TJC Management Consulting Agreement, pursuant to which the Company will in turn pay to TJC Management Corporation (i) one-half of the investment banking, sponsorship and financing advisory fees paid to the Company pursuant to the Transaction Advisory Agreement, unless otherwise determined by our Board of Directors; (ii) (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 the Company or its other subsidiaries and (B) financial advisory fees of up to one-half of 1.0% of any debt, equity or other financing or refinancing involving the Company or such subsidiaries, in each case, arranged with the assistance of TJC Management Corporation or its affiliates, unless otherwise determined by the Company's Board of Directors; and (iii) reimbursement for TJC Management Corporation's and The Jordan Company's out-of-pocket costs incurred in connection with such services. The TJC Management Consulting Agreement also contains indemnities in favor of TJC Management Corporation and its affiliates and The Jordan Company and its affiliates in connection with such services. In consideration for these fees, the services of Mr. Jordan and the investment banking, sponsorship and advisory services of TJC Management Corporation will be provided to the Company. 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. The Company did not pay TJC Management Corporation or The Jordan Company any fees or cost reimbursements for the years 2003, 2004 or 2005 under this agreement. Approximately, $9.7 million of such fees and cost reimbursements are accrued and unpaid under this agreement as of December 31, 2006.
Management Consulting Agreement. Each of the Company's subsidiaries are party to a consulting agreement with the Company, referred to as the Management Consulting Agreement, pursuant to which they pay to the Company annual consulting fees of up to the greater of (i) 3% of the net EBITDA (as defined) and other non-cash charges of each such subsidiary in each case, charged, expensed or accrued against such net income or (ii) 1.0% of such subsidiary's net sales for such services, payable quarterly, and will reimburse the Company for its out-of-pocket costs related to its services. The Management Consulting Agreement expires in December 2007, but is 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.
JI Properties Services Agreement. The Company's nonrestricted subsidiary, JI Properties, Inc., entered into a services agreement, referred to as the JI Properties Services Agreement, with the Company and each of its other subsidiaries, pursuant to which JI Properties grants to the Company the right to use certain of its assets and provides certain services to the Company and such subsidiaries in connection with the use and/or operation of such assets. Pursuant to the JI Properties Services Agreement, the Company's subsidiaries will be charged the costs incurred in the use and/or operation of such assets used or operated by the Company and their allocable portion of costs associated with owning such assets which are not directly attributable to the operation or use of such assets 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. None of the Company's subsidiaries paid any fees to JI Properties under the JI Properties Service Agreement for the years 2004, 2005 or 2006.
The Company also allocates overhead, general and administrative charges and expenses among the Company's subsidiaries based on the respective revenues and usage of corporate overhead by its subsidiaries. The Company received approximately $5.8 million, $4.6 million and $3.5 million for the years ended December 31, 2004, 2005 and 2006, respectively, in respect of overhead allocation reimbursement.
Service and Fee Agreements. Two companies that are not subsidiaries - Healthcare Products Holdings, Inc. and Staffing Consulting Holdings, Inc. - are parties to service and fee agreements or arrangements with the Company and/or TJC Management Corporation, pursuant to which such companies will pay to the Company and/or TJC Management Corporation (i) investment banking and sponsorship fees of up to 2.0% of the aggregate consideration paid in connection with acquisitions, joint ventures, minority investments or sales by such companies of all or substantially all of their or their subsidiaries' capital stock, businesses or properties; (ii) financial advisory fees of up to 1.0% of any amount obtained or made available pursuant to debt, equity or other financing or refinancing involving such company, in each case, arranged with the Company's assistance or that of its affiliates; (iii) fees based upon a percentage of net EBITDA (as defined) or net sales; and (iv) reimbursement for the Company's and/or TJC Management Corporation's out of pocket costs in connection with providing such services. These fee agreements or arrangements contain indemnities in favor of the Company and its affiliates, including TJC Management Corporation, in connection with such services. Pursuant to the TJC Management Consulting Agreement, the Company, 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 the Company's Board of Directors. These fee agreements or arrangements will expire at various times from 2007 through 2009, 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. Pursuant to these services and fee arrangements, the Company received approximately $6.6 million, $5.4 million, and $0.6 million for the years ended December 31, 2004, 2005 and 2006 respectively, which includes companies no longer under these agreements.
Tax Sharing Agreements. Each of the Company's subsidiaries and the Company are parties to a tax sharing agreement. Pursuant to the tax sharing agreement, each of the Company's consolidated subsidiaries owes to the
Company, 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).
Legal Counsel. Mr. G. Robert Fisher, a director of, and secretary to, the Company, is a partner of Sonnenschein, Nath & Rosenthal LLP. Mr. Steven L. Rist, the general counsel and assistant secretary to the Company, is also a partner of Sonnenschein, Nath & Rosenthal LLP. Mr. Fisher, Mr. Rist and their law firm have represented the Company and The Jordan Company in the past, and expect to continue representing them in the future. In 2006, Sonnenschein, Nath & Rosenthal LLP was paid approximately $1.2 million in fees and expenses by the Company. The Company believes that the fees paid were equivalent to what it would have paid to an unaffiliated third party law firm for similar services.
Directors and Officers Indemnification. The Company has entered into indemnification agreements with certain members of the Company's Board of Directors whereby the Company has agreed, subject to certain exceptions, to indemnify and hold harmless each director from liabilities incurred as a result of such persons status as director of the Company.
Future Agreements. The Company has adopted a policy that future transactions between it and its officers, directors and other affiliates (including the Kinetek subsidiaries) must (i) be approved by a majority of the members of the Company's Board of Directors and by a majority of the disinterested members of the Company's Board of Directors and (ii) be on terms no less favorable to the Company than could be obtained from unaffiliated third-parties.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional services rendered by Ernst & Young LLP for the audit of the Company's annual financial statements for the years ended December 31, 2006 and 2005, and fees billed for other services rendered by Ernst & Young during those periods.
Part IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements appearing at Item 8, which is incorporated herein by reference.
(2) Financial Statement Schedule
The following financial statement schedule for the years ended December 31, 2006, 2005, and 2004 is submitted herewith:
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are not applicable and therefore have been omitted, or the information has been included in the consolidated financial statements.
(3) Exhibits
An index to the exhibits required to be listed under this Item 15(a) (3) follows the "Signatures" section hereof and is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
JORDAN INDUSTRIES, INC.
By /s/ John W. Jordan II ------------------------------------- John W. Jordan II Dated: March 30, 2007 Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/ John W. Jordan II ------------------------------------- John W. Jordan, II Dated: March 30, 2007 Chairman of the Board of Directors and Chief Executive Officer
By /s/ Thomas H. Quinn ------------------------------------- Thomas H. Quinn Dated: March 30, 2007 Director, President and Chief Operating Officer
By /s/ G. Robert Fisher ------------------------------------- G. Robert Fisher Dated: March 30, 2007 Director, General Counsel and Secretary
By /s/ David W. Zalaznick ------------------------------------- David W. Zalaznick Dated: March 30, 2007 Director
By /s/ Joseph S. Steinberg ------------------------------------- Joseph S. Steinberg Dated: March 30, 2007 Director
By /s/ Lisa M. Ondrula ------------------------------------- Lisa M. Ondrula Dated: March 30, 2007 Vice President, Chief Financial Officer
Schedule II
JORDAN INDUSTRIES, INC. VALUATION AND QUALIFYING ACCOUNTS (dollars in thousands)
EXHIBIT INDEX
2(a)(4) -- Agreement and Plan of Merger between Thos. D. Murphy Company and Shaw-Barton, Inc.
2(b)(5) -- Asset Purchase Agreement between Alma Piston Company and Alma Products Holdings, Inc. dated as of February 26, 1999.
3(a)(1) -- Articles of Incorporation of the Registrant.
3(b)(1) -- By-Laws of the Registrant.
4(a)(8) -- Series C and Series D 10 3/8% Senior Notes Indenture, dated March 22, 1999, between Jordan Industries, Inc. and U.S. Bank Trust National Association.
4(b)(7) -- Series A and Series B 10 3/8% Senior Notes Indenture, dated July 25, 1997, between Jordan Industries, Inc. and First Trust National Association, as Trustee.
4(c)(8) -- First Supplemental Indenture, dated March 9, 1999, between Jordan Industries, Inc. and U.S. Bank & Trust Company f/k/a First Trust National Association, as Trustee, to the 10 3/8% Senior Notes Indenture, dated July 25, 1997.
4(d)(7) -- Series A and Series B 11 3/4% Senior Subordinated Discount Debentures Indenture, dated April 2, 1997, between Jordan Industries, Inc. and First Trust National Association, as Trustee.
4(e)(7) -- First Supplemental Indenture, dated as of July 25, 1997, between Jordan Industries, Inc. and First Trust National Association, as Trustee, to the 11 3/4% Senior Subordinated Discount Debentures Indenture, dated as of April 2, 1997.
4(f)(8) -- Second Supplemental Indenture, dated as of March 9, 1999, between Jordan Industries, Inc. and First Trust National Association, as Trustee, to the 11 3/4% Senior Subordinated Discount Debentures Indenture, dated as of April 2, 1997.
4(g)(8) -- Global Series D Senior Note.
4(h)(7) -- Global Series B Senior Note.
4(i)(7) -- Global Series B Senior Subordinated Discount Debenture.
4(j)(11) -- Indenture, dated November 7, 1996, between Kinetek, Inc. and Fleet National Bank.
4(k)(12) -- First Supplemental Indenture, dated December 17, 1997, between Kinetek, Inc. and State Street Bank and Trust Company, as Trustee.
4(l)(12) -- Indenture, dated December 17, 1997, between Kinetek, Inc. and State Street Bank and Trust Company, as Trustee.
4(m)(13) -- 5% Indenture, dated as of April 12, 2002, among Kinetek Industries, Inc., U.S. Bank National Association, as Trustee and the Guarantors listed therein.
4(n)(16) -- 13% Senior Secured Notes Indenture, dated February 18, 2004, by and among JII Holdings, LLC, JII Holdings Finance Corporation, Jordan Industries, Inc. and U.S. Bank National Association, as Trustee.
4(o)(16) -- 13% Senior Secured Notes issued by JII Holdings, LLC and JII Holdings Finance Corporation (included in Exhibit 4(n)).
10(a)(1) -- Stockholders Agreement, dated as of June 1, 1988, by and among the Registrant's holders of Common Stock.
10(b)(1) -- Employment Agreement, dated as of February 25, 1988, between the Registrant and Thomas H. Quinn.
10(c)(1) -- Restricted Stock Agreement, dated February 25, 1988, between the Registrant and Jonathan F. Boucher.
10(d)(1) -- Restricted Stock Agreement, dated February 25, 1988, between the Registrant and Jack R. Lowden.
10(e)(1) -- Restricted Stock Agreement, dated February 25, 1988, between the Registrant and Thomas H. Quinn.
10(f)(1) -- Stock Purchase Agreement, dated June 1, 1988, between Leucadia Investors, Inc. and John W. Jordan, II.
10(g)(1) -- Zero Coupon Note, dated June 1, 1988, issued by John W. Jordan, II to Leucadia Investors, Inc.
10(h)(1) -- Pledge, Security and Assignment Agreement, dated June 1, 1988 by John W. Jordan, II.
10(i) -- Amended and Restated Non-Negotiable Subordinated Note, dated as of June 30, 2002, issued by Pamco Printed Tape and Label (f/k/a Pamco Holdings, Inc.) in the initial principal amount of $6,112,501.
10(j)(2,14) -- Tax Sharing Agreement, dated as of June 29, 1994, among the Company and the
subsidiaries signatory thereto.
10(k)(7,2) -- Properties Services Agreement, dated as of July 25, 1997, between Jordan Industries, Inc. and its subsidiaries.
10(l)(7,2) -- Transition Agreement, dated as of July 25, 1997, between Jordan Industries, Inc. and Motors & Gears, Inc.
10(m)(7) -- New TJC Management Consulting Agreement, dated as of July 25, 1997, between TJC Management Corp. and Jordan Industries, Inc.
10(n)(7) -- Termination Agreement, dated as of July 25, 1997, between Jordan Industries, Inc. and its subsidiaries.
10(o)(7,15) -- Form of Indemnification Agreement between Jordan Industries, Inc. and its subsidiaries and their directors.
10(p)(14) -- Non-Negotiable Subordinated Note, dated as of February 11, 1998, issued by Deflecto (f/k/a Deflecto Holdings, Inc.) in the initial principal amount of $5,000,000.
10(q)(14) -- Non-Negotiable Subordinated Note, dated as of February 27, 1998, issued by Rolite (f/k/a Rolite Holdings, Inc.) in the initial principal amount of $900,000.
10(r)(14) -- Non-Negotiable Subordinated Note, dated as of June 2, 2000, issued by Instachange (f/k/a IDL Holdings Limited) in the initial principal amount of $3,714,285 (Canadian Dollars).
10(s)(2,14) -- Management Consulting Agreement, dated as of August 10, 2001, among JII, Inc. and the subsidiaries signatory thereto.
10(t)(2,14) -- Transaction Advisory Agreement, dated as of August 10, 2001, among JII, Inc. and the subsidiaries signatory thereto.
10(u)(9) -- Loan and Security Agreement, dated as of August 16, 2001, among JII, Inc. as borrower, the Company as parent guarantor, the subsidiaries signatory thereto as subsidiary guarantors, Congress Financial Corporation (Central) as agent and First Union Bank as lender.
10(v)(2,14) -- Intercompany Loan Agreement, dated as of August 16, 2001, among JII, Inc. and the subsidiaries signatory thereto, and accompanying Demand Notes.
10(w)(10) -- Loan and Security Agreement, dated as of December 18, 2001, among Kinetek Industries, Inc. as borrower, Kinetek, Inc. as parent guarantor, the subsidiaries signatory thereto as borrowers or subsidiary guarantors and Fleet Capital Corporation as agent.
10(x)(10) -- Management Consulting Agreement, dated as of December 14, 2001, among the Company, Motors and Gears Holdings, Inc. and the subsidiaries signatory thereto.
10(y)(10) -- Transaction Advisory Agreement, dated as of December 14, 2001, among the Company, Motors and Gears Holdings, Inc. and the subsidiaries signatory thereto.
10(z)(10) -- Properties Services Agreement, dated as of December 14, 2001, among JI Properties, Inc., Motors and Gears Holdings, Inc. and the subsidiaries signatory thereto.
10(aa)(10) -- Agreement to Join in the Filing of Consolidated Income Tax Returns, dated as of December 14, 2001, among the Company, Motors and Gears Holdings, Inc. and the subsidiaries signatory thereto.
10(bb)(11) -- Merkle-Korff Industries, Inc. Non-Negotiable Subordinated Note in the principal aggregate amount of $5,000,000 payable to John D. Simms Revocable Trust Under Agreement.
10(cc)(12) -- Electrical Design and Control Company, Inc. Non-Negotiable Subordinated Note in the principal aggregate amount of $1,333,333 payable to Tina Levire.
10(dd)(12) -- Electrical Design and Control Company, Inc. Non-Negotiable Subordinated Note in the principal aggregate amount of $1,333,333 payable to Marta Monson.
10(ee)(12) -- Electrical Design and Control Company, Inc. Non-Negotiable Subordinated Note in the principal aggregate amount of $1,333,334 payable to Eric Monson.
10(ff)(16) -- Amendment No. 5 to Loan and Security Agreement, dated as of February 18, 2004 by and among the financial institutions listed on the signature pages thereto, Congress Financial Corporation (Central), as agent for the lenders, and JII LLC.
10(gg)(16) -- Intercreditor Agreement, dated as of February 18, 2004, by and between U.S. Bank National Association, as Collateral Agent, and Congress Financial Corporation (Central), as Administrative Agent.
10(hh)(16) -- Waiver Agreement, dated as of January 31, 2004, by and between Jordan Industries, Inc. and the other persons signatory thereto.
10(ii)(16) -- Modification Agreement, dated as of February 18, 2004, by and among Jordan Industries, Inc. and those holders of Jordan Industries' 11 3/4% Senior Subordinated Discount Debentures due 2009 identified on Schedule A attached thereto, including Addendum thereto dated April 1, 2004.
12 -- Statements re. Computation of Ratios.
21 -- Subsidiaries of the Registrant.
31(a) -- Certification of John W. Jordan II
31(b) -- Certification of Lisa M. Ondrula
32(a) -- Certification of John W. Jordan II pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32(b) -- Certification of Lisa M. Ondrula pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (no. 33-24317)
(2) The Company entered into Inter-company Demand Notes, Inter-company Management Consulting Agreements, Inter-company Transaction Advisory Agreements, Inter-company Properties Services Agreements and Inter-company Tax Sharing Agreements with each subsidiary not a signatory to the agreements incorporated by reference in this report, which are identical in all material respects with the notes and agreements incorporated by reference in this Report. Copies of such additional notes and agreements have therefore not been included as exhibits to this filing, in accordance with Instruction 2 to Item 601 of Regulation S-K.
(3) Incorporated by reference to the Company's 1988 Form 10-K.
(4) Incorporated by reference to the Company's 1989 First Quarter Form 10-Q.
(5) Incorporated by reference to the Company's Form 8-K filed April 1, 1999.
(6) Incorporated by reference to the Company's 1990 Third Quarter Form 10-Q.
(7) Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 333-34529) filed September 9, 1997.
(8) Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 333-77667) filed May 4, 1999.
(9) Incorporated by reference to the Company's Form 8-K filed August 31, 2001.
(10) Incorporated by reference to the 2001 Form 10-K of Kinetek, Inc. filed March 28, 2002.
(11) Incorporated by reference to the 1996 Form S-4 Registration Statement of Kinetek, Inc.
(12) Incorporated by reference to the 1998 Form S-4 Registration Statement of Kinetek, Inc.
(13) Incorporated by reference to the 8-K of Kinetek, Inc., dated May 8, 2002.
(14) Incorporated by reference to the Company's 2001 Form 10-K.
(15) The form of indemnification agreement was entered into with all of the Company's directors and is identical in all material respects with the form included. Copies of the additional indemnification agreements have therefore not been included as exhibits to this filing, in accordance with Instruction 2 to Item 601 of Regulation S-K.
(16) Incorporated by reference to the 2004 Form S-4 Registration Statement (File No. 333-116554) of Jordan Industries, Inc.