10-Q 1 f10q301financials.txt FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from........ to ...................................... Commission File Number:........... 333-53987.................................... Jackson Products, Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 75-2470881 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer ID No.) incorporation or organization) 2997 Clarkson Road, Chesterfield, Missouri 63017 -------------------------------------------------------------------------------- (Address of principal executive offices) (636) 207-2700 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 43,172 shares of Class A Common Stock at March 31, 2001 15,647 shares of Class B Common Stock at March 31, 2001 3,020 shares of Class C Common Stock at March 31, 2001 JACKSON PRODUCTS, INC. INDEX PAGE Part I. Financial Information: Item 1. Consolidated Financial Statements as of March 31, 2001 (unaudited) and December 31, 2000 and the three months ended March 31, 2001 and 2000 (unaudited): Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosure about Market Risk 15 Part II. Other Information 16 Signature Page 16 JACKSON PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)

See accompanying notes to consolidated financial statements. 2 JACKSON PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) (Unaudited) Three Months Ended March 31, 2001 2000 -------- -------- Net sales .................................... $ 45,786 $ 51,716 Operating expenses: Cost of sales .......................... 34,656 36,432 Restructuring charge.................... 1,200 -- Selling, general and administrative .... 11,555 9,283 Amortization of intangibles ............ 4,326 4,536 -------- -------- Total operating expenses ..................... 51,737 50,251 -------- -------- Operating (loss) income ...................... (5,951) 1,465 Other: Interest expense ....................... (5,096) (5,051) Amortization of deferred financing costs (375) (375) Transaction-related expenses ........... (489) -- Other .................................. (231) (229) -------- -------- Loss before income tax benefit ............... (12,142) (4,190) Income tax benefit ........................... (3,703) (266) -------- -------- Net loss ..................................... $ (8,439) $ (3,924) ======== ======== See accompanying notes to consolidated financial statements. 3 JACKSON PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)

See accompanying notes to consolidated financial statements. 4 JACKSON PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) (1) Basis of Presentation The accompanying unaudited consolidated condensed financial schedules include all normal recurring adjustments and other adjustments as indicated which are, in the opinion of management of the registrant, necessary for a fair statement of the operating results for the periods presented. Certain 2000 balances have been reclassified to conform to 2001 presentation. Operating results for the three-month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. (2) Inventory Inventories at March 31, 2001 consist of the following (in thousands): Raw materials............................... $13,060 Work-in-process............................. 6,831 Finished goods.............................. 17,039 ------- $36,930 ======= (3) Financing Activities Credit Agreement ----------------- During 1998 the Company entered into a credit agreement (the "New Credit Facility") with Fleet National Bank and Firstar Bank National Association, which provided for a line of credit in the aggregate amount of $125.0 million. This credit agreement was increased to $135.0 million during the second quarter of 1999 in conjunction with the TMT-Pathway acquisition. The line consists of an acquisition line facility in the principal amount of $105.0 million and a revolving credit facility in the principal amount of $30.0 million. The maturity date for both the acquisition and the revolving credit line facilities is April 30, 2004. The New Credit Facility also contains several financial covenants, which require the Company to maintain certain financial ratios and restrict the Company's ability to incur indebtedness. The Company was in compliance with these covenants at March 31, 2001. The commitment fee on the unused portion of the Revolver and the Acquisition Facility is 1/2 % per annum, payable quarterly. Borrowings under the New Credit Facility bear interest, at the option of the Company, at a rate per annum equal to (i) the Base Rate (as defined in the New Credit Facility) plus 0.75% for the Revolver and the Acquisition Facility or (ii) the LIBOR Rate (as defined in the New Credit Facility) plus 2.25% for the Revolver and the Acquisition Facility. For each fiscal quarter following September 30, 1998, the factor added to either the Base Rate or the LIBOR Rate is adjusted based on the ratio of the Company's Total Debt to EBITDA (as defined in the New Credit Facility). The average interest rate on outstanding borrowings was 8.0% at March 31, 2001. As of March 31, 2001, there was $13.1 million outstanding on the revolving credit facility and $1.9 million of letters of credit outstanding resulting in availability of $15.0 million. Senior Subordinated Notes ------------------------- On April 16, 1998, the Company offered $115.0 million aggregate principal amount of Senior Subordinated Notes (the "Notes") due April 15, 2005 (the "Offering"). The Notes bear interest at the rate of 9 1/2% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, commencing October 15, 1998. The payments of principal, premium, interest and liquidated damages on the Notes are unconditionally guaranteed, jointly and severally, by the Company's domestic subsidiaries ("Guarantors"). (4) Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards, (SFAS) No. 133 - Accounting for Derivative Instruments and Hedging Activities (SFAS 133). In June 1999 and June 2000, the FASB issued SFAS No. 137 - Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133, and SFAS No. 138 - Accounting for Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133, respectively. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133, as amended, requires an entity to recognize all derivatives as a hedge in one of three categories. 5 JACKSON PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Under SFAS 133, as amended, an entity that elects to apply hedge accounting is required to establish, at the inception of the hedge, the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. The Company utilizes an interest rate cap agreement to assist in the management of interest rate sensitivity and to reduce its interest rate exposure. The Company's interest rate cap is in effect until December 15, 2001 and is immaterial to the financial position and results of operations of the Company. (5) Summary by Business Segment The Company has two reportable segments, which include the Personal Safety Products segment ("PSP") and the Highway Safety Products segment ("HSP"). PSP includes consumable products designed to protect the head, face and eyes. Primary customers for these products are found in the welding, construction, janitorial, healthcare, sporting, and food service sectors. HSP's broad product offering includes reflective glass beads, traffic workzone safety products, traffic coatings and specialized coating applications equipment. Primary customers for these products consist of local and government agencies, private contract stripers and highway safety distributors. The Company evaluates segment performance based upon a measure of profit represented by earnings before interest, taxes, depreciation, amortization and certain non-cash charges and or non-recurring charges ("EBITDA"). Presented below is a summary of financial data for the Company's reportable segments. EBITDA is not included herein as operating data and should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with GAAP. The Company has included EBITDA because the Company understands that it is one measure used by certain investors to determine the Company's operating cash flow and historical ability to service its indebtedness and because certain financial ratios are calculated on a similar basis. EBITDA has not been reduced by management and directors fees, both of which are subordinated to the Company's obligations under its financing agreements. Information presented below for total assets excludes intercompany receivables and investments in wholly owned subsidiaries.

(6) SCG Transaction On December 29, 2000, Jackson Products, Inc. (the "Company"), SCG Acquisition LLC ("SCG") and certain of the stockholders of the Company entered into a Stock Purchase Agreement (the "Purchase Agreement"), whereby SCG agreed to acquire just under 50% of the common stock of the Company (the "Common Stock") from the current stockholders of the Company (the "Stockholders") who executed the Purchase Agreement and the amendment thereto. The Stockholders will continue to hold approximately 50% of the Common Stock and will continue to have the right to appoint a majority of the board of directors of the Company. In consideration for the stock purchased pursuant to the Purchase Agreement, at the closing, SCG paid the Stockholders an aggregate of $41.5 million less certain fees and expenses. The transaction was approved by the boards of directors of the Company and SCG and closed on February 2, 2001. In conjunction with the execution of the Purchase Agreement, the Company incurred approximately $5.0 million of costs which have been reflected in the results of operations for the three months ended March 31, 2001. Included in these costs were the termination of existing stock appreciation rights and the buy-out of certain stock options for an aggregate cost of $2.2 million. These costs were paid as part of the proceeds of the Purchase Agreement and, accordingly, are reflected as a capital contribution to the Company. The Company also incurred $1.1 million of incentives to certain officers and employees and had professional fees and other transaction costs of approximately $0.5 million. In addition, the Company recorded a restructuring charge of $1.2 million in conjunction with the transaction as a result of a new management philosophy and the exiting of certain product lines. (7) Condensed Consolidating Financial Information The payment of principal, premium, interest and liquidated damages on the Notes will be unconditionally guaranteed, jointly and severally, on a senior subordinated basis by American Allsafe Company, a Delaware corporation, Crystaloid Technologies, Inc., a Delaware corporation, Flex-O-Lite, Inc., a Delaware corporation, Silencio/Safety Direct, a Nevada corporation and TMT-Pathway, L.L.C. as guarantors (collectively, the "Guarantors"). Financial information regarding the Guarantors as of March 31, 2001 and December 31, 2000 and for the three months ended March 31, 2001 and 2000 is presented below for the purpose of complying with the reporting requirements of the Guarantor Subsidiaries. The financial information regarding the Guarantors is being presented through condensed consolidating financial schedules since the guarantees are full and unconditional and are joint and several. Guarantor financial statements have not been presented because management does not believe that such financial statements are material to investors. 7 JACKSON PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (7) Condensed Consolidating Financial Information (con't) CONDENSED CONSOLIDATING BALANCE SHEETS March 31, 2001 (Dollars in thousands)

8 JACKSON PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (7) Condensed Consolidating Financial Information (con't) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Three months ended March 31, 2001 (Dollars in thousands)

9 JACKSON PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (7) Condensed Consolidating Financial Information (con't) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Three months ended March 31, 2001 (Dollars in thousands)

10 JACKSON PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (7) Condensed Consolidating Financial Information (con't) CONDENSED CONSOLIDATING BALANCE SHEETS December 31, 2000 (Dollars in thousands)

11 JACKSON PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (7) Condensed Consolidating Financial Information (con't) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Three months ended March 31, 2000 (Dollars in thousands)

12 JACKSON PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) (7) Condensed Consolidating Financial Information (con't) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Three months ended March 31, 2000 (Dollars in thousands)

13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis of the Company's financial condition and results should be read in conjunction with the Company's consolidated financial statements, including the notes, as well as with the Company's other filings with the Securities and Exchange Commission. All statements, trend analysis and other information contained in this filing relative to markets for the Company's services and trends in the Company's operations or financial results, as well as other statements, including words such as "anticipate," "believe," "plan," "estimate," "expect," and "intent" and other similar expressions, constitute forward-looking statements as defined in Section 21E(i)(1) of the Exchange Act and are subject to business and economic risks and actual results may differ materially from those contemplated by the forward-looking statements. On February 2, 2001, the closing of the transaction contemplated under the Stock Purchase Agreement, (the "Purchase Agreement"), dated December 29, 2000, between the Company, SCG Acquisition LLC ("SCG") and the stockholders of the Company (the "Stockholders"), as amended February 1, 2001, occurred. Pursuant to the terms of the Purchase Agreement, the Stockholders sold just under 50% of the common stock of the Company (the "Common Stock") to the affiliates of SCG. The Stockholders continue to hold approximately 50% of the Common Stock and continue to have the right to appoint a majority of the board of directors of the Company. The Company has two reportable segments, which include Personal Safety Products segment ("PSP") and Highway Safety Products segment ("HSP"). The PSP segment manufactures and sells safety products including welding helmets, auto-darkening welding filter lenses, safety caps, hardhats, faceshields, visors, safety goggles, spectacles and hearing protection products. The HSP segment sells reflective glass beads, cones, channelizers, pavement tape, flags, vests, roll-up signs, barricades, high-intensity lights, traffic coatings and specialized coatings applications equipment. EBITDA represents net income plus interest, taxes, depreciation, amortization and certain non-cash and or non-recurring charges. EBITDA is not included herein as operating data and should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with GAAP. The Company has included EBITDA because the Company understands that it is one measure used by certain investors to determine the Company's operating cash flow and historical ability to service its indebtedness and because certain financial ratios are calculated on a similar basis. EBITDA has not been reduced by management and directors fees, both of which are subordinated to the Company's obligations under its financing agreements. Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000 ------------------------------------------ Net sales- Net sales for the three months ended March 31, 2001 decreased 11.4% to $45.8 million from $51.7 million in 2000. PSP net sales decreased 17.8% in the first quarter of 2001 over the same period in 2000 due to the slowing economy and declining distributor inventories in North America. HSP net sales for the comparable three months decreased 4.2% to $22.7 million from $23.7 million primarily due to severe weather, which prevented the release of shipments. Cost of sales- Cost of sales for the three months ended March 31, 2001 decreased 4.7% to $34.7 million from $36.4 million for the same period in 2000 primarily as a result of the decrease in net sales offset by the spike in natural gas prices. Cost of sales as a percentage of sales increased to 75.8% from 70.4%. PSP first quarter cost of sales decreased 12.3% in 2001 over first quarter 2000. However, PSP costs as a percentage of sales increased to 67.6% from 63.4% due to unfavorable overhead absorption on lower sales volume and planned inventory reductions. HSP cost of sales increased 2.2% in first quarter 2001 to $19.0 million from $18.6 million in 2000 as a result of significant increases in natural gas costs. HSP first quarter 2001 cost of sales as a percentage of sales increased to 83.7% from 78.5% in 2000. Restructuring charge - During the first quarter 2001, in conjunction with the Purchase Agreement discussed above the Company recorded $1.2 million of restructuring charges related to the exiting of certain product lines. Selling, general & administrative expenses- Selling, general and administrative expenses for the three months ended March 31, 2001 increased 24.8% to $11.6 million from $9.3 million. The increase in selling, general and administrative expenses from quarter to quarter is a result of non-recurring transaction-related expenses recorded in conjunction with the Purchase Agreement discussed above. The Company incurred $2.2 million of expense related to payment of stock appreciation rights and stock options and $1.1 million of acquisition incentives. Excluding the non-recurring transaction-related expenses, selling, general and administrative expenses decreased $1.0 million from quarter to quarter and remained flat as a percentage of sales. 14 EBITDA- EBITDA for the first quarter 2001 decreased $3.4 million to $4.7 million from $8.1 million in 2000 due to under absorption on soft volumes and planned inventory reductions combined with higher natural gas costs. Operating (loss) income- Operating (loss) income for the three months ended March 31, 2001 and 2000 was ($6.0 million) and $1.5 million, respectively. First quarter 2001 operating loss includes $4.5 million of non-recurring transaction and restructuring charges associated with the Purchase Agreement. Excluding such charges, operating income decreased $3.0 million on decreased sales and margins. PSP and HSP operating income decreased $1.8 million and $1.3 million, respectively, in first quarter 2001 over the prior year period. Income tax benefit - Income tax benefit for the three months ended March 31, 2001 and 2000 was $3.7 million and $0.3 million, respectively. The net first quarter 2001 benefit was due to the recognition of $3.8 million of net operating loss carryforwards associated with the first quarter 2001 taxable loss. Liquidity and Capital Resources ------------------------------- Cash (used in) provided by operating activities for the three months ended March 31, 2001 and 2000 was ($9.1 million) and $0.1 million, respectively. The decrease is largely due to the increased net loss and deferred income taxes over the prior year comparable three-month period. Changes in working capital resulted in cash uses of $3.5 million and $2.9 million for the three months ended March 31, 2001 and 2000, respectively. Cash used in investing activities for the three months ended March 31, 2001 and 2000 was $0.9 million and $1.3 million, respectively. Net cash provided by financing activities for the three months ended March 31, 2001 and 2000 was $10.0 million and $1.2 million, respectively. The increase in first quarter 2001 is a result of weaker operating cash flows coupled with $2.2 million of additional paid in capital related to the payment of stock appreciation rights and stock options. On April 16, 1998, the Company offered $115.0 million aggregate principal amount of Senior Subordinated Notes (the "Notes") due April 15, 2005 (the "Offering"). The Notes bear interest at the rate of 9 1/2% per annum, payable semi-annually in arrears on April 15 and October 15 of each year. The payment of principal, premium, interest and liquidated damages on the Notes are unconditionally guaranteed, jointly and severally, by the Company's domestic subsidiaries ("Guarantors"). Effective April 22, 1998, the Company entered into a credit agreement (the "Credit Facility") with Fleet National Bank, as agent, and Firstar Bank National Association, which provided for a line of credit in the aggregate amount of $125.0 million. This credit agreement was amended during the second quarter of 1999 to increase the line of credit to $135.0 million, consisting of an acquisition line facility in the principal amount of $105.0 million and a revolving credit facility in the principal amount of $30.0 million. The maturity date for both the acquisition and the revolving credit line facilities is April 30, 2004. The credit agreement requires, and borrowing under the revolving credit facility is subject to, satisfaction of financial and other covenants. In addition, revolving credit borrowings are dependent on compliance with a borrowing base test. At March 31, 2001 there was $13.1 million outstanding on the revolving credit facility and $1.9 million of letters of credit outstanding resulting in availability of $15.0 million. The average interest rate on the New Credit Facility outstanding borrowings was 8.0% at March 31, 2001. The Company was in compliance with all of its financial covenants as of March 31, 2001 and based on preliminary information, currently expects to be in compliance as of June 30, 2001. However, if the Company's results of operations were to be adversely affected in the future as they were in the first quarter 2001 or if the Company's current estimates for the second quarter of 2001 were to prove to be inaccurate, then in order to remain in compliance with the credit agreement, the Company would be required to seek a waiver and/or amendment of certain of the Credit Agreement's financial covenants. Subject to the foregoing discussion, the Company believes that cash flow from operations together with available borrowing capacity are sufficient to fund working capital requirements, debt service requirements, and capital expenditures for the remainder of 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There have been no material changes in the Company's market risk during the three months ended March 31, 2001. For additional information, refer to Item 7 in the Company's annual report on Form 10-K for the year ended December 31, 2000. 15 PART II. OTHER INFORMATION Item 1. - Legal Proceedings There has been no change to matters discussed in Business - Legal Proceedings in the Company's Registration Statement on Form S-4 as filed with the Securities and Exchange Commission on September 16, 1998. Item 2. - Changes in Securities None Item 3. - Defaults Upon Senior Securities None Item 4. - Submission of Matters to a Vote of Security Holders On February 1, 2001, the existing stockholders of the Company unanimously consented to the closing of the transactions contemplated by the Stock Purchase Agreement, as amended February 1, 2001. Item 5. - Other Information None Item 6. - Exhibits (a) Exhibits. None (b) Reports on Form 8-K. On January 15, 2001, the Company filed a Form 8-K relating to the Stock Purchase Agreement by and among the Company, SCG Acquisition LLC and certain stockholders of the Company. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JACKSON PRODUCTS, INC. (Registrant) Date: 05/15/01 By:/s/ Christopher T. Paule --------------------------- Christopher T. Paule President and Chief Operating Officer /s/ Mark A. Kolmer --------------------------- Mark A. Kolmer Vice President - Finance

JACKSON PRODUCTS INC 10-Q