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, 1998 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 31, 1999: 100,000.
<PAGE>
TABLE OF CONTENTS
PAGE
Part I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security 9
Holders
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of 11
Operations
Item 7A. Quantitative and Qualitative Disclosures
About Market Risks 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes In and Disagreements with
Accountants on Accounting and Financial 42
Disclosure
Part III
Item 10. Directors and Executive Officers 42
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial 46
Owners and Management
Item 13. Certain Relationships and Related 47
Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports On Form 8-K 50
Signatures 51
<PAGE>
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 financial
reporting and tax purposes until the redemption of the Parent'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, transaxles 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, golf carts, lift trucks, 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. See Note
13 to the Company's consolidated financial statements.
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, golf carts,
lift trucks, 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.
<PAGE>
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-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 100 horsepower. Primary end markets
for these motors include commercial floor care equipment, commercial
dishwashers, commercial sewing machines, industrial ventilation
equipment, golf carts, lift trucks 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,
worm 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, worm and helical gears. Primary
end markets for these products include original equipment
manufacturers ("OEMs") of motors, commercial floor care equipment,
aerospace and food processing product equipment.
<PAGE>
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 ("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 modernization 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 March 1996 the Company acquired the net assets of Colman, Inc.
and Colman Motor Products, Inc. (collectively, "Barber-Colman"). 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"). In May 1998,
the Company purchased all of the outstanding stock of Advanced D.C.
Motors, Inc. and its affiliated corporations ("ADC"). In December
1998, the Company, through its wholly-owned subsidiary Imperial,
acquired all of the stock of Euclid Universal Corporation ("Euclid").
Euclid was subsequently merged into Imperial. See Note 1 to the
consolidated financial statements.
Backlog
The Company's approximate backlog of unfilled orders at the dates
specified was as follows:
Backlog
Year Ended (Dollars
December 31, in
thousands)
1998
Motors $57,831
Controls 19,079
$76,910
1997
Motors $33,936
Controls 16,843
$50,779
The Company will ship substantially all of its 1998 year-end
backlog during 1999.
<PAGE>
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.
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 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 has added 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 six manufacturing facilities, one
research and development facility and one warehouse in Europe. See
Note 13 to the Company's consolidated financial statements.
Employee and Labor Relations
As of December 31, 1998, the Company employed approximately 2,100
employees, of which approximately 1,450 were non-union and 650 were
represented by unions. The Company has experienced no work stoppages
since inception. It considers its relations with its employees to be
excellent.
Competition
The electric motor and electronic 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 and
electronic motion control systems markets include price, quality and
service. Major manufacturers include General Electric, Baldor
Electric Company, Emerson Electric Company and Reliance Electric
<PAGE>
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 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 U.S. Federal, state,
provincial, local and foreign 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, as
amended, 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.
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.
<PAGE>
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, 1998, are set forth in the table below:
Square Owned/ Lease
Location Use Feet Leased Expiration
Des Plaines, IL Design/ 38,000 Leased September
Administration 2000
Sub- Des Plaines, IL Manufacturing 45,000 Leased September
fractional 2000
Products Darlington, WI Manufacturing 68,000 Leased September
2005
Richland Manufacturing 45,000 Leased September
Center, WI 2000
Des Plaines, IL Administration/ 112,000 Leased January
IL Manufacturing 2004
Akron, OH Manufacturing 43,000 Owned
Stow, OH Administration 7,000 Leased September
2000
Middleport, OH Manufacturing 85,000 Owned
Cuyahoga Manufacturing 63,000 Leased October
Falls, OH 2003
Fractional/ Alamagordo, NM Manufacturing 25,800 Leased October
Integral 2002
Horsepower
Products Casalmaggiore, Administration/ 100,000 Owned
Italy Manufacturing
Varano, Italy Manufacturing 30,000 Owned
Bedonia, Italy Manufacturing 8,000 Leased February
2005
Genova, Italy Research & 33,000 Leased July 2002
Development/
Manufacturing
Reggio Emilia, Manufacturing 35,000 Leased August
Italy 2002
Reggio Emilia, Manufacturing 30,000 Leased November
Italy Distribution 2000
Palo Alto, CA Product Design & 1,00 Leased April
Development 1999
Carrollton, TX Manufacturing/ 29,000 Leased September
Administration 1999
Dewitt, NY Manufacturing 18,500 Leased July 2000
Eternoz, Manufacturing/ 10,000 Leased October
France Administration 2004
Syracuse, NY Manufacturing 45,000 Leased December
2004
Syracuse, NY Manufacturing/ 49,600 Owned
Administration
Putzbrunn, Warehouse 1,200 Leased July 1999
Troy, MI Manufacturing/ 29,000 Leased January
Motion 2003
Control Rancho Manufacturing/ 40,000 Leased May 2001
Systems Cordova, CA Adiministration
Rancho Administration 45,000 Leased May 2001
Cordova, CA
Gears and Grand Rapids, Manufacturing/ 45,000 Owned
Gearboxes MI Administration
Oakwood Manufacturing/ 25,000 Leased January
Village, OH Administration 2004
<PAGE>
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.
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, 1998.
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, 1998,
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).
<PAGE>
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.
Predecessor
And Company
Compan y Combined (2) Company (3) Predecessor (4)
September 23, January 1 Year
through through Ended
Year Ended December 31, December 31, September 22, December 31,
1998 1997 1996 1995 1995 1995 1994
Statement of Operations
Data: (1)
Net Sales $275,833 $148,669 $117,571 $ 63,979 $ 24,684 $39,295 $49,340
Gross profit,
excluding
Depreciation 95,380 51,585 41,820 23,437 8,255 15,182 18,022
Depreciation 4,492 4,311 2,960 516 415 101 324
Amortization 8,235 4,704 4,118 840 840 - -
Operating
income 42,324 27,684 23,229 16,369 4,753 11,616 12,309
Interest
expense 32,994 22,363 11,134 2,412 2,412 - -
Income
taxes (5) (3,072) 2,429 5,290 1,232 948 284 171
Net income 13,098 3,355 4,834 12,964 1,360 11,604 11,921
Supplemental Pro Forma and
Other Data:
Pro forma income
Taxes (6) $ - $ - $ - $ 4,755 $ - $ 4,755 $ 4,837
Pro forma
net income 13,098 3,355 4,834 8,493 1,360 7,133 7,255
Balance Sheet Data (at end
of period): (1)
Working
capital $ 67,922 $ 65,074 $ 25,632 $ 14,747 $ 14,747 $ 7,697 $11,546
Total
assets 388,821 335,144 175,530 145,387 145,387 14,409 18,952
Long-term obligations
Including current
Portion 325,816 283,672 175,067 83,547 83,547 - -
Stockholder's equity
(net capital
deficiency) 22,613 7,552 (15,787) 45,925 45,925 9,218 14,332
(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.
(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 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 U.S. Federal and certain
state income taxes. The Company's taxes reflect a reversal of the
Company's valuation allowance of $9,714 for certain deferred tax
assets in 1998.
(6) Prior to its acquisition by the Company, the Predecessor was an
S corporation and therefore was not subject to U.S. 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
three 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 1998, 1997 and 1996
are not directly comparable.
Results of Operations
The following financial information presents the results of
operations of the Company for the years ended December 31, 1998,
1997 and 1996. 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 FIR, ED&C, and Motion Control are included in the
consolidated results of operations since their acquisition on June
12, 1997, October 27, 1997 and December 18, 1997, respectively. The
results of operations of ADC are included in the consolidated
results of operations since its acquisition on May 15, 1998.
Year Ended December 31,
1998 (1) 1997 (1) 1996
(Dollars in thousands)
Net sales $275,833 $148,669 $117,571
Gross profit (excluding 95,380 51,585 41,820
depreciation)
EBITDA(2) 55,051 36,699 30,307
Operating income 42,324 27,684 23,229
Interest expense 32,994 22,363 11,134
Gross margin (excluding
depreciation)(3) 34.6% 34.7% 35.6%
EBITDA margin(3) 20.0 24.7 25.8
Operating margin(3) 15.3 18.6 19.8
(1) With the acquisition of ED&C and Motion Control during 1997,
the results of operations for 1998 and 1997 include operations
for both the motors and controls segments. The controls segment
accounted for $61,603 and $3,030 of net sales, $23,403 and $1,201
of gross profit (excluding depreciation), $9,605 and $645 of
EBITDA (earnings before interest, income taxes, depreciation and
amortization) and $7,124 and $458 of operating income for the
year ended December 31, 1998 and 1997, respectively. Note that
the segment analysis does not include unallocated corporate
overhead and management fees in the EBITDA and operating income
calculations.
(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.
<PAGE>
Year ended December 31, 1998 compared to year ended December 31,
1997
Net sales increased $127.2 million or 85.5% from $148.7 million in
1997 to $275.8 million in 1998. The increase in sales was largely
due to the 1998 acquisition of ADC, accounting for $27.2 million of
the increase, and the three 1997 acquisitions, accounting for $85.9
million of the increase. Subfractional motors sales increased 13.0%
in 1998. The growth in subfractional motors was primarily attributed
to continued strength in the vending and appliance markets. Gears and
gearbox sales decreased 8.4% in 1998 as a result of a weaker floor
care market after a stronger than expected 1997. Sales of
fractional/integral motors in 1998 increased 121.2% mainly as a
result of the 1998 acquisition of ADC and the 1997 acquisition of the
FIR Group. Sales of fractional/integral motors excluding the ADC
acquisition and the FIR acquisition increased 6.6% in 1998,
reflecting market share gains in floor care and a stronger elevator
market. The two Controls acquisitions in the fourth quarter of 1997
accounted for $58.6 million of the increased sales.
Operating income increased $14.6 million or 52.9% from $27.7
million in 1997 to $42.3 million in 1998. The primary increase in
operating income was due to the increase in sales discussed above.
Gross margins remained relatively constant with a 34.6% margin in
1998 versus a 34.7% margin in 1997. Increases in selling, general
and administrative expenses, depreciation and amortization were due
principally to the three 1997 acquisitions and the 1998 acquisition
of ADC. These increases were partially offset by a decrease in
depreciation and other expenses.
Interest expense increased $10.6 million from $22.4 million in 1997
to $33.0 million in 1998, reflecting higher debt levels relating to
the financing of new acquisitions and the Company's December 1997
$100.0 million debt offering.
The income tax benefit for the current year is primarily the result
of reducing the Company's valuation allowance by $9.7 million related
to deferred tax assets arising from the Company's acquisition of
Imperial on November 7, 1996 from an affiliate. The deferred tax
assets pertain to additional tax bases in certain assets related to
this transaction. The valuation allowance was reversed due to
continued profitable domestic operating results and based on
management's assessment that it is more likely than not that all of
the net deferred tax assets will be realized through future taxable
earnings, or implementation of tax planning strategies.
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. Subfractional motors sales increased 18.2% in 1997.
The growth in subfractional 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 1997 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.
<PAGE>
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 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.
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 credit facility.
Operating activities. Net cash provided by operating activities
for the year ended December 31, 1998 was $11.7 million, compared to
$19.2 million provided from operating activities during the same
period in 1997. 1998 working capital requirements exceeded 1997
working capital requirements due to growth of the business.
Investing activities. Capital expenditures of $5.0 million for the
year ended December 31, 1998 were $3.5 million greater than the
comparable period in 1997. The majority of the expenditures were
related to machinery and equipment and tooling in the motors segment.
The Company anticipated its capital investment in 1998 to be greater
than the 1997 spending level as a result of its late 1997
acquisitions.
The Company made two acquisitions in 1998 for approximately $58.5
million, offset by $0.4 million of cash acquired through these
acquisitions. The Company plans to fund future acquisitions through
its revolving line-of-credit agreement and excess operating cash
flow.
During 1998, the Company invested $7.3 million in the Preferred
Stock of JZ International, Ltd. The Chief Executive Officer and
certain shareholders of JZ International, Ltd. are the Company's
directors and shareholders. The Company plans to make an additional
investment of approximately $5.0 million in JZ International's
Preferred Stock which the Company plans to fund from operating cash
flow.
Financing activities. The Company's annual cash interest expense
on the Senior Notes, which are due 2006, is approximately $29.0
million. Interest on the Senior Notes is payable semi-annually on
May 15 and November 15 of each year. Interest on the Junior Seller
Notes will be approximately $0.8 million in 1999.
The Company is party to a Credit Agreement under which the Company
is able to borrow up to approximately $75.0 million over a term of
five years to fund acquisitions and provide working capital and for
<PAGE>
other general corporate purposes. 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 31, 1999, the Company has approximately $38.7 million of
available funds under this Credit 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.
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'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 Disclosure
Introduction. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define
the applicable year. Any of the Company's computer programs or
hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
State of Readiness. Based on recent assessments, the Company
determined that it will be required to modify or replace significant
portions of its software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications or replacements of
existing software and certain hardware, the Year 2000 issue can be
mitigated. However, if such modifications and replacements are not
made, or are not completed timely, the Year 2000 issue could have a
material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 issue involves the
following four phases: assessment, remediation, testing and
implementation. The Company has assembled an internal project team
<PAGE>
that is in the process of assessing all systems that could be
significantly affected by the Year 2000 issue. Preliminary results
of this assessment indicated that some of the Company's significant
information technology systems could be affected, particularly the
general ledger, billing, and inventory systems. The preliminary
assessment also indicated that software and hardware (embedded chips)
used in production and manufacturing systems (hereafter also referred
to as operating equipment) may also be at risk. In addition, based
on a review of its product lines, the Company has determined that
most of the products it has sold and will continue to sell do not
require remediation to be Year 2000 issue compliant. Accordingly,
the Company does not believe that the Year 2000 issue presents a
material exposure as it relates to the Company's products. The
internal project team is contacting each of the Company's significant
customers and suppliers and requesting that they apprise the Company
of the status of their Year 2000 compliance programs. The Company
has targeted the beginning of the second quarter of 1999 as the date
for receiving substantially all customer and supplier responses,
although minimal responses have been received to date. There can be
no assurance as to when this process will be completed.
For its information technology exposures, to date the Company has
completed a majority of the remediation phase and expects to complete
software reprogramming and replacement no later than June 30, 1999.
Once software is reprogrammed or replaced for a system, the Company
begins testing and implementation. The testing and implementation
phases for all significant systems are expected to be completed by
September 30, 1999. The four phases of the Company's Year 2000
program in relation to operating equipment is on-going and expected
to be completed before December 31, 1999.
Cost. The Company will utilize both internal and external
resources to reprogram or replace, test, and implement the software
and operating equipment for Year 2000 modifications. The total cost
of the Year 2000 project is estimated at $3.1 million and is being
funded through operating cash flows and capital leases. To date, the
company has incurred approximately $2.0 million related to all phases
of the Year 2000 project. The majority of these costs have been
capitalized as they relate to new software and equipment.
Risks. Management of the Company believes it has an effective
program in place to resolve the Year 2000 issue in a timely manner.
As noted above, the Company has not yet completed all necessary
phases of the Year 2000 program. In the event that the Company does
not complete any additional phases, the Company could be materially
adversely affected. In addition, disruptions in the economy
generally resulting from the Year 2000 issue could also materially
adversely affect the Company. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
Contingency Plans. The Company is in the process of developing a
contingency plan in the event it does not complete all phases of the
Year 2000 program. The Company expects to have the contingency plan
completed by the end of 1999.
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company does not engage in hedging or other market structure
derivative trading activities. Additionally, the Company's debt
obligations are primarily fixed-rate in nature and, as such, are not
sensitive to changes in interest rates. At December 31, 1998 the
Company does have variable rate debt outstanding of $41.0 million. A
one percentage point increase in interest rates would increase the
amount of annual interest paid by approximately $0.4 million. The
Company does not believe that its market risk financial instruments
on December 31, 1998 would have a material effect on future
operations or cash flow.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
NO.
Reports of Independent Auditors 18
Consolidated Balance Sheets as of December 31,
1998 and 1997 21
Consolidated Statements of Income for the years
ended December 31, 1998, 1997 and 1996 22
Consolidated Statements of Changes in
Shareholder's Equity (Net Capital Deficiency) for 23
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 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, 1998 and 1997 and the
related consolidated statements of income, shareholder's equity, and
cash flows for each of the three years in the period ended December
31, 1998. 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
and the schedule based on our audits. We did not audit the financial
statements of certain subsidiaries whose statements reflect total
assets constituting 34% and 37% as of December 31, 1998 and 1997,
respectively, and net sales constituting 34% and 11% for the years
ended December 31, 1998 and 1997, respectively, 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, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
March 31, 1999
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Motion Control Engineering, Inc.:
We have audited the balance sheets of MOTION CONTROL ENGINEERING,
INC. (a California corporation and a wholly-owned subsidiary of
Motors & Gears, Inc.) as of December 31, 1998 and 1997, and the
related statements of income, shareholders' equity and cash flows
for the year ended December 31, 1998 and for the 13 days ended
December 31, 1997. 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 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 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, 1998 and 1997 and the
results of its operations and its cash flows for the year ended
December 31, 1998 and for the 13 days ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Sacramento, California
February 9, 1999
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
FIR Group
We have audited the consolidated balance sheets of Fir
Group (the "Company") composed of FIR Elettromeccanica S.p.A., CIME
S.p.A., Selin Sistemi S.p.A. and TEA S.r.l. as of October 31, 1998
and 1997, and the related consolidated statements of income,
retained earnings, and cash flows for the year and for the five
months then ended, respectively. 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 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 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 audits
provide 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, 1998 and 1997,
and the results of its operations and its cash flows for the year
and for the five months then ended, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND S.p.A.
Bologna, 5 February 1999
<PAGE>
MOTORS AND GEARS, INC.
CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
December 31,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 7,016 $ 28,880
Accounts receivable, net of allowance of $734
and $529
at December 31, 1998 and 1997, respectively 51,969 40,679
Inventories 43,318 31,665
Prepaid expenses and other current assets 3,058 1,300
Total current assets 105,361 102,524
Property, plant and equipment-Net 22,268 15,201
Goodwill-Net 232,058 195,424
Deferred financing costs-Net 14,182 15,877
Deferred income taxes 4,868 3,825
Investment in affiliate 7,285 -
Other non-current assets 2,799 2,293
Total assets $388,821 $335,144
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable $ - $ 2,009
Accounts payable 23,832 17,424
Accrued interest payable 4,756 4,232
Accrued expenses and other current liabilities 7,274 9,688
Due to affiliated company 1,216 1,488
Accrued consent fee to bondholders - 2,550
Current portion of long term debt 361 59
Total current liabilities 37,439 37,450
Long term debt 325,455 283,613
Deferred income taxes - 3,880
Other non-current liabilities 3,314 2,649
Shareholder's equity:
Common stock, $.01 par value, 100,000 shares
authorized, issued and outstanding 1 1
Additional paid-in capital 50,005 50,005
Accumulated other comprehensive income 1,947 (16)
Accumulated deficit (29,340) (42,438)
Total shareholder's equity 22,613 7,552
Total liabilities and shareholder's equity $388,821 $335,144
See accompanying notes to consolidated financial statements.
<PAGE>
MOTORS AND GEARS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Year Ended December 31,
1998 1997 1996
Net sales $275,833 $148,669 $117,571
Cost of sales, excluding depreciation 180,453 97,084 75,751
Selling, general, and administrative
expenses, excluding depreciation 37,559 13,370 8,796
Depreciation 4,492 4,311 2,960
Amortization of goodwill and other
intangibles 8,235 4,704 4,118
Management fees to affiliated company 2,770 1,516 2,717
Operating income 42,324 27,684 23,229
Other (income) expense:
Interest expense:
Affiliated company - - 732
Other 32,994 22,363 10,402
Interest income (463) (148) (806)
Miscellaneous, net 110 - (67)
Income before income taxes and
extraordinary item 10,026 5,784 12,310
Provision/(benefit) for income taxes (3,072) 2,429 5,290
Income before extraordinary item 13,098 3,355 7,020
Extraordinary loss, net of income tax
benefit of $1,620 - - 2,186
Net income $ 13,098 $ 3,355 $ 4,834
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
MOTORS AND GEARS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Total
Common Stock Accumulated Retained Shareholder's
Number Additional Other Earnings Equity
of Paid-in Comprehensive (Accumulated Net Capital
Shares Amount Capital Income Deficit Deficency
<S> <C> <C> <C> <C> <C> <C>
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
Comprehensive Income - - - - - 4,834
Balance at December 31, 1996 100,000 1 30,005 - (45,793) (15,787)
Capital contribution from
Parent - - 20,000 - - 20,000
Foreign currency translation
adjustment - - - (16) - (16)
Net Income - - - - 3,355 3,355
Comprehensive Income - - - - 3,339 -
Balance at December 31, 1997 100,000 1 50,005 (16) (42,438) 7,552
Foreign currency translation
adjustment - - - 1,963 - 1,963
Net Income - - - - 13,098 13,098
Comprehensive Income - - - - - 15,061
Balance at December 31,1998 100,000 $ 1 $50,005 $ 1,947 $(29,340) $22,613
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MOTORS AND GEARS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Year Ended December 31,
1998 1997 1996
Cash flows from operating activities:
Net income $13,098 $ 3,355 $ 4,834
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,018 10,070 7,877
Provision/(benefit) for deferred
income taxes (5,917) 772 701
Extraordinary Loss - - 3,806
Changes in operating assets and liabilities (net
of effects from acquisitions):
Accounts receivable (6,897) (3,645) 3,190
Inventories (3,017) 1,323 128
Prepaid expenses and other (1,482) 2,205 187
Accounts payable 3,648 593 (3,500)
Accrued expenses and other (2,603) 4,813 4,359
Non-current assets & liabilities 1,081 (29) (12)
Payables to affiliated company (272) (218) (3,433)
Net cash provided by operating activities 11,657 19,239 18,137
Cash flows from investing activities:
Capital expenditures, net (4,964) (1,497) (1,304)
Acquisitions of subsidiaries (58,486) (121,053) (90,692)
Cash acquired in acquisition of
subsidiaries 412 4,462 -
Investment in affiliate (7,285) - -
Net cash used in investing activities (70,323) (118,088) (91,996)
Cash flows from financing activities:
Proceeds from revolving credit facility 59,000 72,500 1,700
Repayment of long-term debt (2,307) (33) (90,230)
Repayment of borrowings under revolving
credit facility (18,000) (72,500) (2,200)
Proceeds from debt issuances - Senior Notes - 104,500 190,000
Payment of financing costs - (6,749) (10,354)
Payment on note payable to affiliated company - - (7,827)
Proceeds from capital contribution from parent - 20,000 -
Payment of consent fee to bondholders (2,550) - -
Net cash provided by financing
activities 36,143 117,718 81,089
Effect of exchange rate changes on cash 659 - -
Net increase/(decrease) in cash and cash
equivalents (21,864) 18,869 7,230
Cash and cash equivalents at beginning
of period 28,880 10,011 2,781
Cash and cash equivalents at end of
period $ 7,016 $ 28,880 $ 10,011
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest:
Affiliated company $ - $ - $ 1,066
Other 31,286 20,981 7,117
Income taxes 5,257 515 781
Non cash investing activities:
Capital leases 1,325 107 77
See accompanying notes to consolidated financial statements.
<PAGE>
MOTORS AND GEARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
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 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. The Company has
also entered into the electronic motion control industry.
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 Division
was subsequently merged into Merkle-Korff.
On November 7, 1996, 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 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 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. 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 $51,082. 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
$33,044. FIR is a manufacturer of electric motors and pumps for
niche applications such as pumps for commercial dishwashers, motors
<PAGE>
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
$15,931 in cash and a $3,850 Subordinated Junior Seller Note. The
purchase price, including costs incurred directly related to the
transaction, was allocated to working capital of $3,514; property
and equipment of $81; covenants not to compete of $120; and resulted
in an excess purchase price over net identifiable assets of $16,066.
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.
On December 18, 1997, the Company purchased all of the stock of
Motion Control Engineering, Inc. ("Motion Control") for $53,942. The
purchase price, including costs incurred directly related to the
transaction, was 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 $41,450. The Company
also has a contingent purchase price agreement relating to the
acquisition of Motion Control. The contingent purchase price is
dependent upon the acquired entity's results of operations exceeding
certain targeted levels substantially above the historical
experience of Motion Control at the time of acquisition. Motion
Control manufactures electronic motion control products for elevator
markets, primarily the elevator modernization market. Motion
Control's customers are located mainly in the United States.
On May 15, 1998, the Company acquired all of the outstanding stock
of Advanced D.C. Motors, Inc. and its affiliated corporations
(collectively "ADC") for $55,500. The purchase price, including
costs incurred directly related to the transaction, was allocated to
working capital of $9,345; property and equipment of $4,088;
covenants not to compete of $662; other long-term assets and
liabilities of $(51); and resulted in an excess purchase price over
net identifiable assets of $41,456. The Company also has a
contingent purchase price agreement of up to approximately $5,600
relating to the acquisition of ADC. The contingent purchase price
is dependent upon the acquired entity's results of operations
exceeding certain targeted levels substantially above the historical
experience of ADC at the time of acquisition. ADC designs and
manufactures special purpose, custom designed motors for use in
electric lift trucks, power sweepers, electric utility vehicles,
golf carts, electric boats, and other niche products. ADC also
designs and manufactures its own production equipment as well as
electric motor components known as commutators.
On December 31, 1998, the Company, through its wholly-owned
subsidiary Imperial, acquired all of the outstanding stock of Euclid
Universal Corporation ("Euclid") for $2,100. The purchase price,
including costs incurred directly related to the transaction, was
preliminarily allocated to working capital of $772; property and
equipment of $953; other long-term assets and liabilities of ($498);
and resulted in an excess purchase price over net identifiable
assets of $873. Euclid designs and manufactures speed reducers,
customer gearing, right angle gearboxes and transaxles for use in a
wide array of industries including material handling, healthcare and
floor care. Euclid has strong technical expertise in the areas of
worm, spur and helical gearing.
<PAGE>
Acquisitions of the Company have been financed primarily through
the use of the revolving line of credit and the issuance of Senior
Debt. These acquisitions have been accounted for using the purchase
method of accounting (except for Imperial which has been accounted
for in a manner similar to a pooling-of-interests). Accordingly,
the operating results of each of these acquisitions have been
included in the consolidated operating results of the Company since
the date of their acquisition.
Unaudited annual pro forma information with respect to the Company
as if the 1998 and 1997 acquisitions had occurred on January 1,
1997, is as follows:
Unaudited
Year Ended December 31,
1998 1997
Net Sales $296,234 $262,991
Income before income
taxes 11,954 7,963
Net Income $ 6,574 $ 4,383
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, Motion Control
and ADC. All significant intercompany transactions and accounts have
been eliminated. Operations of certain 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 prior years' financial
statements in order for them to conform to the current year
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 74% and 71% of the Company's inventories
at December 31, 1998 and 1997, respectively. All other inventories
are valued using the last-in, first-out (LIFO) cost, which
approximated current cost at December 31, 1998.
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
<PAGE>
improvements and assets under capital leases is included in
depreciation expense.
The useful lives of plant and equipment for the purpose of
computing book depreciation are as follows:
Buildings 5 to 33 years
Machinery and equipment 3 to 10 years
Dies and tooling 3 to 5 years
Furniture and fixtures 5 to 10 years
Vehicles 3 to 5 years
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, FIR, ED&C, Motion Control and ADC and up to
40 years at Imperial. Goodwill at December 31, 1998 and 1997 is net
of accumulated amortization of $20,900 and $13,274, 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, 1998 and 1997 are net of
accumulated amortization of $1,174 and $601, 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, 1998 and 1997 are net of accumulated amortization of
$3,016 and $1,226, 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.
<PAGE>
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.
Adoption of Accounting Principles
As of January 1, 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement 130).
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or
shareholders' equity. The Company's only comprehensive income
relates to foreign currency translation. Statement 130 requires
foreign currency translation adjustments, which prior to adoption
were reported separately in shareholders' equity, to be included in
other comprehensive income. Certain amounts in prior year financial
statements have been reclassified to conform to the requirements of
Statement 130.
As of January 1, 1998, the Company adopted Financial Accounting
Standards Board's Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related
Information" (Statement 131). Statement 131 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. The adoption of Statement 130
is solely a reporting requirement and therefore did not have an
effect on the Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (Statement 133), which
is required to be adopted in fiscal years beginning after June 15,
1999. Statement 133 requires all derivatives to be recognized in
the balance sheet as either assets or liabilities at fair value.
Derivatives that are not hedges must be adjusted to fair value
through income. In addition, all hedging relationships must be
designated, reassessed and documented pursuant to the provisions of
SFAS No. 133. Management believes the adoption of this statement
will not have a material effect on the Company.
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, 1998.
<PAGE>
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.
3. Inventories
Inventories consist of the following:
December 31,
1998 1997
Raw materials $27,101 $21,639
Work in process 10,626 7,375
Finished goods 5,591 2,651
$43,318 $31,665
4. Property, Plant, and Equipment
Property, plant, and equipment consists of the following:
December 31,
1998 1997
Land, buildings and improvements $ 8,069 $ 6,380
Machinery and equipment 25,716 17,745
Furniture and fixtures 3,127 1,089
Other (vehicles, dies and tooling) 7,965 6,731
44,877 31,945
Less: Accumulated depreciation
and amortization (22,609) (16,744)
$22,268 $15,201
5. Short Term Notes Payable
FIR has a number of unsecured short-term borrowing facilities
available from approximately 17 banks in the form of overdraft
coverage. The total amount available under the overdraft facilities
is approximately $14,000 at interest rates ranging from 4.5% to 6.5%
at December 31, 1998. Total outstanding borrowings under these
arrangements were $0 and $2,009 at December 31, 1998 and 1997,
respectively.
<PAGE>
6. Income Taxes
Pretax income was taxed in the following jurisdictions:
Year Ended December 31,
1998 1997 1996
Domestic $ 4,738 $4,679 $12,310
Foreign 5,288 1,105 -
$10,026 $5,784 $12,310
The provision/(benefit) for income taxes consists of the
following:
Year Ended December 31,
1998 1997 1996
Current:
Federal $ (954) $ 898 $1,594
State (40) 217 572
Foreign 3,839 542 -
Total current 2,845 1,657 2,166
Deferred:
Federal (5,223) 684 1,228
State (667) 151 276
Foreign (27) (63) -
Total deferred (5,917) 772 1,504
Provision/(benefit) for
income taxes $(3,072) $2,429 $3,670
The provision/(benefit) for income taxes differs from the amount
of income tax provision computed by applying the U.S. federal income
tax rate to income before income taxes. A reconciliation of the
differences is as follows:
Year Ended December 31,
1998 1997 1996
Computed statutory tax provision $ 3,409 $1,967 $2,891
Increase resulting from:
State and local taxes, net of
federal benefit 463 243 560
Higher effective foreign tax
rate 2,014 103 -
Change in valuation allowance (9,714) - -
Previously unrecorded deferred
Taxes 448 - -
Nondeductible amortization 674 181 145
Other (366) (65) 74
Provision/(benefit) for income taxes $(3,072) $2,429 $3,670
<PAGE>
Deferred tax liabilities and assets are comprised of the
following:
December 31,
1998 1997
Deferred tax liabilities:
Goodwill $5,075 $2,686
Property, plant and
equipment 232 900
Other 66 294
Total deferred tax liabilities 5,373 3,880
Deferred tax assets:
Property, plant and
equipment 4,173 5,505
Intangibles other than
goodwill 5,785 6,928
Vacation accrual 364 141
Franchise tax 269 128
Employee benefits 363 196
Uniform capitalization 133 243
Allowance for doubtful
accounts 89 121
Inventory obsolescence
reserve 84 18
Warranty reserve 117 -
Other 120 259
Valuation allowance - (9,714)
Total deferred tax assets 11,497 3,825
Net deferred tax assets/
(liabilities) $ 6,124 $ (55)
During 1998, the Company recorded $262 of net deferred tax assets
in connection with acquisitions.
The increase in deferred tax assets is primarily the result of
reducing the Company's valuation allowance related to deferred tax
assets arising from the Company's acquisition of Imperial on November
7, 1996 from an affiliate. The deferred tax assets pertain to
additional tax bases in certain assets related to this transaction.
The valuation allowance was reversed due to continued profitable
domestic operating results and based on management's assessment that
it is more likely than not that all of the net deferred tax assets
will be realized through future taxable earnings, or implementation
of tax planning strategies.
7. Long Term Debt
Long-term debt consists of the following:
December 31
1998 1997
Series B Senior Notes (A) $ - $170,000
Series C Senior Notes, including
$4,500 of Unamortized premium (A) - 104,500
Series D Senior Notes, including
$4,000 of Unamoritzed premium (A) 274,000 -
Subordinated Notes Payable (B) 8,850 9,000
Revolving Credit Facility (A) 41,000 -
Capital leases (C) 1,966 172
325,816 283,672
Current Portion (361) (59)
$325,455 $283,613
<PAGE>
(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 ("B 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.
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%
(8.125% at December 31, 1998) or base rate plus 1.5% (9.0% at
December 31, 1998), 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 subject to reduction based on the Company's
leverage ratio, as defined. Borrowings are secured by the stock
and substantially all of the assets of the Company. Borrowings
outstanding under the revolving credit facility at December 31,
1998 and 1997 were $41,000 and $0, respectively.
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, and commenced May 15, 1998. The C
Notes were issued at a premium of 4.5% which is being amortized
over the remaining term of the C 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 Notes offering,
the Company used 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 3/4% 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
<PAGE>
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 $275,400 at December 31,
1998. The fair value was calculated by multiplying the face
amount by the market price at December 31, 1998.
(B)The Subordinated Notes Payable consist of a $5,000 note
payable to the former shareholder of Merkle-Korff and a $3,850
note payable to the former shareholders of ED&C. The note
payable to the former 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 former ED&C shareholders is due December 31, 2002 and bears
interest at 9% per annum. These notes are unsecured
obligations of the Company.
(C)Interest rates on capital leases range from 3.9% to 15.6% and
mature in installments through 2004.
The future minimum lease payments as of December 31, 1998
under capital leases consist of the following:
1999 $ 408
2000 529
2001 479
2002 385
2003 355
Thereafter 229
Total 2,385
Less amount representing
Interest (419)
Present value of future
Minimum lease
payments $1,966
The present value of the future minimum lease payments
approximates the book value of property, plant and equipment under
capital leases at December 31, 1998.
Aggregate maturities of long-term debt at December 31, 1998 are as
follows:
1999 $ 361
2000 1,405
2001 1,605
2002 5,422
2003 42,818
Thereafter $270,205
<PAGE>
8. Leases
The Company leases certain land, buildings, and equipment under
noncancellable operating lease agreements expiring in various years
through 2007. Minimum future lease payments, by year, under
noncancellable operating leases including those with related parties
(Note 11), are as follows at December 31, 1998:
1999 $ 3,042
2000 2,591
2001 1,766
2002 1,783
2003 1,220
Thereafter 2,406
Total rent expense was $3,777, $1,951 and $1,680 for the years
ended December 31, 1998, 1997 and 1996, respectively.
9. Capital Stock
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, as described in Note 7.
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 $1,353, $671 and $449 for the years
ended December 31, 1998, 1997 and 1996, 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 0.75% of the retail price index). This obligation is
payable to employees when they leave the employ of the Company and
approximated $3,069 and $2,712 at December 31, 1998 and 1997,
respectively.
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 and $2,700 for the period from
January 1, 1997 to July 24, 1997 and the year ended December 31,
1996, 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. These
arrangements were terminated as of July 25, 1997 and replaced with
<PAGE>
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 are charged
by 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 $1,092 and
$2,379 in 1998 and 1997, respectively); (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
$400 and $1,045 in 1998 and 1997, respectively); and (iii)
reimbursement for The Jordan Company's or JII's out-of-pocket costs
in connection with providing such services (which were $100 and $0 in
1998 and 1997, respectively). The New Subsidiary Advisory Agreement
expires 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 are charged by JII annual
consulting fees of 1.0% of the Company's net sales for such services,
payable quarterly, and are required to reimburse JII for its out-of-
pocket costs related to its services. The New Subsidiary Consulting
Agreement expires 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) is 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 is not
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 $2,770 and $700 for the
year ended December 31, 1998 and for the period from July 25, 1997 to
December 31, 1997, respectively.
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 is 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
$1,214 and $341 for the year ended December 31, 1998 and for the
period from July 25, 1997 to December 31, 1997, respectively. The JI
Properties Services Agreement expires 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
<PAGE>
its subsidiaries. Under this agreement, the Company's allocable
portion of corporate expenses was $2,136 and $690 for the year ended
December 31, 1998 and for the period from July 25, 1997 to December
31, 1997, respectively.
Fifth, the Company and JII entered into the transition agreement
(the "Transition Agreement") pursuant to which JII provides 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 reimburses JII for services provided pursuant
to the Transition Agreement on an allocated cost basis. The
Transition Agreement expires on December 31, 1999, 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, 1998 and 1997, the
income tax payments by the Company to JII under the Tax Sharing
Agreement were $2,087 and $0, respectively. These income tax
payments reflected a federal and state income tax rate of
approximately 39% of each U.S. subsidiaries' pre-tax income.
Related Party Leases. The Company leases certain plants,
warehouses, and offices under net leases from affiliated entities.
Rent expense, including real estate taxes attributable to these
leases, amounted to $1,602, $951 and $736 for the years ended
December 31, 1998, 1997 and 1996, respectively. Future minimum
rental payments required under these leases are as follows:
1999 $1,565
2000 1,378
2001 581
2002 581
2003 544
Thereafter $2,115
Investment in Affiliate. In November 1998, the Company invested
$5,600 in Class A Preferred Stock and $1,700 in Class B Preferred
Stock of JZ International, Ltd. The Company expects to make an
additional $5,000 of investments in JZ International's Class A
Preferred Stock. JZ International's Chief Executive Officer is
David W. Zalaznick, and its stockholders include Messrs. Jordan,
Quinn, Zalaznick and Boucher, who are the Company's directors and
stockholders, as well as other partners, principals and associates.
JZ International is a merchant bank located in London, England that
is focused on making European and other international investments.
The Company is accounting for this investment under the cost method.
At December 31, 1998 the cost of the investment approximates market
value.
Legal Fees. 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 $388, $202 and $201 in fees
and expenses during the years ended December 31, 1998, 1997 and
1996, respectively. The rates charged to the Company were at arms-
length.
<PAGE>
Due to affiliated company (JII) consists of:
December 31
1998 1997
Management fee $ 232 $ 298
Federal income
taxes - 1,087
Overhead allocation
and other 984 103
$ 1,216 $1,488
12. 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.
The terms of the Company's ADC 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. Subject to the terms and
conditions of the agreement, the Company will make payments to the
sellers on or before April first immediately following the respective
fiscal year during which each such contingent payment is earned. The
contingent payments apply to operations of fiscal years 1998 and
1999. The Company made a payment of $3,100 to the sellers of ADC in
March 1999 related to this agreement.
13. 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 controls
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, golf carts, lift trucks
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, worm 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.
<PAGE>
The Company's motion control systems are used primarily in
automated conveyor systems within the automotive industry and the
elevator modernization 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.
<PAGE>
Factors Used to Identify the Enterprise's Reportable Segments
The Company's reportable segments are business units that offer
different products. The reportable segments are each managed
separately because they manufacture and distribute distinct products
with different production processes.
Summary financial information by business segment is as follows:
Year Ended
December 31,
1998 1997 1996
Net Sales
Motors $214,230 $145,639 $117,571
Controls 61,603 3,030 N/A
$275,833 $148,669 $117,571
Operating Income
Motors $ 43,850 $ 30,588 $ 26,165
Controls 7,124 458 N/A
Corporate Expenses (1) (8,650) (3,362) (2,936)
Total Operating Income 42,324 27,684 23,229
Interest Expense (32,99) (22,363) (11,134)
Interest Income 806 463 148
Miscellaneous, net (110) - 67
Income before Income Tax and
Extraordinary Items $ 10,026 5,784 12,310
Identifiable Assets
Motors $284,215 $211,135 $157,796
Controls 80,039 79,263 N/A
Corporate 24,567 44,746 17,734
$388,821 $335,144 $175,530
Capital Expenditures
Motors $ 4,164 1,392 1,304
Controls 1,011 105 N/A
$ 5,175 1,497 1,304
Depreciation
Motors $ 4,101 4,283 2,960
Controls 391 28 N/A
$ 4,492 4,311 2,960
Amortization
Motors $ 6,146 4,544 4,118
Controls 2,089 160 N/A
$ 8,235 4,704 4,118
(1) 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,
1998 1997 1996
Net sales to unaffiliated
customers $232,880 $133,912 $117,571
United States 42,953 14,757 N/A
$275,833 $148,669 $117,571
Identifiable assets
United States $ 22,548 $ 10,371 $ 11,442
Europe 6,383 5,075 N/A
$ 28,931 $ 15,446 $ 11,442
14. 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.
<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 51 Chairman
Ron A. Sansom 39 Chief Executive Officer and a
Director
Norman Bates 37 Chief Financial Officer
Randall Bays 43 President, Imperial
G. Barry Lawrence 52 President, Gear
John W. Brown 62 Chairman and Chief Executive
Officer, Merkle-Korff
Paolo Bergamaschi 29 President, FIR
Todd Williams 41 President, Electrical Design
Javad Rahimian 48 President, Motion Control
William Rodgers 64 President, Advanced DC Motors
Jonathan F. Boucher 42 Vice President and a Director
John W. Jordan, II 51 Director
David W. Zalaznick 44 Director
John D. Simms, Sr. 71 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 Archibald Candy Corporation, Chairman of the Board of Jordan
Telecommunication Products, Inc. as well as a director of AmeriKing,
Inc., Welcome Home, and a number of other privately held companies.
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.
Mr. Lawrence has served as President of Gear since 1991. Prior to
that, Mr. Lawrence held several senior management positions with
Gear since 1978.
<PAGE>
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 1998.
Prior to that, Mr. Bergamaschi held several management positions
within FIR.
Mr. Williams has served as the President of ED&C since September
1998. Prior to that, Mr. Williams was a partner and original
founder of a consulting company providing management, operating and
marketing support activities for a variety of companies. From 1985
to 1992, Mr. Williams held senior management positions at McDonnell
Douglas Corporation.
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. Rodgers has served as President of ADC since its inception in
1989. Prior to 1989, Mr. Rodgers held several management positions
at Prestolite.
Mr. Boucher has served as a Vice President and a director of the
Company since its inception. Since 1983, Mr. Boucher has been 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., Archibald Candy Corporation, Welcome
Home, Inc., GFSI, Inc., GFSI Holdings, Inc., Jordan
Telecommunication Products, Inc., Rockshox, Inc. and Apparel
Ventures, Inc. as well as other privately held companies.
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., Jackson Products, Inc., GFSI, Inc. and GFSI
Holdings, Inc. as well as other privately held companies.
Mr. Simms has served as a director of the Company since 1998. Mr.
Simms was the owner of Merkle-Korff from 1966 until September 22,
1995 when Merkle-Korff was purchased by the Company. Mr. Simms has
nearly fifty years of experience in the electric motor business.
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
<PAGE>
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 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.
<PAGE>
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, 1998
to those persons who were, at December 31, 1998: (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.
Annual
Compensation
Other Annual
Name and Principal Position Year Salary Bonus Compensation(1)
Thomas H. Quinn(2) 1998 $ 0 $ 0 $ -
Chairman of the Board
Ron A. Sansom(2) 1998 0 0 -
Chief Executive Officer
Norman R. Bates(2) 1998 0 0 -
Chief Financial Officer
(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, Sansom, and
Bates by JII.
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 1998, however, Messrs. Boucher, Jordan and Quinn
participated in deliberations of the Board of Directors concerning
executive officer compensation. During 1998, 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 31, 1999 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 Percent
of age
Shares 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%
Leucadia Investors, Inc. 2,019.7802 10.3%
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 31,
1999, 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
sister 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 JZ Equity Partners
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
Services Agreements. The Company and each of its subsidiaries are
parties to an advisory agreement (the "Subsidiary Advisory
Agreement") with JII, pursuant to which the Company and its
subsidiaries will pay 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
$1.1 million in 1998); (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
$400,000 in 1998); and (iii) reimbursement for The Jordan Company's
or JII's out-of-pocket costs in connection with providing such
services (which were $100,000 in 1998). The Subsidiary Advisory
Agreement expires 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.
Mssrs. Jordan, Boucher and Zalaznick, directors of the Company, are
partners of The Jordan Company.
The Company and each of its subsidiaries are parties to a
management consulting agreement (the "Subsidiary Consulting
Agreement"), pursuant to which pay JII annual consulting fees of 1.0%
of the Company's net sales for such services, payable quarterly, and
are required to reimburse JII for its out-of-pocket costs related to
its services. The Subsidiary Consulting Agreement expires 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
Subsidiary Consulting Agreement, JII (but not JII's affiliates) is
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 is not 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 $2.8 million for the year ended December 31, 1998.
The Company and each of its subsidiaries are parties to 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 is 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
$1.2 million for the year ended December 31, 1998. The JI Properties
Services Agreement expires 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.
JII allocates its overhead, general and administrative charges and
expense among JII and its subsidiaries, including the Company, based
on the respective revenues and usage of corporate overhead by JII and
its subsidiaries. Under this agreement, the Company's allocable
portion of corporate expenses was $2.1 million for the year ended
December 31, 1998.
The Company and JII are parties to a transition agreement (the
"Transition Agreement") pursuant to which JII provides office space
and certain administrative and accounting services to the Company to
<PAGE>
facilitate the transition of the Company as a stand-alone company.
The Company reimburses JII for services provided pursuant to the
Transition Agreement on an allocated cost basis. The Transition
Agreement expires on December 31, 1999, 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 parties 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 year ended December 31, 1998 the income
tax payments by the Company to JII under the Tax Sharing Agreement
were $2.1 million. These income tax payments reflected a federal
and state income tax rate of approximately 39% of each subsidiary's
pre-tax income.
Upon redemption of the Junior Preferred Stock or other
circumstances that cause the Company and its subsidiaries to cease
to be tax consolidated subsidiaries of Jordan Industries, the
Company and its subsidiaries will be released from making any
further payments under the Tax Sharing Agreement. While the release
will discharge the Company and its subsidiaries from making future
income tax payments to Jordan Industries, the Company and its
subsidiaries will remain contingently liable to Jordan Industries
under the Tax Sharing Agreement in respect of any increases in their
separate return tax liability for periods prior to the consummation
of the offerings. The Company is not aware of any such liabilities.
Directors of the Company, John W. Jordan II, David W. Zalaznick
and Thomas H. Quinn each have an ownership interest of more than 10%
of the common stock of Jordan Industries.
Merkle-Korff Leases. Merkle-Korff leases some of 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. Rent expenses, including real
estate taxes attributable to the Merkle-Korff Leases, amounted to
$969 for the year ended December 31, 1998. 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, 1999; and
(ii) $600 for the year ended December 31, 2000. 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 $633 for the year ended December 31, 1998. The
Company believes the terms of the Motion Control leases are
comparable to the terms it would obtain from a non-affiliated party.
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
<PAGE>
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
The following financial statement schedule for the years ended
December 31, 1998, 1997 and 1996 is submitted herewith:
Item Page Number
Schedule II - Valuation and qualifying accounts 55
All other 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
Not Applicable.
<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 31, 1999 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 31, 1999 Chairman of the Board
By /s/ Ron A. Sansom
Ron A. Sansom
Dated: March 31, 1999 Director
By /s/ John W. Jordan II
John W. Jordan II
Dated: March 31, 1999 Director
By /s/ David W. Zalaznick
David W. Zalaznick
Dated: March 31, 1999 Director
By /s/ Jonathan F. Boucher
Jonathan F. Boucher
Dated: March 31, 1999 Director
By /s/ John D. Simms, Sr.
John D. Simms, Sr.
Dated: March 31, 1999 Director
By /s/ Norman R. Bates
Norman R. Bates
Dated: March 31, 1999 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 "1996 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)
2.5 Share Purchase Agreement, dated April 9, 1998, for the
direct and indirect sale of all the shares of Advanced
DC (incorporated by reference to exhibit 99.1 to Form 8-
K of Motors and Gears, Inc., dated January 28, 1999)
2.6 Amendment No. 1 to Agreement for Purchase and Sale of
Stock, dated May 15, 1998, for the direct and indirect
sale of all the shares of Advanced DC (incorporated by
reference to exhibit 99.2 to Form 8-K of Motors and
Gears, Inc., dated January 28, 1999)
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 1996 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 1996 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 )
<PAGE>
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 1996
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)
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 1996 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 1996 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
1996 S-4)
<PAGE>
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
1996 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
1996 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
1996 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
1996 S-4)
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 1996 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 1996 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 1996 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 1996 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 Balance
at Additions Charged to Write Offs at
Beginning due to Costs and Net of end of
of Period Acquisitions Expenses Recoveries Other Period
December 31,
1998:
Allowance
for doubtful
accounts $529 67 1,116 (1,001) 23 $734
Reserve for
Obsolescence $ 46 258 417 (226) 266 $761
Warranty
Reserve $105 37 170 0 0 $312
December 31, 1997:
Allowance for
doubtful
accounts $ 59 406 214 (145) (5) $529
Reserve for
obsolescence $184 0 75 (213) 0 $ 46
Warranty
Reserve $ 0 105 0 0 0 $105
December 31, 1996:
Allowance for
doubtful
accounts $ 29 28 40 (38) 0 $ 59
Reserve for
obsolescence $184 0 0 0 0 $184
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,016
<SECURITIES> 0
<RECEIVABLES> 52,703
<ALLOWANCES> (734)
<INVENTORY> 43,318
<CURRENT-ASSETS> 105,361
<PP&E> 44,877
<DEPRECIATION> (22,609)
<TOTAL-ASSETS> 388,821
<CURRENT-LIABILITIES> 37,439
<BONDS> 274,000
0
0
<COMMON> 1
<OTHER-SE> 22,613
<TOTAL-LIABILITY-AND-EQUITY> 388,821
<SALES> 275,833
<TOTAL-REVENUES> 275,833
<CGS> 180,453
<TOTAL-COSTS> 180,453
<OTHER-EXPENSES> 53,056
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,994
<INCOME-PRETAX> 10,026
<INCOME-TAX> (3,072)
<INCOME-CONTINUING> 13,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,098
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
