KINETEK INC
Not applicable.                                          9
The principal properties of the Company, the location, the primary use, the square feet and the ownership status thereof as of December 31, 2005, are set forth in the table below:                                                Square   Owned/       Lease     Location                  Use             Feet     Leased     Expiration  Des Plaines, IL            Design/            38,000   Leased     March 2007                            Administration Darlington, WI             Manufacturing      68,000   Leased     December 2010 Richland Center, WI        Manufacturing      45,000   Leased     September 2006 Des Plaines, IL            Administration/    63,000   Leased     January 2009                            Manufacturing San Luis Potosi, Mexico    Manufacturing      70,000   Leased     December 2009 Shunde, Guangdong, PRC     Manufacturing/    926,000   Owned                            Administration Akron, OH                  Manufacturing     106,000   Leased     August 2010 Middleport, OH             Manufacturing      85,000   Owned Alamagordo, NM             Manufacturing      40,200   Leased     February 2006 Grand Rapids, MI           Manufacturing/     45,000   Owned                            Administration Perry, OH                  Research &          5,000   Leased     September 2008                            Development Solon, OH                  Manufacturing/     66,500   Leased     November 2008                            Administration Casalmaggiore via          Manufacturing       4,000   Leased     December 2008 Vanoni, Italy Casalmaggiore via          Manufacturing      18,000   Owned Vanoni, Italy Casalmaggiore via          Administration/   189,000   Owned Roma, Italy                Manufacturing Casalmaggiore via          Administration/    52,000   Leased     August 2011 Cazumenta, Italy           Manufacturing Varano, Italy              Manufacturing      97,000   Owned Genova, Italy              Research &         34,000   Leased     July 2008                            Development/                            Manufacturing Syracuse, NY               Manufacturing      18,500   Leased     January 2008 Syracuse, NY               Manufacturing      14,000   Leased     December 2009 Syracuse, NY               Manufacturing/     49,600   Owned                            Administration Eternoz, France            Manufacturing/     19,000   Leased     December 2011                            Administration Putzbrunn, Germany         Warehouse           1,200   Leased     July 2006 Rancho Cordova, CA         Manufacturing/    108,000   Leased     May 2011                            Administration Glendale, NY               Manufacturing/     11,200   Leased     March 2008                            Administration            The Company believes that its existing leased facilities are adequate for the operations of the Company and its subsidiaries. The Company does not believe that any single leased facility is material to its operations and that, if necessary, it could readily obtain a replacement facility.                                          10
Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS          ---------------------------------------------------          No matters were submitted to a vote of security holders during the fiscal year ended December 31, 2005.  PART II
The Company has not declared or paid any cash dividends on its common stock since the Company's formation in September 1995. The Indentures with respect to the 10 3/4% Senior Notes due 2006, the 5% Senior Secured Notes due 2007, and the 10% Senior Secured Notes due 2007 contain restrictions on the Company's ability to declare or pay dividends on its common stock. The Indentures also prohibit the declaration or payment of any dividends or the making of any distribution by the Company or any Restricted Subsidiary (as defined in the Indentures).                                           11
(Dollars in thousands)                              Year Ended December 31,                                      -------------------------------------------------------------------                                           2005          2004         2003         2002         2001                                          ----          ----         ----         ----         ----       Statement of Operations Data:  Net Sales                                $337,524     $313,867     $278,309     $274,818     $278,872 Gross profit, excluding depreciation                               100,559       99,437       94,245       97,272      100,751    Depreciation                               5,377        5,487        6,721        6,577        6,023   Amortization                                 126          134          169          408        8,491   Operating income                          40,652       34,153       30,048       38,347       37,226   Interest expense                          35,739       35,592       34,876       35,231       32,173    Income tax expense                        7,735        6,991        5,721       11,575        4,666   Income (loss) from    continuing    operations                               (3,883)      (7,880)     (10,541)      (7,552)         746  Balance sheet data (at end of period):   Working capital (1)                     (206,284)      65,109       70,503       62,260       66,895   Total assets                             372,072      374,120      362,488      363,506      359,415   Long-term debt   including current   portion                                  319,200      317,068      307,626      309,115      304,905   Stockholder's equity   (net capital   deficiency)                              (32,194)     (25,236)     (15,530)     (14,957)      10,684   (1) During 2005, the majority of our debt became current, causing the working capital to become negative. See Note 8 to the "Notes to the Consolidated Financial Statements".                                          12
Overview           The following discussion and analysis of the Company's results of operations and of its liquidity and capital resources should be read in conjunction with the financial statements and the related notes thereto appearing elsewhere in this annual report.  Forward-Looking Statements           This report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The statement regarding the Company in this document that are not historical in nature, particularly those that utilize terminology such as "may", "will," "should," "likely," "expects," "anticipates," "estimates," "believes" or "plans," or comparable terminology, are forward-looking statements based on current expectations about future events, which the Company has derived from information currently available. These forward-looking statements involve known and unknown risks and uncertainties that may cause our results to be materially different from results implied in such forward-looking statements. Those risks include, among others, risks associated with the industry in which the Company operates, the dependence on senior management, maintaining sufficient working capital financing, competitive pressures, general economic conditions and a softening of consumer acceptance of the Company's products leading to a decrease in anticipated revenue and gross profit margins.  Acquisitions           Information regarding acquisitions made by the Company during the three year period ended December 31, 2005 is included in Note 1 to the Notes to financial statements. The results of acquired operations are included in the Company's consolidated results from the respective date of acquisition.  Consolidated Results of Operations           The following financial information presents the consolidated results of operations of the Company for the years ended December 31, 2005, 2004 and 2003.     (Dollars in thousands)                                       Year Ended December 31,                                             ----------------------------------------------                                                2005              2004           2003                                                ----              ----           ----     Motors                                        $252,128         $230,372       $201,654 Controls                                        85,396           83,495         76,655 Net sales                                     $337,524         $313,867       $278,309  Motors                                         $67,665          $66,421        $63,601 Controls                                        32,894           33,016         30,644 Gross profit (excluding depreciation)         $100,559          $99,437         94,245  Motors                                         $40,495          $36,291        $35,458 Controls                                        13,326           10,571          8,686 Corporate expenses                             (13,169)         (12,709)       (14,096) Operating income                               $40,652          $34,153         30,048  Interest expense                                35,739           35,592         34,876  Gross profit (excluding depreciation) (1)       29.8%            31.7%          33.9% Operating margin (1)                            12.0             10.9           10.8  (1) All margins are calculated as a percentage of net sales.                                             13     Year ended December 31, 2005 compared to year ended December 31, 2004  Consolidated net sales increased $23.6 million, from $313.9 million in 2004 to $337.5 million, an increase of 7.5%. The increased net sales were driven by $10.6 million in sales of new products and net gains in market share compared to the prior year. The full year impact of the Company's 2004 acquisition of O. Thompson (see Note 1 to "Notes to Consolidated Financial Statements") contributed $5.4 million in higher sales. The net impact of improved markets in the Company's principal markets in North America and China, partially offset by weaker markets in Europe, contributed approximately $4.2 million in higher sales. The net impact of price increases and decreases charged to customers added $1.9 million in increased sales. The continued revaluation of the Euro against the dollar during 2005 caused a $1.5 million improvement in sales due to the favorable translation impact on the Company's European business.  Sales in the Company's Motors segment increased from $230.4 million in 2004 to $252.1 million in 2005, a gain of $21.7 million, or 9.4%. Sales of Subfractional motor products were virtually identical with the prior year, as generally improved markets for the Company's main products, the full year impact of an ice crusher product first sold to a major appliance customer in 2004, sales of various new products and the impact of general price increases offset losses of share of vending and refrigeration products and price decreases to refrigeration customers. Both the share losses and price decreases were driven by global competition from the Company's principal rival in these markets. Sales of fractional and integral motors increased $21.7 million, driven by significant gains in share of the North American market for electric golf car motors and gains in the Chinese elevator motor market. General improvement in the Company's North American and Chinese markets, selective price increases passed to customers, and the aforementioned improvement of the Euro all further contributed to the sales increases. These gains were partially offset by weakness in the Company's markets in Europe and share losses in those markets.  Sales in the Company's Controls segment increased from $83.5 million in 2004 to $85.4 million in 2005, an increase of $1.9 million, or 2.3%. The sales growth was driven by the aforementioned full year impact of the Company's 2004 acquisition of O. Thompson (see Note 1 to "Notes to Consolidated Financial Statements"), which contributed $5.4 million in higher sales than in 2004. The ramp up of the Company's recently introduced "I" family of control products added higher sales in the form of higher prices per controller sold in comparison with traditional controller products. These increases were partially offset by a generally weaker market for elevator controllers.  Consolidated operating income increased 19.0%, from $34.2 million in 2004 to $40.7 million for 2005. Consolidated operating income increased from 10.9% of sales in 2004 to 12.0% of sales in 2005. Gross profit increased to $100.6 million in 2005, an increase of 1.1% from $99.4 million achieved in 2004. Gross profit as a percentage of net sales decreased from 31.7% in 2004 to 29.8% in 2005. The increase in gross profit is the result of the sales increases described earlier, partly offset by a number of factors, the most significant of which is inflation. Over the past two years, the Company has experienced severe increases in market prices paid for parts used in the assembly of motors, especially copper, steel, and zinc, and increases in the prices of plastic components and freight and transportation associated with rising global oil prices. Gross margin and gross margin as a percentage of sales are also negatively affected by shifts of product mix, as gains in market share reflected in net sales growth are frequently achieved by competing aggressively on price, diluting the Company's total margin as a percentage of sales.                                         14   Selling, general, and administrative expenses decreased by $5.4 million, from $56.5 million in 2004 to $51.0 million in 2005. This decrease reflects the Company's continued cost reduction activities across its business units; the impact of costs incurred in 2004 associated with the relocation of operations of the Grand Rapids, MI, Des Plaines, IL, and Oakwood Village, OH facilities; the capitalization of certain costs in 2005 for development of software that is central to the Company's "I" family of elevator control products (see Note 2 to "Notes to Consolidated Financial Statements"); and to a reduction of $1.2 million of charges for corporate overhead under the Transition Agreement (see Item 13. "Certain Relationships and Related Transactions").   Year ended December 31, 2004 compared to year ended December 31, 2003  Consolidated net sales increased $35.6 million, from $278.3 million in 2003 to $313.9 million in 2004, a gain of 12.8 %. The increased sales were driven by the introduction of new products and net gains in market share, which contributed approximately $20.0 million, and improvements in the Company's principal markets in North America and Europe, which account for approximately $8.4 million in increased sales. The continued revaluation of the Euro against the dollar during 2004 caused a $4.5 million improvement in sales due to the favorable translation impact on the Company's European businesses. The acquisition of O. Thompson (see Note 1 to "Notes to Consolidated Financial Statements") contributed $4.3 million in sales since the acquisition date. The net impact of increases and decreases in selling prices is estimated to reduce sales from the prior year by approximately $1.6 million, reflecting the competitive global market for the Company's core products.  Sales in the Company's Motors segment increased from $201.7 million in 2003 to $230.4 million in 2004, a gain of $28.7 million, or 14.2%. Subfractional motor sales increased $3.7 million on the strength of an improved market for products used in consumer refrigeration appliances, the partial year impact of a new ice crusher product sold to a major appliance manufacturer, and numerous share gains in smaller product categories. These gains were partly offset by the loss of "value-added subassembly" ice crusher products sold to several key refrigeration customers, for whom the Company continues to supply the ice crusher motor. Sales of fractional and integral motors increased $25.0 million on significant gains in market share and the sale of new products used in commercial floor care, and recovery in the markets for material handling and golf car motor products. The Company's European markets remained difficult during 2004, with sales down 4.6% from 2003, due to general market conditions and the impact of net share losses. The European sales declines were more than offset by the aforementioned increase in sales due to favorable Euro translation. Sales of the Company's products in China have benefited from that country's overall market strength and from share gains in elevator motors as the Company expands its market presence geographically.  Sales in the Company's Controls segment increased $6.8 million, to $83.5 million in 2004, an increase of 8.9% from $76.7 million in the prior year. The increase in sales was led by the inclusion of the partial year sales of O. Thompson (see Note 1 to "Notes to Consolidated Financial Statements"), which contributed $4.3 million in sales. Sales of elevator controls and accessory products increased $2.5 million, led by higher sales of the "I" family of control products, the SmarTraq door operator system, and other non-controller products.  Consolidated operating income increased to $34.2 million in 2004, an increase of $4.1 million, or 13.7%, from $30.0 million in 2003. Gross profit increased to $99.4 million (31.7% of net sales), from the prior year level of $94.2 million, (33.9% of net sales). The increase in gross profit is mainly attributable to the                                         15   increases in sales described above. The impact of higher sales is partly offset by the unfavorable impact of net reductions in selling prices resulting from global market competition (approximately $1.6 million) and higher prices for purchased components and services, particularly steel, copper, zinc, aluminum, and freight. Gross margin as a percentage of sales declined in 2004 due to the impacts of net selling price reductions, purchase cost inflation, and the introduction of certain new products and share gains at competitive margins which are lower than the Company's historical average. Selling, general, and administrative expenses ("SG&A") increased from $54.4 million in 2003 to $56.5 million. SG&A increased modestly in line with the increases in sales, and from costs associated with the relocation of operations of the Grand Rapids, MI, Des Plaines, IL, and Oakwood Village, OH facilities. These increases were offset in part by a $1.3 million reduction of charges under the Transition Agreement (see Item 13 "Certain Relationships and Related Transactions"), and a one-time charge of $1.0 million in 2003 for excess medical claims incurred by the Company's subsidiaries during 2001 and 2002.  Liquidity and Capital Resources           In general, the Company requires liquidity for working capital, capital expenditures, interest, taxes, debt repayment and its acquisition strategy. Of primary importance are the Company's working capital requirements, which increase whenever the Company experiences strong incremental demand or geographical expansion. In the short term, the Company expects to satisfy its liquidity requirements through a combination of funds generated from operating activities and the funds available under the Credit Agreement. As our 10 3/4% Senior Notes mature on November 15, 2006, and the Credit Agreement expires on December 18, 2006, the Company is actively pursuing alternative financing which would satisfy our existing creditors while providing working capital necessary to support ongoing operations and the Company's acquisition strategy. If the Company is unable to refinance or enter into a transaction that allows it to pay off this debt, then there is substantial doubt about the Company's ability to continue as a going concern.           Operating activities. Net cash provided by operating activities for the year ended December 31, 2005 was $5.3 million, compared to $3.3 million used during the year ended December 31, 2004. The improvement in cash from operating activities is mainly a result of the Company's higher operating performance discussed above. In addition, a lesser amount of cash was used in 2005 compared to 2004 for increases in accounts receivable and inventory. These improvements were offset in part by a smaller increase in accounts payable and accrued expenses and other liabilities in 2005 compared to 2004, as well as less cash provided by net change in assets and liabilities from discontinued operations.           Investing activities. Net cash used in investing activities was $4.6, $4.4 and $4.0 million in 2005, 2004 and 2003, respectively. Cash used in investing activities in 2005 and 2004 included $562 and $372, respectively, for the acquisition of the significant net assets of O. Thompson, which is detailed in Note 1 to the Consolidated Financial Statements. The remaining use of cash is related to capital expenditures.           Financing activities. Net cash provided by (used in) financing activities was $1.4, $8.9 and ($1.9) million in 2005, 2004 and 2003 respectively.            The Company's annual cash interest expense on the 10 3/4% Senior Notes, which are due November 15, 2006, is approximately $29.0 million. Interest on the Senior Notes is payable semi-annually on May 15 and November 15 of each year.                                         16            The Company's Loan and Security Agreement "Credit Agreement", is in the form of a revolving credit facility and provides for borrowings of up to $35.0 million to fund acquisitions and provide working capital, and for other general corporate purposes. Borrowings are limited by a borrowing base formula consisting of accounts receivable, inventory, machinery and equipment and real estate. Borrowings bear interest at a rate of prime plus 1.35% (8.4% at December 31, 2005), subject to change based on the Company's interest coverage ratio, as defined. Unused commitments under the revolving credit facility are subject to an availability fee of 0.375% per annum subject to change based on the Company's interest coverage ratio, as defined. Borrowings are secured by the stock and substantially all of the assets of the Company. The Company had $6.1 million of borrowing capacity under the Credit Agreement as of December 31, 2005. The Credit Agreement expires December 18, 2006. The Company intends to replace the credit facility made under the Credit Agreement in 2006, in conjunction with the refinancing of its 10 3/4% Senior Notes, which mature on November 15, 2006. Management is confident such refinancing can be obtained under favorable terms to the Company, however, such terms will be subject to market conditions which may change significantly.           In the short term, the Company expects its principal sources of liquidity to be from funds generated from operating activities and funds available under the Credit Agreement. As our 10 3/4% Senior Notes mature on November 15, 2006, and the Credit Agreement expires on December 18, 2006, the Company is actively pursuing alternative financing which would satisfy our existing creditors while providing working capital necessary to support ongoing operations and the Company's acquisition strategy.  Foreign Currency Impact           The functional currencies of the Company's foreign operations are the local currencies. Accordingly, assets and liabilities of the Company's foreign operations are translated from foreign currencies into U.S. dollars at the exchange rates in effect at the balance sheet date while income and expenses are translated at the weighted-average exchange rates for the year. Adjustments resulting from translation are classified as a component of other comprehensive income, while the remeasurement of intercompany notes receivable denominated in Euros from the Company's Italian operation, are classified as a part of miscellaneous non-operating income/expense.   Seasonality and Inflation           The Company's net sales typically show no significant seasonal variations.           The Company purchases certain raw materials for use in the manufacture of its products, including steel, aluminum, copper, and resin which are generally available from multiple sources with adequate supply. While certain commodities have experienced greater pricing volatility in the past year, the Company has used a number of programs to address this risk such as entering into longer term purchase contracts with suppliers of certain commodities and implementing selling price adjustments over time. The Company believes it is not significantly dependent on a limited number of suppliers and that practices are in place to ensure an adequate supply of raw materials in the future.                                           17    Adoption of Accounting Principles           In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections ("FAS 154"), a replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements ("FAS 3"). FAS 154 replaces the provisions of FAS 3 with respect to reporting accounting changes in interim financial statements. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after June 1, 2005. The Company does not expect SFAS 154 will significantly impact its financial statements upon its adoption on January 1, 2006.   Critical Accounting Policies and Estimates           The Company's significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of this Form 10-K. The Company's discussion and analysis of financial condition and results from operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires the Company's to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an on-going basis, the Company evaluates the estimates that it has made. These estimates have been based upon historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. However, actual results may differ from these estimates under different assumptions or conditions.           The Company believes the following critical accounting policies affect the more significant judgments and estimates the Company's has used in the preparation of the consolidated financial statements.  Goodwill           In accordance with SFAS No. 142, the Company discontinued recording goodwill amortization effective January 1, 2002. SFAS No. 142 prescribes a two-step process for impairment testing goodwill. The first step is to identify when goodwill impairment has occurred by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the second step of the goodwill test should be performed to measure the amount of the impairment loss, if any. In this second step, the implied fair value of the reporting unit's goodwill is compared with the carrying amount of the goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss should be recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. If there is a decrease in product demand, market conditions or any condition that changes the assumptions used to measure fair value it could result in requiring material impairment charge in the future.  Investment in Affiliate           The Company has made a strategic investment in the Preferred Units of JZ International, LLC, an affiliated company. See Note 11 to the consolidated financial statements for details of this investment. These debt securities are not publicly traded on any major exchange. The cost method of accounting is used to account for this investment. The Company will record an impairment charge                                         18   when it believes the investment has experienced a decline in value below its current carrying amount that is other than temporary. Future adverse changes in market conditions or poor operating results could result in losses and/or an inability to recover the carrying value of this investment that may not be reflected in the investment's current carrying value, thereby possibly requiring an impairment charge in the future.  Allowance for Doubtful Accounts           Allowances for doubtful accounts are estimated at the individual operating companies based on estimates of losses on customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers its allowance for doubtful accounts balance to be adequate, changes in economic conditions in specific markets in which the Company operates could have a material effect on future reserve balances required.  Excess and Obsolete Inventory           The Company records reserves for excess and obsolete inventory equal to the difference between the cost of inventory and its estimated market value using assumptions about future product life-cycles, product demand and market conditions. If actual product life-cycles, product demand and market conditions are less favorable than those projected by management, additional inventory reserves may be required.  Income Taxes           As part of the process of preparing our consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company's actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheet. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent it believes that recovery is not likely, The Company must establish a valuation allowance. Increases (decreases) in the valuation allowance are included as an increase (decrease) to the Company's consolidated income tax provision (benefit) in the statement of operations.                                            19      Contractual Obligations  The following table summarizes the Company's contractual obligations as of December 31, 2005 (in thousands):                                                      Payments by Period              -------------------------------------------------------------------------------------------                 Total         2006          2007         2008         2009       2010     Thereafter              -------------------------------------------------------------------------------------------           Long-term        debt    $318,749     $293,078     $ 25,671           -           -          - Interest on   Long-term        Debt      29,469       28,830          636            2           1         -           -     Capital      leases         451          276          148           13          13          1          -   Operating      leases                  13,733        3,168        2,968        2,818       2,273      1,806         700              -------------------------------------------------------------------------------------------        Total   $362,402     $325,352     $ 29,423      $ 2,833      $2,287     $1,807       $ 700              -------------------------------------------------------------------------------------------
The Company is exposed to market risk from changes in foreign currency exchange rates, including fluctuations in the functional currency of foreign operations. The functional currency of operations outside the United States is the respective local currency. Foreign currency translation effects are included in accumulated other comprehensive income in shareholder's equity (net capital deficiency).                                           20
PAGE NO.                                                                        --------  Report of Independent Registered Public Accounting Firm                   22  Consolidated Balance Sheets as of December 31, 2005 and 2004              23  Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003                                          24  Consolidated Statements of Changes in Shareholder's Equity (Net Capital Deficiency) for the years ended December 31, 2005, 2004 and 2003                                                             25  Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                                          26  Notes to Consolidated Financial Statements                                27                                            21                 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   The Board of Directors and Shareholder Kinetek, Inc.   We have audited the accompanying consolidated balance sheets of Kinetek, Inc. as of December 31, 2005 and 2004 and the related consolidated statements of operations, shareholder's equity (net capital deficiency), and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kinetek, Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.  The accompanying financial statements have been prepared assuming that Kinetek, Inc. will continue as a going concern. As more fully described in Note 8, the Company has substantial debt maturing within the next year, which raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.   ERNST & YOUNG LLP   Chicago, Illinois March 15, 2006                                                22       KINETEK, INC.                                      CONSOLIDATED BALANCE SHEETS                                  (ALL DOLLAR AMOUNTS IN THOUSANDS)                                                                                   December 31,                                                                         -------------------------                                                                             2005           2004                                                                            ----           ----    ASSETS Current Assets      Cash and cash equivalents                                            $11,676        $10,863      Accounts receivable, net of allowance of $2,437 and      $4,110 at December 31, 2005 and 2004, respectively                    65,485         62,379      Inventories                                                           54,252         53,658      Prepaid expenses and other current assets                              3,650          4,373      Taxes receivable                                                       1,926          3,631      Assets from discontinued operation                                       415          2,024                                                                         ---------       --------           Total current assets                                            137,404        136,928  Property, plant and equipment, net                                         28,754         29,753 Goodwill                                                                  180,736        181,141 Deferred financing costs, net                                               1,999          4,646 Due from affiliated company                                                 8,504          8,415 Investment in affiliate                                                    12,344         12,344 Other non-current assets                                                    2,331            893                                                                        ----------       --------           Total assets                                                   $372,072       $374,120                                                                        ==========       ========  LIABILITIES AND SHAREHOLDER'S EQUITY (NET CAPITAL DEFICIENCY) Current liabilities:      Accounts payable                                                     $33,715        $33,262      Accrued interest payable                                               4,337          4,109      Accrued expenses and other current liabilities                        12,282         12,941      Current portion of long term debt                                    293,354         20,959      Liabilities from discontinued operation                                   -             548                                                                        ----------       --------           Total current liabilities                                       343,688         71,819  Long term debt                                                             25,846        296,109 Deferred income taxes                                                      29,529         25,801 Other non-current liabilities                                               5,203          5,627  Shareholder's equity (net capital deficiency):      Common stock, $1 par value: authorized - 10,000       shares; issued and outstanding - 100 shares                              -              -      Additional paid-in capital                                            50,006         50,006      Accumulated deficit                                                  (85,455)       (80,238)      Accumulated other comprehensive income                                 3,255          4,996                                                                        ----------       --------      Total shareholder's equity (net capital deficiency)                  (32,194)       (25,236)                                                                        ----------       --------       Total liabilities and shareholder's equity (net      capital deficiency)                                                 $372,072       $374,120                                                                        ==========      =========                         See accompanying notes to consolidated financial statements.                                                      23                                                 KINETEK, INC.                                CONSOLIDATED STATEMENTS OF OPERATIONS                                  (ALL DOLLAR AMOUNTS IN THOUSANDS)                                                                     Year Ended December 31,                                                     --------------------------------------------                                                         2005             2004            2003                                                        ----             ----            ----     Net sales                                            $337,524         $313,867        $278,309 Cost of sales, excluding depreciation                 236,965          214,430         184,064 Selling, general and administrative  expenses, excluding depreciation                      51,038           56,470          54,391 Depreciation and amortization                           5,503            5,621           6,890 Management fees and other                               3,366            3,193           2,916                                                     ----------       ----------      ---------- Operating income                                       40,652           34,153          30,048  Other (income) / expense:       Interest expense                                 35,739           35,592          34,876       Interest income                                    (129)            (169)           (140)       Miscellaneous, net                                1,190             (381)            132                                                     ----------       ----------      ---------- Income (loss) from continuing operations  before income taxes                                    3,852             (889)         (4,820)  Income tax provision                                    7,735            6,991           5,721                                                     ----------       ----------      ----------  Loss from continuing operations                       $(3,883)         $(7,880)       $(10,541)  Income (loss) from discontinued operations,  net of tax                                            (1,334)          (5,856)          1,787                                                     ----------       ----------      ----------  Net loss                                             $ (5,217)        $(13,736)        $(8,754)                                                     ==========       ==========      ==========                                See accompanying notes to consolidated financial statements.                                                  24                                               KINETEK, INC.        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (Net Capital Deficiency)                                 (ALL DOLLAR AMOUNTS IN THOUSANDS)                                          Common Stock                                  ----------------------                        Accumulated                        Total                                                               Additional          Other                       Shareholder's                                   Number of                    Paid-In        Comprehensive     Accumulated    Equity (net                                    Shares       Amount         Capital        (Loss) Income       Deficit        capital)                                  ----------   ---------      ------------     -------------    ------------   -------------        Balance at December 31, 2002          100       $  -          $50,006          $ (7,215)        $ (57,748)     $ (14,957)    Foreign Currency   translation adjustments               -          -                -             8,181                 -          8,181    Net loss                              -          -                -                 -            (8,754)        (8,754)                                                                                                               -------------   Comprehensive loss                    -          -                -                 -                 -           (573)                                  ----------   ---------      ------------     -------------    ------------   -------------   Balance at December 31, 2003          100       $  -          $50,006          $    966         $ (66,502)     $ (15,530)    Foreign currency   translation adjustments               -          -                -             4,030                 -          4,030    Net loss                              -          -                -                 -           (13,736)       (13,736)                                                                                                               -------------   Comprehensive loss                    -          -                -                 -                 -         (9,706)                                  ----------   ---------      ------------     -------------    ------------   -------------  Balance at December 31, 2004          100       $  -          $50,006          $  4,996         $ (80,238)     $ (15,530)    Foreign currency   translation adjustments               -          -                -            (1,741)                -         (1,741)    Net loss                              -          -                -                 -            (5,217)        (5,217)                                                                                                               -------------   Comprehensive loss                    -          -                -                 -                 -         (6,958)                                  ----------   ---------      ------------     -------------    ------------   -------------  Balance at December 31, 2005          100       $  -          $50,006          $  3,255         $ (85,455)     $ (32,194)                                  ==========   =========      ============     =============    ===========    =============  See accompanying notes to consolidated financial statements.                                                    25                                                          KINETEK, INC.                                         CONSOLIDATED STATEMENTS OF CASH FLOWS                                           (ALL DOLLAR AMOUNTS IN THOUSANDS)                                                                                       Year Ended December 31,                                                                        ------------------------------------------------                                                                               2005             2004          2003                                                                              ----             ----          ----     Cash flows from operating activities:         Net loss                                                           $(5,217)        $(13,736)       $(8,754) Adjustments to reconcile net loss to net cash  provided by (used in) operating activities:         Depreciation and amortization                                        5,503            5,621          6,890         Amortization of deferred financing fees          and bond premium                                                    3,167            3,079          2,953         Deferred income taxes                                                3,728            5,249          4,366  Changes in operating assets and liabilities (net  of effects from acquisitions):         Accounts receivable                                                 (3,106)          (7,482)        (3,121)         Inventories                                                           (628)          (5,495)        (4,626)         Prepaid expenses and other current assets                            2,428            2,128         (1,405)         Accounts payable                                                       453            6,518            353         Accrued expenses and other current liabilities                          84           (1,687)         1,069         Net change in assets and liabilities from          discontinued operation                                              1,061            4,749         (5,181)         Non-current assets and liabilities                                  (2,055)            (346)           698         Due from affiliated company                                            (89)          (1,916)           (84)                                                                           ---------       ----------      ---------         Net cash provided by(used in) operating activities                   5,329           (3,318)        (6,842)  Cash flows from investing activities:         Capital expenditures, net                                           (4,067)          (3,998)        (4,033)         Acquisition of subsidiaries, net of cash acquired                     (562)            (372)            -                                                                           ---------       ----------      ---------         Net cash used in investing activities                               (4,629)          (4,370)        (4,033)  Cash flows from financing activities:         Borrowings  on revolving credit  facility, net                       4,728           12,244             -         Repayment of long-term debt                                        (11,848)         (10,818)        (2,811)         Proceeds from issuance of long term debt                             8,556            7,505            874                                                                           ---------     --------------------------         Net cash provided by (used in)financing activities                   1,436            8,931         (1,937)  Effect of exchange rate changes on cash                                     (1,323)           2,661          5,329                                                                           ---------       ----------      ---------  Net increase (decrease) in cash and cash equivalents                           813            3,904         (7,483)  Cash and cash equivalents at beginning of year                              10,863            6,959         14,442                                                                           ---------       ----------      --------- Cash and cash equivalents at end of year                                   $11,676         $ 10,863        $ 6,959                                                                           =========       ==========      =========   Supplemental disclosures of cash flow information: Cash paid during the period for:         Interest                                                           $32,534          $31,871        $32,023         Income taxes                                                         3,766            1,081          2,837 Non cash investing and financing activities:         Capital leases                                                          67               -             142                               See accompanying notes to consolidated financial statements.                                                   26                                       KINETEK, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         (ALL DOLLAR AMOUNTS IN THOUSANDS)   1.       Description of Business and Acquisitions           Kinetek, Inc. "Company", a wholly-owned  subsidiary of Motors and Gears Holdings,  Inc. (Parent), a majority-owned  subsidiary of Jordan Industries, Inc. (JII), operates in the motion control industry.           On September 21, 2004, the Company acquired substantially all of the net assets of O. Thompson, a New York City-based elevator control company. The total acquisition cost was originally $887 which was subsequently adjusted to $853 during the first quarter of 2005. Of the total acquisition price, $372 was paid in cash during the third and fourth quarters of 2004 and the remaining $481 was paid during the first quarter of 2005. Also during 2005, the Company paid an additional $81 in acquisition costs and charged to goodwill. The acquisition has been accounted for using the purchase method of accounting. Accordingly, the operating results of the acquired business have been included in the consolidated operating results of Kinetek since September 1, 2004, the effective date of the acquisition. The operating results of O. Thompson are included with those of Kinetek's wholly-owned subsidiary, Motion Control Engineering, within the "Controls" segment.  2.       Summary of Significant Accounting Policies  Principles of Consolidation           The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. Operations of certain subsidiaries outside the United States are included for periods ending two months prior to the Company's year-end and interim periods to ensure the timely preparation of the Company's consolidated financial statements.  Reclassifications           Certain amounts in the prior years' financial statements have been reclassified to conform to the 2005 presentation.  Cash and Cash Equivalents           Cash equivalents consist of highly liquid investments with an initial maturity of three months or less at the time of purchase.  Accounts Receivable and Allowance for Doubtful Accounts  Allowances for doubtful accounts are estimated at the individual operating companies based on estimates of losses on customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. A receivable is considered past due if payments have not been received within agreed upon invoice terms. Uncollectible receivables are charged against the allowance for doubtful accounts when approved by operating company management after all collection efforts have been exhausted.                                           27    Inventories           Inventories are stated at the lower of cost or market. Inventories, which are valued at either average or first-in, first-out (FIFO) cost, accounted for approximately 80% and 78% of the Company's inventories at December 31, 2005 and 2004, respectively. All other inventories are valued using last-in, first-out (LIFO) cost, which approximated current cost at December 31, 2005 and 2004.  Property, Plant, and Equipment           Property, plant, and equipment are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements and assets under capital leases are amortized using the straight-line method over the shorter of the lease term or their estimated productive lives. Amortization of leasehold improvements and assets under capital leases is included in depreciation expense.           The useful lives of plant and equipment for the purpose of computing book depreciation are as follows:         Buildings                                 5 to 33 years       Machinery and equipment                   3 to 10 years       Dies and tooling                          2 to 5  years       Furniture and fixtures                    3 to 7  years       Vehicles                                  3 to 5  years   Foreign Currency Translation           The functional currencies of the Company's foreign operations are the local currencies. Accordingly, assets and liabilities of the Company's foreign operations are translated from foreign currencies into U.S. dollars at the exchange rates in effect at the balance sheet date while income and expenses are translated at the weighted-average exchange rates for the year. Adjustments resulting from translation are classified as a component of other comprehensive income, while the remeasurement of intercompany notes receivable denominated in Euros from the Company's Italian operation, are classified as a part of miscellaneous non-operating income/expense.  Goodwill and Other Long-Lived Assets           Goodwill represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable assets of businesses acquired and accounted for under the purchase method. Accounting rules require that we test at least annually for possible goodwill impairment. We perform our test in the fourth quarter of each year. The Company determined the fair value of each reporting unit using a discounted cash flow approach taking into consideration projections based on the individual characteristics of the reporting units, historical trends and market multiples for comparable businesses. The cash flow estimates incorporate assumptions on future cash flow growth, terminal values and discount rates. Any such valuation is sensitive to these assumptions.                                          28              Other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the related asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted cash flows expected to be generated by the asset. If the asset is determined to be impaired, the impairment recognized is measured by the amount by which the carrying value of the asset exceeds its fair value.  Deferred Financing Costs           Deferred financing costs are amortized using the straight line method, which approximates the interest method, over the terms of the related loans. Deferred financing costs at December 31, 2005 and 2004 are net of accumulated amortization of $18,939 and $16,292, respectively. Amortization of deferred financing costs is included in interest expense.  Income Taxes           Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. The operating results of the Company and its subsidiaries are included in the consolidated federal income tax return of JII. In addition, the Company and its subsidiaries are party to a tax-sharing agreement with JII. The Company's income tax provision (benefit) has been calculated as if the Company would have filed a separate federal income tax return, except that the Company's net operating losses are eliminated if absorbed in the JII consolidated federal income tax return.  Revenue Recognition           The Company's revenue is derived primarily from product sales. Revenue is recognized in accordance with the terms of the sale, primarily upon shipment to customers, once the sales price is fixed or determinable, and collectibility is reasonably assured. Estimated discounts and rebates are recorded as a reduction of sales in the same period revenue is recognized. Sales returns and allowances are estimated and recorded based upon historical experience. If actual future sales returns and allowances are higher than past experience, additional accruals may be required. If any significant obligations to the customer with respect to such sale remain to be fulfilled following shipment, typically involving obligations relating to installation and acceptance by the buyer, revenue recognition is deferred until such obligations have been fulfilled.   Product Development and Enhancements           Our Controls Group accounts for product development and enhancements in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." SFAS No. 86 specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established and assumptions are used that reflect our best estimates. Unamortized product development costs were $1,255 and $0 as of December 31, 2005 and 2004, respectively.                                           29     Shipping and Handling Costs           Shipping and Handling Costs are included in cost of sales in the statement of operations.  Use of Estimates           The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.  Financial Instruments           The Company's financial instruments include cash equivalents, trade accounts receivable, accounts payable, accrued expenses, the Senior Notes, the Senior Secured Notes, the Subordinated Notes, and the revolving credit facility. Other than the Senior Notes (see Note 8), the fair values of the Company's financial instruments are not materially different from their carrying values at December 31, 2005 and 2004.  Concentration of Credit Risk           Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, accounts receivable and the investment in affiliate (see Note 11). The Company deposits cash and cash equivalents with high-quality financial institutions, which are federally insured up to prescribed limits. Cash balances may exceed these limits at any given time.           The Company closely monitors the credit quality of its customers and maintains allowances for potential credit losses which, historically, have not been significant and have been within the range of management's expectations. The Company generally does not require collateral or other security on trade receivables.  Derivative Financial Instruments           The Company recognizes derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in fair value (i.e., gains or losses) of a derivative financial instrument depends on whether it has been designated and whether it qualifies as part of an effective hedging relationship and, further, on the type of hedging relationship. The fair value of derivative financial instruments was not significant as of December 31, 2005 and 2004.  New Accounting Pronouncements           In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections ("FAS 154"), a replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements ("FAS 3"). FAS 154 replaces the provisions of FAS 3 with respect to reporting accounting changes in interim financial statements. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after June 1, 2005. The Company does not expect SFAS 154 will significantly impact its financial statements upon its adoption on January 1, 2006.                                         30   3.       Inventories           Inventories consist of the following:                                                            December 31,                                                   -----------------------------                                                       2005             2004                                                       ----             ----           Raw materials                              $30,163          $30,509          Work in process                             12,062           11,507          Finished goods                              12,027           11,642                                                    ---------        ---------                                                     $54,252          $53,658                                                    =========        =========   4.       Property, Plant, and Equipment           Property, plant, and equipment consist of the following:                                                             December 31,                                                    ---------------------------                                                       2005            2004                                                       ----            ----           Land, buildings and           leasehold improvements                    $21,905         $21,735          Machinery and equipment                     43,992          40,840          Furniture and fixtures                      13,050          14,094          Other (vehicles, dies           and tooling)                                7,557           7,603                                                    ---------       ---------                                                      86,504          84,272           Less:  Accumulated depreciation           and amortization                          (57,750)        (54,519)                                                    ---------       ---------                                                     $ 28,754        $ 29,753                                                    =========       =========  5.       Short Term Notes Payable           FIR Group Holdings Italia and its subsidiaries, have a number of short-term borrowing facilities available from various banks. The total amount available under these facilities is approximately $15,607 at an average interest rate of 4.0% for the year ending December 31, 2005. There were no outstanding borrowings under these arrangements at December 31, 2005 and 2004. A portion of these facilities are secured by FIR's assets and a portion are in the form of overdraft coverage.                                          31   6.       Discontinued Operation           During 2004, the Company undertook a plan to sell Electrical Design and Control ("ED&C"), a wholly-owned subsidiary.           Summarized selected financial information for the discontinued operation as restated is as follows:                                            2005          2004          2003                                           ----          ----          ---- Revenues                               $  1,079      $  4,640      $  6,358  (Loss)/income from discontinued operations                  (1,334)       (5,856)        1,787   The major classes of assets and liabilities of the discontinued operation is as follows:                                               2005           2004                                              ----           ---- Current assets                               $415         $1,978 Property, plant and equipment                   -             14 Other long term assets                          -             32                                            -------        ------- Total assets                                  415          2,024 Current liabilities                             -            548                                            -------        ------- Net assets of discontinued operations                                 $  415         $1,476                                            -------        -------   On May 2, 2005, the Company sold certain inventory, equipment, intellectual property assets and contracts of ED&C. The sales price was $93.7, which was offset by a $150 payment to the buyer to complete those contracts which were not sold. Therefore, the net proceeds from the sale were ($56.3). The Company no longer has any ownership interest in ED&C, however it will continue to collect on the outstanding receivables which were not sold.  7.       Income Taxes  Income from continuing operations before income taxes and cumulative effect of accounting change was comprised of the following:                                                      Year Ended December 31,                                        -----------------------------------------                                            2005          2004          2003                                            ----          ----          ----           Domestic                        $  (983)      $ (3,447)      $(6,637)          Foreign                           4,835          2,558         1,817                                        ----------    -----------    ----------                                           $ 3,852       $   (889)      $(4,820)                                        ==========    ===========    ==========                                           32     The provision (benefit) for income taxes consists of the following:                                                   Year Ended December 31,                                      -----------------------------------------                                          2005           2004          2003                                          ----           ----          ----  Current:        Federal                          $    -         $    -        $    -        State                                678            610           644        Foreign                            3,311          1,148           593                                        ---------      ---------     ---------         Total current                      3,989          1,758         1,237  Deferred:        Federal                            3,086          3,085         3,151        State                                928            927           867        Foreign                             (268)         1,221           466                                        ---------      ---------     ---------         Total deferred                     3,746          5,233         4,484                                        ---------      ---------     ---------  Income tax provision                    $ 7,735        $ 6,991       $ 5,721                                        =========      =========     =========           The provision (benefit) for income taxes differs from the amount of income tax provision (benefit) computed by applying the U.S. federal income tax rate to income before income taxes and cumulative effect of change in accounting principle. A reconciliation of the differences is as follows:                                                     Year Ended December 31,                                             ------------------------------------                                               2005          2004        2003                                               ----          ----        ----  Computed statutory tax provision            $ 1,348      $  (311)     $(1,687)   Increase/(decrease) resulting from:      State and local taxes, net of      federal benefit                          1,044          999        1,006      Differential in foreign tax      rates and tax credits                      834           49         (481)      Change in valuation allowance           (8,301)       4,772        5,589      Net operating loss reduction             9,349           -            -      Amortization of goodwill                 3,410        3,410        3,414      Other                                       51       (1,928)      (2,120)                                            ---------    ---------    ---------  Income tax provision                        $ 7,735      $ 6,991      $ 5,721                                            =========    =========    =========                                           33    Deferred tax liabilities and assets are comprised of the following:                                                       December 31,                                            --------------------------------                                                2005               2004                                                ----               ---- Deferred tax liabilities:      Goodwill                               $(26,060)         $(22,064)      Foreign deferred taxes                   (3,469)           (3,737)                                            ----------        ----------  Total deferred tax liabilities               (29,529)          (25,801)  Deferred tax assets:      Net operating losses                      7,996            14,584      Property, plant and equipment             4,395             3,925      Intangibles other than goodwill           2,717             3,212      Vacation accrual                            432               531      Employee benefits                           614               848      Uniform capitalization                      423               506      Allowance for doubtful accounts             554               707      Inventory obsolescence reserve              516               459      Warranty reserve                            443               627   Other                                          528             1,520                                            ----------        ----------  Total deferred tax assets                     18,618            26,919 Valuation allowance                          (18,618)          (26,919)                                            ----------        ---------- Net deferred tax liabilities                $(29,529)         $(25,801)                                            ==========        ==========  As of December 31, 2005 there was $22,125 of accumulated unremitted earnings from the Company's foreign subsidiaries on which deferred taxes have not been provided as undistributed earnings on foreign subsidiaries are considered to be indefinitely reinvested.  In 2002, the Company adopted SFAS No. 142, which provides that goodwill no longer be amortized. For tax purposes, goodwill continues to be amortized over a fifteen-year life. As such, the tax amortization generates a temporary difference and a corresponding deferred tax liability arises for financial statement purposes. Because goodwill is no longer amortized for book purposes, the Company cannot determine when the resulting deferred tax liabilities will reverse. Therefore, the Company is not able to utilize any future reversal of the deferred tax liability related to goodwill to support the realization of the deferred tax assets.           As previously noted, the Company and its domestic subsidiaries (Kinetek Group) join in the annual filing of a U.S. federal consolidated income tax return with their ultimate parent company, Jordan Industries, Inc. (Parent). During 2004, Parent realized $90.4 million of cancellation of indebtedness income as a result of modifications to certain of its outstanding debt. However, the Internal Revenue Code provides exceptions to the recognition of certain types of cancellation of indebtedness income for U.S. federal income tax purposes. These exceptions required the Parent and certain subsidiaries, including members of the Kinetek Group, to reduce net operating loss carryforwards. The gross net operating loss carryforward of Kinetek was reduced by $26.7 million.                                           34   9.       Long-Term Debt           Long-term debt consists of the following:                                                                December 31,                                                      --------------------------                                                        2005             2004                                                        ----             ----          10.75% Senior Notes,            including $666 and $1,327            of unamortized premium at            December 31, 2005 and 2004,            respectively (A)                         $270,666         $271,326          Revolving Credit Facility (B)                16,972           12,244          Subordinated Notes Payable (C)                1,500            1,500          Capital leases (D)                              451              615          5.0% Secured Senior Notes,            including $1,433 and $2,358 of            unamortized discount at            December 31, 2005 and 2004,            respectively (E)                           13,567           12,642          10.0% Secured Senior Notes,            including $396 and $652 of            unamortized discount at            December 31, 2005 and 2004,            respectively (E)                           10,604           10,348          Bank loans of foreign subsidiary (F)          4,820            7,506          Loan payable to JV partner (G)                  620              887                                                   -----------      -----------                                                      319,200          317,068          Current Portion                            (293,354)         (20,959)                                                   -----------      -----------                                                      $25,846         $296,109                                                   -----------      -----------  (A)      Interest on the Senior Notes is payable in arrears on May 15 and          November 15 of each year. The Senior Notes are unsecured obligations of          the Company and mature on November 15, 2006. The Senior Notes are          redeemable at the option of the Company, in whole or in part, at any          time on or after November 15, 2001. The Indenture relating to the          Senior Notes contains certain covenants which, among other things,          restrict the ability of the Company to incur additional indebtedness,          to pay dividends or make other restricted payments, engage in          transactions with affiliates, to complete certain mergers or          consolidations, or to enter into certain guarantees of indebtedness.           The fair value of the Senior Notes was approximately $253,800 at          December 31, 2005. The fair value was calculated by multiplying the          face amount by the market price at December 31, 2005.  (B)      The Company's Loan and Security Agreement (Credit Agreement),          expiring the earlier of December 18, 2006, or 30 days prior to          the maturity date of the Senior Notes, is in the form of a revolving          credit facility and provides for borrowings of up to $35,000 to fund          acquisitions and provide working capital, and for other general          corporate purposes. Borrowings are limited by a borrowing base          formula consisting of accounts receivable, inventory, machinery and          equipment and real estate. Borrowings bear interest at a rate of          prime plus 1.35% (8.4% at December 31, 2005), subject to change based          on the Company's interest coverage ratio, as defined. Unused          commitments under the revolving credit facility are subject to an          availability fee of 0.375% per annum subject to change based on the          Company's interest coverage ratio, as defined. Borrowings are secured          by the stock and substantially all of the assets of the Company. The          Company had $6,118 of borrowing capacity under the Credit Agreement          as of December 31, 2005.                                         35            The Credit Agreement contains covenants which, among other things,          provide for a minimum level of interest coverage, as defined, and limit          the Company's ability to incur additional indebtedness, create liens,          make restricted payments, engage in affiliate transactions or mergers          and consolidations, and make asset sales.           The Credit Agreement expires December 18, 2006. The Company intends to          replace the credit facility made under the Credit Agreement in 2006.          Management is confident such refinancing can be obtained under          favorable terms to the Company, however, such terms will be subject to          market conditions which may change significantly.  (C)      The Subordinated Notes Payable at December 31, 2005 consists of a          $1,500 note payable to the former shareholder of Merkle-Korff, a          subsidiary of the Company, and is due on January 1, 2007 and bears          interest at 9% per annum.  (D)      Interest rates on capital leases range from 6.4% to 7.6% and mature          in installments through 2010.           The future minimum lease payments as of December 31, 2005 under capital          leases consist of the following:           2006                                                       $336          2007                                                        143          2008                                                         14          2009                                                         14          2010                                                          1                                                                 --------             Total                                                    508          Less amount representing interest                           (57)                                                                 --------          Present value of future minimum lease payments             $451                                                                 ========           The present value of the future minimum lease payments approximates the          book value of property, plant and equipment under capital leases at          December 31, 2005.  (E)      Interest on the Secured Senior Notes is payable in arrears on May 1 and          November 1 of each year. The Secured Senior Notes are secured          obligations of the Company and mature on April 30, 2007. The Indenture          relating to the Senior Notes contains certain covenants which, among          other things, restricts the ability of the Company to incur additional          indebtedness, to pay dividends or make other restricted payments,          engage in transactions with affiliates, to complete certain mergers or          consolidations, or to enter into certain guarantees of indebtedness.  (F)      One of the Company's foreign subsidiaries has bank loans of $4,820 and          $7,506 as of December 31, 2005 and 2004, respectively. Interest rates          on these loans range from 5.6% to 6.1% and mature in 2006. The Company          plans to renew these loans as they mature.                                         36    (G)      The Company has a loan due to a joint venture partner of one of its          foreign subsidiaries of $620 and $887 as of December 31, 2005 and 2004,          respectively. The interest rate on the loan is 5.6% and matures in          April of 2006.           Aggregate maturities of long-term debt at December 31, 2005 are as          follows:            2006            $293,354           2007              25,819           2008                  13           2009                  13           2010                   1                         -----------                           $319,200                         ===========   As noted above, 92% of the Company's long-term debt matures within the next year. Currently, the Company is contemplating various avenues of refinancing this debt, and Management is confident that it will do so prior to the maturity. If the Company is unable to refinance or enter into a transaction that allows it to pay off this debt, then there is substantial doubt about the Company's ability to continue as a going concern.   10.      Operating Leases           The Company leases certain land, buildings, and equipment under noncancellable operating lease agreements expiring in various years through 2011. Minimum future lease payments, by year, under noncancellable operating leases, including those with related parties (Note 10), are as follows at December 31, 2005:                  2006                      $ 3,168                 2007                        2,968                 2008                        2,818                 2009                        2,273                 2010                        1,806                 Thereafter                    700                                         ----------                                           $13,733                                         ==========           Total rent expense was $3,397, $3,305 and $3,041 for the years ended December 31, 2005, 2004 and 2003, respectively.  11.     Benefit Plans           Certain of the Company's subsidiaries participate in the JII 401(k) Savings Plan (the "Plan"), a defined contribution plan for salaried and hourly employees. In order to participate in the Plan, employees must be at least 21 years old and have worked at least 1,000 hours during the first 12 months of employment. Each eligible employee may contribute from 1% to 15% of their before-tax wages into the Plan. In addition to the JII 401(k) Plan, certain subsidiaries have additional defined contribution plans in which employees may participate. The Company made contributions to these plans totaling approximately $1,293, $1,068 and $1,324 for the years ended December 31, 2005, 2004 and 2003, respectively.           FIR provides for a severance liability for all employees at 7.8% of each respective employee's annual salary. In addition, the amount accrued is adjusted each year according to an official index (equivalent to 0.75% of the retail price index). This obligation is payable to employees when they leave the                                         37   Company and approximated $3,007 and $3,358 at December 31, 2005 and 2004, respectively, which is included in other non-current liabilities in the Company's balance sheets.  12.      Related Party Transactions  Services Agreements.  The Company and each of its subsidiaries are subject to the following four agreements and arrangements with JII:           First, the Company and each of its subsidiaries are parties to a transaction advisory agreement (the "Subsidiary Advisory Agreement") with JII, pursuant to which the Company and its subsidiaries are charged by JII (i) investment banking and sponsorship fees of up to 2.0% of the purchase price of acquisitions, joint ventures, minority investments or sales involving the Company and its subsidiaries or their respective businesses or properties (which were $0, $73 and $0 in 2005, 2004, and 2003, respectively); (ii) financial advisory fees of up to 1.0% of debt, equity, or other financing or refinancing involving the Company or such subsidiary, in each case, arranged with the assistance of JII or its affiliates (which was $0 in 2005, 2004 and 2003, respectively); and (iii) reimbursement for JII's out-of-pocket costs in connection with providing such services (which was $0 in 2005, 2004 and 2003). Mssrs. Jordan, Quinn, Boucher and Zalaznick, directors of Parent, are directors and shareholders of JII.           Second, the Company and each of its subsidiaries are parties to a management consulting agreement (the "Subsidiary Consulting Agreement") with JII, pursuant to which the Company and its subsidiaries pay JII annual consulting fees of the greater of (i) 3.0% of the Company's net income before interest, tax, depreciation and amortization and other non-cash charges, or (ii) 1.0% of the Company's net sales for such services and are required to reimburse JII for its out-of-pocket costs related to its services. Pursuant to the Subsidiary Consulting Agreement, JII (but not JII's affiliates) is obligated to present all acquisition, business and investment opportunities that relate to manufacturing, assembly, distribution or marketing of products and services in the motors, gears and motion control industries to the Company, and JII is not permitted to pursue such opportunities or present them to third parties unless the Company determines not to pursue such opportunities or consents thereto. In accordance with this agreement, the Company paid approximately $3,366, $3,193 and $2,916 for the years ended December 31, 2005, 2004 and 2003, respectively, which are reflected as Management Fees and Other in the Consolidated Statement of Operations.           Third, the Company and each of its subsidiaries are parties to a services agreement (the "JI Properties Services Agreement") with JI Properties, Inc. ("JI Properties"), a subsidiary of JII, pursuant to which JI Properties provides certain real estate and other assets, transportation and related services to the Company. Pursuant to the JI Properties Services Agreement, the Company is charged for its allocable portion of such services based upon its usage of such services and its relative revenues, as compared to JII and its other subsidiaries.           Fourth, the Company and JII are parties to a transition agreement (the "Transition Agreement") pursuant to which JII provides office space and certain administrative and accounting services to the Company to facilitate the operations of the Company. Also, JII allocates its overhead, general and administrative charges and expense among JII and its subsidiaries, including the Company, based on the respective revenues and usage of corporate overhead by JII and its subsidiaries. The Company reimburses JII for services provided pursuant to the Transition Agreement on an allocated cost basis.                                         38            In accordance with the JI Properties Services Agreement and the Transition Agreement, such combined charges were $4,634, $5,807 and $7,084 for the years ended December 31, 2005, 2004 and 2003, respectively, and are reflected within Selling, General, and Administrative expenses in the Consolidated Statement of Operations.           The above agreements expire in December 2011, but are automatically renewed for successive one-year terms, unless either party provides written notice of termination 60 days prior to the scheduled renewal date.           Tax Sharing Agreement. The Company and each of its subsidiaries are parties to a Tax Sharing Agreement (the "Tax Sharing Agreement") between JII and each of its consolidated subsidiaries for U.S. federal income tax purposes. Pursuant to the Tax Sharing Agreement, the Company and each of its consolidated subsidiaries owes to JII an amount determined by reference to each entity's separate return tax liability as defined in Treasury Regulation Section 1.1552- 1(a)(2) (ii). For the years ended December 31, 2005, 2004 and 2003, income tax payments made by the Company to JII under the Tax Sharing Agreement were $0.           Related Party Leases. The Company leases certain plants, warehouses, and offices under leases with affiliated entities. Rent expense, including real estate taxes attributable to these leases, amounted to $1,511, $1,614 and $1,653 for the years ended December 31, 2005, 2004 and 2003, respectively. Future minimum rental payments required under these leases are as follows:                      2006                     $1,589                     2007                      1,364                     2008                      1,220                     2009                      1,184                     2010                      1,184                     Thereafter               $  493        Investment in Affiliate. The Company has a $12,344 investment in the Class A and Class B Preferred Units of JZ International, LLC. These debt securities are not publicly traded and do not have a determinable fair value. The cost method of accounting is used to account for this investment. The Preferred Units have a cumulative 5% annual return. The Class A Preferred Units may be redeemed at any time at the discretion of the Board of Directors of JZ International, but no later than December 31, 2017, whereas the Class B Preferred Units may be redeemed at any time at the discretion of the Board of Directors of JZ International, but no later than December 31, 2018. We will record an impairment charge when we believe the investment has experienced a decline in value below its current carrying amount that is other than temporary. JZ International's Chief Executive Officer is David W. Zalaznick, and its members include Messrs. Jordan, Quinn, Zalaznick and Boucher, who are the Company's and/or Parent's directors and stockholders. JZ International and its subsidiaries are focused on making European and other international investments. The Company is accounting for this investment under the cost method.                                           39              Legal Fees. An individual who is a shareholder, General Counsel and Assistant Secretary of the Parent is also a partner in a law firm used by the Company. The firm was paid $174, $174 and $277 in fees and expenses during the years ended December 31, 2005, 2004 and 2003, respectively. The rates charged to the Company were at arms-length.           Due from Affiliate. The Company has a net receivable from JII of $8,504 and $8,415 at December 31, 2005 and 2004, respectively, that is reflected in the consolidated balance sheets as "due from affiliated company".  13.      Additional Purchase Price Arrangements        Kinetek has a contingent purchase price agreement relating to its acquisition of Motion Control Engineering on December 18, 1997. The terms of this agreement provide for additional consideration to be paid to the sellers. The agreement is exercisable at the sellers' option during a five year period that began in 2003. When exercised, the additional consideration will be based on Motion Control Engineering's operating results over the two preceding fiscal years. Payments, if any, under the contingent agreement will be placed in a trust and paid out in cash over a three or four-year period, in annual installments according to a schedule, which is included in the agreement. Additional consideration, if any, will be recorded as an addition to goodwill.  14.      Segment Data  Description of Segments           The Company operates in two separate business segments; electric motors ("Motors") and electronic motion control systems ("Controls"). The Motors segment consists of subfractional motors, fractional/integral motors, and gears and gearboxes. The Controls segment consists of motion control systems.           The Company's subfractional horsepower products are comprised of motors and gearmotors which power applications up to 30 watts (1/25 horsepower). These small, "fist-size" AC and DC motors are used in light duty applications such as snack and beverage vending machines, refrigerator ice dispensers and photocopy machines.           The Company's fractional/integral horsepower products are comprised of AC and DC motors and gearmotors having power ranges from 1/8 to 300 horsepower. Primary end markets for these motors include commercial floor care equipment, commercial dishwashers, commercial sewing machines, industrial ventilation equipment, golf carts, lift trucks and elevators.           The Company's precision gear and gearbox products are produced in sizes of up to 16 inches in diameter and in various customized configurations such as pump, bevel, worm and helical gears. Primary end markets for these products include original equipment manufacturers ("OEMs") of motors, commercial floor care equipment, aerospace and food processing product equipment.           The Company's motion control systems are used primarily in the elevator modernization market. The systems typically control several components such as electric motors, hydraulic or pneumatic valves, actuators and switches that are required for the elevator systems to function properly.                                            40     Measurement of Segment Operating Income and Segment Assets           The Company evaluates performance and allocates resources based on operating income. The accounting policies of the reportable segments are the same as those described in Note 2, "Summary of Significant Accounting Policies". No single customer accounts for 10% or more of consolidated net sales. Identifiable assets are those used by each segment in its operations. Corporate assets consist primarily of cash, due from affiliate, investment in affiliate and deferred financing fees.                                                                41      Factors Used to Identify the Enterprise's Reportable Segments           The Company's reportable segments are business units that offer different products. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes.     Summary financial information by business segment is as follows:                                                                        Year Ended                                                                      December 31,                                              -----------------------------------------------------                                                  2005                2004              2003                                                  ----                ----              ----     Net Sales Motors                                          $252,128           $230,372          $201,654 Controls                                          85,396             83,495            76,655                                                ----------         ----------        ----------                                                 $337,524           $313,867          $278,309                                                ==========         ==========        ==========  Operating Income and Income (Loss) before Income Tax Motors                                          $ 40,495           $ 36,291          $ 35,458 Controls                                          13,326             10,571             8,686 Corporate Expenses (1)                           (13,169)           (12,709)          (14,096)                                                ----------         ----------        ----------    Total Operating Income                         40,652             34,153            30,048 Interest Expense                                 (35,739)           (35,592)          (34,876) Interest Income                                      129                169               140 Miscellaneous, net                                (1,190)               381              (132)                                                ----------         ----------        ----------    Income (loss)     before Income Tax                           $  3,852           $   (889)         $ (4,820)                                                ==========         ==========        ==========   Identifiable Assets Motors                                          $274,814           $276,007          $263,411 Controls                                          70,573             67,441            65,675 Corporate                                         26,270             28,648            22,651                                                ----------         ----------        ----------                                                 $371,657           $372,096          $351,737                                                ==========         ==========        ==========  Capital Expenditures Motors                                          $  3,757           $  3,516          $  3,240 Controls                                             310                482               793                                                ----------         ----------        ----------                                                 $  4,067           $  3,998          $  4,033                                                ==========         ==========        ==========  Depreciation Motors                                          $  4,448           $  4,281          $  5,235 Controls                                             929              1,206             1,486                                                ----------         ----------        ----------                                                 $  5,377           $  5,487          $  6,721                                                ==========         ==========        ==========  Amortization of Intangibles Motors                                          $    126           $    134          $    169 Controls                                              -                  -                 -                                                ----------         ----------        ----------                                                 $    126           $    134          $    169                                                ==========         ==========        ==========    (1) Fees paid to JII under the Services Agreements (Note 11) are included in corporate expenses.                                          42              Summary financial information by geographic area is as follows:                                                                Year Ended                                                              December 31,                                           -----------------------------------------------                                                2005             2004             2003                                                ----             ----             ----     Net sales to unaffiliated customers North America                               $267,867         $246,865         $229,011 Europe                                        52,948           50,982           42,138 Asia                                          16,709           16,020            7,160                                           -----------      -----------      -----------                                             $337,524         $313,867         $278,309                                           ===========      ===========      ===========  Identifiable long-lived assets (including intangible assets) North America                               $193,588         $193,021         $193,589 Europe                                        14,388           15,500           14,497 Asia                                          16,189           15,610           15,900                                           -----------      -----------      -----------                                             $224,165         $224,131         $223,986                                           ===========      ===========      ===========  15.      Goodwill  On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".  During the fourth quarter of 2005, 2004 and 2003, the Company performed its annual impairment review, all of which resulted in no impairment.  The Company determined the fair value of each reporting unit using a discounted cash flow approach taking into consideration projections based on the individual characteristics of the reporting units, historical trends and market multiples for comparable businesses. The cash flow estimates incorporate assumptions on future cash flow growth, terminal values and discount rates. Any such valuation is sensitive to these assumptions.  The changes in the carrying amount of goodwill for the year ended December 31, 2005 were as follows:                                                 Motors          Controls       Consolidated                                           --------------   --------------   --------------     Balance as of January 1, 2004                $144,491         $ 35,870         $180,361  Impact of foreign exchange   fluctuations                                    780               -               780                                             ----------       ----------       ---------- Balance as of January 1, 2005                $145,271         $ 35,870         $181,141  Purchase price adjustment                          -                81               81  Impact of foreign exchange   fluctuations                                   (486)              -              (486)                                             ----------       ----------       ---------- Balance at December 31, 2005                 $144,785         $ 35,951         $180,736                                             ==========       ==========       ==========                                               43     16.      Legal Proceedings           The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. The Company believes that the final disposition of such matters will not have a material adverse effect on the financial position or results of operations of the Company.  17.      Settlement of Litigation           In June 2003, the Company reached a settlement with the former shareholders of ED&C in which the Company received $1,150 cash, and $3,850 in Subordinated Notes Payable to the ED&C shareholders plus $693 of accrued and unpaid interest was extinguished. The settlement is recognized as income on the Consolidated Statements of Operations within Income (Loss) from discontinued operations, net.  18.      Warranties           The Company provides warranties on certain products for varying lengths of time. The Company estimates the costs that may be incurred and records a liability in the amount of such costs at the time product revenue is recognized. Changes to the Company's product warranty accrual during the year are as follows:                                                     2005        2004                                                 ---------    ---------        Balance, beginning of year                $ 1,934      $ 1,615        Warranties issued                             213          572        Change in estimate                           (537)          -        Settlements                                  (409)        (253)                                                 ---------    ---------        Balance, end of year                      $ 1,201      $ 1,934                                                 ---------    ---------  19.      Research and Development Costs           The Company incurred $4,603, $4,542 and $4,084 of research and development costs during 2005, 2004 and 2003, respectively.                                                 44
Item 9A. CONTROLS AND PROCEDURES          -----------------------          Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-15 of the Securities Exchange Act of 1934 ("Exchange Act") promulgated thereunder, we, with the participation of our chairman and our chief financial officer have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2005. Based on such evaluation, our chairman and our chief financial officer have concluded that our disclosure controls and procedures were effective.           Since December 31, 2005, there have been no changes in the internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part III       -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS          --------------------------------          The following sets forth the names and ages of the Company's directors, executive officers (and those of our Parent) and other key employees and the positions they hold as of the date of this annual report:         Name                     Age           Position with Company      Thomas H. Quinn            58       Chairman of Company and Parent      D. Randall Bays            50       President and Chief Operating Officer                                          of Company and Director of Parent      Daniel D. Drury            44       Chief Financial Officer of Company                                          and Parent      Richard D. Meyer           57       President, Merkle-Korff Industries      Paolo Bergamaschi          36       President, FIR Group      James M. Jackson           46       President, Advanced DC Motors      Jonathan F. Boucher        49       Director of Parent      John W. Jordan, II         58       Director of Company and Parent      David W. Zalaznick         51       Director of Parent      John D. Simms, Sr.         78       Director of Parent  Set forth below is a brief description of the business experience of each director and executive officer of the Company.     Mr. Quinn has served as Chairman of the Company since its inception and President from November 15, 2002 through November 2004. Since 1988, Mr. Quinn is also President, Chief Operating Officer and a director of JII. From November 1985 to December 1987, Mr. Quinn was a Group Vice President for Baxter International, Inc. ("Baxter"). From September 1970 through 1985, Mr. Quinn was employed by American Hospital Supply Corporation ("American Hospital") in a variety of management capacities, where he was a Group Vice President of the Hospital Group and a corporate officer when American Hospital was acquired by Baxter. Mr. Quinn is also Chairman and a member of the board of directors of a number of privately held companies. He is also a senior principal of The Jordan Company.                                         45      Mr. Bays was appointed President and Chief Operating Officer of Kinetek, Inc. in November 2004. As President, Mr. Bays succeeds Thomas H. Quinn, who will continue to be the Company's Chief Executive Officer and a Director. Chief Operating Officer is a newly created post. Since April 1997, Mr. Bays has been President of the Company's Imperial Electric subsidiary, and in January 2003 he was appointed President of the Company's Fractional/Integral Products Group, which is comprised of Imperial Electric, Euclid Universal, Gear Research, Advanced DC Motors, FIR Group, and Kinetek De Sheng. Before joining the Company, Mr. Bays held several senior management positions in General Electric's motor and control business from 1991 to 1997. Prior to that, Mr. Bays held senior management positions in Bomar Aerospace, Inc.     Mr. Drury has served as Chief Financial Officer since April 2000. Prior to joining the Company, Mr. Drury held a succession of financial management positions with various divisions of General Electric from 1982 to 2000, most recently as Finance Manager - Control Products at GE Industrial Systems.     Mr. Meyer joined Merkle-Korff Industries in March 2004 as President and COO and was named President and CEO in November 2004. Prior to joining Merkle-Korff Industries, Mr. Meyer held senior management positions at Regal-Beloit in its Electrical Group from 1998-2004 and at MagneTek from 1981-1997 in its Motor Group. Prior to that Mr. Meyer held various management positions with Franklin Electric and General Electric.     Mr. Bergamaschi has served as the President of FIR since 1998. Prior to that, Mr. Bergamaschi held several management positions within FIR.     Mr. Jackson has served as President of ADC since July 2000. From 1995 until joining ADC, Mr. Jackson held several senior management positions with VAPOR, a division of WABTEC. Prior to that, Mr. Jackson held various management positions at GE, Square D, and a variety of other companies.     Mr. Boucher has served as a director of the Parent since its inception. Since 1983, Mr. Boucher has been a partner of The Jordan Company, a private merchant banking firm. Mr. Boucher is also a director of JII and Jackson Products, Inc. as well as other privately held companies.     Mr. Jordan has served as a director of the Company since its inception. Mr. Jordan is a managing principal of The Jordan Company, a private merchant banking firm which he founded in 1982. Mr. Jordan is also Chairman of the Board of Directors and Chief Executive Officer of JII since 1988. Mr. Jordan is also President of Jordan Zalaznick Advisors, Inc. and TJC Management Corporation, Manager of JZ International, LLC, Managing Partner of Jordan Zalaznick Capital Company and Managing Member of Resolute Fund Partners, LLC. Mr. Jordan is also a director of a number of privately held companies.     Mr. Zalaznick has served as a director of the Parent since June 1997. Since 1982, Mr. Zalaznick has been a managing partner of The Jordan Company. Mr. Zalaznick is also the Managing Member, Chairman of the Management Board and Chief Executive Officer of JZ International, LLC, Managing Member of Resolute Fund Partners, LLC, President of TJC Management Corporation and Chairman of Jordan/Zalaznick Advisors, Inc. and President of Jordan/Zalaznick Capital Company. Mr. Zalaznick is also a director of Sensus Metering Systems, Inc., TAL International Group, Inc., Marisa Christina, Inc. as well as other privately held companies.                                         46      Mr. Simms has served as a director of the Parent since 1998. Mr. Simms was the owner of Merkle-Korff from 1966 until September 22, 1995 when Merkle-Korff was purchased by the Company. Mr. Simms has nearly fifty years of experience in the electric motor business.      Board of Directors        Liability Limitation. The Certificate of Incorporation provides that a director of the Company shall not be personally liable to it or its stockholders for monetary damages to the fullest extent permitted by Delaware Corporation Law. In accordance with Delaware Corporation Law, the Certificate of Incorporation does not eliminate or limit the liability of a director for acts or omissions that involve intentional misconduct by a director or a knowing violation of law by a director for voting or assenting to an unlawful distribution, or for any transaction from which the director will personally receive a benefit in money, property, or services to which the director is not legally entitled. Delaware Corporation Law does not affect the availability of equitable remedies such as an injunction or rescission based upon a director's breach of his duty of care. Any amendment to these provisions of the Delaware Corporation Law will automatically be incorporated by reference into the Certificate of Incorporation and the Bylaws, without any vote on the part of its stockholders, unless otherwise required.        Indemnification Agreements. The Company and each of its directors and certain executive officers have entered into indemnification agreements. The indemnification agreements provide that the Company will indemnify the directors against certain liabilities (including settlements) and expenses actually and reasonably incurred by them in connection with any threatened or pending legal action, proceeding or investigation (other than actions brought by or in the right of the Company) to which any of them is, or is threatened to be, made a party by reason of their status as a director, officer or agent of the Company, or serving at the request of the Company in any other capacity for or on behalf of the Company; provided that (i) such director acted in good faith and in a manner not opposed to the best interest of the Company, (ii) with respect to any criminal proceedings had no reasonable cause to believe his or her conduct was unlawful, (iii) such director is not finally adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Company, unless the court views in light of the circumstances the director is nevertheless entitled to indemnification, and (iv) the indemnification does not relate to any liability arising under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the rules or regulations promulgated thereunder. With respect to any action brought by or in the right of the Company, directors are also indemnified to the extent not prohibited by applicable laws or as determined by a court of competent jurisdiction, against expenses actually and reasonably incurred by them in connection with such action if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Company.           Code of Ethics. The Board of Directors has adopted a Code of Ethics for the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, and other senior financial personnel. A copy of the Code is available on the Company's website at www.kinetekinc.com. The company will disclose any amendments or waivers of the Code of Ethics on the same website.                                         47             Audit Committee. The Company is not a "listed company" under SEC rules and is therefore not required to have an audit committee comprised of independent directors. The Company does not currently have an audit committee and does not have an audit committee financial expert. The Board of Directors has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member's financial sophistication. Accordingly, the Board of Directors believes that each of its members have the sufficient knowledge and experience necessary to fulfill the duties and obligations that an audit committee would have.
Directors of the Parent receive $20,000 per year for serving as a director of the Company. In addition, the Company reimburses directors for their travel and other expenses incurred in connection with attending meetings of the Board of Directors.  Executive Compensation           The following table sets forth a summary of certain information regarding compensation paid or accrued by the Company for services rendered to the Company for the fiscal year ended December 31, 2005 to those persons who were, (i) the Company's chief executive officer and (ii) the Company's most highly compensated executive officers other than the chief executive officer whose total salary and bonus exceeded $100,000 during such period.                                                                                                       Long Term                                                         Annual Compensation                      Compensation                                                         -------------------                      ------------ Name and                                                                   Other Annual              LTIP Principal Position            Year          Salary            Bonus        Compensation(1)          Payouts - ------------------            ----          ------            -----        ---------------          -------       Thomas H. Quinn (2)  Chairman of the  Board and Chief  Executive Officer            2005         $      -         $      -            $    -            $    -                               2004         $      -         $      -            $    -            $    -                               2003         $      -         $      -            $    -            $    -  D. Randall Bays  President and  Chief Operating  Officer                      2005         $ 388,808        $ 110,000           $    -            $ 150,000                               2004         $ 342,019        $ 100,000           $    -            $ 125,000  Daniel D. Drury  Chief Financial  Officer                      2005         $ 210,000        $ 100,000           $    -            $    -                               2004         $ 205,833        $ 55,000            $    -            $    -                               2003         $ 180,000        $                   $    -            $    -  (1)      For the periods indicated, no executive officer named in the table          received any Other Annual Compensation in an amount in excess of the          lesser of either $50,000 or 10% of the total of Annual Salary and          Bonus reported for him in the two preceding columns. (2)      Does not reflect compensation paid to Mr. Quinn by JII.     The Company does not maintain a stock option or stock purchase plan and has not awarded any of its employee's individual stock option grants.                                          48    Compensation Committee Interlock and Insider Participation           The Board of Directors does not maintain a Compensation Committee. During fiscal 2005, however, Messrs. Boucher, Jordan and Quinn participated in deliberations of the Board of Directors concerning executive officer compensation. During 2005, certain of the foregoing executive officers of the Company served and currently serve as directors, executive officers and members of a compensation committee of another entity, one of whose executive officers served and currently serves as a director of the Company.
Amount of Beneficial                                                         Ownership (1)                                             -----------------------------------                                                Number of          Percentage                                                  Shares             Owned Executive Officers and Directors: John W. Jordan II (2) (3) (4) (5)             7,136.8809             7.2 David W. Zalaznick (2) (4) (6)                3,531.2473             3.5 Jonathan F. Boucher (2)                       1,116.5587             1.1 Thomas H. Quinn (2)                           1,799.7294             1.8 D. Randall Bays                                   0.0000             0.0 Daniel D. Drury                                   0.0000             0.0 All directors and executive officers   as a Group (10 persons)                    13,584,4163            13.6  Other Principal Stockholders: Jordan Industries, Inc (7)                   80,000.0000            80.2 Leucadia Investors, Inc.                      2,019.7802             2.0 JII Partners (8)                              1,500.0000             1.5  (1)         Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under             Rule 13d-3(d), shares not outstanding which are subject to options,             warrants, rights or conversion privileges exercisable within 60 days             are deemed outstanding for the purpose of calculating the number and             percentage owned by such person, but not deemed outstanding for the             purpose of calculating the percentage owned by each other person             listed. As of March 31, 2003, there were 99,700 shares of Class A             and Class B common stock issued, including (i) 80,000 shares of             Class A common stock issued and outstanding and (ii) 19,700 shares             of Class B common stock of Parent issued, of which 19,400 shares             were issued and outstanding and 300 shares were issued and held in             treasury.  (2)         Does not include shares of Class B common stock of Parent owned by             JII Partners Limited Partnership as to which the named individuals             disclaim beneficial ownership.  (3)         Includes 0.1650 shares of Class B common stock held personally and             7,136.7159 shares of Class B common stock held by the John W. Jordan             II Revocable Trust. Does not include 51.025 shares of Class B common             stock held by Daly Jordan O'Brien, a sister of Mr. Jordan. 51.025             shares of Class B common stock held by Elizabeth O'Brien Jordan,             also a sister of Mr. Jordan or 51.025 shares of Class B common stock             held by George C. Jordan, Jr., the brother of Mr. Jordan.  (4)         Does not include 16.4973 shares of Class B common stock held by the             Jordan/Zalaznick Capital Company or 577.4053 shares of Class B             common stock held by JZ Equity Partners PLC, a publicly traded U.K.             investment trust advised by an affiliate of The Jordan Company             (which is controlled by Messrs. Jordan and Zalaznick).                                         49   (5)         Does not include  535.8871  shares of Class B common stock held by             The Jordan Family Trust, of which John W. Jordan II, George             C. Jordan, Jr. and G. Robert Fisher are the Trustees.  (6)         Does not include 13.5558 shares of Class B common stock held by             Bruce H. Zalaznick, the brother of Mr. Zalaznick.  (7)         JII owns all of the issued and outstanding of Class A common stock,             which entitles JII to approximately 80% of the voting power as of             the date hereof. The principal address of JII is ArborLake Centre,             Suite 550, 1751 Lake Cook Road, Deerfield, IL 60015.  (8)         JII Partners is an investment partnership whose partners include             certain officers and employees of JII and its affiliates. The             principal address of JI Partners is ArborLake Centre, Suite 550,             1751 Lake Cook Road, Deerfield, IL 60015.  The Company does not maintain any compensation plans under which equity securities are authorized for issuance.
Service Agreements. The Company, our parent, and substantially all of our subsidiaries are parties to a transaction advisory agreement (the "Subsidiary Advisory Agreement") with JII, pursuant to which we and our subsidiaries pay JII (i) investment banking and sponsorship fees of up to 2.0% of the purchase price of acquisitions, joint ventures, minority investments or sales involving us and our subsidiaries or their respective businesses or properties (which were $0, $73 and $0 in 2005, 2004 and 2003 pursuant to this agreement or the predecessor agreement, as applicable); (ii) financial advisory fees of up to 1.0% of any debt, equity or other financing or refinancing involving us or such subsidiary, in each case, arranged with the assistance of JII or its affiliates (which were $0, $0 and $0 in 2005, 2004 and 2003 pursuant to this agreement or the predecessor agreement, as applicable); and (iii) reimbursement of JII's out-of-pocket costs in connection with providing such services (which were $0 in 2005, 2004 and 2003, pursuant to this agreement or the predecessor agreement, as applicable). The amount of such fees payable in each such transaction will be no less favorable to us than those that could be obtained from comparable, unaffiliated third parties. We are not required to pay such fees (a) if and to the extent expressly prohibited by the provisions of any credit or financing arrangements, (b) if we have not paid cash interest on any interest payment date, or (c) we have not paid cash dividends on any dividend payment date or have not made redemptions on any redemption date, as applicable under our certificate of incorporation or other governing documents. Any required payment which is not paid when due shall accrue and bear interest at 10% per annum. If we acquire or create any new subsidiaries, we will cause them to be subject to this agreement. The Subsidiary Advisory Agreement expires in December 2011, but is automatically renewed for successive one-year terms, unless either party provides written notice of termination 60 days prior to the scheduled renewal date. Mssrs. Jordan, Quinn, Boucher and Zalaznick, directors of Holdings, are directors and shareholders of JII.           The Company, our parent and substantially all of our subsidiaries are parties to a management consulting agreement (the "Subsidiary Consulting Agreement"), pursuant to which we pay JII annual consulting fees (directly and through our Parent) of the greater of (i) 3.0% of our net income before interest, tax, depreciation and amortization and other non-cash charges of ours, or (ii) 1.0% of our net sales, and are required to reimburse JII for its out-of-pocket costs related to its services. We are not required to pay such fees (a) if and to the extent expressly prohibited by the provisions of any credit or financing arrangements, (b) if we have not paid cash interest on any interest payment date, or (c) we have not paid cash dividends on any dividend                                         50    payment date or have not made redemptions on any redemption date, as applicable under our certificate of incorporation or other governing documents. Any required payment which is not paid when due shall accrue and bear interest at 10% per annum. If we acquire or create any new subsidiaries, we will cause them to be subject to this agreement. The Subsidiary Consulting Agreement expires in December 2011, but is automatically renewed for successive one-year terms, unless either party provides written notice of termination 60 days prior to the scheduled renewal date. In accordance with this agreement or the predecessor of this agreement pursuant to which we only paid under clause (ii) above, we were charged approximately $3,366, $3,193 and $2,916 for the years ended December 31, 2005, 2004 and 2003, respectively.           The Company, our parent and substantially all of our subsidiaries are parties to a properties services agreement (the "JI Properties Services Agreement") with JI Properties, Inc. ("JI Properties"), a subsidiary of JII, pursuant to which JI Properties provides to us the use of certain real estate and other assets, transportation and related services. Pursuant to the JI Properties Services Agreement, we are charged for our allocable portion of such services based upon (i) our usage of such services and (ii) our relative revenues, as compared to JII and its other subsidiaries. The Company is also required to reimburse JI Properties for all reasonable out of pocket expenses it incurs (unless such expenses are already included in the charges described above).           The Company, our parent and substantially all of our subsidiaries are parties to a transition agreement (the "Transition Agreement") pursuant to which JII provides office space and certain administrative and accounting services to the Company to facilitate the operations of the Company. Also, JII allocates its overhead, general and administrative charges and expense among JII and its subsidiaries, including the Company, based on the respective revenues and usage of corporate overhead by JII and its subsidiaries. The Company reimburses JII for services provided pursuant to the Transition Agreement on an allocated cost basis.           In accordance with the JI Properties Services Agreement and the Transition Agreement, such charges were $4,634, $5,807 and $7,084 for the years ended December 31, 2005, 2004 and 2003, respectively. The JI Properties Services Agreement and the Transition Agreement expires in December 2011, but is automatically renewed for successive one-year terms, unless either party provides written notice of termination 60 days prior to the scheduled renewal date.           Tax Sharing Agreement. The Company and each of its subsidiaries are parties to a Tax Sharing Agreement (the "Tax Sharing Agreement") between JII and each of its consolidated subsidiaries for U.S. Federal income tax purposes. Pursuant to the Tax Sharing Agreement, the Company and each of its consolidated subsidiaries owes to JII an amount determined by reference to each entity's separate return tax liability as defined in Treasury Regulation Section 1.1552-1(a)(2)(ii). For the year ended December 31, 2005 no payments were made by the Company to JII under the Tax Sharing Agreement.           If the Tax Sharing Agreement is terminated, then the Company and its subsidiaries will remain contingently liable to JII under the Tax Sharing Agreement in respect of any increases in their separate return tax liability for periods prior to such termination.           Directors. Directors of the Company, John W. Jordan II, David W. Zalaznick and Thomas H. Quinn each have a beneficial ownership interest of more than 10% of the common stock of Jordan Industries, Inc.                                         51            Investment in Affiliate. The Company has a $12,344 investment in the Class A and Class B Preferred Units of JZ International, LLC. JZ International's Chief Executive Officer is David W. Zalaznick, and its members include Messrs. Jordan, Quinn, Zalaznick and Boucher, who are the Company's directors and stockholders, as well as other members. JZ International and its subsidiaries are focused on making European and other international investments.           Merkle-Korff Leases. Merkle-Korff leases some of its plants, warehouse and offices under a net lease (the "Merkle-Korff Leases") from companies controlled by John Simms, Sr., a Director of the Company. Rent expenses, including real estate taxes attributable to the Merkle-Korff Leases, amounted to $303 for the year ended December 31, 2005. The Company has agreed to pay future minimum rental payments under the Merkle-Korff Leases amounting to approximately $267 for the year ended December 31, 2006. The Company has the right of first refusal to buy these facilities from Mr. Simms. See Note 10 to the Company's Consolidated Financial Statements. The Company believes the terms of the Merkle-Korff Leases are comparable to the terms it would obtain from a non-affiliated party.           Motion Control Leases. Motion Control leases substantially all of its production and office space under noncancellable operating leases from a limited partnership whose partners include officers of Motion Control. These leases expire in 2011. Rent expense under the leases was $1,135 for the year ended December 31, 2005. The Company believes the terms of the Motion Control leases are comparable to the terms it would obtain from a non-affiliated party.           Directors and Officers Indemnification. The Company has entered into indemnification agreements with each member of the Company's Board of Directors and certain executive officers whereby the Company agreed, subject to certain exceptions, to indemnify and hold harmless each director and certain executive officers from liabilities incurred as a result of such person's status as a director or executive officer of the Company. See Item 10, Directors and Executive Officers - Board of Directors - Indemnification Agreements.           Future Transactions. The Company has adopted a policy to provide that all transactions between the Company and its officers, directors and other affiliates must (i) be approved by a majority of the members of the Board of Directors and by a majority of the disinterested members of the Board of Directors and (ii) be on terms no less favorable to the Company than could be obtained from unaffiliated third parties.
2005          2004                                    ----          ---- Audit                             $ 616         $ 646 Tax Fees                             85           298 Audit-Related Fees                    -             -                                  -------       -------   Total                           $ 701         $ 944                                  -------       -------                                           52    Part IV - ------- Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES          ------------------------------------------  Documents filed as part of this report:  (1) Financial Statements     --------------------     Reference is made to the Index to Consolidated Financial Statements     Appearing in Item 8, which Index is incorporated herein by reference.  (2) Financial Statement Schedule     ----------------------------     The following financial statement schedule for the years ended     December 31, 2005, 2004 and 2003 is submitted herewith:                 Item                                            Page Number                ----                                            -----------     Schedule II - Valuation and qualifying accounts                57      All other schedules for which provision is made is in the applicable     accounting regulations of the Securities and Exchange Commission are not     required under the related instructions, are not applicable and therefore     have been omitted, or the information has been included in the consolidated     financial statements or is considered immaterial.   (3) Exhibits      An index to the exhibits required to be listed under this Item 15(a)(3)     follows the "Signatures" section hereof and is incorporated herein by     reference.                                           53                                       SIGNATURES           Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                                               KINETEK, INC.                                                By  /s/ Thomas H. Quinn                                                  ----------------------------- Dated:  March 24, 2006                           Thomas H. Quinn                                                  Chairman of the Board        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.                                               By  /s/ Thomas H. Quinn                                                  ----------------------------- Dated:  March 24, 2006                           Thomas H. Quinn                                                  Chairman of the Board                                               By  /s/ John W. Jordan II                                                  ----------------------------- Dated:  March 24, 2006                           John W. Jordan II                                                  Director                                               By  /s/ Daniel D. Drury                                                  ----------------------------- Dated:  March 24, 2006                           Daniel D. Drury                                                  Chief Financial Officer                                                      54                                      EXHIBIT INDEX   Exhibit Number                             Description - -------                            -----------  2.1      Contingent Earnout Agreement, dated as of November 7, 1996, by and          among Kinetek, Inc., Kinetek Industries, Inc., The New Imperial          Electric Company, The New Scott Motors Company, New Gear Research,          Inc., The Imperial Electric Company, The Scott Motors Company and          Gear Research, Inc. (incorporated by reference to Exhibit 2.2 to          Kinetek, Inc.'s Form S-4 Registration Statement) (File No. 333-19257)          (The "1996 S-4")  2.2      Share Purchase Agreement, dated March 2, 1997, by and among Motors          and Gears Holdings, Inc. and the stockholders of FIR Group Holdings          Italia, S.r.l. (incorporate by reference to exhibit 2.1 to Form 8-K          of Kinetek, Inc., date March 31, 1998)  2.3      Purchase Agreement, dated November 17, 1997, by and among Motion          Holdings, Inc. and the shareholders of Motion Control Engineering,          Inc. (incorporated by reference to exhibit 2.2 to Form 8-K of          Kinetek, Inc., dated March 31, 1998)  2.4      Agreement for purchase and sale of stock of Electrical Design and          Control Company by and among ED&C Holdings, Inc. and the shareholders          of Electrical Design and Control Company, (incorporated by reference          to exhibit 2.3 to Form 8-K of Kinetek, Inc., dated March 31, 1998)  2.5      Share Purchase Agreement, dated April 9, 1998, for the direct and          indirect sale of all the shares of Advanced DC (incorporated by          reference to exhibit 99.1 to Form 8-K of Kinetek, Inc., dated          January 28, 2000)  2.6      Amendment No. 1 to Agreement for Purchase and Sale of Stock, dated          May 15, 1998, for the direct and indirect sale of all the shares of          Advanced DC (incorporated by reference to exhibit 99.2 to Form 8-K of          Kinetek, Inc., dated January 28, 2000)  3.1      Certificate of Amendment of Certificate of Incorporation of Motors          And Gears, Inc. and Certificate of Incorporation of Motors And Gears,          Inc. (incorporated by reference to Exhibit 3.1 to Kinetek Inc.'s Form          10-K Annual Report, dated March 28, 2001)  3.2      Bylaws of Kinetek, Inc. (incorporated by reference to Exhibit 3.2          to the 1996 S-4)  4.1      Indenture, dated November 7, 1996, between Kinetek, Inc. and Fleet          National Bank (incorporated by reference to Exhibit 4.1 to the 1996          S-4)  4.2      First Supplemental Indenture, dated December 17, 1997, between          Kinetek, Inc. and State Street Bank and Trust Company, as Trustee          (incorporated by reference to Kinetek Inc.'s Form S-4 Registration          Statement) (File No. 333-44057) (the "1998 S-4")  4.3      Indenture, dated December 17, 1997, between Kinetek, Inc. and State          Street Bank and Trust Company, as Trustee (incorporated by reference          to Exhibit 4.3 to the 1998 S-4)                                          55   4.4      5% Indenture, dated as of April 12, 2002, among Kinetek Industries,          Inc., U.S. Bank National Association, as Trustee and the Guarantors          listed therein (this Indenture is the same as the 10% Indenture other          than the interest rate) (incorporated by reference to Exhibit 4.4 to          Form 8-K of Kinetek, Inc., dated May 8, 2002)(the "2002 8-K")  4.5      Global 5% Note of Kinetek Industries, Inc. (incorporated by          reference to Exhibit 4.5 to the 2002 8-K)  4.6      Global 10% Note of Kinetek Industries, Inc. (incorporated by          reference to Exhibit 4.5 to the 2002 8-K)  4.7      Registration Rights Agreement, dated as of April 12, 2002, among          Kinetek Industries, Inc., Jefferies & Company, Inc. and the          Guarantors listed therein (incorporated by reference to Exhibit 4.7          to the 2002 8-K)  4.8      Intercreditor Agreement, dated as of April 12, 2002, between U.S.          Bank National Association and Fleet Capital Corporation, as agent          (incorporated by reference to Exhibit 4.8 to the 2002 8-K)  4.9      Security Agreement, dated as of April 12, 2002, between Kinetek          Industries, Inc. and U.S. Bank National Association (incorporated by          reference to Exhibit 4.9 to the 2002 8-K)  4.10     Guarantor Security Agreement, dated as of April 12, 2002, between          Kinetek, Inc. and U.S. Bank National Association (substantially          identical agreements were entered into with 9 subsidiaries that are          also guarantors) (incorporated by reference to Exhibit 4.9 to the          2002 8-K)  4.11     Pledge Agreement, dated as of April 12, 2002, between Kinetek          Industries, Inc. and U.S. Bank National Association (substantially          identical agreements were entered into with Kinetek, Inc. and 3          subsidiaries) (incorporated by reference to Exhibit 4.9 to the 2002          8-K)  4.12     Copyright, Patent and Trademark License Mortgage, dated as of April          12, 2002, between Kinetek, Inc. and U.S. Bank National Association          (substantially identical agreements were entered into with 3          subsidiaries) (incorporated by reference to Exhibit 4.9 to the 2002          8-K)  4.13     Real Property Mortgage, dated as of April 12, 2002, between Advanced          D.C. Motors, Inc. and U.S. Bank National Association (substantially          identical agreements were entered into with 2 other subsidiaries)          (incorporated by reference to Exhibit 4.9 to the 2002 8-K)  10.1     Loan and Security Agreement, dated December 18, 2001 by and among          Kinetek Industries, Inc., the lenders listed thereto and Fleet          Capital Corporation, as Agent (incorporated by reference to Exhibit          10.1 to Form 10-K/A of Kinetek, Inc., dated April 19, 2002  10.2     Consent and Amendment No. 1 to Loan and Security Agreement, dated as          of April 12, 2002, among Kinetek Industries, Inc., the lenders listed          thereon and Fleet Capital Corporation, as agent (incorporated by          reference to Exhibit 10.2 to the 2002 8-K)                                          56   10.3     Management Consulting Agreement, dated December 14, 2001, by and          among Jordan Industries, Inc., the Company and the other signatories          thereto (incorporated by reference to Exhibit 10.2 to Form 10-K of          Kinetek, Inc., dated March 29, 2002 (the "2002 10-K")  10.4     Properties Services Agreement, dated December 14, 2001, by and among          JI Properties, Inc., the Company and the other signatories thereto          (incorporated by reference to Exhibit 10.3 to the 2002 10-K)  10.5     Transaction Advisory Agreement, dated December 14, 2001, by and          among Jordan Industries, Inc., the Company and the other signatories          thereto (incorporated by reference to Exhibit 10.4 to the 2002 10-K)  10.6     Agreement to Join in the Filing of Consolidated Tax Return, dated          December 14, 2001 by and among Jordan Industries, Inc., the Company          and the other signatories thereto (incorporated by reference to          Exhibit 10.5 to the 2002 10-K)  10.7     Transition Agreement, dated July 25, 1997, by and between Motors and          Gears Holdings, Inc. and Jordan Industries, Inc. (incorporated by          reference to Exhibit 10.8 to the 1998 S-4).  10.8     Indemnification Agreement, dated November 7, 1996, between Kinetek,          Inc. and Thomas H. Quinn (incorporated by reference to Exhibit          10.1(a) to the 1998 S-4)  10.9     Indemnification Agreement, dated November 7, 1996, between Kinetek,          Inc. and Jonathan F. Boucher (incorporated by reference to Exhibit          10.1(b) to the 1996 S-4)  10.10    Indemnification Agreement, dated November 7, 1996, between Kinetek,          Inc. and David W. Zalaznick (incorporated by reference to Exhibit          10.1(c) to the 1996 S-4)  10.11    Indemnification Agreement, dated November 7, 1996, between Kinetek,          Inc. and John W. Jordan II (incorporated by reference to Exhibit          10.1(d) to the 1996 S-4)  10.12    Merkle-Korff Industries, Inc. Non-negotiable Subordinated Note in          the principal aggregate amount of $5,000,000 payable to John D. Simms          Revocable Trust Under Agreement (incorporated by reference to Exhibit          10.9 to the 1996 S-4)  10.13    Electrical Design and Control Company, Inc. Non-negotiable          Subordinated Note in the principal aggregate amount of $1,333,333          payable to Tina Levire (incorporated by reference to Exhibit 10.13 to          the 1998 Form S-4)  10.14    Electrical Design and Control Company, Inc. Non-negotiable          Subordinated Note in the principal aggregate amount of $1,333,333          payable to Marta Monson (incorporated by reference to Exhibit 10.14          to the 1998 form S-4)  10.15    Electrical Design and Control Company, Inc. Non-negotiable          Subordinated Note in the principal aggregate amount of $1,333,334          payable to Eric Monson (incorporated by reference to Exhibit 10.15 to          the 1998 form S-4)                                          57   10.16    Industrial Building Leases, each dated as of September 22, 1996, by          and between Merkle-Korff Industries, Inc. and the signatory thereto          (incorporated by reference to Exhibits 10.16 - 10.19 to the 1996 S-4)  10.17    Employment and Non Competition Agreement, dated as of September 22,          1995, by and between Merkle-Korff Industries, Inc. and John D. Simms          (incorporated by reference to Exhibit 10.20 to the 1996 S-4)  10.18    Employment and Non Competition Agreement, dated as of September 22,          1995, by and between Merkle-Korff Industries, Inc. and John W. Brown          (incorporated by reference to Exhibit 10.21 to the 1996 S-4)  12.1*    Computations of the Ratios of Earnings to Fixed Charges  21.1*    Subsidiaries of Kinetek, Inc.  31.1*    Certification of Thomas H. Quinn  31.2*    Certification of Daniel D. Drury  32.1*    Certification of Thomas H. Quinn pursuant to Section 906 of the          Sarbanes Oxley Act of 2002  32.2*    Certification of Daniel D. Drury pursuant to Section 906 of the          Sarbanes Oxley Act of 2002  * filed herewith                                                   58                                                                                                    Schedule II                                                       KINETEK, INC.                                            VALUATION AND QUALIFYING ACCOUNTS                                                 (dollars in thousands)                                                                   Additions                                Balance at        Additions       Charged to     Write Offs                 Balance at                                Beginning           due to        Costs and        Net of                     end of                                of Period        acquisitions      Expenses      Recoveries     Other(1)      Period        December 31, 2005:   Allowance for   doubtful accounts             $4,110                 -              256         (2,162)         233         $ 2,437    Deferred Tax   Valuation   Allowance                    $26,919                 -                -              -       (8,301)        $18,618  December 31, 2004:   Allowance for   doubtful accounts             $4,579                 3              499         (1,056)          88         $ 4,110    Deferred Tax   Valuation   Allowance                    $22,147                 -            4,772              -            -         $26,919  December 31, 2003:   Allowance for   doubtful accounts             $4,327                 3              729           (913)         433         $ 4,579    Deferred Tax   Valuation   Allowance                    $16,558                 -            5,589              -            -         $22,147  (1) Changes in Allowance for doubtful accounts resulting from foreign currency translations. Changes in Deferred Tax Valuation Allowance resulting from decrease in Deferred Tax Asset base.                                                      59     EX-12.1 2 ex-121.txt                                                                      Exhibit 12.1                                   KINETEK, INC.             COMPUTATIONS OF THE RATIOS OF EARNINGS TO FIXED CHARGES             -------------------------------------------------------                             (dollars in thousands)                                                    Year Ended December 31,                                           -------------------------------------                                              2005        2004        2003                                              ----        ----        ----  Fixed Charges      Interest expense                      $35,739      $35,592     $34,876      Rental expense included      in fixed charges                        1,121        1,091       1,004                                           ---------    ---------   ---------         Total fixed charges                 36,860       36,683      35,880   Earnings      Pre-tax income (loss)from      continuing operations                   3,852         (889)     (4,820)      Plus:  fixed charges                   36,860       36,683      35,880                                           ---------    ---------   ---------         Total Earnings                     $40,712      $35,794     $31,060   Ratio of earnings to fixed charges            1.1          1.0         0.9                                               ===          ===         ===          EX-21.1 3 ex-211.txt                                                                      Exhibit 21.1                          MOTORS AND GEARS HOLDINGS, INC.                                  SUBSIDIARIES                                                                   Jurisdiction of Subsidiaries                                                     Incorporation  Kinetek, Inc. (1)                                                   Delaware ArborLake Centre, Suite 550 1751 Lake Cook Road Deerfield, IL 60015  Kinetek Industries, Inc. (2)                                        Delaware ArborLake Centre, Suite 550 1751 Lake Cook Road Deerfield, IL 60015  Merkle-Korff Industries, Inc. (3)                                   Illinois 1776 Winthrop Drive Des Plaines, IL 60015  Merkle-Korff de Mexico S.A. de C.V. (4)                             Mexico Av. C.F.E. No. 830, Parque Industrial Millennium Zona Industrial del Potosi San Luis Potosi, S.L.P. C.P. 78395  The Imperial Electric Company (3)                                   Delaware 1503 Exeter Road Akron, Ohio 44306  Gear Research, Inc. (5)                                             Delaware 4329 Eastern Avenue, S.E. Grand Rapids, Michigan 49508  Motion Holdings, Inc. (3)                                           Delaware ArborLake Centre, Suite 550 1751 Lake Cook Road Deerfield, IL 60015  Motion Control Engineering, Inc. (6)                                California 11380 White Rock Road Rancho Cordova, CA 95742  Old ED&C, Inc. (3)                                                  Delaware 1751 Lake Cook Road Deerfield, IL 60015  Advanced D.C. Holdings, Inc. (3)                                    Delaware ArborLake Centre, Suite 550 1751 Lake Cook Road Deerfield, IL 60015  Advanced Motors & Drives, Inc. (7)                                  New York 6268 East Molloy Road East Syracuse, NY 13057  MW Corporation (8)                                                  Georgia 6268 East Molloy Road East Syracuse, NY 13057       Sermed S.A.R.L. (9)                                                 France Eternoz - 25330 Amancey France  Advanced D.C. Motors GmbH (10)                                      Germany  FIR Group Holdings, Inc. (3)                                        Delaware ArborLake Centre, Suite 550 1751 Lake Cook Road Deerfield, IL 60015  TEA International S.r.l. (11)                                       Italy  SelinSistemi, S.p.A. (12)                                           Italy Via Chiaravagna, 28 16153 Genova-Sestri P  FIR Electromeccanica, S.p.A. (12)                                   Italy Via Roma n. 19 26041 Casalmaggiore  CR  Kinetek Asia Holdings, Inc. (3)                                     Delaware ArborLake Centre, Suite 550 1751 Lake Cook Road Deerfield, IL 60015  Kinetek De Sheng (Foshan) Motors Co., Ltd. (13)                     China No. 82, Jizhou Section Shiliang Road, Lunjiao Town Shunde City, Guangdong Province The People's Republic of China, 528308  KII Canada, Inc. (3)                                                Nova Scotia ArborLake Centre 1751 Lake Cook Road, Suite 550 Deerfield, IL 60015                                                           62   Footnotes   (1)    A wholly owned subsidiary of Motors and Gears Holdings, Inc.  (2)    A wholly owned subsidiary of Kinetek, Inc.  (3)    A wholly owned subsidiary of Kinetek Industries, Inc.  (4)    Merkle-Korff Industries, Inc. owns 99.99% of the capital stock of the        corporation and Kinetek, Inc. owns the remaining capital stock of the        corporation.  (5)    A wholly owned subsidiary of The Imperial Electric Company  (6)    A wholly owned subsidiary of Motion Holdings, Inc.  (7)    A wholly owned subsidiary of Advanced D.C. Holdings, Inc.  (8)    A wholly owned subsidiary of Advanced D.C. Motors, Inc.  (9)    A 99% owned subsidiary of Advanced D.C. Motors, Inc.  (10)   A 90% owned subsidiary of Advanced D.C. Motors, Inc.  (11)   A wholly owned subsidiary of FIR Group Holdings, Inc.  (12)   A wholly owned subsidiary of FIR Group Holdings, Italia, S.r.l.  (13)   A 80% owned subsidiary of Kinetek Asia Holdings, Inc.         EX-31.1 4 ex-311.txt                                                                       Exhibit 31.1                                    CERTIFICATE I, Thomas H. Quinn, certify that:  1.    I have reviewed this annual report on Form 10-K of Kinetek, Inc.;  2.    Based on my knowledge, this annual report does not contain any untrue       statement of a material fact or omit to state a material fact necessary       to make the statements made, in light of the circumstances under which       such statements were made, not misleading with respect to the period       covered by this annual report;  3.    Based on my knowledge, the financial statements, and other financial       information included in this annual report, fairly present in all       material respects the financial condition, results of operations and       cash flows of the registrant as of, and for, the periods presented in       this annual report;  4.    The registrant's other certifying officers and I are responsible for       establishing and maintaining disclosure controls and procedures (as       defined in Exchange Act Rules 13a-15 and 15d-15) for the registrant and       we have:        a)     Designed such disclosure controls and procedures, or caused such              disclosure controls and procedures to be designed under our              supervision, to ensure that material information relating to the              registrant, including its consolidated subsidiaries, is made              known to us by others within those entities, particularly during              the period in which this annual report is being prepared;        b)     Evaluated the effectiveness of the registrant's disclosure              controls and procedures, and presented in this annual report our              conclusions about the effectiveness of the disclosure controls              and procedures, as of the end of the period covered by this              annual report based on such evaluation; and        c)     Disclosed in this annual report any change in the registrant's              internal control over financial reporting that occurred during              the period covered by the annual report that has materially              affected, or is reasonably likely to materially affect, the              registrant's internal control over financial reporting;  5.    The registrant's other certifying officers and I have disclosed, based       on our most recent evaluation of internal control over financial       reporting, to the registrant's auditors and the audit committee of the       registrant's board of directors (or persons performing the equivalent       function):        a)     All significant deficiencies and material weaknesses in the              design or operation of internal controls over financial              reporting which are reasonably likely to adversely affect the              registrant's ability to record, process, summarize and report              financial information; and        b)     Any fraud, whether or not material, that involves management or              other employees who have a significant role in the registrant's              internal controls over financial reporting.  Date:  March 24, 2006                                                      /s/ Thomas H. Quinn                                                     ---------------------------                                                     Name:  Thomas H. Quinn                                                     Title: Chairman      EX-31.2 5 ex-312.txt                                                                      Exhibit 31.2                                    CERTIFICATE I, Daniel D. Drury, certify that:  1.    I have reviewed this annual report on Form 10-K of Kinetek, Inc.;  2.    Based on my knowledge, this annual report does not contain any untrue       statement of a material fact or omit to state a material fact necessary       to make the statements made, in light of the circumstances under which       such statements were made, not misleading with respect to the period       covered by this annual report;  3.    Based on my knowledge, the financial statements, and other financial       information included in this annual report, fairly present in all       material respects the financial condition, results of operations and       cash flows of the registrant as of, and for, the periods presented in       this annual report;  4.    The registrant's other certifying officers and I are responsible for       establishing and maintaining disclosure controls and procedures (as       defined in Exchange Act Rules 13a-15 and 15d-15) for the registrant and       we have:        a)     Designed such disclosure controls and procedures, or caused such              disclosure controls and procedures to be designed under our              supervision, to ensure that material information relating to the              registrant, including its consolidated subsidiaries, is made              known to us by others within those entities, particularly during              the period in which this annual report is being prepared;        b)     Evaluated the effectiveness of the registrant's disclosure              controls and procedures, and presented in this annual report our              conclusions about the effectiveness of the disclosure controls              and procedures, as of the end of the period covered by this              annual report based on such evaluation; and        c)     Disclosed in this annual report any change in the registrant's              internal control over financial reporting that occurred during              the period covered by the annual report that has materially              affected, or is reasonably likely to materially affect, the              registrant's internal control over financial reporting;  5.    The registrant's other certifying officers and I have disclosed, based       on our most recent evaluation of internal control over financial       reporting, to the registrant's auditors and the audit committee of the       registrant's board of directors (or persons performing the equivalent       function):        a)     All significant deficiencies and material weaknesses in the              design or operation of internal controls over financial              reporting which are reasonably likely to adversely affect the              registrant's ability to record, process, summarize and report              financial information; and        b)     Any fraud, whether or not material, that involves management or              other employees who have a significant role in the registrant's              internal controls over financial reporting.  Date:  March 24, 2006                                                /s/ Daniel D. Drury                                               --------------------------------                                               Name:  Daniel D. Drury                                               Title: Chief Financial Officer     EX-32.1 6 ex-321.txt                                                                      Exhibit 32.1                    CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER             PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002           The undersigned, being the Chairman of Kinetek, Inc., an Illinois corporation (the "Registrant"), hereby certifies that the Annual Report on Form 10-K (the "Annual Report") of the Registrant for the year ended December 31, 2005, which accompanies this certification, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m (a)) and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.  Date: March 24, 2006    /s/ Thomas H. Quinn - -------------------- Thomas H. Quinn Chairman          EX-32.2 7 ex-322.txt                                                                       Exhibit 32.2                    CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER             PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002           The undersigned, being the Chief Financial Officer of Kinetek, Inc., an Illinois corporation (the "Registrant"), hereby certifies that the Annual Report on Form 10-K (the "Annual Report") of the Registrant for the year ended December 31, 2005, which accompanies this certification, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m (a)) and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.  Date: March 24, 2006    /s/ Daniel D. Drury - ------------------------- Daniel D. Drury Chief Financial Officer         -----END PRIVACY-ENHANCED MESSAGE-----