Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1/A Altra Holdings, Inc. HTML 1.73M
6: CORRESP ¶ Comment-Response or Other Letter to the SEC HTML 65K
2: EX-4.14 EX-4.14 Amended and Restated Stockholders 29 117K
Agreement Dated January 6, 2006
3: EX-4.15 EX-4.15 First Amendment to the Amended and 8 16K
Restated Stockholders Agreement Dated
May 5, 2006
4: EX-23.1 EX-23.1 Consent of Ernst & Young LLP 1 5K
5: EX-23.2 EX-23.2 Consent of Bdo Stoy Hayward LLP 1 5K
Valerie Ford Jacob, Esq.
Stuart Gelfond, Esq.
Fried, Frank, Harris, Shriver & Jacobson LLP
One New York Plaza New York, New York10004-1980
(212) 859-8000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration
Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Title of Each Class of
Aggregate
Amount of
Securities to be Registered
Offering Price(a)
Registration Fee(b)
Common stock, par value $0.001 per share
$172,500,000
$18,458
(a)
Estimated solely for the purpose of calculating the registration
fee in accordance with Rule 457(o) promulgated under the
Securities Act of 1933.
(b)
Previously paid.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information
in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state
where the offer or sale is not
permitted.
This is Altra Holdings, Inc.’s initial public offering of
shares of its common stock. Altra Holdings, Inc. is
selling shares
of common stock and Altra Holdings, Inc. stockholders are
selling shares
of common stock.
We expect the public offering price to be between
$ and
$ per
share. Currently, no public market exists for our common stock.
After pricing of the offering, we expect that the shares will
trade on the NASDAQ Global Market under the symbol
“AIMC.”
Investing in the common stock involves risks that are
described in the “Risk Factors” section beginning on
page 11 of this prospectus.
Per Share
Total
Public offering price
$
$
Underwriting discount
$
$
Proceeds, before expenses, to Altra Holdings, Inc.
$
$
Proceeds, before expenses, to the selling stockholders
$
$
The underwriters may also purchase up to an
additional shares
of common stock from Altra Holdings, Inc., and up to an
additional shares
of common stock from the selling stockholders, at the public
offering price, less the underwriting discount, within
30 days from the date of this prospectus to cover
over-allotments, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The shares will be ready for delivery on or
about ,
2006.
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different
information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in
this prospectus is accurate only as of the date on the front
cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that
date.
The following summary highlights information contained
elsewhere in this prospectus and is qualified in its entirety by
the more detailed information and consolidated financial
statements included elsewhere in this prospectus. This summary
is not complete and may not contain all of the information that
may be important to you. You should read the entire prospectus,
including the “Risk Factors” section and our
consolidated financial statements and notes to those statements,
before making an investment decision. In this prospectus, unless
indicated otherwise, references to (i) the terms “the
company,”“we,”“us” and
“our” refer to Altra Holdings, Inc. and its
subsidiaries, (ii) the terms “pro forma” or
“on a pro forma basis,” when used to describe our
operations, unless the context otherwise requires, refer to our
operations after giving effect to the Other Transactions and the
Hay Hall Acquisition after conversion into U.S. dollars at
the assumed exchange rates described herein (each as defined
under “Our Formation, Recent Acquisitions and The Kilian
Transactions”), as if they had occurred as of the
applicable date for balance sheet purposes and the first day of
the applicable period for results of operations purposes,
(iii) any “fiscal” year refers to the twelve
months ended on December 31 of such year, and
(iv) “PTH,”“Colfax PT” or
“Predecessor” refers to the power transmission
business of Colfax Corporation, or Colfax, which is our
accounting predecessor. For the definition of
“EBITDA,” a reconciliation of EBITDA to a generally
accepted accounting principle, or GAAP, measure, and information
about the limitation of the use of these financial measures, see
Note 3 in the Summary Consolidated Financial Data and
Note 1 in the Selected Historical Financial and Other
Data.
We are a leading global designer, producer and marketer of a
wide range of mechanical power transmission, or MPT, and motion
control products serving customers in a diverse group of
industries, including energy, general industrial, material
handling, mining, transportation and turf and garden. Our
product portfolio includes industrial clutches and brakes,
enclosed gear drives, open gearing, couplings, engineered
bearing assemblies, linear components and other related
products. Our products are used in a wide variety of high-volume
manufacturing processes, where the reliability and accuracy of
our products are critical in both avoiding costly down time and
enhancing the overall efficiency of manufacturing operations.
Our products are also used in non-manufacturing applications
where product quality and reliability are especially critical,
such as clutches and brakes for elevators, and residential and
commercial lawnmowers. For the six months ended June 30,2006, we had net sales of $234.6 million, net income of
$6.9 million and EBITDA of $30.6 million.
We market our products under well recognized and established
brand names, including Warner Electric, Boston Gear, Kilian
Manufacturing, Nuttall Gear, Ameridrives, Wichita Clutch,
Formsprag Clutch, Bibby Transmissions, Stieber, Matrix
International, Inertia Dynamics, or IDI, Twiflex Limited,
Industrial Clutch, Huco Dynatork, Marland Clutch, Delroyd Worm
Gear, Bear Linear and Safetek. Most of these brands have been in
existence for over 50 years. Many of these brands achieved
the number one or number two position in terms of brand
awareness in their respective product categories, according to
the most recently published Motion Systems Design magazine
survey. Over 50% of our revenues for the six months ended
June 30, 2006 were generated from products where we believe
we have the number one or number two market share position in
the markets we serve.
Our products are either incorporated into products sold by
original equipment manufacturers, or OEMs, sold to end users
directly or sold through industrial distributors. We sell our
products in over 70 countries to over 700 direct OEM
customers and over 3,000 distributor outlets through our global
sales and marketing network. Substantially all of our products
are moving, wearing components which are consumed in use. Due to
the complexity of many of our customers’ manufacturing
operations and the high cost of process failure, our customers
have demonstrated a strong preference to replace their worn
Altra brand products with new Altra products. This replacement
dynamic drives recurring replacement sales, resulting in
aftermarket revenue that we estimate accounted for approximately
41% of our revenues for the six months ended June 30, 2006.
We are led by a highly experienced management team that has
established a proven track record of execution, successfully
completing and integrating major strategic acquisitions and
delivering significant growth in both revenue and profits. We
employ a comprehensive business process called the Altra
Business System, or ABS, which focuses on eliminating
inefficiencies from every business process to improve quality,
delivery and cost.
Our Industry
Based on industry data supplied by Penton Information Services,
we estimate that industrial power transmission products
generated worldwide revenues of approximately $75.6 billion
in 2005, of which approximately $30.3 billion was
attributable to sales in the United States. These products are
used to generate, transmit, control and transform mechanical
energy. The industrial power transmission industry can be
divided into three areas: MPT products; motors and generators;
and adjustable speed drives. We compete primarily in the MPT
area which, based on industry data, we estimate was a
$15.7 billion North American market and a
$39.3 billion global market in 2005.
The global MPT market is highly fragmented, with over 1,000
small manufacturers. While smaller companies tend to focus on
regional niche markets with narrow product lines, larger
companies that generate annual sales of over $100 million
generally offer a much broader range of products and have global
capabilities. The industry’s customer base is broadly
diversified across many sectors of the economy and typically
places a premium on factors such as quality, reliability,
availability and design and application engineering support. We
believe the most successful industry participants are those that
leverage their distribution network, their products’
reputations for quality and reliability and their service and
technical support capabilities to maintain attractive margins on
products and gain market share.
Our Strengths
Leading Market Shares and Brand Names. We believe we hold
the number one or number two market position in key products
across several of our core platforms. For example, according a
report published by the Global Industry Analysts, Inc., we are
the leading manufacturer of industrial clutches and brakes in
the world. We believe that over 50% of our sales are derived
from products where we hold the number one or number two share
in the markets we serve. Our brands, most of which have been in
existence for more than 50 years, are widely known in the
MPT product markets. Over 50% of our sales are generated from
products where, according to the most recently published Motion
Systems Design magazine survey, we have the number one or number
two brand recognition in the markets we serve.
Large Installed Base Supporting Aftermarket Sales. With a
history dating back to 1877 with the formation of Boston Gear,
we believe we benefit from one of the largest installed customer
bases in the industry. Given the moving, wearing nature of our
products, which require regular replacement, our large installed
base of products with a diversified group of end user customers
generates significant aftermarket replacement demand which
creates a recurring revenue stream. Many of our products serve
critical functions, where the cost of product failure would
substantially exceed any potential cost reduction benefits from
using cheaper, less proven parts. This end user preference and
consistently recurring replacement demand in turn help to
stabilize our revenue base from the cyclical nature of the
broader economy. For the six months ended June 30, 2006, we
estimate that approximately 41% of our revenues were derived
from aftermarket sales.
Diversified End-Markets. Our revenue base has balanced
exposure across a diverse mix of end user industries, including
energy, general industrial, material handling, mining,
transportation and turf and garden, which helps mitigate the
impact of business and economic cycles. In the first six months
of 2006, no single industry represented more than 11% of our
total sales. In addition, for the six months ended June 30,2006, approximately 28% of our sales were from outside North
America. Our geographic diversification is further enhanced
because some of our products sold into the North American market
are ultimately exported into international markets as part of
the final product sold by the customer.
Strong Relationship with Distributors and OEMs. We have
over 700 direct OEM customers and enjoy established, long-term
relationships with the leading MPT industrial distributors,
critical factors that contribute to our high base of recurring
aftermarket revenues. We sell our products through more than
3,000 distributor outlets worldwide. We believe our scale, end
user preference and expansive product line make our product
portfolio attractive to both large and multi-branch
distributors, as well as regional and independent distributors
in our industry.
Experienced, High-Caliber Management Team. We are led by
a highly experienced management team with over 425 years of
cumulative industrial business experience and an average of
14 years with our companies. Our CEO, Michael Hurt, has
over 39 years of experience in the MPT industry, while COO
Carl Christenson has over 25 years of experience. Our
management team has established a proven track record of
execution, successfully completing and integrating major
strategic acquisitions and delivering significant growth and
profitability.
The Altra Business System. We benefit from an established
culture of lean management emphasizing quality, delivery and
cost through the ABS. ABS is at the core of our
performance-driven culture and drives both our strategic
development and operational improvements. We estimate that in
the period from January 1, 2005 through June 30, 2006,
ABS has enabled us to achieve savings of over $5 million
through various initiatives, including:
(a) set-up time
reduction and productivity improvement, (b) finished goods
inventory reduction, (c) improved quality and reduction of
internal scrap, (d) on-time delivery improvement,
(e) utilizing value stream mapping to minimize work in
process inventory and increase productivity and
(f) headcount reductions. We believe these initiatives will
continue to provide us with recurring annual savings. We intend
to continue to aggressively implement operational excellence
initiatives by utilizing the ABS tools throughout our company.
Proven Product Development Capabilities. Our extensive
application engineering know-how drives both new and repeat
sales. Our broad portfolio of products, knowledge and expertise
across various MPT applications allows us to provide our
customers customized solutions to meet their specific needs. We
are highly focused on developing new products in response to
customer requirements. Recent new product development examples
include the Foot/ Deck Mount Kopper Kool Brake which was
designed for very high heat dissipation in extremely rugged
tensioning applications such as drawworks for oil and gas wells
and anchoring systems for on-shore and off-shore drilling
platforms.
Our Business Strategy
We intend to continue to increase our sales through organic
growth, expand our geographic reach and product offering through
strategic acquisitions and improve our profitability through
cost reduction initiatives. We seek to achieve these objectives
through the following strategies:
•
Leverage Our Sales and Distribution Network. We intend to
continue to leverage our relationships with our distributors to
gain shelf space, further integrate our recently acquired brands
with our core brands and sell new products. In addition, we
intend to continue to actively pursue new OEM opportunities with
innovative and cost-effective product designs and applications
to help maintain and grow our aftermarket revenues. We seek to
capitalize on customer brand preference for our products to
generate pull-through aftermarket demand from our distribution
channel. We believe this strategy also allows our distributors
to achieve high profit margins, further enhancing our preferred
position with them.
•
Focus our Strategic Marketing on New Growth
Opportunities. We intend to expand our emphasis on strategic
marketing to focus on new growth opportunities in key end user
markets. Through a systematic process that leverages our core
brands and products, we seek to identify attractive markets and
product niches, collect customer and market data, identify
market drivers, tailor product and service solutions to specific
market and customer requirements and deploy resources to gain
market share and drive future sales growth.
Accelerate New Product and Technology Development. We are
highly focused on developing new products across our business in
response to customer needs in various markets. Through our
strategic marketing efforts, we continually gain market and
customer intelligence, which feeds new product and technology
development initiatives that are designed to address particular
needs or problems customers identify. This focus has allowed us
to respond quickly to new market opportunities. In total, we
expect new products developed by us during the past three years
to generate approximately $40 million in revenues in 2006.
•
Capitalize on Growth and Sourcing Opportunities in the
Asia-Pacific Market. We intend to leverage our established
sales offices in China, Taiwan and Singapore, as well as add
representation in Japan and South Korea. We also intend to
expand our manufacturing presence in Asia beyond our current
plant in Shenzhen, China, to increase sales in the high-growth
Asia-Pacific region. This region also offers opportunities for
low-cost country sourcing of raw materials. During 2005, we
sourced approximately 12% of our purchases from low-cost
countries, resulting in average cost reductions of approximately
40% for these products. Within the next five years, we intend to
utilize our sourcing office in Shanghai to significantly
increase our current level of low-cost country sourced
purchases. We may also consider opportunities to outsource some
of our production from North American and Western European
locations to Asia.
•
Continue to Improve Operational and Manufacturing
Efficiencies through ABS. We believe we can continue to
improve profitability through cost control, overhead
rationalization, global process optimization, continued
implementation of lean manufacturing techniques and strategic
pricing initiatives. Our operating plan, based on manufacturing
centers of excellence, provides additional opportunities to
reduce costs by sharing best practices across geographies and
business lines and by consolidating purchasing processes. We
have implemented these principles with our recent acquisitions
of Hay Hall Holdings Limited, or Hay Hall, and Bear Linear LLC,
or Bear Linear, and intend to apply such principles to future
acquisitions.
•
Pursue Strategic Acquisitions that Complement our Strong
Platform. With our extensive MPT and motion control
products, our strong customer and distributor relationships and
our know-how in implementing lean enterprise initiatives through
ABS, we have an ideal platform for acquiring and successfully
integrating related businesses, as evidenced through our
acquisition and integration of Hay Hall and Bear Linear.
Management believes that there may be a number of attractive
potential acquisition candidates in the future, in part due to
the fragmented nature of the industry. We plan to continue our
disciplined pursuit of strategic acquisitions to accelerate our
growth, enhance our industry leadership and create value.
Risks Related to Our Strategies
You should also consider the many risks we face that could
mitigate our competitive strengths and limit our ability to
implement our business strategies, including:
•
if we are unable to address technological advances, or introduce
new or improved products to meet customer needs, we may be
unable to maintain or enhance our competitive positions with
customers and distributors;
•
if we are unable to continue to effectively implement our ABS
operating plan, outsource parts and manufacturing from low cost
countries, or introduce new cost effective manufacturing
techniques, we may not continue to achieve cost savings;
our ability to improve or sustain operating margins as a result
of cost-savings may be further impacted by cost increases in raw
materials to the extent we are unable to offset any such cost
increases with price increases on a timely basis;
•
in the past, we have grown through acquisitions and we may be
unable to identify attractive acquisition candidates,
successfully integrate acquired operations or realize the
intended benefits of our acquisitions; and
•
as we expand our international operations we may be further
subjected to risks not present in the U.S. markets such as
foreign and U.S. government regulations and restrictions,
tariffs and other trade barriers, foreign exchange risks and
other risks related to political, economic and social
instability.
Investing in our common stock involves significant risks. Our
ability to attain our objectives depends upon our success in
addressing risks relating to our business and the industries we
serve. You should carefully consider all of the information set
forth in this prospectus, including the specific factors set
forth under “Risk Factors,” before deciding whether to
invest in our common stock.
Our Formation, Recent Acquisitions and Other Transactions
The PTH Acquisition. On November 30, 2004, we
acquired our original core business through the acquisition of
Power Transmission Holding LLC, or PTH, from Warner Electric
Holding, Inc., a wholly-owned subsidiary of Colfax Corporation,
for $180.0 million in cash. PTH was organized in June 2004
to be the holding company for a group of companies comprising
the power transmission business of Colfax Corporation. We refer
to our acquisition of PTH as the “PTH Acquisition.”
The Kilian Transactions. On October 22, 2004, The
Kilian Company, or Kilian, a company formed at the direction of
Genstar Capital LLC, or Genstar Capital, our principal equity
sponsor, acquired Kilian Manufacturing Corporation from Timken
U.S. Corporation for $8.8 million in cash and the
assumption of $12.2 million of debt. At the completion of
the PTH Acquisition, (i) all of the outstanding shares of
Kilian capital stock were exchanged for approximately
$8.8 million of shares of our capital stock and Kilian and
its subsidiaries were transferred to our wholly owned
subsidiary, Altra Industrial Motion, Inc., or Altra Industrial,
and (ii) all outstanding debt of Kilian was retired with a
portion of the proceeds of the sale of Altra Industrial’s
9.0% senior secured notes due 2011. See “Description
of Indebtedness.”
The Hay Hall Acquisition. On February 10, 2006, we
acquired all of the outstanding share capital of Hay Hall
Holdings Limited, or Hay Hall, for $50.3 million in cash.
Hay Hall and its subsidiaries became our indirect wholly owned
subsidiaries.
In connection with our acquisition of Hay Hall in February 2006,
Altra Industrial issued £33.0 million of
111/4% senior
notes due 2013. See “Description of Indebtedness.”
The Bear Linear Acquisition. On May 18, 2006, Altra
Industrial acquired substantially all of the assets of Bear
Linear for $5.0 million in cash. Approximately
$3.5 million was paid at closing and the remaining
$1.5 million is payable over the next two and a half years.
Bear Linear manufactures high value-added linear actuators for
mobile off-highway and industrial applications.
Our Corporate Information
We are a holding company and conduct our operations through
Altra Industrial and its subsidiaries. We were incorporated in
Delaware in 2004. Our principal executive offices are located at
14 Hayward Street, Quincy, Massachusetts02171. Our telephone
number is (617) 328-3300. Our website is located at
www.altramotion.com. The information appearing on our website is
not part of, and is not incorporated into, this prospectus.
We are Altra Industrial’s parent company and own 100% of
Altra Industrial’s outstanding capital stock. Altra
Industrial, directly or indirectly, owns 100% of the capital
stock of its 44 subsidiaries. The following chart
illustrates a summary of our corporate structure:
Our Principal Equity Sponsor
Genstar Capital, LLC, formed in 1988 and based in
San Francisco, is a private equity firm that makes
investments in high-quality, middle-market companies. Genstar
Capital works in partnership with management as an advisor to us
to create long-term value for our stockholders. Genstar Capital
has over $900 million of committed capital under management
and significant experience investing with a focus on life
sciences, business services and industrial technology. Current
portfolio companies include American Pacific Enterprises LLC,
Andros Incorporated, AXIA Health Management LLC,
Fort Dearborn Company, Harlan Sprague Dawley, Inc.,
INSTALLS inc, LLC, North American Construction Group, OnCURE
Medical Corp., Panolam Industries International, Inc., PRA
International, Inc. (NASDAQ: PRAI), Propex Inc. and Woods
Equipment Company. Genstar Capital’s strategy is to make
control-oriented investments and acquire companies with
$50 million to $500 million in annual revenues in a
variety of growth, buyout, recapitalization and consolidation
transactions.
Genstar Capital will beneficially
own %
of our common stock after the offering,
or %
if the underwriters exercise their over-allotment option in full.
Trademarks
Warner Electric, Boston Gear, Kilian Manufacturing, Nuttall
Gear, Ameridrives, Wichita Clutch, Formsprag Clutch, Bibby
Transmissions, Stieber, Matrix International, Inertia Dynamics,
Twiflex Limited, Industrial Clutch, Huco Dynatork, Marland
Clutch, Delroyd Worm Gear, Bear Linear and Safetek are some of
our proprietary brand names and trademarks that appear in this
prospectus. All other trademarks appearing in this prospectus
are the property of their respective holders.
Common Stock to be offered by the selling stockholders
shares
Shares outstanding after the offering
shares
Use of proceeds
We estimate our net proceeds from this offering without exercise
of the over-allotment option will be approximately
$ million.
We may use these proceeds to repay a portion of our outstanding
indebtedness, for general working capital or to make strategic
acquisitions. We will not receive any of the proceeds from the
sale of shares by the selling stockholders.
Risk factors
See “Risk Factors” and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our common stock.
Dividend policy
We do not currently intend to pay cash dividends on shares of
our common stock.
NASDAQ symbol
“AIMC”
The number of shares of our common stock outstanding after the
offering excludes shares available for issuance under future
option grants under our option plan. Unless we indicate
otherwise, all information in this prospectus assumes the
underwriters do not exercise their option to purchase up
to shares
of our common stock to cover over-allotment.
Unless we indicate otherwise, all information in this prospectus
assumes an initial public offering price of
$ per
share, the midpoint of the estimated public offering price range
set forth on the cover page of this prospectus. All reference to
our common stock and per share amounts give effect to
the for reverse
stock split effected on the effective date of this offering and
assumes conversion of all of our outstanding preferred stock.
Our preferred stock will automatically convert into shares of
common stock on the effective date of this offering.
The term “Pro forma” refers to our operations after
giving effect to the Other Transactions and the Hay Hall
Acquisition after conversion into U.S. dollars at the
assumed exchange rates described herein (each as described under
“Our Formation, Recent Acquisitions and The Kilian
Transactions”), as if they had occurred as of the
applicable date for balance sheet purposes and the first day of
the applicable period for results of operations purposes.
(2)
The combined results were prepared by adding the results of
Altra from December 1 to December 31, 2004 to those
from our Predecessor for the 11 month period ending
November 31, 2004. This presentation is not in accordance
with GAAP. The primary differences between our Predecessor and
the successor entity are the inclusion of Kilian in the
successor and the successor’s book basis has been stepped
up to fair value such that the successor has additional
depreciation, amortization and financing costs. The results of
Kilian are included in Altra for the period from
December 1, 2004 through December 31, 2004. Management
believes that this combined basis presentation provides useful
information for our investors in the comparison to Predecessor
trends and operating results. The combined results are not
necessarily indicative of what our results of operations may
have been if the
PTH Acquisition and Kilian Transactions had been consummated
earlier, nor should they be construed as being a representation
of our future results of operations.
(3)
EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization. EBITDA is used by us as a
performance measure. Management believes that EBITDA provides
relevant information for our investors because it is useful for
trending, analyzing and benchmarking the performance and value
of our business. Management also believes that EBITDA is useful
in assessing current performance compared with the historical
performance of our Predecessor because significant line items
within our income statements such as depreciation, amortization
and interest expense were significantly impacted by the PTH
Acquisition. Internally, EBITDA is used as a financial measure
to assess the operating performance and is an important measure
in our incentive compensation plans. EBITDA has important
limitations, and should not be considered in isolation or as a
substitute for analysis of our results as reported under GAAP.
For example, EBITDA does not reflect:
•
cash expenditures, or future requirements, for capital
expenditures or contractual commitments;
•
changes in, or cash requirements for, working capital needs;
•
the significant interest expense, or the cash requirements
necessary to service interest or principal payments, on debts;
•
tax distributions that would represent a reduction in cash
available to us; and
•
any cash requirements for assets being depreciated and amortized
that may have to be replaced in the future.
The following table is a reconciliation of our net income to
EBITDA (in thousands):
EBITDA is not a recognized measurement under GAAP, and when
analyzing our operating performance, you should use EBITDA in
addition to, and not as an alternative for, income (loss) from
operations and net income (loss) (as determined in accordance
with GAAP). Because not all companies use identical
calculations, our presentation of EBITDA may not be comparable
to similarly titled measures of other companies. The amounts
shown for EBITDA also differ from the amounts calculated under
similarly titled definitions in our debt instruments, which are
further adjusted to reflect certain other cash and non-cash
charges and are used to determine compliance with financial
covenants and our ability to engage in certain activities, such
as incurring additional debt and making certain restricted
payments.
To compensate for the limitations of EBITDA, we utilize several
GAAP measures to review our performance. These GAAP measures
include, but are not limited to, net income (loss), income
(loss) from operations, cash provided by (used in) operations,
cash provided by (used in) investing activities and cash
provided by (used in) financing activities. These important GAAP
measures allow management to, among other things, review and
understand our use of cash from period to period, compare our
operations with competitors on a consistent basis and understand
the revenues and expenses matched to each other
for the applicable reporting period. We believe that the use of
these GAAP measures, supplemented by the use of EBITDA, allows
us to have a greater understanding of our performance and allows
us to adapt to changing trends and business opportunities.
(4)
Includes expenses relating to non-cash inventory
step-up costs,
management fees and transaction expenses associated with
acquisitions which, if subtracted out, would result in a higher
EBITDA. Inventory
step-up costs accounted
for $2.3 million, $1.7 million and $1.7 million,
respectively, for the six months ended June 30, 2006, the
twelve months ended December 31, 2005 and the Combined
Twelve Months Ended December 31, 2004. Management fees
consisted of $0.5 million, $1.0 million and
$0.1 million, respectively, for the six months ended
June 30, 2006, the twelve months ended December 31,2005 and the Combined Twelve Months Ended December 31,2004. Transaction fees and expenses associated with acquisitions
accounted for $1.0 million and $4.4 million,
respectively, for the six months ended June 30, 2006 and
the Combined Twelve Months Ended December 31, 2004.
(5)
Working capital consists of total current assets less total
current liabilities.
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors and all
other information contained in this prospectus, including our
financial statements and the related notes, before investing in
our common stock. If any of the following risks materialize, our
business, financial condition or results of operations could be
materially harmed. In that case, the trading price of our common
stock could decline significantly and you could lose some or all
of your investment.
Risks Related to Our Business
We operate in the highly competitive mechanical power
transmission industry and if we are not able to compete
successfully our business may be significantly harmed.
We operate in highly fragmented and very competitive markets in
the MPT industry. Some of our competitors have achieved
substantially more market penetration in certain of the markets
in which we operate, such as helical gear drives and couplings,
and some of our competitors are larger than us and have greater
financial and other resources. With respect to certain of our
products, we compete with divisions of our OEM customers.
Competition in our business lines is based on a number of
considerations, including quality, reliability, pricing,
availability and design and application engineering support. Our
customers increasingly demand a broad product range, and we must
continue to develop our expertise in order to manufacture and
market these products successfully. To remain competitive, we
will need to invest regularly in manufacturing, customer service
and support, marketing, sales, research and development and
intellectual property protection. In the future we may not have
sufficient resources to continue to make such investments and
may not be able to maintain our competitive position within each
of the markets we serve. We may have to adjust the prices of
some of our products to stay competitive.
Additionally, some of our larger, more sophisticated customers
are attempting to reduce the number of vendors from which they
purchase in order to increase their efficiency. If we are not
selected to become one of these preferred providers, we may lose
market share in some of the markets in which we compete.
There is substantial and continuing pressure on major OEMs and
larger distributors to reduce costs, including the cost of
products purchased from outside suppliers such as us. As a
result of cost pressures from our customers, our ability to
compete depends in part on our ability to generate production
cost savings and, in turn, find reliable, cost effective outside
suppliers to source components or manufacture our products. If
we are unable to generate sufficient cost savings in the future
to offset price reductions, then our gross margin could be
materially adversely affected.
Changes in general economic conditions or the cyclical
nature of our markets could harm our operations and financial
performance.
Our financial performance depends, in large part, on conditions
in the markets that we serve and on the U.S. and global
economies in general. Some of the markets we serve are highly
cyclical, such as the metals, mining, industrial equipment and
energy markets. In addition, these markets may experience
cyclical downturns. The present uncertain economic environment
may result in significant
quarter-to-quarter
variability in our performance. Any sustained weakness in demand
or continued downturn or uncertainty in the economy generally
would further reduce our sales and profitability.
We rely on independent distributors and the loss of these
distributors could adversely affect our business.
In addition to our direct sales force and manufacturer sales
representatives, we depend on the services of independent
distributors to sell our products and provide service and
aftermarket support to our customers. We support an extensive
distribution network, with over 3,000 distributor locations
worldwide. Rather than serving as passive conduits for delivery
of product, our independent distributors are active participants
in the overall competitive dynamics in the MPT industry. During
the six months ended
June 30, 2006, approximately 32% of our net sales were
generated through independent distributors. In particular, sales
through our largest distributor accounted for approximately 8%
of our net sales for the six months ended June 30, 2006.
Almost all of the distributors with whom we transact business
offer competitive products and services to our customers. In
addition, the distribution agreements we have are typically
non-exclusive and cancelable by the distributor after a short
notice period. The loss of any major distributor or a
substantial number of smaller distributors or an increase in the
distributors’ sales of our competitors’ products to
our customers could materially reduce our sales and profits.
We must continue to invest in new technologies and
manufacturing techniques; however, our ability to develop or
adapt to changing technology and manufacturing techniques is
uncertain and our failure to do so could place us at a
competitive disadvantage.
The successful implementation of our business strategy requires
us to continuously invest in new technologies and manufacturing
techniques to evolve our existing products and introduce new
products to meet our customers’ needs in the industries we
serve and want to serve. For example, motion control products
offer more precise positioning and control compared to
industrial clutches and brakes. If manufacturing processes are
developed to make motion control products more price competitive
and less complicated to operate, our customers may decrease
their purchases of MPT products.
Our products are characterized by performance and specification
requirements that mandate a high degree of manufacturing and
engineering expertise. If we fail to invest in improvements to
our technology and manufacturing techniques to meet these
requirements, our business could be at risk. We believe that our
customers rigorously evaluate their suppliers on the basis of a
number of factors, including:
•
product quality and availability;
•
price competitiveness;
•
technical expertise and development capability;
•
reliability and timeliness of delivery;
•
product design capability;
•
manufacturing expertise; and
•
sales support and customer service.
Our success depends on our ability to invest in new technologies
and manufacturing techniques to continue to meet our
customers’ changing demands with respect to the above
factors. We may not be able to make required capital
expenditures and, even if we do so, we may be unsuccessful in
addressing technological advances or introducing new products
necessary to remain competitive within our markets. Furthermore,
our own technological developments may not be able to produce a
sustainable competitive advantage.
Our operations are subject to international risks that
could affect our operating results.
Our net sales outside North America represented approximately
28% of our total net sales for the six months ended
June 30, 2006 and we expect these sales to increase in the
future due to the Hay Hall Acquisition. In addition, we sell
products to domestic customers for use in their products sold
overseas. Our business is subject to risks associated with doing
business internationally, and our future results could be
materially adversely affected by a variety of factors, including:
•
fluctuations in currency exchange rates;
•
exchange rate controls;
•
compliance with U.S. Department of Commerce export controls;
tariffs or other trade protection measures and import or export
licensing requirements;
•
potentially negative consequences from changes in tax laws;
•
interest rates;
•
unexpected changes in regulatory requirements;
•
changes in foreign intellectual property law;
•
differing labor regulations;
•
requirements relating to withholding taxes on remittances and
other payments by subsidiaries;
•
restrictions on our ability to own or operate subsidiaries, make
investments or acquire new businesses in various jurisdictions;
•
potential political instability and the actions of foreign
governments;
•
restrictions on our ability to repatriate dividends from our
subsidiaries; and
•
exposure to liabilities under the Foreign Corrupt Practices Act.
As we continue to expand our business globally, our success will
depend, in large part, on our ability to anticipate and
effectively manage these and other risks associated with our
international operations. However, any of these factors could
materially adversely affect our international operations and,
consequently, our operating results.
Our operations depend on production facilities throughout
the world, many of which are located outside the United States
and are subject to increased risks of disrupted production
causing delays in shipments and loss of customers and
revenue.
We operate businesses with manufacturing facilities worldwide,
many of which are located outside the United States including in
Canada, China, France, Germany, England and Scotland. Serving a
global customer base requires that we place more production in
emerging markets to capitalize on market opportunities and cost
efficiencies. Our international production facilities and
operations could be disrupted by a natural disaster, labor
strike, war, political unrest, terrorist activity or public
health concerns, particularly in emerging countries that are not
well-equipped to handle such occurrences.
Material weaknesses in our internal controls over
financial reporting have been identified which could result in a
decrease in the value of our common stock.
In connection with their audit of our fiscal 2005 financial
statements, our independent auditors expressed concerns that as
of the date of their opinion we were unable to report accurate
financial information in a timely manner due to resource
limitations of our corporate financial staffing and the impact
of this limitation on our ability to timely report our financial
information. Based upon the timely financial reporting required
of a public company, the outside auditors informed senior
management and the Audit Committee of our Board of Directors
that they believe this is a material weakness in our internal
controls. We have actively taken steps to address this material
weakness. These steps include the recent hiring of a Director of
Internal Audit and Securities and Exchange Commission Manager,
or SEC Manager and our prior hiring of a Corporate Controller,
Director of Taxation and a Corporate Accountant. We believe that
with the addition of these resources we should be able to
deliver financial information on a timely basis.
However, we cannot assure you that our efforts to correct this
identified material weakness will be successful or that we will
not have other weaknesses in the future. If we fail to correct
the existing material weaknesses or have material weaknesses in
the future, it could affect the financial results that we report
or create a perception that those financial results do not
accurately state our financial condition or
results of operations. Either of those events could have an
adverse effect on the value of our common stock.
If we are unable to complete our assessment as to the
adequacy of our internal controls over financial reporting as of
December 31, 2007 as required by Section 404 of the
Sarbanes-Oxley Act of 2002, or if material weaknesses are
identified and reported, investors could lose confidence in the
reliability of our financial statements, which could result in a
decrease in the value of your investment.
As directed by Section 404 of the Sarbanes-Oxley Act of
2002, the Securities and Exchange Commission, or SEC, adopted
rules requiring public companies to include in their annual
reports on
Form 10-K a report
of management on the company’s internal controls over
financial reporting, including management’s assessment of
the effectiveness of the company’s internal controls over
financial reporting as of the company’s fiscal year end. In
addition, the accounting firm auditing a public company’s
financial statements must also attest to, and report on,
management’s assessment of the effectiveness of the
company’s internal controls over financial reporting as
well as the operating effectiveness of the company’s
internal controls. While we will expend significant resources in
developing the necessary documentation and testing procedures,
fiscal 2007 will be the first year for which we must complete
the assessment and undergo the attestation process required by
Section 404 and there is a risk that we may not comply with
all of its requirements, considering the material weakness
related to our financial staffing. If we do not timely complete
our assessment or if our internal controls are not designed or
operating effectively as required by Section 404, our
independent auditors may either disclaim an opinion as it
relates to management’s assessment of the effectiveness of
its internal controls or may issue a qualified opinion on the
effectiveness of our internal controls. It is possible that
material weaknesses in our internal controls could be found. If
we are unable to remediate any material weaknesses by
December 31, 2007, our independent auditors would be
required to issue an adverse opinion on our internal controls.
If our independent auditors disclaim an opinion as to the
effectiveness of our internal controls or if they render an
adverse opinion due to material weaknesses in our internal
controls, then investors may lose confidence in the reliability
of our financial statements, which could cause the market price
of our common stock to decline and make it more difficult for us
to raise capital in the future.
We rely on estimated forecasts of our OEM customers’
needs, and inaccuracies in such forecasts could materially
adversely affect our business.
We generally sell our products pursuant to individual purchase
orders instead of under long-term purchase commitments.
Therefore, we rely on estimated demand forecasts, based upon
input from our customers, to determine how much material to
purchase and product to manufacture. Because our sales are based
on purchase orders, our customers may cancel, delay or otherwise
modify their purchase commitments with little or no consequence
to them and with little or no notice to us. For these reasons,
we generally have limited visibility regarding our
customers’ actual product needs. The quantities or timing
required by our customers for our products could vary
significantly. Whether in response to changes affecting the
industry or a customer’s specific business pressures, any
cancellation, delay or other modification in our customers’
orders could significantly reduce our revenue, impact our
working capital, cause our operating results to fluctuate from
period to period and make it more difficult for us to predict
our revenue. In the event of a cancellation or reduction of an
order, we may not have enough time to reduce operating expenses
to minimize the effect of the lost revenue on our business and
we may purchase too much inventory and spend more capital than
expected.
The materials used to produce our products are subject to
price fluctuations that could increase costs of production and
adversely affect our profitability.
The materials used to produce our products, especially copper
and steel, are sourced on a global or regional basis and the
prices of those materials are susceptible to price fluctuations
due to supply and demand trends, transportation costs,
government regulations and tariffs, changes in currency exchange
rates, price controls, the economic climate and other unforeseen
circumstances. As of the six months
ended June 30, 2006, approximately 54% of our cost of goods
sold consisted of the purchase of raw materials required for our
manufacturing processes. From the first quarter of 2004 to the
first quarter of 2006, the average price of copper and steel has
increased approximately 84% and 46%, respectively. If we are
unable to continue to pass a substantial portion of such price
increases on to our customers on a timely basis, our future
profitability may be materially and adversely affected. In
addition, passing through these costs to our customers may also
limit our ability to increase our prices in the future.
We face potential product liability claims relating to
products we manufacture or distribute, which could result in our
having to expend significant time and expense to defend these
claims and to pay material claims or settlement amounts.
We face a business risk of exposure to product liability claims
in the event that the use of our products is alleged to have
resulted in injury or other adverse effects. We currently have
several product liability claims against us with respect to our
products. Although we currently maintain product liability
insurance coverage, we may not be able to obtain such insurance
on acceptable terms in the future, if at all, or obtain
insurance that will provide adequate coverage against potential
claims. Product liability claims can be expensive to defend and
can divert the attention of management and other personnel for
long periods of time, regardless of the ultimate outcome. An
unsuccessful product liability defense could have a material
adverse effect on our business, financial condition, results of
operations or our ability to make payments under our debt
obligations when due. In addition, we believe our business
depends on the strong brand reputation we have developed. In the
event that our reputation is damaged, we may face difficulty in
maintaining our pricing positions with respect to some of our
products, which would reduce our sales and profitability.
We may be subject to work stoppages at our facilities, or
our customers may be subjected to work stoppages, which could
seriously impact our operations and the profitability of our
business.
As of June 30, 2006, we had approximately 2,600 full time
employees, of whom approximately 41% were employed abroad.
Approximately 300 of our North American employees and 45 of our
employees in Scotland are represented by labor unions. In
addition, our employees in Europe are generally represented by
local and national social works councils that hold discussions
with employer industry associations regarding wage and work
issues every two to three years. Our European facilities,
particularly those in France and Germany, may participate in
such discussions and be subject to any agreements reached with
employees.
Our four U.S. collective bargaining agreements will expire
on August 10, 2007, September 19, 2007, June 2,2008 and February 1, 2009. Our union agreement in Scotland
expires on March 31, 2007. We may be unable to renew these
agreements on terms that are satisfactory to us, if at all. In
addition, two of our four U.S. collective bargaining
agreements contain provisions for additional, potentially
significant, lump-sum severance payments to all employees
covered by the agreements who are terminated as the result of a
plant closing.
If our unionized workers or those represented by a works council
were to engage in a strike, work stoppage or other slowdown in
the future, we could experience a significant disruption of our
operations. Such disruption could interfere with our ability to
deliver products on a timely basis and could have other negative
effects, including decreased productivity and increased labor
costs. In addition, if a greater percentage of our work force
becomes unionized, our business and financial results could be
materially adversely affected. Many of our direct and indirect
customers have unionized work forces. Strikes, work stoppages or
slowdowns experienced by these customers or their suppliers
could result in slowdowns or closures of assembly plants where
our products are used and could cause cancellation of purchase
orders with us or otherwise result in reduced revenues from
these customers.
Changes in employment laws could increase our costs and
may adversely affect our business.
Various federal, state and international labor laws govern our
relationship with employees and affect operating costs. These
laws include minimum wage requirements, overtime, unemployment
tax rates, workers’ compensation rates paid, leaves of
absence, mandated health and other benefits, and citizenship
requirements. Significant additional government-imposed
increases or new requirements in these areas could materially
affect our business, financial condition, operating results or
cash flow.
In the event our employee-related costs rise significantly, we
may have to curtail the number of our employees or shut down
certain manufacturing facilities. Any such actions would be not
only costly but could also materially adversely affect our
business.
We depend on the services of key executives, the loss of
whom could materially harm our business.
Our senior executives are important to our success because they
are instrumental in setting our strategic direction, operating
our business, maintaining and expanding relationships with
distributors, identifying, recruiting and training key
personnel, identifying expansion opportunities and arranging
necessary financing. Losing the services of any of these
individuals could adversely affect our business until a suitable
replacement could be found. We believe that our senior
executives could not easily be replaced with executives of equal
experience and capabilities. Although we have entered into
employment agreements with certain of our key domestic
executives, we cannot prevent our key executives from
terminating their employment with us. We do not maintain key
person life insurance policies on any of our executives.
If we lose certain of our key sales, marketing or
engineering personnel, our business may be adversely
affected.
Our success depends on our ability to recruit, retain and
motivate highly skilled sales, marketing and engineering
personnel. Competition for these persons in our industry is
intense and we may not be able to successfully recruit, train or
retain qualified personnel. If we fail to retain and recruit the
necessary personnel, our business and our ability to obtain new
customers, develop new products and provide acceptable levels of
customer service could suffer. If certain of these key personnel
were to terminate their employment with us, we may experience
difficulty replacing them, and our business could be harmed.
We are subject to environmental laws that could impose
significant costs on us and the failure to comply with such laws
could subject us to sanctions and material fines and
expenses.
We are subject to a variety of federal, state, local, foreign
and provincial environmental laws and regulations, including
those governing the discharge of pollutants into the air or
water, the management and disposal of hazardous substances and
wastes and the responsibility to investigate and cleanup
contaminated sites that are or were owned, leased, operated or
used by us or our predecessors. Some of these laws and
regulations require us to obtain permits, which contain terms
and conditions that impose limitations on our ability to emit
and discharge hazardous materials into the environment and
periodically may be subject to modification, renewal and
revocation by issuing authorities. Fines and penalties may be
imposed for non-compliance with applicable environmental laws
and regulations and the failure to have or to comply with the
terms and conditions of required permits. From time to time our
operations may not be in full compliance with the terms and
conditions of our permits. We periodically review our procedures
and policies for compliance with environmental laws and
requirements. We believe that our operations generally are in
material compliance with applicable environmental laws,
requirements and permits and that any non-compliances would not
be expected to result in us incurring material liability or cost
to achieve compliance. Historically, the costs of achieving and
maintaining compliance with environmental laws, and requirements
and permits have not been material; however, the operation of
manufacturing plants entails risks in these areas, and a failure
by us to comply with applicable environmental laws, regulations,
or permits could result in civil or criminal fines, penalties,
enforcement actions, third party claims for property damage and
personal injury, requirements to clean up property or to pay for
the costs
of cleanup, or regulatory or judicial orders enjoining or
curtailing operations or requiring corrective measures,
including the installation of pollution control equipment or
remedial actions. Moreover, if applicable environmental laws and
regulations, or the interpretation or enforcement thereof,
become more stringent in the future, we could incur capital or
operating costs beyond those currently anticipated.
Certain environmental laws in the United States, such as the
federal Superfund law and similar state laws, impose liability
for the cost of investigation or remediation of contaminated
sites upon the current or, in some cases, the former site owners
or operators and upon parties who arranged for the disposal of
wastes or transported or sent those wastes to an off-site
facility for treatment or disposal, regardless of when the
release of hazardous substances occurred or the lawfulness of
the activities giving rise to the release. Such liability can be
imposed without regard to fault and, under certain
circumstances, can be joint and several, resulting in one party
being held responsible for the entire obligation. As a practical
matter, however, the costs of investigation and remediation
generally are allocated among the viable responsible parties on
some form of equitable basis. Liability also may include damages
to natural resources. We are not listed as a potentially
responsible party in connection with any sites we currently or
formerly owned or operated or any off-site waste disposal
facility. There is contamination at some of our current
facilities, primarily related to historical operations at those
sites, for which we could be liable under these environmental
laws. The potential for contamination exists due to historic
activities at our other current or former sites. We currently
are not undertaking any remediation or investigations and our
costs or liability in connection with potential contamination
conditions at our facilities cannot be predicted at this time
because the potential existence of contamination has not been
investigated or not enough is known about the environmental
conditions or likely remedial requirements. Currently, other
parties with contractual liability are addressing or have plans
or obligations to address those contamination conditions that
may pose a material risk to human health, safety or the
environment. In addition, while we attempt to evaluate the risk
of liability at the time we acquire them, there may be
environmental conditions currently unknown to us relating to our
prior, existing or future sites or operations or those of
predecessor companies whose liabilities we may have assumed or
acquired which could have a material adverse effect on our
business.
We are being indemnified, or expect to be indemnified by third
parties subject to certain caps or limitations on the
indemnification, for certain environmental costs and
liabilities. Accordingly, based on the indemnification and the
experience with similar sites of the environmental consultants
who we have hired, we do not expect such costs and liabilities
to have a material adverse effect on our business, operations or
earnings. We cannot assure you, however, that these third
parties will in fact satisfy their indemnification obligations.
If these third parties become unable to, or otherwise do not,
comply with their respective indemnity obligations, or if
certain contamination or other liability for which we are
obligated is not subject to these indemnities, we could become
subject to significant liabilities.
We face additional costs associated with our
post-retirement and post-employment obligations to employees
which could have an adverse effect on our financial
condition.
As part of the PTH Acquisition, we agreed to assume pension plan
liabilities for active U.S. employees under the Retirement
Plan for Power Transmission Employees of Colfax, the Ameridrives
International Pension Fund for Hourly Employees Represented by
United Steelworkers of America, Local 3199-10, and the Colfax PT
Pension Plan, collectively referred to as the Prior Plans. We
have established a defined benefit plan, or New Plan, mirroring
the benefits provided under the Prior Plans. The New Plan
accepted a spinoff of assets and liabilities from the Prior
Plans, in accordance with Section 414(l) of the Internal
Revenue Code, or the Code, with such assets and liabilities
relating to active U.S. employees as of the closing of the
PTH Acquisition. Given the funded status of the Prior Plans and
the asset allocation requirements of Code Section 414(l),
liabilities under the New Plan greatly exceed the assets that
were transferred from the Prior Plans. The accumulated benefit
obligation (not including accumulated benefit obligations of
non-U.S. pension
plans in the amount of $2.9 million) was approximately
$24.8 million as of December 31, 2005 while the fair
value of plan assets was approximately $5.8 million as of
December 31, 2005. As the New Plan has a considerable
funding deficit, the cash funding requirements are expected to
be substantial over the next several years, and could have a
material adverse effect on our financial condition. As of
June 30, 2006, funding requirements were estimated to be
$5.5 million during the remainder of 2006,
$3.6 million in 2007, $2.5 million in 2008 and
$1.9 million annually until 2011. These amounts are based
on actuarial assumptions and actual amounts could be materially
different.
Additionally, as part of the PTH Acquisition, we agreed to
assume all pension plan liabilities related to
non-U.S. employees.
The accumulated benefit obligations of
non-U.S. pension
plans were approximately $2.9 million as of
December 31, 2005. There are no assets associated with
these plans.
Finally, as part of the PTH Acquisition, we also agreed to
assume all post-employment and post-retirement welfare benefit
obligations with respect to active U.S. employees. The
benefit obligation for post-retirement benefits, which are not
funded, was approximately $12.8 million as of June 30,2006.
For a description of the post-retirement and post-employment
costs, see Note 9 to the audited financial statements
included elsewhere in this prospectus.
Our future success depends on our ability to integrate
acquired companies and manage our growth effectively.
Our growth through acquisitions has placed, and will continue to
place, significant demands on our management, operational and
financial resources. Realization of the benefits of acquisitions
often requires integration of some or all of the acquired
companies’ sales and marketing, distribution,
manufacturing, engineering, finance and administrative
organizations. Integration of companies demands substantial
attention from senior management and the management of the
acquired companies. In addition, we will continue to pursue new
acquisitions, some of which could be material to our business if
completed. We may not be able to integrate successfully our
recent acquisitions or any future acquisitions, operate these
acquired companies profitably, or realize the potential benefits
from these acquisitions.
We may not be able to protect our intellectual property
rights, brands or technology effectively, which could allow
competitors to duplicate or replicate our technology and could
adversely affect our ability to compete.
We rely on a combination of patent, trademark, copyright and
trade secret laws in the United States and other jurisdictions,
as well as on license, non-disclosure, employee and consultant
assignment and other agreements and domain names registrations
in order to protect our proprietary technology and rights.
Applications for protection of our intellectual property rights
may not be allowed, and the rights, if granted, may not be
maintained. In addition, third parties may infringe or challenge
our intellectual property rights. In some cases, we rely on
unpatented proprietary technology. It is possible that others
will independently develop the same or similar technology or
otherwise obtain access to our unpatented technology. In
addition, in the ordinary course of our operations, we pursue
potential claims from time to time relating to the protection of
certain products and intellectual property rights, including
with respect to some of our more profitable products. Such
claims could be time consuming, expensive and divert resources.
If we are unable to maintain the proprietary nature of our
technologies or proprietary protection of our brands, our
ability to market or be competitive with respect to some or all
of our products may be affected, which could reduce our sales
and profitability.
Goodwill comprises a significant portion of our total
assets, and if we determine that goodwill has become impaired in
the future, net income in such years may be materially and
adversely affected.
Goodwill represents the excess of cost over the fair market
value of net assets acquired in business combinations. We review
goodwill and other intangibles annually for impairment and any
excess in carrying value over the estimated fair value is
charged to the results of operations. Reduction in net income
resulting from the write down or impairment of goodwill would
affect financial results and could have a material and adverse
impact upon the market price of our common stock.
Unplanned repairs or equipment outages could interrupt
production and reduce income or cash flow.
Unplanned repairs or equipment outages, including those due to
natural disasters, could result in the disruption of our
manufacturing processes. Any interruption in our manufacturing
processes would interrupt our production of products, reduce our
income and cash flow and could result in a material adverse
effect on our business and financial condition.
Our operations are highly dependent on information
technology infrastructure and failures could significantly
affect our business.
We depend heavily on our information technology, or IT,
infrastructure in order to achieve our business objectives. If
we experience a problem that impairs this infrastructure, such
as a computer virus, a problem with the functioning of an
important IT application, or an intentional disruption of our IT
systems by a third party, the resulting disruptions could impede
our ability to record or process orders, manufacture and ship in
a timely manner, or otherwise carry on our business in the
ordinary course. Any such events could cause us to lose
customers or revenue and could require us to incur significant
expense to eliminate these problems and address related security
concerns.
Our leverage could adversely affect our financial health
and make us vulnerable to adverse economic and industry
conditions.
We have incurred indebtedness that is substantial relative to
our stockholders’ investment. As of June 30, 2006, we
had approximately $233.4 million of indebtedness
outstanding and $27.6 million available under lines of
credit. Our indebtedness has important consequences; for
example, it could:
•
make it more challenging for us to obtain additional financing
to fund our business strategy and acquisitions, debt service
requirements, capital expenditures and working capital;
•
increase our vulnerability to interest rate changes and general
adverse economic and industry conditions;
•
require us to dedicate a substantial portion of our cash flow
from operations to service our indebtedness, thereby reducing
the availability of our cash flow to finance acquisitions and to
fund working capital, capital expenditures, research and
development efforts and other general corporate activities;
•
make it difficult for us to fulfill our obligations under our
credit and other debt agreements;
•
limit our flexibility in planning for, or reacting to, changes
in our business and our markets; and
•
place us at a competitive disadvantage relative to our
competitors that have less debt.
Substantially all of our assets have been pledged as collateral
against any outstanding borrowings under the credit agreement
governing our senior revolving credit facility, or the Credit
Agreement. In addition, our senior revolving credit facility
requires us to maintain specified financial ratios and satisfy
certain financial condition tests, which may require that we
take action to reduce our debt or to act in a manner contrary to
our business objectives. If an event of default under our senior
revolving credit facility occurs, then the lenders could declare
all amounts outstanding under the senior revolving credit
facility, together with accrued interest, to be immediately due
and payable. In addition, our senior revolving credit facility
and the indentures governing our 9% senior secured notes
and our
111/4% senior
notes have cross-default provisions such that a default under
any one would constitute an event of default in any of the
others.
We are subject to tax laws and regulations in many
jurisdictions and the inability to successfully defend claims
from taxing authorities related to our current or acquired
businesses could adversely affect our operating results and
financial position.
We conduct business in many countries, which requires us to
interpret the income tax laws and rulings in each of those
taxing jurisdictions. Due to the subjectivity of tax laws
between those jurisdictions as well as the subjectivity of
factual interpretations, our estimates of income tax liabilities
may differ from actual payments or assessments. Claims from
taxing authorities related to these differences could have an
adverse impact on our operating results and financial position.
Genstar Capital Partners III, L.P. and
Stargen III, L.P. (together, the Genstar Funds) control us
and may have conflicts of interest with our other stockholders
in the future.
The Genstar Funds own 65.8% of our equity and are able to
control our affairs. After this offering, the Genstar Funds will
beneficially
own %
of our common stock,
or %
if the underwriters exercise their over-allotment option in
full. As a result, the Genstar Funds will continue to be able to
control the election and removal of our directors and determine
our corporate and management policies, including potential
mergers or acquisitions, payment of dividends, asset sales and
other significant corporate transactions. This concentration of
ownership may delay or deter possible changes in control of our
company, which may reduce the market price of our common stock.
We cannot assure you that the interests of the Genstar Funds
will coincide with your interests.
Risks Related to this Offering
The market price of our common stock may be volatile,
which could cause the value of your investment to
decline.
Securities markets worldwide experience significant price and
volume fluctuations. This market volatility, as well as general
economic, market or political conditions, war and incidents of
terrorism and acts of God could reduce the market price of our
common stock notwithstanding our operating performance. In
addition, our operating results could be below the expectations
of public market analysts and investors and, in response, the
market price of our common stock could decrease significantly.
You may be unable to resell your shares of our common stock at
or above the initial public offering price.
Furthermore, following periods of market volatility in the price
of a company’s securities, security holders have sometimes
instituted class action litigation. If the market value of our
stock experiences adverse fluctuations and we become involved in
this type of litigation, regardless of the outcome, we could
incur substantial legal costs and our management’s
attention could be diverted from the operation of our business,
causing our business to suffer.
We cannot assure you that an active trading market will
develop for our stock.
There has never been a public market for our common stock. While
we intend to file an application for the listing of our common
stock on the NASDAQ, an active public market for our common
stock may not develop or be sustained after this offering. If a
market does not develop or is not sustained, it may be difficult
for you to sell your shares of common stock at a price that is
attractive to you or at all. The initial public offering price
of our common stock will be determined through negotiations
between the underwriters, us and the selling stockholders and
may not be indicative of the price that will prevail in the open
market following this offering.
A substantial number of our shares of common stock may be
sold in the public market by our principal stockholders, which
could adversely affect the market price of our shares, which in
turn could negatively impact your investment in us.
Future sales of substantial amounts of our shares of common
stock in the public market (or the perception that such sales
may occur) could adversely affect market prices of our common
stock prevailing
from time to time and could impair our ability to raise capital
through future sales of our equity or equity-related securities
at a time and price that we deem appropriate. Such sales could
create public perception of difficulties or problems with our
business.
Upon completion of this offering, we will
have shares
of common stock issued and outstanding and no options to
purchase shares of our common stock. All of the shares we and
the selling stockholders are selling in this offering, plus any
shares sold upon the exercise of the underwriters’
over-allotment option, will be freely tradeable without
restriction under the Securities Act of 1933, as amended, or the
Securities Act, unless purchased by our affiliates. Upon
completion of this
offering, shares
of our common stock will be restricted or controlled securities
within the meaning of Rule 144 under the Securities Act
( shares
of common stock if the underwriters’ over-allotment option
is exercised in full). The rules affecting the sale of these
securities are summarized under “Shares Eligible for Future
Sale.” Following this offering, without giving effect to
the over-allotment option, stockholders that collectively
own shares
of our common stock will have registration rights with respect
to their shares. See “Certain Relationships and Related
Transactions — Registration Rights Agreement.”
Subject to certain exceptions described under the caption
“Underwriting,” we and all of our directors and
executive officers and certain of our stockholders have agreed
not to offer, sell or agree to sell, directly or indirectly, any
shares of common stock without the permission of the
underwriters for a period of 180 days from the date of this
prospectus. The 180-day
restricted period will be automatically extended if
(1) during the last 17 days of the
180-day restricted
period we issue an earning release or material news or a
material event relating to our business occurs or (2) prior
to the expiration of the
180-day restricted
period, we announce that we will release earnings results or
become aware that material news or a material event will occur
during the 16-day
period beginning on the last day of the
180-day restricted
period, in which case the restrictions described above will
continue to apply until the expiration of the
18-day period beginning
on the issuance of the earnings release or the occurrence of the
material news or material event. When this period expires we and
our locked-up
stockholders will be able to sell our shares in the public
market. Sales of a substantial number of such shares upon
expiration, or early release, of the
lock-up (or the
perception that such sales may occur) could cause our share
price to decline.
Our principal stockholders hold (and following completion of
this offering will continue to hold) shares of our common stock
in which they have a very large unrealized gain, and these
stockholders may wish, to the extent they may permissibly do so,
to realize some or all of that gain relatively quickly by
selling some or all of their shares, which could cause the
market price of our common stock to decline.
We also may issue our shares of common stock from time to time
as consideration for future acquisitions and investments or for
other reasons. If any such acquisition or investment is
significant, the number of shares that we may issue may in turn
be significant. We may also grant registration rights covering
those shares in connection with any such acquisitions and
investments.
You will experience immediate and substantial
dilution.
The initial public offering price of our common stock will be
substantially higher than the net tangible book value per share
of our outstanding common stock. Accordingly, if you purchase
common stock in this offering, you will suffer immediate and
substantial dilution of your investment. Based upon the issuance
and sale
of million
shares of common stock by us at an assumed initial public
offering price of
$ per
share (the midpoint of the initial public offering price range
indicated on the cover of this prospectus), you will incur
immediate dilution of approximately
$ in
the net tangible book value per share.
Because we have not paid dividends in the past and do not
anticipate paying dividends on our common stock in the
foreseeable future, you should not expect to receive dividends
on shares of our common stock.
We have no present plans to pay cash dividends to our
stockholders and, for the foreseeable future, intend to retain
all of our earnings for use in our business. The decision
whether to pay dividends will be made by our board of directors
in light of conditions then existing, including factors such as
our results of operations, financial condition and capital
requirements, and business conditions. In addition, the Credit
Agreement governing the senior revolving credit facility and the
indentures governing the 9% senior secured notes and the
111/4% senior
notes contain covenants limiting the payment of cash dividends.
Consequently, you should not rely on dividends in order to
receive a return on your investment.
Market and industry data included in this prospectus, including
all market share and market size data about the energy, general
industrial, material handling, mining, transportation and turf
and garden markets, mechanical power transmission and motion
control industry,and other markets for mechanical power
transmission and motion control products, as well as our
position and the position of our competitors within these
markets, including our products relative to our competitors, are
based on estimates of our management. These estimates have been
derived from our management’s knowledge and experience in
the markets in which we operate, as well as information obtained
from surveys, reports by market research firms, our customers,
distributors, suppliers, trade and business organizations and
other contacts in the markets in which we operate. Market share
data is subject to change and cannot always be verified with
certainty due to limits on the availability and reliability of
raw data, the voluntary nature of the data gathering process and
other limitations and uncertainties inherent in any statistical
survey of market shares. In addition, customer preferences can
and do change. References herein to our being a leader in a
market or product category refers to our belief that we have a
leading market share position in each specified market, unless
the context otherwise requires, and do not take into account
competitive products outside our industry. Statements in this
prospectus relating to our market share do not include data for
products that are produced internally by other vertically
integrated manufacturers.
This prospectus, including information generally located under
the headings “Summary,”“Risk Factors,”“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
“Business,” contains forward-looking statements. These
forward-looking statements generally relate to our strategies,
plans and objectives for, and potential results of, future
operations and are based upon management’s current plans
and beliefs or current estimates of future results or trends.
Whenever you read a statement that is not solely a statement of
historical fact, such as when we state that we
“believe,”“expect,”“anticipate”
or “plan” that an event will occur and other similar
statements, you should understand that our expectations may not
be correct, although we believe they are reasonable, and that
our plans may change. We do not guarantee that the transactions
and events described in this prospectus will happen as described
or that any positive trends noted in this prospectus will
continue.
Forward-looking statements regarding management’s present
plans or expectations for new product offerings, capital
expenditures, increasing sales, cost-saving strategies and
growth involve risks and uncertainties relative to return
expectations, allocation of resources and changing economic or
competitive conditions, which could cause actual results to
differ from present plans or expectations and such differences
could be material. Similarly, forward-looking statements
regarding management’s present expectations for operating
results and cash flow involve risks and uncertainties relative
to these and other factors including:
•
competitive factors in the industry in which we operate;
•
changes in general economic conditions and the cyclical nature
of the markets in which we operate;
•
our dependence on our distribution network;
•
our ability to invest in, develop or adapt to changing
technologies and manufacturing techniques;
•
international risks on our operations;
•
loss of our key management;
•
increase in litigation, including product liability claims;
other factors that are described under “Risk Factors.”
We caution you that the foregoing list of important factors is
not exclusive. In addition, in light of these risks and
uncertainties, the matters referred to in the forward-looking
statements contained in this prospectus may not in fact occur.
The forward-looking statements contained in this prospectus are
current as of the date of the prospectus. We undertake no
obligation to publicly update or revise any forward-looking
statement as a result of new information, future events or
otherwise, except as otherwise required by law.
You should read this prospectus completely and with the
understanding that actual future results may be materially
different from what we expect.
We estimate that we will receive net proceeds from this offering
of approximately
$ million,
after deducting underwriting discounts and commissions and other
estimated expenses of
$ million
payable by us. This estimate assumes an initial public offering
price of
$ per
share, the midpoint of the range set forth on the cover page of
this prospectus. A $1.00 increase (decrease) in the assumed
initial public offering price of
$ per
share would increase (decrease) the net proceeds to us from this
offering by
$ ,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated expenses payable by us. We will not receive any of
the proceeds from the sale of shares by the selling stockholders.
We may use the net proceeds from this offering to repay a
portion of our 9% senior secured notes due 2011 and/or our
111/4% senior
notes due 2013. We incurred indebtedness under the
9% senior secured notes due 2011 to complete the PTH
Acquisition and under the
111/4% senior
notes due 2013 to complete the Hay Hall Acquisition.
Any remaining net proceeds not used to repay debt may be used by
us for general working capital or to complete strategic
acquisitions. There are currently no strategic acquisitions
pending for which we intend to use those net proceeds.
C:
DIVIDEND POLICY
We intend to retain all future earnings, if any, for use in the
operation of our business and to fund future growth. We do not
anticipate paying any dividends for the foreseeable future, and
the Credit Agreement governing the senior revolving credit
facility and the indentures governing the 9% senior secured
notes and
111/4% senior
notes limit our ability to pay dividends or other distributions
on our common stock. See “Description of
Indebtedness.” We may incur other obligations in the future
that will further limit our ability to pay dividends. The
decision whether to pay dividends will be made by our board of
directors in light of conditions then existing, including
factors such as our results of operations, financial condition
and requirements, business conditions and covenants under any
applicable contractual arrangements.
The following table sets forth our capitalization as of
June 30, 2006:
•
on an actual basis; and
•
on an as adjusted basis to give effect to the conversion of all
shares of our preferred stock
into shares
of common stock, which will occur automatically upon the closing
of this offering, and the sale by us
of shares
of common stock at the assumed initial public offering price of
$ per
share the midpoint of the range set forth on the cover page of
this prospectus, in this offering and our receipt of the net
offering proceeds therefrom, after deducting estimated
underwriting discounts and commissions and offering expenses.
The following table sets forth our cash and cash equivalents and
capitalization as of June 30, 2006. The table below should
be read in conjunction with “Use of Proceeds,”“Unaudited Pro Forma Condensed Combined Financial
Statements,”“Selected Historical Financial and Other
Data,”“Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the
consolidated financial statements and notes included elsewhere
in this prospectus.
Our senior revolving credit facility has $30.0 million of
borrowing capacity (including $10.0 million available for
letters of credit), $27.6 million of which was available as
of June 30, 2006.
Dilution is the amount by which the offering price paid by the
purchasers of the common stock to be sold in this offering
exceeds the net tangible book value per share of common stock
after this offering. Net tangible book value per share is
determined at any date by subtracting our total liabilities from
the total book value of our tangible assets and dividing the
difference by the number of shares of common stock deemed to be
outstanding at that date.
Our net tangible book value as of June 30, 2006 was
$(107.0) million, or
$ per
share of common stock. After giving effect to the receipt and
our intended use of approximately
$ million
of estimated net proceeds from our sale
of shares
of common stock in the offering at an assumed offering price of
$ per
share, the midpoint of the range set forth on the cover page of
this prospectus, our as adjusted net tangible book value as of
June 30, 2006 would have been approximately
$ million,
or
$ per
share of common stock. This represents an immediate increase in
pro forma net tangible book value of
$ per
share to existing stockholders and an immediate dilution of
$ per
share to new investors purchasing shares of common stock in the
offering. The following table illustrates this substantial and
immediate per share dilution to new investors:
Per Share
Assumed initial public offering price per share
$
Net tangible book value before the offering
Increase in net tangible book value per share attributable to
investors in this offering
Pro forma net tangible book value per share after this offering
Dilution per share to new investors
$
A $1.00 increase (decrease) in the assumed initial public
offering price of
$ per
share would decrease (increase) our pro forma net tangible book
deficit by
$ ,
the as adjusted net tangible book deficit per share after this
offering by
$ per
share and the dilution per share to new investors in this
offering by
$ ,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated expenses payable by us.
The following table summarizes on an as adjusted basis as of
June 30, 2006, giving effect to:
•
the total number of shares of common stock purchased from us;
•
the total consideration paid to us, assuming an initial public
offering price of
$ per
share (before deducting the estimated underwriting discount and
commissions and offering expenses payable by us in connection
with this offering); and
•
the average price per share paid by existing stockholders and by
new investors purchasing shares in this offering:
Total
Average
Shares Purchased
Consideration
Per
Number
Percent
Amount
Percent
Share
Existing stockholders
$
%
$
%
$
Investors in the offering
$
%
$
%
$
Total
$
100
%
$
100
%
$
A $1.00 increase (decrease) in the assumed initial public
offering price of
$ per
share would increase (decrease) total consideration paid by
existing stockholders, total consideration paid by new investors
and the average price per share by
$ ,
$ and
$ ,
respectively, assuming the number of shares offered by us, as
set forth on the cover page of this prospectus, remains the
same, and without deducting underwriting discounts and
commissions and estimated expenses payable by us.
The tables and calculations above assume no exercise of the
underwriters’ over-allotment option.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
The following unaudited pro forma condensed combined financial
statements are presented to illustrate the estimated effects of
the Hay Hall Acquisition in February 2006 and related
transactions on our financial condition and results of
operations. We have derived our historical consolidated
financial data for the year ended December 31, 2005 from
the audited consolidated financial statements and related notes
included elsewhere in this prospectus. We have derived the
historical consolidated financial data of our company for the
six months ended June 30, 2006 from the unaudited
consolidated interim financial statements and related notes
included elsewhere in this prospectus. We have derived the
historical consolidated financial data of Hay Hall for the year
ended December 31, 2005 from the audited consolidated
financial statements of Hay Hall included elsewhere in this
prospectus. We have not included an unaudited pro forma balance
sheet since the balance sheet at June 30, 2006 included in
this prospectus gives effect to the Hay Hall acquisition. Hay
Hall historical financial information has been reconciled from
U.K. GAAP to U.S. GAAP in all periods presented and all
amounts have been converted from U.K. pounds sterling to
U.S. dollars for the purpose of these pro forma financial
statements.
The unaudited pro forma condensed combined statements of
operations for the year ended December 31, 2005 and the six
months ended June 30, 2006 assume that the Hay Hall
Acquisition and related transactions, as applicable, took place
on January 1, 2005, the beginning of our 2005 fiscal year.
The information presented in the unaudited pro forma condensed
combined financial statements is not necessarily indicative of
our financial position or results of operations that would have
occurred if the Hay Hall Acquisition and related transactions
had been completed as of the dates indicated, nor should it be
construed as being a representation of our future financial
position or results of operations.
The unaudited pro forma condensed combined financial statements
are presented for illustrative purposes only and do not purport
to be indicative of the operating results that might have been
achieved had the transactions occurred as of an earlier date,
and do not purport to be indicative of future operating results.
The pro forma adjustments are based upon available information
and certain assumptions that we believe are reasonable under the
circumstances. These adjustments are more fully described in the
notes to the unaudited pro forma condensed combined financial
statements below.
The unaudited pro forma condensed combined financial statements
should be read in conjunction with the accompanying notes and
assumptions, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” the
consolidated financial statements of Altra and related notes,
the consolidated financial statements of Hay Hall and the
related notes and the other financial information included
elsewhere in this prospectus.
Selling, general, administrative and other operating expenses
66,163
14,909
125
14,784
26,922
(3,608
)(3)
89,477
Operating profit
25,350
1,338
132
1,470
2,676
1,837
29,863
Interest expense, net
19,514
1,230
—
1,230
2,240
4,782
(4)
26,536
Other income, net
(17
)
(107
)
—
(107
)
(195
)
—
(212
)
(Loss) income before income taxes
5,853
215
132
347
631
(2,945
)
3,539
Income tax (benefit) expense
3,349
292
—
292
532
(1,384
)(5)
2,497
Net income (loss)
$
2,504
£
(77
)
£
132
£
55
$
99
$
(1,561
)
$
1,042
Weighted average shares of common stock outstanding:
Basic
n/a
n/a
n/a
n/a
n/a
Diluted
n/a
n/a
n/a
n/a
n/a
Net income available to holders of shares of common stock per
share:
Basic
$
n/a
n/a
n/a
n/a
n/a
$
Diluted
$
n/a
n/a
n/a
n/a
n/a
$
(a)
Reflects Hay Hall’s Combined Statement of Operations on a
U.S. GAAP basis after translation to U.S. dollars at
an exchange rate of 1.821 U.S. dollars per U.K. pound
sterling (the average exchange rate for the 2005 fiscal year).
See accompanying “Notes to the Unaudited Pro Forma
Condensed Combined Statements of Operations.”
Selling, general, administrative and other expenses
40,313
1,706
(12
)
1,694
2,970
(1,251
)(3)
42,032
Operating profit
23,814
152
13
165
288
2,127
26,229
Interest expense, net
12,815
111
—
111
195
626
(4)
13,636
Other income, net
(87
)
—
—
—
—
—
(87
)
Income before income taxes
11,086
41
13
54
93
1,501
12,680
Income tax (benefit) expense
4,186
13
—
13
23
615
(5)
4,824
Net Income
$
6,900
£
28
£
13
£
41
$
70
$
886
$
7,856
Weighted average shares of common stock outstanding:
Basic
n/a
n/a
n/a
n/a
n/a
Diluted
n/a
n/a
n/a
n/a
n/a
Net income available to holders of shares of common stock per
share:
Basic
$
n/a
n/a
n/a
n/a
n/a
$
Diluted
$
n/a
n/a
n/a
n/a
n/a
$
(a)
Reflects Hay Hall’s Unaudited Interim Condensed Statement
of Operations on a U.S. GAAP basis after translation to
U.S. dollars at an exchange rate of 1.753 U.S. dollars
per U.K. pound sterling (the average exchange rate for the six
month period ended June 30, 2006).
See accompanying “Notes to the Unaudited Pro Forma
Condensed Combined Statements of Operations.”
Elimination of net sales of Engineered Systems of Matrix
business which is included in the Hay Hall financial statements
but which were not acquired by Altra
$
(6,805
)
$
(291
)
Elimination of intercompany sales from Hay Hall to Altra
(1,456
)
(378
)
Elimination of intercompany sales from Altra to Hay Hall
(254
)
(47
)
Total pro forma adjustment
$
(8,515
)
$
(716
)
(2) Adjustments to cost of sales as follows:
Elimination of cost of sales of Engineered Systems of Matrix
business which is included in the Hay Hall financial statements
but which were not acquired by Altra
$
(5,121
)
$
(205
)
Elimination of cost of sales on intercompany sales from Hay Hall
to Altra
(1,456
)
(378
)
Elimination of cost of sales on intercompany sales from Altra to
Hay Hall
(254
)
(47
)
Elimination of additional cost of goods sold as a result of the
fair value adjustment to inventory recorded in connection with
the Acquisition
—
(984
)
To record additional depreciation expense resulting from the
adjustment to the fair market value of property, plant and
equipment in connection with the transaction
87
22
Total pro forma adjustment
$
(6,744
)
$
(1,592
)
(3) Adjustments to selling, general, administrative and other
operating expenses as follows:
Elimination of selling, general, administrative and other
operations expenses of Engineered Systems of Matrix business
which is included in the Hay Hall financial statements but which
were not acquired by Altra
$
(1,724
)
$
(156
)
Elimination of the selling, general, administrative, and other
operations expenses of Hay Hall’s corporate office business
which is included in the Hay Hall financial statements but which
were not acquired by Altra
(2,844
)
(330
)
Additional expense required to present amortization expense
(based on lives ranging from eight to 12 years) associated
with intangible assets recorded in connection with the
Acquisition
960
240
Elimination of additional expense related to Genstar Capital,
L.P. transaction fee
—
(1,005
)
Total pro forma adjustment
$
(3,608
)
$
(1,251
)
(4) Adjustments to interest expense as follows:
Additional expense required associated with the notes issued to
finance the Hay Hall Acquisition (consists of interest on
£33.0 million of notes at
111/4%)
$
6,760
$
756
Elimination of interest expense recorded at Hay Hall
(2,240
)
(195
)
Additional expense required to present a full year of
amortization expense (based on a seven year life)
associated with debt issuance costs incurred in connection with
the notes
262
65
Total pro forma adjustment
$
4,782
$
626
(5) Adjustments to record additional tax (benefit) expense of
47% and 41%, calculated at an effective which reflects the
federal, state and foreign statutory rate in effect at the
beginning of 2005 and 2006, respectively, resulting from the
other pro forma adjustments. Historical tax expense has not been
adjusted
The following table contains selected financial data for us for
the six months ended June 30, 2006 and July 1, 2005
and the year ended December 31, 2005 and the period from
inception (December 1, 2004) to December 31, 2004 and
for PTH, or our Predecessor, for the period from January 1,2004 through November 30, 2004 and for the years ended
December 31, 2003, 2002 and 2001. The following should be
read in conjunction with “Use of Proceeds,”“Capitalization,”“Unaudited Pro Forma Condensed
Combined Financial Statements,”“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements and
notes included elsewhere in this prospectus.
EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization. EBITDA is used by us as a
performance measure. Management believes that EBITDA provides
relevant information for our investors because it is useful for
trending, analyzing and benchmarking the performance and value
of our business. Management also believes that EBITDA is useful
in assessing current performance compared with the historical
performance of our Predecessor because significant line items
within our income statements such as depreciation, amortization
and interest expense were significantly impacted by the PTH
Acquisition. Internally, EBITDA is used as a financial measure
to assess the operating performance and is an important measure
in our incentive compensation plans. EBITDA has important
limitations, and should not be considered in isolation or as a
substitute for analysis of our results as reported under GAAP.
For example, EBITDA does not reflect:
•
cash expenditures, or future requirements, for capital
expenditures or contractual commitments;
•
changes in, or cash requirements for, working capital needs;
•
the significant interest expense, or the cash requirements
necessary to service interest or principal payments, on debts;
•
tax distributions that would represent a reduction in cash
available to us; and
•
any cash requirements for assets being depreciated and amortized
that may have to be replaced in the future.
EBITDA is not a recognized measurement under GAAP, and when
analyzing our operating performance, you should use EBITDA in
addition to, and not as an alternative for, income (loss) from
operations and net income (loss) (as determined in accordance
with GAAP). Because not all companies use identical
calculations, our presentation of EBITDA and may not be
comparable to similarly titled measures of other companies. The
amounts shown for EBITDA also differ from the amounts calculated
under similarly titled definitions in our debt instruments,
which are further adjusted to reflect certain other cash and
non-cash charges and are used to determine compliance with
financial covenants and our ability to engage in certain
activities, such as incurring additional debt and making certain
restricted payments.
To compensate for the limitations of EBITDA, we utilize several
GAAP measures to review our performance. These GAAP measures
include, but are not limited to, net income (loss), income
(loss) from operations, cash provided by (used in) operations,
cash provided by (used in) investing activities and cash
provided by (used in) financing activities. These important GAAP
measures allow management to, among other things, review and
understand our use of cash from period to period, compare our
operations with competitors on a consistent basis and understand
the revenues and expenses matched to each other for the
applicable reporting period. We believe that the use of these
GAAP measures, supplemented by the use of EBITDA, allows us to
have a greater understanding of our performance and allows us to
adapt to changing trends and business opportunities.
(2) These amounts include expenses relating to non-cash
inventory step-up costs, management fees and transaction
expenses associated with acquisitions which, if subtracted out,
would result in a higher EBITDA. Inventory step-up costs
accounted for $2.3 million, $1.7 million,
$1.7 million and $1.7 million, respectively, for the
six months ended June 30, 2006, for the six months ended
July 1, 2005, the twelve months ended December 31,2005 and the Period from December 1, 2004 through
December 31, 2004. Management fees consisted of
$0.5 million, $0.5 million, $1.0 million and
$0.1 million, respectively, for the six months ended
June 30, 2006, for the six months ended July 1, 2005,
the twelve months ended December 31, 2005 and the Period
from December 1, 2004 through December 31, 2004.
Transaction fees and expenses associated with acquisitions
accounted for $1.0 million and $4.4 million,
respectively, for the six months ended June 30, 2006 and
the Period from December 1, 2004 through December 31,2004.
(3)
Working capital consists of total current assets less total
current liabilities.
The following discussion of our financial condition and
results of operations should be read together with
“Selected Historical Financial And Other Data,”“Unaudited Pro Forma Condensed Combined Financial
Statements” and the financial statements and related notes
included elsewhere in this prospectus. The following discussion
includes forward-looking statements. For a discussion of
important factors that could cause actual results to differ
materially from the results referred to in the forward-looking
statements, see “Cautionary Notice Regarding
Forward-Looking Statements.”
Overview
We are a leading global designer, producer and marketer of a
wide range of MPT and motion control products with a presence in
over 70 countries. Our global sales and marketing network
includes over 700 direct OEM customers and over 3,000
distributor outlets. Our product portfolio includes industrial
clutches and brakes, enclosed gear drives, open gearing,
couplings, engineered bearing assemblies, linear components and
other related products. Our products serve a wide variety of end
markets including energy, general industrial, material handling,
mining, transportation and turf and garden. We primarily sell
our products to a wide range of OEMs and through long-standing
relationships with industrial distributors such as Motion
Industries, Applied Industrial Technologies, Kaman Industrial
Technologies and W.W. Grainger.
Our net sales have grown at a compound annual growth rate of
approximately 13% over the last three fiscal years. We believe
this growth has been a result of recent acquisitions, greater
overall global demand for our products due to a strengthening
economy, increased consumption in certain geographic markets
such as China, expansion of our relationships with our customers
and distributors and implementation of improved sales and
marketing initiatives.
We improved our gross profit margin and operating profit margin
every year from fiscal year 2002 through fiscal year 2005 by
implementing strategic price increases, utilizing low-cost
country sourcing of components, increasing our productivity and
employing a more efficient sales and marketing strategy.
While the power transmission industry has undergone some
consolidation, we estimate that in 2005 the top eight
broad-based MPT companies represented approximately 21% of the
U.S. power transmission market. The remainder of the power
transmission industry remains fragmented with many small and
family-owned companies that cater to a specific market niche
often due to their narrow product offerings. We believe that
consolidation in our industry will continue because of the
increasing demand for global distribution channels, broader
product mixes and better brand recognition to compete in this
industry.
Key Components of Results of Operations
Net sales. We derive revenues primarily from selling
products that are either incorporated into products sold by OEMs
to end users directly or sold through industrial distributors.
Although we have exclusive arrangements with less than 5% of our
distributors, we believe our long history of serving the
replacement part market will continue to yield recurring
purchases from our customers resulting in consistent revenues.
Our net sales are derived by eliminating allowances for sales
returns, cash discount and other deductions from revenues.
Cost of sales. Cost of sales includes direct expenses we
incur in producing our products. This includes the amounts we
pay for our raw materials, energy costs and labor expenses. Our
cost of sales has increased due to increasing prices in our raw
materials, energy increases and minimum wage increases. We have
offset certain cost increases by passing through these costs to
our customers by way of product price increases or surcharges,
as well as by focusing on operating efficiencies and cost
savings programs.
Selling, general and administrative expense. Selling,
general and administrative expense includes departmental costs
for executive, legal and administrative services, finance,
telecommunications, facilities and information technology.
Research and development expense. Research and
development expense primarily consists of personnel expenses and
contract services associated with the development of our
products.
History and Recent Acquisitions
Our current business began with the acquisition by Colfax of the
MPT group of Zurn Technologies, Inc. in December 1996. Colfax
subsequently acquired Industrial Clutch Corp. in May 1997,
Nuttall Gear Corp. in July 1997 and the Boston Gear and Delroyd
Worm Gear brands in August 1997 as part of Colfax’s
acquisition of Imo Industries, Inc. In February 2000, Colfax
acquired Warner Electric, Inc., which sold products under the
Warner Electric, Formsprag Clutch, Stieber and Wichita Clutch
brands. Colfax formed PTH in June 2004 to serve as a holding
company for all of these power transmission businesses.
On November 30, 2004, we acquired our original core
business through the acquisition of PTH from Colfax for
$180.0 million in cash.
On October 22, 2004, The Kilian Company, or Kilian, a
company formed at the direction of Genstar Capital, our
principal equity sponsor, acquired Kilian Manufacturing
Corporation from Timken U.S. Corporation for
$8.8 million in cash and the assumption of
$12.2 million of debt. At the completion of the PTH
Acquisition, (i) all of the outstanding shares of Kilian
capital stock were exchanged for approximately $8.8 million
of shares of our capital stock and Kilian and its subsidiaries
were transferred to our wholly owned subsidiary, Altra
Industrial and (ii) all outstanding debt of Kilian was
retired with a portion of the proceeds of the sale of Altra
Industrial’s 9.0% senior secured notes due 2011, or
the 9% senior secured notes.
On November 7, 2005, we entered into a purchase agreement
with the shareholders of Hay Hall pursuant to which we agreed to
acquire all of the outstanding share capital of Hay Hall for
$50.3 million. The acquisition closed on February 10,2006 and Hay Hall and its subsidiaries became our indirect
wholly owned subsidiaries. We paid $6.0 million of the
total purchase price in the form of deferred consideration. At
the closing of the Hay Hall Acquisition, we deposited such
deferred consideration into an escrow account for the benefit of
the current Hay Hall shareholders, which is represented by a
loan note. While the current Hay Hall shareholders hold the
note, their rights are limited to receiving the amount of the
deferred compensation placed in the escrow account. They have no
recourse against us unless we take action to prevent or
interfere in the release of such funds from the escrow account.
Hay Hall is a U.K.-based holding company that is focused
primarily on the manufacture of flexible couplings and clutch
brakes. Through Hay Hall, we acquired 15 strong brands in
complementary product lines, improved customer leverage and
expanded geographic presence in over 11 countries. Hay
Hall’s product offerings diversified our revenue base and
strengthened our key product areas, such as electric clutches,
brakes and couplings. Matrix International, Inertia Dynamics and
Twiflex, three Hay Hall businesses, combined with Warner
Electric, Wichita Clutch, Formsprag Clutch and Stieber, make the
consolidated company the largest individual manufacturer of
industrial clutches and brakes in the world.
The Hay Hall Acquisition did not create a new reportable segment.
On May 18, 2006, Altra Industrial acquired substantially
all of the assets of Bear Linear for $5.0 million.
Approximately $3.5 million was paid at closing and the
remaining $1.5 million is payable over the next two and a
half years. Bear Linear manufactures high value-added linear
actuators which are electromechanical power transmission devices
designed to move and position loads linearly for mobile
off-highway and industrial applications. Bear Linear’s
product design and engineering expertise, coupled with the
Company’s sourcing alliance with a low cost country
manufacturer, were critical components in Altra’s strategic
expansion into the motion control market.
Cost Savings and Productivity Enhancement Initiatives
Our Predecessor enacted significant cost savings programs prior
to our acquisition of PTH and we subsequently enacted other cost
savings programs to reduce overall cost structure and improve
cash flows. Cost reduction programs included the consolidation
of facilities, headcount reductions and reduction in overhead
costs, which resulted in restructuring charges, asset impairment
and transition expenses of $11.1 million in the year ended
December 31, 2003. Cash outflows related to the
restructuring programs were $2.2 million in 2004 and
$13.9 million in 2003. The financial effects of some of the
specific cost reduction programs are listed below:
•
In 2003, our Predecessor incurred transition expenses, including
relocation, training, recruiting and moving costs, directly
related to implementing its restructuring activities amounting
to $9.1 million.
•
In 2003, our Predecessor recorded a $2.0 million loss from
the sale of certain real estate associated with facilities
closed as a part of its restructuring activities.
•
In 2005, we re-negotiated two of our U.S. collective
bargaining agreements which we estimate provide for savings of
$0.8 million annually.
•
In 2006, we re-negotiated one of our U.S. collective
bargaining agreements which we estimate provides for savings of
$2.2 million annually.
Non-GAAP Financial Measures
The discussion of Results of Operations below includes certain
references to financial results on a “combined basis.”
The combined results were prepared by adding the results of
Altra Holdings, Inc. from inception on December 1, 2004 to
December 31, 2004 to those from our Predecessor for the
11 month period ending November 30, 2004. This
presentation is not in accordance with GAAP. The primary
differences between the predecessor entity and the successor
entity are the inclusion of Kilian in the successor and the
successor’s book basis has been stepped up to fair value,
such that the successor has additional depreciation,
amortization and financing costs. The results of Kilian are
included in Altra Holdings, Inc. for the period from
December 1, 2004 through December 31, 2004. Management
believes that this combined basis presentation provides useful
information for our investors in the comparison to Predecessor
trends and operating results. The combined results are not
necessarily indicative of what our results of operations may
have been if the PTH Acquisition and Kilian Transactions had
been consummated earlier, nor should they be construed as being
a representation of our future results of operations.
Net sales increased $46.3 million, or 24.6%, from
$188.3 million, for the six months ended July 1, 2005
to $234.6 million for the six months ended June 30,2006. Net sales increased primarily due to the inclusion of Hay
Hall in the results of the six months ended June 30, 2006.
Hay Hall’s net sales for the 20 week period from
February 10, 2006 (the date of acquisition) through
June 30, 2006 were $28.3 million. The remaining net
increase was due to price increases which accounted for
approximately $6.3 million, strong economic conditions at
our customers in the steel, energy and mining industries which
accounted for $5.8 million and increased sales to turf and
garden OEM customers which accounted for $2.3 million.
Gross profit
Gross profit increased $18.9 million, or 41.8%, from
$45.2 million (24% of net sales), in the six months ended
July 1, 2005 to $64.1 million (27.3% of net sales) in
the same period of 2006. The increase includes $9.0 million
from Hay Hall for the six months ended June 30, 2006.
Excluding Hay Hall, gross profit increased approximately
$9.9 million, or 21.9%, and gross profit as a percentage of
sales increased to 26.7%. The remaining increase in gross profit
is attributable to price increases during the first quarter of
2006, and an increase in material sourcing from lower cost
geographies and manufacturing efficiencies implemented by the
new management team in the second half of 2005. We were able to
offset the impact of higher energy and raw materials costs by
passing many of these costs on to our customers.
Selling, general and administrative expenses
Selling, general and administrative expenses increased
$6.7 million, or 21.7%, from $31.1 million in the six
months ended July 1, 2005 to $37.8 million in the six
months ended June 30, 2006. The increase in selling,
general and administrative expenses is due to the inclusion of
Hay Hall in 2006, which contributed $4.4 million to the
increase, a $1.0 million transaction fee paid to Genstar
Capital, L.P., pursuant to our advisory services agreement, for
advisory services provided in connection with the Hay Hall
Acquisition calculated as 2% of the aggregate purchase price and
increased salaries and professional
fees. Excluding Hay Hall and the related transaction fee paid to
Genstar Capital, L.P., selling, general and administrative
expenses, as a percentage of net sales, decreased from 16.5% in
the six months ended July 1, 2005 to 16.1% in the six
months ended June 30, 2006, primarily due to operating
efficiencies and cost savings measures that were put into place
during the second half of 2005.
Research and development expenses
Research and development expenses increased $0.2 million,
or 8.7%, from $2.3 million in the six months ended
July 1, 2005 to $2.5 million in the six months ended
June 30, 2006. The increase in research and development
expenses is due to higher average compensation rates and the
timing of project expenses.
Interest expense
We recorded interest expense of $12.8 million during the
six months ended June 30, 2006, which was an increase of
$3.0 million, or 31.2%, from the six months ended
July 1, 2005. The increase was primarily due to the
interest associated with the
111/4% senior
notes issued in connection with the Hay Hall Acquisition, which
amounted to $2.5 million.
Provision for income taxes
The provision for income taxes was $4.2 million, or 37.8%
of income before taxes, for the six months ended June 30,2006, versus a provision of $1.0 million, or 50.7% of
income before taxes, for the six months ended July 1, 2005.
The 2006 provision as a percent of income before taxes was lower
than that of 2005 primarily due to the Hay Hall Acquisition and
a greater proportion of taxable income in jurisdictions
possessing lower statutory tax rates. For further discussion,
refer to Note 10 to the unaudited condensed consolidated
interim financial statements.
Net sales increased $59.8 million, or 19.7%, from
$303.7 million on a combined basis, for the year ended
December 31, 2004 to $363.5 million for the year ended
December 31, 2005. Net sales increased primarily due to the
inclusion of Kilian in the results of the year ended
December 31, 2005. Kilian’s net sales for 2005 were
$42.5 million. The remaining net increase was due to price
increases, improving economic conditions at our customers in the
steel, energy and petrochemical industries and increased sales
of $4.7 million to certain transportation customers and
$2.5 million in mining OEM customers, partially offset by a
weakening at our turf and garden OEM customers. On a constant
currency basis sales increased $58.7 million, or 19.3%, in
2005. Excluding Kilian, the constant currency increase in sales
was $17.0 million, or 5.6%.
Gross profit
Gross profit increased $21.0 million, or 29.7%, from
$70.6 million (23.2% of net sales) on a combined basis, in
2004 to $91.5 million (25.2% of net sales) in 2005. The
increase includes $9.1 million from Kilian for 2005.
Excluding Kilian, gross profit increased approximately
$11.9 million, or 16.8%, and gross profit as a percent of
sales increased to 25.7%. The remaining increase in gross profit
is attributable to price increases during the second half of
2005, an increase in low cost country material sourcing and
manufacturing efficiencies implemented by the new management
team. Savings from low cost country material sourcing and
manufacturing efficiencies totaled $2.63 million.
Selling, general and administrative expenses increased
$7.3 million, or 13.4%, from $54.3 million on a
combined basis in 2004 to $61.6 million in 2005. The
increase in selling, general and administrative expenses is due
to the inclusion of Kilian in 2005, which contributed
$3.4 million to the increase, $3.0 million of
amortization of intangibles, and $1.0 million management
fee paid to Genstar Capital, L.P., offset by cost savings
initiatives of $1.0 million put in place during 2005.
Excluding Kilian, selling, general and administrative expenses,
as a percentage of net sales, increased from 17.9% in 2004 to
18.1% in 2005, primarily due to the amortization of intangibles
and the management fee paid to Genstar Capital, L.P., offset by
the cost savings initiatives. On a constant currency basis,
selling, general and administrative expenses increased
$6.4 million, or 11.8%, from $54.3 million, on a
combined basis, in 2004. Excluding Kilian, selling, general and
administrative expenses, on a constant currency basis, increased
$3.0 million, or 5.6%, and was 17.9% of sales.
Research and development expenses
Research and development expenses increased $0.4 million,
or 8.3%, from $4.3 million on a combined basis in 2004 to
$4.7 million in 2005. The increase was primarily due to
development projects including the Foot/ Deck Mount Kopper Kool
brake, a new clutch brake for the mining industry, spot brake
technology, various elevator brakes and forklift brakes.
Gain on sale of assets
Our Predecessor recorded a gain on sale of assets of
$1.3 million during 2004 relating to the sale of surplus
real estate. We recorded a gain of $0.1 million from the
sale of surplus machinery during 2005.
Restructuring charge, asset impairment and transition
expenses
Restructuring charge, asset impairment and transition expenses
decreased from $0.9 million on a combined basis in 2004 to
zero in 2005 due to the ending of the program in 2004.
Interest expense
We recorded interest expense of $19.5 million during 2005
primarily due to the 9% senior secured notes, the
subordinated notes and the amortization of related deferred
financing costs. On a combined basis, interest expense of
$5.9 million was recorded during 2004.
Provision for income taxes
The provision for income taxes was $3.3 million, or 57.2%,
of income before taxes, for 2005, versus a combined provision of
$5.2 million, or 83.9%, of income before taxes, for 2004.
The 2004 provision as a percent of income before taxes was
higher than that of 2005 primarily due to the impact of
non-deductible transaction expenses incurred in connection with
the PTH Acquisition in 2004. For further discussion, refer to
Note 8 to the audited financial statements.
On a combined basis, net sales increased $36.8 million, or
13.8%, from $266.9 million in 2003 to $303.7 million
in 2004. Net sales increased primarily due to continued strength
in the turf and garden market, the general domestic industrial
recovery and increased activity in the transportation and mining
sectors which allowed us to increase sales prices and recover
material surcharges of $1.4 million from customers.
Combined net sales in 2004 also include $3.2 million of
sales from Kilian which is included in the amounts presented
since inception. On a constant currency basis, sales increased
11.6%.
On a combined basis, gross profit increased $11.6 million,
or 19.8%, from $58.9 million (22.1% of net sales) in 2003
to $70.6 million (23.2% of net sales) in 2004. The increase
includes $0.9 million from Kilian since inception.
Approximately two-thirds of the absolute increase in gross
profit is due to increased net sales as discussed above. The
remaining increase in gross profit and the improvement noted in
the gross profit percentage is due to cost savings resulting
from restructuring activities completed in prior years.
Selling, general and administrative expenses
On a combined basis, selling, general and administrative
expenses increased $4.8 million, or 9.7%, from
$49.5 million in 2003 to $54.3 million in 2004. As a
percentage of net sales, selling, general and administrative
expenses decreased from 18.6% in 2003 to 17.9% in 2004. The
change in selling, general and administrative expenses reflects
the offsetting impact of increased sales commissions incurred
from the increase in sales, incremental costs of approximately
$1.0 million relating to corporate expenses not previously
incurred by our Predecessor, a one-time $4.4 million
transaction fee paid to Genstar Capital, L.P. and cost savings
resulting from restructuring activities completed in prior
years. On a constant currency basis, selling, general and
administrative expenses increased by 7.1%, or $3.5 million,
from $49.5 million in 2003 to $52.9 million in 2004.
Research and development expenses
Research and development expenses increased $0.9 million,
or 25.2%, from $3.5 million in 2003 to $4.3 million in
2004. The increase was due to the change in currency valuations
as a result of a higher average rate for the Euro in 2004 and
development projects for the turf and garden industry.
Restructuring charge, asset impairment and transition
expenses
Our Predecessor recorded a restructuring charge, asset
impairment and transition expenses of $0.9 million in 2004
primarily as a result of relocation, training, recruiting and
moving costs incurred to complete restructuring activities begun
in 2002. These costs were significantly below the amounts
recorded in prior years when the majority of the restructuring
activities, as described under “— Cost Savings
and Productivity Enhancement Initiatives,” were taking
place.
Interest expense
We recorded consolidated interest expense of $1.6 million
during the period from inception on December 1, 2004 to
December 31, 2004 primarily due to the 9% senior
secured notes, the subordinated notes and the amortization of
related deferred financing costs. Our Predecessor recorded
interest expense of $4.3 million during the eleven months
ended November 30, 2004. This amount was trending below the
$5.4 million recognized in 2003 largely as a result of
reductions in the amount of outstanding debt.
Other non-operating (income) expense
Our Predecessor recorded a gain on sale of assets of
$1.3 million during the 11 months ended
November 30, 2004 relating to the sale of surplus real
estate.
Other non-operating expense was $0.1 million in 2004
compared to $0.5 million in 2003. The higher expense in
2003 is primarily due to the write-off of deferred loan costs of
approximately $0.4 million associated with refinancing.
There were no deferred loan costs written-off in 2004.
Provision for income taxes
The provision for income taxes was $5.2 million on a
combined basis in 2004, versus a benefit of $1.7 million
for 2003. The increase in the provision for 2004 was primarily a
result of the increase in our taxable income for the year. For
further discussion, refer to Note 9 of the audited
financial statements.
Selected Quarterly Consolidated Financial Information
The following table sets forth our unaudited quarterly
consolidated statements of operations for each of our last eight
quarters. You should read these tables in conjunction with our
consolidated financial statements and accompanying notes
included elsewhere in this prospectus. We have prepared this
unaudited information on the same basis as our audited
consolidated financial statements. These tables include all
adjustments, consisting only of normal recurring adjustments
that we consider necessary for a fair presentation of our
operating results for the quarters presented. Operating results
for any quarter are not necessarily indicative of results for
any subsequent periods.
Selling, general and administrative and research and development
expenses
20,382
19,931
16,678
16,094
16,456
16,935
9,351
8,996
13,082
Operating profit (loss)
11,891
11,923
8,250
5,277
6,858
4,965
(4,573
)
691
4,601
Interest expense (income), net
6,374
6,441
4,867
4,876
4,902
4,869
1,612
702
1,123
Other expense (income), net
72
(159
)
(20
)
(10
)
13
—
—
(28
)
301
Income (loss) before income taxes
5,445
5,641
3,403
411
1,943
96
(6,185
)
17
3,177
Provision for income taxes (benefit)
1,749
2,437
2,108
207
859
175
(292
)
270
4,258
Net income (loss)
$
3,696
$
3,204
$
1,295
$
204
$
1,084
$
(79
)
$
(5,893
)
$
(253
)
$
(1,081
)
Weighted average shares of common stock outstanding:
Basic
n/a
n/a
Diluted
n/a
n/a
Net income available to holders of shares of Class A common
stock per share:
Basic
$
$
$
$
$
$
$
n/a
n/a
Diluted
$
$
$
$
$
$
$
n/a
n/a
Seasonality
We experience seasonality in our turf and garden business, which
in recent years has represented approximately 10% of our net
sales. As our large OEM customers prepare for the spring season,
our shipments generally start increasing in December, peak in
February and March, and begin to decline in April and May. This
allows our customers to have inventory in place for the peak
consumer purchasing periods for turf and garden products. Our
low season is typically June through November and our customers
in the turf and garden market. Seasonality for the turf and
garden business is also affected by weather and the level of
housing starts.
Inflation can affect the costs of goods and services we use. The
majority of the countries that are of significance to us, from
either a manufacturing or sales viewpoint, have in recent years
enjoyed relatively low inflation. The competitive environment in
which we operate inevitably creates pressure on us to provide
our customers with cost-effective products and services.
Liquidity and Capital Resources
Overview
Historically, our Predecessor financed capital and working
capital requirements through a combination of cash flows from
operating activities and borrowings from financial institutions
and its former parent company, Colfax. We finance our capital
and working capital requirements through a combination of cash
flows from operating activities and borrowings under our senior
revolving credit facility. We expect that our primary ongoing
requirements for cash will be for working capital, debt service,
capital expenditures and pension plan funding. If additional
funds are needed for strategic acquisitions or other corporate
purposes, we believe we could borrow additional funds or raise
funds through the issuance of equity securities or asset sales.
Borrowings
In connection with the PTH Acquisition, we incurred substantial
indebtedness. To partially fund the PTH acquisition, our
subsidiary, Altra Industrial, issued $165.0 million of
9% senior secured notes, we issued $14.0 million of
subordinated notes to Caisse de dépôt et placement du
Québec, or CDPQ, as a limited partner of Genstar Capital
Partners III, L.P., and Altra Industrial entered into a
$30.0 million senior revolving credit facility. In
connection with our acquisition of Hay Hall in February 2006,
Altra Industrial issued £33.0 million of
111/4% senior
notes. Based on an exchange rate of 1.7462 U.S. Dollars to
U.K. pounds sterling (as of February 8, 2006), the proceeds
from these notes were approximately $57.6 million. The
notes are unsecured and are due in 2013. Interest on the
111/4% senior
notes is payable in U.K. pounds sterling semiannually in arrears
on February 15 and August 15 of each year, commencing
August 15, 2006. As of June 30, 2006, taking into
account these transactions, we had approximately
$223.4 million of total indebtedness outstanding (including
capital leases) which on an annualized basis results in
approximately $27.3 million interest expense.
As of June 30, 2006, we had $3.2 million outstanding
under the subordinated notes. As of June 30, 2006, Altra
Industrial had outstanding $165.0 million of its
9% senior secured notes, $59.9 million of its
111/4%
senior notes and had no outstanding borrowings and
$2.4 million of outstanding letters of credit under its
senior revolving credit facility.
Altra Industrial’s senior revolving credit facility
provides for senior secured financing of up to
$30.0 million, including $10.0 million available for
letters of credit. The senior revolving credit facility requires
Altra Industrial to comply with a minimum fixed charge coverage
ratio of 1.10 for the four quarter period ended
December 31, 2005 and 1.20 for all four quarter periods
thereafter when availability falls below $12.5 million.
Altra Industrial and all of its domestic subsidiaries are
borrowers, or Borrowers under the senior revolving credit
facility. Certain of our existing and subsequently acquired or
organized domestic subsidiaries which are not Borrowers do and
will guarantee (on a senior secured basis) the senior revolving
credit facility. Obligations of the other Borrowers under the
senior revolving credit facility, and the guarantees are secured
by substantially all of the Borrowers’ assets and the
assets of each of our existing and subsequently acquired or
organized domestic subsidiaries that is a guarantor of our
obligations under the senior revolving credit facility (with
such subsidiaries being referred to as the
“U.S. subsidiary guarantors”), including but not
limited to: (a) a first-priority pledge of all the capital
stock of subsidiaries held by the Borrowers or any
U.S. subsidiary guarantor (which pledge, in the case of any
foreign subsidiary, will be limited to 100% of any non-voting
stock and 65% of the voting stock of such foreign
subsidiary) and (b) perfected first-priority security
interests in and mortgages on substantially all tangible and
intangible assets of each Borrower and U.S. subsidiary
guarantor, including accounts receivable, inventory, equipment,
general intangibles, investment property, intellectual property,
real property (other than (i) leased real property and
(ii) our existing and future real property located in the
State of New York), cash and proceeds of the foregoing (in each
case subject to materiality thresholds and other exceptions).
We would suffer an event of default under the senior revolving
credit facility for a change of control if: (i) after an
initial public offering, a person or group, other than Genstar
Capital and its affiliates, beneficially owns more than 35% of
Altra Industrial’s stock and such amount is more than the
amount of shares owned by Genstar Capital and its affiliates,
(ii) Altra Industrial ceases to own or control 100% of each
of its borrower subsidiaries, or (iii) a change of control
occurs under the 9% senior secured notes;
111/4% senior
notes or any other subordinated indebtedness.
We would cause an event of default under the senior revolving
credit facility if an event of default occurs under the
indenture or if there is a default under any other indebtedness
any Borrower may have involving an aggregate amount of
$3 million or more and such default; (i) occurs at
final maturity of such debt, (ii) allows the lender
thereunder to accelerate such debt or (iii) causes such
debt to be required to be repaid prior to its stated maturity.
An event of default would also occur under the senior revolving
credit facility if any of the indebtedness under the senior
revolving credit facility ceases to be senior in priority to any
of our other contractually subordinated indebtedness, including
the obligations under the 9% senior secured notes and the
111/4% senior
notes.
Under the agreements governing Altra Industrial’s
indebtedness, its subsidiaries are permitted to make dividend
payments to Altra Industrial for use in its operations and to
pay off its senior revolving credit facility and outstanding
notes. Altra Industrial and its subsidiaries are restricted,
however, from making dividend payments to Altra Holdings to pay
off the CDPQ subordinated notes, subject to certain exceptions.
As of June 30, 2006, Altra Industrial had prepaid
approximately $10.8 million of the CDPQ subordinated notes
on Altra Holdings’ behalf pursuant to these exceptions. In
addition, the first priority liens against Altra Industrial, its
subsidiaries and their assets created by Altra Industrial’s
indebtedness limits its ability to sell or transfer such
subsidiaries or assets.
As of June 30, 2006, we were in compliance with all
covenant requirements associated with all of our borrowings,
with the exception of filing timely financial information
related to the subordinated notes. This by itself does not
constitute an event of default nor trigger the callability of
the subordinated notes.
Capital Expenditures
We made capital expenditures of approximately $4.1 million
and $2.0 million in the six months ended June 30, 2006
and July 1, 2005, respectively and $6.2 million for
fiscal year 2005. These capital expenditures will support
on-going business needs. We expect to spend approximately
$10 million on capital expenditures in each of 2006 and
2007.
Our senior revolving credit facility imposes a maximum annual
limit on our capital expenditures of $11.0 million for
fiscal year 2006, $9.8 million for fiscal year 2007,
$10.0 million for fiscal year 2008, and $10.3 million
for fiscal year 2009 and each fiscal year thereafter, provided
that unspent amounts from prior periods may be used in future
fiscal years.
Pension Plans
As of June 30, 2006, we had cash funding requirements
associated with our pension plan which we estimated to be
$5.5 million during the remainder of 2006,
$3.6 million in 2007, $2.5 million in 2008 and
$1.9 million annually until 2011. These amounts represent
funding requirements for the previous pension benefits we
provided our employees. In 2006, we eliminated pension benefits
in one of our locations. These amounts are based on actuarial
assumptions and actual amounts could be materially different.
See Note 9 in the audited financial statements.
Cash and cash equivalents totaled $5.6 million at
June 30, 2006 compared to $10.1 million at
December 31, 2005. Net cash provided by operating
activities for the six months ended June 30, 2006 resulted
mainly from cash provided by net income of $6.9 million and
the add-back of non-cash depreciation, amortization and deferred
financing costs of $7.9 million, amortization of deferred
compensation expense of $0.1 million, deferred tax expense
of $2.2 million, non-cash amortization of $2.3 million
for inventory step-ups
recorded as part of the Hay Hall Acquisition offset by a net
decrease in operating liabilities of $3.8 million, and by
cash used from a net increase in operating assets of
$9.5 million.
Net cash used in investing activities of $58.2 million for
the six months ended June 30, 2006 resulted from
$50.3 million used in the purchase of Hay Hall,
$3.5 million used in the purchase of Bear Linear and
$4.1 million used in the purchases of property, plant and
equipment primarily for investment in manufacturing equipment.
Net cash provided by financing activities of $47.3 million
for the six months ended June 30, 2006 consisted primarily
of the proceeds of $57.6 million from the issuance of the
111/4% senior
notes in connection with the Hay Hall Acquisition and the
$2.5 million in proceeds from a mortgage on our German
manufacturing facility offset by principal debt payments of
$10.8 million, payment of debt issuance costs of
$1.9 million and approximately $0.1 million of capital
lease payments.
Net cash flow used in operating activities, in the year to date
period ended July 1, 2005 resulted mainly from cash
provided by net income of $1.0 million and the add-back of
non-cash depreciation, amortization and deferred financing costs
of $6.3 million, deferred tax expense of $0.4 million
and non-cash amortization of $1.7 million for inventory
step-ups recorded as
part of the Colfax acquisition offset by a net decrease in
operating liabilities of $2.4 million, and by cash used
from a net increase in operating assets of $4.8 million.
Net cash used in investing activities of $2.1 million for
the year to date period ended July 1, 2005 resulted from
$2.0 million used in the purchases of property, plant and
equipment primarily for investment in manufacturing equipment
and for the consolidation of our IT infrastructure and from the
$0.7 million final payment related to the acquisition of
Kilian offset by $0.6 million in proceeds from the sale of
certain fixed assets.
Net cash provided by financing activities of $3.8 million
for the year to date period ended July 1, 2005 resulted
from proceeds of $4.4 million in short-term borrowings,
partially offset by $0.4 million in payments under capital
lease agreements and payment of $0.2 million of
paid-in-kind interest.
Cash and cash equivalents totaled $10.1 million at
December 31, 2005 compared to $4.7 million at
December 31, 2004. The primary source of funds for fiscal
2005 was cash provided by operating activities of
$12.0 million. Net cash flow provided by operating
activities resulted mainly from cash provided by net income of
$2.5 million, and the add-back of non-cash depreciation,
amortization and deferred financing costs of $13.1 million,
deferred tax expense of $0.2 million, amortization of
deferred compensation expense of $0.1 million, non-cash
amortization of $1.7 million for inventory
step-ups recorded as
part of the PTH Acquisition which was offset by cash used by a
net decrease in operating liabilities of $3.8 million and
by cash used from a net increase in operating assets of
$1.8 million.
Net cash used in investing activities of $5.2 million for
the fiscal year ended December 31, 2005 resulted from
$6.2 million of purchases of property, plant and equipment
primarily for investment in manufacturing equipment and for the
consolidation of our IT infrastructure and from the
$0.7 million final payment related to the acquisition of
Kilian, partially offset by the sale of manufacturing equipment
with proceeds of approximately $0.1 million and the return
of approximately $1.6 million of the purchase price for PTH.
Net cash used by financing activities of $1.0 million for
2005 consisted primarily of payments of debt issuance expenses
of $0.3 million, payment of $0.2 million of
paid-in-kind interest and approximately
$0.8 million of capital lease payments partially offset by
proceeds of $0.4 million from the sale of preferred stock.
Net cash flow provided by (used in) our Predecessor’s
operating activities, in the 11 months ended
November 30, 2004 and the year ended December 31, 2003
was $3.6 million and $(14.3) million, respectively.
The increased cash flow provided by operating activities during
2004 was due primarily to increased sales and related operating
results and a reduction in cash required to complete
restructuring programs. The cash used in 2003 was primarily
attributable to $13.9 million of cash required by the
restructuring programs, an investment in inventories to support
customer requirements during transition periods caused by
restructuring programs and a reduction in accounts payable that
had grown during 2002. See “Cost Savings and Productivity
Enhancement Initiatives” for a description of the
restructuring charges.
Surplus property was sold which provided $4.4 million
during the 11 months ended November 30, 2004 and
$3.7 million in the year ended December 31, 2003.
Our ability to make scheduled payments of principal and
interest, to fund planned capital expenditures and to meet our
pension plan funding obligations will depend on our ability to
generate cash in the future. We believe that proceeds from this
offering, cash flow from operations and available cash, together
with available borrowings under our senior revolving credit
facility will be adequate to meet our future liquidity
requirements for the foreseeable future. However, our ability to
generate cash is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are
beyond our control.
We cannot assure you that our business will generate sufficient
cash flow from operations, that any revenue growth or operating
improvements will be realized or that future borrowings will be
available under our senior revolving credit facility in amounts
sufficient to enable us to service our indebtedness or to fund
our other liquidity needs. Our ability to access capital in the
long term will depend on the availability of capital markets and
pricing on commercially reasonable terms at the time we are
seeking funds. In addition, our ability to borrow funds under
our senior revolving credit facility will depend on our ability
to satisfy the financial and non-financial covenants contained
in that facility.
Debt Repayment
During the six month period ended June 2006, Altra Industrial
prepaid approximately $10.8 million of our debt owed to
CDPQ on our behalf. Altra Industrial also paid approximately
$0.7 million and $0.6 million of interest and
prepayment premium, respectively.
Contractual Obligations
The following table is a summary of contractual obligations as
of June 30, 2006 (in millions):
We have semi-annual cash interest requirements due on the
9% senior secured notes with $14.9 million payable in
2006, 2007, 2008, 2009, 2010 and thereafter.
(2)
We have semi-annual cash interest requirements due on the
111/4% senior
notes. Assuming an exchange rate of 1.8163 U.S. dollars per
U.K. pound sterling as of June 30, 2006, we will have
$3.4 million payable in 2006, $6.7 million payable in
each of 2007, 2008, 2009 and 2010 and $16.9 million
thereafter. The principal balance of £33.0 million is
due in 2013.
(3)
We have quarterly interest requirements due on the 17% CDPQ
note. Interest is payable in cash or as paid-in-kind to be
accrued against the outstanding principal balance at the
discretion of the Company.
(4)
We have up to $30.0 million of borrowing capacity, through
November 2009, under our senior revolving credit facility
(including $10.0 million available for use for letters of
credit). At June 30, 2006, we had no outstanding borrowings
and $2.4 million of outstanding letters of credit under our
senior revolving credit facility.
We have cash funding requirements associated with our pension
plan. As of June 30, 2006, these requirements were
estimated to be $5.5 million during the remainder of 2006,
$3.6 million in 2007, $2.5 million in 2008 and
$1.9 million annually thereafter until 2011.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that provide
liquidity, capital resources, market or credit risk support that
expose us to any liability that is not reflected in our combined
financial statements.
Stock-based Compensation
The Company established the 2004 Equity Incentive Plan that
provides for various forms of stock based compensation to
officers and senior level employees of the Company. The Company
accounts for grants under this plan in accordance with the
provisions of SFAS No. 123(R). As of June 30, 2006,
the company had 2,730,000 shares of unvested restricted
stock with a fair value of $0.3 million to be amortized
through 2011. Based on the IPO price
of per
share, the intrinsic value of these awards as of June 30,2006
was ,
of
which related
to vested shares
and related
to unvested shares.
Income Taxes
We are subject to taxation in multiple jurisdictions throughout
the world. Our effective tax rate and tax liability will be
affected by a number of factors, such as the amount of taxable
income in particular jurisdictions, the tax rates in such
jurisdictions, tax treaties between jurisdictions, the extent to
which we transfer funds between jurisdictions and repatriate
income, and changes in law. Generally, the tax liability for
each legal entity is determined either (a) on a
non-consolidated and non-combined basis or (b) on a
consolidated and combined basis only with other eligible
entities subject to tax in the same jurisdiction, in either case
without regard to the taxable losses of non-consolidated and
non-combined affiliated entities. As a result, we may pay income
taxes to some jurisdictions even though on an overall basis we
incur a net loss for the period.
We have completed an analysis of the American Jobs Creation Act
that was passed by both the U.S. House of Representatives
and Senate and signed by the President in October 2005. The Act
provides a deduction that has the effect of reducing our tax
rate and will be phased in over the next five years. As of the
six months ended June 30, 2006, there is no impact on the
Company’s tax rate from the American Jobs Creation Act.
Critical Accounting Policies
The methods, estimates and judgments we use in applying our
critical accounting policies have a significant impact on the
results we report in our financial statements. We evaluate our
estimates and
judgments on an on-going basis. Our estimates are based upon
historical experience and assumptions that we believe are
reasonable under the circumstances. Our experience and
assumptions form the basis for our judgments about the carrying
value of assets and liabilities that are not readily apparent
from other sources. Actual results may vary from what our
management anticipates and different assumptions or estimates
about the future could change our reported results.
We believe the following accounting policies are the most
critical in that they are important to the financial statements
and they require the most difficult, subjective or complex
judgments in the preparation of the financial statements.
Revenue Recognition. Sales and related cost of sales are
recorded upon transfer of the title of the product and risk of
loss, which occurs upon shipment to the customer, based on the
invoice price less allowances for sales returns, cash discounts,
and other deductions as required under GAAP. Collection is
reasonably consistent with internal policy as determined through
an evaluation of each customer’s ability to pay.
Inventory. We value raw materials,
work-in-progress and
finished goods produced since inception at the lower of cost or
market, as determined on a
first-in, first-out
(FIFO) basis. We periodically review the carrying value of
the inventory and have at times determined that a certain
portion of our inventories are excess or obsolete. In those
cases, we write down the value of those inventories to their net
realizable value based upon assumptions about future demand and
market conditions. If actual market conditions are less
favorable than those projected by management, additional
inventory write-downs may be required.
Retirement Benefits. Pension obligations and other post
retirement benefits are actuarially determined and are affected
by several assumptions, including the discount rate, assumed
annual rates of return on plan assets, and per capita cost of
covered health care benefits. Changes in discount rate and
differences from actual results for each assumption will affect
the amounts of pension expense and other post retirement expense
recognized in future periods.
Goodwill and Intangible Assets. Intangible assets of our
Predecessor consisted of goodwill, which represented the excess
of the purchase price paid over the fair value of the net assets
acquired. In connection with the PTH Acquisition, intangible
assets were identified and recorded at their fair value, in
accordance with Statement of Financial Accounting Standards, or
SFAS No. 141, Business Combinations. We
recorded intangible assets for customer relationships, trade
names and trademarks, product technology and patents, and
goodwill. In valuing the customer relationships, trade names and
trademarks and product technology intangible assets, we utilized
variations of the income approach. The income approach was
considered the most appropriate valuation technique because the
inherent value of these assets is their ability to generate
current and future income. The income approach relies on
historical financial and qualitative information, as well as
assumptions and estimates for projected financial information.
Projected information is subject to risk if our estimates are
incorrect. The most significant estimate relates to our
projected revenues. If we do not meet the projected revenues
used in the valuation calculations then the intangible assets
could be impaired. In determining the value of customer
relationships, we reviewed historical customer attrition rates
which were determined to be approximately 5% per year. Most
of our customers tend to be long-term customers with very little
turnover. While we do not typically have long-term contracts
with customers, we have established long-term relationships with
customers which make it extremely difficult for competitors to
displace us. Additionally, we assessed historical revenue growth
within our industry and customers’ industries in
determining the value of customer relationships. The value of
our customer relationships intangible asset could become
impaired if future results differ significantly from any of the
underlying assumptions. This could include a higher customer
attrition rate or a change in industry trends such as the use of
long-term contracts which we may not be able to obtain
successfully. Customer relationships and product technology and
patents are considered finite-lived assets, with estimated lives
of 12 years and 8 years, respectively. The estimated
lives were determined by calculating the number of years
necessary to obtain 95% of the value of the discounted cash
flows of the respective intangible asset. Goodwill and trade
names and trademarks are considered indefinite lived assets.
Trade names and trademarks were determined to be indefinite
lived assets based on the criteria stated in paragraph 11
in SFAS No. 142, Goodwill and Other Intangible
Assets. Other
intangible assets include trade names and trademarks that
identify us and differentiate us from competitors, and therefore
competition does not limit the useful life of these assets. All
of our brands have been in existence for over 50 years and
therefore are not susceptible to obsolescence risk.
Additionally, we believe that our trade names and trademarks
will continue to generate product sales for an indefinite
period. All indefinite lived intangible assets are reviewed at
least annually to determine if an impairment exists. An
impairment could be triggered by a loss of a major customer,
discontinuation of a product line, or a change in any of the
underlying assumptions utilized in estimating the value of the
intangible assets. If an impairment is identified it will be
recognized in that period.
In accordance with SFAS No. 142, we will assess the
fair value of our reporting units for impairment of intangible
assets based upon a discounted cash flow methodology. Estimated
future cash flows are based upon historical results and current
market projections, discounted at a market comparable rate. If
the carrying amount of the reporting unit exceeds the estimated
fair value determined using the discounted cash flow
calculation, goodwill impairment may be present. We would
evaluate impairment losses based upon the fair value of the
underlying assets and liabilities of the reporting unit,
including any unrecognized intangible assets, and estimate the
implied fair value of the intangible asset. An impairment loss
would be recognized to the extent that a reporting unit’s
recorded value of the intangible asset exceeded its calculated
fair value.
We have allocated goodwill and intangible assets arising from
the application of purchase accounting for our Predecessor and
Kilian acquisitions, and have allocated these assets across our
reporting units. We evaluated our intangible assets at the
reporting unit level at December 31, 2005 and found no
evidence of impairment at that date. If the book value of a
reporting unit exceeds its fair value, the implied fair value of
goodwill is compared with the carrying amount of goodwill. If
the carrying amount of goodwill exceeds the implied fair value,
an impairment loss is recorded in an amount equal to that
excess. The fair value of a reporting unit is estimated using
the discounted cash flow approach, and is dependent on estimates
and judgments related to future cash flows and discount rates.
If the actual cash flows differ significantly from the estimates
used by management, we may be required to record an impairment
charge to write down the goodwill to its realizable value.
Long-lived Assets. Long-lived assets are reviewed for
impairment when events or circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable and
for all assets to be disposed. Long-lived assets held for use
are reviewed for impairment by comparing the carrying amount of
an asset to the undiscounted future cash flows expected to be
generated by the asset over its remaining useful life. If an
asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair value, and is charged to
results of operations at that time. Assets to be disposed of are
reported at the lower of the carrying amounts or fair value less
cost to sell. Our management determines fair value using
discounted future cash flow analysis. Determining market values
based on discounted cash flows requires our management to make
significant estimates and assumptions, including long-term
projections of cash flows, market conditions and appropriate
discount rates.
Income Taxes. We record income taxes using the asset and
liability method. Deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective income tax
bases, and operating loss and tax credit carryforwards. We
evaluate the realizability of our net deferred tax assets and
assess the need for a valuation allowance on a quarterly basis.
The future benefit to be derived from our deferred tax assets is
dependent upon our ability to generate sufficient future taxable
income to realize the assets. We record a valuation allowance to
reduce our net deferred tax assets to the amount that may be
more likely than not to be realized. To the extent we establish
a valuation allowance, an expense will be recorded within the
provision for income taxes line on the statement of operations.
In periods subsequent to establishing a valuation allowance, if
we were to determine that we would be able to realize our net
deferred tax assets in excess of our net recorded amount, an
adjustment to the valuation allowance would be recorded as a
reduction to income tax expense in the period such determination
was made.
SFAS No. 123(R). On December 16, 2004, the FASB
issued SFAS No. 123 (revised 2004)
(SFAS No. 123(R), Share-Based Payment, which is a
revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees,
and amends SFAS No. 95, Statement of Cash
Flows. Generally, the approach in SFAS 123(R) is
similar to the approach described in SFAS No. 123.
However, SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the income statements based on
their fair values. We will apply SFAS 123(R) to any stock
options we may issue in the future.
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, (“Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20,
Accounting Changes and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial
Statements”)(“SFAS 154”). SFAS 154
provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes, unless
impracticable, retrospective application as the required method
for reporting a change in accounting principle in the absence of
explicit transition requirements specific to the newly adopted
accounting principle. SFAS 154 also provides guidance for
determining whether retrospective application of a change in
accounting principle is impracticable and for reporting a change
when retrospective application is impracticable. The provisions
of this Statement are effective for accounting changes and
corrections of errors made in fiscal periods beginning after
December 15, 2005. The adoption of the provisions of
SFAS 154 is not expected to have a material impact on the
Company’s financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4”. SFAS No. 151, which is
effective for the Company beginning January 1, 2006,
SFAS No. 151 clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) so that those items are recognized as
current-period charges. This statement also requires the
allocation of fixed production overhead costs based on the
normal capacity of the production facilities regardless of the
actual use of the facility. The Company does not believe that
this statement will have any material impact on the
Company’s financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation
No. FIN 48, or FIN 48, Accounting for
Uncertainty in Income Taxes — An Interpretation of
FASB Statement No. 109, which prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 will be effective for
fiscal years beginning after December 15, 2006. We have not
yet completed our evaluation of the impact of adoption on our
financial position or results of operations.
Qualitative and Quantitative Information about Market Risk
We are exposed to various market risk factors such as
fluctuating interest rates and changes in foreign currency
rates. At present, we do not utilize derivative instruments to
manage this risk.
Foreign Currency Exchange Rate Risk
Currency translation. The results of operations of our
foreign subsidiaries are translated into U.S. dollars at
the average exchange rates for each period concerned. The
balance sheets of foreign subsidiaries are translated into
U.S. dollars at the exchange rates in effect at the end of
each period. Any adjustments resulting from the translation are
recorded as other comprehensive income. As of December 31,2005 and June 30, 2006, the aggregate total assets (based
on book value) of foreign subsidiaries were $74.6 million
and $135.8 million, respectively, representing
approximately 25.1% and 36.5%, respectively, of our total assets
(based on book value). Our foreign currency exchange rate
exposure is primarily with respect to the Euro and British
pounds sterling. The approximate exchange rates in effect at
December 31, 2005 and June 30, 2006 were $1.19 and
$1.25, respectively to the Euro. The approximate exchange rates
in effect at December 31, 2005 and June 30, 2006 were
$1.74 and $1.82,
respectively to the British Pound Sterling. The result of a
hypothetical 10% strengthening of the U.S. dollar against
the Euro and British Pound Sterling would result in a decrease
in the book value of the aggregate total assets of foreign
subsidiaries of approximately $13.6 million as of
June 30, 2006. The result of a hypothetical 10%
strengthening of the U.S. dollar against the Euro and
British Pound Sterling would result in a decrease in net income
of approximately $0.3 million.
Currency transaction exposure. Currency transaction
exposure arises where actual sales and purchases are made by a
business or company in a currency other than its own functional
currency. Any transactional differences at an international
location are accounted for on a monthly basis.
Interest rate risk
We are subject to market exposure to changes in interest rates
based on our financing activities. This exposure relates to
borrowings under our senior revolving credit facility that are
payable at prime rate plus 1.25% in the case of prime rate
loans, or LIBOR rate plus 2.50%, in the case of LIBOR rate
loans. As of June 30, 2006, we had no outstanding
borrowings and $2.4 million of outstanding letters of
credit under our senior revolving credit facility. Because we
have no outstanding debt under our senior revolving credit
facility, a hypothetical change in interest rates of 1% would
not have a material effect on our near-term financial condition
or results of operations. See “Description of
Indebtedness.”
The Sarbanes-Oxley Act of 2002 and Material Weakness in
Internal Control
In connection with their audit of our fiscal 2005 financial
statements, our independent auditors expressed concerns that as
of the date of their opinion we were unable to report accurate
financial information in a timely manner due to resource
limitations of our financial staffing. Based upon the timely
financial reporting required of a public company, the outside
auditors informed senior management and the Audit Committee of
the board of directors that they believe this is a material
weakness in our internal controls. We are actively taking steps
to address this material weakness. These steps include the
recent hiring of a Director of Internal Audit and an SEC Manager
and our prior hiring of a Corporate Controller, Director of
Taxation and a Corporate Accountant. We believe that with the
addition of these resources we should be able to deliver
financial information on a timely basis.
We are a leading global designer, producer and marketer of a
wide range of MPT and motion control products serving customers
in a diverse group of industries, including energy, general
industrial, material handling, mining, transportation and turf
and garden. Our product portfolio includes industrial clutches
and brakes, enclosed gear drives, open gearing, couplings,
engineered bearing assemblies, linear components and other
related products. Our products are used in a wide variety of
high-volume manufacturing processes, where the reliability and
accuracy of our products are critical in both avoiding costly
down time and enhancing the overall efficiency of manufacturing
operations. Our products are also used in non-manufacturing
applications where product quality and reliability are
especially critical, such as clutches and brakes for elevators
and residential and commercial lawnmowers. For the six months
ended June 30, 2006, we had net sales of
$234.6 million, net income of $6.9 million and EBITDA
of $30.6 million.
We market our products under well recognized and established
brand names, including Warner Electric, Boston Gear, Kilian
Manufacturing, Nuttall Gear, Ameridrives, Wichita Clutch,
Formsprag Clutch, Bibby Transmissions, Stieber, Matrix
International, Inertia Dynamics, Twiflex Limited, Industrial
Clutch, Huco Dynatork, Marland Clutch, Delroyd Worm Gear, Bear
Linear and Safetek. Most of these brands have been in existence
for over 50 years. Many of these brands achieved the number
one or number two position in terms of brand awareness in their
respective product categories, according to the most recently
published Motion Systems Design magazine survey. We believe over
50% of our revenues for the six months ended June 30, 2006
were generated from key products where we have the number one or
number two market share position in the markets we serve.
Our products are either incorporated into products sold by OEMs,
sold to end users directly or sold through industrial
distributors. We sell our products in over 70 countries to
over 700 direct OEM customers and over 3,000 distributor outlets
through our global sales and marketing network. Substantially
all of our products are moving, wearing components which are
consumed in use. Due to the complexity of many of our
customers’ manufacturing operations and the high cost of
process failure, our customers have demonstrated a strong
preference to replace their worn Altra brand products with new
Altra products. This replacement dynamic drives recurring
replacement sales, resulting in aftermarket revenue that we
estimate accounted for approximately 41% of our revenues for the
six months ended June 30, 2006.
We are led by a highly experienced management team with over
425 years of cumulative industrial business experience and
an average of 14 years with our companies. Our management
team has established a proven track record of execution,
successfully completing and integrating major strategic
acquisitions and delivering significant growth in both revenues
and profits. We employ a comprehensive business process called
the ABS, which focuses on eliminating inefficiencies from every
business process to improve quality, delivery and cost.
Our Industry
Based on industry data supplied by Penton Information Services,
we estimate that industrial power transmission products
generated worldwide revenues of approximately $75.6 billion
in 2005, of which approximately $30.3 billion was generated
in the United States. These products are used to generate,
transmit, control and transform mechanical energy. The
industrial power transmission industry can be divided into three
areas: MPT products; motors and generators; and adjustable speed
drives. We compete primarily in the MPT area which, based on
industry data, we estimate was a $15.7 billion North
American market and a $39.3 billion global market in 2005.
The global MPT market is highly fragmented, with over 1,000
small manufacturers. While smaller companies tend to focus on
regional niche markets with narrow product lines, larger
companies that each generate annual sales over $100 million
offer a much broader range of products and have global
capabilities. The industry’s customer base is broadly
diversified across many sectors of the economy and
typically places a premium on factors such as quality,
reliability, availability and design and application engineering
support. We believe the most successful industry participants
are those that leverage their distribution network, their
products’ reputations for quality and reliability and their
service and technical support capabilities to maintain
attractive margins on products and gain market share.
Our Strengths
Leading Market Shares and Brand Names. We believe that we
hold the number one or number two market position in key
products across several of our core platforms. For example,
under a report published by the Global Industry Analysts, Inc.,
we are the leading manufacturer of industrial clutches and
brakes in the world. We believe that over 50% of our sales are
derived from products where we hold the number one or number two
share of in the markets we serve. Our brands, most of which have
been in existence for more than 50 years, are widely known
in the MPT product markets. Over 50% of our sales are generated
from products where, according to the most recently published
Motion Systems Design magazine survey, we have the number one or
number two brand recognition in the markets we serve.
Large Installed Base and Diversified OEM Customers Supporting
Aftermarket Sales. With a history dating back to 1877 with
the formation of Boston Gear, we believe we benefit from one of
the largest installed customers bases in the industry. Given the
moving, wearing nature of our products, which require regular
replacement, our large installed base of products with a
diversified group of end user customers, generates significant
aftermarket replacement demand which creates a recurring revenue
stream. Many of our products serve critical functions, where the
cost of product failure would substantially exceed any potential
cost reduction benefits from using cheaper, less proven parts.
This end user preference and consistently recurring replacement
demand in turn help to stabilize our revenue base from the
cyclical nature of the broader economy. For the six months ended
June 30, 2006 we estimate that approximately 41% of our
revenues were derived from aftermarket sales.
Diversified End-Markets. Our revenue base has balanced
exposure across a diverse mix of end user industries, including
energy, general industrial, material handling, mining,
transportation and turf and garden, which helps mitigate the
impact of business and economic cycles. No single industry
represented more than 11% of our total sales. In addition, for
the six months ended June 30, 2006, approximately 28% of
our sales were from outside North America. Our geographic
diversification is further enhanced because some of our products
sold into the North American market are ultimately exported into
international markets as part of the final product sold by the
customer.
Strong Relationship with Distributors and OEMs. We have
over 700 direct OEM customers and enjoy established, long-term
relationships with the leading MPT industrial distributors,
critical factors that contribute to our high base of recurring
aftermarket revenues. We sell our products through more than
3,000 distributor outlets worldwide. We believe our scale,
end user preference and expansive product line make our product
portfolio attractive to both large and multi-branch
distributors, as well as regional and independent distributors
in our industry.
Experienced, High-Caliber Management Team. We are led by
a highly experienced management team with over 425 years of
cumulative industrial business experience and an average of
14 years with our companies. Our CEO, Michael Hurt, has
over 39 years of experience in the MPT industry, while COO
Carl Christenson has over 25 years of experience. Our
management team has established a proven track record of
execution, successfully completing and integrating major
strategic acquisitions and delivering significant growth and
profitability.
The Altra Business System. We benefit from an established
culture of lean management emphasizing quality, delivery and
cost through the ABS. ABS is at the core of our
performance-driven culture and drives both our strategic
development and operational improvements. We estimate that in
the period from January 1, 2005 through June 30, 2006,
ABS has enabled us to achieve savings of over $5 million
through various initiatives, including:
(a) set-up time
reduction and productivity improvement, (b) finished goods
inventory reduction, (c) improved quality and reduction of
internal scrap, (d) on-time delivery improvement,
(e) utilizing value stream mapping to minimize work in
process inventory and
increase productivity and (f) headcount reductions. We
believe these initiatives will continue to provide us with
recurring annual savings. We intend to continue to aggressively
implement operational excellence initiatives by utilizing the
ABS tools throughout our company.
Proven Product Development Capabilities. Our extensive
application engineering know-how drives both new and repeat
sales. Our broad portfolio of products, knowledge and expertise
across various MPT applications allows us to provide our
customers customized solutions to meet their specific needs. We
are highly focused on developing new products in response to
customer requirements. We employ approximately 174
non-manufacturing engineers involved with product development,
research and development, test and technical customer support.
Recent new product development examples include the Foot/ Deck
Mount Kopper Kool Brake which was designed for very high heat
dissipation in extremely rugged tensioning applications such as
drawworks for oil and gas wells and anchoring systems for
on-shore and off-shore drilling platforms.
Our Business Strategy
We intend to continue to increase our sales through organic
growth, expand our geographic reach and product offering through
strategic acquisitions and improve our profitability through
cost reduction initiatives. We seek to achieve these objectives
through the following strategies:
•
Leverage Our Sales and Distribution Network. We intend to
continue to leverage our relationships with our distributors to
gain shelf space, further integrate our recently acquired brands
with our core brands and sell new products. In addition, we
intend to continue to actively pursue new OEM opportunities with
innovative and cost-effective product designs and applications
to help maintain and grow our aftermarket revenues. For example,
in 2002 we launched a new product in the wrap spring category.
Despite established competition within this particular category,
we were able to quickly penetrate the market and we expect to
exceed 15% in global market share in 2006 due to the strength of
our Warner Electric brand. We seek to capitalize on customer
brand preference for our products to generate pull-through
aftermarket demand from our distribution channel. We believe
this strategy also allows our distributors to achieve high
profit margins, further enhancing our preferred position with
them.
•
Focus our Strategic Marketing on New Growth
Opportunities. We intend to expand our emphasis on strategic
marketing to focus on new growth opportunities in key end user
markets. Through a systematic process that leverages our core
brands and products, we seek to identify attractive markets and
product niches, collect customer and market data, identify
market drivers, tailor product and service solutions to specific
market and customer requirements and deploy resources to gain
market share and drive future sales growth.
•
Accelerate New Product and Technology Development. We are
highly focused on driving new product development across our
business in response to customer needs in various markets.
Through our strategic marketing efforts, we continually gain
market and customer intelligence, which feeds new product and
technology development initiatives that are designed to address
particular needs or problems customers identify. This focus has
allowed us to respond quickly to new market opportunities.
Recent new product development examples include the Foot/ Deck
Mount Kopper Kool Brake, a new clutch brake design which
significantly extends product life and can dramatically reduce
blade stop time on commercial and residential lawn tractors, a
new magnetic particle clutch designed to solve a number of
long-standing performance issues on soft-drink bottle capping
applications, and the RA10 speed reducer, designed for use in
the rapidly growing market for armor-fitted military vehicles
used by the US military. In total, we expect new products
developed by us during the past three years to generate
approximately $40 million in revenues in 2006.
Capitalize on Growth and Sourcing Opportunities in the
Asia-Pacific Market. We intend to leverage our established
sales offices in China, Taiwan and Singapore, as well as add
representation in Japan and South Korea. We also intend to
expand our manufacturing presence in Asia beyond our current
plant in Shenzhen, China, to increase sales in the high-growth
Asia-Pacific region. This region also offers opportunities for
low-cost country sourcing of raw materials. During 2005, we
sourced approximately 12% of our purchases from low-cost
countries, resulting in average cost reductions of approximately
40% for these products. Within the next five years, we intend to
utilize our sourcing office in Shanghai to significantly
increase our current level of low-cost country sourced
purchases. We may also consider opportunities to outsource some
of our production from North American and Western European
locations to Asia.
•
Continue to Improve Operational and Manufacturing
Efficiencies through ABS. We believe we can continue to
improve profitability through cost control, overhead
rationalization, global process optimization, continued
implementation of lean manufacturing techniques and strategic
pricing initiatives. Our operating plan, based on manufacturing
centers of excellence, provides additional opportunities to
reduce costs by sharing best practices across geographies and
business lines and by consolidating purchasing processes. We
have implemented these principles with our recent acquisitions
of Hay Hall and Bear Linear and intend to apply such principles
to future acquisitions.
•
Pursue Strategic Acquisitions that Complement our Strong
Platform. With our extensive MPT and motion control
products, our strong customer and distributor relationships and
our know-how in implementing lean enterprise initiatives through
ABS, we have an ideal platform for acquiring and successfully
integrating related businesses, as evidenced through our
acquisition and integration of Hay Hall and Bear Linear.
Management believes that there may be a number of attractive
potential acquisition candidates in the future, in part due to
the fragmented nature of the industry. We plan to continue our
disciplined pursuit of strategic acquisitions to accelerate our
growth, enhance our industry leadership and create value.
Products
We produce and market a wide variety of MPT products. Our
product portfolio includes industrial clutches and brakes, open
and enclosed gearing, couplings, engineered bearing assemblies
and other related power transmission components which are sold
across a wide variety of industries. Our products benefit from
our industry leading brand names including Warner Electric,
Boston Gear, Kilian Manufacturing, Nuttall Gear,
Ameridrives, Wichita Clutch, Formsprag Clutch,
Bibby Transmissions, Stieber, Matrix International, Inertia
Dynamics, Twiflex Limited, Industrial Clutch,
Huco Dynatork, Marland Clutch, Delroyd Worm Gear, Bear
Linear and Safetek. Our products serve a wide variety of end
markets including aerospace, energy, food processing, general
industrial, material handling, mining, petrochemical,
transportation and turf and garden. We primarily sell our
products to OEMs and through long-standing relationships with
the industry’s leading industrial distributors such as
Motion Industries, Applied Industrial Technologies, Kaman
Industrial Technologies and W.W. Grainger.
Aerospace, energy, material handling, metals, turf and garden,
mining
Elevators, forklifts, lawn mowers, oil well drawworks, punch
presses, conveyors
Gearing
Boston Gear, Nuttall Gear, Delroyd Worm Gear,
Food processing, material handling, metals, transportation
Conveyors, ethanol mixers, packaging machinery, rail car wheel
drives
Engineered Couplings
Ameridrives, Bibby Transmissions
Energy, metals, plastics
Extruders, turbines, steel strip mills
Engineered Bearing Assemblies
Kilian Manufacturing
Aerospace, material handling, transportation
Cargo rollers, steering columns, conveyors
Power Transmission Components
Warner Electric, Boston Gear, Huco Dynatork, Bear Linear, Matrix
International, Safetek
Material handling, metals, turf and garden
Conveyors, lawn mowers, machine tools
Clutches and Brakes. Clutches are devices which use
mechanical, magnetic, hydraulic, pneumatic, or friction type
connections used to facilitate engaging or disengaging two
rotating members. Brakes are combinations of interacting parts
that work to slow or stop machinery. We manufacture a variety of
clutches and brakes in three main product categories:
electromagnetic, overrunning and heavy duty. Our core clutch and
brake manufacturing facilities are located in Indiana, Illinois,
Michigan, Texas, the United Kingdom, Germany, France and China.
•
Electromagnetic Clutches and Brakes. Our industrial
products include clutches and brakes with specially designed
controls for material handling, forklift, elevator, medical
mobility, mobile off-highway, baggage handling and plant
productivity applications. We also offer a line of clutch and
brake products for walk-behind mowers, residential lawn tractors
and commercial mowers. While industrial applications are
predominant, we also manufacture several vehicular niche
applications including on-road refrigeration compressor clutches
and agricultural equipment clutches. We market our
electromagnetic products under the Warner Electric, IDI and
Matrix brand names.
•
Overrunning Clutches. Specific product lines include the
Formsprag and Stieber indexing and backstopping clutches.
Primary industrial applications include conveyors, gear
reducers, hoists and cranes, mining machinery, machine tools,
paper machinery, packaging machinery, pumping equipment and
other specialty machinery. We market and sell these products
under the Formsprag, Marland and Stieber brand names.
•
Heavy Duty Clutches and Brakes. Our heavy duty clutch and
brake product lines serve various markets including metal
forming, off-shore and land-based oil and gas drilling
platforms, mining material handling, marine applications and
various off-highway and construction equipment segments. Our
line of heavy duty pneumatic, hydraulic and caliper clutches and
brakes are marketed under the Wichita Clutch and Twiflex brand
names.
Gearing. Gears reduce the output speed and increase the
torque of an electric motor or engine to the level required to
drive a particular piece of equipment. These products are used
in various industrial, material handling, mixing, transportation
and food processing applications. Specific product lines include
vertical and horizontal gear drives, speed reducers and
increasers, high-speed compressor drives, enclosed
custom gear drives, various enclosed gear drive configurations
and open gearing products such as spur, helical, worm and
miter/bevel gears. We design and manufacture a broad range of
gearing products under the Boston Gear, Nuttall Gear and Delroyd
Worm Gear brand names. We manufacture our gearing products at
our facilities in New York and North Carolina and sell to a
variety of end markets.
Engineered Couplings. Couplings are the interface between
two shafts, which enable power to be transmitted from one shaft
to the other. Because shafts are often misaligned, we designed
our couplings with a measure of flexibility that accommodates
various degrees of misalignment. Our coupling product line
includes gear couplings, high-speed disc and diaphragm
couplings, grid couplings, universal joints and spindles. Our
coupling products are used in the power generation, steel and
custom machinery industries. We manufacture a broad range of
coupling products under the Ameridrives and Bibby brand names.
Our engineered couplings are manufactured in our facilities in
Pennsylvania and the United Kingdom.
Engineered Bearing Assemblies. Bearings are components
that support, guide and reduce friction of motion between fixed
and moving machine parts. Our engineered bearing assembly
product line, includes ball bearings, roller bearings, thrust
bearings, track rollers, stainless steel bearings, polymer
assemblies, housed units and custom assemblies. We manufacture a
broad range of engineered bearing products under the Kilian
brand name. We sell bearing products to a wide range of end
markets, including the general industrial and automotive
markets, with a particularly strong OEM customer focus. We
manufacture our bearing products at our facilities in New York
and Canada.
Power Transmission Components. Power transmission
components are used in a number of industries to generate,
transfer or control motion from a power source to an application
requiring rotary or linear motion. Power transmission products
are applicable in most industrial markets, including, but not
limited to metals processing, turf and garden and material
handling applications. Specific product lines include linear
actuators, miniature and small precision couplings, air motors,
friction materials and other various items. We manufacture or
market a broad array of power transmission components under
several businesses including Bear Linear, Huco Dynatork,
Safetek, Boston Gear, Warner Electric and Matrix. Our core power
transmission component manufacturing facilities are located in
England, Scotland, Illinois, North Carolina, the United Kingdom
and China.
•
Bear Linear. Bear Linear is a designer and manufacturer
of rugged service electromechanical linear actuators for
off-highway vehicles, agriculture, turf care, special vehicles,
medical equipment, industrial and marine applications.
•
Huco Dynatork. Huco Dynatork is a leading manufacturer
and supplier of a complete range of precision couplings,
universal joints, rod ends and linkages.
•
Safetek. Safetek manufactures a broad range of high
quality non-asbestos friction materials for industrial, marine,
construction, agricultural and vintage and classic cars and
motorcycles.
•
Other Accessories. Our Boston Gear, Warner Electric and
Matrix businesses make or market several other accessories such
as sensors, sleeve bearings, AC/ DC motors, adjustable speed
drives, shaft accessories, face tooth couplings and fluid power
components that are used in numerous end markets.
Research and Development and Product Engineering
We closely integrate new product development with marketing,
manufacturing and product engineering in meeting the needs of
our customers. We have product engineering teams that work to
enhance our existing products and develop new product
applications for our growing base of customers that require
custom solutions. We believe these capabilities provide a
significant competitive advantage in the development of high
quality industrial power transmission products. Our product
engineering teams focus on:
•
lowering the cost of manufacturing our existing products;
•
redesigning existing product lines to increase their efficiency
or enhance their performance; and
Our continued investment in new product development is intended
to help drive customer growth as we address key customer needs.
Sales and Marketing
We sell our products in over 70 countries to over 700 direct OEM
customers and over 3,000 distributor outlets. We offer our
products through our direct sales force comprised of
101 company-employed sales associates as well as
independent sales representatives. Our worldwide sales and
distribution presence enables us to provide timely and
responsive support and service to our customers, many of which
operate globally, and to capitalize on growth opportunities in
both developed and emerging markets around the world.
We employ an integrated sales and marketing strategy
concentrated on both key industries and individual product
lines. We believe this dual vertical market and horizontal
product approach distinguishes us in the marketplace allowing us
to quickly identify trends and customer growth opportunities and
deploy resources accordingly. Within our key industries, we
market to OEMs, encouraging them to incorporate our products
into their equipment designs, to distributors and to end users,
helping to foster brand preference. With this strategy, we are
able to leverage our industry experience and product breadth to
sell MPT and motion control solutions for a host of industrial
applications.
Distribution
Our MPT components are either incorporated into end products
sold by OEMs or sold through industrial distributors as
aftermarket products to end users and smaller OEMs. We operate a
geographically diversified business. For the six months ended
June 30, 2006, 72.2% of our net sales were derived from
customers in North America, 20.3% from customers in Europe and
7.5% from customers in Asia and the rest of the world. Our
global customer base is served by an extensive global sales
network comprised of our sales staff as well as our network of
over 3,000 distributor outlets.
Rather than serving as passive conduits for delivery of product,
our industrial distributors are active participants in
influencing product purchasing decisions in the MPT industry. In
addition, distributors play a critical role through stocking
inventory of our products, which affects the accessibility of
our products to aftermarket buyers. It is for this reason that
distributor partner relationships are so critical to the success
of the business. We enjoy strong established relationships with
the leading distributors as well as a broad, diversified base of
specialty and regional distributors.
Competition
We operate in highly fragmented and very competitive markets
within the MPT market. Some of our competitors have achieved
substantially more market penetration in certain of the markets
in which we operate, such as helical gear drives and couplings,
and some of our competitors are larger than us and have greater
financial and other resources. In particular, we compete with
Emerson Power Transmission Manufacturing, L.P., Regal Beloit
Corporation and Rockwell Automation. In addition, with respect
to certain of our products, we compete with divisions of our
OEM customers. Competition in our business lines is based
on a number of considerations including quality, reliability,
pricing, availability and design and application engineering
support. Our customers increasingly demand a broad product range
and we must continue to develop our expertise in order to
manufacture and market these products successfully. To remain
competitive, we will need to invest regularly in manufacturing,
customer service and support, marketing, sales, research and
development and intellectual property protection. We may have to
adjust the prices of some of our products to stay competitive.
In addition, some of our larger, more sophisticated customers
are attempting to reduce the number of vendors from which they
purchase in order to increase their efficiency. There is
substantial and continuing pressure on major OEMs and larger
distributors to reduce costs, including the cost of products
purchased from outside suppliers such as us. As a result of cost
pressures from our customers, our ability to compete depends in
part on our ability to generate
production cost savings and, in turn, find reliable,
cost-effective outside component suppliers or manufacture our
products.
Intellectual Property
We rely on a combination of patents, trademarks, copyright and
trade secret laws in the United States and other
jurisdictions, as well as employee and third-party
non-disclosure agreements, license arrangements and domain name
registrations to protect our intellectual property. We sell our
products under a number of registered and unregistered
trademarks, which we believe are widely recognized in the MPT
industry. With the exception of Boston Gear and Warner Electric,
we do not believe any single patent, trademark or trade name is
material to our business as a whole. Any issued patents that
cover our proprietary technology and any of our other
intellectual property rights may not provide us with adequate
protection or be commercially beneficial to us and, if applied
for, may not be issued. The issuance of a patent is not
conclusive as to its validity or its enforceability. Competitors
may also be able to design around our patents. If we are unable
to protect our patented technologies, our competitors could
commercialize technologies or products which are substantially
similar to ours.
With respect to proprietary know-how, we rely on trade secret
laws in the United States and other jurisdictions and on
confidentiality agreements. Monitoring the unauthorized use of
our technology is difficult and the steps we have taken may not
prevent unauthorized use of our technology. The disclosure or
misappropriation of our intellectual property could harm our
ability to protect our rights and our competitive position.
Some of our registered and unregistered trademarks include:
Warner Electric, Boston Gear, Kilian Manufacturing, Nuttall
Gear, Ameridrives, Wichita Clutch, Formsprag Clutch, Bibby
Transmissions, Stieber, Matrix International, Inertia Dynamics,
Twiflex Limited, Industrial Clutch, Huco Dynatork, Marland
Clutch, Delroyd Worm Gear, Bear Linear and Safetek.
As of June 30, 2006, we had approximately
2,600 full-time and 145 part-time employees, of whom
approximately 55% were located in the United States, 31% in
Europe, and 14% in Asia. Approximately 19% of our full-time
factory non-exempt North American employees are represented by
labor unions. In addition, approximately half of our employees
in our facility in Scotland are represented by a labor union.
The four U.S. collective bargaining agreements to which we
are a party will expire on August 10, 2007,
September 19, 2007, June 2, 2008 and February 1,2009, while our agreement in Scotland expires on March 31,2007. Two of the four U.S. collective bargaining agreements
contain provisions for additional, potentially significant
lump-sum severance payments to all employees covered by the
agreements who are terminated as the result of a plant closing.
See “Risk Factors — Risks Related to our
Business — We may be subjected to work stoppages at
our facilities, or our customers may be subjected to work
stoppages, which could seriously impact the profitability of our
business.”
The remainder of our European facilities have employees who are
generally represented by local and national social works
councils which are common in Europe. Social works councils meet
with employer industry associations every two to three years to
discuss employee wages and working conditions. Our facilities in
France and Germany often participate in such discussions and
adhere to any agreements reached.
In addition to our leased headquarters in Quincy, Massachusetts,
we maintain 23 production facilities, ten of which are located
in the United States, two in Canada, ten in Europe and one in
China. The following table lists all of our facilities, other
than sales offices and distribution centers, as of June 30,2006 indicating the location, principal use and whether the
facilities are owned or leased.
Must give the lessor twelve month notice for termination.
(5)
Month to month lease.
Suppliers and Raw Materials
We obtain raw materials, component parts and supplies from a
variety of sources, generally from more than one supplier. Our
suppliers and sources of raw materials are based in both the
United States and other countries and we believe that our
sources of raw materials are adequate for our needs for the
foreseeable future. We do not believe the loss of any one
supplier would have a material adverse effect on our business or
result of operations. Our principal raw materials are steel,
castings and copper. We generally purchase our materials on the
open market, where certain commodities such as steel and copper
have increased in price significantly in recent years. We have
not experienced any significant shortage of our key materials
and have not historically engaged in hedging transactions for
commodity suppliers.
Regulation
We are subject to a variety of government laws and regulations
that apply to companies engaged in international operations.
These include compliance with the Foreign Corrupt Practices Act,
U.S. Department of Commerce export controls, local
government regulations and procurement policies and practices
(including regulations relating to import-export control,
investments, exchange controls and repatriation of earnings). We
maintain controls and procedures to comply with laws and
regulations associated with our international operations. In the
event we are unable to remain compliant with such laws and
regulations, our business may be adversely affected.
See “Risk Factors — Risks Related to Our
Business — Our operations are subject to international
risks that could affect our operating results.”
Environmental and Health and Safety Matters
We are subject to a variety of federal, state, local, foreign
and provincial environmental laws and regulations, including
those governing the discharge of pollutants into the air or
water, the management and disposal of hazardous substances and
wastes and the responsibility to investigate and cleanup
contaminated sites that are or were owned, leased, operated or
used by us or our predecessors. Some of these laws and
regulations require us to obtain permits, which contain terms
and conditions that impose limitations on our ability to emit
and discharge hazardous materials into the environment and
periodically may be subject to modification, renewal and
revocation by issuing authorities. Fines and penalties may be
imposed for non-compliance with applicable environmental laws
and regulations and the failure to have or to comply with the
terms and conditions of required permits. From time to time our
operations may not be in full compliance with the terms and
conditions of our permits. We periodically review our procedures
and policies for compliance with environmental laws and
requirements. We believe that our operations generally are in
material compliance with applicable environmental laws and
requirements and that any non-compliance would not be expected
to result in us incurring material liability or cost to achieve
compliance. Historically, the costs of achieving and maintaining
compliance with environmental laws and requirements have not
been material.
Certain environmental laws in the United States, such as the
federal Superfund law and similar state laws, impose liability
for the cost of investigation or remediation of contaminated
sites upon the current or, in some cases, the former site owners
or operators and upon parties who arranged for the disposal of
wastes or transported or sent those wastes to an off-site
facility for treatment or disposal,
regardless of when the release of hazardous substances occurred
or the lawfulness of the activities giving rise to the release.
Such liability can be imposed without regard to fault and, under
certain circumstances, can be joint and several, resulting in
one party being held responsible for the entire obligation. As a
practical matter, however, the costs of investigation and
remediation generally are allocated among the viable responsible
parties on some form of equitable basis. Liability also may
include damages to natural resources. We are not listed as a
potentially responsible party in connection with any sites we
currently or formerly owned or operated or any off-site waste
disposal facility. There is contamination at some of our current
facilities, primarily related to historical operations at those
sites, for which we could be liable under these environmental
laws. The potential for contamination exists due to historic
activities at our other current or former sites. We currently
are not undertaking any remediation or investigations and our
costs or liability in connection with potential contamination
conditions at our facilities cannot be predicted at this time
because the potential existence of contamination has not been
investigated or not enough is known about the environmental
conditions or likely remedial requirements. Currently, other
parties with contractual liability are addressing or have plans
or obligations to address those contamination conditions that
may pose a material risk to human health, safety or the
environment. We are being indemnified by third parties subject
to certain caps or limitations on the indemnification, for
certain environmental costs and liabilities. Accordingly, based
on the indemnification and the experience with similar sites of
the environmental consultants who we have hired, we do not
expect such costs and liabilities to have a material adverse
effect on our business, operations or earnings.
Legal Proceedings
We are, from time to time, party to various legal proceedings
arising out of our business. These proceedings primarily involve
commercial claims, product liability claims, intellectual
property claims, environmental claims, personal injury claims
and workers’ compensation claims. We cannot predict the
outcome of these lawsuits, legal proceedings and claims with
certainty. Nevertheless, we believe that the outcome of any
currently existing proceedings, even if determined adversely,
would not have a material adverse effect on our business,
financial condition and results of operations.
Michael L. Hurt, P.E. has been our Chief Executive
Officer and a director since the formation of Altra in 2004.
During 2004, prior to our formation, Mr. Hurt provided
consulting services to Genstar Capital and was appointed
Chairman and Chief Executive Officer of Kilian in October 2004.
From January 1991 to November 2003, Mr. Hurt was the
President and Chief Executive Officer of TB Woods Incorporated,
a manufacturer of industrial power transmission products. Prior
to TB Woods, Mr. Hurt spent 23 years in a variety of
management positions at the Torrington Company, a major
manufacturer of bearings and a subsidiary of Ingersoll Rand.
Mr. Hurt holds a B.S. degree in Mechanical Engineering from
Clemson University and an M.B.A. from Clemson-Furman University.
Carl R. Christenson has been our President and Chief
Operating Officer since January 2005. From 2001 to 2005,
Mr. Christenson was the President of Kaydon Bearings, a
manufacturer of custom-engineered bearings and a division of
Kaydon Corporation. Prior to joining Kaydon,
Mr. Christenson held a number of management positions at TB
Woods Incorporated and several positions at the Torrington
Company. Mr. Christenson holds a M.S. and B.S. degree in
Mechanical Engineering from the University of Massachusetts and
a M.B.A. from Rensselaer Polytechnic.
David A. Wall has been our Chief Financial Officer since
January 2005. From 2000 to 2004, Mr. Wall was the Chief
Financial Officer of Berman Industries, a manufacturer and
distributor of portable lighting products. From 1994 to 2000,
Mr. Wall was the Chief Financial Officer of DoALL Company,
a manufacturer and distributor of machine tools and industrial
supplies. Mr. Wall is a Certified Public Accountant and
holds a B.S. degree in Accounting from the University of
Illinois and a M.B.A. in Finance from the University of Chicago.
Gerald Ferris has been Altra Industrial’s Vice
President of Global Sales since November 2004 and held the same
position with Power Transmission Holdings, LLC, our Predecessor,
since March 2002. He is responsible for the worldwide sales of
our broad product platform. Mr. Ferris joined our
Predecessor in 1978 and since joining has held various
positions. He became the Vice President of Sales for
Boston Gear in 1991. Mr. Ferris holds a B.A. degree in
Political Science from Stonehill College.
Timothy McGowan has been Altra Industrial’s Vice
President of Human Resources since November 2004 and held the
same position with our Predecessor since June 2003. Prior to
joining the
Company, Mr. McGowan was Vice President, Human Resources
for Bird Machine, part of Baker Hughes, Inc., an oil equipment
manufacturing company. Before his tenure with Bird Machine,
Mr. McGowan spent many years with Raytheon in various Human
Resources positions. Mr. McGowan holds a B.A. degree in
English from St. Francis College in Maine.
Edward L. Novotny has been Altra Industrial’s Vice
President and General Manager of Boston Gear, Overrunning
Clutch, Huco since November 2004 and held the same position with
our Predecessor since May 2001. Prior to joining our Predecessor
in 1999, Mr. Novotny served in a plant management role and
then as the Director of Manufacturing for Stabilus Corporation,
an automotive supplier, since October 1990. Prior to Stabilus,
Mr. Novotny held various plant management and production
control positions with Masco Industries and Rockwell
International. Mr. Novotny holds a B.S. degree in Business
Administration from Youngstown State University.
Craig Schuele has been Altra Industrial’s Vice
President of Marketing and Business Development since November
2004 and held the same position with our Predecessor since July
2004. Prior to his current position, Mr. Schuele has been
Vice President of Marketing since March 2002, and previous to
that he was a Director of Marketing. Mr. Schuele joined our
Predecessor in 1986 and holds a B.S. degree in management from
Rhode Island College.
Jean-Pierre L. Conte was elected as one of our directors
and chairman of the board in connection with the PTH Acquisition
which occurred in November 2004. Mr. Conte is currently
Chairman and Managing Director of Genstar Capital.
Mr. Conte joined Genstar Capital in 1995. Prior to leading
Genstar Capital, Mr. Conte was a principal for six
years at the NTC Group, Inc., a private equity investment firm.
He began his career at Chase Manhattan in 1985. He has served as
a director and chairman of the board of PRA International, Inc.
since 2000. Mr. Conte has also served as a director of
Propex Fabrics, Inc. since December 2004 and as a director of
Panolam Industries International, Inc. since September 2005.
Mr. Conte holds a B.A. from Colgate University and an
M.B.A. from Harvard University.
Frank E. Bauchierowas elected as one of our directors in
connection with the PTH Acquisition. Mr. Bauchiero serves
on the Strategic Advisory Committee of Genstar Capital. Prior to
joining Genstar Capital, Mr. Bauchiero was President
and Chief Operating Officer of Walbro Corporation, a
manufacturer of fuel storage and delivery systems for the
automotive industry and President of Dana Corporation’s
North American Industrial Operations.
Darren J. Goldwas elected as one of our directors in
connection with the PTH Acquisition. Mr. Gold is currently
a Principal of Genstar Capital. Mr. Gold joined Genstar
Capital in 2000. Prior to joining Genstar Capital, Mr. Gold
was an engagement manager with McKinsey & Company. He
has served as a director at INSTALLS inc., LLC since 2002 and
Panolam Industries International, Inc. since 2005. Mr. Gold
holds a B.A. in Political Science and History from the
University of California, Los Angeles and a J.D. from the
University of Michigan.
Larry McPhersonwas elected as one of our directors in
January 2005. Prior to joining our board, Mr. McPherson was
a Director of NSK Ltd. from 1997 until his retirement in 2003
and served as Chairman and CEO of NSK Europe from January 2002
to December 2003. In total he was employed by NSK Ltd. for
21 years and was Chairman and CEO of NSK Americas for the
six years prior to his European assignment. Mr. McPherson
continues to serve as an advisor to the board of directors of
NSK Ltd. as well as a board member of McNaughton and Gunn, Inc.
and of a privately owned printing company. Mr. McPherson
earned his MBA from Georgia State and his undergraduate degree
in Electrical Engineering from Clemson University.
Richard D. Paterson was elected as one of our directors
in connection with the PTH Acquisition. Since 1987,
Mr. Paterson has been a Managing Director at Genstar
Capital. Prior to joining Genstar Capital, Mr. Paterson was
a Senior Vice President and Chief Financial Officer of Genstar
Corporation, a New York Stock Exchange listed company. He has
served as a director of North American Energy Partners Inc.
since 2005, Propex Fabrics, Inc. since 2004, American Pacific
Enterprises, LLC since 2004,
Woods Equipment Company since 2004 and INSTALLS inc, LLC since
2004. Mr. Paterson is a Chartered Accountant and holds a
Bachelor of Commerce degree from Concordia University.
Board Composition
Our bylaws provide for a board of directors consisting of six
members. Upon completion of this offering, we will be a
“controlled company” within the meaning given to that
term under the rules of the NASDAQ. As a controlled company, we
will be exempt from the requirements that our board of directors
be comprised of a majority of independent directors and that our
compensation committee and governance and nominating committee
be comprised of independent directors. Currently,
Mr. McPherson is an ”independent” director within
the meaning of the rules of the NASDAQ and federal securities
laws.
Committees of the Board of Directors
Our board of directors has three standing committees: the audit
committee, the nominating and corporate governance committee and
the compensation committee.
Audit Committee
The primary purpose of the audit committee is to assist the
board’s oversight of:
•
the integrity of our financial statements;
•
our compliance with legal and regulatory requirements;
•
our independent auditors’ qualifications and independence;
•
the performance of our independent auditors and our internal
audit function; and
•
prepare the report required to be prepared by the committee
pursuant to SEC rules.
Messrs. Richard D. Paterson, Darren J. Gold, and Larry
McPherson serve on the audit committee. Mr. Paterson serves
as chairman of our audit committee. Mr. McPherson qualifies
as an independent “audit committee financial expert”
as such term has been defined by the SEC in Item 401(h)(2)
of Regulation S-K.
Mr. Paterson and Mr. Gold are not considered to be
“independent” directors as provided by the Rules of
NASDAQ and the Securities Exchange Act of 1934, or the Exchange
Act. The audit committee currently complies and at the time of
listing will comply with NASDAQ and federal securities law
independence requirements pursuant to an exemption from the
requirement that all audit committee members must be independent
provided by Section 4350(a)(5) of the NASDAQ Rules and
Rule 10A-3(b)(1)(iv) of the Exchange Act. After the
completion of this offering, we expect non-independent members
of our audit committee will be replaced so that the majority of
our audit committee will be independent within 90 days of
the effectiveness of this registration statement. In addition,
we expect that all of our audit committee members will be
independent within one year from the effectiveness of this
registration statement.
Nominating and Corporate Governance Committee
The primary purpose of the nominating and corporate governance
committee is to:
•
identify and to recommend to the board individuals qualified to
serve as directors of our company and on committees of the board;
•
advise the board with respect to the board composition,
procedures and committees;
•
develop and recommend to the board a set of corporate governance
principles and guidelines applicable to us; and
•
oversee the evaluation of the board and our management.
Messrs., ,
and serve
on the nominating and corporate governance committee.
Mr. serves
as the chairman of the corporate governance and nominating
committee. Pursuant to an exemption for controlled companies
provided by Section 4350(c)(5) of the NASDAQ Rules, the
nominating and corporate governance committee is exempt from the
requirement that its membership be comprised of independent
directors.
Compensation Committee
The primary purpose of our compensation committee is to oversee
our compensation and employee benefit plans and practices and to
produce a report on executive compensation as required by SEC
rules. Messrs. Darren J. Gold, Richard D. Paterson and
Frank E. Bauchiero serve on the compensation committee.
Mr. Gold serves as the chairman of the compensation
committee. Pursuant to an exemption for controlled companies
provided by Section 4350(c)(5) of the NASDAQ Rules, the
compensation committee is exempt from the requirement that its
membership be comprised of independent directors.
Director Compensation
All members of our board of directors are reimbursed for their
usual and customary expenses incurred in connection with
attending all board and other committee meetings.
Messrs. Frank Bauchiero and Larry McPherson, receive
director fees of $40,000 per year. In January of 2005, each
of Mr. Bauchiero and McPherson was also granted
68,250 shares of restricted common stock, which stock is
subject to vesting over a period of five years.
Executive Compensation
The following table sets forth all compensation paid to or
incurred on our behalf of our Chief Executive Officer and each
of our other four most highly compensated executive officers, or
the named executive officers, during the fiscal year ended
December 31, 2005. The compensation agreements for each of
these officers that are currently in effect are described under
the caption “— Employment Arrangements and Change
of Control Arrangements” below.
Mr. Hurt was paid a signing bonus of $146,000 during 2005.
(2)
Mr. Christenson was paid a signing bonus of $120,000 during
2005.
(3)
Mr. Wall was paid a signing bonus of $10,000 during 2005.
(4)
Value at time of grant. The aggregate restricted stock holdings
of Mr. Hurt at the end of 2005 were 916,466 shares
with a value of $97,500. Restricted stock grants vest in five
equal annual installments and include the right to receive
dividends on such stock when declared by the board.
(5)
Value at time of grant. The aggregate restricted stock holdings
of Mr. Christenson at the end of 2005 were
780,000 shares with a value of $78,000. Restricted stock
grants vest in five equal annual installments and include the
right to receive dividends on such stock when declared by the
board.
(6)
Value at time of grant. The aggregate restricted stock holdings
of Mr. Wall at the end of 2005 were 390,000 shares
with a value of $39,000. Restricted stock grants vest in five
equal annual installments and include the right to receive
dividends on such stock when declared by the board.
(7)
Value at time of grant. The aggregate restricted stock holdings
of Mr. Novotny at the end of 2005 was 195,000 shares
with a value of $19,500. Restricted stock grants vest in five
equal annual installments and include the right to receive
dividends on such stock when declared by the board.
(8)
Value at time of grant. The aggregate restricted stock holdings
of Mr. Ferris at the end of 2005 was 195,000 shares
with a value of $19,500. Restricted stock grants vest in five
equal annual installments and include the right to receive
dividends on such stock when declared by the board.
(9)
Represents our 401k contribution on the officer’s behalf.
(10)
Mr. Christenson was reimbursed $161,534 in 2005 for costs
related to his relocation and we made a $12,600 401k
contribution on his behalf.
(11)
Mr. Wall was reimbursed $38,545 in 2005 for costs related
to his relocation and we made a $12,600 401k contribution on his
behalf.
Compensation Committee Interlocks and Insider
Participation
During our last completed fiscal year, none of our executive
officers served on our compensation committee or served on the
compensation committee or board of directors of any other
company of which any of our directors is an executive officer.
In January 2005, Mr. Frank Banchiero, a member of our
Compensation Committee, received a one-time consulting fee of
$75,000 for certain consulting and advisory services rendered to
us in connection with the PTH Acquisition. In addition,
Mr. Richard Patterson and Mr. Darren Gold are
employees of Genstar Capital, our largest stockholder. Please
see “Certain Relationships and Related Transactions”
for a description of Genstar Capital’s relationship with
the Company.
Equity Incentive Plan
In connection with the PTH Acquisition, we adopted an equity
incentive plan that permits the grant of restricted stock, stock
units, stock appreciation rights, cash, non-qualified stock
options and incentive stock options to purchase shares of our
common stock. The maximum number of shares of our common stock,
par value $0.001, that may be issued under the terms of the
equity incentive plan is 4,500,000. The maximum number of shares
that may be subject to “incentive stock options”
(within the meaning of Section 422 of the Code) is
3,500,000 shares. A committee appointed by our board of
directors administers the equity incentive plan and has
discretion to establish the specific terms and conditions for
each award. Our employees, consultants and directors are
eligible to receive awards under our equity incentive plan.
Stock options, stock appreciation rights, restricted stock,
stock units and cash awards may constitute performance-based
awards in accordance with Section 162(m) of the Code at the
discretion of the committee. Any grant of restricted stock under
our plan may be subject to vesting requirements, as provided in
its applicable award agreement, and will generally vest in five
equal annual
installments. The committee may provide that any time prior to a
change in control, any outstanding stock options, stock
appreciation rights, stock units and unvested cash awards shall
immediately vest and become exercisable and any restriction on
restricted stock awards or stock units shall immediately lapse.
In addition, the committee may provide that all awards held by
participants who are in our service at the time of the change of
control, shall remain exercisable for the remainder of their
terms notwithstanding any subsequent termination of a
participant’s service. All awards shall be subject to the
terms of any agreement effecting a change of control. Upon a
participant’s termination of employment (other than for
cause), unless the board or committee provides otherwise:
(i) any outstanding stock options or stock appreciation
rights may be exercised 90 days after termination, to the
extent vested, (ii) unvested restricted stock awards and
stock units shall expire and (iii) cash awards and
performance-based awards shall be forfeited.
Pension Plan
Gerald Ferris and Craig Schuele previously participated in the
Colfax PT Pension Plan; however, on December 31, 1998,
their participation in and benefits accrued under such plan were
frozen. Under the provisions of the plan, upon reaching the
normal retirement age of 65, Messrs. Ferris and Schuele
will receive annual payments of approximately $38,700 and
$10,800 respectively. These amounts were determined from a
formula set forth in the plan and are based upon (i) a
participant’s years of service, (ii) a
participant’s compensation at the time the plan was frozen,
and (iii) a standard set of benefit percentage multipliers.
As part of the PTH Acquisition, we were obligated to assume
certain liabilities of the Colfax PT Pension Plan, including
such future payments to Messrs. Ferris and Schuele, and
established a new plan, the Altra Industrial Motion, Inc.
Retirement Plan to do so. Participation in and the benefits
under the Altra Industrial Motion Retirement Plan have been
frozen at identical levels to the Colfax PT Pension Plan. See
“Risk Factors — Risks Relating to Our
Business — We face additional costs associated with
our post-retirement and post-employment obligations to employees
which could have an adverse effect on our financial
condition.”
Severance Agreements
We assumed severance agreements with certain executive officers
upon the completion of the PTH Acquisition. Each of the
severance agreements provided that, subject to the
executive’s execution of a general release of claims and
the executive’s compliance with certain other restrictive
covenants, if the executive was terminated during the first year
of employment after the PTH Acquisition by us without
“cause” or by the executive for “good
reason” (each as defined in the severance agreements), we
would pay the executive a severance benefit equal to the
executive’s annual base salary as of the closing date for a
specified amount of time ranging from nine months to
12 months. If an executive timely elected continuation
coverage under our health care and dental plans, subject to the
executive’s continued co-payment of the applicable
premiums, we would continue to pay our share of the health care
and dental premiums during the period of salary continuation.
Continuation coverage under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, would commence after the
period of salary continuation. Any severance benefit would cease
upon the executive’s obtaining other full-time employment
at a rate of pay equal to or greater than 75% of the
executive’s base salary at the time of termination of
employment.
During the first quarter of 2005, two executives with severance
agreements were terminated. The amount paid by us under the
severance agreements was approximately $0.5 million.
Employment Agreements and Change of Control Arrangements
Three of our senior executives, Michael Hurt, Carl Christenson
and David Wall, entered into employment agreements with us and
Altra Industrial in early January 2005. Under the terms of their
respective employment agreements, Mr. Hurt has a three-year
term and Messrs. Christenson and Wall have five-year terms.
The employment agreements contain usual and customary
restrictive covenants, including 12 month non-competition
provisions and non-solicitation/no hire of employees or
customers provisions, non-disclosure of proprietary information
provisions and non-disparagement provisions. In the event of a
termination without “cause” or departure for
“good reason,” the terminated senior executives are
entitled to severance equal to 12 months salary plus an
amount equal to their pro-rated bonus for the year of
termination. Mr. Hurt, Mr. Christenson and
Mr. Wall will receive annual base salaries of $373,000,
$275,000 and $230,000, respectively, in 2006 and each is
eligible to receive an annual performance bonus of up to 60%,
50% and 40% of their annual base salary, respectively.
Under the agreements, each senior executive is also eligible to
participate in all compensation or employee benefit plans or
programs and to receive all benefits and perquisites for which
salaried employees of Altra Industrial generally are eligible
under any current or future plan or program on the same basis as
other senior executives of Altra Industrial.
In connection with the PTH Acquisition, the Genstar Funds and
Caisse de dépôt et placement du Québec, or CDPQ,
purchased approximately 26.3 million shares of our
preferred stock for approximately $26.3 million.
The Kilian Transactions. On October 22, 2004,
Kilian, a company formed at the direction of Genstar Capital
prior to our organization, acquired Kilian Manufacturing
Corporation from Timken U.S. Corporation for
$8.8 million in cash and the assumption of
$12.2 million of debt.
Concurrently with the PTH Acquisition, the Genstar Funds,
Michael L. Hurt, our CEO, and certain other Kilian investors
acquired an additional 8.8 million shares of our preferred
stock by exchanging the Kilian preferred stock at a value of
$8.8 million.
All of the cash and Kilian preferred stock we received from such
sales of our preferred stock were contributed to Altra
Industrial, and the cash portion thereof provided a portion of
the funds necessary to complete the PTH Acquisition.
In 2005, following their employment, Mr. Christenson and
Mr. Wall also purchased 300,000 and 100,000 shares of
our preferred stock for a purchase price of $300,000 and
$100,000, respectively.
After the completion of this offering, all outstanding shares of
our preferred stock will automatically convert into shares of
our common stock on a
one-to-one basis. The
Genstar Funds will
own %
of our common stock and CDPQ will
own %
of our common stock.
Genstar Advisory Services Agreement
In connection with the PTH Acquisition, we entered into an
advisory services agreement with Genstar Capital, L.P., an
affiliate of Genstar Management LLC, for management, consulting
and financial advisory services to be provided to us and our
subsidiaries. The agreement provides for the payment to Genstar
Capital, L.P. of an annual fee of $1 million for advisory
and other consulting services, plus additional amounts for
investment banking services in connection with any mergers,
acquisitions or other strategic transactions, as approved by our
board of directors, plus reimbursement of expenses, including
legal fees. Pursuant to the agreement in November, 2004 we paid
Genstar Capital, L.P. a transaction fee of $4.0 million and
an expense reimbursement of $0.4 million upon the
consummation of the PTH Acquisition. In addition, in connection
with our acquisition of Hay Hall in February 2006, we paid
Genstar Capital, L.P. a transaction fee of $1.0 million.
The agreement also provides for indemnification of Genstar
Capital, L.P. against liabilities and expenses arising out of
Genstar’s performance of services under the agreement. We
and Genstar Capital, L.P. have mutually agreed to terminate the
agreement upon the completion of this offering.
CDPQ Subordinated Notes Investment
In connection with the PTH Acquisition, CDPQ entered into a note
purchase agreement with us, pursuant to which CDPQ purchased
$14.0 million of our subordinated notes, to provide a
portion of the funds necessary to complete the transaction. The
subordinated notes:
•
accrue payment-in-kind
interest at an annual rate of 17%, provided that we may in our
sole discretion pay such interest in whole or in part in cash to
the extent allowed under the terms of the indenture governing
the notes;
are redeemable at our option prior to maturity at specified
prepayment premiums; and
•
are redeemable at the option of the holder at 101% of the
principal amount with accrued interest in the event of a change
of control of us or any of Altra Industrial.
Altra Industrial prepaid debt principal of approximately
$10.8 million during the first six months of fiscal 2006 of
on our behalf and also paid approximately $0.7 million and
$0.6 million of prepayment premium and accrued interest,
respectively during the first six months of fiscal 2006.
Management Consulting Service Fees
Following the consummation of the PTH Acquisition, our board of
directors granted, and Michael Hurt, our chief executive
officer, and Frank Bauchiero, one of our directors, were paid,
one-time consulting fees of $125,000 and $75,000, respectively,
for certain consulting and advisory services rendered to us in
connection with the PTH Acquisition.
Severance Agreements
Upon completion of the PTH Acquisition, we assumed severance
agreements with certain of our named executive officers as
described in “Management — Severance
Agreements.” As of December 31, 2005 all severance
agreements had expired.
Indebtedness of Management
On January 10, 2006, Altra Industrial loaned David A. Wall,
our Chief Financial Officer, $100,000 at an interest rate of
4.05%, the company’s then current rate of funds. The loan
was paid in full and terminated on March 22, 2006.
Stockholders Agreement
We have entered into an agreement with our stockholders that
grants certain rights to and places certain limitations on the
actions of our stockholders. These rights and restrictions
generally include (i) restrictions on the right to sell or
transfer our stock, (ii) the Genstar Funds’ rights of
first refusal and drag-along rights with respect to sales of
shares by other stockholders, (iii) the stockholders’
rights to participate in the sale of the our shares by the
Genstar Fund (a co-sale right), (iv) the stockholders’
right of first offer with respect to additional sales of shares
by us and (v) the Genstar Funds’ right to designate
all of our directors. In addition, stockholders who are part of
our management are subject to non-competition and
non-solicitation provisions and also grant us and the Genstar
Funds the right to repurchase their shares upon their
termination of employment.
Upon the completion of this offering, certain significant
provisions of the stockholders agreement will terminate
automatically, including the rights of first refusal, drag-along
rights, co-sale rights, rights of first offer, and the Genstar
Funds’ right to designate our directors. In addition,
shares held by members of our management will no longer be
subject to a repurchase right upon termination. Members of
management will remain subject to the non-competition and
non-solicitation provisions following the offering.
We entered into a registration rights agreement pursuant to
which we have agreed to register for sale under the Securities
Act shares of our common stock in the circumstances described
below. This agreement provides some stockholders with the right
to require us to register common stock owned by them.
Demand Rights. The holders of a majority of the shares of
common stock issued to the Genstar Funds or any affiliate
thereof, or the Genstar Holders, acting as a single group, have
the right to require us to register all of the Genstar
Holders’ beneficial interests in our common stock, or the
Genstar Securities, under the Securities Act. We call the right
to require us to register the Genstar Securities a demand right,
and the resulting registration a demand registration. The
Genstar Holders may make an unlimited number of such demands for
registration on
Form S-1 or, if
available to us, on
Form S-3. Holders
of piggyback
rights, described below, may include shares they own, subject to
certain restrictions, in a demand registration.
Piggyback Rights.The Company’s stockholders who are
a party to the agreement, including the Genstar Funds, CDPQ and
stockholders who are members of management, can request to
participate in, or “piggyback” on, registrations of
any of our securities for sale by us. We call this right a
piggyback right, and the resulting registration a piggyback
registration. The piggyback right applies to any registration
other than, among other things, a registration on
Form S-4, S-8 or
in an initial public offering.
Bear Linear Acquisition
On May 18, 2006, Altra Industrial entered into a purchase
agreement with Bear Linear and certain of its members to
purchase the business and substantially all of the assets of
Bear Linear for $5.0 million. One of the three members of
Bear Linear, Robert F. Bauchiero, is the son of one of our
directors, Frank E. Bauchiero. The Board of Directors of
Altra Industrial unanimously approved the acquisition of Bear
Linear which was conducted by arms length negotiations between
the parties.
The following table sets forth information, as of the date of
this prospectus, regarding the beneficial ownership of our
common stock immediately prior to the completion of this
offering and as adjusted to reflect the sale of the shares of
common stock in this offering by:
•
each person that is a beneficial owner of more than 5% of our
outstanding common stock;
•
each of our named executive officers;
•
each of our directors and director nominees;
•
all directors and executive officers as a group; and
•
each of the selling stockholders.
Beneficial ownership is determined under the rules of the SEC
and generally includes voting or investment power over
securities. Except in cases where community property laws apply
or as indicated in the footnotes to this table, we believe that
each stockholder identified in the table possesses sole voting
and investment power over all shares of common stock shown as
beneficially owned by the stockholder. Percentage of beneficial
ownership is based on 39,508,511 shares of common stock
outstanding as of the date of this prospectus,
and shares
of common stock outstanding after the completion of this
offering. Unless indicated otherwise in the footnotes, the
address of each individual listed in the table is c/o Altra
Holdings, Inc., 14 Hayward Street, Quincy, Massachusetts02171.
Shares
Shares Owned Prior
Owned After the
to the Offering(1)
Shares Offered
Offering
Name and Address of Beneficial Owner
Number
%
Number
%
Number
%
Directors, named executive officers and stockholders owning
more than 5%
Number of shares of common stock listed gives effect to the
automatic conversion of shares of our preferred stock into
shares of our common stock on a one-to-one basis. All shares of
our issued and outstanding preferred stock were issued at a
price of $1.00 per share. All shares of our common stock
issued prior to this offering were restricted stock issued
pursuant to our equity incentive plan. See
“Management — Equity Incentive Plan” for a
description of the issuance of the common shares and
“Certain Relationships and Related Transactions” for a
description of the issuance of the preferred shares.
(2)
Genstar Capital Partners III, L.P., a Delaware limited
partnership (“Genstar III”), owns 63.5% of the
outstanding capital stock of Altra Holdings. Genstar Capital
exercises investment discretion and
control over the shares held by Genstar III. Jean-Pierre L.
Conte, the chairman and a managing director of Genstar Capital,
and Richard D. Paterson, a managing director of Genstar Capital,
may be deemed to share beneficial ownership of the shares shown
as beneficially owned by Genstar III. Each of
Mr. Conte and Mr. Paterson disclaims such beneficial
ownership except to the extent of his pecuniary interest
therein. The address of Genstar III is Four Embarcadero
Center, Suite 1900, San Francisco, California94111.
(3)
Stargen III, L.P., a Delaware limited partnership, owns
2.3% of the outstanding capital stock of Altra Holdings. Genstar
Capital exercises investment discretion and control over the
shares held by Stargen III, L.P. Jean-Pierre L. Conte, the
chairman and a managing director of Genstar Capital, and Richard
D. Paterson, a managing director of Genstar Capital, may be
deemed to share beneficial ownership of the shares shown as
beneficially owned by Stargen III, L.P. Each of
Mr. Conte and Mr. Paterson disclaims such beneficial
ownership except to the extent of his pecuniary interest
therein. The address of Stargen III, L.P. is Four
Embarcadero Center, Suite 1900, San Francisco,
California94111.
(4)
CDPQ is a limited partner of Genstar III and its address is
1000 place Jean-Paul-Riopelle, Montreal, Québec.
(5)
Mr. Bauchiero is a Strategic Advisor and Mr. Gold is a
Principal of Genstar III. Mr. Bauchiero and
Mr. Gold do not directly or indirectly have or share voting
or investment power or the ability to influence voting or
investment power over the shares shown as beneficially owned by
Genstar III.
(6)
Includes 750,000 shares of stock held by Frank Bauchiero
MKC Worldwide.
Upon completion of this offering, our authorized capital stock
will consist
of shares
of common stock, par value $0.001 per share. As of
October 31, 2006, there were 4,008,511 shares of
common stock issued and outstanding and 35,500,000 shares
of preferred stock issued and outstanding. As of
October 31, 2006, there were fourteen holders of record of
our common stock and eighteen holders of record of our preferred
stock. All of our outstanding shares of preferred stock will
automatically convert into shares of common stock immediately
prior to the closing of this offering.
All of our existing stock is, and the shares of common stock
being offered by us in this offering will be, upon payment
therefore, validly issued, fully paid and nonassessable. The
discussion set forth below describes the most important terms of
our capital stock, certificate of incorporation and bylaws as
will be in effect upon completion of this offering. Because it
is only a summary, this section does not contain all the
information that may be important to you. For a complete
description you should refer to our certificate of incorporation
and bylaws, copies of which will be filed as exhibits to the
registration statement of which the prospectus is a part.
Common Stock
Voting Rights. The holders of our common stock are
entitled to one vote per share on all matters submitted for
action by the stockholders. There is no provision for cumulative
voting with respect to the election of directors. Accordingly, a
holder of more than 50% of the shares of our common stock can,
if it so chooses, elect all of our directors. In that event, the
holders of the remaining shares will not be able to elect any
directors.
Dividend Rights. All shares of our common stock are
entitled to share equally in any dividends our board of
directors may declare from legally available sources, subject to
the terms of any outstanding preferred stock.
Liquidation Rights. Upon liquidation or dissolution of
our company, whether voluntary or involuntary, all shares of our
common stock are entitled to share equally in the assets
available for distribution to stockholders after payment of all
of our prior obligations, including any then-outstanding
preferred stock.
Other Matters. The holders of our common stock have no
preemptive or conversion rights, and our common stock is not
subject to further calls or assessments by us. There are no
redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of our common stock, including the
common stock offered in this offering, are fully paid and
non-assessable.
Preferred Stock
Our board of directors has the authority to issue preferred
stock in one or more classes or series and to fix the
designations, powers, preferences and rights, and the
qualifications, limitations or restrictions thereof including
dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any class or
series, without further vote or action by the stockholders. The
issuance of preferred stock may have the effect of delaying,
deferring or preventing a change of control of our company
without further action by the stockholders and may adversely
affect the voting and other rights of the holders of common
stock. At present, we have no plans to issue any of the
preferred stock.
Certain Anti-Takeover, Limited Liability and Indemnification
Provisions
Requirements for Advance Notification of Stockholder
Nominations and Proposals. Our bylaws establish advance
notice procedures with respect to stockholder proposals and the
nomination of candidates for election as directors, other than
nominations made by or at the direction of the board of
directors or one of its committees.
Delaware Anti-Takeover Law. We are a Delaware corporation
subject to Section 203 of the Delaware General Corporation
Law. Under Section 203, certain “business
combinations” between a Delaware corporation whose stock
generally is publicly traded or held of record by more than
2,000 stockholders and an “interested stockholder” are
prohibited for a three-year period following the date that such
stockholder became an interested stockholder, unless:
•
the corporation has elected in its certificate of incorporation
not to be governed by Section 203, which we have elected;
•
the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder was approved
by the board of directors of the corporation before such
stockholder became an interested stockholder;
•
upon consummation of the transaction that made such stockholder
an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at
the commencement of the transaction excluding voting stock owned
by directors who are also officers or held in employee benefit
plans in which the employees do not have a confidential right to
tender stock held by the plan in a tender or exchange offer; or
•
the business combination is approved by the board of directors
of the corporation and authorized at a meeting by two-thirds of
the voting stock which the interested stockholder did not own.
The three-year prohibition also does not apply to some business
combinations proposed by an interested stockholder following the
announcement or notification of an extraordinary transaction
involving the corporation and a person who had not been an
interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority
of the corporation’s directors. The term “business
combination” is defined generally to include mergers or
consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder
involving the assets or stock of the corporation or its
majority-owned subsidiaries, and transactions which increase an
interested stockholder’s percentage ownership of stock. The
term “interested stockholder” is defined generally as
those stockholders who become beneficial owners of 15% or more
of a Delaware corporation’s voting stock, together with the
affiliates or associates of that stockholder.
Limitation of Officer and Director Liability and
Indemnification Arrangements. Our certificate of
incorporation limits the liability of our directors to the
maximum extent permitted by Delaware law. Delaware law provides
that directors will not be personally liable for monetary
damages for breach of their fiduciary duties as directors,
except liability for:
•
any breach of their duty of loyalty to the corporation or its
stockholders;
•
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
•
unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
•
any transaction from which the director derived an improper
personal benefit.
This charter provision has no effect on any non-monetary
remedies that may be available to us or our stockholders, nor
does it relieve us or our officers or directors from compliance
with federal or state securities laws. The certificate also
generally provides that we shall indemnify, to the fullest
extent permitted by law, any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit, investigation, administrative hearing or
any other proceeding by reason of the fact that he is or was a
director or officer of ours, or is or was serving at our request
as a director,
officer, employee or agent of another entity, against expenses
incurred by him in connection with such proceeding. An officer
or director shall not be entitled to indemnification by us if:
•
the officer or director did not act in good faith and in a
manner reasonably believed to be in, or not opposed to, our best
interests; or
•
with respect to any criminal action or proceeding, the officer
or director had reasonable cause to believe his conduct was
unlawful.
These charter and bylaw provisions and provisions of Delaware
law may have the effect of delaying, deterring or preventing a
change of control of Altra Holdings, Inc.
Transfer Agent and Registrar
American Stock Transfer Company is the transfer agent and
registrar for the common stock.
We summarize below the principal terms of the agreements that
govern our senior revolving credit facility. This summary is not
a complete description of all of the terms of the agreements.
General. On November 30, 2004, the Borrowers entered
into a senior revolving credit facility with the lenders
signatory thereto and Wells Fargo Foothill, Inc., as the
arranger and administrative agent. The senior revolving credit
facility is in an aggregate amount of up to $30.0 million.
Up to $10.0 million of the senior revolving credit facility
is available in the form of letters of credit and amounts repaid
under the senior revolving credit facility may be reborrowed
(subject to satisfaction of the applicable borrowing conditions,
including availability under a borrowing base formula) at any
time prior to the maturity of the senior revolving credit
facility, which will be November 30, 2009. Our availability
under the senior revolving credit facility is based on a formula
that calculates the borrowing base, based on a percentage of the
value of accounts receivable, inventory, owned real property and
equipment, subject to customary eligibility requirements and net
of customary reserves. All borrowings are subject to the
satisfaction of customary conditions, including delivery of
borrowing notice, accuracy of representations and warranties in
all material respects and absence of defaults. Proceeds of the
senior revolving credit facility will be used to provide working
capital and for general corporate purposes, including permitted
acquisitions, if any, and general corporate needs.
Interest and Fees. Borrowings under the senior revolving
credit facility bear interest, at our option, at the prime rate
plus 1.25%, in the case of prime rate loans, or the LIBOR rate
plus 2.50%, in case of LIBOR rate loans. At no time will the
indebtedness under the senior revolving credit facility bear
interest at a rate per annum less than 3.75%.
We will pay 2.0% per annum on all outstanding letters of
credit, unused revolver fees in an amount equal to
0.375% per year on the unused commitments under the senior
revolving credit facility, and servicing fees of
$10,000 per quarter. These fees are payable quarterly in
arrears and upon the maturity or termination of the commitments,
calculated based on the number of days elapsed in a
360-day year. We paid a
one-time closing fee of $375,000 to Wells Fargo Foothill, Inc.
and approximately $1.5 million of related accounting, legal
and other professional fees.
Guarantees and Collateral. Certain of our existing and
subsequently acquired or organized domestic subsidiaries which
are not Borrowers do and will guarantee (on a senior secured
basis) the senior revolving credit facility. Obligations of the
other Borrowers under the senior revolving credit facility and
the guarantees are secured by substantially all of the
Borrowers’ assets and the assets of each of our existing
and subsequently acquired or organized domestic subsidiaries
that is a guarantor of our obligations under the senior
revolving credit facility (with such subsidiaries being referred
to as the “U.S. subsidiary guarantors”),
including but not limited to: (a) a first-priority pledge
of all the capital stock of subsidiaries held by all of the
Borrowers or any U.S. subsidiary guarantor (which pledge,
in the case of any foreign subsidiary, will be limited to 100%
of any non-voting stock and 65% of the voting stock of such
foreign subsidiary) and (b) perfected first-priority
security interests in and mortgages on substantially all of the
tangible and intangible assets of each Borrower and
U.S. subsidiary guarantor, including accounts receivable,
inventory, equipment, general intangibles, investment property,
intellectual property, real property (other than (i) leased
real property and (ii) the Borrowers’ existing and
future real property located in the State of New York), cash and
proceeds of the foregoing (in each case subject to materiality
thresholds and other exceptions).
Covenants and Other Matters. The senior revolving credit
facility requires us to comply with a minimum fixed charge
coverage ratio (when availability falls below $12,500,000) of
1.10 for the four quarter period ended December 31, 2005
and 1.20 for all four quarter periods thereafter. There is a
maximum annual limit on capital expenditures of
$11.0 million for fiscal year 2006, $9.8 million for
fiscal year 2007, $10.0 million for fiscal year 2008, and
$10.3 million for fiscal year 2009 and each fiscal year
thereafter, provided that unspent amounts from prior periods may
be used in future fiscal years.
We would suffer an event of default under the senior revolving
credit facility for a change of control if: (i) prior to an
initial public offering, 50% of Altra Industrial’s voting
stock is no longer beneficially owned by Genstar Capital, L.P.
and its affiliates, (ii) after an initial public offering,
if a person or group, other than Genstar Capital, L.P. and its
affiliates, beneficially owns more than 35% of Altra
Industrial’s stock and such amount is more than the amount
of shares owned by Genstar Capital, L.P. and its affiliates,
(iii) Altra Industrial ceases to own or control 100% of
each of its borrower subsidiaries, or (iv) a change of
control occurs under the notes or any other subordinated
indebtedness.
We would cause an event of default under the senior revolving
credit facility if an event of default occurs under the
indenture or if there is a default under any other indebtedness
any Borrower may have involving an aggregate amount of
$3 million or more and such default: (i) occurs at
final maturity of such debt, (ii) allows the lender
thereunder to accelerate such debt or (iii) causes such
debt to be required to be repaid prior to its stated maturity.
An event of default would also occur under the senior revolving
credit facility if any of the indebtedness under the senior
revolving credit facility ceases to be senior in priority to any
of our other contractually subordinated indebtedness, including
the obligations under the 9% senior secured notes and the
111/4% senior
notes.
The senior revolving credit facility contains customary
representations and warranties and affirmative covenants.
9% Senior Secured Notes due 2011
As of June 30, 2006, our wholly owned subsidiary, Altra
Industrial, had outstanding 9% senior secured notes in an
aggregate principal amount of $165.0 million. The
9% senior secured notes are general obligations and are
secured on a second-priority basis, equally and ratably, by
security interests in substantially all our assets (other than
certain excluded assets) and all of our capital stock, subject
only to first-priority liens securing our senior credit facility
and other permitted prior liens. Except with respect to payments
from the liquidation of collateral securing the first-priority
liens as held by our senior revolving credit facility, the
9% senior secured notes are pari passu in right of payment
with all of our senior indebtedness, but to the extent of the
security interests, effectively senior to all of our unsecured
indebtedness, including the
111/4% senior
notes, and unsecured trade credit. The 9% senior secured
notes are senior in right of payment to any future subordinated
indebtedness and are unconditionally guaranteed by all of Altra
Industrial’s existing and future domestic restricted
subsidiaries.
The indenture governing our 9% senior secured notes
contains covenants which restrict our restricted subsidiaries.
These restrictions limit or prohibit, among other things, their
ability to:
•
incur additional indebtedness;
•
repay subordinated indebtedness prior to stated maturities;
•
pay dividends on or redeem or repurchase stock or make other
distributions;
•
issue capital stock;
•
make investments or acquisitions;
•
sell certain assets or merge with or into other companies;
•
restrict dividends, distributions or other payments from our
subsidiaries;
enter into certain transactions with stockholders and
affiliates; and
•
otherwise conduct necessary corporate activities.
In addition, if we experience a change of control, Altra
Industrial will be required to offer to purchase all of the
outstanding 9% senior secured notes at a purchase price in
cash equal to 101% of the
principal amount thereof on the date of purchase, plus accrued
and unpaid interest, if any, to the date of purchase. Under the
indenture governing the 9% senior secured notes, a change
of control will have occurred if, after an initial public
offering, a person or group, other than Genstar Capital, L.P.
and its affiliates, beneficially owns more than 35% of Altra
Industrial’s stock and such amount is more than the amount
of shares owned by Genstar Capital, L.P. and its affiliates.
111/4% Senior
Notes due 2013
As of June 30, 2006, Altra Industrial had outstanding
111/4% senior
notes in an aggregate principal amount of £33 million.
The
111/4% senior
notes are our general obligations. The
111/4% senior
notes are junior to all of our secured indebtedness, including
the 9% senior secured notes. The senior are unconditionally
guaranteed by all of our existing and future domestic restricted
subsidiaries.
The indenture governing our
111/4% senior
notes contains covenants which restrict our restricted
subsidiaries. These restrictions limit or prohibit, among other
things, their ability to:
•
incur additional indebtedness;
•
repay subordinated indebtedness prior to stated maturities;
•
pay dividends on or redeem or repurchase stock or make other
distributions;
•
sell certain assets or merge with or into other companies;
•
restrict dividends, distributions or other payments from our
subsidiaries;
•
create liens;
•
enter into certain transactions with stockholders and
affiliates; and
•
otherwise conduct necessary corporate activities.
If we experience a change of control, Altra Industrial will be
required to offer to purchase all of the outstanding
111/4% senior
notes at a purchase price in cash equal to 101% of the principal
amount thereof on the date of purchase, plus accrued and unpaid
interest, if any, to the date of purchase. Under the indenture
governing the
111/4% senior
notes, a change of control will have occurred if, after an
initial public offering, a person or group, other than Genstar
Capital, L.P. and its affiliates, beneficially owns more than
35% of our stock and such amount is more than the amount of
shares owned by Genstar Capital, L.P. and its affiliates.
CDPQ Subordinated Note
In connection with the PTH Acquisition, we issued
$14.0 million of subordinated notes to CDPQ. During the
period ended June 2006, Altra Industrial prepaid approximately
$10.8 million of our debt owed to CDPQ and also paid
approximately $0.7 million and $0.6 million of
interest and prepayment premium, respectively.
Mortgage
In June 2006, our German subsidiary, Stieber GmbH, entered into
a mortgage on its building in Heidelberg, Germany with a local
bank. The mortgage has a principal of
€2.0 million
and an interest rate of 5.75% and is payable in monthly
installments over 15 years.
Capital Leases
We have entered into capital leases for certain buildings and
equipment. As of June 30, 2006 we had approximately
$1.7 million of outstanding capital lease obligations.
Prior to the offering, there has been no public market for our
common stock. If our stockholders sell substantial amounts of
our common stock, in the public market following the offering,
the market price of our common stock could decline. These sales
also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that
we deem appropriate.
Upon completion of the offering, we will have outstanding an
aggregate
of shares
of our common stock, assuming no exercise of the
underwriters’ over-allotment option. Of these shares, all
of the shares sold in the offering will be freely tradeable
without restriction or further registration under the Securities
Act, unless the shares are purchased by “affiliates”
as that term is defined in Rule 144 under the Securities
Act. This
leaves shares
eligible for sale in the public market as follows:
Number of Shares
Date
After days from the date of this prospectus
(subject, in some cases, to volume limitations).
At various times after days from the date of
this prospectus as described below under “Lock-up
Agreements.”
Rule 144
In general, under Rule 144 of the Securities Act as
currently in effect, beginning 90 days after the date of
this prospectus, a person who has beneficially owned shares of
our common stock for at least one year would be entitled to sell
within any three-month period a number of shares that does not
exceed the greater of:
•
1% of the number of shares of our common stock then outstanding,
which will equal
approximately shares
immediately after the offering; or
•
the average weekly trading volume of our common stock on the
NASDAQ during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of
current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the three months
preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, including the
holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner
of sale, public information, volume limitation or notice
provisions of Rule 144.
Lock-Up Agreements
All of our officers and directors and certain of our
stockholders have entered into
lock-up agreements
under which they agreed not to transfer or dispose of, directly
or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of
our common stock, except for shares sold in this offering by the
selling stockholders, for a period of 180 days after the
date of this prospectus without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated on
behalf of the underwriters. The
180-day period is
subject to extension as described under “Underwriting.”
Rule 701
In general, under Rule 701 of the Securities Act as
currently in effect, any of our employees, consultants or
advisors who purchase shares of our common stock from us in
connection with a
compensatory stock or option plan or other written agreement is
eligible to resell those shares 90 days after the effective
date of the offering in reliance on Rule 144, but without
compliance with some of the restrictions, including the holding
period, contained in Rule 144.
Registration of Shares under Stock Option Plans
Following this offering, we intend to file a registration
statement on
Form S-8 under the
Securities Act covering
approximately shares
of common stock issued or issuable upon the exercise of stock
options, subject to outstanding options or reserved for issuance
under our employee and director stock benefit plans.
Accordingly, shares registered under the registration statement
will, subject to Rule 144 provisions applicable to
affiliates, be available for sale in the open market, except to
the extent that the shares are subject to vesting restrictions
or the contractual restrictions described above. See
“Management — Equity Incentive Plan.”
C:
MATERIAL UNITED STATES TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS
OF COMMON STOCK
The following is a summary of the material U.S. federal
income and estate tax consequences to
non-U.S. holders
of the purchase, ownership and disposition of our common stock,
but is not a complete analysis of all the potential tax
considerations relating thereto. The summary is based upon the
provisions of the Internal Revenue Code of 1986, as amended (the
“Code”), Treasury regulations promulgated thereunder,
administrative rulings and judicial decisions, all as of the
date of this prospectus (the “Tax Authorities”). The
Tax Authorities may be changed or interpreted differently,
possibly retroactively, so as to result in U.S. federal
income or estate tax consequences different from those set forth
below. The summary is applicable only to
non-U.S. holders
who hold our common stock as a capital asset (generally, an
asset held for investment purposes). We have not sought any
ruling from the Internal Revenue Service, (the “IRS”),
with respect to the statements made and the conclusions reached
in the summary, and there can be no assurance that the IRS will
agree with such statements and conclusions.
This summary also does not address the tax considerations
arising under the laws of any state, local or
non-U.S. jurisdiction.
In addition, this discussion does not address tax considerations
applicable to an investor’s particular circumstances or to
investors that may be subject to special tax rules, including,
without limitation:
•
banks, insurance companies, regulated investment companies or
other financial institutions;
•
persons subject to the alternative minimum tax;
•
tax-exempt organizations;
•
dealers in securities, commodities or currencies;
•
traders in securities that elect to use a
mark-to-market method
of accounting for their securities holdings;
•
partnerships or other pass-through entities or investors in such
entities;
•
“controlled foreign corporations,”“passive
foreign corporations,” and corporations that accumulate
earnings to avoid U.S. federal income tax;
•
U.S. expatriates or former long-term residents of the
United States;
•
persons who hold our common stock as a position in a hedging
transaction, “straddle,”“conversion
transaction” or other risk reduction or integrated
transaction; or
•
persons deemed to sell our common stock under the constructive
sale provisions of the Code.
In addition, if a partnership or other pass-through entity
(including an entity or arrangement treated as a partnership or
other type of pass-through entity for U.S. federal income
tax purposes) owns our common stock, the tax treatment of a
partner or beneficial owner of the partnership or other
pass-through entity generally will depend on the status of the
partner or beneficial owner and the activities of the
partnership or entity and certain determinations made at the
partner or beneficial owner level. Accordingly, partners and
beneficial owners in partnerships or other pass-through entities
that own our common stock should consult their own tax advisors
as to the particular U.S. federal income and estate tax
consequences applicable to them.
This discussion is for general information only and is not
tax advice. You are urged to consult your tax advisor with
respect to the application of the U.S. federal income and
estate tax laws to your particular situation, as well as any tax
consequences of the purchase, ownership and disposition of our
common stock arising under the U.S. gift tax rules or under
the laws of any state, local, foreign or other taxing
jurisdiction or under any applicable tax treaty.
Non-U.S. Holder
Defined
•
For purposes of this discussion, you are a
non-U.S. holder if
you are a beneficial owner of our common stock that, for
U.S. federal income tax purposes, is not a
U.S. person. For purposes of this discussion, a
U.S. person is:
•
an individual who is a citizen or resident of the United States,
including an alien individual who is a lawful permanent resident
of the United States or who meets the “substantial
presence” test under Section 7701(b) of the Code;
•
a corporation or other entity taxable as a corporation for
U.S. federal tax purposes created or organized in the
United States or under the laws of the United States or of any
state therein or the District of Columbia;
•
an estate whose income is subject to U.S. federal income
tax regardless of its source; or
•
a trust (1) whose administration is subject to the primary
supervision of a U.S. court and of which one or more
U.S. persons has the authority to control all substantial
decisions of the trust or (2) that has made a valid
election to be treated as a U.S. person.
Distributions
If distributions are made on shares of our common stock, those
payments will constitute dividends for U.S. federal income
tax purposes to the extent paid from our current or accumulated
earnings and profits, as determined under U.S. federal
income tax principles. To the extent those distributions exceed
both our current and our accumulated earnings and profits, they
will constitute a return of capital and will first reduce your
adjusted tax basis in our common stock, but not below zero, and
then will be treated as gain from the sale of stock.
Any dividend paid to you that is not effectively connected with
your conduct of a U.S. trade or business generally will be
subject to withholding of U.S. federal income tax either at
a rate of 30% of the gross amount of the dividend or such lower
rate as may be specified by an applicable tax treaty. In order
to receive a reduced treaty rate, you must provide an IRS
Form W-8BEN or other appropriate version of IRS
Form W-8 certifying qualification for the reduced rate in
accordance with applicable certification and disclosure
requirements.
Non-U.S. holders
should consult their own tax advisors regarding their
entitlement to benefits under a relevant tax treaty and the
manner of claiming the benefits.
Dividends received by you that are effectively connected with
your conduct of a U.S. trade or business (and, if required
by an applicable tax treaty, are attributable to a
U.S. permanent establishment maintained by you) are exempt
from such withholding tax. In order to obtain this exemption,
you must provide an IRS Form W-8ECI properly certifying
such exemption in accordance with applicable certification and
disclosure requirements. Such effectively connected dividends,
although not subject to
withholding tax, are taxed at the same graduated rates
applicable to U.S. persons, net of any allowable deductions
and credits. In addition, if you are a corporate
non-U.S. holder,
dividends you receive that are effectively connected with your
conduct of a U.S. trade or business may also be subject to
a branch profits tax at a rate of 30% or such lower rate as may
be specified by an applicable tax treaty.
If you are eligible for a reduced rate of withholding tax
pursuant to a tax treaty, you may obtain a refund of any excess
amounts currently withheld if you file an appropriate claim for
refund with the IRS in a timely manner.
Gain on Disposition of Common Stock
You generally will not be required to pay U.S. federal
income tax on any gain realized upon the sale or other
disposition of our common stock unless:
•
the gain is effectively connected with your conduct of a
U.S. trade or business (and, if required by an applicable
tax treaty, is attributable to a U.S. permanent
establishment maintained by you);
•
you are an individual who is present in the United States for a
period (or periods) aggregating 183 days or more during the
calendar year in which the sale or disposition occurs and
certain other conditions are met; or
•
our common stock constitutes a U.S. real property interest
by reason of our status as a “United States real property
holding corporation” for U.S. federal income tax
purposes (a USRPHC) at any time within the shorter of the
five-year period preceding the disposition or your holding
period for our common stock.
We believe that we are not currently and will not become a
USRPHC. However, because the determination of whether we are a
USRPHC depends on the fair market value of our U.S. real
property relative to the fair market value of our other business
assets, we cannot assure you that we will not become a USRPHC in
the future. Even if we become USRPHC, however, as long as our
common stock is regularly traded on an established securities
market, such common stock will be treated as U.S. real
property interests only if you actually or constructively hold
more than 5% of our common stock.
If you are a
non-U.S. holder
described in the first bullet above (pertaining to effectively
connected gain), you will be required to pay tax on the net gain
derived from the sale under regular graduated U.S. federal
income tax rates applicable to U.S. persons, and corporate
non-U.S. holders
described in the first bullet above may be subject to the branch
profits tax at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty. If you are an individual
non-U.S. holder
described in the second bullet above (pertaining to presence in
the United States), even though you are not considered a
resident alien under the Code, you will be required to pay a
flat 30% tax on the gain derived from the sale, which gain for
such purposes may be offset by U.S. source capital losses.
You should consult any applicable income tax treaties, which may
provide for different rules.
Federal Estate Tax
Our common stock that is owned or treated as owned by an
individual who is not a U.S. citizen or resident of the
United States (as specifically defined for U.S. federal
estate tax purposes) at the time of death will be included in
the individual’s gross estate for U.S. federal estate
tax purposes, unless an applicable estate tax or other treaty
provides otherwise and, therefore, may be subject to
U.S. federal estate tax.
Backup Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of
dividends paid to you, your name and address and the amount of
tax withheld, if any. A similar report is sent to you. These
information
reporting requirements apply even if withholding was not
required. Pursuant to tax treaties or other agreements, the IRS
may make its reports available to tax authorities in your
country of residence.
Payments of dividends made to you will not be subject to backup
withholding if you establish an exemption, for example by
properly certifying your
non-U.S. status on
a Form W-8BEN or another appropriate version of
Form W-8. Notwithstanding the foregoing, backup withholding
currently at a rate of 28%, may apply if either we or our paying
agent has actual knowledge, or reason to know, that you are a
U.S. person.
Payments of the proceeds from a disposition of our common stock
affected outside the United States by a
non-U.S. holder
made by or through a foreign office of a broker generally will
not be subject to information reporting or backup withholding.
Information reporting (but not backup withholding) will apply to
such a payment, however, if the broker is a U.S. person, a
controlled foreign corporation for U.S. federal income tax
purposes, a foreign person 50% or more of whose gross income is
effectively connected with a U.S. trade or business for a
specified three-year period or a foreign partnership with
certain connections with the United States, unless the broker
has documentary evidence in its records that the beneficial
owner is a
non-U.S. holder
and specified conditions are met or an exemption is otherwise
established.
Payments of the proceeds from a disposition of our common stock
by a
non-U.S. holder
made by or through the U.S. office of a broker is generally
subject to information reporting and backup withholding unless
the
non-U.S. holder
certifies as to its
non-U.S. holder
status under penalties of perjury or otherwise establishes an
exemption from information reporting and backup withholding.
Backup withholding is not an additional tax. Rather, the
U.S. income tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund or
credit may be obtained, provided that the required information
is furnished to the IRS in a timely manner.
Subject to the terms and conditions described in an underwriting
agreement among us, the selling stockholders and the
underwriters, we and the selling stockholders have agreed to
sell to the underwriters, and the underwriters severally have
agreed to purchase from us and the selling stockholders, the
number of shares listed opposite their names below.
Number of
Underwriter
Shares
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Wachovia Capital Markets, LLC.
Jefferies & Company, Inc.
Robert W. Baird & Co. Incorporated
Total
The underwriters have agreed to purchase all of the shares sold
under the underwriting agreement if any of these shares are
purchased. If an underwriter defaults, the underwriting
agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the underwriting
agreement may be terminated. The closings for the sale of shares
to be purchased by the underwriters are conditioned on one
another.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those
liabilities.
The underwriters are offering the shares, subject to prior sale,
when, as and if issued to and accepted by them, subject to
approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the
underwriting agreement, such as the receipt by the underwriters
of officer’s certificates and legal opinions. The
underwriters reserve the right to withdraw, cancel or modify
offers to the public and to reject orders in whole or in part.
Commissions and Discounts
The underwriters have advised us and the selling stockholders
that they propose initially to offer the shares to the public at
the initial public offering price on the cover page of this
prospectus and to dealers at that price less a concession not in
excess of
$ per
share. The underwriters may allow, and the dealers may reallow,
a discount not in excess of
$ per
share to other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.
The following table shows the public offering price,
underwriting discount and proceeds before expenses to Altra
Holdings, Inc. and the selling stockholders. The information
assumes either no exercise or full exercise by the underwriters
of their over-allotment option.
Per Share
Without Option
With Option
Public offering price
$
$
$
Underwriting discount
$
$
$
Proceeds, before expenses, to Altra Holdings, Inc.
$
$
$
Proceeds, before expenses, to the selling
stockholders
$
$
$
The expenses of this offering, not including the underwriting
discount, are estimated at $ and are payable by Altra Holdings,
Inc.
We and the selling stockholders have granted an option to the
underwriters to purchase up
to additional
shares at the public offering price less the underwriting
discount. The underwriters may exercise this option for
30 days from the date of this prospectus solely to cover
any over-allotments. If the underwriters exercise this option,
each will be obligated, subject to conditions contained in the
purchase agreement, to purchase a number of additional shares
proportionate to that underwriter’s initial amount
reflected in the above table.
Reserved Shares
At our request, the underwriters have reserved for sale, at the
initial public offering price, up
to %
of the shares offered by this prospectus for sale to some of our
directors, officers, employees, distributors, dealers, business
associates and related persons. If these persons purchase
reserved shares, this will reduce the number of shares available
for sale to the general public. Any reserved shares that are not
orally confirmed for purchase within one day of the pricing of
this offering will be offered by the underwriters to the general
public on the same terms as the other shares offered by this
prospectus.
No Sales of Similar Securities
We and the selling stockholders and our executive officers and
directors and all existing stockholders have agreed, with
exceptions, not to sell or transfer any common stock for
180 days after the date of this prospectus without first
obtaining the written consent of Merrill Lynch. Specifically, we
and these other individuals have agreed, with certain
exceptions, not to directly or indirectly:
•
offer, pledge, sell or contract to sell any common stock,
•
sell any option or contract to purchase any common stock;
•
purchase any option or contract to sell any common stock;
•
grant any option, right or warrant for the sale of any common
stock;
•
lend or otherwise dispose of or transfer any common stock;
•
request or demand that we file a registration statement related
to the common stock; or
•
enter into any swap or other agreement that transfers; in whole
or in part, the economic consequence of ownership of any common
stock whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable
with common stock. It also applies to common stock owned now or
acquired later by the person executing the agreement or for
which the person executing the agreement later acquires the
power of disposition.
The 180-day restricted
period will be automatically extended if (1) during the
last 17 days of the
180-day restricted
period the Company issues an earning release or material news or
a material event relating to its business occurs or
(2) prior to the expiration of the
180-day restricted
period, the Company announces that it will release earnings
results or becomes aware that material news or a material event
will occur during the
16-day period beginning
on the last day of the
180-day restricted
period, in which case the restrictions described above will
continue to apply until the expiration of the
18-day period beginning
on the issuance of the earnings release or the occurrence of the
material news or material event.
NASDAQ Listing
We expect the shares to be approved for listing on the NASDAQ
Exchange under the symbol “AIMC.” In order to meet the
requirements for listing on that exchange, the underwriters have
undertaken to sell a minimum number of shares to a minimum
number of beneficial owners as required by that exchange.
Before this offering, there has been no public market for our
common stock. The initial public offering price will be
determined through negotiations among us, the selling
stockholders and the underwriters. In addition to prevailing
market conditions, the factors to be considered in determining
the initial public offering price are
•
the valuation multiples of publicly traded companies that the
underwriters believe to be comparable to us;
•
our financial information;
•
the history of, and the prospects for, our company and the
industry in which we compete;
•
an assessment of our management; its past and present
operations, and the prospects for, and timing of, our future
revenues;
•
the present state of our development; and
•
the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
An active trading market for the shares may not develop. It is
also possible that after the offering the shares will not trade
in the public market at or above the initial public offering
price.
The underwriters do not expect to sell more than 5% of the
shares in the aggregate to accounts over which they exercise
discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit underwriters and selling group members from bidding for
and purchasing our common stock. However, the underwriters may
engage in transactions that stabilize the price of the common
stock, such as bids or purchases to peg, fix or maintain that
price.
In connection with the offering, the underwriters may purchase
and sell our common stock in the open market. These transactions
may include short sales, purchases on the open market to cover
positions created by short sales and stabilizing transactions.
Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the
offering. “Covered” short sales are sales made in an
amount not greater than the underwriters’ option to
purchase additional shares in the offering. The underwriters may
close out any covered short position by either exercising their
over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out the covered
short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase
shares through the over-allotment option. “Naked”
short sales are sales in excess of the over-allotment option.
The underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of our shares in the
open market after pricing that could adversely affect investors
who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of shares made by the
underwriters in the open market prior to the completion of the
offering. The underwriters may also impose a penalty bid. This
occurs when a particular underwriter repays to the underwriters
a portion of the underwriting discount received by it because
the representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters’
purchases to cover the syndicate short sales may have the effect
of raising or maintaining the market price of our common stock
or preventing or retarding a decline in the market price of our
common stock. As a result, the price of our common stock may be
higher than the price that might otherwise exist in the open
market.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common
stock. In addition, neither we nor any of the underwriters makes
any representation that the underwriters will engage in these
transactions or that these transactions, once commenced, will
not be discontinued without notice.
Other Relationships
Some of the underwriters and their affiliates have engaged in,
and may in the future engage in, investment banking and other
commercial dealings in the ordinary course of business with us.
They have received customary fees and commissions for these
transactions.
As of October 31, 2006, MLEMEA Principal Credit Group
(MLEMEA), an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, holds
$ of
the
111/4%
senior notes and Jefferies & Company, Inc. holds
$ of
the 9% senior secured notes. Each of MLEMEA and
Jefferies & Company, Inc. may receive a portion of the
proceeds of this offering.
C:
LEGAL MATTERS
Weil, Gotshal & Manges LLP, Redwood Shores, California
has passed upon the validity of the shares of common stock
offered hereby on our behalf. The underwriters have been
represented by Fried, Frank, Harris, Shriver & Jacobson
LLP, New York, New York.
EXPERTS
The consolidated financial statements of Altra Holdings, Inc. at
December 31, 2005 and 2004 and for the year ended
December 31, 2005 and for the period from inception
(December 1, 2004) through December 31, 2004, and the
combined financial statements of our Predecessor for the period
from January 1, 2004 through November 30, 2004, and
for the year ended December 31, 2003, appearing in this
Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
The financial statements included in this Prospectus and in the
Registration Statement related to Hay Hall Holdings Limited have
been audited by BDO Stoy Hayward, LLP, independent chartered
accountants, to the extent and for the periods set forth in
their report appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given
upon the authority of said firm as experts in auditing and
accounting.
C:
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1 under the
Securities Act with respect to the shares of our common stock
being offered hereunder. This prospectus, which is a part of the
registration statement, omits certain information included in
the registration statement and the exhibits thereto. For further
information with respect to us and the securities, we refer you
to the registration statement and its exhibits. The descriptions
of each contract and document contained in this prospectus are
summaries and qualified in their entirety by reference to the
copy of each such contract or document filed as an exhibit to
the registration statement. You may read and copy any document
we file or furnish with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, DC 20549. You
may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at 100 F
Street, N.E., Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 to
obtain information on the operation of the Public Reference
Room. In addition, the SEC maintains an Internet site that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. You can review our SEC filings, including the registration
statement by accessing the SEC’s Internet site at
http://www.sec.gov.
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Altra Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Altra Holdings, Inc. (“the Company”), as of
December 31, 2005 and 2004 and the related consolidated
statements of operations and comprehensive loss, convertible
preferred stock and stockholders’ equity, and cash flows
for the year ended December 31, 2005 and the period from
inception (December 1, 2004) through December 31,2004, and the combined statements of operations and
comprehensive income, stockholders’ equity and cash flows
of the Predecessor for the period from January 1, 2004
through November 30, 2004, and for the year ended
December 31, 2003. Our audits also included the financial
statement schedules listed in the index at Item 16(b).
These financial statements and schedules are the responsibility
of management of the Company and its Predecessor. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Altra Holdings, Inc. at December 31,2005 and 2004 and the consolidated results of the operations and
cash flows of the Company for the year ended December 31,2005 and the period from inception (December 1, 2004)
through December 31, 2004, and the combined results of
operations and cash flows of its Predecessor for the period from
January 1, 2004 through November 30, 2004, and for the
year ended December 31, 2003, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the
information set forth therein.
Trade receivables, less allowance for doubtful accounts of
$1,797 and $1,424
46,441
46,441
45,969
Inventories, less allowance for obsolete materials of $6,843 and
$6,361
54,654
54,654
56,732
Deferred income taxes
2,779
2,779
1,145
Prepaid expenses and other
1,973
1,973
4,792
Total current assets
115,907
115,907
113,367
Property, plant and equipment, net
66,393
66,393
68,006
Intangible assets, net
44,751
44,751
48,758
Goodwill
65,345
65,345
63,145
Other assets
5,295
5,295
6,111
Total assets
$
297,691
$
297,691
$
299,387
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
30,724
$
30,724
$
28,787
Accrued payroll
16,016
16,016
11,661
Accruals and other liabilities
16,085
16,085
14,306
Deferred income taxes
33
33
129
Current portion of long-term debt
186
186
913
Total current liabilities
63,044
63,044
55,796
Long-term debt, less current portion and net of unaccreted
discount
173,574
173,574
172,938
Deferred income taxes
7,653
7,653
9,828
Pension liabilities
14,368
14,368
19,534
Other post retirement benefits
12,500
12,500
12,203
Other long term liabilities
1,601
1,601
—
Commitments and Contingencies
—
—
—
Convertible Preferred Series A stock ($0.001 par
value, 40,000,000 shares authorized, 35,500,000 and
35,100,000 shares issued and outstanding, respectively)
—
35,500
35,100
Stockholders’ equity:
Common stock ($0.001 par value, 50,000,000 shares
authorized, 594,040 issued and outstanding at December 31,2005)
Description of Business and Summary of Significant Accounting
Policies
Basis of Preparation and Description of Business
Headquartered in Quincy, Massachusetts, Altra Holdings, Inc.
(“the Company”) produces, designs and distributes a
wide range of mechanical power transmission products, including
industrial clutches and brakes, enclosed gear drives, open
gearing and couplings. The Company consists of several power
transmission component manufacturers including Warner Electric,
Boston Gear, Formsprag Clutch, Stieber Clutch, Ameridrives
Couplings, Wichita Clutch, Nuttall Gear, Kilian and Delroyd Worm
Gear. The Company designs and manufactures products that serve a
variety of applications in the food and beverage, material
handling, printing, paper and packaging, specialty machinery,
and turf and garden industries. Primary geographic markets are
in North America, Western Europe and Asia.
The Company was formed on November 30, 2004 following
acquisitions of certain subsidiaries of Colfax Corporation
(“Colfax”) and The Kilian Company
(“Kilian”), both acquisitions of which are described
in detail in Note 3. The consolidated financial statements
of the Company include the accounts of the Company subsequent to
November 30, 2004. The financial statements of “the
Predecessor” include the combined historical financial
statements of the Colfax entities acquired by the Company that
formerly comprised the Power Transmission Group of Colfax, a
privately-held industrial manufacturing company, that are
presented for comparative purposes.
Prior to May 30, 2003, the Predecessor was a group of
entities under common control. On May 30, 2003, through a
series of capital contributions and exchanges of equity
securities by the Predecessor’s shareholders, entities that
were under common ownership, became subsidiaries of Colfax. In
addition, certain entities that were previously taxed at the
shareholder level became taxable entities (see the discussion on
income taxes below and Note 8).
The historical financial results of Kilian, which was not
related to the Predecessor, are not included in the presentation
of Predecessor balances in the financial statements or the
accompanying footnotes.
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company, the Predecessor (where noted) and their wholly
owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
Pro Forma (unaudited)
The unaudited pro forma financial information presents the
effect of a conversion of the preferred series A shares to
common stock. Shares of the preferred stock are convertible in
whole or in part into common shares at a ratio of one-to-one
subject to adjustments for stock splits, mergers,
consolidations, recapitalizations and/or reorganizations. The
pro forma equity financial information and earnings per share
information reflect a one-to-one conversion as of the beginning
of the period presented.
Net Income Per Share
Basic earnings per share is based on the weighted average number
of common shares outstanding, and diluted earnings per share is
based on the weighted average number of common shares
outstanding and all dilutive potential common equivalent shares
outstanding. Common equivalent shares are included in the
dilutive per share calculations when the effect of their
inclusion would be dilutive.
Shares used in net income per common share — basic
18
Effect of dilutive securities:
Incremental shares of unvested restricted common stock
2,419
Conversion of preferred stock
35,500
Shares used in net income per common share — diluted
37,937
Net income per common share — basic
$
139.11
Net income per common share — diluted
$
0.07
There was no common stock outstanding for the one month period
from December 1, 2004 to December 31, 2004 to
establish a basic earnings per share. The Company did not
generate earnings for the period from December 1, 2004 to
December 31, 2004, therefore, the potential common stock
equivalents were anti-dilutive and excluded from dilutive
earnings per share.
The Predecessor’s capital structure was comprised of
contributions from the parent and affiliated companies. There
was no common stock associated with the group of entities which
comprised the Predecessor. Accordingly there is no respective
earnings per share.
Subsequent to year end, the Company granted 693,511 shares
of restricted stock to certain employees. The restricted shares
granted have similar terms to those issued under previous
grants. This restricted stock is unvested and therefore would
have no impact on calculating basic earnings per share had the
grant occurred prior to December 31, 2005. This restricted
stock would be dilutive had it been granted prior to
December 31, 2005, however it would not have had a material
impact on diluted earnings per share.
Fair Value of Financial Instruments
The carrying values of financial instruments, including accounts
receivable, accounts payable and other accrued liabilities,
approximate their fair values due to their short-term
maturities. The Company believes that the subordinated notes are
carried at their fair value at December 31, 2005 based on
estimated rates for similar borrowing by the Company. At
December 31, 2005 the carrying amount of long-term debt of
the 9% Senior Secured Notes was $159.4 million. The
estimated fair value at December 31, 2005 was
$160.1 million based on quoted market prices for such notes.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the financial statements. Actual results could differ
from those estimates.
Foreign currency translation
Assets and liabilities of subsidiaries operating outside of the
United States with a functional currency other than the
U.S. dollar are translated into U.S. dollars using
exchange rates at the end of the respective period. Revenues and
expenses are translated at average exchange rates effective
during the respective period.
Foreign currency translation adjustments are included in
accumulated other comprehensive income (loss) as a separate
component of stockholders’ equity. Net foreign currency
transaction gains and losses
Notes to Consolidated Financial
Statements — (Continued)
are included in the results of operations in the period incurred
and were not material in any of the periods presented.
Cash and Cash Equivalents
Cash and cash equivalents include all financial instruments
purchased with an initial maturity of three months or less. Cash
equivalents are stated at cost, which approximates fair value.
Trade Receivables
An allowance for doubtful accounts is recorded for estimated
collection losses that will be incurred in the collection of
receivables. Estimated losses are based on historical collection
experience, as well as, a review by management of the status of
all receivables. Collection losses have been within the
Company’s expectations.
Inventories
Inventories are stated at the lower of cost or market using the
first-in, first-out
(“FIFO”) method. The cost of inventories acquired by
the Company in its acquisitions reflect their fair values at
November 30, 2004 as determined by the Company based on the
replacement cost of raw materials, the sales price of the
finished goods less an appropriate amount representing the
expected profitability from selling efforts, and for
work-in-process the
sales price of the finished goods less an appropriate amount
representing the expected profitability from selling efforts and
costs to complete.
The Company periodically reviews its quantities of inventories
on hand and compares these amounts to the expected usage of each
particular product or product line. The Company records as a
charge to cost of sales any amounts required to reduce the
carrying value of inventories to net realizable value.
Property, Plant and Equipment
Property, plant, and equipment are stated at cost, net of
accumulated depreciation incurred since November 30, 2004.
Depreciation of property, plant, and equipment is provided using
the straight-line method over the estimated useful life of the
asset, as follows:
Buildings and improvements
15 to 45 years
Machinery and equipment
2 to 15 years
Improvements and replacements are capitalized to the extent that
they increase the useful economic life or increase the expected
economic benefit of the underlying asset. Repairs and
maintenance expenditures are charged to expense as incurred.
Intangible Assets
Intangibles represent product technology and patents, tradenames
and trademarks and customer relationships. Product technology
and patents and customer relationships are amortized on a
straight-line basis over 8 to 12 years. The tradenames and
trademarks are considered indefinite-lived assets and are not
being amortized. Intangibles are stated at fair value on the
date of acquisition net of accumulated amortization.
Goodwill
Goodwill represents the excess of the purchase price paid by the
Company for the Predecessor and Kilian over the fair value of
the net assets acquired in each of the acquisitions. Goodwill
can be
Notes to Consolidated Financial
Statements — (Continued)
attributed to the value placed on the Company being an industry
leader with a market leading position in the Power Transmission
industry. The Company’s leadership position in the market
was achieved by developing and manufacturing innovative products
and management anticipates that its leadership position and
profitability will continue to expand, enhanced by cost
improvement programs associated with ongoing consolidation and
centralization of it operations.
Impairment of Goodwill and Indefinite-Lived Intangible
Assets
The Company evaluates the recoverability of goodwill and
indefinite-lived intangible assets annually, or more frequently
if events or changes in circumstances, such as a decline in
sales, earnings, or cash flows, or material adverse changes in
the business climate, indicate that the carrying value of an
asset might be impaired. Goodwill is considered to be impaired
when the net book value of a reporting unit exceeds its
estimated fair value. Fair values are established using a
discounted cash flow methodology (specifically, the income
approach). The determination of discounted cash flows is based
on the Company’s strategic plans and long-range forecasts.
The revenue growth rates included in the forecasts are the
Company’s best estimates based on current and anticipated
market conditions, and the profit margin assumptions are
projected based on current and anticipated cost structures.
Because the Company was still in the process of allocating its
final goodwill and intangible assets, arising from the
application of purchase accounting for the Predecessor and
Kilian acquisitions, and had not allocated these assets across
its business units, the Company evaluated its long-lived assets
at the Company level at December 31, 2004. This analysis
included consideration of discounted cash flows as well as
EBITDA multiples. The analysis indicated no impairment to be
present. During 2005, the Company completed its allocation of
goodwill and intangible assets across its business units and
performed its annual assessment at the reporting unit level
noting no impairment of such assets.
Impairment of Long-Lived Assets Other Than Goodwill and
Indefinite-Lived Intangible Assets
The Company assesses its long-lived assets other than goodwill
and indefinite-lived intangible assets for impairment whenever
facts and circumstances indicate that the carrying amounts may
not be fully recoverable. To analyze recoverability, the Company
projects undiscounted net future cash flows over the remaining
lives of such assets. If these projected cash flows are less
than the carrying amounts, an impairment loss would be
recognized, resulting in a write-down of the assets with a
corresponding charge to earnings. The impairment loss is
measured based upon the difference between the carrying amounts
and the fair values of the assets. Assets to be disposed of are
reported at the lower of the carrying amounts or fair value less
cost to sell. Management determines fair value using the
discounted cash flow method or other accepted valuation
techniques.
Debt Issuance Costs
Costs directly related to the issuance of debt are capitalized,
included in other long-term assets and amortized using the
effective interest method over the term of the related debt
obligation. The net carrying value of debt issuance costs was
approximately $3.9 million and $3.7 million at
December 31, 2005 and 2004, respectively.
Revenue Recognition
Product revenues are recognized, net of sales tax collected, at
the time title and risk of loss pass to the customer, which
generally occurs upon shipment to the customer. Service revenues
are recognized as services are performed. Amounts billed for
shipping and handling are recorded as revenue. Product return
reserves are accrued at the time of sale based on the historical
relationship between shipments and returns, and are recorded as
a reduction of net sales.
Notes to Consolidated Financial
Statements — (Continued)
Certain large distribution customers receive quantity discounts
which are recognized net at the time the sale is recorded.
Shipping and Handling Costs
Shipping and handling costs associated with sales are classified
as a component of cost of sales.
Warranty Costs
Estimated expenses related to product warranties are accrued at
the time products are sold to customers. Estimates are
established using historical information as to the nature,
frequency, and average costs of warranty claims.
Self-Insurance
Certain operations are self-insured up to pre-determined amounts
above which third-party insurance applies, for medical claims,
workers’ compensation, vehicle insurance, product liability
costs and general liability exposure. The accompanying balance
sheets include reserves for the estimated costs associated with
these self-insured risks, based on historic experience factors
and management’s estimates for known and anticipated
claims. A portion of medical insurance costs are offset by
charging employees a premium equivalent to group insurance rates.
Research and Development
Research and development costs are expensed as incurred.
In December 2004, the FASB issued Statement of Financial
Accounting Standard (SFAS) No. 123(R),
“Share-Based Payment,”which requires the
measurement of all share-based payments to employees, including
grants of employee stock options, using a fair-value-based
method and the recording of such expense in the Company’s
consolidated statement of operations.
The Company established the 2004 Equity Incentive Plan that
provides for various forms of stock based compensation to
officers and senior-level employees of the Company. The Company
accounts for grants under this plan in accordance with the
provisions of SFAS No. 123(R). Expense associated with equity
awards is recognized on a straight-line basis over the service
period.
Income Taxes
The Company records income taxes using the asset and liability
method. Deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective income tax
bases, and operating loss and tax credit carryforwards. The
Company evaluates the realizability of its net deferred tax
assets and assesses the need for a valuation allowance on a
quarterly basis. The future benefit to be derived from its
deferred tax assets is dependent upon the Company’s ability
to generate sufficient future taxable income to realize the
assets. The Company records a valuation allowance to reduce its
net deferred
Notes to Consolidated Financial
Statements — (Continued)
tax assets to the amount that may be more likely than not to be
realized. To the extent the Company establishes a valuation
allowance, an expense will be recorded within the provision for
income taxes line on the statement of operations. In periods
subsequent to establishing a valuation allowance, if the Company
were to determine that it would be able to realize its net
deferred tax assets in excess of their net recorded amount, an
adjustment to the valuation allowance would be recorded as a
reduction to income tax expense in the period such determination
was made.
Prior to various dates in mid-2003, only Boston Gear and the
Predecessor’s
non-U.S. based
subsidiaries were accounted for under this method. The remaining
U.S. based Predecessor affiliates were S-corporations
and/or partnerships for U.S. income tax purposes. As such,
income tax obligations were the responsibility of the
Predecessor’s shareholders and partners for those periods.
During 2003, these remaining Predecessor affiliates became
subject to tax at the entity level and income taxes have been
provided for since those dates. The effects of recognizing
deferred tax assets and liabilities related to this change in
status have been included in the provision (benefit) for income
taxes for the year ended December 31, 2003. For all
Predecessor periods, no taxes payable or receivable have been
recorded in the Predecessor financial statements subsequent to
the entities becoming taxable. The related estimated income tax
payable or receivable is included as a component of the net
contribution from (distribution to) affiliates as shown in the
accompanying Statement of Stockholders’ Equity. The
U.S. based current tax expense or benefit is presented as
deferred tax expense or benefit for all Predecessor periods
presented, as no current tax benefits or losses accrue to the
Company or its Predecessor due to utilization of consolidated
net operating losses of the former owner.
2.
Recent Accounting Pronouncements
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, (“Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20,
Accounting Changes and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial
Statements”)(“SFAS 154”). SFAS 154
provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes, unless
impracticable, retrospective application as the required method
for reporting a change in accounting principle in the absence of
explicit transition requirements specific to the newly adopted
accounting principle. SFAS 154 also provides guidance for
determining whether retrospective application of a change in
accounting principle is impracticable and for reporting a change
when retrospective application is impracticable. The provisions
of this Statement are effective for accounting changes and
corrections of errors made in fiscal periods beginning after
December 15, 2005. The adoption of the provisions of
SFAS 154 is not expected to have a material impact on the
Company’s financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4”. SFAS No. 151, which is
effective for the Company beginning January 1, 2006,
SFAS No. 151 clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) so that those items are recognized as
current-period charges. This statement also requires the
allocation of fixed production overhead costs based on the
normal capacity of the production facilities regardless of the
actual use of the facility. The Company does not believe that
this statement will have any material impact on the
Company’s financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No.
(“FIN”) 48, “Accounting for Uncertainty in Income
Taxes — An Interpretation of FASB Statement
No. 109”, which prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 will be effective for fiscal years
beginning after December 15, 2006. The Company has not yet
completed its evaluation of the impact of adoption on the
Company’s financial position or results of operations.
Notes to Consolidated Financial
Statements — (Continued)
3.
Acquisitions
On November 30, 2004, the Company acquired the Predecessor
for $180.0 million in cash and Kilian for an
$8.8 million issuance of preferred and common stock plus
the assumption of Kilian debt in the amount of approximately
$12.2 million. The purchase price of both acquisitions has
been adjusted following the completion of certain negotiations
surrounding adjustments to the respective seller’s recorded
working capital at the acquisition date. In 2005 Predecessor
negotiations were finalized resulting in the return of
approximately $1.6 million of the purchase price to the
Company. Negotiations were also finalized for Kilian which
resulted in a final payment by the Company of approximately
$0.7 million.
The acquisitions have been accounted for in accordance with
SFAS No. 141, “Business
Combinations.” As discussed in the Basis of
Presentation in Note 1, the consolidated financial
statements include the results of operations for the period
December 1, 2004 through December 31, 2004, and those
of the Predecessor for prior periods.
The Company has completed its purchase price allocations. The
value of the acquired assets, assumed liabilities and identified
intangibles from the acquisition of the Predecessor and Kilian,
as presented below, are based upon management’s estimates
of fair value as of the date of the acquisition. The goodwill
and intangibles recorded in connection with the acquisition of
the Predecessor have been allocated across the business units
acquired from the Predecessor. The purchase price allocations
are as follows (in thousands):
Predecessor
Kilian
Total
Total purchase price, including closing costs of approximately
$2.6 million
$
181,019
$
9,594
$
190,613
Cash and cash equivalents
1,183
1,184
2,367
Trade receivables
39,233
6,096
45,329
Inventories
52,761
5,108
57,869
Prepaid expenses and other
4,770
207
4,977
Property, plant and equipment
59,320
9,111
68,431
Intangible assets
49,004
—
49,004
Deferred income taxes — long term
—
104
104
Other assets
150
—
150
Total assets acquired
206,421
21,810
228,231
Accounts payable, accrued payroll, and accruals and other
current liabilities
46,422
3,125
49,547
Bank debt
—
12,178
12,178
Deferred income taxes
8,127
—
8,127
Pensions, other post retirement benefits and other liabilities
34,166
—
34,166
Total liabilities assumed
88,715
15,303
104,018
Net assets acquired
117,706
6,507
124,213
Excess purchase price over the fair value of net assets acquired
Notes to Consolidated Financial
Statements — (Continued)
The excess of the purchase price over the fair value of the net
assets acquired was recorded as goodwill. The amounts recorded
as identifiable intangible assets consist of the following:
Predecessor
Kilian
Total
Customer relationships
$
27,802
$
—
$
27,802
Product technology and patents
5,122
—
5,122
Total intangible assets subject to amortization
32,924
—
32,924
Trade names and trademarks, not subject to amortization
16,080
—
16,080
Total intangible assets
$
49,004
$
—
$
49,004
Customer relationships, product technology and patents, are
subject to amortization over their estimated useful lives of
twelve and eight years, respectively, which reflects the
anticipated periods over which the Company estimates it will
benefit from the acquired assets. The weighted average estimated
useful life of all intangible assets subject to amortization is
approximately 11.1 years. Substantially all of this
amortization is deductible for income tax purposes.
The following table sets forth the unaudited pro forma results
of operations of the Company for the two years in the period
ended December 31, 2004 as if the Company had acquired the
Predecessor and Kilian as of January 1, 2003. The pro forma
information contains the actual combined operating results of
the Company, the Predecessor and Kilian with the results prior
to the December 1, 2004 adjusted to include the pro forma
impact of (i) additional amortization and depreciation
expense associated with the adjustment to and recognition of
fair value of fixed and intangible assets; (ii) the
elimination of additional expense as a result of the fair value
adjustment to inventory recorded in connection with the
Acquisition; (iii) additional expenses associated with new
contractual commitments created at Inception;
(iv) additional expenses associated with general and
administrative services previously performed by the
Predecessor’s parent and not charged to the Predecessor;
(v) additional interest expense associated with debt issued
at Inception; (vi) the elimination of previously incurred
interest expense of the Predecessor and Kilian; and
(vii) the elimination of expense associated with pension
and OPEB obligations retained by the Predecessor. These pro
forma amounts do not purport to be indicative of the results
that would have actually been obtained if the acquisitions
occurred as of January 1, 2003 or that may be obtained in
the future.
The Goodwill adjustments primarily relate to the finalization of
the recorded working capital balances for both the Kilian and
Predecessor acquisitions, which resulted in a decrease in
goodwill of $0.9 million. Goodwill was further adjusted
down by $2.0 million for deferred taxes that had been
previously established as part of the purchase accounting. These
decreases in goodwill were offset by an increase in the amount
of assumed liabilities identified, of approximately,
$6.1 million.
The Company recorded $3.0 million and $0.2 million of
amortization expense for the year-ended December 31, 2005
and the period from inception through December 31, 2004,
respectively. No amortization expense was recorded by the
Predecessor.
Customer relationships, product technology and patents, are
subject to amortization over their estimated useful lives of
twelve and eight years, respectively, which reflects the
anticipated periods over which the Company estimates it will
benefit from the acquired assets. The weighted average estimated
useful life of all intangible assets subject to amortization is
approximately 11.1 years. Substantially all of this
amortization is deductible for income tax purposes.
Effect of losses of domestic S corporation and partnership
entities
—
—
—
(5,927
)
Valuation allowance
—
2,011
895
7,153
Disallowed interest expense
313
26
—
—
Foreign and other
614
(97
)
(100
)
1,074
Provision (benefit) for income taxes
$
3,349
$
(292
)
$
5,532
$
(1,658
)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
deferred tax assets and liabilities as of December 31, 2005
and 2004 were as follows:
2005
2004
Deferred tax assets:
Post-retirement obligations
12,050
$
10,580
Expenses not currently deductible
8,657
8,575
Net operating loss carryover
1,740
1,997
Other
883
842
Total deferred tax assets
23,330
21,994
Valuation allowance for deferred tax assets
(16,389
)
(18,374
)
Net deferred tax assets
6,941
3,620
Deferred tax liabilities:
Property, plant and equipment
6,264
4,010
Intangible assets
5,278
7,638
Other
306
784
Total deferred tax liabilities
11,848
12,432
Net deferred tax liabilities
$
(4,907
)
$
(8,812
)
At December 31, 2005 and 2004, the Company had net
operating loss carryforwards primarily related to operations in
France of $5.0 million and $5.4 million, respectively,
which can be carried forward indefinitely.
The decrease in net deferred tax liabilities for the year
includes a deferred tax benefit of approximately
$2.0 million attributable to the release of valuation
allowances established in purchase
Notes to Consolidated Financial
Statements — (Continued)
accounting, resulting in a reduction of book goodwill, and a
deferred tax benefit of approximately $1.9 million
attributable to accrued pension liabilities and currency
translation adjustments recorded through other comprehensive
income.
Valuation allowances are established for a deferred tax asset
that management believes may not be realized. The Company
continually reviews the adequacy of the valuation allowance and
recognizes tax benefits only as reassessments indicate that it
is more likely than not the benefits will be realized. A
valuation allowance at December 31, 2005 and 2004 of
$16.4 million and $18.4 million, respectively, has
been recognized to offset deferred tax assets due to the
uncertainty of realizing the benefits of the deferred tax
assets. The decrease in the valuation allowance relates
primarily to deferred tax adjustments associated with purchase
price accounting and have been recorded to goodwill. Of the
total valuation allowance existing at December 31, 2005,
approximately $16.1 million will be allocated to reduce
book goodwill if and when released in subsequent periods.
The undistributed earnings of the Company’s foreign
subsidiaries on which tax is not provided was approximately
$0.4 million as of December 31, 2005, and are
considered to be indefinitely reinvested. As of
December 31, 2005, the Company has not recorded
U.S. federal deferred income taxes on these undistributed
earnings from its foreign subsidiaries. It is expected that
these earnings will be permanently reinvested in operations
outside the U.S. If the undistributed earnings were not
reinvested in operations outside the U.S., the tax impact would
be immaterial to the Company.
The American Jobs Creation Act of 2004 (the “Job Creation
Act”) was enacted on October 22, 2004. Among other
things, the Job Creation Act repeals an export incentive and
creates a new deduction for qualified domestic manufacturing
activities. The Company has recorded in the computation of the
account, a deduction of $0.1 million. In addition, the Job
Creation Act also included a deduction of 85% of certain foreign
earnings that are repatriated, as defined in the Job Creation
Act. The Company did not repatriate any earnings in 2005 under
this provision of the Job Creation Act.
9.
Pension and Other Employee Benefits
Defined Benefit (Pension) and Postretirement Benefit
Plans
The Company’s, wholly-owned subsidiary Altra Industrial
Motion, Inc. (Altra Industrial), sponsors various defined
benefit (pension) and postretirement (medical and life insurance
coverage) plans for certain, primarily unionized, active
employees (those in the employment of Altra Industrial at or
hired since November 30, 2004). The Predecessor sponsored
similar plans that covered certain employees, former employees
and eligible dependents. At November 30, 2004, Altra
Industrial assumed the pension and postretirement benefit
obligations of all active U.S. employees and all
non-U.S. employees
of the Predecessor. Additionally, Altra Industrial assumed all
post-employment and post-retirement welfare benefit obligations
with respect to active U.S. employees. Colfax retained all
other pension and postretirement benefit obligations relating to
the Predecessor’s former employees.
The accounting for these plans is subject to the guidance
provided in SFAS No. 87, “Employers’
Accounting for Pensions,”and SFAS No. 106,
“Employers’ Accounting for Postretirement Benefits
Other than Pensions.”Both of these statements require
management to make assumptions relating to the long-term rate of
return on plan assets, discount rates used to measure future
obligations and expenses, salary scale inflation rates, health
care cost trend rates, and other assumptions. The selection of
assumptions is based upon historical trends and known economic
and market conditions at the time of valuation. Because of the
volatility of the assumptions, actual results may vary
substantially from forecast plan assumptions. Both the pension
plans and the postretirement plans are revalued annually, using
a December 31 measurement date, based upon updated
assumptions and information about the individuals covered by the
plan.
Notes to Consolidated Financial
Statements — (Continued)
The following tables represent the reconciliation of the benefit
obligation, fair value of plan assets and funded status of the
respective defined benefit (pension) and postretirement
benefit plans as of December 31, 2005 and 2004 and
November 30, 2004 of the Predecessor:
Amounts recognized in the balance sheets consist of:
Accrued benefit cost
$
(21,865
)
$
(20,059
)
$
(45,343
)
$
(12,500
)
$
(12,203
)
$
(27,338
)
Intangible asset
49
—
223
—
—
—
Accumulated other comprehensive income
2,390
722
58,616
—
—
—
Net amount recognized
$
(19,426
)
$
(19,337
)
$
13,496
$
(12,500
)
$
(12,203
)
$
(27,338
)
For all pension plans presented above, the accumulated and
projected benefit obligations exceed the fair value of plan
assets. The accumulated benefit obligation at December 31,2005 and 2004 was $27.7 million and $24.7 million,
respectively. Non-US pension liabilities recognized in the
amounts presented above are $2.9 million and
$3.2 million at December 31, 2005 and 2004,
respectively.
Notes to Consolidated Financial
Statements — (Continued)
The key economic assumptions used in the computation of the
respective benefit obligations at December 31, 2005 and
2004 presented above are as follows:
Pension
Postretirement
Benefits
Benefits
2005
2004
2005
2004
Weighted-average discount rate
5.5
%
5.8
%
5.5
%
5.8
%
Weighted-average rate of compensation increase
N/A
N/A
N/A
N/A
The following table represents the components of the net
periodic benefit cost associated with the respective plans:
The reasonableness of the expected return on the funded pension
plan assets was determined by three separate analyses:
(i) review of forty years of historical data of portfolios
with similar asset allocation characteristics,
(ii) analysis of six years of historical performance for
the Predecessor plan assuming the current portfolio mix and
investment manager structure, and (iii) a projected
portfolio performance, assuming the plan’s target asset
allocation.
For measurement of the postretirement benefit obligations and
net periodic benefit costs, an annual rate of increase in the
per capita cost of covered health care benefits of approximately
7.5% was assumed. This rate was assumed to decrease gradually to
5% by 2008 and remain at that level thereafter.
Notes to Consolidated Financial
Statements — (Continued)
The assumed health care trends are a significant component of
the postretirement benefit costs. A one-percentage-point change
in assumed health care cost trend rates would have the following
effects:
In December 2003, Congress passes the “Medicare
Prescription Drug Improvement and Modernization Act of
2003” (the Act) that reformed Medicare in such a way that
Altra Industrial may have been eligible to receive subsidies for
certain prescription drug benefits that are incurred on behalf
of plan participants. There has been no impact on Altra
Industrial’s plans as either prescription drug coverage is
not offered past the age of 65 or we have not applied for any
subsidy. Accordingly, the amounts recorded and disclosed in
these financial statements do not reflect any amounts related to
this Act.
The asset allocations for Altra Industrial’s and the
Predecessor’s funded retirement plans at December 31,2005 and 2004, respectively, and the target allocation for 2005,
by asset category, are as follows:
Allocation Percentage of
Plan Assets at Year End
2005
2005
2004
Asset Category
Actual
Target
Actual
Equity securities
67
%
65
%
(i
)
Fixed income securities
33
%
35
%
(i
)
(i)
The assets for Altra Industrial’s funded retirement plan at
the end of 2004 were held by the Predecessor, awaiting transfer.
Once received, they were invested in a manner consistent with
the 2005 target allocation.
The investment strategy is to achieve a rate of return on the
plan’s assets that, over the long-term, will fund the
plan’s benefit payments and will provide for other required
amounts in a manner that satisfies all fiduciary
responsibilities. A determinant of the plan’s returns is
the asset allocation policy. The plan’s asset mix will be
reviewed by Altra Industrial periodically, but at least
quarterly, to rebalance within the target guidelines. Altra
Industrial will also periodically review investment managers to
determine if the respective manager has performed satisfactorily
when compared to the defined objectives, similarly invested
portfolios, and specific market indices.
Expected cash flows
The following table provides the amounts of expected benefit
payments, which are made from the plans’ assets and
includes the participants’ share of the costs, which is
funded by participant contributions. The amounts in the table
are actuarially determined and reflect Altra Industrial’s
best estimate given its current knowledge; actual amounts could
be materially different.
Notes to Consolidated Financial
Statements — (Continued)
Altra Industrial contributed $0.9 million to its pension
plan in 2005. Altra Industrial has cash funding requirements
associated with its pension plan which are estimated to be
$6.9 million in 2006, $3.6 million in 2007,
$2.5 million in 2008 and $1.9 million annually until
2011.
Defined Contribution Plans
At November 30, 2004, Altra Industrial established a
defined contribution plan for substantially all full-time
U.S.-based employees on
terms that mirror those previously provided by the Predecessor.
All active employees became participants of Altra
Industrial’s plan and all of their account balances in the
Predecessor plans were transferred to Altra Industrial’s
plan at Inception.
Under the terms of both the Altra Industrial and Predecessor
plans, eligible employees may contribute from one to fifteen
percent of their compensation to the plan on a pre-tax basis.
Altra Industrial makes a matching contribution equal to half of
the first six percent of salary contributed by each employee and
makes a unilateral contribution of three percent of all
employees’ salary (including non-contributing employees).
Altra Industrial’s expense associated with the defined
contribution plan was $2.5 and $0.3 million during the
year-ended December 31, 2005 and the period
December 1, 2004 through December 31, 2004,
respectively. The Predecessor’s expense was
$2.4 million during the eleven months ending
November 30, 2004, and $2.0 million in the year ending
December 31, 2003.
10.
Long-Term Debt
Revolving Credit Agreement
At November 30, 2004, Altra Industrial entered into an
agreement for up to $30 million of revolving borrowings
from a commercial bank (the Revolving Credit Agreement), subject
to certain limitations resulting from the requirement of Altra
Industrial to maintain certain levels of collateralized assets,
as defined in the Revolving Credit Agreement. Altra Industrial
may use up to $10 million of its availability under the
Revolving Credit Agreement for standby letters of credit issued
on its behalf, the issuance of which will reduce the amount of
borrowings that would otherwise be available to Altra
Industrial. Altra Industrial may re-borrow any amounts paid to
reduce the amount of outstanding borrowings; however, all
borrowings under the Revolving Credit Agreement must be repaid
in full as of November 30, 2009.
Borrowings under the Revolving Credit Agreement bear interest,
at Altra Industrial’s election, at LIBOR plus
250 basis points annually or the lenders Prime Rate plus
125 basis points, but in no event no lower than 3.75%.
Altra Industrial must also pay 2.0% per annum on all
outstanding letters of credit, 0.375% per annum on the
unused availability under the Revolving Credit Agreement and
$10 per quarter in service fees. Altra Industrial incurred
approximately $1.5 million in fees associated with the
issuance of the Revolving Credit Agreement which have been
capitalized as deferred financing costs and will be amortized
over the five year life of the Revolving Credit Agreement as a
component of interest expense.
Substantially all of Altra Industrial’s assets have been
pledged as collateral against outstanding borrowings under the
Revolving Credit Agreement. The Revolving Credit Agreement
requires Altra Industrial to maintain a minimum fixed charge
coverage ratio (when availability under the line falls below
$12.5 million) and imposes customary affirmative covenants
and restrictions on Altra Industrial. Altra Industrial was in
compliance with certain covenants and obtained a waiver for
noncompliance with one covenant at December 31, 2005. Altra
Industrial was in compliance with all requirements of the
Revolving Credit Agreement at December 31, 2004.
There were no borrowings under the Revolving Credit Agreement at
December 31, 2005 and 2004, however; the lender had issued
$2.4 million and $1.9 million, respectively, of
outstanding letters of credit on behalf of Altra Industrial.
Notes to Consolidated Financial
Statements — (Continued)
9% Senior Secured Notes
At November 30, 2004, Altra Industrial issued
9% Senior Secured Notes (Senior Notes), with a face value
of $165 million. Interest on the Senior Notes is payable
semiannually, in arrears, on June 1 and December 1 of
each year, beginning June 1, 2005, at an annual rate of 9%.
The effective interest rate on the Senior Notes is approximately
10.0%, after consideration of the amortization of
$6.6 million related to initial offer discounts (included
in long-term debt) and $2.7 million of deferred financing
costs (included in other assets).
The Senior Notes mature on December 1, 2011 unless
previously redeemed by Altra Industrial. Through
December 1, 2007, Altra Industrial may elect to redeem up
to 35% of the Senior Notes with the proceeds of certain equity
transactions by paying a 9% premium of the amounts paid by such
redemption. From December 1, 2008 through November 30,2009, Altra Industrial may also elect to redeem any or all of
the Senior Notes still outstanding by paying a 4.5% premium of
the amounts paid for such redemptions. A 2.25% premium is due
for redemptions completed from December 1, 2009 to
November 30, 2010. Subsequent to November 30, 2010,
Altra Industrial may elect to redeem any or all of the Senior
Notes then outstanding at face value.
In connection with the issuance of the Senior Notes, Altra
Industrial agreed to file a registration statement with the
U.S. Securities and Exchange Commission in an effort to
convert the Senior Notes to publicly traded instruments. Altra
Industrial experienced delays in the effectiveness of such
filing, and incurred additional interest at an annual rate of
..25%, increasing by an additional .25% for each 90 day
delay in the registration up to .75% of additional interest by
the time the registration statement became effective. The
additional interest expense included in the statement operations
for the year ended December 31, 2005 was $0.4 million.
The Senior Notes are guaranteed by Altra Industrial’s
U.S. domestic subsidiaries and are secured by a second
priority lien, subject to first priority liens securing the
Revolving Credit Agreement, on substantially all of Altra
Industrial’s assets. The Senior Notes contain numerous
terms, covenants and conditions, which impose substantial
limitations on Altra Industrial. With the exception of filing
timely financial information, Altra Industrial was in compliance
with all covenants of the Senior Notes at December 31,2005. This by itself does not constitute an event of default nor
trigger the callability of the Senior Notes. As of
December 31, 2004 Altra Industrial was in compliance with
all of the requirements of the Senior Notes.
Subordinated Notes
At November 30, 2004, the Company executed an agreement
with a stockholder to obtain $14.0 million of unsecured
subordinated financing (the Subordinated Notes). The
Subordinated Notes were issued at par value and mature on
November 30, 2019. Interest accrues at an annual rate of
17% and is payable quarterly in full or
paid-in-kind (PIK). As
of December 31, 2004, the Company elected to accrue
$198 thousand of interest expenses as PIK. During 2005, the
Company paid all interest, including the 2004 PIK interest, in
full. As of December 31, 2005, there was $595 thousand
of accrued interest included in accruals and other liabilities
in the accompanying balance sheet.
The Subordinated notes become callable by the lender on
December 1, 2011 or upon full payment of the 9% Senior
Secured notes discussed above. The lender also has the right to
demand payment at 101% upon change of control. The company may
elect to redeem the Subordinated Notes at any time in whole or
in part. Payments made prior to November 30, 2006 will
incur a 6% prepayment penalty. This prepayment penalty decreases
by 1% on every subsequent anniversary date.
The Company incurred approximately $0.3 million in fees
associated with the issuance of the Subordinated Notes that are
capitalized as deferred financing costs included in other assets
in the
Notes to Consolidated Financial
Statements — (Continued)
accompanying balance sheet. These costs will be amortized
through November 2011 as a component of interest expense.
The Subordinated Notes impose customary affirmative covenants
and restrictions on the Company, including the delivery of
timely financial information to the lender. With the exception
of filing timely financial information, the Company was in
compliance with all covenants of the Subordinated Notes at
December 31, 2005. This by itself does not constitute an
event of default nor trigger the callability of the Subordinated
Notes. The Company was in compliance with all covenant
requirements as of December 31, 2004.
Predecessor Debt
During 2003, the Predecessor borrowed $70.6 million from
its parent company which was used to retire all, then existing,
bank debt. In connection with the repayment of the bank debt,
the Predecessor wrote off $0.4 million of deferred
financing costs, which was charged to the gain on sale of assets
and other non-operating expense (income) caption in the
statement of operations. The amounts borrowed from the parent
company bore an interest rate of 5.83% which approximated the
rates incurred by the parent company for their third-party debt.
Capital Leases (see also Note 16)
The Company and the Predecessor lease a building and certain
equipment under capital lease arrangements, whose obligations
are included in both short-term and long-term debt. Capital
lease obligations amounted to approximately $0.3 million
and $1.1 million at December 31, 2005 and 2004,
respectively. Assets under capital leases are included in
property, plant and equipment with the related amortization
recorded as depreciation expense.
11.
Convertible Preferred Stock
The Company has authorized 40,000,000 shares of
Series A Convertible Preferred Stock (the Preferred),
35,500,000 and 35,100,000 of which was outstanding as of
December 31, 2005 and 2004, respectively. The initial
35,100,000 Preferred shares were issued in connection with the
acquisitions discussed in Note 3. An additional 400,000
Preferred shares were purchased by certain members of management
in 2005. A Preferred holder is also the holder of the
Company’s Subordinated Notes, discussed in Note 10.
The Preferred Stock holders are entitled to the following rights:
Dividends
The holders of the outstanding Preferred Stock are entitled to
receive, when and if declared by the Board, non-cumulative cash
dividends at an annual rate of $0.08 per share of the
Preferred Stock. As of December 31, 2005 and 2004, no
dividends have been declared.
Liquidation
In the event of any voluntary or involuntary liquidation,
dissolution or
winding-up of the
Company, as defined, the holder of each share of Preferred Stock
is entitled to receive, prior to any distribution to common
shareholders, the greater of an amount equal to
(i) $1.00 per share, plus all unpaid declared
dividends, or (ii) the amount per share they would have
received if the Preferred shares had been converted to common
stock prior to a liquidity event. Liquidation, as defined, would
include the sale of the business or the sale of greater than 50%
of the common stock of the Company.
Notes to Consolidated Financial
Statements — (Continued)
Redemption
The Preferred Stock is not redeemable at the option of the
Company or the holders.
Conversion
The shares of Preferred Stock can, at the election of the
holders, at any time, be converted in whole or in part into
common shares at a ratio of
one-to-one subject to
adjustments for stock splits, mergers, consolidations,
recapitalizations and or reorganizations.
Each share of Preferred Stock is automatically converted at the
then effective conversion rate immediately upon the consummation
of an underwritten public offering, provided that aggregate net
proceeds to the Company of such offering are not less than
$50,000,000.
Voting
The holders of Preferred Stock have the same voting rights as
the Common stockholders. The two classes of stock shall vote
together and not as separate classes. Each shareholder of
Preferred Stock is entitled to one vote per each share of Common
Stock into which the Preferred Stock could then be converted.
Protective Provision
Holders of the Company’s Preferred Stock are entitled to
anti-dilutive protections and protective class voting rights;
including the right to veto sales or mergers of the Company, to
prevent amendments to the Company’s certificate of
incorporation and to prohibit future sales of Common and
Preferred stock.
At inception, the Company and its common and preferred
stockholders entered into a Stockholders Agreement which defines
the rights and limitations of its stockholders. The Stockholders
Agreement was amended on January 6, 2005.
The Amended and Restated Stockholders Agreement (the
Stockholders Agreement) generally imposes restrictions on the
transfer of Company stock and grants the Company and certain of
its stockholders certain rights of first refusal and co-sale
rights with respect to sales of shares by other stockholders.
The Stockholders Agreement also grants to Genstar Capital, LP.
(Genstar), one of the primary stockholders, the right to
designate all directors of the Company and the right to require
other parties to participate, on a pro-rata basis, in any sale
of shares by Genstar.
Regarding shares held by employees of the Company, the
Stockholders Agreement grants, to the Company and Genstar, the
right to purchase such shares, upon the employees’
termination from the Company, at fair market value, or in the
case of termination for cause (as defined in the Stockholders
Agreement), at the employees’ cost if lower than the fair
market value.
At Inception, the Company and its common stockholders entered
into a Registration Rights Agreement which defines the rights to
register shares of the Company’s common stock (including
shares of common stock issuable upon conversion of shares of the
Company’s Series A Preferred Stock).
The Amended and Restated Registration Rights Agreement (the
Registration Agreement) generally grants, to Genstar, the right
to require the Company to register its shares of common stock
for public trading at any time after January 6, 2006. The
Registration Agreement also grants other shareholders the right
to participate in any registration of common stock required by
Genstar. The
Notes to Consolidated Financial
Statements — (Continued)
Registration Agreement imposes restrictions on the sale of the
Company shares for a period of 180 days following the
effective date of a registration statement or the commencement
of a public distribution of shares, provides for certain
procedures and requirements for filing of a registration
statement with the U.S. Securities and Exchange Commission
and provides for certain indemnifications by the Company and its
shareholders upon any such registration.
Restricted Common Stock
The Company’s Board of Directors established the 2004
Equity Incentive Plan (the Plan) that provides for various forms
of stock based compensation to independent directors, officers
and senior-level employees of the Company. Simultaneous with the
establishment of this plan, the Board of Directors authorized
and issued 3.3 million shares of restricted common stock to
certain independent directors and employees of the Company. The
restricted shares issued pursuant to the plan will be service
time vested ratably over each of the five years from the date of
grant, provided, that the vesting of the restricted shares may
accelerate upon the occurrence of certain liquidity events, if
approved by the Board of Directors in connection with the
transactions. Common stock awarded under the 2004 Equity
Incentive Plan is generally subject to restrictions on transfer,
repurchase rights, and other limitations and rights as set forth
in the Stockholders Agreement and Registration Agreement.
The Plan permits the Company to grant restricted stock to key
employees and other persons who make significant contributions
to the success of the Company. The restrictions and vesting
schedule for restricted stock granted under the Plan are
determined by the Compensation Committee of the Board of
Directors. In connection with the November 2004 transaction the
Company issued 878,114 shares of restricted common stock with a
fair value of $88. In January 2005 351,443 shares with a fair
value of $35 were forfeited and 2,788,329 shares of restricted
common stock with a fair value of $279 were granted. At
December 31, 2005, 3,209,666 shares of unvested
restricted stock were outstanding with a fair value of
$0.3 million as of the date of the grant. At
December 31, 2004, 878,114 shares of unvested
restricted stock were outstanding with a fair value of $88 as of
the grant date.
The fair value of the Company’s common stock is determined
by the Company’s Board of Directors (the Board) at the time
of the restricted common stock grants. In the absence of a
public trading market for the Company’s common stock, the
Company’s Board considers objective and subjective factors
in determining the fair value of the Company’s common stock
and related options. Consistent with the guidance provided by
the AICPA’s Technical Practice Aid on The Valuation of
Privately-held-Company Equity Securities Issued as Compensation
(the TPA), such considerations included, but were not
limited to, the following factors:
•
Historical and expected future earnings performance
•
The liquidation preferences and dividend rights of the preferred
stock
Notes to Consolidated Financial
Statements — (Continued)
Predecessor
For the Predecessor, all historical equity balances are
reflected in the combined financial statements as invested
capital. The annual net cash flows from the Boston Gear
division, the recognition or settlement of intercompany balances
of any of the Predecessor entities with Colfax, federal and
state income taxes payable or receivable and allocations of
balances from Colfax are reflected as contributions from and
distributions to affiliates in the consolidated statements of
stockholders’ equity.
13.
Related-Party Transactions
Kilian Acquisition
As discussed in Note 3, the Company acquired Kilian through
the exchange of preferred and common stock in the Company that
was issued to certain preferred and common shareholders of
Kilian, the majority of whom were represented by Genstar Capital
Partners III, L.P., one of the primary stockholders of the
Company.
Management Agreement
At November 30, 2004, the Company entered into an advisory
services agreement with Genstar Capital, L.P.
(“Genstar”), whereby Genstar agreed to provide certain
management, business strategy, consulting, financial advisory
and acquisition related services to the Company. Pursuant to the
agreement, the Company will pay to Genstar an annual consulting
fee of $1.0 million (payable quarterly, in arrears at the
end of each calendar quarter), reimbursement of
out-of-pocket expenses
incurred in connection with the advisory services and an
advisory fee of 2.0% of the aggregate consideration relating to
any acquisition or dispositions completed by the Company. The
Company recorded $1.0 million and $0.1 million in
management fees, included in selling, general and administrative
expenses for the year ended December 31, 2005 and for the
period from inception through December 31, 2004,
respectively. Genstar also received a one-time transaction fee
of $4.0 million, and $0.4 million in reimbursement of
transaction related expenses, for advisory services it provided
in connection with the acquisitions and related financings
discussed in Notes 3 and 10, and such amounts are
reflected in selling, general and administrative expenses for
the period from inception (December 1, 2004) through
December 31, 2004. At December 31, 2005, the Company
had $0.3 million recorded in accruals and other liabilities
as a payable to Genstar in connection with the annual consulting
fee, there were no amounts outstanding at December 31, 2004.
Subordinated Notes
As discussed in Notes 10 & 11, a Preferred
Stock holder is the holder of the Subordinated Notes payable. In
2004, the Company recorded $198 thousand of interest
expense related to the Notes and no cash payments were made. In
2005, the Company recorded $2.4 million of related interest
expense and disbursed $2 million in cash payments to the
holder.
Transition Services Agreement
In connection with the acquisition of the Predecessor operations
from Colfax, the Company entered into a transition services
agreement with Colfax whereby Colfax agreed to provide the
Company with transitional support services. The transition
services include the continued access to Colfax’ employee
benefit plans through February 2005, the provision of certain
accounting, treasury, tax and payroll services through various
periods all of which ended by May 2005 and the transition of
management oversight of various on-going business initiatives
through May 2005. The cost of these services was less than
$0.1 million.
Notes to Consolidated Financial
Statements — (Continued)
Predecessor Related Party Transactions
Danaher Corporation (Danaher) was related to the Predecessor
through common ownership. Revenue from sales of products to
Danaher was approximately $0.3 for the eleven months ended
November 30, 2004 and $0.3 million for the year ended
December 31, 2003. Purchases of products from Danaher
amounted to $5.8 million and $7.2 million in the
eleven months ending November 30, 2004 and the year ending
December 31, 2003, respectively.
Certain corporate and administrative services were performed for
the Predecessor by Colfax personnel. Such services consist
primarily of executive management, accounting, legal, tax,
treasury and finance. Services performed for the Predecessor by
Colfax were allocated to the Predecessor to the extent that they
were identifiable, clearly applicable to the Predecessor and
factually supported as attributable to the Predecessor.
Management believes that this method of allocation is reasonable
and it is consistent throughout all periods presented. No
significant amounts are included in the Company’s financial
statements for such services although certain professional fees
including auditing fees have been allocated to the Predecessor
results in the Statement of Operations and Comprehensive Income
(Loss). Management estimates that these expenses would increase
by approximately $1.0 million if the Predecessor was a
stand alone entity. In addition, the Predecessor participated in
group purchasing arranged by Colfax for costs such as insurance,
health care and raw materials. These direct expenses were
charged to the Predecessor entities as incurred.
The Predecessor utilized a materials sourcing operation located
in China that was operated by Colfax for the benefit of all
affiliated entities. Management estimates that expenses would
increase approximately $0.6 million if the Predecessor had
to operate this sourcing function on a stand alone basis.
The Predecessor also participated in the Colfax treasury
function whereby funds were loaned to and borrowed from
affiliates in the normal course of business. The net amount due
to Colfax and its subsidiaries, which are not a component of the
Predecessor, are reported as affiliate debt in the Balance Sheet.
14.
Concentrations of Credit, Business Risks and Workforce
Financial instruments, which are potentially subject to
concentrations of credit risk, consist primarily of trade
accounts receivable. The Company manages this risk by conducting
credit evaluations of customers prior to delivery or
commencement of services. When the Company enters into a sales
contract, collateral is normally not required from the customer.
Payments are typically due within thirty days of billing. An
allowance for potential credit losses is maintained, and losses
have historically been within management’s expectations.
Credit related losses may occur in the event of non-performance
by counterparties to financial instruments. Counterparties
typically represent international or well established financial
institutions.
The Company and its Predecessor operate in a single business
segment for the development, manufacturing and sales of
mechanical power transmission products. The Company’s chief
operating decision maker reviews consolidated operating results
to make decisions about allocating resources and
Notes to Consolidated Financial
Statements — (Continued)
assessing performance for the entire Company. Net sales to third
parties and property, plant and equipment by geographic region
are as follows (in thousands):
Net sales to third parties are attributed to the geographic
regions based on the country in which the shipment originates.
Amounts attributed to the geographic regions for long-lived
assets are based on the location of the entity, which holds such
assets.
The Company has not provided specific product line sales as our
general purpose financial statements do not allow us to readily
determine groups of similar product sales.
Approximately 32.3% of the Company’s labor force (19.3% and
90.1% in the United States and Europe, respectively) is
represented by collective bargaining agreements.
15.
Predecessor Restructuring, Asset Impairment and Transition
Expenses
On January 1, 2003, the Predecessor adopted
SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities”.
SFAS No. 146 nullifies
EITF 94-3,
“Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)”. Restructuring
plans initiated prior to December 31, 2002 are accounted
for according to
EITF 94-3 while
all restructuring actions initiated after December 31, 2002
will be accounted for according to SFAS No. 146.
SFAS No. 146 requires that a liability for costs
associated with an exit or disposal activity be recognized when
the liability is incurred.
EITF 94-3 had
previously required that a liability for such costs be
recognized at the date of the Company’s commitment to an
exit or disposal plan. SFAS No. 146 may effect the
periods in which costs are recognized although the total amount
of costs recognized will be the same as previous accounting
guidance.
Beginning in the fourth quarter of 2002, the Predecessor adopted
certain restructuring programs intended to improve operational
efficiency by reducing headcount, consolidating its operating
facilities and relocating manufacturing and sourcing to low-cost
countries. The Predecessor did not exit any of its operating
activities and these programs did not reduce sales. The amounts
recorded as restructuring charges, asset impairment and
transition expenses in the Consolidated Statement of
Comprehensive Income (Loss) for the period January 1, 2004
through November 30, 2004 and the year ended
Certain period costs such as relocation, training, recruiting,
duplicative associates and moving costs resulting from
restructuring programs amounted to $0.6 million and
$9.1 million for the period January 1, 2004 through
November 30, 2004 and the year ended December 31,2003, respectively, were included as a component of transition
expense. A summary of Predecessor cost reduction programs
follows.
United States Programs
The speed reducer product line consolidation resulted in the
closure of the Florence, KY distribution center, the Louisburg,
NC manufacturing facility and the Charlotte, NC manufacturing
facility. The three closed locations were moved into a new
leased facility in Charlotte, NC. In addition the Norwalk, CA
distribution center was downsized and moved into a smaller
facility and the engineering and purchasing functions were moved
from Quincy, MA to the new Charlotte, NC production facility.
This program, other than the payment of accrued severance
amounts, was substantially completed in the third quarter of
2003.
The electronic clutch brake product line consolidation resulted
in the closure of the Roscoe, IL manufacturing facility. The
high volume turf and garden product line was moved to the
Columbia City, IN coil production facility, while the industrial
and vehicular product lines were moved into the South Beloit, IL
manufacturing facility. This program, other than the payment of
accrued severance amounts and certain remaining transition
expenses, was substantially completed in the fourth quarter of
2003.
The sprag clutch product line consolidation resulted in the
closure of the LaGrange, IL manufacturing facility. Production
was relocated to the Formsprag production facility in Warren,
MI. This program, other than the payment of accrued severance
amounts, was substantially completed in the fourth quarter of
2002.
The heavy duty clutch product relocation resulted in the closure
of the Waukesha, WI production facility, which was consolidated
into the Wichita Falls, TX heavy duty clutch production
facility. Engineering support remained in Waukesha in a separate
smaller leased facility. This program, other than the payment of
accrued severance amounts, was substantially completed in the
third quarter of 2003.
Administrative process streamlining primarily involved the
consolidation of the speed reducer and electronic clutch brake
product lines customer service function in South Beloit, IL.
This program, other than the payment of accrued severance
amounts, was substantially completed in the third quarter of
2003.
European and Asian Programs
The European and Asian electronic clutch brake consolidation
resulted in the closure of the Bishop Auckland, United Kingdom
manufacturing facility with production being relocated to
Angers, France and Shenzhen, China. In addition, customer
service and engineering functions were centralized in Angers,
France. The two French facilities in Angers and Lemans were also
rationalized. The Lemans facility was downsized to focus
exclusively on machining operations. All other manufacturing and
Notes to Consolidated Financial
Statements — (Continued)
administrative functions were centralized in Angers. This
program, other than the payment of accrued severance amounts,
was substantially completed in the fourth quarter of 2003.
Notes to Consolidated Financial
Statements — (Continued)
16.
Commitments and Contingencies
Minimum Lease Obligations
The Company leases certain offices, warehouses, manufacturing
facilities, automobiles and equipment with various terms that
range from a month to month basis to ten year terms and which,
generally, include renewal provisions. Future minimum rent
obligations under non-cancelable operating leases are as follows:
Operating
Capital
Year Ending December 31:
Leases
Leases
2006
$
2,709
$
211
2007
2,269
166
2008
1,396
6
2009
680
—
2010
513
—
Thereafter
1,464
—
Total lease obligations
$
9,031
383
Less amounts representing interest
(44
)
Present value of minimum capital lease obligations
The Company is involved in various pending legal proceedings
arising out of the ordinary course of business. None of these
legal proceedings is expected to have a material adverse effect
on the financial condition of the Company. With respect to these
proceedings, management believes that it will prevail, has
adequate insurance coverage or has established appropriate
reserves to cover potential liabilities. Any costs that
management estimates may be paid related to these proceedings or
claims are accrued when the liability is considered probable and
the amount can be reasonably estimated. There can be no
assurance, however, as to the ultimate outcome of any of these
matters, and if all or substantially all of these legal
proceedings were to be determined adversely to the Company,
there could be a material adverse effect on the financial
condition of the Company.
As parent to the Predecessor, Colfax maintained reserves for
various legal and environmental matters. Unless a legal or
environmental matter of Colfax could be specifically identified
as related to the Predecessor, no reserve has been provided for
in the Predecessor financial statements. In addition, Colfax has
agreed to indemnify the Company for certain pre-existing matters
up to agreed upon limits.
The Predecessor’s capital structure was comprised of
contributions from the parent and affiliated companies. There
was no common stock associated with the group of entities which
comprised the Predecessor. Accordingly there is no respective
earnings per share.
18.
Subsequent Event (Unaudited)
On November 7, 2005, we entered into a purchase agreement
with the shareholders of Hay Hall Holdings Limited, or Hay Hall,
pursuant to which we agreed to acquire all of the outstanding
share capital of Hay Hall for $50.3 million subject to
certain purchase price adjustments. Under the purchase
agreement, the initial aggregate purchase price of
$50.3 million to be paid at closing will be subject to a
change in working capital adjustment, less debt balances at
closing, plus cash balances at closing. We closed the
acquisition on February 9, 2006 for $49.2 million. The
purchase price is still subject to a change as a result of the
finalization of a working capital adjustment in accordance with
the terms of the purchase agreement. We will also pay up to
$6.0 million of the total purchase price in the form of
deferred consideration. At the closing we deposited such
deferred consideration into an escrow account for the benefit of
the former Hay Hall shareholders. The deferred consideration is
represented by a loan note. While the former Hay Hall
shareholders will hold the note, their rights will be limited to
receiving the amount of the deferred compensation placed in the
escrow account. They will have no recourse against the Company
unless we take action to prevent or interfere in the release of
such funds from the escrow account. At closing, Hay Hall and its
subsidiaries became the Company’s direct or indirect wholly
owned subsidiaries. Hay Hall is a UK-based holding company
established in 1996 that is focused primarily on the manufacture
of couplings and clutch brakes. Hay Hall consists of five main
businesses that are niche focused and have strong brand names
and established reputations within their primary markets.
The Hay Hall acquisition will be accounted for in accordance
with SFAS No. 141. Since the closing date of the Hay
Hall acquisition was subsequent to December 31, 2005, the
Company’s consolidated financial statements as of that date
do not include any amounts related to Hay Hall.
The Company has not completed its final purchase price
allocation. The value of the acquired assets, assumed
liabilities and identified intangibles from the acquisition of
Hay Hall, as presented below, are based upon management’s
estimates of fair value as of the date of the acquisition.
However, the
Notes to Consolidated Financial
Statements — (Continued)
goodwill and intangibles recorded in connection with the
acquisition of Hay Hall have not yet been allocated across the
business units acquired nor have the values been finished.
Further, and as discussed above, the final purchase price is
subject to certain purchase price adjustments which have not
been finalized. The final purchase price allocations will be
completed within one year of the acquisition and are not
expected to have a material impact on the Company’s
financial position or results of operations. The preliminary
purchase price allocation is as follows:
Total purchase price, including closing costs of approximately
$1.7 million
$
50,981
Cash and cash equivalents
441
Trade receivables
11,668
Inventories
16,989
Prepaid expenses and other
1,442
Property, plant and equipment
10,509
Intangible assets
15,900
Total assets acquired
56,949
Accounts payable, accrued payroll, and accruals and other
current liabilities
11,862
Other liabilities
5,647
Total liabilities assumed
17,509
Net assets acquired
39,440
Excess purchase price over the fair value of net assets acquired
$
11,541
The excess of the purchase price over the fair value of the net
assets acquired was recorded as goodwill.
The estimated amounts recorded as intangible assets consist of
the following:
Customer relationships
$
9,064
Product technology and patents
1,589
Total intangible assets subject to amortization
10,653
Trade names and trademarks, not subject to amortization
5,247
Total intangible assets
$
15,900
Customer relationships, product technology and patents, are
subject to amortization over their estimated useful lives which
reflects the anticipated periods over which the Company
estimates it will benefit from the acquired assets. The
estimated useful lives have not been finalized by the Company.
The Company anticipates that substantially all of this
amortization is deductible for income tax purposes. The Company
is considering its options relative to the deductibility of
goodwill and is unable at this time to determine what, if any,
will be deductible for income tax purposes.
Notes to Unaudited Condensed Consolidated Interim Financial
Statements
Dollars in thousands, unless otherwise noted
1.
Organization and Nature of Operations
Headquartered in Quincy, Massachusetts, Altra Holdings, Inc.
(“the Company”) produces, designs and distributes a
wide range of mechanical power transmission products, including
industrial clutches and brakes, enclosed gear drives, open
gearing and couplings. The Company consists of several power
transmission component manufacturers including Warner Electric,
Boston Gear, Formsprag Clutch, Stieber Clutch, Ameridrives
Couplings, Wichita Clutch, Nuttall Gear, Kilian, Delroyd Worm
Gear, Bibby Transmissions, Twiflex, Matrix International,
Inertia Dynamics and Huco Dynatork. The Company designs and
manufactures products that serve a variety of applications in
the food and beverage, material handling, printing, paper and
packaging, specialty machinery, and turf and garden industries.
Primary geographic markets are in North America, Western Europe
and Asia.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles. In the opinion of management,
the accompanying condensed consolidated financial statements
contain all adjustments, which include normal recurring
adjustments, necessary to present fairly the consolidated
unaudited financial statements as of June 30, 2006 and for
the year-to-date
periods ended June 30, 2006 and July 1, 2005.
The Company follows a four-, four-, five-week calendar per
quarter with all quarters consisting of thirteen weeks.
The accompanying unaudited consolidated financial statements
should be read in conjunction with the audited consolidated
financial statements for the year-ended December 31, 2005.
The unaudited pro forma financial information presents the
effect of a conversion of the preferred series A shares to
common stock. Shares of the preferred stock are convertible in
whole or in part into common shares at a ratio of one-to-one
subject to adjustments for stock splits, mergers,
consolidations, recapitalizations and/or reorganizations. The
pro forma equity financial information and earnings per share
information reflect a one-to-one conversion as of the beginning
of the period presented.
3.
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No.
(“FIN”) 48, “Accounting for Uncertainty in Income
Taxes — An Interpretation of FASB Statement
No. 109”, which prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 will be effective for fiscal years
beginning after December 15, 2006. The Company has not yet
completed its evaluation of the impact of adoption on the
Company’s financial position or results of operations.
4.
Net Income Per Share
Basic earnings per share is based on the weighted average number
of common shares outstanding, and diluted earnings per share is
based on the weighted average number of common shares
outstanding and all dilutive potential common equivalent shares
outstanding. Common equivalent shares are included in the per
share calculations when the effect of their inclusion would be
dilutive.
Shares used in net income per common share — basic
570
—
Effect of dilutive securities:
Incremental shares of unvested restricted common stock
2,629
1,983
Conversion of preferred stock
35,500
35,100
Shares used in net income per common share — diluted
38,699
37,083
Net income per common share — basic
$
12.11
$
—
Net income per common share — diluted
$
0.18
$
0.03
Subsequent to June 30, 2006, the Company granted
615,511 shares of restricted stock to certain employees.
The restricted shares granted have similar terms to those issued
under previous grants. This restricted stock is unvested and
therefore would have no impact on calculating basic earnings per
share had the grant occurred prior to June 30, 2006. This
restricted stock would be dilutive had it been granted prior to
June 30, 2006, however it would not have had a material
impact on diluted earnings per share.
5.
Acquisitions
On November 7, 2005, we entered into a purchase agreement
with the shareholders of Hay Hall Holdings Limited, or Hay Hall,
pursuant to which we agreed to acquire all of the outstanding
share capital of Hay Hall for $50.3 million subject to
certain purchase price adjustments. Under the purchase
agreement, the initial aggregate purchase price of
$50.3 million to be paid at closing is subject to a change
in working capital adjustment, less debt balances at closing,
plus cash balances at closing. We closed the acquisition on
February 10, 2006 for $49.2 million. The purchase
price is still subject to a change as a result of the
finalization of a working capital adjustment in accordance with
the terms of the purchase agreement. Included in the purchase
price was $6.0 million paid in the form of deferred
consideration. At the closing we deposited such deferred
consideration into an escrow account for the benefit of the
former Hay Hall shareholders. The deferred consideration is
represented by a loan note. While the former Hay Hall
shareholders will hold the note, their rights will be limited to
receiving the amount of the deferred compensation placed in the
escrow account. They will have no recourse against the Company
unless we take action to prevent or interfere in the release of
such funds from the escrow account. At closing, Hay Hall and its
subsidiaries became the Company’s direct or indirect wholly
owned subsidiaries. Hay Hall is a UK-based holding company
established in 1996 that is focused primarily on the manufacture
of couplings and clutch brakes. Hay Hall consists of five main
businesses that are niche focused and have strong brand names
and established reputations within their primary markets.
The Hay Hall acquisition has been accounted for in accordance
with SFAS No. 141. The closing date of the Hay Hall
acquisition was February 10, 2006, and as such, the
Company’s consolidated financial statements reflect Hay
Hall’s results of operations only from that date forward.
The Company has not completed its final purchase price
allocation. The preliminary value of the acquired assets,
assumed liabilities and identified intangibles from the
acquisition of Hay Hall, as presented below, are based upon
management’s estimates of fair value as of the date of the
acquisition. However, the goodwill and intangibles recorded in
connection with the acquisition of Hay Hall have not yet been
allocated across the business units acquired nor have the values
been finalized. Further, and as
Notes to Unaudited Condensed Consolidated Interim
Financial Statements — (Continued)
discussed above, the final purchase price is subject to certain
purchase price adjustments which have not been finalized. The
final purchase price allocations will be completed within one
year of the acquisition and are not expected to have a material
impact on the Company’s financial position or results of
operations. The preliminary purchase price allocation is as
follows:
Total purchase price, including closing costs of approximately
$1.7 million
$
50,981
Cash and cash equivalents
441
Trade receivables
12,959
Inventories
16,388
Prepaid expenses and other
1,099
Property, plant and equipment
13,996
Intangible assets
13,881
Total assets acquired
58,764
Accounts payable, accrued payroll, and accruals and other
current liabilities
11,282
Other liabilities
3,493
Total liabilities assumed
14,775
Net assets acquired
43,989
Excess purchase price over the fair value of net assets acquired
6,992
The excess of the purchase price over the fair value of the net
assets acquired was recorded as goodwill.
The estimated amounts recorded as intangible assets consist of
the following:
Customer relationships, subject to amortization
$
6,931
Trade names and trademarks, not subject to amortization
6,950
Total intangible assets
$
13,881
Customer relationships, product technology and patents, are
subject to amortization over their estimated useful lives which
reflects the anticipated periods over which the Company
estimates it will benefit from the acquired assets. The
estimated useful lives have not been finalized by the Company.
The Company anticipates that substantially all of this
amortization is deductible for income tax purposes. The Company
is considering its options relative to the deductibility of
goodwill and is unable at this time to determine what, if any,
will be deductible for income tax purposes.
On May 18, 2006, we entered into a purchase agreement with
the shareholders of Bear Linear LLC, or Bear, to purchase
substantially all of the assets of the company for
$5.0 million. Approximately $3.5 million was paid at
closing and the remaining $1.5 million is payable over the
next 2.5 years. One of Bear’s selling shareholders is
a direct relative of one of the Company’s directors. Bear
manufacturers high value-added linear actuators for mobile
off-highway and industrial applications.
The Bear acquisition has been accounted for in accordance with
SFAS No. 141. The closing date of the Bear acquisition
was May 18, 2006, and as such, the Company’s
consolidated financial statements reflect Bear’s results of
operations only from that date forward.
Bear had approximately $0.5 million of net assets at
closing consisting primarily of accounts receivable, inventory,
fixed assets and accounts payable and accrued liabilities. We
recorded the $4.2 million excess purchase price over the
fair value of the net assets acquired as goodwill. The Company
has not completed its final purchase price allocation, but will
complete it within one year of the acquisition
Notes to Unaudited Condensed Consolidated Interim
Financial Statements — (Continued)
and it is not expected to have a material impact on the
Company’s financial position or results of operations.
The following table sets forth the unaudited pro forma results
of operations of the Company for the
year-to-date periods
ended June 30, 2006 and July 1, 2005 as if the Company
had acquired Hay Hall and Bear Linear as of January 1,2005. The pro forma information contains the actual operating
results of the Company, Bear Linear, and Hay Hall with the
results prior to May 18, 2006 for Bear Linear, and
February 10, 2006 for Hay Hall adjusted to include the pro
forma impact of (i) the elimination of additional expense
as a result of the fair value adjustment to inventory recorded
in connection with the Acquisition; (ii) additional
interest expense associated with debt issued on February 8,2006; (iii) the elimination of intercompany sales between
Hay Hall and the Company; (iv) additional expense as a
result of estimated amortization of identifiable intangible
assets; (v) and an adjustment to the tax provision for the
tax effect of the above adjustments. These pro forma amounts do
not purport to be indicative of the results that would have
actually been obtained if the acquisitions occurred as of
January 1, 2005 or that may be obtained in the future.
As of June 30, 2006the Company had $1.2 million of
unpresented checks in excess of the domestic cash on hand.
Accordingly, this amount has been recorded as short term bank
borrowings in the accompanying balance sheet.
The Company recorded $1.8 million and $1.5 million of
amortization expense
year-to-date through
the periods ended June 30, 2006 and July 1, 2005,
respectively.
Customer relationships and product technology and patents are
amortized over their useful lives of 12 and 8 years,
respectively. The weighted average estimated useful life of
intangible assets subject to amortization is approximately
11 years.
The estimated amortization expense for intangible assets is
approximately $3.9 million in each of the next five years
and $15.3 million thereafter.
9.
Warranty Costs
Estimated expenses related to product warranties are accrued at
the time products are sold to customers. Estimates are
established using historical information as to the nature,
frequency, and average costs of warranty claims. Changes in the
carrying amount of accrued product warranty costs for the
year-to-date periods
ended June 30, 2006 and July 1, 2005 are as follows:
Notes to Unaudited Condensed Consolidated Interim
Financial Statements — (Continued)
10.
Income Taxes
The effective tax rates recorded for the
year-to-date periods
ended June 30, 2006 and July 1, 2005 were recorded
based upon management’s best estimate of the effective tax
rates for the entire respective years. The change in the
effective tax rate from 50.7% for the first half of 2005 to
37.8% for the same period in 2006 is the result of the Hay Hall
acquisition and a greater amount of interest expense disallowed
for income tax benefit. In addition, there was a greater
proportion of taxable income in jurisdictions possessing lower
statutory tax rates. The 2006 tax rate differs from the
statutory rate due to the impact of
non-U.S. tax rates
and permanent differences.
11.
Pension and Other Employee Benefits
Defined Benefit (Pension) and Postretirement Benefit
Plans
The Company’s wholly owned subsidiary, Altra Industrial
Motion, Inc. (Altra Industrial), sponsors various defined
benefit (pension) and postretirement (medical and life
insurance coverage) plans for certain, primarily unionized,
active employees (those in the employment of Altra Industrial at
or hired since November 30, 2004). Additionally, Altra
Industrial assumed all post-employment and post-retirement
welfare benefit obligations with respect to active
U.S. employees.
The following table represents the components of the net
periodic benefit cost associated with the respective plans for
the quarter and
year-to-date periods
ended June 30, 2006 and July 1, 2005:
In December 2003, Congress passed the “Medicare
Prescription Drug Improvement and Modernization Act of
2003” (the Act) that reformed Medicare in such a way that
Altra Industrial may
Notes to Unaudited Condensed Consolidated Interim
Financial Statements — (Continued)
have been eligible to receive subsidies for certain prescription
drug benefits that are incurred on behalf of plan participants.
There has been no impact on Altra Industrial’s plans as
either prescription drug coverage is not offered past the age of
65 or we have not applied for any subsidy. Accordingly, the
amounts recorded and disclosed in these financial statements do
not reflect any amounts related to this Act.
In May, 2006 Altra Industrial renegotiated its contract with the
labor union at its South Beloit, IL manufacturing facility. As a
result of the renegotiation, participants in Altra
Industrial’s pension plan cease to accrue additional
benefits starting July 3, 2006. Additionally, the other
post retirement benefit plan has been terminated for all
eligible participants who have not retired, or given notice to
retire in 2006, by August 1, 2006. Altra Industrial expects
to recognize a non-cash gain associated with the curtailment of
these plans in the third quarter of 2006 and is currently
working to quantify the amount.
11.
Financing Arrangements
Revolving Credit Agreement
At November 30, 2004, Altra Industrial entered into an
agreement for up to $30 million of revolving borrowings
from a commercial bank (the Revolving Credit Agreement), subject
to certain limitations resulting from the requirement of Altra
Industrial to maintain certain levels of collateralized assets,
as defined in the Revolving Credit Agreement. Altra Industrial
may use up to $10 million of its availability under the
Revolving Credit Agreement for standby letters of credit issued
on its behalf, the issuance of which will reduce the amount of
borrowings that would otherwise be available to Altra
Industrial. Altra Industrial may re-borrow any amounts paid to
reduce the amount of outstanding borrowings; however, all
borrowings under the Revolving Credit Agreement must be repaid
in full as of November 30, 2009.
Substantially all of Altra Industrial’s assets have been
pledged as collateral against outstanding borrowings under the
Revolving Credit Agreement. The Revolving Credit Agreement
requires Altra Industrial to maintain a minimum fixed charge
coverage ratio (when availability under the line falls below
$12.5 million) and imposes customary affirmative covenants
and restrictions on Altra Industrial. The Company was in
compliance with all requirements of the Revolving Credit
Agreement at June 30, 2006.
There were no borrowings under the Revolving Credit Agreement at
June 30, 2006 and December 31, 2005, however, as of
both dates, the lender had issued $2.4 million of
outstanding letters of credit on behalf of Altra Industrial.
9% Senior Secured Notes
At November 30, 2004, Altra Industrial issued
9% Senior Secured Notes, with a face value of
$165 million. Interest on the Senior Secured Notes is
payable semiannually, in arrears, on June 1 and
December 1 of each year, beginning June 1, 2005, at an
annual rate of 9%. The effective interest rate on the Senior
Secured Notes is approximately 10.0%, after consideration of the
amortization of $6.6 million related to initial offer
discounts (included in long-term debt) and $2.7 million of
deferred financing costs (included in other assets). The Senior
Secured Notes mature on December 1, 2011 unless previously
redeemed by the Company.
The Senior Secured Notes are guaranteed by Altra
Industrial’s U.S. domestic subsidiaries and are
secured by a second priority lien, subject to first priority
liens securing the Revolving Credit Agreement, on substantially
all of Altra Industrial’s assets. The Senior Secured Notes
contain numerous terms, covenants and conditions, which impose
substantial limitations on Altra Industrial. Altra Industrial
was in compliance with all covenants of the Senior Secured Notes
at June 30, 2006.
Notes to Unaudited Condensed Consolidated Interim
Financial Statements — (Continued)
11.25% Senior Notes
At February 8, 2006, Altra Industrial issued
11.25% Senior Notes, with a face value of
£33 million. Interest on the Senior Notes is payable
semiannually, in arrears, on August 15 and February 15 of each
year, beginning August 15, 2006, at an annual rate of
11.25%. The effective interest rate on the Senior Notes is
approximately 11.7%, after consideration of the
$2.0 million of deferred financing costs (included in other
assets). The Senior Notes mature on February 15, 2013
unless previously redeemed by the Company.
The Senior Notes are guaranteed on a senior unsecured basis by
Altra Industrial’s U.S. domestic subsidiaries. The
Senior Notes contain numerous terms, covenants and conditions,
which impose substantial limitations on Altra Industrial. Altra
Industrial was in compliance with all covenants of the Senior
Notes at June 30, 2006.
Subordinated Notes
At November 30, 2004, the Company executed an agreement
with a stockholder to obtain $14.0 million of unsecured
subordinated financing (the Subordinated Notes). The
Subordinated Notes were issued at par value and mature on
November 30, 2019. Interest accrues at an annual rate of
17% and is payable quarterly in full or
payment-in-kind (PIK).
For the periods presented, the Company has paid all interest in
full. As of June 30, 2006 and December 31, 2005, there
was $136 thousand and $595 thousand of accrued interest included
in accruals and other liabilities in the accompanying balance
sheet.
The Subordinated notes become callable by the lender on
December 1, 2011 or upon full payment of the 9% Senior
Secured notes discussed below. The lender also has the right to
demand payment at 101% upon change of control. The Company may
elect to redeem the Subordinated notes at any time in whole or
in part. Payments made prior to November 30, 2006 will
incur a 6% prepayment penalty. This prepayment penalty decreases
by 1% on every subsequent anniversary date. During 2006 the
Company prepaid $10.8 million of the Subordinated Notes,
incurring a prepayment penalty of approximately
$0.6 million.
The Company incurred approximately $0.3 million in fees
associated with the issuance of the Subordinated Notes that are
capitalized as deferred financing costs included in other assets
in the accompanying balance sheet. These costs will be amortized
through November 2011 as a component of interest expense.
The Subordinated Notes impose customary affirmative covenants
and restrictions on the Company, including the delivery of
timely financial information to the lender. With the exception
of filing timely financial information, the Company was in
compliance with all covenant requirements as of June 30,2006 and December 31, 2005. This by itself does not
constitute an event of default nor trigger the callability of
the Subordinated Notes.
Mortgage
In June, 2006, the Company’s German subsidiary entered into
a mortgage on their building in Heidelberg, Germany, with a
local bank. The mortgage has a principal of
€2.0 million,
an interest rate of 5.75% and is payable in monthly installments
over 15 years.
Capital Leases
The Company leases certain equipment under capital lease
arrangements, whose obligations are included in both short-term
and long-term debt. Capital lease obligations amounted to
approximately $1.6 million and $0.3 million at
June 30, 2006 and December 31, 2005, respectively.
Assets under capital
Notes to Unaudited Condensed Consolidated Interim
Financial Statements — (Continued)
leases are included in property, plant and equipment with the
related amortization recorded as depreciation expense.
12.
Convertible Preferred Stock
The Company has authorized 40,000,000 shares of
Series A Convertible Preferred Stock (the Preferred),
35,500,000 of which was outstanding as of June 30, 2006 and
December 31, 2005, respectively. A Preferred holder is also
the holder of the Company’s Subordinated Notes, discussed
in Note 10. The Preferred Stock holders are entitled to the
following rights:
Dividends
The holders of the outstanding Preferred Stock are entitled to
receive, when and if declared by the Board, non-cumulative cash
dividends at an annual rate of $0.08 per share of the
Preferred Stock. As of June 30, 2006 and December 31,2005, no dividends have been declared.
Liquidation
In the event of any voluntary or involuntary liquidation,
dissolution or
winding-up of the
Company, as defined, the holder of each share of Preferred Stock
is entitled to receive, prior to any distribution to common
shareholders, the greater of an amount equal to
(i) $1.00 per share, plus all unpaid declared
dividends, or (ii) the amount per share they would have
received if the Preferred shares had been converted to common
stock prior to a liquidity event. Liquidation, as defined, would
include the sale of the business or the sale of greater than 50%
of the common stock of the Company.
Redemption
The Preferred Stock is not redeemable at the option of the
Company or the holders.
Conversion
The shares of Preferred Stock can, at the election of the
holders, at any time, be converted in whole or in part into
common shares at a ratio of
one-to-one subject to
adjustments for stock splits, mergers, consolidations,
recapitalizations and or reorganizations.
Each share of Preferred Stock is automatically converted at the
then effective conversion rate immediately upon the consummation
of an underwritten public offering, provided that aggregate net
proceeds to the Company of such offering are not less than
$50,000,000.
Voting
The holders of Preferred Stock have the same voting rights as
the Common stockholders. The two classes of stock shall vote
together and not as separate classes. Each shareholder of
Preferred Stock is entitled to one vote per each share of Common
Stock into which the Preferred Stock could then be converted.
Protective Provision
Holders of the Company’s Preferred Stock are entitled to
anti-dilutive protections and protective class voting rights;
including the right to veto sales or mergers of the Company, to
prevent amendments to the Company’s certificate of
incorporation and to prohibit future sales of Common and
Preferred stock.
At inception, the Company and its common and preferred
stockholders entered into a Stockholders Agreement which defines
the rights and limitations of its stockholders. The Stockholders
Agreement was amended on January 6, 2005.
The Amended and Restated Stockholders Agreement (the
Stockholders Agreement) generally imposes restrictions on the
transfer of Company stock and grants the Company and certain of
its stockholders certain rights of first refusal and co-sale
rights with respect to sales of shares by other stockholders.
The Stockholders Agreement also grants to Genstar Capital, LP.
(Genstar), one of the primary stockholders, the right to
designate all directors of the Company and the right to require
other parties to participate, on a pro-rata basis, in any sale
of shares by Genstar.
Regarding shares held by employees of the Company, the
Stockholders Agreement grants, to the Company and Genstar, the
right to purchase such shares, upon the employees’
termination from the Company, at fair market value, or in the
case of termination for cause (as defined in the Stockholders
Agreement), at the employees’ cost if lower than the fair
market value.
At Inception, the Company and its common stockholders entered
into a Registration Rights Agreement which defines the rights to
register shares of the Company’s common stock (including
shares of common stock issuable upon conversion of shares of the
Company’s Series A Preferred Stock).
The Amended and Restated Registration Rights Agreement (the
Registration Agreement) generally grants, to Genstar, the right
to require the Company to register its shares of common stock
for public trading at any time after January 6, 2006. The
Registration Agreement also grants other shareholders the right
to participate in any registration of common stock required by
Genstar. The Registration Agreement imposes restrictions on the
sale of the Company shares for a period of 180 days
following the effective date of a registration statement or the
commencement of a public distribution of shares, provides for
certain procedures and requirements for filing of a registration
statement with the U.S. Securities and Exchange Commission
and provides for certain indemnifications by the Company and its
shareholders upon any such registration.
Restricted Common Stock
The Company’s Board of Directors established the 2004
Equity Incentive Plan (the Plan) that provides for various forms
of stock based compensation to independent directors, officers
and senior-level employees of the Company. Simultaneous with the
establishment of this plan, the Board of Directors authorized
and issued 3.3 million shares of restricted common stock to
certain independent directors and employees of the Company. The
restricted shares issued pursuant to the plan will be service
time vested ratably over each of the five years from the date of
grant, provided, that the vesting of the restricted shares may
accelerate upon the occurrence of certain liquidity events, if
approved by the Board of Directors in connection with the
transactions. Common stock awarded under the 2004 Equity
Incentive Plan is generally subject to restrictions on transfer,
repurchase rights, and other limitations and rights as set forth
in the Stockholders Agreement and Registration Agreement.
The Plan permits the Company to grant restricted stock to key
employees and other persons who make significant contributions
to the success of the Company. The restrictions and vesting
schedule for restricted stock granted under the Plan are
determined by the Compensation Committee of the Board of
Directors. In January 2005, 351,443 shares with a fair value of
$35 were forfeited and 2,788,329 shares of restricted common
stock with a fair value of $88 were granted. In January 2006 the
Company granted 78,000 shares of restricted common stock with a
fair value of $59 and 557,666 shares of restricted
Notes to Unaudited Condensed Consolidated Interim
Financial Statements — (Continued)
common stock vested. At June 30, 2006,
2,730,000 shares of unvested restricted stock were
outstanding with a fair value of $0.3 million as of the
date of the grant. At December 31, 2005,
3,209,666 shares of unvested restricted stock were
outstanding with a fair value of $0.3 million as of the
grant date.
The fair value of the Company’s common stock is determined
by the Company’s Board of Directors (the Board) at the time
of the restricted common stock grants. In the absence of a
public trading market for the Company’s common stock, the
Company’s Board considers objective and subjective factors
in determining the fair value of the Company’s common stock
and related options. Consistent with the guidance provided by
the AICPA’s Technical Practice Aid on The Valuation of
Privately-held-Company Equity Securities Issued as Compensation
(the TPA), such considerations included, but were not
limited to, the following factors:
•
Historical and expected future earnings performance
•
The liquidation preferences and dividend rights of the preferred
stock
The Company acquired Kilian through the exchange of preferred
and common stock in the Company that was issued to certain
preferred and common shareholders of Kilian, the majority of
whom were represented by Genstar Capital Partners III,
L.P., one of the primary stockholders in the Company.
Management Agreement
At November 30, 2004, the Company entered into an advisory
services agreement with Genstar Capital, L.P.
(“Genstar”), whereby Genstar agreed to provide certain
management, business strategy, consulting, financial advisory
and acquisition related services to the Company. Pursuant to the
agreement, the Company will pay to Genstar an annual consulting
fee of $1.0 million (payable quarterly, in arrears at the
end of each calendar quarter), reimbursement of
out-of-pocket expenses
incurred in connection with the advisory services and an
advisory fee of 2.0% of the aggregate consideration relating to
any acquisition or dispositions completed by the Company. The
Company recorded $0.5 million in management fees, included
in selling, general and administrative expenses for each of the
year-to-date periods
ended June 30, 2006 and July 1, 2005. Genstar also
received a one-time transaction fee of $1.0 million, for
advisory services it provided in connection with the Hay Hall
acquisition and related financings discussed in Notes 5
and 12, and such amounts are reflected in selling, general
and administrative expenses for the
year-to-date period
ended June 30, 2006. There were no amounts payable to
Genstar at June 30, 2006 or July 1, 2005.
Notes to Unaudited Condensed Consolidated Interim
Financial Statements — (Continued)
Subordinated Notes
The holder of the Subordinated Notes is also a Preferred Stock
holder. For the six months ended June 30, 2006, the Company
expensed $1.4 million and disbursed $12.6 million in
cash to the holder. For the six months ended July 1, 2005,
the Company expensed $1.2 million in related interest and
disbursed $.8 million in cash to the holder.
15.
Concentrations of Credit, Business Risks and Workforce
Financial instruments, which are potentially subject to
concentrations of credit risk, consist primarily of trade
accounts receivable. The Company manages this risk by conducting
credit evaluations of customers prior to delivery or
commencement of services. When the Company enters into a sales
contract, collateral is normally not required from the customer.
Payments are typically due within thirty days of billing. An
allowance for potential credit losses is maintained, and losses
have historically been within management’s expectations.
Credit related losses may occur in the event of non-performance
by counterparties to financial instruments. Counterparties
typically represent international or well established financial
institutions.
Approximately 23.4% of the Company’s labor force (17.9% and
46.3% in the United States and Europe, respectively) is
represented by collective bargaining agreements.
16.
Geographic Information
The Company operates in a single business segment for the
development, manufacturing and sales of mechanical power
transmission products. The Company’s chief operating
decision maker reviews consolidated operating results to make
decisions about allocating resources and assessing performance
for the entire Company. Net sales to third parties and property,
plant and equipment by geographic region are as follows (in
thousands):
Net sales to third parties are attributed to the geographic
regions based on the country in which the shipment originates.
Amounts attributed to the geographic regions for long-lived
assets are based on the location of the entity, which holds such
assets.
Notes to Unaudited Condensed Consolidated Interim
Financial Statements — (Continued)
The Company has not provided specific product line sales as our
general purpose financial statements do not allow us to readily
determine groups of similar product sales.
17.
Commitments and Contingencies
General Litigation
The Company is involved in various pending legal proceedings
arising out of the ordinary course of business. None of these
legal proceedings is expected to have a material adverse effect
on the financial condition of the Company. With respect to these
proceedings, management believes that it will prevail, has
adequate insurance coverage or has established appropriate
reserves to cover potential liabilities. Any costs that
management estimates may be paid related to these proceedings or
claims are accrued when the liability is considered probable and
the amount can be reasonably estimated. There can be no
assurance, however, as to the ultimate outcome of any of these
matters, and if all or substantially all of these legal
proceedings were to be determined adversely to the Company,
there could be a material adverse effect on the financial
condition of the Company.
Colfax maintained reserves for various legal and environmental
matters and has agreed to indemnify the Company for certain
pre-existing matters up to agreed upon limits.
We have audited the accompanying consolidated balance sheet of
Hay Hall Holdings Limited as of December 31, 2005 and the
related consolidated profit and loss account and cash flows for
the year then ended. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides 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 Hay Hall Holdings Limited at December 31, 2005, and the
results of its consolidated profit and loss account and its cash
flows for the year then ended in conformity with accounting
principles generally accepted in the United Kingdom, which
differ in certain respects from those followed in the United
States, as described in Note 28 to the financial statements.
The principal accounting policies are set out below. They have
all been applied consistently throughout the period.
a) Basis of accounting
The accounts have been prepared under the historical cost
convention and in accordance with applicable accounting
standards. The Group has adopted the full accounting
requirements of FRS17 — Retirement Benefits in the
2005 accounts and comparative figures for 2004 have been
restated accordingly. The change in accounting policy had the
effect of increasing group profits after tax for the year by
£75,000, and decreasing group shareholders’ funds by
£2,069,000.
b) Accounting period
The financial statements cover the period for the year ended
31 December 2005.
c) Basis of
consolidation
The Group accounts consolidate the accounts of Hay Hall Holdings
Limited and its material subsidiary undertakings drawn up to
31 December. The results of subsidiaries acquired or sold
are consolidated for the periods from or to the date on which
control passed. Acquisitions are accounted for under the
acquisition method.
As permitted by Section 230 of the Companies Act 1985, no
profit and loss account is presented in respect of Hay Hall
Holdings Limited. The retained profit for the financial period
of the parent company was £Nil.
d) Goodwill
Goodwill arising on acquisitions is capitalised and written off
on a straight line basis over its useful economic life which is
a maximum of twenty years. Provision is made for any impairment.
e) Tangible fixed
assets
Tangible fixed assets are shown at cost, net of depreciation and
any provision for impairment. Depreciation is provided on all
tangible fixed assets other than freehold land, at rates
calculated to write off the cost, less estimated residual value,
of fixed assets on a straight-line basis over their expected
useful lives, as follows:
Freehold buildings
2% to
31/3% per
annum
Improvements to short leasehold premises
Over term of lease
Plant and machinery and equipment
4% to
331/3% per
annum
Residual value is calculated on prices prevailing at the date of
acquisition or revaluation.
Where depreciation charges are increased following a
revaluation, an amount equal to the increase is transferred
annually from the revaluation reserve to the profit and loss
account as a movement on reserves. On the disposal or
recognition of a provision for impairment of a revalued fixed
asset, any related balance remaining in the revaluation reserve
is also transferred to the profit and loss account as a movement
on reserves.
Fixed asset investments are shown at cost less provision for
impairment.
g) Stocks
Stocks are stated at the lower of cost and net realisable value.
Cost includes materials, direct labour and an attributable
proportion of manufacturing overheads based on normal levels of
activity. Net realisable value is based on estimated selling
price, less further costs expected to be incurred to completion
and disposal. Provision is made for obsolete, slow-moving or
defective items where appropriate.
h) Taxation
Corporation tax payable is provided on taxable profits at the
current rate. Payment is made in certain cases by group
companies for group relief surrendered to them.
Deferred tax is recognised in respect of all timing differences
that have originated but not reversed at the balance sheet date
where transactions or events that result in an obligation to pay
more tax in the future or a right to pay less tax in the future
have occurred at the balance sheet date. Timing differences are
differences between the company’s taxable profits and its
results as stated in the financial statements that arise from
the inclusion of gains and losses in tax assessments in periods
different from those in which they are recognised in the
financial statements.
A net deferred tax asset is regarded as recoverable and
therefore recognised only when, on the basis of all available
evidence, it can be regarded as more likely than not that there
will be suitable taxable profits from which the future reversal
of the underlying timing differences can be deducted.
Deferred tax is not recognised when fixed assets are revalued
unless by the balance sheet date there is a binding agreement to
see the revalued assets and the gain or loss expected to arise
on sale has been recognised in the financial statements. Neither
is deferred tax recognised when fixed assets are sold and it is
more likely than not that the taxable gain will be rolled over,
being charged to tax only if and when the replacements assets
are sold.
Deferred tax is recognised in respect of the retained earnings
of overseas subsidiaries and associates only to the extent that,
at the balance sheet date, dividends have been accrued as
receivable or a binding agreement to distribute past earnings in
future has been entered into by the subsidiary or associates.
Deferred tax is measured at the average tax rates that are
expected to apply in the periods in which the timing differences
are expected to reverse, based on tax rates and laws that have
been enacted or substantively enacted by the balance sheet date.
Deferred tax is measured on a non-discounted basis.
i) Foreign currency
Transactions in foreign currencies are recorded at the rate of
exchange at the date of the transaction or, if hedged, at the
forward contract rate. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are
reported at the rates of exchange prevailing at that date or, if
appropriate, at the forward contract rate. Any gain or loss
arising from a change in exchange rates subsequent to the date
of the transaction is included as an exchange gain or loss in
the profit and loss account.
The results of overseas operations are translated at the average
rates of exchange during the period and their balance sheets at
the rates ruling at the balance sheet date. Exchange differences
arising on translation of the opening net assets and on foreign
currency borrowings, to the extent that they hedge the
group’s investment in such operations, are dealt with
through reserves. All other exchange differences are included in
the profit and loss account.
Assets held under finance leases, which confer rights and
obligations similar to those attached to owned assets, are
capitalised as tangible fixed assets and are depreciated over
the shorter of the lease terms and their useful lives. The
capital elements of future lease obligations are recorded as
liabilities, while the interest elements are charged to the
profit and loss account over the period of the leases to produce
a constant rate of charge on the balance of capital repayments
outstanding. Hire purchase transactions are dealt with
similarly, except that assets are depreciated over their useful
lives.
Rentals under operating leases are charged on a straight-line
basis over the lease term, even if the payments are not made on
such a basis.
k) Turnover
Turnover represents amounts receivable for goods and services
provided in the normal course of business, net of trade
discounts, VAT and other sales related taxes.
l) Pension costs
Contributions to the group’s defined contribution pension
scheme are charged to the profit and loss account in the year in
which they become payable.
The difference between the fair value of the assets held in the
group’s defined benefit pension scheme and the
scheme’s liabilities measures on an actuarial basis using
the projected unit method are recognised in the group’s
balance sheet as a pension asset or liability as appropriate.
The carrying value of any resulting pension scheme asset is
restricted to the extent that the group is able to recover the
surplus either through reduced contributions in the future or
through refunds from the scheme. The pension scheme balance is
recognised net of any related deferred tax balance.
Charges in the defined benefit scheme asset or liability arising
from factors other than cash contribution by the group are
charged to the profit and loss account or the statement of total
recognised gains and losses in accordance with FRS17
‘Retirement benefits’.
m) Finance costs
Finance costs of debt and non-equity shares are recognised in
the profit and loss account over the term of such instruments at
a constant rate on the carrying amount. Where the finance costs
for non-equity shares are not equal to the dividends on these
instruments, the difference is also accounted for in the profit
and loss account as an appropriation of profits.
n) Debt
Debt is initially stated at the amount of the net proceeds after
deduction of issue costs. The carrying amount is increased by
the finance cost in respect of the accounting year and reduced
by payments made in the year.
Turnover relates to the Group’s principal activities as
described in the directors’ report. An analysis of turnover
by geographical destination for the year ended 31 December
2005 is as follows:
2005
£’000
UK
12,348
Rest of Europe
8,471
Americas
14,086
Rest of the World
4,357
39,262
Turnover by origin is as follows:
2005
£’000
UK
30,050
Rest of Europe
700
USA
7,192
Africa
1,320
39,262
3
Operating costs less other income
2005
Continuing
Operations
£’000
Change in stocks of finished goods and work in progress
Amounts payable to BDO Stoy Hayward LLP in respect of non-audit
services were £23,000. Auditors’ remuneration for
audit services charged to the company profit and loss account of
Hay Hall Holdings Limited was £Nil.
The difference between the total current tax shown above and the
amount calculated by applying the standard rate of UK
corporation tax to the profit before tax is as follows:
2005
£’000
Profit on ordinary activities before tax
215
Tax on profit on ordinary activities at standard UK corporation
tax rate of 30%
The net book value of tangible fixed assets includes an amount
of £629,000 in respect of assets held under finance leases
and hire purchase contracts. The related depreciation charge on
these assets for the year was £78,000.
Freehold land and buildings include land of £400,000 which
has not been depreciated.
Company
The company does not have any tangible fixed assets.
The investment in the associated undertaking is not material
therefore it has not been included in the consolidated results
of the group.
Acquisition of subsidiary undertaking
On 1 August 2005 the company acquired 100% of the issued
share capitals of Dynatork Air Motors Limited and Dynatork
Limited. The following table sets out the identifiable assets
and liabilities acquired and their book and fair value:
Book and Fair
Value
£’000
Tangible fixed assets
13
Stocks
25
Debtors
56
Creditors
(6
)
Taxation
(41
)
Cash acquired
42
89
Goodwill (note 9)
399
488
Satisfied by:
Cash
288
Deferred consideration
200
488
Dynatork Air Motors Limited earned a profit after taxation of
£48,000 in the year ended 31 March 2005. The
summarised profit and loss account for the period from
1 April 2005 to 31 July 2005, shown on the basis of
the accounting policies of Dynatork Air Motors Limited prior to
the acquisition, are as follows:
On 30 September 2004 the company acquired the majority of
the issued share capital of The Hay Hall Group Limited, a
company based in Birmingham. The following table sets out the
identifiable assets and liabilities acquired and their book and
fair value:
Book and
Fair Value
£’000
(As restated)
Investments
10
Tangible fixed assets
6,563
Stocks
7,309
Debtors
8,728
Creditors
(7,074
)
Overdrafts acquired
(5,206
)
Loans
(8,280
)
Obligations under finance leases and hire purchase contracts
(515
)
Pension obligations
(1,604
)
(69
)
Goodwill (note 9) (as previously reported)
745
Prior year adjustment
1,604
2,349
2,280
Satisfied by:
Cash
150
Issue of shares
2,130
2,280
The calculation of goodwill above has been restated following
the adoption of FRS17 — Retirement Benefits. This has
resulted in the inclusion of the book value of Pension
obligations in the amount of £1,604,000 as set out in
note 25.
12
Stocks
2005
£’000
Group
Raw materials and consumables
1,668
Work in progress
1,848
Finished goods and goods for resale
5,143
8,659
There is no material difference between the balance sheet value
of stocks and their replacement cost.
Deferred consideration of £200,000 is due in respect of the
acquisition during the year of Dynatork Air Motors Limited, of
which £182,000 is due after more than 1 year. The rate
of payment of the deferred consideration is dependent upon the
value of sales made of the company’s product range
subsequent to the acquisition and is payable bi-annually
commencing on 31 January 2006.
16
Creditors: Amounts falling due after more than one year
2005
Group
Company
£’000
£’000
Senior loans
9,185
—
The senior loans were at variable rate and were repayable in
varying installments. The loans were secured on the assets of
the principal subsidiary and its subsidiary undertakings.
Analysis of borrowings
Loans were repayable by installments and not wholly within five
years. Amounts due at 31 December were payable as follows:
2005
Group
£’000
Amounts payable:
— within one year
1,200
— between one and two years
1,200
— between two and five years
7,985
10,385
Loan issue costs not amortised
—
10,385
In accordance with Financial Reporting Standard 4, the
carrying value of the loans is shown net of issue costs of which
£181,000 has been charged to the profit and loss account in
the year.
On 10 February 2006 all of the loans were repaid in full
following the acquisition of the company by the Warner Electric
(U.K.) Group.
The group also has losses of £761,000, giving a deferred
tax asset of £228,000 which is unprovided. This deferred
tax asset has not been recognised on the basis that it is
unlikely to be utilised in the foreseeable future.
Reconciliation of movements in shareholders’ funds
2005
Group
Company
£’000
£’000
(Loss) Profit for the financial period
(77
)
—
Issue of share capital
—
—
Profit (Loss) on foreign currency translation
118
—
Actuarial losses on pension scheme
(2,148
)
—
Net (reduction in) addition to shareholders’ funds
(2,107
)
—
Opening shareholders’ funds
2,309
2,130
Closing shareholders’ funds
202
2,130
21
Minority interests
2005
£’000
At 1 January 2005 (as restated)
—
Profit on ordinary activities after taxation for the year
—
At 31 December 2005
—
On 10 February 2006 the Company acquired the remaining shares in
The Hay Hall Group Limited that it did not previously own with
the result that The Hay Hall Group Limited became a 100% owned
subsidiary at that date.
22
Reconciliation of operating profit to operating cash flows
Cross guarantees between the Group companies are in place to
guarantee the Group’s borrowings.
25
Pension arrangements
Composition of the Scheme
The Hay Hall Group Limited, the Company’s principal
subsidiary, operates a defined benefit scheme in the UK. A full
actuarial valuation was carried out at 05 April 2003 and updated
to 31 December 2005 by a qualified actuary. The major
assumptions used by the actuary were:
At 31 December 2005
Rate of increase in pensions in payment (where increases are not
fixed)
2.65%
Discount rate
5.00%
Inflation assumption
2.75%
The scheme also holds assets and liabilities in respect of
defined contribution benefits. As at 31 December 2005, the
liabilities and matching assets have a value of £1,935,900
and are excluded from the following figures.
Contributions to defined contribution schemes in the year were
£279,000.
The assets in the scheme and expected rates of return were:
Long Term Rate
of Return
Expected at
Market Value at
31 December
31 December
2005
2005
£000
Equities
8.00
%
11,366
Bonds
4.70
%
15,656
Cash
4.10
%
155
Total market value of assets
27,177
Present value of scheme liabilities
32,281
(Deficit) surplus in the Scheme
(5,104
)
Related deferred tax asset (liability)
1,531
Net pension liability
(3,573
)
31 December 2005
£000
Analysis of the amount charged in operating profit
Current service cost
—
Past service cost
—
Curtailment (gain)/loss
—
Total Operating Charge
—
Analysis of the amount credited to other finance income
Analysis of amount recognised in statement of total
recognised gains and losses (STRGL)
Actual return less expected return on scheme assets
1,777
Experience gains and losses arising on the scheme liabilities
(334
)
Changes in assumptions underlying the present value of the
scheme liabilities
(4,511
)
Actuarial (loss) gain recognised in STRGL
(3,068
)
Movement in (deficit) during the period
Deficit in scheme at beginning of the period
(2,143
)
Movement in the period:
Current service cost
—
Contributions
—
Past service cost
—
Curtailments gain/(loss)
—
Other finance income
107
Actuarial loss
(3,068
)
(5,104
)
History of experience gains and losses
Actuarial less expected return
1,777
7
%
Experience gain on the liabilities
(334
)
(1
)%
Total amount recognised in the STRGL
(3,068
)
(10
)%
26
Subsequent Events
On 10 February 2006 the Company and the majority of its trading
subsidiaries were acquired by Warner Electric (U.K.) Group
Limited, a company incorporated in England, which is a
subsidiary of Altra Industrial Motion, Inc., a company
incorporated in the U.S.
27
Related Party Disclosures
On 10 February 2006 the company was acquired by Warner Electric
(U.K.) Group Limited, a company incorporated in England. With
effect from this date the company’s ultimate parent company
is Altra Industrial Motion, Inc., a company incorporated in the
U.S.
28
Summary of differences between accounting principles in the
United Kingdom and the United State of America
The consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United
Kingdom (“UK GAAP”) which differs in certain respects
from accounting principles in the United States of America
(“US GAAP”).
The following are the adjustments to net income and
shareholders’ funds determined in accordance with UK GAAP,
necessary to reconcile to net income and shareholders’
funds determined in accordance with US GAAP.
Notes
2005
£’000
Net (loss) income in accordance with UK GAAP
(77
)
Goodwill
a
125
Tangible assets
b
7
Net (loss) income in accordance with US GAAP
55
Shareholders’ funds in accordance with UK GAAP
202
Goodwill
a
155
Tangible assets
b
(268
)
Shareholders’ funds in accordance with US GAAP
89
(a)
Goodwill Amortization
Under UK GAAP, goodwill is recorded at its actual cost in
sterling, or at the original foreign currency amount translated
at the exchange rate applying on the acquisition date. Goodwill
is then held in the currency of the acquiring entity at historic
cost and amortized at a rate calculated to write off its value
on a straight-line basis over its estimated useful life, which
is currently considered to be twenty years. Furthermore,
goodwill is reviewed for impairment if events or changes in
circumstances indicate that the carrying value may not be
recoverable.
Under US GAAP, goodwill is not amortized but rather tested at
least annually for impairment. Furthermore, goodwill is
denominated in the functional currency of the acquired entity.
Consequently, the goodwill is retranslated at each period end at
the closing rate of exchange.
(b)
Tangible Assets
Under UK GAAP, certain assets may be revalued, while under US
GAAP, they are shown as historical cost.
1.
Balance sheet and profit and loss account presentation
General
The format of a balance sheet prepared in accordance with UK
GAAP differs in certain respects from US GAAP. UK GAAP requires
assets to be presented in ascending order of liquidity whereas
US GAAP assets are presented in descending order of liquidity.
In addition, current assets under UK GAAP include amounts that
fall due after more than one year, whereas under US GAAP, such
assets are classified as non-current assets.
2.
Consolidated statement of cashflow
The consolidated statement of cash flow prepared under UK GAAP
presents substantially the same information as that required
under US GAAP. Cash flow under UK GAAP represents increases or
decreases in “cash”, which comprises cash in hand,
deposits repayable on demand and bank overdrafts. Under US GAAP,
cash flow represents increases or decreases in “cash and
Cash equivalents”, which includes short-term, highly liquid
investments with original maturities of less than three months,
and excludes bank overdrafts.
Under UK GAAP, cash flows are presented separately for operating
activities, equity dividends, returns on investment and
servicing of finance, taxation, capital expenditure and
financial investment, acquisitions and disposals, management of
liquid resources and financing activities. Under US GAAP, only
three categories of cash flow activity are presented, being cash
flows relating to operating activities, investing activities and
financing activities. Cash flows from taxation and returns on
investments and servicing of finance, with the exception of
servicing of members’ finance, are included as operating.
The following statements summarize the statements of cash flows
as if they had been presented in accordance with US GAAP, and
include the adjustments that reconcile cash and cash equivalents
under US GAAP to cash and short term deposits under UK GAAP.
2005
£’000
Net cash provided by operating activities
1,504
Net cash used by investing activities
(923
)
Net cash provided by financing activities
(947
)
Net decrease in cash and cash equivalents
(366
)
Cash and cash equivalents under US GAAP at beginning of the
period
(1,895
)
Cash and cash equivalents under US GAAP at end of the period
(2,261
)
Cash and cash equivalents under UK GAAP at end of the period
Through and
including ,
2006 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
Set forth below is a table of the registration fee for the
Securities and Exchange Commission, the filing fee for the
National Association of Securities Dealers, Inc., the listing
fee for the NASDAQ and estimates of all other expenses to be
incurred in connection with the issuance and distribution of the
securities described in the registration statement, other than
underwriting discounts and commissions:
SEC registration fee
$
18,458
NASD filing fee
NASDAQ listing fee
Printing and engraving expenses
*
Legal fees and expenses
*
Accounting fees and expenses
*
Transfer agent and registrar fees
*
Miscellaneous
*
Total
$
*
To be completed by amendment.
Item 14.
Indemnification of Directors and Officers
The following is a summary of the statute, charter and bylaw
provisions or other arrangements under which the
registrant’s directors and officers are insured or
indemnified against liability in their capacities as such. All
the directors and officers of the registrant are covered by
insurance policies maintained and held in effect by Altra
Holdings, Inc. against certain liabilities for actions taken in
their capacities as such, including liabilities under the
Securities Act. In addition, three of our directors,
Messrs. Conte, Paterson and Gold, are also indemnified by
insurance policies maintained and held by Genstar Capital.
Section 145 of Delaware General Corporation Law.
Altra Holdings, Inc., is incorporated under the laws of the
State of Delaware. Section 145 of the Delaware General
Corporation Law, or DGCL, provides that a corporation may
indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
corporation) by reason of the fact that the person is or was a
director, officer, employee, or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses
(including attorneys’ fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in
connection with such action, suit, or proceeding if the person
acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person’s
conduct was unlawful.
Section 145 also provides that a corporation may indemnify
any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action or suit by
or in the right of the corporation to procure a judgment in its
favor by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses
(including attorneys’ fees) actually and reasonably
incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good
faith and in a
manner the person reasonably believed to be in or not opposed to
the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Court of Chancery of Delaware or the court in which such action
or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of
Chancery of Delaware or such other court shall deem proper.
To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to above, or
in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses (including attorneys’
fees) actually and reasonably incurred by such person in
connection therewith; provided that indemnification provided for
by Section 145 or granted pursuant thereto shall not be
deemed exclusive of any other rights to which the indemnified
party may be entitled; and a Delaware corporation shall have
power to purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person
and incurred by such person in any such capacity or arising out
of such person’s status as such whether or not the
corporation would have the power to indemnify such person
against such liabilities under Section 145.
The Certificate of Incorporation of Altra Holdings, Inc.
provides that a director of the corporation shall not be
personally liable to either the corporation or any of its
stockholder for monetary damages for a breach of fiduciary duty
except for (i) breaches of the duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions not
in good faith or involving intentional misconduct or knowing
violation of the law, (iii) as required by Section 174
of the DGCL or (iv) a transaction resulting in an improper
personal benefit. In addition the corporation has the power to
indemnify any person serving as a director, officer or agent of
the corporation to the fullest extent permitted by law.
The By-laws of Altra Holdings, Inc. provide generally that the
corporation has the power to indemnify its directors, officers,
employees and agents who are or were a party, or threatened to
be made a party, to any threatened, pending, or contemplated
action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in
the right of the corporation), by reason of the fact that such
person is or was the director, officer, employee or agent of the
corporation, or is or was serving in such a position at its
request of any other corporation, partnership, joint venture,
trust or other enterprise.
In connection with the PTH Acquisition in November 2004, Genstar
Capital Partners III, L.P. and Stargen III, L.P.
(together, the “Genstar Funds”) and CDPQ purchased
approximately 26.3 million shares of our preferred stock
for approximately $26.3 million.
In addition, the Genstar Funds and certain members of management
acquired an additional 8.8 million shares of our preferred
stock by exchanging Kilian preferred stock of equivalent value.
Certain members of management also exchanged 8,767 shares
of Kilian restricted common stock for 878,114 shares of our
restricted common stock. All of the cash and Kilian preferred
stock received by us from such sales of our preferred stock were
contributed to Altra Industrial, and the cash portion thereof
provided a portion of the funds necessary to complete the PTH
Acquisition.
In 2005, following the commencement of their employment,
Mr. Christenson and Mr. Wall purchased 300,000 and
100,000 shares of our preferred stock for a purchase price
of $300,000 and $100,000, respectively.
In January 2005 and January 2006, we issued an aggregate of
2,788,329 shares and 78,000 shares, respectively, of our
restricted common stock to members of our management pursuant to
our 2004 Equity Incentive Plan. In addition, in August 2006 we
issued 407,798 shares of our restricted common stock to our
Chief Executive Officer and 207,713 shares of our
restricted common stock to our President and COO, in each case,
pursuant to our 2004 Equity Incentive Plan.
The issuances of the securities described above were exempt from
registration under the Securities Act in reliance on
Section 4(2) of such Securities Act as transactions by an
issuer not involving any public offering, or under Rule 701
under the Securities Act. The recipients of securities in each
such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates issued in such
transactions.
Item 16.
Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed with this Registration
Statement.
LLC Purchase Agreement, dated as of October 25, 2004, among
Warner Electric Holding, Inc., Colfax Corporation and Registrant
2
.2(1)
Assignment and Assumption Agreement, dated as of
November 21, 2004, between Registrant and Altra Industrial
Motion, Inc.
2
.3(2)
Share Purchase Agreement, dated as of November 7, 2005,
among Altra Industrial Motion, Inc. and the stockholders of Hay
Hall Holdings Limited listed therein
2
.4*
Asset Purchase Agreement, dated May 18, 2006, among Warner
Electric LLC, Bear Linear LLC and the other guarantors listed
therein
3
.1+
Amended and Restated Certificate of Incorporation of the
Registrant, to be in effect upon the consummation of the offering
3
.2+
Amended and Restated Bylaws of the Registrant, to be in effect
upon the consummation of the offering
4
.1*
Amended and Restated Registration Rights Agreement, dated
January 6, 2005, among Registrant, Genstar Capital Partners
II, L.P., Stargen III, L.P. and Caisse de dépôt et
Placement du Québec
4
.2(1)
Indenture, dated as of November 30, 2004, among Altra
Industrial Motion, Inc., the Guarantors party thereto and The
Bank of New York Trust Company, N.A. as trustee
4
.3(3)
First Supplemental Indenture, dated as of February 7, 2006,
among Altra Industrial Inc., the guarantors party thereto, and
The Bank of New York Trust Company, N.A. as trustee
4
.4(2)
Second Supplemental Indenture, dated as of February 8,2006, among Altra Industrial Inc., the guarantors party thereto,
and The Bank of New York Trust Company, N.A. as trustee
4
.5(3)
Third Supplemental Indenture, dated as of April 24, 2006,
among Altra Industrial Inc., the guarantors party thereto, and
The Bank of New York Trust Company, N.A. as trustee
4
.6(1)
Form of 9% Senior Secured Notes due 2011 (included in
Exhibit 4.1)
4
.7(1)
Registration Rights Agreement, dated as of November 30,2004, among Altra Industrial Motion, Inc., Jefferies &
Company, Inc., and the Subsidiary Guarantors party thereto
4
.8(2)
Indenture, dated as of February 8, 2006, among Altra
Industrial Motion Inc. the guarantors party thereto, the Bank of
New York, as trustee and paying agent and the Bank of New York
(Luxembourg) SA, as Luxembourg paying agent
First Supplemental Indenture, dated as of April 24, 2006,
among Altra Industrial Inc., the guarantors party thereto, and
The Bank of New York as trustee
4
.10(2)
Form of
111/4%
Senior Notes due 2013
4
.11(2)
Registrants Rights Agreement, dated as of February 8, 2006,
among Altra Industrial Inc., the guarantors party thereto, and
Jefferies International Limited, as initial purchasers
4
.12*
Note Purchase Agreement, dated November 30, 2004,
between Registrant and Caisse de dépôt et Placement du
Québec
4
.13*
Form of Caisse de dépôt et Placement du Québec
Note, due November 30, 2019
4
.14
Stockholders Agreement, dated January 6, 2005, among the
Registrant and the stockholders listed therein
4
.15
First Amendment to the Amended and Restated Stockholders
Agreement, dated May 1, 2005, among the Registrant and the
stockholders listed therein.
5
.1+
Opinion of Weil, Gotshal Manges LLP
10
.1(1)
Credit Agreement, dated as of November 30, 2004, among
Altra Industrial Motion, Inc. and certain subsidiaries of the
Company, as Guarantors, the financial institutions listed
therein, as Lenders, and Wells Fargo Bank, as Lead Arranger
10
.2(1)
Security Agreement, dated as of November 30, 2004, among
Altra Industrial Motion, Inc., the other Grantors listed therein
and The Bank of New York Trust Company, N.A.
10
.3(1)
Patent Security Agreement, dated as of November 30, 2004,
among Kilian Manufacturing Corporation, Warner Electric
Technology LLC, Formsprag LLC, Boston Gear LLC, Ameridrives
International, L.P. and The Bank of New York Trust Company,
N.A.
10
.4(1)
Trademark Security Agreement, dated as of November 30,2004, among Warner Electric Technology LLC, Boston Gear LLC and
The Bank of New York Trust Company, N.A.
10
.5(1)
Intercreditor and Lien Subordination Agreement, dated as of
November 30, 2004, among Wells Fargo Foothill, Inc., The
Bank of New York Trust Company, N.A. and Altra Industrial
Motion, Inc.
10
.6(1)
Agreement, dated as of October 24, 2004, between
Ameridrives International, L.P. and United Steel Workers of
America Local 3199-10
10
.7(1)
Labor Agreement, dated as of August 9, 2004, between Warner
Electric LLC (formerly Warner Electric Inc.) and International
Association of Machinists and Aerospace Works, AFL-CIO, and
Aeronautical Industrial District Lode 776, Local Lodge 2771
10
.8*
Labor Agreement, dated May 17, 2006, between Warner
Electric LLC and United Steelworkers and Local Union
No. 3245
10
.9*
Labor Agreement, dated June 6, 2005, between Formsprag LLC
and UAW Local 155
Convertible Preferred Series A stock ($0.001 par
value, 40,000,000 shares authorized, 35,500,000 and 35,100,000
shares issued and outstanding, respectively)
35,500
35,100
Stockholders’ deficit
(10,549
)
(6,012
)
$
38,900
$
43,215
The accompanying notes are an integral part of these condensed
financial statements.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF
REGISTRANT — (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
Altra Holdings, Inc. (Parent Company) was formed on
December 1, 2004. Therefore, results of operations and cash
flows are only presented for periods subsequent to that date. In
the parent-company-only financial statements, the Company’s
investment in subsidiaries is stated at cost plus equity in
undistributed earnings of subsidiaries since the date of
acquisition. The parent-company-only financial statements should
be read in conjunction with the Company’s consolidated
financial statements.
2. Restriction
The Company’s wholly owned subsidiary, Altra Industrial
Motion, Inc. (Altra Industrial), issued 9% senior secured notes
in an aggregate principal amount of $165.0 million due in
2011 (the Notes). The Notes are secured on a second-priority
basis, by security interests in substantially all of the
Company’s assets (other than certain excluded assets) and
are unconditionally guaranteed by all existing and future
domestic restricted subsidiaries. The indenture governing the
Notes contains covenants which restrict the Company’s
restricted subsidiaries. These restrictions limit or prohibit,
among other things, their ability to: incur additional
indebtedness; repay subordinated indebtedness prior to stated
maturities; pay dividends on or redeem or repurchase stock or
make other distributions; make investments or acquisitions; sell
certain assets or merge with or into other companies; sell stock
in the Company’s subsidiaries; and create liens. The net
assets of the domestic restricted subsidiaries was
$176.7 million and $157.9 million at December 31,2005 and 2004, respectively.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF
REGISTRANT — (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
Altra Holdings, Inc. (Parent Company) was formed on
December 1, 2004. Therefore, results of operations and cash
flows are only presented for periods subsequent to that date. In
the parent-company-only financial statements, the Company’s
investment in subsidiaries is stated at cost plus equity in
undistributed earnings of subsidiaries since the date of
acquisition. The parent-company-only financial statements should
be read in conjunction with the Company’s consolidated
financial statements.
2. Restriction
The Company’s wholly owned subsidiary, Altra Industrial
Motion, Inc. (Altra Industrial), issued 9% senior secured notes
in an aggregate principal amount of $165.0 million due in
2011 (the Notes). The Notes are secured on a second-priority
basis, by security interests in substantially all of the
Company’s assets (other than certain excluded assets) and
are unconditionally guaranteed by all existing and future
domestic restricted subsidiaries. The indenture governing the
Notes contains covenants which restrict the Company’s
restricted subsidiaries. These restrictions limit or prohibit,
among other things, their ability to: incur additional
indebtedness; repay subordinated indebtedness prior to stated
maturities; pay dividends on or redeem or repurchase stock or
make other distributions; make investments or acquisitions; sell
certain assets or merge with or into other companies; sell stock
in the Company’s subsidiaries; and create liens. The net
assets of the domestic restricted subsidiaries was
$192.9 million and $176.7 million at June 30,2006 and December 31, 2005, respectively.
The difference between the balance at the end of the period
ending November 30, 2004 and the balance at
December 1, 2004 is the result of purchase accounting for
the Acquisition.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to Item 14
above, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issues.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under
the Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) That for the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To provide to the underwriters at the closing specified
in the Underwriting Agreement, certificates in such denomination
and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(4) That, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser, if the Registrant
is subject to Rule 430C, each prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to
an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in
the registration statement as of the date it is first used after
effectiveness; provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such date of first use.
(5) That, for the purpose of determining liability of the
Registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities, in a primary
offering of securities of the undersigned Registrant pursuant to
this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any
of the following communications, the undersigned Registrant will
be a seller to the purchaser and will be considered to offer or
sell such securities to such purchaser:
i. Any preliminary prospectus or prospectus of the
undersigned Registrant relating to the offering required to be
filed pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned Registrant or used
or referred to by the undersigned Registrant;
iii. The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned Registrant or its securities provided by or on
behalf of the undersigned Registrant; and
iv. Any other communication that is an offer in the
offering made by the undersigned Registrant to the purchaser.
Pursuant to the requirements of the Securities Act of 1933, as
amended, Altra Holdings, Inc. has duly caused this Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Quincy, State of
Massachusetts, on November 3, 2006.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the
following persons in the capacities indicated on
November 3, 2006.
LLC Purchase Agreement, dated as of October 25, 2004, among
Warner Electric Holding, Inc., Colfax Corporation and Registrant
2
.2(1)
Assignment and Assumption Agreement, dated as of
November 21, 2004, between Registrant and Altra Industrial
Motion, Inc.
2
.3(2)
Share Purchase Agreement, dated as of November 7, 2005,
among Altra Industrial Motion, Inc. and the stockholders of Hay
Hall Holdings Limited listed therein
2
.4*
Asset Purchase Agreement, dated May 18, 2006, among Warner
Electric LLC, Bear Linear LLC and the other guarantors listed
therein
3
.1+
Amended and Restated Certificate of Incorporation of the
Registrant, to be in effect upon the consummation of the offering
3
.2+
Amended and Restated Bylaws of the Registrant, to be in effect
upon the consummation of the offering
4
.1*
Amended and Restated Registration Rights Agreement, dated
January 6, 2005, among Registrant, Genstar Capital Partners
II, L.P., Stargen III, L.P. and Caisse de dépôt et
Placement du Québec
4
.2(1)
Indenture, dated as of November 30, 2004, among Altra
Industrial Motion, Inc., the Guarantors party thereto and The
Bank of New York Trust Company, N.A. as trustee
4
.3(3)
First Supplemental Indenture, dated as of February 7, 2006,
among Altra Industrial Inc., the guarantors party thereto, and
The Bank of New York Trust Company, N.A. as trustee
4
.4(2)
Second Supplemental Indenture, dated as of February 8,2006, among Altra Industrial Inc., the guarantors party thereto,
and The Bank of New York Trust Company, N.A. as trustee
4
.5(3)
Third Supplemental Indenture, dated as of April 24, 2006,
among Altra Industrial Inc., the guarantors party thereto, and
The Bank of New York Trust Company, N.A. as trustee
4
.6(1)
Form of 9% Senior Secured Notes due 2011 (included in
Exhibit 4.1)
4
.7(1)
Registration Rights Agreement, dated as of November 30,2004, among Altra Industrial Motion, Inc., Jefferies &
Company, Inc., and the Subsidiary Guarantors party thereto
4
.8(2)
Indenture, dated as of February 8, 2006, among Altra
Industrial Motion Inc. the guarantors party thereto, the Bank of
New York, as trustee and paying agent and the Bank of New York
(Luxembourg) SA, as Luxembourg paying agent
4
.9(3)
First Supplemental Indenture, dated as of April 24, 2006,
among Altra Industrial Inc., the guarantors party thereto, and
The Bank of New York as trustee
4
.10(2)
Form of
111/4%
Senior Notes due 2013
4
.11(2)
Registrants Rights Agreement, dated as of February 8, 2006,
among Altra Industrial Inc., the guarantors party thereto, and
Jefferies International Limited, as initial purchasers
4
.12*
Note Purchase Agreement, dated November 30, 2004,
between Registrant and Caisse de dépôt et Placement du
Québec
4
.13*
Form of Caisse de dépôt et Placement du Québec
Note, due November 30, 2019
4
.14
Stockholders Agreement, dated January 6, 2005, among the
Registrant and the stockholders listed therein
4
.15
First Amendment to the Amended and Restated Stockholders
Agreement, dated May 1, 2005, among the Registrant and the
stockholders listed therein.
5
.1+
Opinion of Weil, Gotshal Manges LLP
10
.1(1)
Credit Agreement, dated as of November 30, 2004, among
Altra Industrial Motion, Inc. and certain subsidiaries of the
Company, as Guarantors, the financial institutions listed
therein, as Lenders, and Wells Fargo Bank, as Lead Arranger
10
.2(1)
Security Agreement, dated as of November 30, 2004, among
Altra Industrial Motion, Inc., the other Grantors listed therein
and The Bank of New York Trust Company, N.A.
Patent Security Agreement, dated as of November 30, 2004,
among Kilian Manufacturing Corporation, Warner Electric
Technology LLC, Formsprag LLC, Boston Gear LLC, Ameridrives
International, L.P. and The Bank of New York Trust Company,
N.A.
10
.4(1)
Trademark Security Agreement, dated as of November 30,2004, among Warner Electric Technology LLC, Boston Gear LLC and
The Bank of New York Trust Company, N.A.
10
.5(1)
Intercreditor and Lien Subordination Agreement, dated as of
November 30, 2004, among Wells Fargo Foothill, Inc., The
Bank of New York Trust Company, N.A. and Altra Industrial
Motion, Inc.
10
.6(1)
Agreement, dated as of October 24, 2004, between
Ameridrives International, L.P. and United Steel Workers of
America Local 3199-10
10
.7(1)
Labor Agreement, dated as of August 9, 2004, between Warner
Electric LLC (formerly Warner Electric Inc.) and International
Association of Machinists and Aerospace Works, AFL-CIO, and
Aeronautical Industrial District Lode 776, Local Lodge 2771
10
.8*
Labor Agreement, dated May 17, 2006, between Warner
Electric LLC and United Steelworkers and Local Union
No. 3245
10
.9*
Labor Agreement, dated June 6, 2005, between Formsprag LLC
and UAW Local 155