##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 29, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from           to
 Commission file number 333-124944
 ALTRA INDUSTRIAL MOTION, INC.
  Delaware
    
    30-0283143(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)14 Hayward Street, Quincy, Massachusetts
    
    02171(Address of principal executive offices)
    
    (Zip Code)
 (617) 328-3300
 NONE  NONE
 þ o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 Page #PART IFINANCIAL INFORMATION
    
    
    3Item 1. Unaudited Condensed Consolidated Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART IIOTHER INFORMATION
    
    
    28Item 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    30EX-2.1 Asset Purchase Agreement dated May 18, 2006EX-31.1 Sec 302 Certification of CEOEX-31.2 Sec 302 Certification of CFOEX-32.1 Sec 906 Certification of CEOEX-32.2 Sec 906 Certification of CFO
  2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ALTRA INDUSTRIAL MOTION, INC.
 Condensed Consolidated Balance Sheets
 Dollars in thousands
 September 29,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,760
    
    
    $
    10,060Trade receivables, less allowance for doubtful accounts of $2,089 and $1,797
    
    
    64,555
    
    
    
    46,441Inventories, less allowance for obsolete materials of $9,598 and $6,843
    
    
    73,691
    
    
    
    54,654Deferred income taxes
    
    
    2,387
    
    
    
    2,779Prepaid expenses and other current assets
    
    
    3,895
    
    
    
    1,973Total current assets
    
    
    150,288
    
    
    
    115,907Property, plant and equipment, net
    
    
    81,511
    
    
    
    66,393Intangible assets, net
    
    
    57,465
    
    
    
    44,751Goodwill
    
    
    78,036
    
    
    
    65,345Other assets, net
    
    
    6,116
    
    
    
    5,008Total assets
    
    $
    373,416
    
    
    $
    297,404Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    34,567
    
    
    $
    30,724Accrued payroll
    
    
    11,323
    
    
    
    16,016Accruals and other liabilities
    
    
    22,899
    
    
    
    16,239Deferred income taxes
    
    
    282
    
    
    
    33Current portion of capital leases and short-term bank borrowings
    
    
    1,476
    
    
    
    186Total current liabilities
    
    
    70,547
    
    
    
    63,198Long-term debt, less current portion and net of unaccreted discount
    
    
    226,351
    
    
    
    159,574Deferred income taxes
    
    
    11,034
    
    
    
    7,550Pension liabilities
    
    
    15,308
    
    
    
    14,368Other post retirement benefits
    
    
    8,289
    
    
    
    12,500Other long term liabilities
    
    
    2,443
    
    
    
    1,601Commitments and Contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock (1,000 shares authorized, issued & outstanding, $0.001 par value)
    
    
    
    
    
    
    Additional paid-in capital
    
    
    48,814
    
    
    
    48,814Due from Parent
    
    
    (15,751
    )
    
    
    (1,610
    )Retained earnings (deficit)
    
    
    10,632
    
    
    
    (1,318
    )Cumulative foreign currency translation adjustment
    
    
    (2,829
    )
    
    
    (5,851
    )Minimum pension liability
    
    
    (1,422
    )
    
    
    (1,422
    )Total stockholders equity
    
    
    39,444
    
    
    
    38,613Total liabilities and stockholders equity
    
    $
    373,416
    
    
    $
    297,404
  3




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##### Table of Contents



ALTRA INDUSTRIAL MOTION, INC.
 Condensed Consolidated Statements of Income and Comprehensive Income  (Unaudited)
 Dollars in thousands
 Quarter Ended
    
    
    Year to Date EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    112,953
    
    
    $
    85,155
    
    
    $
    347,511
    
    
    $
    273,491Cost of sales
    
    
    82,528
    
    
    
    63,784
    
    
    
    252,959
    
    
    
    206,906Gross profit
    
    
    30,425
    
    
    
    21,371
    
    
    
    94,552
    
    
    
    66,585Selling, general and administrative expenses
    
    
    19,543
    
    
    
    14,891
    
    
    
    57,364
    
    
    
    45,946Research and development expenses
    
    
    1,315
    
    
    
    1,187
    
    
    
    3,807
    
    
    
    3,495Gain on curtailment of post-retirement benefit plan
    
    
    (3,838
    )
    
    
    
    
    
    
    (3,838
    )
    
    
    Income from operations
    
    
    13,405
    
    
    
    5,293
    
    
    
    37,219
    
    
    
    17,144Interest expense, net
    
    
    6,345
    
    
    
    4,256
    
    
    
    17,571
    
    
    
    12,813Other non-operating expense (income), net
    
    
    734
    
    
    
    (10
    )
    
    
    647
    
    
    
    3Income before income taxes
    
    
    6,326
    
    
    
    1,047
    
    
    
    19,001
    
    
    
    4,328Provision for income taxes
    
    
    2,377
    
    
    
    352
    
    
    
    7,051
    
    
    
    1,665Net income
    
    
    3,949
    
    
    
    695
    
    
    
    11,950
    
    
    
    2,663Other comprehensive income (loss), net of income
taxes:Foreign currency translation adjustment
    
    
    1,465
    
    
    
    (33
    )
    
    
    3,022
    
    
    
    (1,951
    )Other comprehensive income (loss)
    
    
    1,465
    
    
    
    (33
    )
    
    
    3,022
    
    
    
    (1,951
    )Comprehensive income
    
    $
    5,414
    
    
    $
    662
    
    
    $
    14,972
    
    
    $
    712
  4




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ALTRA INDUSTRIAL MOTION, INC.
 Condensed Consolidated Statements of Cash Flows  (unaudited)
 Dollars in thousands
 Year to Date EndedSeptember 29, 2006
    
    September 30, 2005Cash flows from operating activities:Net income
    
    $
    11,950
    
    
    $
    2,663Adjustments to reconcile net income to cash provided by
operating activities:Depreciation
    
    
    7,544
    
    
    
    6,249Amortization of intangible assets
    
    
    2,767
    
    
    
    2,215Amortization of deferred loan costs
    
    
    694
    
    
    
    477Loss on
foreign currency, net
    
    
    466
    
    
    
    Accretion of debt discount
    
    
    707
    
    
    
    711Amortization of inventory fair value adjustment
    
    
    2,278
    
    
    
    1,699Gains on sale of fixed assets
    
    
    (14
    )
    
    
    (103
    )Stock-based compensation
    
    
    439
    
    
    
    Gain on curtailment of post-retirement benefit plan
    
    
    (3,838
    )
    
    
    Provision for deferred taxes
    
    
    1,527
    
    
    
    25Changes in operating assets and liabilities:Trade receivables
    
    
    (1,945
    )
    
    
    1,887Inventories
    
    
    (1,763
    )
    
    
    2,640Accounts payable and accrued liabilities
    
    
    (8,384
    )
    
    
    (2,297
    )Other current assets and liabilities
    
    
    159
    
    
    
    (2,116
    )Other operating assets and liabilities
    
    
    343
    
    
    
    (931
    )Net cash provided by operating activities
    
    
    12,930
    
    
    
    13,119Cash flows from investing activities:Purchases of fixed assets
    
    
    (6,133
    )
    
    
    (3,401
    )Sales of fixed assets
    
    
    
    
    
    
    125Payment of additional Kilian purchase price
    
    
    
    
    
    
    (730
    )Acquisitions, net of $441 of cash acquired
    
    
    (54,302
    )
    
    
    Net cash used in investing activities
    
    
    (60,435
    )
    
    
    (4,006
    )Cash flows from financing activities:Proceeds from issuance of senior notes
    
    
    57,625
    
    
    
    Payment of debt issuance costs
    
    
    (2,506
    )
    
    
    Payments made on behalf of Parent company
    
    
    (14,580
    )
    
    
    (1,108
    )Borrowings under revolving credit agreement
    
    
    5,057
    
    
    
    4,408Payments on revolving credit agreement
    
    
    (5,057
    )
    
    
    (4,408
    )Proceeds from mortgages
    
    
    2,510
    
    
    
    Payments of capital leases
    
    
    (106
    )
    
    
    (724
    )Net cash provided by (used in) financing activities
    
    
    42,943
    
    
    
    (1,832
    )Effect of exchange rates on cash
    
    
    262
    
    
    
    (1,716
    )(Decrease) increase in cash and cash equivalents
    
    
    (4,300
    )
    
    
    5,565Cash and cash equivalents, beginning of period
    
    
    10,060
    
    
    
    4,729Cash and cash equivalents, end of period
    
    $
    5,760
    
    
    $
    10,294Cash paid during the period for:Interest
    
    $
    12,997
    
    
    $
    9,002Income Taxes
    
    $
    2,160
    
    
    $
    1,383Non-Cash Financing:Acquisition of capital equipment under capital lease
    
    $
    404
    
    
    
    
  5




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##### Table of Contents



ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 1. Organization and Nature of Operations
  2. Basis of Presentation
     3. Recent Accounting Pronouncements
     6




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
  4. Acquisitions
    Total purchase price, including closing costs of approximately $1.9 million
    
    $
    51,177Cash and cash equivalents
    
    
    441Trade receivables
    
    
    12,959Inventories
    
    
    16,388Prepaid expenses and other
    
    
    1,099Property, plant and equipment
    
    
    13,996Intangible assets
    
    
    13,881Total assets acquired
    
    
    58,764Accounts payable, accrued payroll, and accruals and other current liabilities
    
    
    11,282Other liabilities
    
    
    3,493Total liabilities assumed
    
    
    14,775Net assets acquired
    
    
    43,989Excess purchase price over the fair value of net assets acquired
    
    $
    7,188
   Customer relationships, subject to amortization
    
    $
    6,931Trade names and trademarks, not subject to amortization
    
    
    6,950Total intangible assets
    
    $
    13,881
 7




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
      Year to Date
    
    
    Year to Dateended
    
    
    ended(Pro forma, unaudited, in thousands)
    
    September 29, 2006
    
    
    September 30, 2005Total Revenues
    
    $
    356,844
    
    
    $
    326,362Net income
    
    $
    13,549
    
    
    $
    3,959
 5. Cash and Cash Equivalents
  8




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 6. Inventories
  September 29,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    28,432
    
    
    $
    22,512Work in process
    
    
    19,038
    
    
    
    13,876Finished goods
    
    
    35,819
    
    
    
    25,10983,289
    
    
    
    61,497LessAllowance for excess, slow-moving and obsolete inventory
    
    
    (9,598
    )
    
    
    (6,843
    )$
    73,691
    
    
    $
    54,654
 7. Goodwill and Intangible Assets
  CostGoodwillBalance December 31, 2005
    
    $
    65,345Additions related to Hay Hall acquisition
    
    
    7,188Additions related to Bear Linear acquisition
    
    
    4,231Impact of changes in foreign currency
    
    
    1,272Balance September 29, 2006
    
    $
    78,036
 September 29, 2006
    
    
    December 31, 2005Accumulated
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Cost
    
    
    AmortizationIntangible AssetsIntangible assets not subject to amortization:Tradenames and trademarks
    
    $
    23,030
    
    
    $
    
    
    
    $
    16,080
    
    
    $
    Intangible assets subject to amortization:Customer relationships
    
    
    34,733
    
    
    
    4,804
    
    
    
    27,802
    
    
    
    2,515Product technology and patents
    
    
    5,122
    
    
    
    1,168
    
    
    
    5,122
    
    
    
    690Impact of changes in foreign currency
    
    
    552
    
    
    
    
    
    
    
    (1,048
    )
    
    
    Total intangible assets
    
    $
    63,437
    
    
    $
    5,972
    
    
    $
    47,956
    
    
    $
    3,205
   9




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 8. Warranty Costs
  September 29, 2006
    
    
    September 30, 2005Balance at beginning of period
    
    $
    1,876
    
    
    $
    1,528Accrued warranty costs
    
    
    1,365
    
    
    
    979Payments and adjustments
    
    
    (1,072
    )
    
    
    (957
    )Balance at end of period
    
    $
    2,169
    
    
    $
    1,550
 9. Income Taxes
 .
 10. Pension and Other Employee Benefits
 Defined Benefit (Pension) and Postretirement Benefit Plans
   Quarter EndedPension Benefits
    
    
    Other BenefitsSeptember 29, 2006
    
    
    September 30, 2005
    
    
    September 29, 2006
    
    
    September 30, 2005Service cost
    
    $
    66
    
    
    $
    132
    
    
    $
    (40
    )
    
    $
    34Interest cost
    
    
    334
    
    
    
    307
    
    
    
    (36
    )
    
    
    50Expected return on plan assets
    
    
    (207
    )
    
    
    (108
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    2
    
    
    
    2
    
    
    
    (458
    )
    
    
    (302
    )Amortization of net (gain) loss
    
    
    
    
    
    
    
    
    
    
    (140
    )
    
    
    (15
    )Gain on
curtailment of post-retirement benefit plan
    
    
    
    
    
    
    
    
    
    
    (3,838
    )
    
    
    Net periodic benefit cost
    
    $
    195
    
    
    $
    333
    
    
    $
    (4,512
    )
    
    $
    (233
    )
 Year to Date EndedPension Benefits
    
    
    Other BenefitsSeptember 29, 2006
    
    
    September 30, 2005
    
    
    September 29, 2006
    
    
    September 30, 2005Service cost
    
    $
    369
    
    
    $
    397
    
    
    $
    128
    
    
    $
    222Interest cost
    
    
    1,003
    
    
    
    921
    
    
    
    263
    
    
    
    411Expected return on plan assets
    
    
    (622
    )
    
    
    (324
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    5
    
    
    
    5
    
    
    
    (659
    )
    
    
    (302
    )Amortization of net (gain) loss
    
    
    
    
    
    
    
    
    
    
    (105
    )
    
    
    (15
    )Gain on curtailment of
post-retirement benefit plan
    
    
    
    
    
    
    
    
    
    
    (3,838
    )
    
    
    Net periodic benefit cost
    
    $
    755
    
    
    $
    999
    
    
    $
    (4,211
    )
    
    $
    316
  10




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\

ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
   11. Financing Arrangements
 Revolving Credit Agreement
    9% Senior Secured Notes
   11.25% Senior Notes
  11




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
  Mortgage
 
 Capital Leases
  12. Stockholders Equity
 Stock-Based Compensation
   The Valuation of Privately-held-Company Equity Securities Issued
as Compensation
 
    
    Historical and expected future earnings performance
    
    The liquidation preferences and dividend rights of the preferred stock
    
    Milestones achieved by the company
    
    Marketplace and major competition
    
    Market barriers to entry
    
    The Companys workforce and related skills
    
    Customer and vendor characteristics
    
    Strategic relationships with suppliers
    
    Risk factors and uncertainties facing the Company
 13. Related-Party Transactions
 Kilian Acquisition
  12




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 Management Agreement
  Altra Holdings
   14. Concentrations of Credit, Business Risks and Workforce
     15. Geographic Information
  13




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 Net Sales
    
    
    Property, Plant and EquipmentQuarter Ended
    
    
    Year to Date EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,
    
    
    September 29,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005North America (primarily U.S.)
    
    $
    79,015
    
    
    $
    64,581
    
    
    $
    250,225
    
    
    $
    207,354
    
    
    $
    49,805
    
    
    $
    47,587Europe
    
    
    29,405
    
    
    
    16,569
    
    
    
    84,812
    
    
    
    54,478
    
    
    
    29,916
    
    
    
    16,968Asia and other
    
    
    4,533
    
    
    
    4,005
    
    
    
    12,474
    
    
    
    11,659
    
    
    
    1,790
    
    
    
    1,838Total
    
    $
    112,953
    
    
    $
    85,155
    
    
    $
    347,511
    
    
    $
    273,491
    
    
    $
    81,511
    
    
    $
    66,393
    16. Commitments and Contingencies
 General Litigation
   17. Guarantor Subsidiaries
  14




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##### Table of Contents



ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 Condensed Consolidating Balance Sheets of the Company
 September 29, 2006
 September 29, 2006Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    2,737
    
    
    $
    (2,737
    )
    
    $
    5,760
    
    
    $
    
    
    
    $
    5,760Trade receivables, less allowance for doubtful accounts
    
    
    
    
    
    
    36,725
    
    
    
    27,830
    
    
    
    
    
    
    
    64,555Loans receivable from related parties
    
    
    8,277
    
    
    
    36,404
    
    
    
    
    
    
    
    (44,681
    )
    
    
    Inventories, less allowances for obsolete materials
    
    
    
    
    
    
    48,164
    
    
    
    25,527
    
    
    
    
    
    
    
    73,691Deferred income taxes
    
    
    
    
    
    
    2,201
    
    
    
    186
    
    
    
    
    
    
    
    2,387Prepaid expenses and other
    
    
    161
    
    
    
    1,290
    
    
    
    2,444
    
    
    
    
    
    
    
    3,895Total current assets
    
    
    11,175
    
    
    
    122,047
    
    
    
    61,747
    
    
    
    (44,681
    )
    
    
    150,288Property, plant and equipment, net
    
    
    
    
    
    
    47,684
    
    
    
    33,827
    
    
    
    
    
    
    
    81,511Intangible assets, net
    
    
    
    
    
    
    35,052
    
    
    
    22,413
    
    
    
    
    
    
    
    57,465Goodwill
    
    
    
    
    
    
    59,030
    
    
    
    19,006
    
    
    
    
    
    
    
    78,036Other assets
    
    
    5,481
    
    
    
    602
    
    
    
    33
    
    
    
    
    
    
    
    6,116Investments in subsidiaries
    
    
    253,084
    
    
    
    
    
    
    
    
    
    
    
    (253,084
    )
    
    
    $
    269,740
    
    
    $
    264,415
    
    
    $
    137,026
    
    
    $
    (297,765
    )
    
    $
    373,416Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    19,206
    
    
    $
    15,361
    
    
    $
    
    
    
    $
    34,567Accrued payroll
    
    
    1,061
    
    
    
    5,593
    
    
    
    4,669
    
    
    
    
    
    
    
    11,323Accruals and other current liabilities
    
    
    6,967
    
    
    
    10,523
    
    
    
    5,409
    
    
    
    
    
    
    
    22,899Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    282
    
    
    
    
    
    
    
    282Current portion of capital leases and short-term bank
borrowings
    
    
    
    
    
    
    1,092
    
    
    
    384
    
    
    
    
    
    
    
    1,476Loans payable from related parties
    
    
    
    
    
    
    
    
    
    
    44,681
    
    
    
    (44,681
    )
    
    
    Total current liabilities
    
    
    8,028
    
    
    
    36,414
    
    
    
    70,786
    
    
    
    (44,681
    )
    
    
    70,547Long-term debt, less current portion
    
    
    222,268
    
    
    
    412
    
    
    
    3,671
    
    
    
    
    
    
    
    226,351Deferred income taxes
    
    
    
    
    
    
    2,625
    
    
    
    8,409
    
    
    
    
    
    
    
    11,034Pension liabilities
    
    
    
    
    
    
    12,273
    
    
    
    3,035
    
    
    
    
    
    
    
    15,308Other post-retirement benefits
    
    
    
    
    
    
    8,289
    
    
    
    
    
    
    
    
    
    
    
    8,289Other long-term liabilities
    
    
    
    
    
    
    977
    
    
    
    1,466
    
    
    
    
    
    
    
    2,443Total liabilities
    
    
    230,296
    
    
    
    60,990
    
    
    
    87,367
    
    
    
    (44,681
    )
    
    
    333,972Total stockholders equity
    
    
    39,444
    
    
    
    203,425
    
    
    
    49,659
    
    
    
    (253,084
    )
    
    
    39,444$
    269,740
    
    
    $
    264,415
    
    
    $
    137,026
    
    
    $
    (297,765
    )
    
    $
    373,416
 15




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##### Table of Contents



ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 Condensed Consolidating Balance Sheets of the Company
 December 31, 2005
 December 31, 2005NonIssuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    8,819
    
    
    $
    (2,713
    )
    
    $
    3,954
    
    
    $
    
    
    
    $
    10,060Trade receivables, less allowance for doubtful accounts
    
    
    
    
    
    
    32,892
    
    
    
    13,549
    
    
    
    
    
    
    
    46,441Loan receivable from related parties
    
    
    
    
    
    
    34,306
    
    
    
    4,301
    
    
    
    (38,607
    )
    
    
    Inventories, less allowances for obsolete materials
    
    
    
    
    
    
    43,562
    
    
    
    11,092
    
    
    
    
    
    
    
    54,654Deferred income taxes
    
    
    
    
    
    
    2,652
    
    
    
    127
    
    
    
    
    
    
    
    2,779Prepaid expenses and other
    
    
    25
    
    
    
    934
    
    
    
    1,014
    
    
    
    
    
    
    
    1,973Total current assets
    
    
    8,844
    
    
    
    111,633
    
    
    
    34,037
    
    
    
    (38,607
    )
    
    
    115,907Property, plant and equipment, net
    
    
    
    
    
    
    45,405
    
    
    
    20,988
    
    
    
    
    
    
    
    66,393Intangible assets, net
    
    
    
    
    
    
    36,729
    
    
    
    8,022
    
    
    
    
    
    
    
    44,751Goodwill
    
    
    
    
    
    
    53,784
    
    
    
    11,561
    
    
    
    
    
    
    
    65,345Other assets
    
    
    4,804
    
    
    
    167
    
    
    
    37
    
    
    
    
    
    
    
    5,008Investments in subsidiaries
    
    
    225,974
    
    
    
    
    
    
    
    
    
    
    
    (225,974
    )
    
    
    $
    239,622
    
    
    $
    247,718
    
    
    $
    74,645
    
    
    $
    (264,581
    )
    
    $
    297,404Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    44
    
    
    $
    21,931
    
    
    $
    8,749
    
    
    
    
    
    
    $
    30,724Accrued payroll
    
    
    
    
    
    
    12,487
    
    
    
    3,529
    
    
    
    
    
    
    
    16,016Accruals and other current liabilities
    
    
    2,937
    
    
    
    10,384
    
    
    
    2,918
    
    
    
    
    
    
    
    16,239Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    33Current portion of capital leases and short-term bank
borrowings
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    186Loans payable from related parties
    
    
    38,607
    
    
    
    
    
    
    
    
    
    
    
    (38,607
    )
    
    
    Total current liabilities
    
    
    41,588
    
    
    
    44,988
    
    
    
    15,229
    
    
    
    (38,607
    )
    
    
    63,198Long-term debt, less current portion
    
    
    159,421
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    159,574Deferred income taxes
    
    
    
    
    
    
    1,719
    
    
    
    5,831
    
    
    
    
    
    
    
    7,550Pension liabilities
    
    
    
    
    
    
    11,505
    
    
    
    2,863
    
    
    
    
    
    
    
    14,368Other post-retirement benefits
    
    
    
    
    
    
    12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500Other long-term liabilities
    
    
    
    
    
    
    107
    
    
    
    1,494
    
    
    
    
    
    
    
    1,601Total liabilities
    
    
    201,009
    
    
    
    70,972
    
    
    
    25,417
    
    
    
    (38,607
    )
    
    
    258,791Total stockholders equity
    
    
    38,613
    
    
    
    176,746
    
    
    
    49,228
    
    
    
    (225,974
    )
    
    
    38,613$
    239,622
    
    
    $
    247,718
    
    
    $
    74,645
    
    
    $
    (264,581
    )
    
    $
    297,404
 16




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##### Table of Contents



ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 Condensed Consolidating Statements of Operations of the Company
 Quarter ended September 29, 2006
 Quarter ended September 29, 2006Non-Issuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    78,000
    
    
    $
    40,031
    
    
    $
    (5,078
    )
    
    $
    112,953Cost of sales
    
    
    
    
    
    
    57,622
    
    
    
    29,984
    
    
    
    (5,078
    )
    
    
    82,528Gross profit
    
    
    
    
    
    
    20,378
    
    
    
    10,047
    
    
    
    
    
    
    
    30,425Selling, general and administrative expenses
    
    
    439
    
    
    
    11,671
    
    
    
    7,433
    
    
    
    
    
    
    
    19,543Research and development expenses
    
    
    
    
    
    
    740
    
    
    
    575
    
    
    
    
    
    
    
    1,315Gain on curtailment of post-retirement benefit plan
    
    
    
    
    
    
    (3,838
    )
    
    
    
    
    
    
    
    
    
    
    (3,838
    )Income (loss) from operations
    
    
    (439
    )
    
    
    11,805
    
    
    
    2,039
    
    
    
    
    
    
    
    13,405Interest expense (income)
    
    
    2,240
    
    
    
    (182
    )
    
    
    4,287
    
    
    
    
    
    
    
    6,345Other non-operating expense
    
    
    139
    
    
    
    102
    
    
    
    493
    
    
    
    
    
    
    
    734Equity in earnings of subsidiaries
    
    
    6,767
    
    
    
    
    
    
    
    
    
    
    
    (6,767
    )
    
    
    Income (loss) before income taxes
    
    
    3,949
    
    
    
    11,885
    
    
    
    (2,741
    )
    
    
    (6,767
    )
    
    
    6,326Provision for income taxes
    
    
    
    
    
    
    1,358
    
    
    
    1,019
    
    
    
    
    
    
    
    2,377Net income (loss)
    
    $
    3,949
    
    
    $
    10,527
    
    
    $
    (3,760
    )
    
    $
    (6,767
    )
    
    $
    3,949
 Condensed Consolidating Statements of Operations of the Company
Year to Date ended September 29, 2006
 Year to Date ended September 29, 2006Non-Issuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    243,964
    
    
    $
    114,099
    
    
    $
    (10,552
    )
    
    $
    347,511Cost of sales
    
    
    
    
    
    
    178,918
    
    
    
    84,593
    
    
    
    (10,552
    )
    
    
    252,959Gross profit
    
    
    
    
    
    
    65,046
    
    
    
    29,506
    
    
    
    
    
    
    
    94,552Selling, general and administrative expenses
    
    
    1,444
    
    
    
    35,129
    
    
    
    20,791
    
    
    
    
    
    
    
    57,364Research and development expenses
    
    
    
    
    
    
    2,118
    
    
    
    1,689
    
    
    
    
    
    
    
    3,807Gain on curtailment of post-retirement benefit plan
    
    
    
    
    
    
    (3,838
    )
    
    
    
    
    
    
    
    
    
    
    (3,838
    )Income (loss) from operations
    
    
    (1,444
    )
    
    
    31,637
    
    
    
    7,026
    
    
    
    
    
    
    
    37,219Interest expense (income)
    
    
    13,339
    
    
    
    (140
    )
    
    
    4,372
    
    
    
    
    
    
    
    17,571Other non-operating expense (income)
    
    
    377
    
    
    
    (32
    )
    
    
    302
    
    
    
    
    
    
    
    647Equity in earnings of subsidiaries
    
    
    27,110
    
    
    
    
    
    
    
    
    
    
    
    (27,110
    )
    
    
    Income before income taxes
    
    
    11,950
    
    
    
    31,809
    
    
    
    2,352
    
    
    
    (27,110
    )
    
    
    19,001Provision for income taxes
    
    
    
    
    
    
    5,130
    
    
    
    1,921
    
    
    
    
    
    
    
    7,051Net income
    
    $
    11,950
    
    
    $
    26,679
    
    
    $
    431
    
    
    $
    (27,110
    )
    
    $
    11,950
 17




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##### Table of Contents



ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 Condensed Consolidating Statements of Operations of the Company
 Quarter ended September 30, 2005
 Quarter ended September 30, 2005Non-Issuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    65,333
    
    
    $
    21,979
    
    
    $
    (2,157
    )
    
    $
    85,155Cost of sales
    
    
    
    
    
    
    49,223
    
    
    
    16,718
    
    
    
    (2,157
    )
    
    
    63,784Gross profit
    
    
    
    
    
    
    16,110
    
    
    
    5,261
    
    
    
    
    
    
    
    21,371Selling, general and administrative expenses
    
    
    
    
    
    
    10,417
    
    
    
    4,474
    
    
    
    
    
    
    
    14,891Research and development expenses
    
    
    
    
    
    
    651
    
    
    
    536
    
    
    
    
    
    
    
    1,187Income from operations
    
    
    
    
    
    
    5,042
    
    
    
    251
    
    
    
    
    
    
    
    5,293Interest expense (income)
    
    
    4,609
    
    
    
    (34
    )
    
    
    (319
    )
    
    
    
    
    
    
    4,256Other non-operating (income) expense, net
    
    
    
    
    
    
    16
    
    
    
    (26
    )
    
    
    
    
    
    
    (10
    )Equity in earnings of subsidiaries
    
    
    5,213
    
    
    
    
    
    
    
    
    
    
    
    (5,213
    )
    
    
    Income before income taxes
    
    
    604
    
    
    
    5,060
    
    
    
    596
    
    
    
    (5,213
    )
    
    
    1,047Provision (Benefit) for income taxes
    
    
    1,665
    
    
    
    (660
    )
    
    
    (653
    )
    
    
    
    
    
    
    352Net income (loss)
    
    $
    (1,061
    )
    
    $
    5,720
    
    
    $
    1,249
    
    
    $
    (5,213
    )
    
    $
    695
 Condensed Consolidating Statements of Operations of the Company
Year to Date ended September 30, 2005
 Year to Date ended September 30, 2005Non-Issuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    209,670
    
    
    $
    70,350
    
    
    $
    (6,529
    )
    
    $
    273,491Cost of sales
    
    
    
    
    
    
    160,962
    
    
    
    52,473
    
    
    
    (6,529
    )
    
    
    206,906Gross profit
    
    
    
    
    
    
    48,708
    
    
    
    17,877
    
    
    
    
    
    
    
    66,585Selling, general and administrative expenses
    
    
    
    
    
    
    32,654
    
    
    
    13,292
    
    
    
    
    
    
    
    45,946Research and development expenses
    
    
    
    
    
    
    1,852
    
    
    
    1,643
    
    
    
    
    
    
    
    3,495Income from operations
    
    
    
    
    
    
    14,202
    
    
    
    2,942
    
    
    
    
    
    
    
    17,144Interest expense (income)
    
    
    12,716
    
    
    
    12
    
    
    
    85
    
    
    
    
    
    
    
    12,813Other non-operating (income) expense, net
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Equity in earnings of subsidiaries
    
    
    17,044
    
    
    
    
    
    
    
    
    
    
    
    (17,044
    )
    
    
    Income before income taxes
    
    
    4,328
    
    
    
    14,187
    
    
    
    2,857
    
    
    
    (17,044
    )
    
    
    4,328Provision for income taxes
    
    
    1,665
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,665Net income
    
    $
    2,663
    
    
    $
    14,187
    
    
    $
    2,857
    
    
    $
    (17,044
    )
    
    $
    2,663
 18




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##### Table of Contents



ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 Condensed Consolidating Statements of Cash Flows of the Company
 Year to Date ended September 29, 2006
 Non-Issuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income
    
    $
    11,950
    
    
    $
    26,679
    
    
    $
    431
    
    
    $
    (27,110
    )
    
    $
    11,950Undistributed equity in earnings of subsidiaries
    
    
    (27,110
    )
    
    
    
    
    
    
    
    
    
    
    27,110Adjustments to reconcile net income to cash provided by
(used in) operating activities:Depreciation
    
    
    
    
    
    
    4,910
    
    
    
    2,634
    
    
    
    
    
    
    
    7,544Amortization of intangible assets
    
    
    
    
    
    
    1,709
    
    
    
    1,058
    
    
    
    
    
    
    
    2,767Amortization of deferred loan costs
    
    
    694
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    694Loss on
foreign currency, net
    
    
    377
    
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    466Accretion of debt discount
    
    
    707
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    707Amortization of inventory fair value adjustment
    
    
    
    
    
    
    245
    
    
    
    2,033
    
    
    
    
    
    
    
    2,278Gain on sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )Provision for deferred taxes
    
    
    
    
    
    
    1,202
    
    
    
    325
    
    
    
    
    
    
    
    1,527Stock based compensation
    
    
    439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    439Gain on curtailment of post-retirement benefit plan
    
    
    
    
    
    
    (3,838
    )
    
    
    
    
    
    
    
    
    
    
    (3,838
    )Changes in operating assets and liabilities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trade receivables
    
    
    
    
    
    
    (1,141
    )
    
    
    (804
    )
    
    
    
    
    
    
    (1,945
    )Inventories
    
    
    
    
    
    
    (1,875
    )
    
    
    112
    
    
    
    
    
    
    
    (1,763
    )Accounts payable and accrued liabilities
    
    
    5,047
    
    
    
    (10,973
    )
    
    
    (2,458
    )
    
    
    
    
    
    
    (8,384
    )Other current assets and liabilities
    
    
    (136
    )
    
    
    894
    
    
    
    (599
    )
    
    
    
    
    
    
    159Other operating assets and liabilities
    
    
    1,135
    
    
    
    (726
    )
    
    
    (66
    )
    
    
    
    
    
    
    343Net cash provided by (used in) operating activities
    
    
    (6,897
    )
    
    
    17,175
    
    
    
    2,652
    
    
    
    
    
    
    
    12,930Cash flows from investing activities:Purchases of fixed assets
    
    
    
    
    
    
    (4,670
    )
    
    
    (1,463
    )
    
    
    
    
    
    
    (6,133
    )Acquisitions, net of cash acquired
    
    
    
    
    
    
    (9,467
    )
    
    
    (44,835
    )
    
    
    
    
    
    
    (54,302
    )Net cash used in investing activities
    
    
    
    
    
    
    (14,137
    )
    
    
    (46,298
    )
    
    
    
    
    
    
    (60,435
    )Cash flows from financing activities:Proceeds from issuance of senior subordinated notes
    
    
    57,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,625Payment of debt issuance costs
    
    
    (2,506
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,506
    )Payment on behalf of parent company
    
    
    (14,580
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,580
    )Proceeds from mortgages
    
    
    
    
    
    
    
    
    
    
    2,510
    
    
    
    
    
    
    
    2,510Borrowings under revolving credit agreements
    
    
    5,057
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,057Payments on revolving credit agreements
    
    
    (5,057
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,057
    )Change in affiliate debt
    
    
    (39,724
    )
    
    
    (2,483
    )
    
    
    42,207
    
    
    
    
    
    
    
    Payments of capital leases
    
    
    
    
    
    
    (579
    )
    
    
    473
    
    
    
    
    
    
    
    (106
    )Net cash provided by (used in) financing activities
    
    
    815
    
    
    
    (3,062
    )
    
    
    45,190
    
    
    
    
    
    
    
    42,943Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    262
    
    
    
    
    
    
    
    262Increase (decrease) in cash and cash equivalents
    
    
    (6,082
    )
    
    
    (24
    )
    
    
    1,806
    
    
    
    
    
    
    
    (4,300
    )Cash and cash equivalents, beginning of the period
    
    
    8,819
    
    
    
    (2,713
    )
    
    
    3,954
    
    
    
    
    
    
    
    10,060Cash and cash equivalents, end of period
    
    $
    2,737
    
    
    $
    (2,737
    )
    
    $
    5,760
    
    
    
    
    
    
    $
    5,760
 19




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##### Table of Contents



ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 Condensed Consolidating Statements of Cash Flows of the Company
 Year to Date ended September 30, 2005
 Non-Issuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income
    
    $
    2,663
    
    
    $
    14,187
    
    
    $
    2,857
    
    
    $
    (17,044
    )
    
    $
    2,663Undistributed equity in earnings of subsidiaries
    
    
    (17,044
    )
    
    
    
    
    
    
    
    
    
    
    17,044
    
    
    
    Adjustments to reconcile net income to cash (used in)
provided by operating activities:Depreciation
    
    
    
    
    
    
    4,407
    
    
    
    1,842
    
    
    
    
    
    
    
    6,249Amortization of intangible assets
    
    
    
    
    
    
    1,687
    
    
    
    528
    
    
    
    
    
    
    
    2,215Amortization and write-off of deferred loan costs
    
    
    477
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    477Accretion of debt discount
    
    
    711
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    711Amortization of inventory fair value adjustment
    
    
    
    
    
    
    1,270
    
    
    
    429
    
    
    
    
    
    
    
    1,699Gain on sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    (103
    )
    
    
    
    
    
    
    (103
    )Provision for deferred taxes
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25Changes in operating assets and liabilities:Trade receivables
    
    
    
    
    
    
    376
    
    
    
    1,511
    
    
    
    
    
    
    
    1,887Inventories
    
    
    
    
    
    
    (809
    )
    
    
    3,449
    
    
    
    
    
    
    
    2,640Accounts payable and accrued liabilities
    
    
    1,151
    
    
    
    (2,624
    )
    
    
    (824
    )
    
    
    
    
    
    
    (2,297
    )Other current assets and liabilities
    
    
    (2,100
    )
    
    
    (4,737
    )
    
    
    4,721
    
    
    
    
    
    
    
    (2,116
    )Other operating assets and liabilities
    
    
    (2,459
    )
    
    
    (295
    )
    
    
    1,823
    
    
    
    
    
    
    
    (931
    )Net cash (used in) provided by operating activities
    
    
    (16,601
    )
    
    
    13,487
    
    
    
    16,233
    
    
    
    
    
    
    
    13,119Cash flows from investing activities:Purchases of fixed assets
    
    
    
    
    
    
    (2,805
    )
    
    
    (596
    )
    
    
    
    
    
    
    (3,401
    )Payment of additional Kilian purchase price
    
    
    
    
    
    
    (730
    )
    
    
    
    
    
    
    
    
    
    
    (730
    )Sale of fixed assets
    
    
    
    
    
    
    20
    
    
    
    105
    
    
    
    
    
    
    
    125Net cash used in investing activities
    
    
    
    
    
    
    (3,515
    )
    
    
    (491
    )
    
    
    
    
    
    
    (4,006
    )Cash flows from financing activities:Payments made on behalf of Parent company
    
    
    (1,108
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,108
    )Borrowings under revolving credit agreements
    
    
    4,408
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,408Payment under revolving credit agreements
    
    
    (4,408
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,408
    )Change in affiliate debt
    
    
    21,154
    
    
    
    (7,879
    )
    
    
    (13,275
    )
    
    
    
    
    
    
    Change in capital leases
    
    
    
    
    
    
    (180
    )
    
    
    (544
    )
    
    
    
    
    
    
    (724
    )Net cash (used in) provided by financing activities
    
    
    20,046
    
    
    
    (8,059
    )
    
    
    (13,819
    )
    
    
    
    
    
    
    (1,832
    )Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    (1,716
    )
    
    
    
    
    
    
    (1,716
    )Increase in cash and cash equivalents
    
    
    3,445
    
    
    
    1,913
    
    
    
    207
    
    
    
    
    
    
    
    5,565Cash and cash equivalents, beginning of the period
    
    
    2,219
    
    
    
    (1,913
    )
    
    
    4,423
    
    
    
    
    
    
    
    4,729Cash and cash equivalents, end of period
    
    $
    5,664
    
    
    $
    
    
    
    $
    4,630
    
    
    $
    
    
    
    $
    10,294
 20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion of the financial condition and results of operations of Altra Industrial
Motion, Inc. should be read together with the financial statements of Altra Industrial Motion, Inc.
and its Predecessor and related notes included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2005. 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 Forward-Looking Statements. in the
Companys Annual Report on Form 10-K for the year ended December 31, 2005.
 General
  Recent Acquisition
   Parent Debt Repayment
  Retirement Benefits
  21




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Critical Accounting Policies
  Recent Accounting Pronouncements
     Non-GAAP Financial Measures
   22




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##### Table of Contents




    
    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.
   Results of Operations
 Quarter Ended
    
    
    Year to Date EndedSeptember 29, 2006
    
    
    September 30, 2005
    
    
    September 29, 2006
    
    
    September 30, 2005Net sales
    
    $
    112,953
    
    
    $
    85,155
    
    
    $
    347,511
    
    
    $
    273,491Cost of sales
    
    
    82,528
    
    
    
    63,784
    
    
    
    252,959
    
    
    
    206,906Gross profit
    
    
    30,425
    
    
    
    21,371
    
    
    
    94,552
    
    
    
    66,585Gross profit percentage
    
    
    26.9
    %
    
    
    25.1
    %
    
    
    27.2
    %
    
    
    24.4
    %Selling, general and administrative expenses
    
    
    19,543
    
    
    
    14,891
    
    
    
    57,364
    
    
    
    45,946Research and development expenses
    
    
    1,315
    
    
    
    1,187
    
    
    
    3,807
    
    
    
    3,495Gain on curtailment of post-retirement benefit plan
    
    
    (3,838
    )
    
    
    
    
    
    
    (3,838
    )
    
    
    Income from operations
    
    
    13,405
    
    
    
    5,293
    
    
    
    37,219
    
    
    
    17,144Interest expense
    
    
    6,345
    
    
    
    4,256
    
    
    
    17,571
    
    
    
    12,813Other non-operating (income) expense
    
    
    734
    
    
    
    (10
    )
    
    
    647
    
    
    
    3Income before income taxes
    
    
    6,326
    
    
    
    1,047
    
    
    
    19,001
    
    
    
    4,328Provision for income taxes
    
    
    2,377
    
    
    
    352
    
    
    
    7,051
    
    
    
    1,665Net income
    
    $
    3,949
    
    
    $
    695
    
    
    $
    11,950
    
    
    $
    2,663
 Quarter Ended September 29, 2006 Compared with Quarter Ended September 30, 2005
 Net sales.
 Gross profit.
 23




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##### Table of Contents



Selling, general and administrative expenses.
 Gain on curtailment of post-retirement benefit plan
 Research and development expenses.
 EBITDA.
 Interest expense.
 Provision for income taxes.
 Year to Date Ended September 29, 2006 Compared with Year to Date Ended September 30, 2005
 Net sales.
 Gross profit.
 24




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##### Table of Contents



Selling, general and administrative expenses.
 Research and development expenses.
 EBITDA.
 Interest expense.
 Provision for income taxes.
 Liquidity and Capital Resources
     25




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##### Table of Contents



Liquidity
      Changes in general economic conditions or the cyclical nature of our markets could
harm our operations and financial performance .
 Our substantial level of indebtedness could adversely affect our financial condition, harm
our ability to react to changes to our business and prevent us from fulfilling our obligations on
the notes.
 26




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
   27




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##### Table of Contents



PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equtiy Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 The following exhibits are filed as part of this report:
 28




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description2.1
    
    Asset Purchase Agreement, dated
May 18, 2006 among Warner Electric LLC, Bear Linear and the
guarantors listed therein.3.1 (1)
    
    Certificate of Incorporation of Altra Industrial Motion, Inc.3.2 (1)
    
    By-laws of Altra Industrial Motion, Inc.4.1 (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 trustee4.2 (1)
    
    Form of 9% Senior Secured Notes due 2011 (included in Exhibit 4.1)4.3 (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) S.A., as Luxembourg paying agent4.4 (2)
    
    Form of 11 1/4% Senior Notes due 20134.5 (2)
    
    Registration Rights Agreement, dated as of February 8, 2006, among Altra Industrial Motion, Inc.,
the guarantors party thereto and Jefferies International Limited, as initial purchasers4.6 (3)
    
    First Supplemental Indenture, dated as of February 7, 2006, among Altra Industrial Motion, Inc.,
the guarantors party thereto and The Bank of New York Trust Company, N.A. as trustee4.7 (2)
    
    Second Supplemental Indenture, dated as of February 8, 2006, among Altra Industrial Motion, Inc.,
the guarantors party thereto and The Bank of New York Trust Company, N.A. as trustee4.8 (3)
    
    Third Supplemental Indenture, dated as of April 24, 2006, among Altra Industrial Motion, Inc.,
the guarantors party thereto and The Bank of New York Trust Company, N.A. as trustee4.9 (3)
    
    First Supplemental Indenture, dated as of April 24, 2006, among Altra Industrial Motion, Inc.,
the guarantors party thereto and The Bank of New York Trust Company, N.A. as trustee31.1
    
    Certification of Chief Executive
Officer pursuant to Securities Exchange Act Rules 13a-14(a) and
15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial
Officer pursuant to Securities Exchange Act Rules 13a-14(a) and
15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to the Registration Statement on Form S-4 (File No.333-124944)
filed with the Securities and Exchange Commission on May 16, 2005(2)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K (File No.
333-124944) filed with the Securities and Exchange Commission on February 14, 2006(3)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K (File No.
333-124944) filed with the Securities and Exchange Commission on May 15, 2006 29




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##### Table of Contents



SIGNATURES
  ALTRA INDUSTRIAL MOTION, INC.November 13, 2006
    By:
    /s/ Michael L. HurtName:
    Michael L. HurtTitle:
    Chief Executive OfficerNovember 13, 2006
    By:
    /s/ David WallName:
    David WallTitle:
    Chief Financial Officer 30