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, 1999 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 13, 2000: 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 14
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes In and Disagreements with
Accountants on Accounting and Financial 37
Disclosure
Part III
Item 10. Directors and Executive Officers 37
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial 41
Owners and Management
Item 13. Certain Relationships and Related 42
Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports On Form 8-K 45
Signatures 46
<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 an 82% 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 industries. 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). See Note 12 to the Company's
consolidated financial statements for financial segment data.
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.
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.
<PAGE>
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.
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.
<PAGE>
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)
----------- -------------
1999
Motors $54,279
Controls 26,587
------
$80,866
======
1998
Motors $57,831
Controls 19,079
------
$76,910
======
The Company will ship substantially all of its 1999 year-end
backlog during 2000.
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.
<PAGE>
International Operations
The Company currently operates six manufacturing facilities, one
research and development facility and one warehouse in Europe. See
Note 12 to the Company's consolidated financial statements.
Employee and Labor Relations
As of December 31, 1999, the Company employed approximately 2,050
employees, of which approximately 1,450 were non-union and 600 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
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.
<PAGE>
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.
Item 2. PROPERTIES
The Company's headquarters are located in an approximately 43,700
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, 1999, are set forth in the table below:
<PAGE>
<TABLE>
<CAPTION>
Square Owned/ Lease
Location Use Feet Leased Expiration
<S> <C> <C> <C> <C> <C>
Des Plaines, IL Design/ 38,000 Leased September 2000
Administration
Subfractional Des Plaines, IL Manufacturing 45,000 Leased September 2000
Products Darlington, WI Manufacturing 68,000 Leased September 2005
Richland Center, WI Manufacturing 45,000 Leased September 2000
Des Plaines, IL Administration/ 112,000 Leased January 2004
Manufacturing
- -------------------------------------------------------------------------------------------------------------------
Akron, OH Manufacturing 43,000 Owned
Stow, OH Administration 7,000 Leased September 2000
Middleport, OH Manufacturing 85,000 Owned
Cuyahoga Falls, OH Manufacturing 63,000 Leased October 2003
Fractional/ Alamagordo, NM Manufacturing 25,800 Leased October 2002
Integral Casalmaggiore, Administration/ 100,000 Owned
Horsepower Italy Manufacturing
Products Varano, Italy Manufacturing 30,000 Owned
Bedonia, Italy Manufacturing 8,000 Leased March 2005
Genova, Italy Research & 33,000 Leased July 2002
Development/
Manufacturing
Reggio Emilia, Manufacturing/ 30,000 Leased August 2002
Italy Distribution
Palo Alto, CA Product Design & 1,000 Leased April 2000
Development
Carrollton, TX Manufacturing/ 29,000 Leased September 2004
Administration
Dewitt, NY Manufacturing 18,500 Leased July 2000
Eternoz, France Manufacturing/ 15,000 Leased October 2004
Administration
Syracuse, NY Manufacturing 45,000 Leased December 2004
Syracuse, NY Manufacturing/ 49,600 Owned
Administration
Putzbrunn, Germany Warehouse 1,200 Leased July 2000
- -------------------------------------------------------------------------------------------------------------------
Troy, MI Manufacturing/ 29,000 Leased January 2003
Motion Administration
Control Rancho Cordova, CA Manufacturing/ 40,000 Leased May 2001
Systems Administration
Rancho Cordova, CA Administration 45,000 Leased May 2001
- -------------------------------------------------------------------------------------------------------------------
Gears and Grand Rapids, MI Manufacturing/ 45,000 Owned
Gearboxes Administration
Oakwood Village, OH Manufacturing/ 25,000 Leased January 2004
Administration
</TABLE>
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.
<PAGE>
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, 1999.
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, 1999,
all common stock of the Company was held by the Parent.
The Company has not declared or paid any cash dividends on its
common stock since the Company's formation in September 1995. The
Indenture (the "Indenture") by and between the Company and State
Street Bank and Trust Company, as Trustee, with respect to the 10_%
Senior Notes due 2006, contains restrictions on the Company's ability
to declare or pay dividends on its common stock. The Indenture
prohibits the declaration or payment of any dividends or the making
of any distribution by the Company, or any Restricted Subsidiary (as
defined in the Indenture).
Item 6. SELECTED FINANCIAL DATA
The following table presents selected financial information
derived from the Company's and its predecessor's financial
statements as well as the combined results of operations of the
predecessor from January 1, 1995 to September 22, 1995 and the
Company from September 23, 1995 to December 31, 1995.
<PAGE>
<TABLE>
<CAPTION>
Predecessor
and Company
Combined (2) Predecessor (4)
Company Company (3)
- ------------------------------------------------------------------------------------------------------------------------------
September 23, January 1,
Through Through
Year Ended December 31, December 31, September 22,
---------------------------------------------------------------
------------ ----------- ----------- ----------- --------------
1999 1998 1997 1996 1995 1995 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data: (1)
Net sales $307,877 $275,833 $148,669 $117,571 $ 63,979 $ 24,684 $39,295
Gross profit,
excluding
depreciation 111,119 95,380 51,585 41,820 23,437 8,255 15,182
Depreciation 5,549 4,492 4,311 2,960 516 415 101
Amortization 9,045 8,235 4,704 4,118 840 840 -
Operating income 50,597 42,324 27,684 23,229 16,369 4,753 11,616
Interest expense 33,802 32,994 22,363 11,134 2,412 2,412 -
Income taxes (5) 8,698 (3,072) 2,429 5,290 1,232 948 284
Net income 8,618 13,098 3,355 4,834 12,964 1,360 11,604
Supplemental pro forma and
other data:
Pro forma income
taxes (6) $ - $ - $ - $ - $ 4,755 $ - $ 4,755
Pro forma net
income 8,618 13,098 3,355 4,834 8,493 1,360 7,133
Balance sheet data (at end
of period): (1)
Working capital $ 69,363 $ 67,922 $ 65,074 $ 25,632 $ 14,747 $ 14,747 $ 7,697
Total assets 382,586 388,821 335,144 175,530 145,387 145,387 14,409
Long-term
obligations
including current
portion 313,179 325,816 283,672 175,067 83,547 83,547 -
Stockholder's
equity (net
capital
deficiency) 24,159 22,613 7,552 (15,787) 45,925 45,925 9,218
</TABLE>
(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.
<PAGE>
(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.
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 1999, 1998
and 1997 is the result of acquisitions. Each of the acquisitions
during this three year period 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. As a result of these acquisitions, the Company's
combined results for 1999, 1998 and 1997 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, 1999,
1998 and 1997. The results of operations of FIR, ED&C, Motion
Control, ADC and Euclid are included in the consolidated results of
operations since their acquisition on June 12, 1997, October 27,
1997, December 18, 1997, May 15, 1998 and December 31, 1998,
respectively.
Year Ended December 31,
1998 1997
1999 (1) (1) (1)
(Dollars in thousands)
Net sales $307,877 $275,833 $148,669
Gross profit (excluding 111,119 95,380 51,585
depreciation)
EBITDA(2) 65,192 55,051 36,699
Operating income 50,597 42,324 27,684
Interest expense 33,802 32,994 22,363
Gross margin (excluding 34.6% 34.7%
depreciation)(3) 36.1%
EBITDA margin(3) 21.2 20.0 24.7
Operating margin(3) 16.4 15.3 18.6
(1) With the acquisition of ED&C and Motion Control during 1997,
the results of operations include operations for both the motors
and controls segments. The controls segment accounted for
$72,503, $61,603 and $3,030 of net sales, $27,545, $23,403 and
$1,201 of gross profit (excluding depreciation), $11,291, $9,605
and $645 of EBITDA (earnings before interest, income taxes,
depreciation and amortization) and $8,367, $7,124 and $458 of
operating income for the years ended December 31, 1999, 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, 1999 compared to year ended December 31,
1998
Net sales increased $32.0 million or 11.6% from $275.8 million in
1998 to $307.9 million in 1999. The increase in net sales was
primarily driven by the 1998 acquisition of ADC and Euclid which
accounted for $21.8 million of the increase. Subfractional motor
sales decreased 4.1% in 1999 as compared to 1998 largely due to
weakness in the vending markets. Significant difficulties in
international markets of a major beverage company are the primary
reason for this decline. In 1999, sales of fractional/integral
products increased 22.8% including the effects of the 1998
acquisitions, and 3.2% excluding the effects of the 1998
acquisitions. The growth for fractional/integral products is a
result of strong performance in the material handling, elevator and
floor care markets partially offset by a weak European market and an
unfavorable Euro exchange rate. Sales of electronic motion control
systems increased by 17.7% mainly attributed to continued strength in
the elevator modernization market.
Operating income increased $8.3 million or 19.5% from $42.3 million
in 1998 to $50.6 million in 1999. The primary increase in operating
income was a result of the increase in sales discussed above coupled
with an improvement in gross margin from 34.6% in 1998 to 36.1% in
1999. The improvement in gross margin is a result of product design
changes, manufacturing process improvements and material cost savings
experienced throughout the Company due to efforts put forth by the
Company's sourcing council. Improvements in gross margin were
partially offset by increases in selling, general and administrative
expenses primarily as a result of the 1998 acquisitions and increases
in depreciation due to the 1998 acquisitions and due to a new systems
implementation at one of the Company's subsidiaries.
The income tax benefit during 1998 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, 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.
<PAGE>
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.
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, 1999 was $28.0 million, compared to
$11.7 million provided from operating activities during the same
period in 1998. The increase in cash from operating activities is
primarily due to improved working capital performance.
Investing activities. Net cash used in investing activities was
$7.8 million in 1999 and $70.3 million in 1998. $65.8 million of the
cash used in investing activities in 1998 was related to the 1998
acquisitions and the Company's investment in an affiliated company.
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 2000.
The Company is party to a Credit Agreement under which the Company
is able to borrow up to approximately $75.0 million to fund
acquisitions and provide working capital and for other general
corporate purposes. 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
13, 2000, the Company has approximately $52.5 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 cash requirements for working capital,
capital expenditures, interest, taxes, and debt repayment for at
least the next 12 months.
<PAGE>
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.
Impact of Year 2000
The Company experienced no significant disruptions in mission
critical information technology and non-information technology
systems and believes those systems successfully responded to the Year
2000 date change. The total cost of the Year 2000 project was
approximately $3.3 million and was funded through operating cash
flows and capital leases. The majority of these costs have been
capitalized as they relate to new software and equipment.
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, 1999 the
Company had variable rate debt outstanding of $28.0 million with an
interest rate of approximately 8.75%. A one percentage point
increase in interest rates would increase the amount of annual
interest paid by approximately $0.3 million. The Company does not
believe that its market risk financial instruments on December 31,
1999 would have a material effect on future operations or cash flow.
The Company is exposed to market risk from changes in foreign
currency exchange rates, including fluctuations in the functional
currency of foreign operations. The functional currency of
operations outside the United States is the respective local
currency. Foreign currency translation effects are included in
accumulated other comprehensive income in shareholder's equity.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
NO.
Reports of Independent Auditors 16
Consolidated Balance Sheets as of December 31,
1999 19
and 1998
Consolidated Statements of Income for the years
ended December 31, 1999, 1998 and 1997 20
Consolidated Statements of Changes in
Shareholder's Equity (Net Capital Deficiency) for
the years ended December 31, 1999, 1998 and 1997 21
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997 22
Notes to Consolidated Financial Statements 23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder
Motors and Gears, Inc.
We have audited the accompanying consolidated balance sheets of
Motors and Gears, Inc. as of December 31, 1999 and 1998 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, 1999. 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 34% as of December 31, 1999 and 1998,
respectively, and net sales constituting 33% and 34% for the years
ended December 31, 1999 and 1998, 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, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
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 7, 2000
<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, 1999 and 1998, and the
related statements of income, shareholders' equity and cash flows
for the years then ended 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, 1999 and 1998 and the
results of its operations and its cash flows for the years then
ended and for the 13 days ended December 31, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Sacramento, California
January 21, 2000
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
FIR Group Holding Italia S.p.A.
We have audited the consolidated balance sheets of Fir
Group Holding Italia S.p.A. (the "Company") as of October 31, 1999
and 1998, and the related consolidated statements of income for the
years then ended, and the related consolidated statements of
retained earnings and cash flow for the year ended October 31,
1999. 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, 1999 and 1998,
and the results of its operations for the years then ended and its
cash flow for the year ended October 31, 1999, in conformity with
generally accepted accounting principles.
PRICEWATERHOUSECOOPERS S.p.A.
Bologna, 26 January 2000
<PAGE>
MOTORS AND GEARS, INC.
CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
December 31,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 11,260 $ 7,016
Accounts receivable, net of allowance of $850
and $734 53,473 51,969
at December 31, 1999 and 1998, respectively
Inventories 44,146 43,318
Prepaid expenses and other current assets 3,058
4,035
Total current assets 112,914 105,361
Property, plant and equipment-Net 21,562 22,268
Goodwill-Net 223,561 232,058
Deferred financing costs-Net 12,392 14,182
Deferred income taxes 2,851 4,868
Investment in affiliate 7,285 7,285
Other non-current assets 2,021 2,799
Total assets $382,586
$388,821
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 22,670 $ 23,832
Accrued interest payable 4,986 4,756
Accrued expenses and other current liabilities 12,081 7,274
Due to affiliated company 2,185 1,216
Current portion of long term debt 1,629 361
Total current liabilities 43,551 37,439
Long term debt 311,550 325,455
Other non-current liabilities 3,326 3,314
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 (5,125) 1,947
Accumulated deficit (29,340)
(20,722)
Total shareholder's equity 24,159 22,613
Total liabilities and shareholder's equity $382,586 $388,821
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MOTORS AND GEARS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Year Ended December 31,
----------------------------------------------------
----------------- ---------------- -----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $307,877 $275,833 $148,669
Cost of sales, excluding depreciation 196,758 180,453 97,084
Selling, general and administrative expenses,
excluding depreciation 42,862 37,559 13,370
Depreciation 5,549 4,492 4,311
Amortization of goodwill and other intangibles 9,045 8,235 4,704
Management fees to affiliated company 3,066 2,770 1,516
-------- -------- --------
Operating income 50,597 42,324 27,684
Other (income) expense:
Interest expense 33,802 32,994 22,363
Interest income (390) (806) (463)
Miscellaneous, net (131) 110 -
-------- -------- --------
Income before income taxes 17,316 10,026 5,784
Provision/(benefit) for income taxes 8,698 (3,072) 2,429
-------- -------- --------
Net income $ 8,618 $ 13,098 $ 3,355
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MOTORS AND GEARS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (NET CAPITAL
DEFICIENCY)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Total
Accumulated Retained Shareholder's
Common Stock Additional Other Earnings Equity
------------------------
------------------------
Number of Paid-in Comprehensive (Accumulated (Net Capital
-
Shares Amount Capital Income Deficit) Deficiency)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Foreign Currency translation adjustment - - - (7,072) - (7,072)
Net Income - - - - 8,618 8,618
-------
Comprehensive Income - - - - - 1,546
------- ------- ------- ------- -------- -------
Balance at December 31, 1999 100,000 $ 1 $50,005 $(5,125) $(20,722) $24,159
======= ======= ======= ======= ======== =======
</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,
1999 1998 1997
Cash flows from operating activities:
Net income $ 8,618 $13,098 $ 3,355
Adjustments to reconcile net income to
net cash
provided by operating activities:
Depreciation and amortization 15,884 14,018 10,070
Provision/(benefit) for deferred 1,133 (5,917) 772
income taxes
Changes in operating assets and
liabilities (net
of effects from acquisitions):
Accounts receivable (1,503) (6,897) (3,645)
Inventories (828) (3,017) 1,323
Prepaid expenses and other (95) (1,482) 2,205
Accounts payable (1,161) 3,648 593
Accrued expenses and other 5,037 (2,603) 4,813
Non-current assets & liabilities (54) 1,081 (29)
Payables to affiliated company 969 (272) (218)
Net cash provided by operating 28,000 11,657 19,239
activities
Cash flows from investing activities:
Capital expenditures, net (4,171) (4,964) (1,497)
Acquisition of subsidiaries (3,596) (58,486) (121,053)
Cash acquired in acquisition of - 412 4,462
subsidiaries
Investment in affiliate - (7,285) -
Net cash used in investing activities (7,767) (70,323) (118,088
Cash flows from financing activities:
Proceeds from revolving credit facility 25,000 59,000 72,500
Repayment of long-term debt (414) (2,307) (33)
Repayment of borrowings under revolving
credit facility (38,000) (18,000) (72,500)
Proceeds from debt issuances - - - 104,500
Senior Notes
Payment of financing costs - - (6,749)
Proceeds from capital contribution - - 20,000
from parent
Payment of consent fee to
bondholders - (2,550) -
Net cash (used in)/provided by
financing activities (13,414) 36,143 117,718
Effect of exchange rate changes on cash (2,575) 659 -
Net increase/(decrease) in cash and 4,244 (21,864) 18,869
cash equivalents
Cash and cash equivalents at beginning 7,016 28,880 10,011
of period
Cash and cash equivalents at end of $11,260 $ 7,016 $ 28,880
period
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Third Party Interest $32,275 $31,286 $20,981
Income taxes 5,576 5,257 515
Non cash investing activities:
Capital leases 1,284 1,325 107
See accompanying notes to consolidated financial statements.
<PAGE>
MOTORS AND GEARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
1. Description of Business 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), operates in the motion
control industry.
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
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 set 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 $59,157. 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 $45,113. The Company also has a
contingent purchase price agreement relating to the acquisition of
ADC. The contingent purchase price is dependent upon the acquired
entity's results of operations for 1998 and 1999 exceeding certain
targeted levels set substantially above the historical experience of
<PAGE>
ADC at the time of acquisition. Under this agreement the Company
paid $3,200 in 1999 related to 1998 operations and expects to pay an
additional $3,200 in 2000 related to 1999 performance. 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 some of 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 $2,039. The purchase price,
including costs incurred directly related to the transaction, was
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 $812.
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.
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. 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 acquisitions had occurred on January 1, 1998, is as
follows:
Unaudited Year
Ended December 31,
1998
Net Sales $296,234
Income before income taxes 11,954
Net Income $ 6,574
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 77% and 74% of the Company's inventories
at December 31, 1999 and 1998, respectively. All other inventories
are valued using the last-in, first-out (LIFO) cost, which
approximated current cost at December 31, 1999.
<PAGE>
Property, Plant, and Equipment
Property, plant, and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided using either straight-line or
accelerated methods over the estimated useful lives of the assets.
Leasehold improvements and assets under capital leases are amortized
using the straight-line method over the shorter of the lease term or
their estimated productive lives. Amortization of leasehold
improvements and assets under capital leases is included in
depreciation expense.
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 2 to 5 years
Furniture and fixtures 3 to 7 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 the balance sheet date rates while income and
expenses are translated at the weighted-average exchange rates for
the year. The Company is exposed to market risk from changes in
foreign currency exchange rates, including fluctuations in the
functional currency of foreign operations. 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, 1999 and 1998 is net
of accumulated amortization of $29,198 and $20,900, 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, 1999 and 1998 are net of
accumulated amortization of $1,806 and $1,174, 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, 1999 and 1998 are net of accumulated
amortization of $4,807 and $3,016, 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.
<PAGE>
Revenue Recognition
Revenues are primarily recognized when products are shipped to
customers.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
Adoption of Accounting Principles
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 quarters beginning after June
15, 2000. Statement 133 requires all derivatives to be recognized
in the balance sheet as either assets or liabilities at fair value.
Derivatives that are not hedged 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
are not materially different from their carrying values at December
31, 1999.
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.
<PAGE>
3. Inventories
Inventories consist of the following:
December 31,
---------------------------------
1999 1998
---- ----
Raw materials $27,262 $27,101
Work in process 12,086 10,626
Finished goods 4,798 5,591
------- -------
$44,146 $43,318
======= =======
4. Property, Plant, and Equipment
Property, plant, and equipment consists of the following:
December 31,
----------------------------
1999 1998
---- ----
Land, buildings and improvements $ 8,103 $ 8,069
Machinery and equipment 27,615 25,716
Furniture and fixtures 6,321 3,127
Other (vehicles, dies and tooling) 7,770 7,965
------- -------
49,809 44,877
Less: Accumulated depreciation
and amortization (28,247) (22,609)
------- -------
$21,562 $22,268
======= =======
5. Short Term Notes Payable
FIR has a number of short-term borrowing facilities available from
various banks. The total amount available under these facilities is
approximately $14,000 at interest rates ranging from 3.5% to 5.5% at
December 31, 1999. There were no outstanding borrowings under these
arrangements at December 31, 1999 and 1998. A portion of these facilities
are secured by FIR's assets and a portion are in the form of overdraft
coverage.
6. Income Taxes
Pretax income was taxed in the following jurisdictions:
Year Ended December 31,
------------------------------------------------
1999 1998 1997
---- ---- ----
Domestic $14,328 $ 4,738 $4,679
Foreign 2,988 5,288 1,105
------- ------- ------
$17,316 $10,026 $5,784
======= ======= ======
<PAGE>
The provision/(benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $4,167 $ (954) $ 898
State 981 (40) 217
Foreign 2,417 3,839 542
------- ------- -------
Total current 7,565 2,845 1,657
Deferred:
Federal 1,037 (5,223) 684
State 211 (667) 151
Foreign (115) (27) (63)
------ ------- ------
Total deferred 1,133 (5,917) 772
------ ------- ------
Provision/(benefit) for income taxes $8,698 $(3,072) $2,429
====== =======- ======
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed statutory tax provision $5,887 $ 3,409 $1,967
Increase resulting from:
State and local taxes, net of
federal benefit 800 463 243
Higher effective foreign tax rate
1,305 2,014 103
Change in valuation allowance - (9,714) -
Previously unrecorded deferred
Taxes - 448 -
Nondeductible amortization 833 674 181
Other (127) (366) (65)
------ ------- ------
Provision/(benefit) for income taxes $8,698 $(3,072) $2,429
====== ======= ======
</TABLE>
The change in the Company's valuation allowance is related to
deferred tax assets arising from the Company's acquisition of a
subsidiary 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.
<PAGE>
Deferred tax liabilities and assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
Deferred tax liabilities:
Goodwill $ 5,973 $ 5,075
Property, plant and equipment 184 232
Foreign deferred taxes 478 -
Other 67 66
------- -------
Total deferred tax liabilities 6,702 5,373
Deferred tax assets:
Property, plant and equipment 3,931 4,173
Intangibles other than goodwill 5,070 5,785
Vacation accrual 407 364
State tax 610 -
Franchise tax 262 269
Employee benefits 362 363
Uniform capitalization 133 133
Allowance for doubtful accounts 151 89
Inventory obsolescence reserve 352 84
Warranty reserve 196 117
Other 219 120
-------- -------
Total deferred tax assets 11,693 11,497
------- -------
Net deferred tax assets $ 4,991 $ 6,124
======= =======
</TABLE>
During 1998, the Company recorded $262 of net deferred tax assets in
connection with acquisitions.
7. Long Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following:
December 31,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
Series D Senior Notes, including $3,500 and
$4,000 of Unamortized premium at December $273,500
31, 1999 and 1998, respectively (A) $274,000
Revolving Credit Facility (A) 28,000 41,000
Subordinated Notes Payable (B) 8,850 8,850
Capital leases (C) 2,829 1,966
--------- --------
313,179 325,816
Current Portion (1,629) (361)
-------- -------
$311,550 $325,455
========= ========
</TABLE>
(A) On February 23, 1998, the Company completed an exchange
offer under which $270,000 of 10 _% Series D Senior Notes
("D Notes") were exchanged for the $170,000 of B Notes and
the $100,000 of C Notes which were issued and outstanding
prior to 1998. The terms of the D Notes are substantially
identical to the terms of the B and C Notes.
<PAGE>
Interest on the D Notes is payable in arrears on May 15 and
November 15 of each year. The D Notes are unsecured
obligations of the Company and mature on November 15, 2006.
The D Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after November 15, 2001.
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 $267,300 at December
31, 1999. The fair value was calculated by multiplying the
face amount by the market price at December 31, 1999.
The Company's Credit Agreement, expiring November 7, 2001,
is in the form of a revolving credit facility and provides
for borrowings of up to $75,000. Borrowings bear interest at
a floating rate of LIBOR plus 2.25% (8.75% at December 31,
1999) or base rate plus 1.25% (9.75% at December 31, 1999),
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 0.375% 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, 1999 and 1998 were $28,000 and $41,000, respectively.
The 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.
(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 8.4% and
mature in installments through 2005.
The future minimum lease payments as of December 31, 1999 under
capital leases consist of the following:
2000 $ 827
2001 745
2002 690
2003 660
2004 405
Thereafter 43
------
Total 3,370
Less amount representing
Interest (541)
-----
Present value of future
Minimum lease payments $2,829
======
<PAGE>
The present value of the future minimum lease payments approximates
the book value of property, plant and equipment under capital leases at
December 31, 1999.
Aggregate maturities of long-term debt at December 31, 1999 are as
follows:
2000 $ 1,629
2001 29,842
2002 5,682
2003 2,098
2004 387
Thereafter $273,541
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 10), are as follows at December 31, 1999:
2000 $2,547
2001 1,780
2002 1,710
2003 1,504
2004 746
Thereafter $1,715
Total rent expense was $3,586, $3,777 and $1,951 for the years
ended December 31, 1999, 1998 and 1997, respectively.
9. 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 $1,451, $1,353 and $671 for the years
ended December 31, 1999, 1998 and 1997, 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 $2,900 and $3,069 at December 31, 1999 and 1998,
respectively.
10. 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.
Management and advisory fees charged to the Company were
approximately $800 for the period from January 1, 1997 to July 24,
1997. 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
<PAGE>
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 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 $36, $1,092 and
$2,379 in 1999, 1998, and for the period from July 25, 1997 to
December 31, 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
$0, $400 and $1,045 in 1999, 1998 and for the period from July 25,
1997 to December 31, 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 $0, $100 and $0 in 1999, 1998 and
for the period from July 25, 1997 to December 31, 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
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 $2,739, $2,770 and $700 for the years ended December
31, 1999, 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
$1,593, $1,214 and $341 for the years ended December 31, 1999, 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.
<PAGE>
Fourth, JII refined the allocation of its overhead, general and
administrative charges and expense among JII and its subsidiaries,
including the Company, in order to more closely match these overhead
charges with the revenues and usage of corporate overhead by JII and
its subsidiaries. Under this agreement, the Company's allocable
portion of corporate expenses was $2,152, $2,136 and $690 for the
years ended December 31, 1999, 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 operations of the 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, 2000, but is automatically renewed for
successive one year periods (unless either party provides prior
written notice of non-renewal) through 2007. The Transition
Agreement 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, 1999 and 1998, the
income tax payments by the Company to JII under the Tax Sharing
Agreement were $1,000 and $2,087, 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 $1,657, $1,602 and $951 for the years ended
December 31, 1999, 1998 and 1997, respectively. Future minimum
rental payments required under these leases are as follows:
2000 $1,134
2001 540
2002 540
2003 540
2004 540
Thereafter $1,575
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 may make additional
investments in JZ International's Class A Preferred Stock up to
approximately $5,000. 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, 1999 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 $180, $388 and $202 in fees
and expenses during the years ended December 31, 1999, 1998 and
1997, respectively. The rates charged to the Company were at arms-
length.
<PAGE>
Due to affiliated company (JII) consists of:
December 31,
---------------------------
1999 1998
---- ----
Management fee $ 559 $ 232
Overhead allocation and other 1,626 984
------ ------
$2,185 $1,216
====== =====
11. 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
remaining contingent payments apply to operations of fiscal year
1999. The Company made a payment of $3,200 to the sellers of ADC in
March 1999 related to this agreement and expects to pay an additional
$3,200 in 2000. These contingent payments are recorded as an
addition to goodwill.
12. 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.
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.
<PAGE>
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 single customer accounts for 10% or more of
consolidated net sales. Identifiable assets are those used by each
segment in its operations. Corporate assets consist primarily of
cash and deferred financing fees.
Factors Used to Identify the Enterprise's Reportable Segments
The Company's reportable segments are business units that offer
different products. The reportable segments are each managed
separately because they manufacture and distribute distinct products
with different production processes.
<PAGE>
<TABLE>
<CAPTION>
Summary financial information by business segment is as follows:
Year Ended
December 31,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Sales
Motors $235,374 $214,230 $145,639
Controls 72,503 61,603 3,030
-------- -------- --------
$307,877 $275,833 $148,669
======== ======== ========
Operating Income
Motors $ 51,076 $ 43,850 $ 30,588
Controls 8,367 7,124 458
Corporate Expenses (1) (8,846) (8,650) (3,362)
-------- -------- --------
Total Operating Income 50,597 42,324 27,684
Interest Expense (33,802) (32,994) (22,363)
Interest Income 390 806 463
Miscellaneous, net 131 (110) -
-------- -------- -------
Income before Income Tax $ 17,316 $ 10,026 $ 5,784
======== ======== =======
Identifiable Assets
Motors $272,282 $284,215 $211,135
Controls 87,207 80,039 79,263
Corporate 23,097 24,567 44,746
-------- -------- --------
$382,586 $388,821 $335,144
======== ======== ========
Capital Expenditures
Motors $ 3,087 $ 4,164 $ 1,392
Controls 1,169 1,011 105
-------- -------- --------
$ 4,256 $ 5,175 $ 1,497
======== ======== ========
Depreciation
Motors $ 4,726 $ 4,101 $ 4,283
Controls 823 391 28
-------- -------- --------
$ 5,549 $ 4,492 $ 4,311
======== ======== ========
Amortization
Motors $ 6,945 $ 6,146 $ 4,544
Controls 2,100 2,089 160
-------- -------- --------
$ 9,045 $ 8,235 $ 4,704
======== ======== ========
</TABLE>
(1) Management fees paid to affiliated company have been included
in corporate expenses.
<PAGE>
Summary financial information by geographic area is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales to unaffiliated customers
United States $263,242 $232,880 $133,912
Europe 44,635 42,953 14,757
-------- -------- --------
$307,877 $275,833 $148,669
======== ======== ========
Identifiable assets
United States $ 24,136 $ 22,548 $ 10,371
Europe 5,215 6,383 5,075
-------- -------- --------
$ 29,351 $ 28,931 $ 15,446
======== ======== ========
</TABLE>
13. 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.
14. Subsequent Events
In December 1999, the Company, through its wholly-owned subsidiary
FIR, acquired certain net assets of the L'Europea Electric Hoist
division ("L'Europea") from Pramac Industriale for approximately
$5,200.
L'Europea hoists are electric pulleys and elevators used for
lifting applications mainly found at construction sites. As FIR's
operations are included for periods ending two months prior to the
Company's year-end and interim periods (see Note 2) the effects of
this transaction are not included in the Company's 1999 results.
<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 52 Chairman
Ron A. Sansom 40 Chief Executive Officer and a Director
Norman Bates 38 Chief Financial Officer
Randall Bays 44 President, Imperial
G. Barry Lawrence 53 President, Gear
John W. Brown 63 Chairman, Merkle-Korff
Paul Boggs 50 President, Merkle-Korff
Paolo Bergamaschi 30 President, FIR
Todd Williams 42 President, Electrical Design
Javad Rahimian 49 President, Motion Control
William Rodgers 65 Chairman, Advanced DC Motors
Michael Dieroff 32 President, Advanced DC Motors
Jonathan F. Boucher 43 Vice President and a Director
John W. Jordan, II 52 Director
David W. Zalaznick 45 Director
John D. Simms, Sr. 72 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 Archibald Candy Corporation, 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.
Mr. Brown has served as Chairman of Merkle-Korff since 1999. From
1993 to 1999 Mr. Brown served as Merkle-Korff's President. Prior to
that, Mr. Brown held several senior management positions with Merkle-
Korff since the 1950's, including Executive Vice President until
1993.
<PAGE>
Mr. Boggs has served as President of Merkle-Korff since 1999.
From 1996 through 1999, Mr. Boggs was a Business Team leader for
certain motors and controls divisions of General Electric. Prior to
that Mr. Boggs held several management and engineering positions
with General Electric.
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. Dieroff has served as the President of ADC since September
1999. From May 1997 to September 1999, Mr. Dieroff held management
positions at ADC. Prior to that, Mr. Dieroff held various
management positions at Emerson Electric.
Mr. Rodgers has served as Chairman of ADC since 1999. From ADC's
inception in 1989 through 1999, Mr. Rodgers served as President of
ADC. 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 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., Carmike Cinemas, Inc.,
Archibald Candy Corporation, Welcome Home, Inc., GFSI, Inc., GFSI
Holdings, 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., Marisa Christina, Inc., Apparel
Ventures, 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.
<PAGE>
Board of Directors
Liability Limitation. The Certificate of Incorporation provides
that a director of the Company shall not be personally liable to it
or its stockholders for monetary damages to the fullest extent
permitted by Delaware Corporation Law. In accordance with Delaware
Corporation Law, the Certificate of Incorporation does not eliminate
or limit the liability of a director for acts or omissions that
involve intentional misconduct by a director or a knowing violation
of law by a director for voting or assenting to an unlawful
distribution, or for any transaction from which the director will
personally receive a benefit in money, property, or services to
which the director is not legally entitled. Delaware Corporation Law
does not affect the availability of equitable remedies such as an
injunction or rescission based 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, 1999
to those persons who were, at December 31, 1999: (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.
<TABLE>
<CAPTION>
Annual
Compensation
Other Annual
Name and Principal Position Year Salary Bonus Compensation(1)
- ---------------------------- ----- ------ ----- ---------------
<S> <C> <C> <C> <C>
Thomas H. Quinn(2) 1999 $ 0 $ 0 $ -
Chairman of the Board
Ron A. Sansom(2) 1999 0 0 -
Chief Executive Officer
Norman R. Bates(2) 1999 0 0 -
Chief Financial Officer
</TABLE>
(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 1999, however, Messrs. Boucher, Jordan and Quinn
participated in deliberations of the Board of Directors concerning
executive officer compensation. During 1999, 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 13, 2000 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.
<TABLE>
<CAPTION>
Amount of Beneficial Ownership(1)
-----------------------------------
Number of Percentage
Shares Owned
<S> <C> <C>
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%
JII Partners Limited Partnership(8) 1,500.0000 7.6
</TABLE>
(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 13,
2000, 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
JII Partners Limited Partnership as to which the named
individuals disclaim beneficial ownership.
(3) Includes 0.1650 shares held personally and 7,136.7159 shares
held by the John W. Jordan II Revocable Trust. Does not include
51.025 shares held by Daly Jordan O'Brien, the sister of Mr.
Jordan. 51.025 shares held by Elizabeth O'Brien Jordan, the
mother of Mr. Jordan or 51.025 shares held by George C. Jordan,
Jr., the brother of Mr. Jordan.
(4) Does not include 16.4973 shares held by the Jordan/Zalaznick
Capital Company or 577.4053 shares held by 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
approximately 82% 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)JII Partners Limited Partnership 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
$0 in 1999); (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 $0 in 1999); and (iii)
reimbursement for The Jordan Company's or JII's out-of-pocket costs
in connection with providing such services (which were $0 in 1999).
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 they pay JII annual consulting fees of
1.0% of the Company's net sales for such services 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 $2.7 million for the
year ended December 31, 1999.
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
$1.6 million for the year ended December 31, 1999. 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 $2.2 million for the year ended
December 31, 1999.
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
facilitate the operations of the 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, 2000, but is automatically renewed for successive one year
periods (unless either party provides prior written notice of non-
renewal) through 2007. The Transition Agreement may be terminated by
the Company on 90 days' written notice.
<PAGE>
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, 1999 the income
tax payments by the Company to JII under the Tax Sharing Agreement
were $1.0 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 JII, 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 JII, the Company and its subsidiaries will remain contingently
liable to JII 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.
Investment in Affiliate. In November 1998, the Company invested
$5.6 million in Class A Preferred Stock and $1.7 million in Class B
Preferred Stock of JZ International, Ltd. The Company may make
additional investments in JZ International's Class A Preferred Stock
up to approximately $5.0 million. 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, 1999 the cost of
the investment approximates market value.
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
$1.0 million for the year ended December 31, 1999. The Company has
agreed to pay future minimum rental payments under the Merkle-Korff
Leases amounting to $0.6 million for the year ended December 31,
2000. The Company has the right of first refusal to buy these
facilities from Mr. Simms. See Note 10 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 $0.7 million for the year ended December 31, 1999.
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
executive officer of the Company. See Item 10, Directors and
Executive Officers - Board of Directors - Indemnification Agreements.
<PAGE>
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.
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, 1999, 1998 and 1997 is submitted herewith:
Item Page Number
---- -----------
Schedule II - Valuation and qualifying accounts 50
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 13, 2000 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 13, 2000 Chairman of the Board
By /s/ Ron A. Sansom
Ron A. Sansom
Dated: March 13, 2000 Director
By /s/ John W. Jordan II
John W. Jordan II
Dated: March 13, 2000 Director
By /s/ David W. Zalaznick
David W. Zalaznick
Dated: March 13, 2000 Director
By /s/ Jonathan F. Boucher
Jonathan F. Boucher
Dated: March 13, 2000 Director
By /s/ John D. Simms, Sr.
John D. Simms, Sr.
Dated: March 13, 2000 Director
By /s/ Norman R. Bates
Norman R. Bates
Dated: March 13, 2000 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)
12.1 Computations of the Ratios of Earnings to Fixed Charges
21.1 Subsidiaries of Motors and Gears, Inc.
27.1 Financial Data Schedule
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
MOTORS AND GEARS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
Additions
Balance at Additions due to Charged to Write Offs Balance at
Beginning of acquisitions Costs and Net of end of Period
Period Expenses Recoveries Other
--------------- ------------------- ---------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Allowance for
doubtful accounts $734 0 784 (592) (76) $850
Reserve for
Obsolescence $761 0 902 (415) (37) $1,211
Warranty reserve $312 0 209 (34) 0 $487
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
</TABLE>
Exhibit 12.1
MOTORS AND GEARS, INC.
COMPUTATIONS OF THE RATIOS OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
Year Ended December 31,
----------------------------------
1999 1998 1997
---- ---- ----
Fixed Charges
Interest expense $31,291 $31,203 $21,310
Rental expense included in
fixed charges 1,183 1,246 644
------ ------ ------
Total fixed charges 32,474 32,449 21,954
Earnings
Pre-tax income 17,316 10,026 5,784
Plus: fixed charges 32,474 32,449 21,954
------ ------ ------
Total Earnings $49,790 $42,475 $27,738
Ratio of earnings to fixed 1.5 1.3 1.3
charges === === ===
Exhibit 21.1
MOTORS AND GEARS HOLDINGS, INC.
SUBSIDIARIES
Subsidiaries Jurisdiction of Incorporation
- ------------ -----------------------------
Motors and Gears, Inc.(1) Delaware
ArborLake Centre, Suite 550
1751 Lake Cook Road
Deerfield, IL 60015
Motors and Gears Industries, Inc.(2) Delaware
ArborLake Centre, Suite 550
1751 Lake Cook Road
Deerfield, IL 60015
Merkle-Korff Industries, Inc.(3) Illinois
1776 Winthrop Drive
Des Plaines, IL 60015
Merkle-Korff de Mexico S.A. de C.V.(4) Mexico
The Imperial Electric Company (3) Delaware
1533 Commerce Drive
Stow, Ohio 44224
Gear Research, Inc. (5) Delaware
4329 Eastern Avenue, S.E.
Grand Rapids, Michigan 49508
Motion Holdings, Inc. (3) Delaware
ArborLake Centre, Suite 550
1751 Lake Cook Road
Deerfield, IL 60015
Motion Control Engineering, Inc. (6) California
11354 White Rock Road
Rancho Cordova, CA 95742
Electrical Design and Control Company (3) Delaware
2350 Meijer Drive
Troy, Michigan 48084
Advanced D.C. Holdings, Inc. (3) Delaware
ArborLake Centre, Suite 550
1751 Lake Cook Road
Deerfield, IL 60015
Advanced D.C. Motors, Inc. (7) New York
6268 East Molloy Road
East Syracuse, NY 13057
Electric Vehicle Components, Ltd. (8) California
552 College Avenue
Palo Alto, CA 94306
Sermed S.A.R.L. (9) France
<PAGE>
R&A Machine Tool Corporation (10) New York
Box 370-A, Steadman Road
Lee Center, NY 13363
Advanced D.C. Motors GmbH (11) Germany
FIR Group Holdings, Inc. (3) Delaware
ArborLake Centre, Suite 550
1751 Lake Cook Road
Deerfield, IL 60015
Motors and Gears Amsterdam B.V. (12) The Netherlands
Atrium Building, 7th Floor
Strawinskylaan 31015
1077 ZK Amsterdam
Motors and Gears Rotterdam B.V. (13) The Netherlands
FIR Group Holdings Italia, S.r.l. (14) Italy
Construgioni Italiane Motori Elettrici, Italy
S.p.A. (15)
43040 Viazzano di Varano De'Melegari
(Parma) Italia
SelinSistemi, S.p.A. (16) Italy
Via Chiaravagna, 28
16153 Genova-Sestri P
FIR Electromeccanica, S.p.A. (17) Italy
Via Roma n. 19
26041 Casalmaggiore CR
T.E.A. Technologie Electromeccaniche ed Italy
Automazione, S.r.l. (18)
Beta (we have no information)
<PAGE>
Footnotes
(1) A wholly owned subsidiary of Motors and Gears Holdings, Inc.
(2) A wholly owned subsidiary of Motors and Gears, Inc.
(3) A wholly owned subsidiary of Motors and Gears Industries, Inc.
(4) Merkle-Korff Industries, Inc. owns 99.99% of the capital stock
of the corporation and Motors and Gears, Inc. owns the remaining
capital stock of the corporation.
(5) A wholly owned subsidiary of The Imperial Electric Company
(6) A wholly owned subsidiary of Motion Holdings, Inc.
(7) A wholly owned subsidiary of Advanced D.C. Holdings, Inc.
(8) A 50% owned subsidiary of Advanced D.C. Motors, Inc.
(9) A 99% owned subsidiary of Advanced D.C. Motors, Inc.
(10) A 20% owned subsidiary of Advanced D.C. Motors, Inc.
(11) A 90% owned subsidiary of Advanced D.C. Motors, Inc.
(12) A wholly owned subsidiary of FIR Group Holdings, Inc.
(13) Local counsel has shareholder information. We do not maintain
corporate records.
(14) Local counsel has shareholder information. We do not maintain
corporate records.
(15) Local counsel has shareholder information. We do not maintain
corporate records.
(16) Local counsel has shareholder information. We do not maintain
corporate records.
(17) Local counsel has shareholder information. We do not maintain
corporate records.
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