##### 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 March 31, 2007
 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
 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
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART IIOTHER INFORMATION
    
    
    24Item 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24SIGNATURES
    
    
    27EX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 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 (except share amounts)+
 March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    11,558
    
    
    $
    42,527Trade receivables, less allowance for doubtful accounts of $1,659 and $2,017
    
    
    74,246
    
    
    
    61,506Inventories, less allowance for obsolete materials of $10,097 and $10,163
    
    
    76,911
    
    
    
    75,769Deferred income taxes
    
    
    6,915
    
    
    
    6,783Prepaid expenses and other current assets
    
    
    5,930
    
    
    
    7,532Total current assets
    
    
    175,560
    
    
    
    194,117Property, plant and equipment, net
    
    
    81,387
    
    
    
    82,387Intangible assets, net
    
    
    58,810
    
    
    
    59,662Goodwill
    
    
    66,539
    
    
    
    65,397Deferred income taxes
    
    
    2,138
    
    
    
    2,135Other assets, net
    
    
    4,535
    
    
    
    5,670Total assets
    
    $
    388,969
    
    
    $
    409,368Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    36,312
    
    
    $
    34,053Accrued payroll
    
    
    11,229
    
    
    
    17,696Accruals and other liabilities
    
    
    16,255
    
    
    
    11,570Taxes payable
    
    
    3,857
    
    
    
    6,549Deferred income taxes
    
    
    1,382
    
    
    
    1,382Current portion of long-term debt
    
    
    834
    
    
    
    573Total current liabilities
    
    
    69,869
    
    
    
    71,823Long-term debt, less current portion and net of unaccreted discount
    
    
    207,413
    
    
    
    228,555Deferred income taxes
    
    
    7,191
    
    
    
    7,130Pension liabilities
    
    
    14,505
    
    
    
    15,169Other post retirement benefits
    
    
    3,055
    
    
    
    3,262Other long term liabilities
    
    
    4,236
    
    
    
    3,910Commitments and Contingencies (See footnote 13)
    
    
    
    
    
    
    Stockholders equity:Common stock (1,000 shares authorized, issued & outstanding, $0.001 par value)
    
    
    
    
    
    
    Additional paid-in capital
    
    
    48,814
    
    
    
    48,814Due to Parent
    
    
    23,856
    
    
    
    24,724Retained earnings
    
    
    12,655
    
    
    
    9,045Accumulated other comprehensive loss
    
    
    (2,625
    )
    
    
    (3,064
    )Total stockholders equity
    
    
    82,700
    
    
    
    79,519Total liabilities and stockholders equity
    
    $
    388,969
    
    
    $
    409,368
  3




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##### Table of Contents



ALTRA INDUSTRIAL MOTION, INC.
 Condensed Consolidated Statements of Income and Comprehensive Income
Dollars in thousands
(unaudited)
 Quarter EndedMarch 31,2007
    
    
    2006Net sales
    
    $
    132,706
    
    
    $
    114,784Cost of sales
    
    
    94,658
    
    
    
    82,930Gross profit
    
    
    38,048
    
    
    
    31,854Selling, general and administrative expenses
    
    
    20,804
    
    
    
    18,727Research and development expenses
    
    
    1,294
    
    
    
    1,204Restructuring charges
    
    
    793
    
    
    
    Income from operations
    
    
    15,157
    
    
    
    11,923Interest expense, net
    
    
    9,148
    
    
    
    5,176Other non-operating income, net
    
    
    (47
    )
    
    
    (159
    )Income before income taxes
    
    
    6,056
    
    
    
    6,906Provision for income taxes
    
    
    2,265
    
    
    
    2,822Net income
    
    $
    3,791
    
    
    $
    4,084Consolidated Statement of Comprehensive
IncomeForeign currency translation adjustment
    
    
    439
    
    
    
    472Other comprehensive income
    
    
    439
    
    
    
    472Comprehensive income
    
    $
    4,230
    
    
    $
    4,556
  4




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##### Table of Contents



ALTRA INDUSTRIAL MOTION, INC.
 Condensed Consolidated Statements of Cash Flows
Dollars in thousands
(unaudited)
 Quarter EndedMarch 31,2007
    
    2006Cash flows from operating activities:Net income
    
    $
    3,791
    
    
    $
    4,084Adjustments to reconcile net income to cash provided
by (used in) operating activities:Depreciation
    
    
    3,474
    
    
    
    2,200Amortization of intangible assets
    
    
    991
    
    
    
    745Amortization and write-off of deferred loan costs
    
    
    1,076
    
    
    
    178Accretion of debt discount
    
    
    236
    
    
    
    237Loss on foreign currency, net
    
    
    38
    
    
    
    Amortization of inventory fair value adjustment
    
    
    
    
    
    
    984Stock-based compensation
    
    
    257
    
    
    
    65Loss (gain) on sale of fixed assets
    
    
    112
    
    
    
    (6
    )Provision for deferred taxes
    
    
    
    
    
    
    1,094Changes in operating assets and liabilities:Trade receivables
    
    
    (12,282
    )
    
    
    (9,040
    )Inventories
    
    
    (1,024
    )
    
    
    (2,309
    )Accounts payable and accrued liabilities
    
    
    (4,319
    )
    
    
    3,282Other current assets and liabilities
    
    
    1,619
    
    
    
    1,030Other operating assets and liabilities
    
    
    31
    
    
    
    (832
    )Net cash provided by (used in) operating activities
    
    
    (6,000
    )
    
    
    1,712Cash flows from investing activities:Purchases of fixed assets
    
    
    (1,034
    )
    
    
    (1,245
    )Acquisitions, net of $441 of cash acquired
    
    
    
    
    
    
    (50,540
    )Net cash used in investing activities
    
    
    (1,034
    )
    
    
    (51,785
    )Cash flows from financing activities:Proceeds from issuance of senior notes
    
    
    
    
    
    
    57,625Payment of senior notes
    
    
    (22,673
    )
    
    
    Payment of debt issuance costs
    
    
    
    
    
    
    (1,833
    )Payments made on behalf of Parent company, net
    
    
    (1,125
    )
    
    
    (10,475
    )Borrowings under revolving credit agreement
    
    
    520
    
    
    
    5,057Payments on revolving credit agreement
    
    
    (520
    )
    
    
    (5,057
    )Payments of capital leases
    
    
    (250
    )
    
    
    (57
    )Net cash provided by (used) financing activities
    
    
    (24,048
    )
    
    
    45,260Effect of exchange rates on cash
    
    
    113
    
    
    
    75Decrease in cash and cash equivalents
    
    
    (30,969
    )
    
    
    (4,738
    )Cash and cash equivalents, beginning of period
    
    
    42,527
    
    
    
    10,060Cash and cash equivalents, end of period
    
    $
    11,558
    
    
    $
    5,322Cash paid during the period for:Interest
    
    $
    7,844
    
    
    $
    14Income Taxes
    
    $
    6,406
    
    
    $
    184Non-cash financing:Acquisition of capital equipment under capital lease
    
    $
    1,655
    
    
    $
    
  5




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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. Inventories
  March 31,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    30,474
    
    
    $
    29,962Work in process
    
    
    18,963
    
    
    
    19,112Finished goods
    
    
    37,571
    
    
    
    36,85887,008
    
    
    
    85,932LessAllowance for excess, slow-moving and obsolete inventory
    
    
    (10,097
    )
    
    
    (10,163
    )76,911
    
    
    $
    75,769
 4. Goodwill and Intangible Assets
  CostGoodwillBalance December 31, 2006
    
    $
    65,397Impact of additional tax contingencies
    
    
    956Impact of changes in foreign currency
    
    
    186Balance March 31, 2007
    
    $
    66,539
  6




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 March 31, 2007
    
    
    December 31, 2006Accumulated
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Cost
    
    
    AmortizationOther IntangiblesIntangible assets not subject to amortization:Tradenames and trademarks
    
    $
    23,010
    
    
    $
    
    
    
    $
    23,010
    
    
    $
    Intangible assets subject to amortization:Customer relationships
    
    
    37,114
    
    
    
    6,472
    
    
    
    37,114
    
    
    
    5,679Product technology and patents
    
    
    5,232
    
    
    
    1,514
    
    
    
    5,232
    
    
    
    1,316Impact of changes in foreign currency
    
    
    1,440
    
    
    
    
    
    
    
    1,301
    
    
    
    Total intangible assets
    
    $
    66,796
    
    
    $
    7,986
    
    
    $
    66,657
    
    
    $
    6,995
   7




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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
 5. Warranty Costs
  March 31, 2007
    
    
    March 31, 2006Balance at beginning of period
    
    $
    2,083
    
    
    $
    1,876Accrued warranty costs
    
    
    326
    
    
    
    449Payments and adjustments
    
    
    (208
    )
    
    
    (458
    )Balance at end of period
    
    $
    2,201
    
    
    $
    1,867
 6. Income Taxes
 .
     8




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
 7. Pension and Other Employee Benefits
 Defined Benefit (Pension) and Postretirement Benefit Plans
   Pension Benefits
    
    
    Other BenefitsMarch 31, 2007
    
    
    March 31, 2006
    
    
    March 31, 2007
    
    
    March 31, 2006Service cost
    
    $
    65
    
    
    $
    151
    
    
    $
    18
    
    
    $
    84Interest cost
    
    
    336
    
    
    
    334
    
    
    
    49
    
    
    
    150Expected return on plan assets
    
    
    (268
    )
    
    
    (207
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    2
    
    
    
    2
    
    
    
    (243
    )
    
    
    (101
    )Amortization of net (gain) loss
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    17Net periodic benefit cost (income)
    
    $
    135
    
    
    $
    280
    
    
    $
    (229
    )
    
    $
    150
 8. Financing Arrangements
 Revolving Credit Agreement
     Overdraft Agreements
  9% Senior Secured Notes
  9




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
    11.25% Senior Notes
    Mortgage
  
 Capital Leases
  9. Stockholders Equity
  Stock-Based Compensation
  10




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
  10. Related-Party Transactions
 Altra Holdings, Inc.
  Joy Global Sales
  Management Agreement
  11. Concentrations of Credit, Business Risks and Workforce
     12. Geographic Information
  11




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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
  Net SalesQuarter Ended
    
    
    Property, Plant and EquipmentMarch 31,
    
    
    March 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006North America (primarily U.S.)
    
    $
    93,179
    
    
    $
    84,614
    
    
    $
    50,454
    
    
    $
    50,673Europe
    
    
    35,580
    
    
    
    26,230
    
    
    
    29,143
    
    
    
    29,865Asia and other
    
    
    3,947
    
    
    
    3,940
    
    
    
    1,790
    
    
    
    1,849Total
    
    $
    132,706
    
    
    $
    114,784
    
    
    $
    81,387
    
    
    $
    82,387
    13. Commitments and Contingencies
 General Litigation
   14. Restructuring, Asset Impairment and Transition Expenses
    12




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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Dollars in thousands, unless otherwise noted
  Costs incurred
    
    
    Expected coststhrough March
    
    
    through program31, 2007
    
    
    completionMoving and relocation costs
    
    $
    516
    
    
    $
    5Severance
    
    
    82
    
    
    
    31Other
    
    
    86
    
    
    
    30Total expense
    
    $
    684
    
    
    $
    66
  Balance at December 31, 2006
    
    $
    Restructuring expenses incurred
    
    
    793Cash payments
    
    
    (684
    )Non-cash loss on disposal of fixed assets
    
    
    (109
    )Balance at March 31, 2007
    
    $
    
 15. Subsequent Events
    16. Guarantor Subsidiaries
  13




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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
March 31, 2007
 March 31, 2007Issuer
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    11,927
    
    
    $
    (4,592
    )
    
    $
    4,223
    
    
    $
    
    
    
    $
    11,558Trade receivables, less allowance for doubtful accounts
    
    
    
    
    
    
    44,979
    
    
    
    29,267
    
    
    
    
    
    
    
    74,246Loans receivable from related parties
    
    
    10,111
    
    
    
    37,190
    
    
    
    
    
    
    
    (47,301
    )
    
    
    Inventories, less allowances for obsolete materials
    
    
    
    
    
    
    51,854
    
    
    
    25,057
    
    
    
    
    
    
    
    76,911Deferred income taxes
    
    
    
    
    
    
    7,291
    
    
    
    (376
    )
    
    
    
    
    
    
    6,915Prepaid expenses and other
    
    
    
    
    
    
    3,053
    
    
    
    2,877
    
    
    
    
    
    
    
    5,930Total current assets
    
    
    22,038
    
    
    
    139,775
    
    
    
    61,048
    
    
    
    (47,301
    )
    
    
    175,560Property, plant and equipment, net
    
    
    
    
    
    
    48,778
    
    
    
    32,609
    
    
    
    
    
    
    
    81,387Intangible assets, net
    
    
    
    
    
    
    36,096
    
    
    
    22,714
    
    
    
    
    
    
    
    58,810Goodwill
    
    
    
    
    
    
    42,616
    
    
    
    23,923
    
    
    
    
    
    
    
    66,539Deferred income taxes
    
    
    
    
    
    
    2,123
    
    
    
    15
    
    
    
    
    
    
    
    2,138Other assets
    
    
    4,236
    
    
    
    266
    
    
    
    33
    
    
    
    
    
    
    
    4,535Investments in subsidiaries
    
    
    269,151
    
    
    
    
    
    
    
    
    
    
    
    (269,151
    )
    
    
    $
    295,425
    
    
    $
    269,654
    
    
    $
    140,342
    
    
    $
    (316,452
    )
    
    $
    388,969Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    
    395
    
    
    $
    19,337
    
    
    $
    16,580
    
    
    
    
    
    
    $
    36,312Accrued payroll
    
    
    962
    
    
    
    5,043
    
    
    
    5,224
    
    
    
    
    
    
    
    11,229Accruals and other current liabilities
    
    
    6,709
    
    
    
    6,468
    
    
    
    3,078
    
    
    
    
    
    
    
    16,255Taxes payable
    
    
    1,609
    
    
    
    1,509
    
    
    
    739
    
    
    
    
    
    
    
    3,857Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    1,382
    
    
    
    
    
    
    
    1,382Current portion of capital leases and short-term bank
borrowings
    
    
    
    
    
    
    422
    
    
    
    412
    
    
    
    
    
    
    
    834Loans payable from related parties
    
    
    
    
    
    
    
    
    
    
    47,301
    
    
    
    (47,301
    )
    
    
    Total current liabilities
    
    
    9,675
    
    
    
    32,779
    
    
    
    74,716
    
    
    
    (47,301
    )
    
    
    69,869Long-term debt, less current portion
    
    
    202,717
    
    
    
    1,688
    
    
    
    3,008
    
    
    
    
    
    
    
    207,413Deferred income taxes
    
    
    
    
    
    
    (1,095
    )
    
    
    8,286
    
    
    
    
    
    
    
    7,191Pension liabilities
    
    
    
    
    
    
    11,097
    
    
    
    3,408
    
    
    
    
    
    
    
    14,505Other post-retirement benefits
    
    
    
    
    
    
    3,055
    
    
    
    
    
    
    
    
    
    
    
    3,055Other long-term liabilities
    
    
    333
    
    
    
    710
    
    
    
    3,193
    
    
    
    
    
    
    
    4,236Total liabilities
    
    
    212,725
    
    
    
    48,234
    
    
    
    92,611
    
    
    
    (47,301
    )
    
    
    306,269Total stockholders equity
    
    
    82,700
    
    
    
    221,420
    
    
    
    47,731
    
    
    
    (269,151
    )
    
    
    82,700$
    295,425
    
    
    $
    269,654
    
    
    $
    140,342
    
    
    $
    (316,452
    )
    
    $
    388,969
 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
December 31, 2006
 December 31, 2006NonIssuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    41,016
    
    
    $
    (5,488
    )
    
    $
    6,999
    
    
    $
    
    
    
    $
    42,527Trade receivables, less allowance for doubtful accounts
    
    
    
    
    
    
    37,780
    
    
    
    23,726
    
    
    
    
    
    
    
    61,506Loan receivable from related parties
    
    
    9,866
    
    
    
    36,681
    
    
    
    
    
    
    
    (46,547
    )
    
    
    Inventories, less allowances for obsolete materials
    
    
    
    
    
    
    50,573
    
    
    
    25,196
    
    
    
    
    
    
    
    75,769Deferred income taxes
    
    
    
    
    
    
    7,159
    
    
    
    (376
    )
    
    
    
    
    
    
    6,783Prepaid expenses and other
    
    
    1,875
    
    
    
    3,353
    
    
    
    2,340
    
    
    
    
    
    
    
    7,532Total current assets
    
    
    52,757
    
    
    
    130,058
    
    
    
    57,849
    
    
    
    (46,547
    )
    
    
    194,117Property, plant and equipment, net
    
    
    
    
    
    
    48,762
    
    
    
    33,625
    
    
    
    
    
    
    
    82,387Intangible assets, net
    
    
    
    
    
    
    36,708
    
    
    
    22,954
    
    
    
    
    
    
    
    59,662Goodwill
    
    
    
    
    
    
    41,660
    
    
    
    23,737
    
    
    
    
    
    
    
    65,397Deferred income taxes
    
    
    
    
    
    
    2,120
    
    
    
    15
    
    
    
    
    
    
    
    2,135Other assets
    
    
    5,302
    
    
    
    279
    
    
    
    89
    
    
    
    
    
    
    
    5,670Investments in subsidiaries
    
    
    258,221
    
    
    
    
    
    
    
    
    
    
    
    (258,221
    )
    
    
    $
    316,280
    
    
    $
    259,587
    
    
    $
    138,269
    
    
    $
    (304,768
    )
    
    $
    409,368Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    18,316
    
    
    $
    15,737
    
    
    
    
    
    
    $
    34,053Accrued payroll
    
    
    2,469
    
    
    
    9,714
    
    
    
    5,513
    
    
    
    
    
    
    
    17,696Accruals and other current liabilities
    
    
    5,346
    
    
    
    3,428
    
    
    
    2,796
    
    
    
    
    
    
    
    11,570Taxes payable
    
    
    
    
    
    
    1,509
    
    
    
    1,105
    
    
    
    
    
    
    
    6,549Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    1,382
    
    
    
    
    
    
    
    1,382Current portion of long-term debt
    
    
    
    
    
    
    254
    
    
    
    319
    
    
    
    
    
    
    
    573Loans payable from related parties
    
    
    
    
    
    
    
    
    
    
    46,547
    
    
    
    (46,547
    )
    
    
    Total current liabilities
    
    
    11,750
    
    
    
    33,221
    
    
    
    73,399
    
    
    
    (46,547
    )
    
    
    71,823Long-term debt, less current portion
    
    
    225,011
    
    
    
    349
    
    
    
    3,195
    
    
    
    
    
    
    
    228,555Deferred income taxes
    
    
    
    
    
    
    (1,156
    )
    
    
    8,286
    
    
    
    
    
    
    
    7,130Pension liabilities
    
    
    
    
    
    
    11,797
    
    
    
    3,372
    
    
    
    
    
    
    
    15,169Other post-retirement benefits
    
    
    
    
    
    
    3,262
    
    
    
    
    
    
    
    
    
    
    
    3,262Other long-term liabilities
    
    
    
    
    
    
    682
    
    
    
    3,228
    
    
    
    
    
    
    
    3,910Total liabilities
    
    
    236,761
    
    
    
    48,155
    
    
    
    91,480
    
    
    
    (46,547
    )
    
    
    329,849Total stockholders equity
    
    
    79,519
    
    
    
    211,432
    
    
    
    46,789
    
    
    
    (258,221
    )
    
    
    79,519$
    316,280
    
    
    $
    259,587
    
    
    $
    138,269
    
    
    $
    (304,768
    )
    
    $
    409,368
 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 Statements of Operations of the Company
Quarter ended March 31, 2007
 Quarter ended March 31, 2007Non-Issuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    93,624
    
    
    $
    45,538
    
    
    $
    (6,456
    )
    
    $
    132,706Cost of sales
    
    
    
    
    
    
    68,005
    
    
    
    33,109
    
    
    
    (6,456
    )
    
    
    94,658Gross profit
    
    
    
    
    
    
    25,619
    
    
    
    12,429
    
    
    
    
    
    
    
    38,048Selling, general and administrative expenses
    
    
    
    
    
    
    12,656
    
    
    
    8,148
    
    
    
    
    
    
    
    20,804Research and development expenses
    
    
    
    
    
    
    694
    
    
    
    600
    
    
    
    
    
    
    
    1,294Restructuring Charges
    
    
    
    
    
    
    577
    
    
    
    216
    
    
    
    
    
    
    
    793Income from operations
    
    
    
    
    
    
    11,692
    
    
    
    3,465
    
    
    
    
    
    
    
    15,157Interest expense
    
    
    7,175
    
    
    
    33
    
    
    
    1,940
    
    
    
    
    
    
    
    9,148Other non-operating (income) expense, net
    
    
    (36
    )
    
    
    (25
    )
    
    
    14
    
    
    
    
    
    
    
    (47
    )Equity in earnings of subsidiaries
    
    
    10,930
    
    
    
    
    
    
    
    
    
    
    
    (10,930
    )
    
    
    Income before income taxes
    
    
    3,791
    
    
    
    11,684
    
    
    
    1,511
    
    
    
    (10,930
    )
    
    
    6,056Provision for income taxes
    
    
    
    
    
    
    1,696
    
    
    
    569
    
    
    
    
    
    
    
    2,265Net income (loss)
    
    $
    3,791
    
    
    $
    9,988
    
    
    $
    942
    
    
    $
    (10,930
    )
    
    $
    3,791
 Condensed Consolidating Statements of Operations of the Company
Quarter ended March 31, 2006
 Quarter ended March 31, 2006Non-Issuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    84,614
    
    
    $
    33,131
    
    
    $
    (2,961
    )
    
    $
    114,784Cost of sales
    
    
    
    
    
    
    61,691
    
    
    
    24,200
    
    
    
    (2,961
    )
    
    
    82,930Gross profit
    
    
    
    
    
    
    22,923
    
    
    
    8,931
    
    
    
    
    
    
    
    31,854Selling, general and administrative expenses
    
    
    1,005
    
    
    
    11,844
    
    
    
    5,878
    
    
    
    
    
    
    
    18,727Research and development expenses
    
    
    
    
    
    
    666
    
    
    
    538
    
    
    
    
    
    
    
    1,204Income (loss) from operations
    
    
    (1,005
    )
    
    
    10,413
    
    
    
    2,515
    
    
    
    
    
    
    
    11,923Interest expense (income)
    
    
    4,407
    
    
    
    (53
    )
    
    
    822
    
    
    
    
    
    
    
    5,176Other non-operating (income) expense, net
    
    
    
    
    
    
    (110
    )
    
    
    (49
    )
    
    
    
    
    
    
    (159
    )Equity in earnings of subsidiaries
    
    
    9,496
    
    
    
    
    
    
    
    
    
    
    
    (9,496
    )
    
    
    Income before income taxes
    
    
    4,084
    
    
    
    10,576
    
    
    
    1,742
    
    
    
    (9,496
    )
    
    
    6,906Provision for income taxes
    
    
    
    
    
    
    2,011
    
    
    
    811
    
    
    
    
    
    
    
    2,822Net income
    
    $
    4,084
    
    
    $
    8,565
    
    
    $
    931
    
    
    $
    (9,496
    )
    
    $
    4,084
 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 Cash Flows of the Company
Quarter ended March 31, 2007
 Non-Issuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income
    
    $
    3,791
    
    
    $
    9,988
    
    
    $
    942
    
    
    
    (10,930
    )
    
    $
    3,791Undistributed equity in earnings of subsidiaries
    
    
    (10,930
    )
    
    
    
    
    
    
    
    
    
    
    10,930
    
    
    
    Adjustments to reconcile net income to cash provided by
(used in) operating activities:Depreciation
    
    
    
    
    
    
    2,032
    
    
    
    1,442
    
    
    
    
    
    
    
    3,474Amortization of intangible assets
    
    
    
    
    
    
    612
    
    
    
    379
    
    
    
    
    
    
    
    991Amortization and write-off of deferred loan costs
    
    
    1,076
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,076Accretion of debt discount
    
    
    236
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236Loss (gain) on foreign currency
    
    
    286
    
    
    
    
    
    
    
    (248
    )
    
    
    
    
    
    
    38Loss on sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    112Stock based compensation
    
    
    257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    257Changes in operating assets and liabilities:Trade receivables
    
    
    
    
    
    
    (7,199
    )
    
    
    (5,083
    )
    
    
    
    
    
    
    (12,282
    )Inventories
    
    
    
    
    
    
    (1,281
    )
    
    
    257
    
    
    
    
    
    
    
    (1,024
    )Accounts payable and accrued liabilities
    
    
    (3,066
    )
    
    
    (1,517
    )
    
    
    264
    
    
    
    
    
    
    
    (4,319
    )Other current assets and liabilities
    
    
    3,018
    
    
    
    (843
    )
    
    
    (556
    )
    
    
    
    
    
    
    1,619Other operating assets and liabilities
    
    
    (10
    )
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    31Net cash provided by (used in) operating activities
    
    
    (5,342
    )
    
    
    1,833
    
    
    
    (2,492
    )
    
    
    
    
    
    
    (6,000
    )Cash flows from investing activities:Purchases of fixed assets
    
    
    
    
    
    
    (729
    )
    
    
    (305
    )
    
    
    
    
    
    
    (1,034
    )Net cash used in investing activities
    
    
    
    
    
    
    (729
    )
    
    
    (305
    )
    
    
    
    
    
    
    (1,034
    )Cash flows from financing activities:Payments on senior notes
    
    
    (22,673
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,673
    )Borrowings under revolving credit agreements
    
    
    520
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    520Payments on revolving credit agreements
    
    
    (520
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (520
    )Change in affiliate debt
    
    
    (1,074
    )
    
    
    (353
    )
    
    
    302
    
    
    
    
    
    
    
    (1,125
    )Change in capital leases
    
    
    
    
    
    
    145
    
    
    
    (395
    )
    
    
    
    
    
    
    (250
    )Net cash used in financing activities
    
    
    (23,747
    )
    
    
    (208
    )
    
    
    (93
    )
    
    
    
    
    
    
    (24,048
    )Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    113Increase (decrease) in cash and cash equivalents
    
    
    (29,089
    )
    
    
    896
    
    
    
    (2,777
    )
    
    
    
    
    
    
    (30,969
    )Cash and cash equivalents, beginning of the period
    
    
    41,016
    
    
    
    (5,488
    )
    
    
    6,999
    
    
    
    
    
    
    
    42,527Cash and cash equivalents, end of period
    
    
    11,927
    
    
    
    (4,592
    )
    
    
    4,223
    
    
    
    
    
    
    
    11,558
 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 Cash Flows of the Company
Quarter Ended March 31, 2006
 Non-Issuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income
    
    $
    4,084
    
    
    $
    8,565
    
    
    $
    931
    
    
    $
    (9,496
    )
    
    $
    4,084Undistributed equity in earnings of subsidiaries
    
    
    (9,496
    )
    
    
    
    
    
    
    
    
    
    
    9,496
    
    
    
    Adjustments to reconcile net income to cash (used in)
provided by operating activities:Depreciation
    
    
    
    
    
    
    1,555
    
    
    
    645
    
    
    
    
    
    
    
    2,200Amortization of intangible assets
    
    
    
    
    
    
    571
    
    
    
    174
    
    
    
    
    
    
    
    745Amortization of deferred loan costs
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178Accretion of debt discount
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237Amortization of inventory fair value adjustment
    
    
    
    
    
    
    103
    
    
    
    881
    
    
    
    
    
    
    
    984Gain on sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Stock based compensation
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65Provision for deferred taxes
    
    
    
    
    
    
    854
    
    
    
    240
    
    
    
    
    
    
    
    1,094Changes in operating assets and liabilities:Trade receivables
    
    
    
    
    
    
    (6,862
    )
    
    
    (2,178
    )
    
    
    
    
    
    
    (9,040
    )Inventories
    
    
    
    
    
    
    (1,718
    )
    
    
    (591
    )
    
    
    
    
    
    
    (2,309
    )Accounts payable and accrued liabilities
    
    
    4,801
    
    
    
    (1,074
    )
    
    
    (445
    )
    
    
    
    
    
    
    3,282Other current assets and liabilities
    
    
    (369
    )
    
    
    1,633
    
    
    
    (234
    )
    
    
    
    
    
    
    1,030Other operating assets and liabilities
    
    
    1,106
    
    
    
    (289
    )
    
    
    (1,649
    )
    
    
    
    
    
    
    (832
    )Net cash (used in) provided by operating activities
    
    
    606
    
    
    
    3,338
    
    
    
    (2,232
    )
    
    
    
    
    
    
    1,712Cash flows from investing activities:Purchases of fixed assets
    
    
    
    
    
    
    (1,157
    )
    
    
    (88
    )
    
    
    
    
    
    
    (1,245
    )Acquisitions, net of cash acquired
    
    
    
    
    
    
    (5,692
    )
    
    
    (44,848
    )
    
    
    
    
    
    
    (50,540
    )Net cash used in investing activities
    
    
    
    
    
    
    (6,849
    )
    
    
    (44,936
    )
    
    
    
    
    
    
    (51,785
    )Cash flows from financing activities:Proceeds from issuance of senior notes
    
    
    57,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,625Payment of debt issuance costs
    
    
    (1,833
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,833
    )Payments made on behalf of Parent company
    
    
    (10,475
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,475
    )Borrowings under revolving credit agreements
    
    
    5,057
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,057Payments under revolving credit agreements
    
    
    (5,057
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,057
    )Change in affiliate debt
    
    
    (51,954
    )
    
    
    3,480
    
    
    
    48,474
    
    
    
    
    
    
    
    Change in capital leases
    
    
    
    
    
    
    (44
    )
    
    
    (13
    )
    
    
    
    
    
    
    (57
    )Net cash (used in) provided by financing activities
    
    
    (6,637
    )
    
    
    3,436
    
    
    
    48,461
    
    
    
    
    
    
    
    45,260Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    75Increase (decrease) in cash and cash equivalents
    
    
    (6,031
    )
    
    
    (75
    )
    
    
    1,368
    
    
    
    
    
    
    
    (4,738
    )Cash and cash equivalents, beginning of the period
    
    
    8,819
    
    
    
    (2,713
    )
    
    
    3,954
    
    
    
    
    
    
    
    10,060Cash and cash equivalents, end of period
    
    $
    2,788
    
    
    $
    (2,788
    )
    
    $
    5,322
    
    
    $
    
    
    
    $
    5,322
 18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Conditiona 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, 2006. 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, 2006.
 General
  Recent Acquisition
  Critical Accounting Policies
  Recent Accounting Pronouncements
  Non-GAAP Financial Measures
  19




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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 EndedMarch 31,2007
    
    
    2006Net sales
    
    $
    132,706
    
    
    $
    114,784Cost of sales
    
    
    94,658
    
    
    
    82,930Gross profit
    
    
    38,048
    
    
    
    31,854Gross profit percentage
    
    
    28.7
    %
    
    
    27.8
    %Selling, general and administrative expenses
    
    
    20,804
    
    
    
    18,727Research and development expenses
    
    
    1,294
    
    
    
    1,204Restructuring expense
    
    
    793
    
    
    
    Income from operations
    
    
    15,157
    
    
    
    11,923Interest expense
    
    
    9,148
    
    
    
    5,176Other non-operating income
    
    
    (47
    )
    
    
    (159
    )Income before income taxes
    
    
    6,056
    
    
    
    6,906Provision for income taxes
    
    
    2,265
    
    
    
    2,822Net income
    
    $
    3,791
    
    
    $
    4,084
 Quarter Ended March 31, 2007 Compared with Quarter Ended March 31, 2006
 Net sales.
 20




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##### Table of Contents



Gross profit.
 Selling, general and administrative expenses.
 Research and development expenses.
 Restructuring
 EBITDA.
 Interest expense.
 Provision for income taxes.
 Liquidity
and Capital Resources
 Net Cash
     21




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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 .
  22




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
     23




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##### Table of Contents



PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity 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:
 24




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1(1)
    
    Certificate of Incorporation of the Registrant3.3(1)
    
    By-laws of the Registrant4.1(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 trustee.4.2(2)
    
    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
trustee.4.3(3)
    
    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 trustee.4.4(2)
    
    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
trustee.4.5(4)
    
    Fourth Supplemental Indenture, dated as of March 21, 2007,
among Altra Industrial Motion, Inc., the guarantors party
thereto, and The Bank of New York Trust Company, N.A. as
trustee.4.6(5)
    
    Fifth Supplemental Indenture, dated as of April 5, 2007,
among Altra Industrial Motion, Inc., the guarantors party
thereto, and The Bank of New York Trust Company, N.A. as
trustee.4.7(1)
    
    Form of 9% Senior Secured Notes due 2011.4.8(1)
    
    Registration Rights Agreement, dated as of November 30,
2004, among Altra Industrial Motion, Inc., Jefferies &
Company, Inc., and the subsidiary guarantors party thereto.4.9(6)
    
    Registration Rights Agreement, dated as of April 5, 2007,
among Altra Industrial Motion, Inc., Jefferies & Company,
Inc., and the subsidiary guarantors party thereto.4.10(3)
    
    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.4.11(2)
    
    First Supplemental Indenture, dated as of April 24, 2006,
among Altra Industrial Motion, Inc., the guarantors party
thereto, and The Bank of New York as trustee.4.12(4)
    
    Second Supplemental Indenture, dated as of March 26, 2007,
among Altra Industrial Motion, Inc., the guarantors party
thereto, and The Bank of New York, as trustee.4.13(5)
    
    Third Supplemental Indenture, dated as of April 5, 2007,
among Altra Industrial Motion, Inc., the guarantors party
thereto, and The Bank of New York, as trustee.4.14(3)
    
    Form of 111/4% Senior Notes due 2013.4.15(3)
    
    Registration Rights Agreement, dated as of February 8,
2006, among Altra Industrial Motion, Inc., the guarantors
party thereto, and Jefferies International Limited, as
initial purchasers.
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##### Table of Contents



ExhibitNumber
    
    Description10.1(7)
    
    Fourth Amendment to Credit Agreement, dated as of February
16, 2007, among Altra Industrial Motion, Inc., the
financial institutions listed therein, as Lenders, and
Wells Fargo Foothill, Inc.10.2(6)
    
    Fifth Amendment to, and Consent and Waiver under, Credit
Agreement and Joinder to Loan Documents, dated as of April
5, 2007, among Altra Industrial Motion, Inc., the financial
institutions listed therein, as Lenders, and Wells Fargo
Foothill, Inc.31.1*
    
    Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1**
    
    Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2**
    
    Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.**
    
    Furnished herewith.(1)
    
    Incorporated by reference to the Registrants 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 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on May 15, 2006.(3)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 14, 2006.(4)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 26, 2007.(5)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 11, 2007.(6)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-4 (File No.
333-142692-06) filed with the Securities and Exchange Commission on May 8, 2007.(7)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 19, 2007. 26




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SIGNATURES
  ALTRA INDUSTRIAL MOTION, INC.May 15, 2007
    By:
    /s/ Michael L. HurtName:
    Michael L. HurtTitle:
    Chairman and Chief Executive OfficerMay 15, 2007
    By:
    /s/ David WallName:
    David WallTitle:
    Chief Financial Officer 27