SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1997 Commission File Number 333-19257
MOTORS AND GEARS, INC.
(Exact name of registrant as specified in charter)
Illinois 36-4109641
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ArborLake Centre, Suite 550 60015
1751 Lake Cook Road (Zip Code)
Deerfield, Illinois
(Address of Principal Executive Offices)
Registrant's telephone number, including Area Code:
(847) 945-5591
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
None
Indicated by checkmark 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 twelve (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 ninety (90) days.
Yes x No
The aggregate market value of voting stock held by non-affiliates of the
Registrant is not determinable as such shares were privately placed and there
is currently no public market for such shares.
The number of shares outstanding of Registrant's Common Stock as of
March 30, 1998: 100,000.
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TABLE OF CONTENTS
PAGE
Part I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote
of Security Holders 10
Part II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12
Item 7A. Quantitative and Qualitative
Disclosures About Market Risks 16
Item 8. Financial Statements 17
Item 9. Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure 40
Part III
Item 10. Directors and Executive Officers 40
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management 44
Item 13. Certain Relationships and Related
Transactions 45
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports On Form 8-K 49
Signatures 50
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PART I
Item 1. BUSINESS
THE COMPANY
Motors and Gears, Inc. (the "Company") was incorporated in the State of
Illinois on September 8, 1995. On November 1, 1996, the Company effected a
reincorporation merger whereby MK Group, Inc., an Illinois corporation, was
merged with and into the Company, with the Company being the surviving entity.
The Company is a direct, wholly-owned subsidiary of Motors and Gears Holdings,
Inc., a Delaware corporation ("Parent"). The Parent is a majority owned
subsidiary of Jordan Industries, Inc. ("JII"), a private holding company which
owns and manages a widely diversified group of operating companies. Preferred
shares of stock of the Parent owned by JII represent approximately 80%
ownership interest of the Parent. All remaining preferred stock and common
stock is owned by executive officers and directors of the Company and other
employees of JII. The Company was organized by JII to acquire and operate
companies in the motors, gears and motion control industry. The Company and
its subsidiaries are included in JII's consolidated financial statements, and
will continue to be part of the JII consolidated group for tax purposes until
the redemption of the Company's Junior Preferred Stock or until such time as
the Company can no longer be consolidated for federal income tax purposes.
The Company's principal executive offices are located at ArborLake Centre,
Suite 550, 1751 Lake Cook Road, Deerfield, Illinois 60015, and its telephone
number is (847)945-5591.
BUSINESS
The Company is a manufacturer of specialty purpose electric motors,
gearmotors, gearboxes, gears and electronic motion controls for a wide variety
of consumer, commercial and industrial markets. The Company has a diverse
base of customers and its products are used in a broad range of applications
including vending machines, industrial ventilation equipment, automated
material handling systems and elevators. The Company competes primarily in
the electric motors and electronic motion control systems industries.
Business Segment Information
The Company operates in two separate business segments; electric motors
("motors") and electronic motion control systems ("controls"). The
Company entered the controls business segment through the acquisition of two
companies during 1997(see Note 1 to the Company's consolidated financial
statements). Accordingly, segment information for controls is not applicable
for the years prior to 1997. Summary financial information by business
segment included in the consolidated financial statements of the Company is as
follows:
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Year Ended December 31,
1997 1996 1995(1)
(Dollars in thousands)
Net Sales
Motors $145,639 $117,571 $ 63,979
Controls 3,030 N/A N/A
$148,669 $117,571 $ 63,979
Operating Income
Motors $ 30,588 $ 26,165 $ 16,369
Controls 458 N/A N/A
Corporate Expenses (2) (3,362) (2,936) N/A
Total Operating Income 27,684 23,229 16,369
Interest Expense (22,363) (11,134) (2,412)
Other 463 215 239
Income before Income Tax and
Extraordinary Items $ 5,784 $ 12,310 $ 14,196
Identifiable Assets
Motors $211,135 $157,796 $145,387
Controls 79,263 N/A N/A
Corporate 44,746 17,734 N/A
$335,144 $175,530 $145,387
Capital Expenditures
Motors $ 1,392 $ 1,304 $ 269
Controls 105 N/A N/A
$ 1,497 $ 1,304 $ 269
Depreciation
Motors $ 4,283 $ 2,960 $ 516
Controls 28 N/A N/A
$ 4,311 $ 2,960 $ 516
Amortization
Motors $ 4,544 $ 4,118 $ 840
Controls 160 N/A N/A
$ 4,704 $ 4,118 $ 840
(1) Reflects the combined results of operations of the Predecessor from
January 1, 1995 to September 22, 1995 and the Company from September 23, 1995
to December 31, 1995. The results of operations of Imperial, Scott and Gear
are included in the Company's consolidated operating results from September
23, 1995, the date at which the Company and Imperial, Scott and Gear came
under the common control of JII.
(2) Management fees paid to affiliated company have been included in corporate
expenses.
Products
The Company has established itself as a reliable niche manufacturer of
high-quality, economical, custom electric motors, gearmotors, gears and
electronic motion control systems used in a wide variety of applications
including vending machines, refrigerator ice dispensers, commercial
dishwashers, commercial floor care equipment, automated material handling
systems and elevators. The Company's products are custom designed to meet
specific application requirements. Less than 5% of the Company's products are
sold as stock products.
The Company offers a wide variety of options to provide greater flexibility
in its custom designs. These options include thermal protectors, special
mounting brackets, custom leads and terminals, single or double shaft
extensions, brakes, cooling fans, special heavy gearing, custom shaft
machining and custom software solutions. The Company also provides value-
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added assembly work, incorporating some of the above options into its final
motor and control products. All of the custom-tailored motors, gearmotors and
control systems are designed for long life, quiet operation, and superior
performance.
Electric Motors
Electric motors are devices that convert electric power into rotating
mechanical energy. The amount of energy delivered is determined by the level
of input power supplied to the electric motor and the size of the motor
itself. An electric motor can be powered by alternating current ("AC") or
direct current ("DC"). AC power is generally supplied by power companies
directly to homes, offices and industrial sites whereas DC power is supplied
either through the use of batteries or by converting AC power to DC power.
Both AC motors and DC motors can be used to power most applications; the
determination is made through the consideration of power source availability,
speed variability requirements, torque considerations, and noise constraints.
The power output of electric motors is measured in horsepower. Motors are
produced in power outputs that range from less than one horsepower up to
thousands of horsepower.
Subfractional Motors. The Company's subfractional horsepower products are
comprised of motors and gearmotors which power applications up to 30 watts
(1/25 horsepower). These small, "fist-size" AC and DC motors are used in
light duty applications such as snack and beverage vending machines,
refrigerator ice dispensers and photocopy machines.
Fractional/Integral Motors. The Company's fractional/integral horsepower
products are comprised of AC and DC motors and gearmotors having power ranges
from 1/8 to 300 horsepower. Key end markets for these motors include
commercial floor care equipment, commercial dishwashers, commercial sewing
machines, industrial ventilation equipment and elevators.
Gears and Gearboxes. Gears and gearboxes are mechanical components used to
transmit mechanical energy from one source to another source. They are
normally used to change the speed and torque characteristics of a power source
such as an electric motor. Gears and gearboxes come in various configurations
such as helical gears, bevel gears, planetary gearboxes, and right-angle
gearboxes. For certain applications, an electric motor and a gear box are
combined to create a gearmotor.
The Company's precision gear and gearbox products are produced in sizes of
up to 16 inches in diameter and in various customized configurations such as
pump, bevel and helical gears. Key end markets for these products include
original equipment manufacturers ("OEMs") of motors, commercial floor care
equipment, aerospace and food processing product equipment.
Electronic Motion Control Systems
Electronic motion control systems are assemblies of electronic and
electromechanical components that are configured in such a manner that the
systems have the capability to control various commercial or industrial
processes such as conveyor systems, packaging systems, elevators and automated
assembly operations. The components utilized in a motion control system are
typically electric motor drives (electronic controls that vary the speed and
torque characteristics of electric motors), programmable logic controls
<PAGE>
("PLCs"), transformers, capacitors, switches and various types of software.
The majority of the Company's motion control products control automated
conveyor systems used in automotive manufacturing and elevators.
The Company's motion control systems are used primarily in automated
conveyor systems within the automotive industry and the elevator
modernizations market. The systems typically control several components such
as electric motors, hydraulic or pneumatic valves, actuators and switches that
are required for the conveyor or elevator systems to function properly.
Acquisitions
In September 1995, the Company acquired Merkle-Korff Industries, Inc.
("Merkle-Korff") from JII and acquired the net assets of Colman, Inc. and
Colman Motor Products, Inc (collectively, "Barber-Colman) in March 1996
through Merkle-Korff. In November 1996, the Company acquired the business and
net assets of Imperial Electric Company ("Imperial") and Imperial's
subsidiaries, Scott Motor Company ("Scott") and Gear Research, Inc. ("Gear")
from JII. In June 1997, the Company purchased all of the common stock of FIR
Group Companies ("FIR") consisting of CIME S.p.A., SELIN, S.p.A. and FIR
S.p.A. In October 1997, the Company purchased all outstanding stock of E.D.
and C. Company, Inc. through its newly formed wholly owned subsidiary,
Electrical Design and Control Company ("ED&C"). In December 1997, the Company
acquired all of the stock of Motion Control Engineering, Inc. ("Motion
Control"). See Note 1 to the consolidated financial statements included in
Item 8 of this annual report for further information regarding acquisitions.
Backlog
The Company's approximate backlog of unfilled orders at the dates
specified was as follows:
Backlog
Year Ended (Dollars in
December 31, thousands)
1997
Motors $33,936
Controls 16,843
$50,779
1996
Motors $44,562
Controls N/A
$44,562
The Company will ship substantially all of its 1997 year-end backlog
during 1998.
Marketing and Support Services
The Company's sales and marketing success is characterized by long-term
customer relationships which are the result of continuity of management,
outstanding delivery records, high-quality products, and competitive pricing.
The Company utilizes a combination of direct sales personnel and
manufacturers' representatives to market the Company's product lines.
Generally, the inside sales organization is compensated through a fixed salary
while the manufacturers' representative organizations receive commission.
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National Accounts Managers serve large national OEMs such as General
Electric, Whirlpool and Vendo. More than 95% of the Company's sales are to
OEM customers. However, the Company has begun a distribution program with
four distributors in its subfractional horsepower product line to increase
coverage and generate more revenue growth.
The Company's motion control systems business is served primarily through
internal sales and marketing professionals as well as independent
representatives. The Company plans to add sales talent to this product group
in order to expand its presence into additional motion control markets.
The Company's advertising efforts consist of specific product literature
which is printed and provided to customers as applications are developed. In
addition, the Company attends various trade shows to market products and to
stay abreast of industry trends. It also advertises in trade magazines on a
periodic basis.
International Operations
The Company currently operates five manufacturing facilities and one
research and development facility in Europe. See Note 15 to the Company's
consolidated financial statements included elsewhere in this annual report for
additional geographic information.
Employee and Labor Relations
As of December 31, 1997, the Company employed 1,692 employees, of which
1,091 were non-union, and 601 were represented by unions. The Company has
experienced no work stoppages over the past 10 years. It considers its
relations with its employees to be excellent.
Competition
The electric motor, gear and motion control systems' markets are highly
fragmented with a multitude of manufacturing companies servicing numerous
markets. Motor manufacturers range from small local producers serving a
specific application or end user, to high volume manufacturers offering
general-purpose "off the shelf" motors to a wide variety of end users.
While there are numerous manufacturers of gears and gearboxes that service a
wide variety of industries and applications, the Company competes in certain
niche markets.
The Company's motion control systems business competes primarily within the
automated conveyor system controls market and sells to conveyor manufacturers
that serve the automotive manufacturing industry and the elevator
modernization market. These niche markets consist of four to five major
competitors.
The principal competitive factors in the electric motor, gear and motion
control systems' markets include price, quality and service. Major motor
manufacturers include General Electric, Baldor Electric Company, Emerson
Electric Company and Reliance Electric Company; however, the Company generally
competes with smaller, specialized manufacturers. While many of the major
motor manufacturers have substantially greater assets and financial resources,
the Company believes that its leading position in certain niche markets, its
<PAGE>
high-quality products and its value-added custom applications are adequate to
meet competition.
Raw Materials and Suppliers
The primary raw materials used by the Company to produce its products are
steel, copper, and miscellaneous purchased parts such as endshield castings,
powdered metal gears, commutators, electronic components and packaging
supplies. All materials are readily available in the marketplace. The
Company is not dependent upon any single supplier in its operations for any
materials essential to its business or not otherwise commercially available to
the Company. The Company has been able to obtain an adequate supply of raw
materials, and no shortage of raw materials is currently anticipated.
Surcharges and/or raw material price escalation clauses are often used to
insulate the Company from fluctuations in prices.
Intellectual Property
The Company's patents and trademarks taken individually, and as a whole,
are not critical to the ongoing success of its business. The proprietary
nature of the Company's products is attributable to the custom application
designs for particular customers' needs rather than attributable to
proprietary patented or licensed technology.
Environmental Regulation
The Company is subject to a variety of Federal, state and local
governmental regulations related to the storage, use, discharge and disposal
of toxic, volatile or otherwise hazardous materials used in its manufacturing
processes. Moreover, the Company anticipates that such laws and regulations
will become increasingly stringent in the future. The Company does not
currently anticipate any material adverse effect on its business, financial
condition or results of operations as a result of compliance with U.S.
Federal, state, provincial, local or foreign environmental laws or regulations
or remediation costs. However, some risk of environmental liability and other
costs is inherent in the nature of the Company's business. For example,
pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Company could be responsible for the necessary
costs responding to any releases of hazardous substances for disposal. In
addition, any failure by the Company to obtain and maintain permits that may
be required for manufacturing operations could subject the Company to
suspension of its operations. Such liability or suspension of manufacturing
operations could have a material adverse effect on the Company's results of
operations and financial condition.
Barber-Colman Motors, a division of the Company, leases property that has
been the subject of remedial investigation and corrective action following the
removal of a small, underground waste oil tank in 1994. Contaminated soils
have been removed up to the edge of the foundation of an overlying structure
and down to bedrock. The Wisconsin Department of Natural resources has
advised the Company that no further action is necessary at this time. In
connection with the Barber-Colman Acquisition, the Company obtained
indemnification from the former owner of Barber-Colman Motors for
environmental liability resulting from its prior operations.
<PAGE>
Soils and groundwater, contaminated by historic waste handling practices at
the FIR property in Casalmaggiore, Italy are the subject of an investigation
and remediation under the review of government authorities. In connection
with the FIR Acquisition, the Company obtained indemnification from the former
owners for this investigation and remediation.
Item 2. PROPERTIES
The Company's headquarters are located in an approximately 31,700 square
foot office space in Deerfield, Illinois that is provided by JII pursuant to
the Transition Agreement (see Item 13 "Certain Relationships and Related
Transactions"). The Transition Agreement expires in December 2007.
The principal properties of the Company, the location, the primary use, the
square feet and the ownership status thereof as of December 31, 1997, are set
forth in the table below:
Location Use Square Owned/ Lease
Feet Leased Expiration
Des Plaines, IL Design/
Administration 38,000 Leased September 2000
Subfrac-
tional Des Plaines, IL Manufacturing 45,000 Leased September 2000
Horse-
power Crystal Lake, IL Manufacturing 46,000 Leased April 1998
Products Darlington, WI Manufacturing 68,000 Leased September 2005
Richland Center,
WI Manufacturing 45,000 Leased September 2000
Belvedere, IL Design/
Administration 12,000 Leased March 1998
Akron, OH Manufacturing 43,000 Owned
Stow, OH Administration 7,000 Leased September 2000
Middleport, OH Manufacturing 85,000 Owned
Cuyahoga Falls,
OH Manufacturing 63,000 Leased October 2003
Fractional/
Integral Alamagordo, NM Manufacturing 15,000 Leased October 2002
Horsepower Casalmaggiore,
Products Italy Administration/
Manufacturing 100,000 Owned
Varano, Italy Manufacturing 30,000 Owned
Bedonia, Italy Manufacturing 8,000 Owned
Genona, Italy Research &
Development/
Manufacturing 33,000 Leased July 2002
Reggio Emilia,
Italy Manufacturing 35,000 Leased August 2002
Reggio Emilia,
Italy Manufacturing 30,000 Leased November 2000
Motion Troy, MI Manufacturing/
Control Administration 12,000 Leased January 1998
Systems Troy, MI Administration 4,000 Leased January 1998
Rancho Cordova,
CA Administration 40,000 Leased May 2001
Gears and
Gearboxes Grand Rapids, MI Manufacturing/
Administration 39,000 Owned
The Company believes that its existing leased facilities are adequate for
the operations of the Company and its subsidiaries. The Company does not
believe that any single leased facility is material to its operations and
that, if necessary, it could readily obtain a replacement facility.
On January 1, 1998, the Company, through a wholly owned subsidiary, entered
into a new lease agreement in preparation for exiting the Crystal Lake, IL and
Belvedere, IL locations. The new facility is approximately 112,000 square
<PAGE>
feet and will be used primarily for manufacturing. The six-year lease expires
on December 31, 2003 and includes an option to extend the agreement an
additional five years.
On January 19, 1998, the Company, through a wholly owned subsidiary,
entered into a new lease agreement in preparation for exiting both Troy, MI
locations. The new facility is approximately 29,240 square feet and will be
used for manufacturing and administration. The five-year lease expires
December 2002. The relocation to the new facility was completed in February
of 1998.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding the resolution
of which, the management of the Company believes, would have a material
adverse effect on the Company's results of operations or financial condition,
nor to any other pending legal proceedings other than ordinary, routine
litigation incidental to its business.
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, 1997.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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. At December 31, 1997, all common stock of the
Company was held by the Parent.
The Company has not declared or paid any cash dividends on its common stock
since the Company's formation in September 1995. The Indenture (the
"Indenture") by and between the Company and State Street Bank and Trust
Company, as Trustee, with respect to the 10_% Senior Notes due 2006, contains
restrictions on the Company's ability to declare or pay dividends on its
common stock. The Indenture prohibits the declaration or payment of any
dividends or the making of any distribution by the Company, or any Restricted
Subsidiary (as defined in the Indenture).
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial information derived from
the Company's and its predecessor's financial statements as well as the
combined results of operations of the predecessor from January 1, 1995 to
September 22, 1995 and the Company from September 23, 1995 to December 31,
1995.
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Company Predecessor
And Company
Combined(2) Company (3) Predecessor(4)
Year Ended Year Ended Sept 23, Jan 1
Dec 31, Dec. 31, through through Year Ended
Dec 31, Sept 22, Dec 31,
1997 1996 1995 1995 1995 1994 1993
(Dollars in thousands)
Statement of Operations
Data: (1)
Net sales $148,669 $117,571 $ 63,979 $ 24,684 $39,295 $49,340 $43,766
Gross profit, excluding
Depreciation 51,585 41,820 23,437 8,255 15,182 18,022 16,315
Depreciation 4,311 2,960 516 415 101 324 334
Amortization 4,704 4,118 840 840 - - -
Operating income 27,684 23,229 16,369 4,753 11,616 12,309 8,547
Interest expense 22,363 11,134 2,412 2,412 - - -
Income taxes(5) 2,429 5,290 1,232 948 284 171 143
Net income 3,355 4,834 12,964 1,360 11,604 11,921 8,122
Supplemental Pro Forma and
Other Data:
Pro forma income
Taxes (6) - - 4,755 - 4,755 4,837 3,306
Pro forma net income 3,355 4,834 8,493 1,360 7,133 7,255 4,959
Balance Sheet Data (at end
of period): (1)
Working capital $ 65,074 $ 25,632 $ 14,747 $ 14,747 $ 7,697 $11,546 $ 9,944
Total assets 335,144 175,530 145,387 145,387 14,409 18,952 16,421
Long-term obligations,
including current
portion 283,672 175,067 83,547 83,547 - - -
Stockholder's equity
(net capital
deficiency) 7,552 (15,787) 45,925 45,925 9,218 14,332 12,515
(1) The Company has acquired a diversified group of operating companies over
the five-year period, which significantly affects the comparability of the
information shown above.
(2) Reflects the combined results of operations of the Predecessor from
January 1, 1995 to September 22, 1995 and the Company from September 23, 1995
to December 31, 1995. The results of operations of Imperial, Scott and Gear
are included in the Company's consolidated operating results from September
23, 1995, the date at which the Company and Imperial, Scott
and Gear came under the common control of JII.
(3) Reflects the Company's results of operations from September 23, 1995
through December 31, 1995.
(4) Reflects the results of operations of the Predecessor for the two years
prior to its acquisition by the Company on September 22, 1995.
(5) For the Predecessor, historical net income reflects only certain state
income taxes attributable to Merkle-Korff's income for the historical periods
presented prior to its acquisition by the Company on September 22, 1995,
during which it elected to be a subchapter S corporation and therefore was
not subject to federal and certain state income taxes.
(6) Prior to its acquisition by the Company, the Predecessor was an S
corporation and therefore was not subject to federal and certain state income
taxes. The pro forma data presented includes an unaudited pro forma
adjustment for income taxes which would have been recorded if the Predecessor
had been a C corporation.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the Company's results of
operations and of its liquidity and capital resources should be read in
conjunction with the financial statements and the related notes thereto
appearing elsewhere in this annual report.
Acquisitions
A substantial portion of the Company's growth during the past two years is
the result of acquisitions. Each of the acquisitions have been accounted for
under the purchase method of accounting and are included in the Company's
consolidated financial statements from their respective dates of acquisition,
excluding the Imperial Electric Company acquisition which was accounted for
in a manner similar to the pooling-of-interests method. As a result of these
acquisitions, the Company's combined results for 1997, 1996 and 1995 are not
directly comparable.
Results of Operations
The following financial information presents, for the years ended December
31, 1997 and 1996, the results of operations of the Company and for the year
ended December 31, 1995, the combined results of operations of the
Predecessor from January 1, 1995 to September 22, 1995, and the Company, from
September 23, 1995 to December 31, 1995. The results of operations of Barber
Colman Motors are included in the consolidated results of operations of the
Company since its acquisition on March 8, 1996. The results of operations of
Imperial, Scott and Gear are included in the consolidated results of
operations of the Company from September 23, 1995, the date at which the
Company and Imperial, Scott and Gear came under the common control of JII.
The results of operations of FIR Elettromeccanica, Electrical Design and
Control Co., and Motion Control Engineering are included in the consolidated
results of operations since their acquisition on June 12, 1997, October 27,
1997 and December 18, 1997, respectively.
<PAGE>
Predecessor
and Company
Company Combined
Year Ended December 31,
1997(1) 1996 1995
(Dollars in thousands)
Net sales $148,669 $117,571 $63,979
Gross profit (excluding
depreciation) 51,585 41,820 23,437
EBITDA(2) 36,699 30,307 18,408
Operating income 27,684 23,229 16,369
Interest expense 22,363 11,134 2,412
Gross margin (excluding
depreciation)(3) 34.7% 35.6% 36.6%
EBITDA margin(3) 24.7 25.8 28.8
Operating margin(3) 18.6 19.8 25.6
(1) With the acquisition of ED&C and Motion Control during 1997, the results of
operations for 1997 include operations for both the motors and controls
segments. The controls segment is responsible for $3,030 of net sales,
$1,201 of gross profit (excluding depreciation), $645 of EBITDA (earnings
before interest, income taxes, depreciation and amortization) and $458 of
operating income for the year ended December 31, 1997.
(2) EBITDA is included herein because management believes that certain
investors find it to be a useful tool for measuring the ability of the
Company to service its debt.
(3) All margins are calculated as a percentage of net sales.
Year ended December 31, 1997 compared to year ended December 31, 1996
Net sales increased $31.1 million or 26.5% from $117.6 million in 1996 to
$148.7 million in 1997. The increase in sales was largely due to the three
1997 acquisitions, accounting for $17.8 million of the increase. Sub-
fractional motors sales increased 18.2% in 1997. The growth in sub-fractional
motors was primarily attributable to the inclusion of Barber-Colman in the
1996 period only from March 8, 1996, as well as continued strength in the
vending and appliance markets. Gears and gearbox sales increased 24% in 1997
as a result of strong sales of planetary gears in the floor care market.
Sales of fractional/integral motors in 1996 increased 36.5% reflecting the
acquisition of the FIR Group in June of 1997. Sales of fractional/integral
motors excluding the FIR acquisition decreased 6.6% in 1997, reflecting the
unusually strong sales in the first half of 1996, principally due to a
substantial reduction in the backlog of orders accumulated in the fourth
quarter of 1995. The two Controls acquisitions in the fourth quarter of 1997
accounted for $3.0 million of the increased sales.
Operating income increased $4.5 million or 19.2% from $23.2 million in 1996
to $27.7 million in 1997. The primary increase in operating income was due to
the increase in sales discussed above. Gross margins decreased slightly from
35.6% to 34.7% due to the acquisition of FIR, which operates at slightly lower
gross margins than the rest of the Company. Increases in selling, general, and
administrative expenses, depreciation, and amortization were due principally
to the Barber-Colman acquisition and the three 1997 acquisitions. These
increases were partially offset by reduced management fees and other expenses
related to Imperial. The two controls acquisitions in the fourth quarter of
1997 accounted for $0.5 million of the increased operating income.
Interest expense increased $11.3 million from $11.1 million in 1996 to
$22.4 million in 1997, reflecting higher debt levels relating to the financing
of new acquisitions and the Company's December 1997 $100.0 million debt
offering.
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Year ended December 31, 1996 compared to year ended December 31, 1995
Net sales increased $53.6 million or 83.8%. The acquisition of Barber-
Colman on March 8, 1996 added $17.6 million to current year sales. Also, the
inclusion of the Imperial Electric Company for the entire year of 1996 as
compared to only the period from September 22, 1995 to December 31, 1995 in
the prior year, accounted for approximately $29.9 million of the increase in
1996 net sales. Sub-fractional motor sales of the Predecessor Company
increased 11.5% over the prior year due primarily to increased sales in the
vending and appliance markets.
Operating income increased $6.9 million or 41.9% in 1996. This increase
was driven primarily by increased sales. Gross margin decreased from 36.6% to
35.6% largely due to the acquisition of Barber-Colman, which operated at
slightly lower gross margins than the rest of the Company. The increase in
gross profit was partially offset by increased depreciation and amortization
of $5.7 million and increased management fees to affiliated company of $2.0
million. The combined effect of the reduced gross margin and increased
expenses caused operating margin to decrease from 25.6% in 1995 to 19.8% in
1996.
Interest expense increased $8.7 million from $2.4 million in 1995 to $11.1
million in 1996, reflecting higher debt levels resulting from the issuance of
$170 million of Senior Notes in November of 1996.
Liquidity and Capital Resources
In general, the Company requires liquidity for working capital, capital
expenditures, interest, taxes, debt repayment and its acquisition strategy.
Of primary importance are the Company's working capital requirements, which
increase whenever the Company experiences strong incremental demand or
geographical expansion. The Company expects to satisfy its liquidity
requirements through a combination of funds generated from operating
activities and the funds available under its revolving line-of-credit
agreement.
Operating activities. Net cash provided by operating activities for the
year ended December 31, 1997 was $19.2 million, compared to $18.1 million
provided from operating activities during the same period in 1996. Increases
in accounts receivable due to revenue growth were offset by improved inventory
turnover and improved working capital management.
Investing activities. Capital expenditures of $1.5 million for the year
ended December 31, 1997 were $0.2 million greater than the comparable period
in 1996. The majority of the expenditures were related to machinery and
equipment in the motors segment. The Company expects its capital investment
in 1998 to be greater than the 1997 spending level as a result of late 1997
acquisitions of the Controls' companies.
The Company made three acquisitions in 1997 for a combined $121.1 million,
offset by $4.5 million of cash acquired through acquisitions. The Company
plans to fund future acquisitions through its revolving line-of-credit
agreement and excess operating cash flow.
Financing activities. The Company's annual cash interest expense on
the Senior Notes, which are due 2006, will be approximately $29.0 million.
Interest on the Senior Notes is payable semi-annually on May 15 and November
<PAGE>
15 of each year. Interest on the Junior Seller Notes will be approximately
$0.8 million in 1998.
The Company is party to a Credit Agreement under which the Company is able
to borrow up to approximately $75.0 million to fund acquisitions and provide
working capital and for other general corporate purposes. The Credit
Agreement provides for a revolving line of credit of $75.0 million over a term
of five years. Obligations under the Credit Agreement are guaranteed by M&G
Industries' subsidiaries, and secured by pledges of the stock of M&G
Industries' subsidiaries and liens in respect of certain assets of M&G
Industries and its subsidiaries. As of March 30, 1998, the Company has
approximately $75 million of available funds under this Agreement. In
addition, under the terms of the Series D Notes, the Company is able to
increase the credit facility to approximately $115.0 million.
On December 10, 1997, the Company issued $100.0 million aggregate principal
amount of 10 3/4% Series C Senior Notes ("C Notes") and used a portion of
the net proceeds to repay existing indebtedness, acquire Motion Control,
provide additional working capital and pay fees and expenses incurred in
connection with the offering. Concurrent with the issuance of the C Notes,
the Company's Parent made a capital contribution of $20.0 million to the
Company.
The Company expects its principal sources of liquidity to be from its
operating activities and funding from the revolving line-of-credit agreement.
The Company further expects that these sources will enable it to meet its
long-term cash requirements for working capital, capital expenditures,
interest, taxes, and debt repayment for at least the next 12 months.
Foreign Currency Impact
The Company does not currently hedge its foreign currency exposure. The
Company's exposure to decreases in the value of foreign currency is protected
by its investment in manufacturing facilities overseas whose costs, including
labor and raw materials, are also denominated in local currency. 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 and results of operations.
Seasonality and Inflation
The Company's net sales typically show no significant seasonal variations.
The impact of inflation on the Company's operations has not been
significant to date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's
operating results.
Year 2000
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 96-14, Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000, which provides
that costs associated with modifying computer software for the Year 2000 be
expensed as incurred. The Company is in the process of conducting a
<PAGE>
comprehensive review of its computer systems to identify the systems that
could be affected by the Year 2000 issue and is developing an implementation
plan to resolve the issue. The Year 2000 problem is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the Year 1900 rather than the
Year 2000. This could result in a system failure or miscalculations.
Management has not yet assessed the Year 2000 compliance expense and related
potential affect on the Company's earnings.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
None.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE NO.
Reports of Independent Auditors 18
Consolidated Balance Sheets as of December 31, 1997
and 1996 21
Consolidated Statements of Income for the years ended
December 31, 1997 and 1996 and for the period from
September 23, 1995 to December 31, 1995 22
Consolidated Statements of Changes in Shareholder's Equity
(Net Capital Deficiency) for the years ended December 31,
1997 and 1996 and the period from September 23, 1995 to
December 31, 1995 23
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 and for the period from
September 23, 1995 to December 31, 1995 24
Notes to Consolidated Financial Statements 25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Motors and Gears, Inc.
We have audited the accompanying consolidated balance sheets of Motors and
Gears, Inc. as of December 31, 1997 and 1996 and the related consolidated
statements of income, shareholder's equity, and cash flows for the years ended
December 31, 1997 and 1996, and the period from September 23, 1995 to December
31, 1995. Our audits also included the financial statement schedule listed
in the index at Item 14 (a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We did not
audit the financial statements of certain subsidiaries whose statements
reflect total assets constituting 37% as of December 31, 1997 and net sales
constituting 11% for the year ended December 31, 1997, of the related
consolidated totals. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
data included for these subsidiaries, is based solely on the reports of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Motors and Gears, Inc. at
December 31, 1997 and 1996, and the consolidated results of its operations and
its cash flows for the years ended December 31, 1997 and 1996, and the period
from September 23, 1995 to December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statements 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.
ERNST & YOUNG LLP
Chicago, Illinois
March 25, 1998
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Motion Control Engineering, Inc.:
We have audited the balance sheet of MOTION CONTROL ENGINEERING, INC. (a
California corporation) as of December 31, 1997 and the related statements of
income, shareholders' equity and cash flows for the 13 days ended December
31, 1997 not separately presented herein. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Motion Control Engineering,
Inc. as of December 31, 1997 and the results of its operations and its cash
flows for the period then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Sacramento, California
February 18, 1998
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
FIR Group
We have audited the consolidated balance sheet of Fir Group (the
"Company") composed of FIR Elettromeccanica S.p.A., CIME S.p.A., Selin
Sistemi S.p.A., TEA S.r.l. and Nuova BETA S.r.l. as of October 31, 1997, and
the related consolidated statements of income, retained earnings, and cash
flows for the five months then ended (not separately presented herein).
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of the
Company as of October 31, 1997, and the results of its operations and its
cash flows for the five months then ended in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND S.p.A.
Milan, 27 February 1998
<PAGE>
MOTORS AND GEARS, INC.
(A Subsidiary of Motors and Gears Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
(In thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 28,880 $ 10,011
Accounts receivable, net of allowance
of $529 and $59 at December 31, 1997
and 1996, respectively 40,679 13,056
Inventories 31,665 16,554
Prepaid expenses and other 1,300 886
Total current assets 102,524 40,507
Property, plant and equipment-Net 15,201 11,431
Goodwill-Net 195,424 109,103
Deferred financing costs-Net 15,877 10,181
Deferred income taxes 3,825 3,021
Other non-current assets 2,293 1,287
Total assets $ 335,144 $ 175,530
LIABILITIES AND SHAREHOLDER'S EQUITY (NET
CAPITAL DEFICIENCY)
Current liabilities:
Notes payable $ 2,009 $ -
Accounts payable 17,424 5,408
Accrued interest payable 4,232 3,204
Accrued consent fee to Bondholders 2,550 -
Accrued expenses and other 9,688 4,539
Due to affiliated company 1,488 1,706
Current portion of long term debt 59 18
Total current liabilities 37,450 14,875
Long term debt 283,613 175,049
Deferred income taxes 3,880 1,349
Other non-current liabilities 2,649 44
Shareholder's equity (net capital deficiency):
Common stock, $.01 par value, 100,000 shares
authorized, issued and Outstanding 1 1
Additional paid-in capital 50,005 30,005
Cumulative translation adjustment (16) -
Accumulated deficit (42,438) (45,793)
Total shareholder's equity (net capital
deficiency) 7,552 (15,787)
Total liabilities and shareholder's equity
(net capital deficiency) $ 335,144 $ 175,530
See accompanying notes.
<PAGE>
MOTORS AND GEARS, INC.
(A Subsidiary of Motors and Gears Holdings, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
Period From
September 23,
1995 to
Year Ended December 31, December 31,
1997 1996 1995
(In thousands)
Net sales $148,669 $117,571 $ 24,684
Cost of sales, excluding
depreciation 97,084 75,751 16,429
Selling, general, and
administrative expenses,
excluding depreciation 13,370 8,796 1,564
Depreciation 4,311 2,960 415
Amortization of goodwill and
other intangibles 4,704 4,118 840
Management fees to affiliated
company 1,516 2,717 683
Operating income 27,684 23,229 4,753
Other income (expense):
Interest expense:
Affiliated company - (732) (301)
Other (22,363) (10,402) (2,111)
Miscellaneous, net 463 215 (33)
Income before income taxes and
extraordinary item 5,784 12,310 2,308
Provision for income taxes 2,429 5,290 948
Income before extraordinary item 3,355 7,020 1,360
Extraordinary loss, net of
income tax benefit of $1,620 - 2,186 -
Net income $ 3,355 $ 4,834 $ 1,360
See accompanying notes
<PAGE>
MOTORS AND GEARS, INC.
(A Subsidiary of Motors and Gears Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(NET CAPITAL DEFICIENCY)
(In thousands, except share amounts)
Total
Shareholder's
Cumulative Retained Equity
Common Stock Additional Foreign Earnings (Net
# of Paid-in Currency (Accumulated Capital
Shares Amount Capital Translation Deficit Deficiency)
Balance at September
22, 1995 100 $ - $ - $ - $ - $ -
Equity of Imperial
at date of
combination - - 100 - 14,559 14,659
Issuance of common
stock 99,900 1 29,905 - - 29,906
Net income - - - - 1,360 1,360
Balance at December
31, 1995 100,000 1 30,005 - 15,919 45,925
Acquisition of
Imperial - - - - (66,546) (66,546)
Net income - - - - 4,834 4,834
Balance at December
31, 1996 100,000 1 30,005 - (45,793) (15,787)
Foreign currency
translation
adjustment - - - (16) - (16)
Capital contribution
from Parent - - 20,000 - - 20,000
Net Income - - - - 3,355 3,355
Balance at December
31,1997 100,000 $ 1 $50,005 $ (16) $(42,438) $ 7,552
See accompanying notes
<PAGE>
MOTORS AND GEARS, INC.
(A Subsidiary of Motors and Gears Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
September
23,1995 to
Year Ended December 31, December 31,
1997 1996 1995
(In thousands)
Cash flows from operating activities:
Net income $ 3,355 $ 4,834 $ 1,360
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 9,015 7,078 1,255
Amortization of deferred financing
costs 1,055 799 152
Deferred income taxes 772 701 (3)
Extraordinary loss - 3,806 -
Changes in assets and liabilities
(net of effects from acquisitions)
Accounts receivable (3,645) 3,190 80
Inventories 1,323 128 871
Prepaid expenses and other 2,205 187 24
Increase (decrease) in due to
affiliated company (218) (3,433) 948
Accounts payable 593 (3,500) 363
Accrued expenses and other 4,813 4,359 1,671
Other non-current assets and
liabilities (29) (12) (19)
Net cash provided by operating
activities 19,239 18,137 6,702
Cash flows from investing activities:
Purchases of property, plant
and equipment (1,497) (1,304) (269)
Acquisitions of subsidiaries (121,053) (90,692) (102,406)
Cash acquired in acquisitions of
subsidiaries 4,462 - 696
Net cash used in investing
activities (118,088) (91,996) (101,979)
Cash flows from financing activities:
Proceeds from debt issuances-Senior
Notes 104,500 190,000 70,000
Payment of financing costs (6,749) (10,354) -
Payments on Senior Notes - (89,375) (625)
Proceeds from revolving credit
facility 72,500 1,700 2,500
Payments on revolving credit facility (72,500) (2,200) (2,000)
Proceeds from common stock issuance - - 29,906
Proceeds from capital contribution
from Parent 20,000 - -
Payments on note payable
to affiliated company - (7,827) (1,635)
Payments on capital lease obligations (33) (855) (88)
Net cash provided by financing
activities 117,718 81,089 98,058
Increase in cash and cash equivalents 18,869 7,230 2,781
Cash and cash equivalents at
beginning of period 10,011 2,781 -
Cash and cash equivalents at end
of period $ 28,880 $ 10,011 $ 2,781
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest:
Affiliated company $ - $ 1,066 $ 589
Other 20,981 7,117 23
Income taxes 515 781 94
Non cash investing activities:
Capital leases 107 77 -
See accompanying notes.
<PAGE>
MOTORS AND GEARS, INC.
(A Subsidiary of Motors and Gears Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1. Formation of the Company and Acquisitions
Motors and Gears, Inc. (Company), a wholly-owned subsidiary of Motors and
Gears Holdings, Inc. (Parent), a majority-owned subsidiary of Jordan
Industries, Inc. (JII), was formed on September 8, 1995, to combine a group
of companies engaged in the manufacture and sale of reversible, permanent
split-capacitor, shaded-pole, and DC subfractional horsepower motors and gear
motors primarily to customers located throughout the United States. Since
its formation, the Company has also entered into the electronic motion
control industry.
On September 22, 1995, the Company acquired all of the outstanding shares
of Merkle-Korff Industries, Inc. (Merkle-Korff), Mercury Industries, Inc.
(Mercury) and Elmco Industries, Inc. (Elmco), for $107,406. The purchase
price, including costs incurred directly related to the transaction, was
allocated to working capital of $8,201; property and equipment of $3,652;
covenants not to compete of $500; deferred financing fees of $3,791; and
resulted in an excess purchase price over net identifiable assets of $91,262.
Mercury and Elmco were subsequently merged into Merkle-Korff.
On March 8, 1996, the Company acquired the net assets of Barber-Colman
Motors Division (Division), a division of Barber-Colman Company, which was
wholly-owned by Siebe, plc. The Division consisted of Colman OEM and Colman
Motor Products, wholly-owned subsidiaries of Barber-Colman Company, and the
motors division of Barber-Colman Company. The Division is a vertically
integrated manufacturer of subfractional horsepower AC and DC motors and gear
motors, with applications in such products as vending machines, copiers,
printers, ATM machines, currency changers, X-ray machines, peristaltic pumps,
HVAC actuators, and other products.
The purchase price of $21,700, including costs incurred directly related
to the transaction, has been allocated to working capital of $4,899;
property, plant, and equipment of $5,843; covenants not to compete of $1,000,
deferred financing fees of $793, and resulted in an excess purchase price
over net identifiable assets of $9,165. The acquisition was financed with
$21,700 of new and existing credit facilities. The Division was subsequently
merged into Merkle-Korff.
Concurrent with the consummation of a debt offering on November 7, 1996
(see Note 7), the Company acquired Imperial Electric Company (Imperial), a
wholly-owned subsidiary of JII, and Imperial's wholly-owned subsidiaries,
Scott Motors Company (Scott) and Gear Research, Inc. (Gear) (Imperial, Scott
and Gear are hereafter collectively referred to as Imperial), for $75,000 of
cash payments from the offering proceeds, which included the repayment of
$6,008 in Imperial liabilities owed to JII, and a contingent payment payable
pursuant to a contingent earnout arrangement. Under the terms of the
contingent earnout arrangement, 50% of Imperial, Scott and Gear's cumulative
earnings before interest, taxes, depreciation and amortization, as defined,
exceeding $50,000 during the five fiscal years ended December 31, 1996
through December 31, 2000 will be paid to an affiliate of JII. Payments, if
<PAGE>
any, under the contingent earnout arrangement will be determined and made on
April 30, 2001.
Imperial designs, manufactures, and distributes specialty electric motors,
generators, and gears for industrial and commercial use. Scott manufactures
specialty electric motors and was merged with Imperial effective December 31,
1997. Gear manufactures gears and precision gear assemblies. Imperial, Scott
and Gear's customers are located mainly in the United States.
The Company and Imperial came under the common control of JII on September
22, 1995, the date the Company acquired a controlling interest in Merkle-
Korff, Mercury and Elmco, and the Company commenced operations. The
consolidated financial statements give retroactive effect to the acquisition
of Imperial, which has been accounted for in a manner similar to the pooling-
of-interests method. Accordingly, the results of operations of the Company
include the historical results of operations of Imperial since September 22,
1995. As a result of the Imperial acquisition, the Company recorded a $66,546
charge to retained earnings in 1996. This amount represents the $75,000 of
cash payments to JII, less $6,008 in Imperial liabilities owed to JII and
$2,446 of deferred income taxes recorded in connection with the acquisition.
On June 12, 1997, the Company purchased all of the common stock of the FIR
Group Companies, consisting of CIME S.p.A., SELIN, S.p.A. and FIR S.p.A.
(collectively "FIR") for $50,496. The purchase price, including costs
incurred directly related to the transaction, was allocated to working
capital of $16,562; property and equipment of $4,918; other long-term assets
and liabilities of $3,442; and resulted in an excess purchase price over net
identifiable assets of $32,458. FIR is a manufacturer of electric motors and
pumps for niche applications such as pumps for commercial dishwashers, motors
for industrial sewing machines and motors for industrial fans and
ventilators. FIR's operations are located in Italy and its customers are
located mainly in Europe.
On October 27, 1997, the Company acquired all of the outstanding stock of
Electrical Design and Control Company, Inc. ("ED&C") for $16,000 in cash and
a $4,000 Subordinated Junior Seller Note. The purchase price, including costs
incurred directly related to the transaction, was preliminarily allocated to
working capital of $3,514; property and equipment of $132; covenants not to
compete of $120; and resulted in an excess purchase price over net
identifiable assets of $16,234. ED&C is a full-service electrical
engineering company which designs, engineers and manufactures electrical
control systems and panels for material handling systems and other like
applications. ED&C provides comprehensive design, build and support services
to produce electronic control panels which regulate the speed and movement of
conveyor systems used in a variety of automotive plants and other industrial
applications. ED&C's customers are located mainly in the United States.
Concurrent with the consummation of a debt offering on December 10, 1997
(see Note 7), the Company purchased all of the stock of Motion Control
Engineering, Inc. ("Motion Control") for $53,600. The purchase price,
including costs incurred directly related to the transaction, was
preliminarily allocated to working capital of $10,071; property and equipment
of $1,428; covenants not to compete of $1,005; other long-term assets and
liabilities of $12; and resulted in an excess purchase price over net
identifiable assets of $41,108. Motion Control manufactures electronic
motion control products for elevator markets, primarily the elevator
<PAGE>
modernization market. Motion Control's customers are located mainly in the
United States.
Unaudited annual pro forma information with respect to the Company as if
the 1997 and 1996 acquisitions had occurred on January 1, 1996, is as
follows:
Unaudited
Year Ended December 31,
1997 1996
Net Sales $220,768 $210,376
Income before income taxes 5,917 5,154
Net Income $ 3,550 $ 3,093
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Motors and Gears Industries, Inc., Merkle-
Korff, Imperial, FIR, ED&C and Motion Control. All significant intercompany
transactions and accounts have been eliminated. Operations of subsidiaries
outside the United States are included for periods ending two months prior to
the Company's year-end and interim periods to ensure timely consolidated
financial statements.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements
in order for them to conform to the 1997 presentation.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with an initial
maturity of three months or less at the time of purchase.
Inventories
Inventories are stated at the lower of cost or market. Inventories valued
at either average or first-in, first-out (FIFO) cost, accounted for
approximately 71% and 100% of the Company's inventories at December 31, 1997
and 1996, respectively. All other inventories are valued using the last-in,
first-out (LIFO) cost, which approximated current cost at December 31, 1997.
Property, Plant, and Equipment
Property, plant, and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided using either straight-line or
accelerated methods over the estimated useful lives of the assets. Leasehold
improvements and assets under capital leases are amortized using the
straight-line method over the shorter of the lease term or their estimated
productive lives. Amortization of leasehold improvements and assets under
capital leases is included in depreciation expense.
<PAGE>
The useful lives of plant and equipment for the purpose of computing book
depreciation are as follows:
Buildings 5 to 31 years
Machinery and equipment 3 to 7 years
Dies and tooling 3 years
Furniture and fixtures 5 to 10 years
Vehicles 5 years
Leasehold improvements Life of lease
Foreign Currency Translation
In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation," assets and liabilities of the Company's
foreign operations are translated from foreign currencies into U.S. dollars at
year-end rates while income and expenses are translated at the weighted-
average exchange rates for the year. Gains or losses resulting from the
translations of foreign currency financial statements are deferred and
classified as a separate component of shareholder's equity.
Intangible Assets
Goodwill is being amortized using the straight-line method over 30 years
at Merkle-Korff, 40 years at Imperial, and 30 years at FIR, ED&C and Motion
Control. Goodwill at December 31, 1997 and 1996 is net of accumulated
amortization of $13,274 and $8,880, respectively. The covenants not to
compete are being amortized using the straight-line method over the
respective terms of the agreements. The covenants not to compete at December
31, 1997 and 1996 are net of accumulated amortization of $601 and $294,
respectively. Deferred financing costs are amortized using the straight-line
method over the shorter of the terms of the related loans or the period such
loans are expected to be outstanding. Deferred financing costs at December
31, 1997 and 1996 are net of accumulated amortization of $1,226 and $173,
respectively. Amortization of deferred financing costs is included in
interest expense.
Income Taxes
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases 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 operating results of the Company are
included in the consolidated federal income tax return of JII. In addition,
the Company is party to a tax-sharing agreement with JII. However, the
Company's income tax provision has been calculated as if the Company would
have filed a separate federal income tax return.
Revenue Recognition
Revenues are primarily recognized when products are shipped to customers.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
<PAGE>
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income". The Statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
Statement is effective for the Company in 1998. The Company does not
anticipate that adoption of this Statement will have a material impact on the
current presentation of its financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for years beginning
after December 15, 1997. This Statement establishes standards for the way
that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This Statement is effective
for financial statements for fiscal years beginning after December 15, 1997,
and therefore the Company will adopt the new requirements in 1998.
Management has not completed its review of this Statement, but does not
anticipate that the adoption of this Statement will have a significant effect
on the Company's reported segments.
3. Inventories
Inventories consist of the following:
December 31,
1997 1996
Raw materials $21,639 $ 9,351
Work in process 7,375 4,668
Finished goods 2,651 2,535
$31,665 $16,554
4. Property, Plant, and Equipment
Property, plant, and equipment consists of the following:
December 31,
1997 1996
Land, buildings and improvements $ 6,380 $ 3,471
Machinery and equipment 17,745 15,798
Furniture and fixtures 1,089 846
Other (vehicles, dies and tooling) 6,731 3,881
31,945 23,996
Less: Accumulated depreciation and amortization (16,744) (12,565)
$15,201 $11,431
5. Short Term Notes Payable
FIR has a number of unsecured short-term borrowing facilities available
from approximately 25 banks in the form of overdraft coverage. The total
amount available under the overdraft facilities is $3,500 at interest rates
ranging from 9.5% to 10.5% at December 31, 1997. Total outstanding
borrowings under these arrangements were $2,009 at December 31, 1997.
<PAGE>
6. Income Taxes
Pretax income was taxed in the following jurisdictions:
Period from
September 23
Year Ended to
December 31, December 31,
1997 1996 1995
Domestic $4,679 $12,310 $2,308
Foreign 1,105 N/A N/A
$5,784 $12,310 $2,308
The provision for income taxes consists of the following:
Period from
September 23
Year Ended to
December 31, December 31,
1997 1996 1995
Current:
Federal $ 898 $1,594 $827
State 217 572 124
Foreign 542 - -
Total current 1,657 2,166 951
Deferred:
Federal 684 1,228 (3)
State 151 276 -
Foreign (63) - -
Total deferred 772 1,504 (3)
Provision for income taxes $2,429 $3,670 $948
The provision for income taxes differs from the amount of income tax
provision computed by applying the federal income tax rate to income before
income taxes. A reconciliation of the differences is as follows:
Period from
September 23
Year Ended to
December 31, December 31,
1997 1996 1995
Computed statutory tax provision $1,967 $2,891 $785
Increase resulting from:
State and local taxes, net of
federal benefit 243 560 82
Higher effective foreign tax rate 103 - -
Nondeductible amortization 181 145 37
Other (65) 74 44
Provision for income taxes $2,429 $3,670 $ 948
<PAGE>
Deferred tax liabilities and assets are comprised of the following:
December 31,
1997 1996
Deferred tax liabilities:
Goodwill $2,686 $1,349
Property, plant and equipment 900 -
Other 294 -
Total deferred tax liabilities 3,880 1,349
Deferred tax assets:
Property, plant and equipment 2,263 2,104
Covenants not to compete 455 75
Vacation accrual 141 36
Franchise tax 128 128
Employee benefits 196 129
Uniform capitalization 243 243
Allowance for doubtful accounts 121 12
Inventory obsolescence reserve 18 71
Other 260 223
Total deferred tax assets 3,825 3,021
Net deferred tax (liabilities) assets $ (55) $1,672
During 1997, the Company recorded $955 of deferred tax liabilities in
connection with the acquisition of FIR. During 1997, the Company also
adjusted its foreign deferred tax liabilities by $148 for enacted changes in
foreign tax rates.
7. Long Term Debt
Long-term debt consists of the following:
December 31
1997 1996
Series B Senior Notes (A) $170,000 $170,000
Series C Senior Notes, including $4,500 of
unamortized premium (A) 104,500 -
Subordinated Notes Payable (B) 9,000 5,000
Other 172 67
283,672 175,067
Current Portion (59) (18)
$283,613 $175,049
(A) On November 7, 1996, the Company issued $170,000 aggregate principal
amount of 10 3/4% Series A Senior Notes ("A Notes"). In April 1997, the
Company completed an exchange offer under which $170,000 of 10 _ Series
B Senior Notes were exchanged for the $170,000 of Series A Notes. The
terms of the A Notes were substantially identical to the terms of the B
Notes.
Interest on the B Notes is payable in arrears on May 15 and November 15
of each year and commenced May 15, 1997. The B Notes are unsecured
obligations of the Company and mature on November 15, 2006.
<PAGE>
Concurrent with the consummation of the above offering, the Company
used a portion of the net proceeds to repay all of its outstanding
indebtedness under the existing Credit Agreement, canceled the existing
Credit Agreement, and entered into a new Credit Agreement (New Credit
Agreement) with a bank. Accordingly, the unamortized balance of
deferred financing costs related to the previous credit agreement of
$3,806 was written-off as an extraordinary charge. The New Credit
Agreement is in the form of a revolving credit facility and provides
for borrowings of up to $75,000 over a five year term. Borrowings bear
interest at a floating rate of LIBOR plus 2.5% or base rate plus 1.5%,
subject to reduction based on the Company's leverage ratio, as defined.
Unused commitments under the revolving credit facility are subject to
an availability fee of 1/2 of 1% per annum, as defined. Borrowings are
secured by the stock and substantially all of the assets of the
Company. There were no borrowings outstanding under the revolving
credit facility at December 31, 1997 and 1996.
The New Credit Agreement contains covenants which, among other things,
provide for a minimum level of interest coverage, as defined, and limit
the Company's ability to incur additional indebtedness, create liens,
make restricted payments, engage in affiliate transactions or mergers
and consolidations, and make asset sales.
On December 10, 1997, the Company issued $100,000 aggregate principal
amount of 10 3/4% Series C Senior Notes ("C Notes"). Interest on the C
Notes is payable in arrears on May 15 and November 15 of each year,
commencing May 15, 1998. The C Notes were issued at a premium of 4.5%
which will be amortized over the remaining term of the Notes.
Concurrent with the issuance of the C Notes, the Company's Parent made
a capital contribution of $20,000 to the Company.
In conjunction with the consummation of the C Note offering, the
Company used a portion of the net proceeds to repay existing
indebtedness under the new credit agreement, acquire Motion Control,
provide additional working capital and pay fees and expenses incurred
in connection with the offering.
On January 9, 1998, the Company completed an exchange offer under which
$270,000 of 10 _% Series D Senior Notes ("D Notes") were exchanged for
the $170,000 of B Notes and the $100,000 of C Notes. The terms of the
D Notes are substantially identical to the terms of the B and C Notes.
The D Notes are unsecured obligations of the Company and mature on
November 15, 2006. The D Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after November 15,
2001. In addition, notwithstanding the foregoing, the Company may
redeem up to 35% of the original aggregate principal amount prior to
November 15, 1999 under certain circumstances. The Indenture relating
to the D Notes contains certain covenants which, among other things,
restricts the ability of the Company to incur additional indebtedness,
to pay dividends or make other restricted payments, engage in
transactions with affiliates, to complete certain mergers or
consolidations, or to enter into certain guarantees of indebtedness.
The fair value of the Senior Notes was $286,875 at December 31, 1997.
The fair values were calculated by multiplying the face amount by the
market prices of each security at December 31, 1997.
<PAGE>
(B) The Subordinated Notes Payable consist of a $5,000 note payable to the
former shareholder of Merkle-Korff and a $4,000 note payable to the
former shareholders of ED&C Company. The note payable to the
shareholder of Merkle-Korff is due in installments beginning December
31, 2000 through December 31, 2003 and bears interest at 9% per annum.
The note payable to the ED&C Company shareholders is due December 31,
2002 and bears interest at 9% per annum. These notes are unsecured
obligations of the Company.
Aggregate maturities of long-term debt at December 31, 1997 are as
follows:
1998 $ 59
1999 61
2000 1,041
2001 1,261
2002 5,250
Thereafter $271,500
8. Leases
The Company leases certain land, buildings, and equipment under
noncancellable operating lease agreements expiring in various years through
2003. Under the terms of one of these operating leases, monthly rental
payments may be adjusted every 36 months. Minimum future lease payments, by
year and in aggregate, under noncancellable operating leases including those
with related parties (Note 11), are as follows at December 31, 1997:
1998 $ 2,534
1999 2,375
2000 1,919
2001 1,178
2002 1,194
Thereafter 1,107
Total rent expense was $1,951, $1,680 and $333 for the years ended
December 31, 1997 and 1996, and for the period from September 23, 1995 to
December 31, 1995, respectively.
9. Common Stock
Concurrent with its formation on September 8, 1995, the Company issued 100
shares of its stock for one hundred dollars. On September 22, 1995, the
Company sold an additional 99,900 shares of its common stock for $29,906. The
proceeds were used to finance a portion of the acquisition of all of the
outstanding shares of Merkle-Korff, Mercury, and Elmco, as described in Note
1.
On December 10, 1997, the Company received a capital contribution of
$20,000 from its Parent in connection with the issuance of $100,000 of Series
C Notes.
<PAGE>
10. Benefit Plans
Certain 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 their 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 $671, $449 and $130 for the years ended December 31,
1997 and 1996, and for the period from September 23, 1995 to December 31,
1995, respectively.
FIR provides for a severance liability for all employees at 7.4% of each
respective employee's annual salary. In addition, the amount accrued is
adjusted each year according to an official index (equivalent to the retail
price index plus 1.5%). This obligation is payable to employees when they
leave the employ of the Company and approximated $2,712 at December 31, 1997.
11. Related Party Transactions
Services Agreements. Until July 24, 1997, the Parent and its subsidiaries
(including the Company) had been charged an annual management and advisory fee
by JII equal to 1.0% of its net sales payable quarterly. Management and
advisory fees charged to the Company were approximately $800, $2,700 and $700
for the period from January 1, 1997 to July 24, 1997, the year ended December
31, 1996 and for the period from September 23, 1995 to December 31, 1995,
respectively. The Company was also obligated to pay to The Jordan Company (i)
an investment banking and sponsorship fee of up to 2.0% of the purchase price
of certain acquisitions or sales involving the Company or any of its
subsidiaries, (ii) a financial consulting fee of up to 1.0% of any debt,
equity or other financing arranged by the Company with the assistance of The
Jordan Company and (iii) reimbursement for out-of-pocket costs; provided, that
such fees may be paid, in whole or in part, to JII, upon the mutual agreement
of the board of directors of JII and The Jordan Company. In connection with
the acquisitions of Merkle-Korff and Barber-Colman Motors and related
financings, The Jordan Company was paid investment banking fees of $2,100 and
$400, respectively. In connection with the Imperial Acquisitions and the
$170,000 Note Offering and the Existing Credit Agreement, the Company paid The
Jordan Company $2,250 pursuant to such agreements. These arrangements were
terminated as of July 25, 1997 and replaced with five new types of agreements
and arrangements which are described below.
First, the Company and each of its subsidiaries entered into a new advisory
agreement (the "New Subsidiary Advisory Agreement") with JII, pursuant to
which the Company and its subsidiaries will pay to JII (i) investment banking
and sponsorship fees of up to 2.0% of the purchase price of acquisitions,
joint ventures, minority investments or sales involving the Company and its
subsidiaries or their respective businesses or properties (which were $2,379
in 1997); (ii) financial advisory fees of up to 1.0% of any debt, equity or
other financing or refinancing involving the Company or such subsidiary, in
each case, arranged with the assistance of The Jordan Company or its
affiliates (which were $1,045 in 1997); and (iii) reimbursement for The Jordan
Company's or JII's out-of-pocket costs in connection with providing such
services (which were $0 in 1997). The New Subsidiary Advisory Agreement will
expire in December 2007, but is automatically renewed for successive one-year
<PAGE>
terms, unless either party provides written notice of termination 60 days
prior to the scheduled renewal date.
Second, the Company and each of its subsidiaries entered into a management
consulting agreement (the "New Subsidiary Consulting Agreement"), pursuant
to which they will pay to JII annual consulting fees of 1.0% of the Company's
net sales for such services, payable quarterly, and will reimburse JII for its
out-of-pocket costs related to its services. The New Subsidiary Consulting
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. Pursuant to the New
Subsidiary Consulting Agreement, JII (but not JII's affiliates) will be
obligated to present all acquisition, business and investment opportunities
that relate to manufacturing, assembly, distribution or marketing of products
and services in the motors, gears and motion control industries to the
Company, and JII will not be permitted to pursue such opportunities or present
them to third parties unless the Company determines not to pursue such
opportunities or consents thereto. In accordance with this agreement, the
Company paid approximately $700 for the period from July 25, 1997 to December
31, 1997.
Third, the Company and each of its subsidiaries entered into a services
agreement (the "JI Properties Services Agreement") with JI Properties, Inc.
("JI Properties"), a subsidiary of JII, pursuant to which JI Properties
provides certain real estate and other assets, transportation and related
services to the Company. Pursuant to the JI Properties Services Agreement,
the Company will be charged for its allocable portion of such services based
upon its usage of such services and its relative revenues, as compared to JII
and its other subsidiaries. In accordance with this agreement, such charges
were $341 for the period from July 25, 1997 to December 31, 1997. 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.
Fourth, JII refined the allocation of its overhead, general and
administrative charges and expense among JII and its subsidiaries, including
the Company, in order to more closely match these overhead charges with the
revenues and usage of corporate overhead by JII and its subsidiaries. Under
this agreement, the Company's allocable portion of corporate expenses was
$690 for the period from July 25, 1997 to December 31, 1997.
Fifth, the Company and JII entered into the transition agreement (the
"Transition Agreement") pursuant to which JII will provide office space and
certain administrative and accounting services to the Company to facilitate
the transition of the Company as a stand-alone company. The Company will
reimburse JII for services provided pursuant to the Transition Agreement on an
allocated cost basis. The Transition Agreement will expire on December 31,
1998, but is automatically renewed for successive one year periods (unless
either party provides prior written notice of non-renewal) and may be
terminated by the Company on 90 days' written notice.
The Company leases certain plants, warehouses, and offices under net leases
from affiliated entities. Rent expenses, including real estate taxes
attributable to these leases, amounted to $951, $736 and $261 for the years
ended December 31, 1997 and 1996 and for the period from September 23, 1995 to
<PAGE>
December 31, 1995, respectively. Future minimum rental payments required
under these leases are as follows:
1998 $1,306
1999 1,321
2000 1,134
2001 540
2002 540
Thereafter $2,655
An individual who is a shareholder, Director, General Counsel and
Secretary of the Parent is also a partner in a law firm used by the Company.
The firm was paid $202, $201 and $0 in fees and expenses during the year
ended December 31, 1997 and 1996, and for the period from September 23, 1995
to December 31, 1995, respectively. The rates charged to the Company were at
arms-length.
Due to affiliated company (JII) consists of:
December 31
1997 1996
Management fee $ 298 $ 243
Federal income taxes 1,087 968
Other 103 495
$ 1,488 $1,706
12.Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company deposits cash and cash equivalents with
high-quality financial institutions, which are federally insured up to
prescribed limits. Cash balances may exceed these limits at any given time.
The Company closely monitors the credit quality of its customers and
maintains allowances for potential credit losses which, historically, have
not been significant and have been within the range of management's
expectations. The Company generally does not require collateral or other
security on trade receivables.
13. Additional Purchase Price Arrangements
The terms of the Company's Motion Control acquisition agreement provides
for additional consideration to be paid if the acquired entity's results of
operations exceed certain targeted levels. Targeted levels are set
substantially above the historical experience of the acquired entity at the
time of acquisition. The agreement becomes exercisable in 2003 and payments
if any under the contingent agreement will be placed in a trust and paid out
in cash in equal annual installments over a four year period.
14. Financial Instruments
The Company's financial instruments include cash equivalents, trade
accounts receivable, accounts payable, accrued expenses, the Senior Notes,
the Subordinated Notes, and the revolving credit facility. The fair values
of the Company's financial instruments, except for the Senior Notes (Note 7),
are not materially different from their carrying values at December 31, 1997.
<PAGE>
15. Segment Data
Description of Segments
The Company operates in two separate business segments; motors and
controls. The motors segment consists of subfractional motors,
fractional/integral motors, and gears and gearboxes. The control segment
consists of motion control systems.
The Company's subfractional horsepower products are comprised of motors and
gearmotors which power applications up to 30 watts (1/25 horsepower). These
small, "fist-size" AC and DC motors are used in light duty applications such
as snack and beverage vending machines, refrigerator ice dispensers and
photocopy machines.
The Company's fractional/integral horsepower products are comprised of AC
and DC motors and gearmotors having power ranges from 1/8 to 300 horsepower.
Key end markets for these motors include commercial floor care equipment,
commercial dishwashers, commercial sewing machines, industrial ventilation
equipment and elevators.
The Company's precision gear and gearbox products are produced in sizes of
up to 16 inches in diameter and in various customized configurations such as
pump, bevel and helical gears. Key end markets for these products include
original equipment manufacturers ("OEMs") of motors, commercial floor care
equipment, aerospace and food processing product equipment.
The Company's motion control systems are used primarily in automated
conveyor systems within the automotive industry and the elevator
modernizations market. The systems typically control several components such
as electric motors, hydraulic or pneumatic valves, actuators and switches that
are required for the conveyor or elevator systems to function properly.
The Company entered the controls business segment through the acquisition
of two companies during 1997(Note 1). Accordingly, segment information for
controls is not available for the years prior to 1997.
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, "Summary of Significant Accounting
Policies." No intrasegment sales exist. No single customer accounts for 10%
or more of consolidated net sales. Identifiable assets are those used by each
segment in its operations. Corporate assets consist primarily of cash and
deferred financing fees.
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.
<PAGE>
Summary financial information by business segment is as follows:
Year Ended
December 31,
1997 1996 1995(1)
(Dollars in thousands)
Net Sales
Motors $145,639 $117,571 $ 63,979
Controls 3,030 N/A N/A
$148,669 $117,571 $ 63,979
Operating Income
Motors $ 30,588 $ 26,165 $ 16,369
Controls 458 N/A N/A
Corporate Expenses (2) (3,362) (2,936) N/A
Total Operating Income 27,684 23,229 16,369
Interest Expense (22,363) (11,134) (2,412)
Other 463 215 239
Income before Income Tax and
Extraordinary Items $ 5,784 $ 12,310 $ 14,196
Identifiable Assets
Motors $211,135 $157,796 $145,387
Controls 79,263 N/A N/A
Corporate 44,746 17,734 N/A
$335,144 $175,530 $145,387
Capital Expenditures
Motors $ 1,392 $ 1,304 $ 269
Controls 105 N/A N/A
$ 1,497 $ 1,304 $ 269
Depreciation
Motors $ 4,283 $ 2,960 $ 516
Controls 28 N/A N/A
$ 4,311 $ 2,960 $ 516
Amortization
Motors $ 4,544 $ 4,118 $ 840
Controls 160 N/A N/A
$ 4,704 $ 4,118 $ 840
(1) Reflects the combined results of operations of the Predecessor from
January 1, 1995 to September 22, 1995 and the Company from September 23, 1995
to December 31, 1995. The results of operations of Imperial, Scott and Gear
are included in the Company's consolidated operating results from September
23, 1995, the date at which the Company and Imperial, Scott and Gear came
under the common control of JII.
(2) Management fees paid to affiliated company have been included in corporate
expenses.
<PAGE>
Summary financial information by geographic area is as follows:
Year Ended
December 31,
1997 1996 1995 (1)
(Dollars in thousands)
Net sales to unaffiliated customers
United States $133,912 $117,571 $ 63,979
Europe 14,757 N/A N/A
$148,669 $117,571 $ 63,979
Operating income
United States $ 26,179 $ 23,229 $ 16,369
Europe 1,505 N/A N/A
$ 27,684 $ 23,229 $ 16,369
Identifiable assets
United States $270,367 $175,530 $145,387
Europe 64,777 N/A N/A
$335,144 $175,530 $145,387
(1) Reflects the combined results of operations of the Predecessor from
January 1, 1995 to September 22, 1995 and the Company from September 23, 1995
to December 31, 1995. The results of operations of Imperial, Scott and Gear
are included in the Company's consolidated operating results from September
23, 1995, the date at which the Company and Imperial, Scott and Gear came
under the common control of JII.
16. Legal Proceedings
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.
17. Subsequent Events
On January 9, 1998, the Company completed an exchange offer under which
$270,000 of 10 _% Series D Senior Notes were exchanged for $170,000 of Series
A Senior Notes and $100,000 of Series C Senior Notes (Note 7).
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the names and ages of the Company's directors,
executive officers and other key employees and the positions they hold as of
the date of this annual report:
Name Age Position with Company
Thomas H. Quinn 50 Chairman
Ron A. Sansom 38 Chief Executive Officer and a Director
Norman Bates 36 Chief Financial Officer
Randall Bays 42 President, Imperial (Fractional/Integral
Products)
G. Barry Lawrence 51 President, Gear (Gears and Gear Boxes)
John W. Brown 61 Chairman and Chief Executive Officer, Merkle-
Korff (Subfractional Products)
Carlo Bergamaschi 66 President, FIR
Mike McGuire 56 President, Electrical Design
Javad Rahimian 47 President, Motion Control
Jonathan F. Boucher 40 Vice President and a Director
John W. Jordan, II 49 Director
David W. Zalaznick 43 Director
Set forth below is a brief description of the business experience of each
director and executive officer of the Company.
Mr. Quinn has served as Chairman of the Company since its inception. Since
1988, Mr. Quinn has been President, Chief Operating Officer and a director of
JII. Mr. Quinn is also the Chairman of the Board and Chief Executive Officer
of American Safety Razor Company and Welcome Home, Inc. as well as a director
of AmeriKing, Inc. and Jordan Telecommunication Products, Inc. and of a
number of privately held companies. On January 22, 1997, Welcome Home, Inc.
filed a Chapter 11 petition in the United States Bankruptcy Court for the
Southern District of New York.
Mr. Sansom has served as Chief Executive Officer and a director of the
Company since June 1996. Prior to joining the Company, Mr. Sansom held
several senior management positions with General Electric from 1981 to 1996,
including General Manager of General Electric's Appliance Components
business.
Mr. Bates has served as Chief Financial Officer of the Company since
April, 1997. Prior to that, Mr. Bates held several financial management
positions with General Electric from 1984 to 1997, including Finance Manager
of General Electric's Appliance Components business.
Mr. Bays has served as the President of Imperial since April, 1997. Prior
to that, Mr. Bays held several senior management positions in General
Electric's motor and control business from 1991 to 1997. Prior to that, Mr.
Bays held senior management positions in Bomar, Inc.'s electronics business.
<PAGE>
Mr. Lawrence has served as President of Gear since 1991. Prior to that,
Mr. Lawrence held several senior management positions with Gear since 1978.
Mr. Brown has served as President of Merkle-Korff since 1993 and of
Barber-Colman Motors since March 1996. Prior to that, Mr. Brown held several
senior management positions with Merkle-Korff since the 1950's, including
Executive Vice President until 1993.
Mr. Bergamaschi has served as the President of FIR since 1960. Prior to
that, Mr. Bergamaschi held several management positions within FIR.
Mr. McGuire has served as the General Manager of Electrical Design since
1990 and was promoted to President after the Electrical Design Acquisition.
Prior to that, Mr. McGuire was President of a controls company from 1985 to
1989. Mr. McGuire has 31 years of experience in the motion controls
business.
Mr. Rahimian has served as President of Motion Control since its inception
in 1983. Prior to that, Mr. Rahimian was employed by Elevator Industries as
an engineering specialist.
Mr. Boucher has served as a Vice President and a director of the Company
since its inception. Since 1983, Mr. Boucher has need a partner of The
Jordan Company, a private merchant banking firm. Mr. Boucher is also a
director of JII, Jordan Telecommunication Products, Inc. and American Safety
Razor Company as well as other privately held companies
Mr. Jordan has served as a director of the Company since its inception.
Mr. Jordan is a managing partner of The Jordan Company, a private merchant
banking firm which he founded in 1982. Mr. Jordan is also a director of JII,
AmeriKing, Inc., American Safety Razor Company, Carmike Cinemas, Inc.,
Welcome Home, Inc., GFSI, Inc., GFSI Holdings, Inc., Jordan Telecommunication
Products, Inc. and Apparel Ventures, Inc. as well as other privately held
companies. On January 22, 1997, Welcome Home, Inc. filed a Chapter 11
petition in the United States Bankruptcy Court for the Southern District of
New York.
Mr. Zalaznick has served as a director of the Company since June 1996.
Since 1982, Mr. Zalaznick has been a managing partner of The Jordan Company.
Mr. Zalaznick is also a director of JII, AmeriKing, Inc., Carmike Cinemas,
Inc., American Safety Razor Company, Marisa Christina, Inc., Apparel
Ventures, Inc., Jordan Telecommunication Products, Inc., GFSI, Inc. and GFSI
Holdings, Inc. as well as other privately held companies.
Board of Directors
Liability Limitation. The Certificate of Incorporation provides that a
director of the Company shall not be personally liable to it or its
stockholders for monetary damages to the fullest extent permitted by Delaware
Corporation Law. In accordance with Delaware Corporation Law, the Certificate
of Incorporation does not eliminate or limit the liability of a director for
acts or omissions that involve intentional misconduct by a director or a
knowing violation of law by a director for voting or assenting to an unlawful
distribution, or for any transaction from which the director will personally
receive a benefit in money, property, or services to which the director is
not legally entitled. Delaware Corporation Law does not affect the
availability of equitable remedies such as an injunction or rescission based
<PAGE>
upon a director's breach of his duty of care. Any amendment to these
provisions of the Delaware Corporation Law will automatically be incorporated
by reference into the Certificate of Incorporation and the Bylaws, without
any vote on the part of its stockholders, unless otherwise required.
Indemnification Agreements. The Company and each of its directors and
certain executive officers have entered into indemnification agreements. The
indemnification agreements provide that the Company will indemnify the
directors against certain liabilities (including settlements) and expenses
actually and reasonably incurred by them in connection with any threatened or
pending legal action, proceeding or investigation (other than actions brought
by or in the right of the Company) to which any of them is, or is threatened
to be, made a party by reason of their status as a director, officer or agent
of the Company, or serving at the request of the Company in any other
capacity for or on behalf of the Company; provided that (i) such director
acted in good faith and in a manner not opposed to the best interest of the
Company, (ii) with respect to any criminal proceedings had no reasonable
cause to believe his or her conduct was unlawful, (iii) such director is not
finally adjudged to be liable for negligence or misconduct in the performance
of his or her duty to the Company, unless the court views in light of the
circumstances the director is nevertheless entitled to indemnification, and
(iv) the indemnification does not relate to any liability arising under
Section 16(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or the rules or regulations promulgated thereunder. With
respect to any action brought by or in the right of the Company, directors
are also indemnified to the extent not prohibited by applicable laws or as
determined by a court of competent jurisdiction, against expenses actually
and reasonably incurred by them in connection with such action if they acted
in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the Company.
Item 11. EXECUTIVE COMPENSATION
Directors' Compensation
Directors of the Company receive $20,000 per year for serving as a
director of the Company. In addition, the Company reimburses directors for
their travel and other expenses incurred in connection with attending
meetings of the Board of Directors.
Executive Compensation
The following table sets forth a summary of certain information regarding
compensation paid or accrued by the Company for services rendered to the
Company for the fiscal year ended December 31, 1997 to those persons who
were, at December 31, 1997: (i) the Company's chief executive officer and
(ii) the Company's four most highly compensated executive officers other than
the chief executive officer whose total salary and bonus exceeded $100,000
during such period.
<PAGE>
Annual
Compensation
Other Annual
Name and Principal Position Year Salary Bonus Compensation(1)
Thomas H. Quinn(2)
Chairman of the Board 1997 $ 0 $ 0 $ -
Ron A. Sansom(2)
Chief Executive Officer 1997 0 0 -
(1) For the periods indicated, no executive officer named in the table
received any Other Annual Compensation in an amount in excess of the lesser
of either $50,000 or 10% of the total of Annual Salary and Bonus reported for
him in the two preceding columns.
(2) Does not reflect compensation paid to Messrs. Quinn and Sansom by JII.
See "Certain Transactions-JII Services Agreement."
The Company does not maintain a stock option or stock purchase plan and
has not awarded any of its employees individual stock option grants.
Compensation Committee Interlock and Insider Participation
The Board of Directors does not maintain a Compensation Committee. During
fiscal 1997, however, Messrs. Boucher, Jordan and Quinn participated in
deliberations of the Board of Directors concerning executive officer
compensation. During 1997, certain of the foregoing executive officers of
the Company served and currently serve as directors, executive officers and
members of a compensation committee of another entity, one of whose executive
officers served and currently serves as a director of the Company.
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding common stock of the Company is owned by Parent. The
table below sets forth as of March 30, 1998 certain information regarding
beneficial ownership of the common stock of Parent held by (i) each of its
directors and executive officers who own shares of common stock of Parent,
(ii) all directors and executive officers of Parent as a group and (iii) each
person known by Parent to own beneficially more than 5% of its common stock.
The Company believes that each individual or entity named has sole investment
and voting power with respect to shares of common stock of Parent indicated
as beneficially owned by them, except as otherwise noted.
Amount of Beneficial
Ownership(1)
Number of Shares Percentage Owned
Executive Officers and Directors:
Ron A. Sansom 300.0000 1.5%
John W. Jordan II(2)(3)(4)(5) 7,136.8809 36.2
David W. Zalaznick(2)(4)(6) 3,531.2473 17.9
Jonathan F. Boucher(2) 1,116.5587 5.7
Thomas H. Quinn(2) 1,799.7294 9.1
All directors and executive officers as a
group (12 persons) 13,884.4163 70.5
Other Principal Stockholders:
Jordan Industries, Inc(7) 0.0000 0.0%
JI Partners(8) 1,500.0000 7.6
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned by
such person, but not deemed outstanding for the purpose of
calculating the percentage owned by each other person listed. As of March 30,
1997, there were 19,700 shares of common stock of Parent issued and
outstanding.
(2) Does not include shares of common stock of Parent owned by JI Partners as
to which the named individuals disclaim beneficial ownership.
(3) Includes 0.1650 shares held personally and 7,136.7159 shares held by the
John W. Jordan II Revocable Trust. Does not include 51.025 shares held by
Daly Jordan O'Brien, the sister of Mr. Jordan. 51.025 shares held by
Elizabeth O'Brien Jordan, the mother of Mr. Jordan or 51.025 shares held by
George C. Jordan, Jr., the brother of Mr. Jordan.
(4) Does not include 16.4973 shares held by the Jordan/Zalaznick Capital
Company or 577.4053 shares held by MCIT PLC, a publicly traded U.K.
investment trust advised by an affiliate of The Jordan Company (which is
controlled by Messrs. Jordan and Zalaznick).
(5) Does not include 535.8871 shares held by The Jordan Family Trust, of
which John W. Jordan II, George C. Jordan, Jr. and G. Robert Fisher are the
Trustees.
(6) Does not include 13.5558 shares held by Bruce H. Zalaznick, the brother
of Mr. Zalaznick.
(7) JII owns all of the issued and outstanding junior preferred stock of
Parent. The junior preferred stock entitles JII to 80% of the voting power
as of the date hereof. The principal address of JII is ArborLake Centre,
Suite 550, 1751 Lake Cook Road, Deerfield, IL 60015.
(8) JI Partners is an investment partnership whose partners include certain
officers and employees of JII and its affiliates. The principal address of
JI Partners is ArborLake Centre, Suite 550, 1751 Lake Cook Road, Deerfield,
IL 60015.
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(Dollars in thousands)
The Company was formed in September 1995 in order to acquire and operate
companies in the motion control industry. In September 1995, the Company
acquired Merkle-Korff for $107,400, including the $90,000 MK Installment
Note, a $5,600 promissory note paid in 1995, the $5,000 Junior Seller Note
and related fees and expenses. The Company borrowed approximately $72,500
under the Credit Agreement to finance the cash portion of the purchase price
for Merkle-Korff and to pay related fees and expenses. In connection with the
acquisition of Merkle-Korff, the Company also entered into the MK Installment
Note LC Facility, pursuant to which Merkle-Korff deposited $90,000 in a cash
collateral account which, in turn, secured a letter of credit in the face
amount of $90,000 which was delivered to the Merkle-Korff seller in support
of payment of the MK Installment Note and other obligations. In March 1996,
the Company, through Merkle-Korff, effected the Barber Colman Acquisition for
$21,700. The Company borrowed approximately $21,700 under the Credit
Agreement to finance the cash purchase price for the Barber Colman
Acquisition and to pay related fees and expenses.
Prior to the consummation of the issuance of $170,000 of Senior Notes,
Imperial, Scott and Gear were subsidiaries of JII. Imperial, Scott and Gear
were sold to the Company for $75,000 in cash, which included the repayment of
approximately $6,000 of liabilities of Imperial and its subsidiaries owed to
JII, and the Contingent Earnout, if any, to be earned pursuant to the
Contingent Earnout Agreement. The acquisition agreement entered into in
connection with such sale contained customary terms and provisions used in
transactions of that type and limited the aggregate amount of any claims for
indemnification by the Company for breaches by the sellers thereunder to
$15,000. The cash portion of the purchase price for the Imperial Acquisitions
were funded from the net proceeds of the Old Note Offering. The Contingent
Earnout Agreement, an obligation of each of the Company, M&G Industries,
Imperial, Scott and Gear is payable to an affiliate of JII and will not be
limited or otherwise restricted by the Indenture or the New Credit Agreement.
See "The Company-The Imperial Acquisitions," "Use of Proceeds" and "Principal
Stockholders."
Services Agreements. Until July 24, 1997, the Parent and its subsidiaries
(including the Company) had been charged an annual management and advisory
fee by JII equal to 1.0% of its net sales payable quarterly. Management and
advisory fees charged to the Company were approximately $800, $2,700 and $700
for the period from January 1, 1997 to July 24, 1997, the year ended December
31, 1996 and for the period from September 23, 1995 to December 31, 1995,
respectively. The Company was also obligated to pay to The Jordan Company
(i) an investment banking and sponsorship fee of up to 2.0% of the purchase
price of certain acquisitions or sales involving the Company or any of its
subsidiaries, (ii) a financial consulting fee of up to 1.0% of any debt,
equity or other financing arranged by the Company with the assistance of The
Jordan Company and (iii) reimbursement for out-of-pocket costs; provided,
that such fees may be paid, in whole or in part, to JII, upon the mutual
agreement of the board of directors of JII and The Jordan Company. In
connection with the acquisitions of Merkle-Korff and Barber-Colman Motors and
related financings, The Jordan Company was paid investment banking fees of
$2,100 and $400, respectively. In connection with the Imperial Acquisitions
and the $170,000 Note Offering and the Existing Credit Agreement, the Company
paid The Jordan Company $2,250 pursuant to such agreements. These
<PAGE>
arrangements were terminated as of July 25, 1997 and replaced with five new
types of agreements and arrangements which are described below.
First, the Company and each of its subsidiaries entered into a new advisory
agreement (the "New Subsidiary Advisory Agreement") with JII, pursuant to
which the Company and its subsidiaries will pay to JII (i) investment banking
and sponsorship fees of up to 2.0% of the purchase price of acquisitions,
joint ventures, minority investments or sales involving the Company and its
subsidiaries or their respective businesses or properties (which were $2,379
in 1997); (ii) financial advisory fees of up to 1.0% of any debt, equity or
other financing or refinancing involving the Company or such subsidiary, in
each case, arranged with the assistance of The Jordan Company or its
affiliates (which were $1,045 in 1997); and (iii) reimbursement for The Jordan
Company's or JII's out-of-pocket costs in connection with providing such
services (which were $0 in 1997). The New Subsidiary Advisory 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.
Second, the Company and each of its subsidiaries entered into a management
consulting agreement (the "New Subsidiary Consulting Agreement"), pursuant
to which they will pay to JII annual consulting fees of 1.0% of the Company's
net sales for such services, payable quarterly, and will reimburse JII for its
out-of-pocket costs related to its services. The New Subsidiary Consulting
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. Pursuant to the New
Subsidiary Consulting Agreement, JII (but not JII's affiliates) will be
obligated to present all acquisition, business and investment opportunities
that relate to manufacturing, assembly, distribution or marketing of products
and services in the motors, gears and motion control industries to the
Company, and JII will not be permitted to pursue such opportunities or present
them to third parties unless the Company determines not to pursue such
opportunities or consents thereto. In accordance with this agreement, the
Company paid approximately $700 for the period from July 25, 1997 to December
31, 1997.
Third, the Company and each of its subsidiaries entered into a services
agreement (the "JI Properties Services Agreement") with JI Properties, Inc.
("JI Properties"), a subsidiary of JII, pursuant to which JI Properties
provides certain real estate and other assets, transportation and related
services to the Company. Pursuant to the JI Properties Services Agreement,
the Company will be charged for its allocable portion of such services based
upon its usage of such services and its relative revenues, as compared to JII
and its other subsidiaries. In accordance with this agreement, such charges
were $341 for the period from July 25, 1997 to December 31, 1997. 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.
Fourth, JII refined the allocation of its overhead, general and
administrative charges and expense among JII and its subsidiaries, including
the Company, in order to more closely match these overhead charges with the
revenues and usage of corporate overhead by JII and its subsidiaries. Under
this agreement, the Company's allocable portion of corporate expenses was
$690 for the period from July 25, 1997 to December 31, 1997.
<PAGE>
Fifth, the Company and JII entered into the transition agreement (the
"Transition Agreement") pursuant to which JII will provide office space and
certain administrative and accounting services to the Company to facilitate
the transition of the Company as a stand-alone company. The Company will
reimburse JII for services provided pursuant to the Transition Agreement on an
allocated cost basis. The Transition Agreement will expire on December 31,
1998, but is automatically renewed for successive one year periods (unless
either party provides prior written notice of non-renewal) and may be
terminated by the Company on 90 days' written notice.
Tax Sharing Agreement. The Company and each of its subsidiaries are party
to a Tax Sharing Agreement (the "Tax Sharing Agreement") among JII and each
of its consolidated subsidiaries for Federal income tax purposes. Pursuant to
the Tax Sharing Agreement, each of the consolidated subsidiaries of JII pays
to JII, on an annual basis, an amount determined by reference to the separate
return tax liability of the subsidiary as defined in Treasury Regulation
1.1552-1(a)(2)(ii). For the years ended December 31, 1997 and 1996 the income
tax payments by the Company to JII under the Tax Sharing Agreement were $0
and $2,400, respectively. For the year ended December 31, 1995, the income
tax payments by Imperial, Scott and Gear to JII under the Tax Sharing
Agreement were $1,300. These income tax payments reflected a Federal and
state income tax rate of approximately 40% of each subsidiary's pre-tax
income.
Merkle-Korff Leases. Merkle-Korff leases its plants, warehouse and offices
under a net lease (the "Merkle-Korff Leases") from companies controlled by
John Simms, Sr., Chairman and Chief Executive Officer of Merkle-Korff and
Barber Colman Motors. Rent expenses, including real estate taxes attributable
to the Merkle-Korff Leases, amounted to $932 for the year ended December 31,
1997. The Company has agreed to pay the following future minimum rental
payments under the Merkle-Korff Leases: (i) $800 for the year ended December
31, 1998; (ii) $800 for the year ended December 31, 1999; and (iii) $600 for
the year ended December 31, 2002. The Company has the right of first refusal
to buy these facilities from Mr. Simms. See Note 11 to the Company's
Consolidated Financial Statements. The Company believes the terms of the
Merkle-Korff Leases are comparable to the terms it would obtain from a non-
affiliated party.
Motion Control Leases. Motion Control leases substantially all of its
production and office space under noncancellable operating leases from a
limited partnership whose partners include officers of Motion Control. These
leases expire in 2007. Rent expense under the leases was $19 for the
thirteen days from the date of acquisition by the Company to December 31,
1997. The Company believes the terms of the Motion Control leases are
comparable to the terms it would obtain from a non-affiliated party.
Employment Agreements. Effective September 22, 1995, Merkle-Korff entered
into an employment agreement with John D. Simms, Sr. (the "Simms Employment
Agreement"). Pursuant to the terms of the Simms Employment Agreement, Mr.
Simms agreed to serve as Chairman and Chief Executive Officer of Merkle-Korff
for a three-year period ending on September 22, 1998. Mr. Simms also agreed
not to compete against Merkle-Korff throughout the term of his employment
agreement and for three years thereafter or until September 22, 2000,
whichever is later, and not to disclose any confidential information during
and after the term of his employment. In exchange for his services and
covenants, Merkle-Korff agreed to compensate Mr. Simms with (i) a base salary
<PAGE>
of $100,000 per annum, (ii) the use of an automobile, including reimbursement
for automobile-related costs and (iii) participation in Merkle-Korff's
benefit programs. In the event Mr. Simms no longer provides services to
Merkle-Korff due to his dismissal without cause (as defined in the Simms
Employment Agreement), then Mr. Simms is entitled to receive his base
compensation from the date of his termination through the remaining term of
his employment agreement.
Effective September 22, 1995, Merkle-Korff entered into an employment
agreement with John W. Brown (the "Brown Employment Agreement"). Pursuant to
the terms of the Brown Employment Agreement, Mr. Brown agreed to serve as
President of Merkle-Korff for a three-year period ending on September 22,
1998. Mr. Brown also agreed not to compete against Merkle-Korff throughout
the term of his employment agreement and for three years thereafter or until
September 22, 2000, whichever is later, and not to disclose any confidential
information during and after the term of his employment. In exchange for his
services and covenants, Merkle-Korff agreed to compensate Mr. Brown with (i)
a base salary of $200,000 per annum, (ii) the use of an automobile, including
reimbursement for automobile-related costs, (iii) payment of monthly and
other incidental country club fees, (iv) payment of annual life insurance
premiums on his life and (v) participation in benefit programs for JII's
executives. In addition, Mr. Brown is eligible to receive an annual bonus of
up to $200,000, as calculated by a formula reflecting annual increases in
Merkle-Korff's profitability. In the event Mr. Brown no longer provides
services to Merkle-Korff due to his dismissal without cause (as defined in
the Brown Employment Agreement), then Mr. Brown is entitled to receive his
base compensation from the date of his termination through the remaining term
of his employment agreement and a pro rata portion of the annual bonus which
he would have been entitled to had he not been dismissed.
Directors and Officers Indemnification. The Company has entered into
indemnification agreements with each member of the Company's Board of
Directors and certain executive officers whereby the Company agreed, subject
to certain exceptions, to indemnify and hold harmless each director and
certain executive officers from liabilities incurred as a result of such
person's status as a director or executive officer of the Company. See Item
10, Directors and Executive Officers - Board of Directors - Indemnification
Agreements.
Future Transactions. The Company has adopted a policy to provide that all
transactions between the Company and its officers, directors and other
affiliates must (i) be approved by a majority of the members of the Board of
Directors and by a majority of the disinterested members of the Board of
Directors and (ii) be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements
appearing in Item 8, which Index is incorporated herein by reference.
(2) Financial Statement Schedule
All schedules for which provision is made is 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
or is considered immaterial.
(3) Exhibits
An index to the exhibits required to be listed under this Item 14(a)(3)
follows the "Signatures" section hereof and is incorporated herein by
reference.
(a) Reports on Form 8-K
The Company filed a Form 8-K on January 2, 1998 describing the
acquisition of Motion Control Engineering, Inc. on December 18, 1997.
Financial Statements and exhibits were not filed at that time. The
required financial information, incorporated in Form S-4, was filed on
January 12, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MOTORS AND GEARS, INC.
By /s/ Thomas H. Quinn
Thomas H. Quinn
Dated: March 30, 1998 Chairman of the Board
Pursuant to the requirements of the Securities 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/ Thomas H. Quinn
Thomas H. Quinn
Dated: March 30, 1998 Chairman of the Board
By /s/ Ron A. Sansom
Ron A. Sansom
Dated: March 30, 1998 Director
By /s/ John W. Jordan II
John W. Jordan II
Dated: March 30, 1998 Director
By /s/ David W. Zalaznick
David W. Zalaznick
Dated: March 30, 1998 Director
By /s/ Jonathan F. Boucher
Jonathan F. Boucher
Dated: March 30, 1998 Director
By /s/ Norman R. Bates
Norman R. Bates
Dated: March 30, 1998 Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
2.1 Contingent Earnout Agreement, dated as of November 7, 1996, by and
among Motors and Gears, Inc., Motors and Gears Industries, Inc.,
The New Imperial Electric Company, The New Scott Motors Company,
New Gear Research, Inc., The Imperial Electric Company, The Scott
Motors Company and Gear Research, Inc. (incorporated by reference
to Exhibit 2.2 to Motors and Gears Inc.'s Form S-4 Registration
Statement (File No. 333-19257) (the "Motors and Gears S-4")
2.2 Share Purchase Agreement, dated March 2, 1997, by and among Motors
and Gears Holdings, Inc. and the stockholders of FIR Group
Holdings Italia, S.r.l. (incorporate by reference to exhibit 2.1
to Form 8-K of Motors and Gears, Inc., dated March 31, 1998)
2.3 Purchase Agreement, dated November 17, 1997, by and among Motion
Holdings, Inc. and the shareholders of Motion Control Engineering,
Inc. (incorporated by reference to exhibit 2.2 to Form 8-K of
Motors and Gears, Inc., dated March 31, 1998)
2.4 Agreement for purchase and sale of stock of Electrical Design and
Control Company by and among ED&C Holdings, Inc. and the
shareholders of Electrical Design and Control Company,
(incorporated by reference to exhibit 2.3 to Form 8-K of Motors
and Gears, Inc., dated March 31, 1998)
3.1 Restated Certificate of Incorporation of Motors and Gears, Inc.
(incorporated by reference to Exhibit 3.1 to Motors and Gears
Inc.'s Form S-4 Registration Statement (File No. 333-44057) (the
"1998 Form S-4" )
3.2 Bylaws of Motors and Gears, Inc. (incorporated by reference to
Exhibit 3.2 to the Motors and Gears S-4)
4.1 Indenture, dated November 7, 1996, between Motors and Gears, Inc.
and Fleet National Bank (incorporated by reference to Exhibit 4.1
to the Motors and Gears S-4)
4.2 First Supplemental Indenture, dated December 17, 1997, between
Motors and Gears, Inc. and State Street Bank and Trust Company, as
Trustee (incorporated by reference to Exhibit 4.2 to the 1998 Form
S-4 )
4.3 Indenture, dated December 17, 1997, between Motors and Gears, Inc.
and State Street Bank and Trust Company, as Trustee (incorporated
by reference to Exhibit 4.3 to the 1998 Form S-4 )
10.1 Credit Agreement, dated November 7, 1996 by and among Motors and
Gears Industries, Inc., the lenders listed thereto and Bankers
Trust Company, as Agent (incorporated by reference to Exhibit 4.5
to the Motors and Gears S-4)
10.2 Amendment No. 1 to Credit Agreement, dated June 3, 1997, by and
among Motors and Gears Industries, Inc., the lenders listed
thereto and Bankers Trust Company, as Agent (incorporated by
reference to Exhibit 10.2 to the 1998 Form S-4 )
<PAGE>
10.3 Amendment No. 2 to Credit Agreement, dated October 27, 1997, by
and among Motors and Gears Industries, Inc., the lenders listed
thereto and Bankers Trust Company, as Agent (incorporated by
reference to Exhibit 10.3 to the 1998 Form S-4 )
10.4 Amendment No. 3 to Credit Agreement, dated November 21, 1997, by
and among Motors and Gears Industries, Inc., the lenders listed
thereto and Bankers Trust Company, as Agent (incorporated by
reference to Exhibit 10.4 to the 1998 Form S-4 )
10.5 Tax Sharing Agreement, dated June 28, 1994, by and among Jordan
Industries, Inc. and each other corporation which is a signatory
thereto (incorporated by reference to Exhibit 10.3 to the Motors
and Gears S-4)
10.6 Management Consulting Agreement, dated November 7, 1996, by and
among Motors and Gears, Inc. and TJC Management Corporation and
the other signatories thereto (incorporated by reference to
Exhibit 10.5 to the Motors and Gears S-4)
10.7 Properties Services Agreement, dated July 25, 1997, by and among
JI Properties, Inc., Jordan Industries, Inc. and the other
signatories thereto (incorporated by reference to Exhibit 10.7 to
the 1998 Form S-4 )
10.8 Transition Agreement, dated July 25, 1997, by and between Motors
and Gears Holdings, Inc. and Jordan Industries, Inc. (incorporated
by reference to Exhibit 10.8 to the 1998 Form S-4 )
10.9 New Subsidiary Advisory Agreement, dated July 25, 1997, by and
among Motors and Gears Holdings, Inc., Jordan Industries, Inc. and
the other signatories thereto (incorporated by reference to
Exhibit 10.9 to the 1998 Form S-4 )
10.10 New Subsidiary Consulting Agreement, dated July 25, 1997, by and
among Motors and Gears Holdings, Inc., Jordan Industries, Inc. and
the other signatories thereto (incorporated by reference to
Exhibit 10.10 to the 1998 Form S-4 )
10.11 Indemnification Agreement, dated November 7, 1996, between Motors
and Gears, Inc. and Thomas H. Quinn (incorporated by reference to
Exhibit 10.1(a) to the Motors and Gears S-4)
10.12 Indemnification Agreement, dated November 7, 1996, between Motors
and Gears, Inc. and Jonathan F. Boucher (incorporated by reference
to Exhibit 10.1(b) to the Motors and Gears S-4)
10.13 Indemnification Agreement, dated November 7, 1996, between Motors
and Gears, Inc. and David W. Zalaznick (incorporated by reference
to Exhibit 10.1(c) to the Motors and Gears S-4)
10.14 Indemnification Agreement, dated November 7, 1996, between Motors
and Gears, Inc. and John W. Jordan II (incorporated by reference
to Exhibit 10.1(d) to the Motors and Gears S-4)
10.15 Indemnification Agreement, dated November 7, 1996, between Motors
and Gears, Inc. and Ron A. Sansom (incorporated by reference to
Exhibit 10.1(e) to the Motors and Gears S-4)
<PAGE>
10.16 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 (incorporated by reference
to Exhibit 10.9 to the Motors and Gears S-4)
10.17 Electrical Design and Control Company, Inc. Non-negotiable
Subordinated Note in the principal aggregate amount of $1,333,333
payable to Tina Lavire (incorporated by reference to Exhibit
10.13 to the 1998 Form S-4 )
10.18 Electrical Design and Control Company, Inc. Non-negotiable
Subordinated Note in the principal aggregate amount of $1,333,333
payable to Marta Monson (incorporated by reference to Exhibit
10.14 to the 1998 Form S-4 )
10.19 Electrical Design and Control Company, Inc. Non-negotiable
Subordinated Note in the principal aggregate amount of $1,333,334
payable to Eric Monson (incorporated by reference to Exhibit
10.15 to the 1998 Form S-4 )
10.20 Industrial Building Leases, each dated as of September 22, 1996,
by and between Merkle-Korff Industries, Inc. and the signatory
thereto (incorporated by reference to Exhibits 10.16-10.19 to the
Motors and Gears S-4)
10.21 Employment and Non Competition Agreement, dated as of September
22, 1995, by and between Merkle-Korff Industries, Inc. and John D.
Simms (incorporated by reference to Exhibit 10.20 to the Motors
and Gears S-4)
10.22 Employment and Non Competition Agreement, dated as of September
22, 1995, by and between Merkle-Korff Industries, Inc. and John
W. Brown (incorporated by reference to Exhibit 10.21 to the Motors
and Gears S-4)
21.1 Subsidiaries of Motors and Gears, Inc. (incorporated by reference
to Exhibit 21.1 to the 1998 Form S-4)
27.1 Financial Data Schedule
<PAGE>
SCHEDULE II
MOTORS AND GEARS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
Balance Additions Write Balance
at Additions Charged to Offs at
Beginning due to Costs and Net of End of
Period Acquisitons Expenses Recoveries Other Period
December 31, 1997:
Allowance for
doubtful accounts $ 59 406 214 (145) (5) $529
Reserve for
obsolescence $184 0 75 (213) 0 $ 46
December 31, 1996:
Allowance for
doubtful accounts $ 29 28 40 (38) 0 $ 59
Reserve for
obsolescence $184 0 0 0 0 $184
December 31, 1995:
Allowance for
doubtful accounts $ 15 0 14 0 0 $ 29
Reserve for
obsolescence $184 0 0 0 0 $184
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 28,880
<SECURITIES> 0
<RECEIVABLES> 41,208
<ALLOWANCES> (529)
<INVENTORY> 31,665
<CURRENT-ASSETS> 102,524
<PP&E> 31,945
<DEPRECIATION> 16,744
<TOTAL-ASSETS> 335,144
<CURRENT-LIABILITIES> 37,450
<BONDS> 274,500
0
0
<COMMON> 1
<OTHER-SE> 7,552
<TOTAL-LIABILITY-AND-EQUITY> 335,144
<SALES> 148,669
<TOTAL-REVENUES> 148,669
<CGS> 97,084
<TOTAL-COSTS> 97,084
<OTHER-EXPENSES> 23,901
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,363
<INCOME-PRETAX> 5,784
<INCOME-TAX> 2,428
<INCOME-CONTINUING> 3,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,355
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
