Exhibit 99.4
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
THE JOHNSON CORPORATION AND SUBSIDIARIES
DECEMBER 31, 2004 AND 2003
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS............................ 1
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS ........................................................ 2
STATEMENTS OF INCOME...................................................... 4
STATEMENT OF STOCKHOLDERS' EQUITY......................................... 5
STATEMENTS OF CASH FLOWS.................................................. 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ 9
i
GRANT THORNTON
Accountants and Business Advisors
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
The Johnson Corporation
We have audited the consolidated balance sheets of The Johnson Corporation (a
Michigan corporation) and Subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America as established by the Auditing Standards Board
of the American Institute of Certified Public Accountants. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes 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, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Johnson
Corporation and Subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
On May 2, 2003, we originally reported on the Company's 2002 financial
statements. This report was issued prior to the discovery of matters set forth
in note J to the consolidated financial statements, wherein restatements of
amounts previously reported as of December 31, 2002, are described.
/s/ Grant Thornton LLP
Chicago, Illinois
April 15, 2005
<
1
>
The Johnson Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
- ---------------------------------------------------------------------------------------------------------------
ASSETS 2004 2003
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $13,719,903 $ 7,779,095
Accounts receivable
Trade 14,268,817 17,604,503
Other 854,214 612,365
----------- -----------
15,123,031 18,216,868
Less allowance for doubtful receivables 925,992 1,205,302
----------- -----------
14,197,039 17,011,566
Inventories, net 10,056,466 9,576,232
Prepaid insurance and deposits 2,207,170 1,620,912
Deferred income taxes 2,178,809 2,779,904
----------- -----------
Total current assets 42,359,387 38,767,709
PROPERTY, PLANT AND EQUIPMENT
Buildings 12,506,562 11,666,075
Machinery and equipment 20,919,740 20,216,725
Furniture and fixtures 6,544,955 5,950,268
----------- -----------
39,971,257 37,833,068
Less accumulated depreciation 26,208,799 23,857,379
----------- -----------
13,762,458 13,975,689
Land 732,500 687,292
----------- -----------
14,494,958 14,662,981
OTHER ASSETS
Cash surrender value of life insurance - net of loans of
$122,706 at December 31, 2004 and 2003 335,255 361,782
Goodwill 5,127,044 4,907,157
Sundry 135,287 95,751
Deferred income taxes 627,961 290,588
----------- -----------
6,225,547 5,655,278
----------- -----------
$63,079,892 $59,085,968
=========== ===========
<
2
>
The Johnson Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
----------- -----------
CURRENT LIABILITIES
Short-term bank debt $ 1,668,594 $ -
Current maturities of long-term debt 1,777,354 1,003,925
Accounts payable 4,497,743 5,499,805
Income taxes payable 2,101,753 2,093,058
Profit sharing 891,703 733,367
Salaries, wages and bonuses 4,213,618 4,320,096
Property, payroll and other taxes 1,028,752 1,017,574
Commissions 118,924 265,819
Customer deposits 1,383,112 507,744
Interest and other 1,334,127 2,002,428
Accrued restructuring charges - 68,459
----------- -----------
Total current liabilities 19,015,680 17,512,275
LONG-TERM DEBT - less current maturities 919,000 2,640,374
POST-RETIREMENT BENEFITS LIABILITY 4,661,857 4,153,658
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST IN SUBSIDIARIES 1,021,792 736,609
STOCKHOLDER' EQUITY
Common stock, Class A, voting - authorized, 100,000
shares of $10 par value; issued and outstanding,
36,460 shares at December 31, 2004
and 2003, respectively 364,600 364,600
Common stock, Class B, non-voting - authorized,
1,500,000 shares of $10 par value; issued and
outstanding, 543,070 and 542,985 shares at
December 31, 2004 and 2003, respectively 5,430,700 5,429,850
Capital contributed in excess of par value of
common stock 2,454,748 2,421,801
Retained earnings 24,469,964 22,625,609
Accumulated other comprehensive income 4,741,551 3,201,192
----------- -----------
37,461,563 34,043,052
----------- -----------
$63,079,892 $59,085,968
=========== ===========
The accompanying notes are an itegral party of these statements.
<
3
>
The Johnson Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
- -----------------------------------------------------------------------------------------------------------------
2004 2003
----------- -----------
Sales $76,037,199 $78,044,776
Commission income 54,779 2,481
----------- -----------
Net sales 76,091,978 78,047,257
Cost of goods sold 34,945,175 35,865,376
----------- -----------
Gross profit 41,146,803 42,181,881
Operating expenses - selling and administrative 34,677,142 35,046,843
----------- -----------
Operating profit 6,469,661 7,135,038
Other income (expenses)
Interest income 180,200 51,060
Interest expense (182,710) (437,106)
----------- -----------
(2,510) (386,046)
----------- -----------
Income before income taxes
and minority interest 6,467,151 6,748,992
Income tax expense 2,868,079 1,153,663
----------- -----------
Income before minority interest 3,599,072 5,595,329
Minority interest in earnings of foreign subsidiaries 361,677 33,416
----------- -----------
NET EARNINGS $ 3,237,395 $ 5,561,913
=========== ===========
The accompanying notes are an integral part of these statements.
<
4
>
The Johnson Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Two years ended December 31, 2004
- ----------------------------------------------------------------------------------------------------------------------------
Common stock
----------------------- Capital
Class A, Class B, contributed
voting non-voting in excess of Treasury
$10 par $10 par common stock stock
-------- ---------- ------------ ----------
Balance at January 1, 2003 (Restated) $373,600 $5,198,300 $ 655,918 $(764,864)
Net earnings for the year - - - -
Foreign currency translation - - - -
Total comprehensive income
Retire 900 shares Class A voting common stock (9,000) - - 53,481
Retire 13,945 shares Class B non-voting common stock - (139,450) - 835,921
Purchase of 300 shares of Class A voting common stock - - - (17,313)
Purchase of 1,858 shares of Class B non-voting common stock - - - (107,225)
Issuance with option exercise: 37,100 shares of Class B
non-voting common stock - 371,000 1,765,883 -
Dividends declared
Common stock - $1.60 per share, voting and non-voting - - - -
-------- ---------- ------------ ----------
Balance at December 31, 2003 364,600 5,429,850 2,421,801 -
Net earnings for the year - - - -
Foreign currency translation - - - -
Total comprehensive income
Purchase and retire 665 shares Class B non-voting common stock - (6,650) - -
Issuance with option exercise: 750 shares of Class B
non-voting common stock - 7,500 32,947 -
Dividends declared
Common stock - $1.60 per share, voting and non-voting - - - -
-------- ---------- ------------ ----------
Balance at December 31, 2004 $364,600 $5,430,700 $ 2,454,748 $ -
======== ========== ============ ==========
The accompanying notes are an integral part of this statement.
<
5
>
The Johnson Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDER' EQUITY
Two years ended December 31, 2004 (continued)
- --------------------------------------------------------------------------------------------------------------
Accumulated
other Total
Retained comprehensive stockholders'
earnings income equity
----------- ------------- ---------------
Balance at January 1, 2003 (Restated) $18,674,880 $ 537 $ 24,675,505
Net earnings for the year 5,561,913 - 5,561,913
Foreign currency translation - 2,663,521 2,663,521
-----------
Total comprehensive income 8,225.434
Retire 900 shares Class A voting common stock (44,481) - -
Retire 13,945 shares Class B non-voting common stock (696,471) - -
Purchase of 300 shares of Class A voting common stock -- - (17,313)
Purchase of 1,858 shares of Class B non-voting common stock -- - (107,225)
Issuance with option exercise: 37,100 shares of Class B
non-voting common stock -- - 2,136,883
Dividends declared
Common stock - $1.60 per share, voting and non-voting (870,232) - (870,232)
----------- ------------- ------------
Balance at December 31, 2003 22,625,609 3,201,192 34,043,052
Net earnings for the year 3,237,395 - 3,237,395
Foreign currency translation -- 1,540,359 1,540,359
-----------
Total comprehensive income 4,777,754
Purchase and retire 665 shares Class B non-voting common stock (31,726) - (38,376)
Issuance with option exercise: 750 shares of Class B
non-voting common stock -- - 40,447
Dividends declared
Common stock - $1.60 per share, voting and non-voting (1,361,314) - (1,361,314)
----------- ------------- ------------
Balance at December 31, 2004 $24,469,964 $ 4,741,551 $ 37,461,563
=========== ============= ============
The accompanying notes are an integral part of this statement.
<
6
>
The Johnson Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
- --------------------------------------------------------------------------------------------------------------
2004 2003
----------- -----------
Cash flows from operating activities
Net earnings $ 3,237,395 $ 5,561,913
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation 2,176,445 2,449,640
Loss on disposal of fixed assets 23,641 13,036
Minority interest in earnings of foreign
subsidiaries 361,677 33,416
Deferred income taxes 329,504 (1,288,380)
Post-retirement benefits 508,199 309,343
Bad debt expense 483,321 813,581
Changes in assets and liabilities
Accounts receivable 2,819,022 (133,743)
Inventories (477,115) (344,692)
Prepaid insurance and deposits (464,658) (437,414)
Income taxes payable (107,199) 990,428
Other assets (12,167) 18,515
Accounts payable (1,212,612) (241,461)
Accrued liabilities (72,428) 3,695,828
Accrued restructuring charge (68,459) (737,509)
----------- -----------
Net cash provided by operating activities 7,524,566 10,702,501
Cash flows from investing activities
Purchases of property, plant and equipment (1,778,255) (2,034,958)
Proceeds from sale of property, plant and equipment 4,276 127,309
Cash surrender value of life insurance 26,370 (39,535)
Other (92,395) (42,772)
----------- -----------
Net cash used in investing activities (1,840,004) (1,989,956)
<
7
>
The Johnson Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31,
- --------------------------------------------------------------------------------------------------------------
2004 2003
----------- -----------
Cash flows from financing activities
Proceeds from notes payable $ 1,668,594 $ -
Payments of notes payable (49,133) (4,130,490)
Proceeds from long-term debt 1,449,600 966,400
Payments of long-term debt (2,340,936) (2,516,086)
Purchase of common stock (38,376) (124,538)
Sale of common stock 40,447 2,136,883
Common stock dividends paid (1,361,314) (870,232)
----------- -----------
Net cash used in financing activities (631,118) (4,538,063)
Effect of exchange rate changes on cash 887,364 624,131
Net increase in cash and
cash equivalents 5,940,808 4,798,613
Cash and cash equivalents at beginning of year 7,779,095 2,980,482
----------- -----------
Cash and cash equivalents at end of year $13,719,903 $ 7,779,095
=========== ===========
Supplemental cash flow information
Cash payments for
Interest $ 272,735 $ 444,760
Taxes 2,992,351 1,716,113
The accompanying notes are an integral part of these statements.
<
8
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows.
Business
The Johnson Corporation and its subsidiaries (together referred to as the
"Company" or "Group") design and manufacture rotary pressure joints, syphon
systems and accessory equipment used in heating and cooling systems, sold
throughout the United States and abroad. The Company's sales are primarily to
the paper processing industry, with the remainder being for various industrial,
mechanical and commercial uses. The Group grants unsecured credit to customers
in the normal course of business, with the exception of foreign sales, which are
secured at the Company's discretion, or as required by local regulations through
letters of credit.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The subsidiaries, their locations and the Company's percentage
ownerships are as follows:
The Johnson Export Corporation Three Rivers, MI 100%
Specialty Castings, Inc. Springport, MI 100
Johnson Investments, Inc. Three Rivers, MI 100
Johnson Technical Services, Inc. Three Rivers, MI 100
Johnson Southeast, L.L.C. New Orleans, LA 60
Johnson Technical Solutions Inc. Lenoir City, TN 100
Johnson Canada, Inc. Canada 100
The Johnson Corporation Latin America Holding, Inc. Three Rivers, MI 100
The Johnson Corporation Holland B.V. Holland 100
Johnson South East Asia Pty. Ltd. Australia 90
Johnson China Investments, Inc. Three Rivers, MI 100
Johnson Northeast, Inc. Falmouth, ME 100
Johnson Argentina Argentina 100
In December 2003, the Company decided to close and absorb the operations of
Johnson Services Wisconsin into the Company and Johnson Technical Services, Inc.
Johnson Services Wisconsin had a net profit of $27,866 at December 31, 2003.
<
9
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Principles of Consolidation - Continued
On September 15, 2003, the Company established a joint venture with Fluiten
Italia Spa called Johnson-Fluiten Srl. The Company is a 50% partner in the joint
venture under which it has acquired the rights to all of Johnson-Fluiten Srl
rotary joint activities. Johnson-Fluiten Srl is engaged in the development,
manufacture and sale of fluid handling equipment, which finds applications in
many industries. Within the Company, Johnson-Fluiten Srl is reported in
Holland's consolidated statements.
Effective December 31, 2003, The Johnson Corporation Holland B.V. sold its 60%
participation in Desmo Srl (formerly called Johnson Montaggi Srl) to the two
minority stockholders of Desmo Srl.
Revenue Recognition
The Company recognizes revenue from product sales when title transfers, the
risks and rewards of ownership have been transferred to the customer, the sales
price is fixed and determinable and collection of the related receivable is
probable, which generally is at the time of shipment. Revenue is recorded net of
estimated returns of products, based on management's analysis of historical
returns, current economic trends and changes in customer demands. Provisions for
returns and other adjustments are provided for in the same period the related
sales are recorded based on experience and other relevant factors.
Revenue from service contracts is recognized using the percentage of completion
("POC") method of accounting. In using the POC method, the Company records
revenue by reference to the costs incurred to date and the estimated costs
remaining to complete the contracts. Provisions for losses on service contracts
are recognized during the period in which the loss first becomes apparent. For
some of the contracts, the Company bills the customer prior to performing the
services. For other contracts, the Company performs services prior to billing
the customer. These circumstances result in deferred revenue and unbilled
revenue, respectively. At December 31, 2004 and 2003, the Company did not have
any material contracts in process.
Foreign Currency Translation
All balance sheet accounts of foreign operations are translated into U.S.
dollars at the year-end rate of exchange and statement of income items are
translated at the weighted-average exchange rates for the year. The resulting
translation adjustments are made directly to a separate component of
stockholders' equity. Gains or losses from other foreign currency transactions,
such as those resulting from the settlement of foreign receivables or payables,
are included in the accompanying consolidated statements of income.
<
10
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Cash Equivalents
Cash equivalents consist of certificates of deposit, money market funds and bank
repurchase agreements with maturities of three months or less at date of
purchase. The carrying value of these investments approximates fair market
value.
The Company has concentrated $7,046,322 and $5,050,210 of cash and cash
equivalents in one financial institution at December 31, 2004 and 2003,
respectively. Cash and cash equivalents held by foreign subsidiaries totaled
$12,834,573 and $6,832,473 at December 31, 2004 and 2003, respectively.
Trade Receivables
Financial instruments that subject the Company to credit risk consist primarily
of trade accounts receivable. The Company performs periodic credit evaluations
of its customers' financial condition and, generally, does not require
collateral on trade accounts receivable. Accounts receivable are due within 30
days and are stated at amounts due from customers net of allowance for doubtful
accounts. Accounts outstanding longer than the contractual payment terms are
considered past due. The Company determines its allowance by considering a
number of factors, including the length of time receivables are past due, loss
history, customers' current ability to pay and general economic and industrial
conditions. Credit losses for customers consistently have been within
management's expectations.
Changes in the Company's allowance for doubtful accounts are as follows at
December 31:
2004 2003
---------- ----------
Beginning balance $1,205,302 $ 377,349
Bad debt expense 483,321 813,581
Accounts written off (771,944) (85,775)
Recoveries and foreign exchange 9,313 100,147
---------- ----------
Ending balance $ 925,992 $1,205,302
=========== ==========
Inventories
Inventories are valued at the lower of cost or market. Cost of inventories is
determined by the first-in, first-out ("FIFO") and last-in, first-out ("LIFO")
methods.
<
11
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, principally
on a straight-line basis for financial reporting purposes.
Asset description Life
- ----------------------- ------------
Buildings 7 - 30 years
Machinery and equipment 5 - 7 years
Furniture and fixtures 3 - 7 years
Expenditures for new additions and improvements that extend the useful lives of
assets are capitalized, while maintenance and repairs are charged to operations
as incurred. Gains and losses resulting from sales or retirements are recorded
as incurred, at which time related capitalized costs and accumulated
depreciation are removed from the accounts.
Goodwill
The excess of purchase price over the fair value of the net assets of acquired
businesses ("goodwill") was being amortized on a straight-line basis through
December 31, 2001. On January 1, 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," which requires that goodwill no longer be amortized, and that goodwill
be tested annually for impairment or more frequently if events and circumstances
warrant. If impairment exists, the carrying amount of goodwill will be reduced.
As a result, effective January 1, 2002, the Company is no longer amortizing
goodwill; rather, it performs an annual impairment test. The Company performs
its annual impairment test for goodwill as of December 31 of each year. SFAS No.
142 requires the Company to compare the fair value of its reporting units to the
carrying amount, including goodwill, on an annual basis to determine if there is
potential impairment. The Company has determined it has four reporting units for
purposes of this test. Fair value of the reporting units are determined using
valuation methods including discounted cash flows, comparable company analysis
and recent transaction analysis. If the fair value of a reporting unit exceeds
its carrying value, goodwill of the reporting unit is not considered impaired.
If the carrying amount of a reporting unit exceeds its fair value, the second
step of the goodwill impairment test must be performed to measure the amount of
impairment loss, if any. An impairment test was completed in fiscal years 2004
and 2003 and indicated no impairment of goodwill. The goodwill balances relate
to the Company's foreign operations.
<
12
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes
The Company and its domestic subsidiaries file a consolidated Federal income tax
return. The provision for income taxes is based on elements of income and
expense as reported in the consolidated statement of income. The foreign
subsidiaries file separate income tax returns.
The Company provides for income taxes under the asset and liability method (SFAS
No. 109). Under this method, deferred income taxes are recognized for the
expected future tax consequences of temporary differences between financial
statement carrying amounts, and the tax bases of existing assets and liabilities
using tax rates expected in the years in which those temporary differences are
expected to be recovered or settled. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Deferred income tax expenses or benefits are based on the changes in the
deferred tax asset or liability accounts.
Restructuring Costs
Restructuring costs are primarily comprised of severance costs and related
benefits, costs to eliminate or vacate duplicate facilities and costs to
terminate certain contractual commitments.
The Company adopted SFAS No. 146, "Accounting for Costs Associated With Exit or
Disposal Activities," on January 1, 2003. SFAS No. 146 superseded Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)," and requires that a liability for a
cost associated with an exit plan or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of a company's commitment to an exit plan. SFAS No.
146 eliminates the definition and requirements for recognition of exit costs in
EITF Issue No. 94-3, and also establishes that fair value is the objective for
initial measurement of the liability. Accordingly, for exit or disposal
activities since December 31, 2002, the Company records liabilities as they are
incurred as a restructuring charge in the statements of income. Restructuring
costs are based on plans that have been committed to by management.
Restructuring cost estimates may change as additional information becomes
available and as management finalizes execution of the restructuring plan.
Changes in estimates to restructuring plans accounted for under SFAS No. 146 are
recorded in the Company's statement of income as an adjustment to restructuring
charges.
<
13
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Impairment of Long-Lived Assets
The Company assesses the impairment of long-lived assets, including property and
equipment, whenever events or changes in circumstances indicate that the
carrying value may not be fully recoverable. When the Company determines that
the carrying value of such assets may not be recoverable, it measures
recoverability based on the undiscounted cash flows expected to be generated by
the related asset or asset group. If the Company determines that a long-lived
asset or asset group is not recoverable, it records an impairment loss equal to
the difference between the carrying amount of the asset or asset group and fair
value of the asset or asset group. The Company generally measures fair value of
an asset or asset group based on the projected discounted cash flow method using
a discount rate determined by management to be commensurate with the risk
inherent in its current business model. The Company did not record an impairment
provision in any of the years presented in these consolidated financial
statements.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximates fair value based on their short-term nature. The
fair value of long-term debt is estimated based on prevailing market rates of
interest on similar debt instruments and on the current rates offered to the
Company for debt of the same remaining maturity. The fair value of long-term
debt approximates the carrying value of each debt instrument at December 31,
2004 and 2003, since each was issued at a market rate of interest, and such rate
is still representative of market interest.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business from
transactions and other events from non-owner sources. Comprehensive income
includes net income and other non-owner changes in equity which bypass the
statement of income and are reported as a separate component of equity. For all
periods presented, other comprehensive income includes only one component, which
is the change in the foreign currency translation reserve.
<
14
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Research and Development
Research and development costs are expensed as incurred and totaled $1,571,912
and $1,565,374 for the years ended December 31, 2004 and 2003, respectively.
Advertising
All advertising costs are expensed as incurred. Advertising expenses were
$266,196 and $286,690 in 2004 and 2003, respectively.
Shipping and Handling Costs
Shipping and handling costs are included in cost of goods sold expense in the
accompanying consolidated statements of income.
Accounting for Stock-Based Compensation
The Company has a formula-based, stock-based employee compensation plan, which
is more fully described in note G. The Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plan. Related compensation expense for 2003 and 2004 is based
on the changes in the formula value from the grant date to the date a
substantial investment is made by the option holder.
2004 2003
---------- -----------
Net income, as reported $3,237,395 $ 5,561,913
Add stock-based employee compensation cost, net of related tax included
in net income, as reported 118,873 1,409,075
Deduct total stock-based employee compensation expense determined using
the fair value based method for all awards, net of related taxes - (5,503,299)
---------- -----------
Pro forma net income $3,356,268 $ 1,467,689
========== ===========
Recent Accounting Pronouncements
In June 2002, SFAS No. 146 was issued. SFAS No. 146 supersedes EITF Issue
No. 94-3. SFAS No. 146 provides guidance on the recognition and measurement
of liabilities associated with disposal activities, and was effective as of
January 1, 2003. Under SFAS No. 146, companies record the fair value of exit
or disposal costs when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The Company adopted SFAS No. 146 on
January 1, 2003, resulting in no material impact.
<
15
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Recent Accounting Pronouncements - Continued
On August 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of," and elements of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects on Disposal of a Segment of a
Business and Extraordinary, Unusual or Infrequently Occurring Events and
Transactions." SFAS No. 144 establishes a single accounting model for long-
lived assets to be disposed of while maintaining many of the provisions
relating to impairment testing and valuation. The adoption of SFAS No. 144
did not have material impact on the Company's consolidated financial
statements.
In December 2003, the Financial Accounting Standards Board ("FASB") issued a
revised Interpretation No. 46 ("FIN 46R"), "Consolidation of Variable Interest
Entities," which addresses how a business enterprise should evaluate whether it
has a controlling financial interest in an entity through means other than
voting rights and, accordingly, should consolidate the entity. FIN 46R replaces
Interpretation No. 46, "Consolidation of Variable Interest Entities," issued in
January 2003. FIN 46R applies to interests in variable interest entities
("VIEs") created after December 31, 2003. For VIEs created before January 1,
2004, the interpretation will be applied beginning on January 1, 2005. For any
VIEs that must be consolidated under FIN 46R created before January 1, 2004, the
assets, liabilities and non-controlling interests of the VIEs initially are
measured at their carrying amounts, with any difference between the net amount
added to the balance sheet, and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and non-controlling
interest of the VIEs. As the Company has no VIEs, it has determined that the
adoption of the provisions of FIN 46R will not have a material effect on its
balance sheet, statement of income or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 amends SFAS No. 133 for decisions made: (1) as part of the Derivatives
Implementation Group process that effectively required amendments to SFAS No.
133, (2) in connection with other FASB projects dealing with financial
instruments, and (3) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying," and the characteristics of a
<
16
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Recent Accounting Pronouncements - Continued
derivative that contain financing components. The statement is generally
effective for contracts entered into or modified after June 30, 2003, and is to
be applied prospectively. The Company has no derivative instruments and, as
such, has determined that the provisions of SFAS No. 149 do not have a material
effect on its balance sheet, statement of income or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payments" ("SFAS 123(R"). This statement is a revision of FASB Statement No. 123
"Accounting for Stock-Based Compensation." In addition, this statement
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
its related implementation guidance. The revised SFAS No. 123 establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods and services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods and services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. The revised SFAS No. 123
focuses primarily on accounting for transactions in which the entity obtains
employee services in share-based payment transactions. The statement requires a
public entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the fair value of the award at the date
of grant. The cost of employee services is recognized over the period during
which an employee is required to provide service in exchange for the award. The
fair value of employee share options will be estimated using option-pricing
models adjusted for the unique characteristics of the instruments. If an equity
award is modified after a grant date for the benefit of an employee, incremental
compensation cost is required to be recognized.
The revised SFAS No. 123 was originally effective for periods beginning after
June 15, 2005. In April 2005, the U.S. Securities and Exchange Commission
extended the effective date to fiscal years beginning after June 15, 2005. The
cumulative effect of initially applying the statement, if any, will be
recognized as of the required effective date. The Company has not yet determined
the impact of implementing this statement.
<
17
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE B - RESTRUCTURING
During 1997, the Company's Board of Directors approved a restructuring plan
which resulted in a pretax charge of $6,214,812. This charge primarily
represents the costs of terminating the operation of certain manufacturing
operations ($1,045,000), the costs associated with the withdrawal from the joint
venture in China ($1,000,000), and the cost of terminating certain agency
agreements, including legal expenses arising out of litigation associated
therewith ($4,169,000). The balance remaining at December 31, 2003, was $68,459,
which was used during the first quarter of 2004, as designated by the Company's
Board of Directors, to cover the ongoing costs of the terminated agency
agreements as provided for 1997.
2004 2003
-------- ---------
Beginning balance $ 68,459 $ 854,999
Charges (68,459) (786,540)
-------- ---------
Ending balance $ - $ 68,459
======== =========
- ------------------------------------------------------------------------------------------------------------------
NOTE C - INVENTORIES
The inventory cost methods used are as follows at December 31:
2004 2003
----------- -----=-----
LIFO method $ 4,706,865 $ 4,497,841
FIFO method 5,349,601 5,078,391
----------- -----------
$10,056,466 $ 9,576,232
=========== ===========
Inventory consists of the following at December 31:
2004 2003
----------- -----------
Raw materials $12,250,890 $10,768,626
Work in process 816,364 822,085
Finished goods 7,350,648 7,573,329
----------- -----------
20,417,902 19,164,040
Reserve for excess and obsolete items (5,856,328) (5,320,253)
----------- -----------
FIFO inventory 14,561,574 13,843,787
LIFO reserve (4,505,108) (4,267,555)
----------- -----------
Total $10,056,466 $ 9,576,232
=========== ===========
<
18
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE C - INVENTORIES - Continued
Inventory would have been $4,505,108 and $4,267,558 higher than reported at
December 31, 2004 and 2003, respectively, if the FIFO method of inventory
accounting had been used to value all inventories.
- --------------------------------------------------------------------------------
NOTE D - DEBT
Short-term bank debt consists of the following:
- - The Johnson Corporation Holland B.V. maintains a line of credit with a
Dutch bank (ABN). The line of credit permits maximum borrowings of up to
1,250,000 Euro ($1,695,875 based on December 31, 2004 exchange rates).
Borrowings are secured by the building/real estate of The Johnson
Corporation Holland B.V. There were letters of credit outstanding related
to this line of credit totaling 463,798 Euro ($629,235) at December 31,
2004, and 441,768 Euro ($555,700) at December 31, 2003. There were no
borrowings on this line for December 31, 2004 and 2003.
- - Johnson Canada Inc. maintains a line of credit with a Canadian bank. The
line of credit permits maximum borrowings of up to 600,000 Canadian dollars
($500,208) based on December 31, 2004 exchange rates), bearing interest at
the prime rate (4.25 % at December 31, 2004) plus .5%. The borrowings are
secured by a security agreement representing a first lien on inventories
and accounts receivable, and a second lien on equipment. There were no
borrowings on this line for December 31, 2004 and 2003.
- - The Company maintains a line of credit with an American bank. The line of
credit permits borrowings of up to $6,000,000. The borrowings on this line
totaled $1,668,594 and $-0- at December 31, 2004 and 2003, respectively.
Long-term debt consists of the following at December 31:
2004 2003
--------- --------
The Johnson Corporation Holland B.V., 4.6% loan payable in 20 quarterly
installments of $85,621, due April 2006 $ - $770,592
The Johnson Corporation Holland B.V., 6.0% capital lease for equipment
entered into in 1998, with terms of 60 months, final payment
October 22, 2004 - 133,282
Specialty Castings, Inc., 5.13% note payable in 36 monthly installments of
$42,761, final payment due July 21, 2005 290,869 774,976
The Johnson Corporation (Wuxi) Technology Co. Ltd., mortgage at 5.85% on
machinery equipment, with a payment due date of January 2005 966,400 966,400
<
19
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- ------------------------------------------------------------------------------------------------------------------
NOTE D - DEBT - Continued
2004 2003
---------- ----------
The Johnson Corporation (Wuxi) Technology Co. Ltd., mortgage at 5.58% on
machinery equipment, with a payment due date of April 16, 2005 $ 483,200 $ -
Johnson Corporation Latin America S.A., non-interest-bearing notes payable
with due dates ranging from December 31, 2002 to December 31, 2006 816,523 859,687
Johnson Corporation Latin America S.A., 7.5% note payable, interest accrued
and paid semi-annually, due December 31, 2006 139,000 139,000
Other installment debt 362 362
---------- ----------
2,696,354 3,644,299
Less current maturities 1,777,354 1,003,925
---------- ----------
$ 919,000 $2,640,374
========== ==========
Long-term debt is scheduled to mature during the fiscal years ending December 31 as follows:
Years ending December 31,
- -------------------------
2005 $1,777,354
2006 919,000
----------
Total $2,696,354
==========
- --------------------------------------------------------------------------------
NOTE E - EMPLOYEE BENEFIT PLANS
Profit-Sharing and 401(k) Plan
The Company has established The Johnson Corporation Employees' Profit
Sharing Trust and 401(k) Plan for the benefit of the Company, Specialty
Castings, Inc., Johnson Technical Services, Inc., Johnson Technical
Solutions Inc., The Johnson Export Corporation and Johnson Northeast, Inc.
employees. Contributions are at the discretion of the Board of Directors,
subject to the terms set forth in the agreement. Under the agreement, any
contributions by the Company cannot exceed the maximum amount deductible for
Federal income tax purposes. Starting July 1, 2002, employees are able to
contribute to the 401(k) plan limited to the maximum amount as set by the
Internal Revenue Service.
<
20
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE E - EMPLOYEE BENEFIT PLANS - Continued
Profit-Sharing and 401(k) Plan - Continued
For plan years beginning on or after July 1, 2002, the Company has decided to
make a safe harbor non-elective contribution. With the adoption of this
provision, 3% will be allocated as a safe harbor contribution, while the
remaining 12% will be allocated to the profit-sharing plan based on
contributions at the discretion of the Board of Directors.
The provision for the profit-sharing plan was as follows:
2004 2003
---------- ----------
The Johnson Corporation $1,320,436 $1,101,446
Specialty Castings, Inc. 113,754 106,120
Johnson Technical Services, Inc. 15,756 16,277
Johnson Technical Solutions Inc. 71,270 60,138
Johnson Northeast, Inc. 31,188 34,583
---------- ----------
$1,552,404 $1,318,564
========== ==========
Post-retirement Benefits
The Company sponsors a post-retirement benefit plan for eligible retired
employees. The plan provides healthcare and dental benefits to certain salaried
and hourly employees reaching age 55 with 30 years of service, or age 62 with
five years of service. During 2004, the Company amended the plan's retiree and
spouse cost-sharing provisions.
The following tables reconcile the plan's status to the accrued post-retirement
healthcare cost liability and present the assumptions used to determine both the
benefit obligations and the net periodic post-retirement costs as reflected at
December 31:
2004 2003
----------- -----------
Change in benefit obligation
Benefit obligation at beginning of year $ 5,935,829 $ 6,497,107
Service costs 362,561 220,001
Interest costs 420,496 344,613
Amendments (3,582,776) (532,272)
Actuarial gain (loss) 1,760,475 (280,291)
Benefits paid (417,314) (313,329)
----------- -----------
Benefit obligation at end of year $ 4,479,271 $ 5,935,829
=========== ===========
<
21
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
Post-retirement Benefits - Continued
- -------------------------------------------------------------------------------------------------------------------
NOTE E - EMPLOYEE BENEFIT PLANS - Continued
2004 2003
----------- -----------
Funded (unfunded) status
Unfunded status $(4,479,271) $(5,935,829)
Unrecognized actuarial gain 3,859,582 2,278,003
Unrecognized prior service cost (income) (4,042,168) (495,832)
----------- -----------
Net amount recognized $(4,661,857) $(4,153,658)
=========== ===========
Change in plan assets
Employer contribution $ 417,314 $ 313,329
Benefits paid (417,314) (313,329)
----------- -----------
$ - $ -
=========== ===========
Assumptions used to determine obligations
Discount rate 5.75% 6.25%
Current-year trend rate 8.00% 7.45%
Ultimate trend rate 5.00% 5.25%
Year of ultimate trend rate 2011 2007
Census date January 1, 2004 January 1, 2003
Assumptions used to determine net periodic costs
Discount rate 6.25% 6.75%
Current-year trend rate 7.45% 8.00%
Ultimate trend rate 5.25% 5.25%
Year of ultimate trend rate 2007 2007
Census date January 1, 2004 January 1, 2003
Net periodic post-retirement benefit cost for the years ended December 31, 2004 and 2003, included the
following components:
2004 2003
-------- --------
Service cost $362,561 $220,001
Interest cost 420,496 344,613
Net amortization and deferral 142,456 58,058
-------- --------
Net periodic post-retirement benefit $925,513 $622,672
======== ========
<
22
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE E - EMPLOYEE BENEFIT PLANS - Continued
Post-retirement Benefits - Continued
The healthcare trend rate assumption has a significant effect on the amounts
reported. If the assumed healthcare trend rate were increased by one percentage
point, the accumulated post-retirement benefit obligation would increase by
$792,284 and $716,091 for December 31, 2004 and 2003, respectively. The
post-retirement benefit cost would increase by $188,481 and $139,603 for
December 31, 2004 and 2003, respectively.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
2005 $ 180,228
2006 185,185
2007 193,121
2008 198,681
2009 210,830
2010 - 2014 1,252,312
The Company expects to make contributions to the plan of $180,228 during the
year ending December 31, 2005.
- --------------------------------------------------------------------------------
NOTE F - COMMITMENTS AND CONTINGENCIES
Leases
Non-cancelable operating leases that expire at various dates through 2009 are
for equipment and vehicles that the Company will bear all of the property taxes,
insurance, normal maintenance and utility expenses incurred.
Future minimum lease payments for non-cancelable operating leases consist of the
following at December 31, 2004:
2005 $410,347
2006 219,608
2007 87,516
2008 55,145
2009 38,810
Thereafter 3,321
--------
Total minimum lease payments $814,747
========
<
23
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE F - COMMITMENTS AND CONTINGENCIES - Continued
Stockholder Agreements
The Company has entered into agreements with officer/stockholders and certain
key employees under which, in the event an individual desires to sell, exchange,
give or pledge his or her Company stock, or upon the death, retirement or
termination of employment of the individual, the Company has the option to
reacquire all or a part of his or her stock. The purchase price is to be
determined by the agreement and is payable as the parties may determine.
Insurance Coverage
The Company has a plan to provide medical, dental, life, short-term disability,
and accidental death and dismemberment insurance benefits for substantially all
of its domestic employees. The Company is self-insured for certain health
benefits up to $60,000 per occurrence.
- --------------------------------------------------------------------------------
NOTE G - STOCK-BASED COMPENSATION
The Company has issued certain non-qualified stock options under the terms of
its employee stock option agreement. The agreement provides for the fair value
to be set by the formula in the agreement. The options vest immediately upon
grant. The employee may resell the options or shares received upon exercise to
the Company at the formula value. In addition, if the employee resells the share
to the Company, they have the option to repurchase them at any point in the
future at the price originally paid by the Company. The terms of the plan result
in no substantial investment of the employee being at risk while holding the
option or upon exercising the shares. Compensation expense has been recorded for
any changes in the formula value from the grant date through the date a
substantial investment is made with a corresponding accrued liability.
Compensation expense was $191,730 and $2,126,846 for 2004 and 2003,
respectively.
The pro forma information regarding net income is required under SFAS No. 123,
and has been determined as if the Company had accounted for its stock options
granted under the fair value method of that statement. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for the years ended
December 31, 2003 and 2004: risk-free interest rate of 4.24% and $4.27%,
respectively; dividend yield of -0-%; volatility of -0-% and expected life of 10
years.
<
24
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- ------------------------------------------------------------------------------------------------------------
NOTE G - STOCK-BASED COMPENSATION - Continued
The table below summaries all option activity during the years ended December 31, 2004 and 2003:
Weighted-
average
exercise
Options price
------- ---------
Outstanding at December 31, 2002 40,950 $ 53.93
Granted 96,000 57.71
Exercised (37,100) 57.60
Cancelled - -
-------
Outstanding at December 31, 2003 99,850 56.20
Granted - -
Exercised (750) 53.93
Cancelled -
-------
Outstanding at December 31, 2004 99,100 $56.22
=======
Options granted in 2002 had an exercise price of $53.93 and expire in November
2012. Options granted in 2003 had an exercise price of $57.71 and expire in
December 2012. No options were granted in 2004.
The following table summarizes information about stock options outstanding at
December 31, 2004:
Remaining
Number contractual
Exercise price outstanding life
-------------- ----------- ------------
$53.93 39,100 7.9 years
57.71 60,000 8 years
<
25
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- -------------------------------------------------------------------------------------------------------------
NOTE H - INCOME TAXES
Income (loss) before income taxes and minority interest consists of the following at December 31:
2004 2003
---------- ----------
Domestic $ (469,946) $ 934,109
Non-U.S. 6,937,097 5,814,883
---------- ----------
Total $6,467,151 $6,748,992
========== ==========
Income tax expense consists of the following:
2004 2003
---------- ----------
Current provision
Federal $ 564,993 $1,008,341
State 146,477 63,642
Foreign 1,827,105 1,370,060
---------- ----------
Total current 2,538,575 2,442,043
Deferred provision (benefit)
Federal 46,807 (757,934)
State 5,507 (89,169)
Foreign 277,190 (441,277)
---------- ----------
329,504 (1,288,380)
---------- ----------
Total provisions $2,868,079 $1,153,663
========== ==========
The effective income tax rate on pretax earnings (loss) differed from the U.S.
Federal statutory rate for the following reasons in December 31:
2004 2003
------- -------
U.S. Federal statutory rate 34.0% 34.0%
Foreign repatriation, net of tax credits not previously
benefited 3.3 -
Foreign sub-part F income 6.8 4.3
Foreign rate differentials 3.6 (2.9)
Restoration of deferred tax assets which previously had
a 100% valuation allowance - (8.6)
Research and experimentation credits utilized in 2003 - (3.3)
Foreign tax holiday (6.3) (5.7)
Other, including foreign exchange 2.9 (0.7)
------ -------
Effective tax rate 44.3% 17.1%
======= =======
<
26
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- -------------------------------------------------------------------------------------------------------------
NOTE H - INCOME TAXES - Continued
Significant components of deferred income taxes are as follows at December 31:
2004 2003
----------- -----------
Current deferred tax assets (liabilities)
Inventory valuations $ 1,176,986 $ 1,345,921
Compensation and other expenses deducted on a paid basis for tax purposes 878,445 870,897
Restructuring charge - 26,014
Foreign net operating loss carryforward - 274,680
Other 123,378 262,392
----------- -----------
2,178,809 2,779,904
Valuation allowance - -
----------- -----------
Net current deferred tax assets 2,178,809 2,779,904
Non-current deferred tax (liabilities) assets
Property, plant and equipment (1,307,576) (1,387,426)
Post-retirement benefits 1,771,506 1,578,390
Foreign net operating loss carryforward 729,548 256,225
Other 164,031 99,624
----------- -----------
1,357,509 546,813
Valuation allowance (729,548) (256,225)
----------- -----------
Net non-current deferred tax assets 627,961 290,588
----------- -----------
Total deferred tax assets $ 2,806,770 $ 3,070,492
=========== ===========
The gross deferred tax assets as of December 31, 2004 and 2003, were $4,843,894
and $4,714,143, respectively. The gross deferred tax liabilities as of December
31, 2004 and 2003, were $1,307,576 and $1,387,426, respectively.
The Company has net operating loss carryforwards of approximately $1,917,000 and
$1,434,000 at December 31, 2004 and 2003, respectively. The Company has provided
a valuation allowance against certain of the carryforwards due to the
uncertainty of ultimate recoverability.
<
27
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE I - GEOGRAPHIC SEGMENT INFORMATION
The Company's chief operating decision maker is its President and CEO. While the
President and CEO is apprised of a variety of financial metrics and information,
the Company is principally managed on a geographic basis in terms of revenue and
segment profit performance. The Company's four geographic business segments are:
North America, Europe, Asia and South America.
Revenues are defined as revenues generated from unaffiliated customers and are
based on the country in which billing originates. The segment profit reported
for the geographic segments is computed by subtracting costs of goods sold and
operating expenses by the geographic segment from segment net revenue.
Accounting policies for each of the reportable segments are the same as those
used on a consolidated basis.
The following table presents certain geographic segment information by major
geographic region as follows for 2004 and 2003:
Operating Total Long-lived Capital
2004 Net revenues profit Assets assets expenditures Depreciation
------------ ---------- ----------- ------------ ------------ ------------
North America $ 37,226,750 $ 410,956 $22,337,208 $ 7,834,527 $ 523,430 $ 1,310,882
Europe 28,381,068 4,349,387 24,838,273 3,174,777 237,633 386,400
South America 3,846,429 453,354 5,328,763 510,620 45,329 109,349
Asia 6,637,731 1,255,964 10,575,648 2,975,034 971,863 369,814
------------ ---------- ----------- ------------ ------------ ------------
Total $ 76,091,978 $6,469,661 $63,079,892 $ 14,494,958 $ 1,778,255 $ 2,176,445
============ ========== =========== ============ ============ ============
2003
North America $ 34,713,377 $1,617,239 $22,751,908 $ 8,617,219 $ 716,041 $ 1,502,745
Europe 34,462,759 4,052,635 23,854,230 3,082,465 642,376 571,522
South America 3,029,161 185,005 4,566,369 584,782 314,613 77,071
Asia 5,841,960 1,280,159 7,913,461 2,378,515 361,928 298,302
------------ ---------- ----------- ------------ ------------ ------------
Total $ 78,047,257 $7,135,038 $59,085,968 $ 14,662,981 $ 2,034,958 $ 2,449,640
============ ========== =========== ============ ============ ============
No single customer accounted for 10% or more of the consolidated revenues of the Company in 2004 or 2003.
<
28
>
The Johnson Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE J - RESTATEMENTS
The accompanying consolidated financial statements have been restated as of
December 31, 2002, due to the improper evaluation of the Company's allowance for
excess and obsolete ("E&O") inventory and the improper amortization of goodwill.
In addition, a restatement has been made to recognize income tax on certain
foreign earnings previously omitted from the Company's tax provision. The
effects of the restatement on retained earnings as of December 31, 2002, are as
follows:
Retained
earnings
-----------
Balance at December 31, 2002, as previously reported $21,371,933
Adjustments
Record additional E&O reserve, net of tax (2,688,882)
Reverse improper goodwill amortization, net of tax 142,966
Record tax on previously unrecognized foreign income (151,137)
-----------
Balance at December 31, 2002, as restated $18,674,880
===========
- --------------------------------------------------------------------------------
NOTE K - SUBSEQUENT EVENT
On April 7, 2005, the Company entered into a definitive agreement to be acquired
by Kadant, Inc. for approximately $102 million in cash, subject to post-closing
adjustments. The completion of the sale is subject to certain closing
conditions, including regulatory approval, the approval of the Company's
stockholders, and Kadant securing financing. The sale is expected to close in
the second quarter of 2005.
29