**UNITED        STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

________________

 

**FORM        10-Q**

 

| x      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                    SECURITIES EXCHANGE ACT OF 1934**                     |
|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                               |
|   | **For the quarterly period ended September 29,                    2007**                                                           |
|   |                                                                                                                               |
|   | **or**                                                                                                                             |
|   |                                                                                                                               |
| o      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                    SECURITIES EXCHANGE ACT OF 1934**                    |
|   |                                                                                                                               |
|   | **For the transition period from**               **to** |

 

**Commission file number 333-124944**

 

**ALTRA        INDUSTRIAL MOTION, INC.**

(Exact        name of registrant as specified in its charter)

 

| **Delaware**                                                                      | **30-0283143**                       |
|-----------------------------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of incorporation or                    organization) | (I.R.S. Employer Identification No.) |
|                                                                              |                                 |
| **14 Hayward Street, Quincy, Massachusetts**                                      | **02171**                            |
| (Address of principal executive offices)                                          | (Zip Code)                           |

 

 

**(617)        328-3300**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports        required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during        the preceding 12 months (or for such shorter period that the registrant was required to        file such reports), and (2) has been subject to such filing requirements for the past 90        days. Yes  xNoo

 

Indicate by check mark whether the registrant is a large accelerated filer,        an accelerated filer, or a non-accelerated filer. See definition of “accelerated        filer and larger accelerated filer” in Rule 12b-2 of the Exchange Act. (Check        one):

 

| Large Accelerated filer | o | Accelerated Filer | o | Non-accelerated filer                    x |
|-------------------------|---|-------------------|---|--------------------------------------------|

 

| Indicate by check mark whether the registrant is a shell company                    (as defined in Rule 12b-2 of the Exchange Act). Yes | o | No x |
|-----------------------------------------------------------------------------------------------------------------------------------------|---|------|

 

As of November 1, 2007, 1,000 shares of Common Stock, $.001 par value per        share, were outstanding.

 

 

 

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***TABLE OF CONTENTS***

 

|                                                                                                                                      | Page # |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
| PART                    I—FINANCIAL INFORMATION                                                                                     | 2      |
| Item 1. Unaudited                    Condensed Consolidated Financial Statements                                                          | 2      |
| Item 2.                    Management’s Discussion and Analysis of Financial Condition and Results                    of Operations | 23     |
| Item 3. Quantitative                    and Qualitative Disclosures about Market Risk                                                     | 28     |
| Item 4. Controls and                    Procedures                                                                                        | 28     |
|                                                                                                                                      |   |
| PART II—OTHER                    INFORMATION                                                                                        |   |
| Item 1. Legal                    Proceedings                                                                                              | 29     |
| Item 1A. Risk                    Factors                                                                                                  | 29     |
| Item 2. Unregistered                    Sales of Equity Securities and Use of Proceeds                                                    | 29     |
| Item 3. Defaults                    Upon Senior Securities                                                                                | 29     |
| Item 4. Submission                    of Matters to a Vote of Security Holders                                                            | 29     |
| Item 5. Other                    Information                                                                                              | 29     |
| Item 6.                    Exhibits                                                                                                       | 29     |
|                                                                                                                                      |   |
| SIGNATURES                                                                                                                                | 32     |
| EX-31.1 Section 302                    Certification of C.E.O.                                                                            |   |
| EX-31.2 Section 302                    Certification of C.F.O.                                                                            |   |
| EX-32.1 Section 906                    Certification of C.E.O.                                                                            |   |
| EX-32.2 Section 906 Certification of C.F.O.                                                                                               |   |

 

 

1

 

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**PART        I—FINANCIAL INFORMATION**

**Item 1.        Financial Statements**

**ALTRA        INDUSTRIAL MOTION, INC.**

**Condensed Consolidated Balance Sheets**

**Amounts in thousands (except share amounts)**

 

|                                                                                                  |   | **September 29,****2007** |    | **December 31,****2006** |
|-------------------------------------------------------------------------------------------------------|--------|---------------------------|---------|--------------------------|
|                                                                                                  |   | **(unaudited)**           |    |
| Assets                                                                                                |   |                      |    |                     |   |
| Current assets:                                                                                       |   |                      |    |                     |   |
| Cash and cash equivalents                                                                             |   | $                         | 30,034  |                     | $ | 42,527 |   |
| Trade receivables, less allowance for doubtful accounts of                    $1,297 and $2,017       |   |                      | 86,634  |                     |   | 61,506 |   |
| Inventories                                                                                           |   |                      | 107,641 |                     |   | 75,769 |   |
| Deferred income taxes                                                                                 |   |                      | 7,022   |                     |   | 6,783 |   |
| Prepaid expenses and other                                                                            |   |                      | 5,767   |                     |   | 7,532 |   |
| Total current assets                                                                                  |   |                      | 237,098 |                     |   | 194,117 |   |
| Property, plant and equipment, net                                                                    |   |                      | 116,668 |                     |   | 82,387 |   |
| Intangible assets, net                                                                                |   |                      | 99,528  |                     |   | 59,662 |   |
| Goodwill                                                                                              |   |                      | 122,694 |                     |   | 65,397 |   |
| Deferred income taxes                                                                                 |   |                      | 2,380   |                     |   | 2,135 |   |
| Other assets                                                                                          |   |                      | 6,496   |                     |   | 5,670 |   |
| Total assets                                                                                          |   | $                         | 584,864 |                     | $ | 409,368 |   |
| Liabilities and stockholder’s equity                                                            |   |                      |    |                     |   |   |   |
| Current liabilities:                                                                                  |   |                      |    |                     |   |   |   |
| Accounts payable                                                                                      |   | $                         | 40,406  |                     | $ | 34,053 |   |
| Accrued payroll                                                                                       |   |                      | 16,493  |                     |   | 14,071 |   |
| Accruals and other liabilities                                                                        |   |                      | 27,068  |                     |   | 15,195 |   |
| Taxes payable                                                                                         |   |                      | 6,756   |                     |   | 6,549 |   |
| Deferred income taxes                                                                                 |   |                      | 1,382   |                     |   | 1,382 |   |
| Current portion of long-term debt                                                                     |   |                      | 2,433   |                     |   | 573 |   |
| Total current liabilities                                                                             |   |                      | 94,538  |                     |   | 71,823 |   |
| Long-term debt, less current portion and net of unaccreted                    discount and premium    |   |                      | 295,401 |                     |   | 228,555 |   |
| Deferred income taxes                                                                                 |   |                      | 30,077  |                     |   | 7,130 |   |
| Pension liabilities                                                                                   |   |                      | 12,861  |                     |   | 15,169 |   |
| Other post retirement benefits                                                                        |   |                      | 2,863   |                     |   | 3,262 |   |
| Other long term liabilities                                                                           |   |                      | 4,301   |                     |   | 3,910 |   |
| Commitments and Contingencies (See Note 14)                                                           |   |                      | — |                     |   | — |   |
| Stockholder’s equity:                                                                           |   |                      |    |                     |   |   |   |
| Common stock (1,000 shares authorized, issued & outstanding,                    $0.001 par value) |   |                      | — |                     |   | — |   |
| Due to parent                                                                                         |   |                      | 24,341  |                     |   | 24,724 |   |
| Additional paid-in capital                                                                            |   |                      | 97,829  |                     |   | 48,814 |   |
| Retained earnings                                                                                     |   |                      | 21,814  |                     |   | 9,045 |   |
| Accumulated other comprehensive income (loss)                                                         |   |                      | 839     |                     |   | (3,064 | ) |
| Total stockholder’s equity                                                                      |   |                      | 144,823 |                     |   | 79,519 |   |
| Total liabilities and stockholder’s equity                                                      |   | $                         | 584,864 |                     | $ | 409,368 |   |
|                                                                                                       |        |                           |         |                          |  |  |  |  |

 

**See        accompanying notes.**

 

 

2

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Condensed Consolidated Statements of Income and Comprehensive        Income**

**Amounts in thousands**

**(unaudited)**

 

 

|                                                |   | **Quarter Ended****September 29,** |    | **Year to Date Ended****September 29,** |   |
|-----------------------------------------------------|--------|------------------------------------|---------|-----------------------------------------|--------|
|                                                |   | **2007**                           |    | **2006**                                |   | **2007** |   | **2006** |   |
|                                                |   |                               |    |                                    |   |   |   |   |   |   |   |   |   |
| Net sales                                           |   | $                                  | 156,976 |                                    | $      | 112,953 |   | $ | 452,824 |   | $ | 347,511 |   |
| Cost of sales                                       |   |                               | 111,920 |                                    |   | 82,528 |   |   | 323,816 |   |   | 252,959 |   |
| Gross profit                                        |   |                               | 45,056  |                                    |   | 30,425 |   |   | 129,008 |   |   | 94,552 |   |
| Selling, general and administrative expenses        |   |                               | 24,626  |                                    |   | 19,543 |   |   | 70,465 |   |   | 57,364 |   |
| Research and development expenses                   |   |                               | 2,245   |                                    |   | 1,315 |   |   | 5,743 |   |   | 3,807 |   |
| Restructuring charges                               |   |                               | 189     |                                    |   | — |   |   | 1,180 |   |   | — |   |
| Gain on curtailment of post-retirement benefit plan |   |                               | — |                                    |   | (3,838 | ) |   | — |   |   | (3,838 | ) |
| Income from operations                              |   |                               | 17,996  |                                    |   | 13,405 |   |   | 51,620 |   |   | 37,219 |   |
| Interest expense, net                               |   |                               | 11,389  |                                    |   | 6,345 |   |   | 31,229 |   |   | 17,571 |   |
| Other non-operating expense, net                    |   |                               | 298     |                                    |   | 734 |   |   | 374 |   |   | 647 |   |
| Income before income taxes                          |   |                               | 6,309   |                                    |   | 6,326 |   |   | 20,017 |   |   | 19,001 |   |
| Provision for income taxes                          |   |                               | 1,999   |                                    |   | 2,377 |   |   | 7,067 |   |   | 7,051 |   |
| Net income                                          |   | $                                  | 4,310   |                                    | $      | 3,949 |   | $ | 12,950 |   | $ | 11,950 |   |
|                                                |   |                               |    |                                    |   |   |   |   |   |   |   |   |   |
| **Consolidated Statement of Comprehensive Income**  |   |                               |    |                                    |   |   |   |   |   |   |   |   |   |
|                                                |   |                               |    |                                    |   |   |   |   |   |   |   |   |   |
| Foreign currency translation adjustment             |   |                               | 2,643   |                                    |   | 1,465 |   |   | 3,903 |   |   | 3,022 |   |
| Comprehensive income                                |   | $                                  | 6,953   |                                    | $      | 5,414 |   | $ | 16,853 |   | $ | 14,972 |   |
|                                                |   |                               |    |                                    |   |   |   |   |   |   |   |   |   |

 

**See        accompanying notes.**

 

3

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Condensed Consolidated Statements of Cash Flows**

**Dollars in thousands**

**(unaudited)**

 

|                                                                                             |   | **Year to Date Ended**

**September 29,** |
|--------------------------------------------------------------------------------------------------|--------|-------------------------------------------|
|                                                                                             |   | **2007**                                  |   | **2006** |
| **Cash flows from operating activities:**                                                        |   |                                      |   |   |   |   |
| Net income                                                                                       |   | $                                         | 12,950 |   | $ | 11,950 |
| Adjustments to reconcile net income to cash provided by                    operating activities: |   |                                      |   |   |   |   |
| Depreciation                                                                                     |   |                                      | 12,378 |   |   | 7,544 |
| Amortization of intangible assets                                                                |   |                                      | 3,999 |   |   | 2,767 |
| Amortization and write-offs of deferred loan costs                                               |   |                                      | 2,980 |   |   | 694 |
| Loss on foreign currency, net                                                                    |   |                                      | 409 |   |   | 466 |
| Accretion of debt discount and premium, net                                                      |   |                                      | 594 |   |   | 707 |
| Amortization of inventory fair value adjustment                                                  |   |                                      | 651 |   |   | 2,278 |
| Loss (gain) on sale of fixed assets                                                              |   |                                      | 112 |   |   | (14) |
| Stock based compensation                                                                         |   |                                      | 1,092 |   |   | 439 |
| Gain on curtailment of post-retirement benefit plan                                              |   |                                      | — |   |   | (3,838) |
| Provision for deferred taxes                                                                     |   |                                      | — |   |   | 1,527 |
| Changes in operating assets and liabilities:                                                     |   |                                      |   |   |   |   |
| Trade receivables                                                                                |   |                                      | (6,884 | ) |   | (1,945) |
| Inventories                                                                                      |   |                                      | (2,281 | ) |   | (1,763) |
| Accounts payable and accrued liabilities                                                         |   |                                      | (8,402 | ) |   | (8,384) |
| Other current assets and liabilities                                                             |   |                                      | 4,147 |   |   | 159 |
| Other operating assets and liabilities                                                           |   |                                      | 6 |   |   | 343 |
| Net cash provided by operating activities                                                        |   |                                      | 21,751 |   |   | 12,930 |
| **Cash flows from investing activities:**                                                        |   |                                      |   |   |   |   |
| Purchases of fixed assets                                                                        |   |                                      | (6,803 | ) |   | (6,113) |
| Acquisitions, net of $5,522 and $441 of cash acquired                                            |   |                                      | (117,911 | ) |   | (54,302) |
| Net cash used in investing activities                                                            |   |                                      | (124,714 | ) |   | (60,435) |
| **Cash flows from financing activities:**                                                        |   |                                      |   |   |   |   |
| Capital contribution from Parent Company                                                         |   |                                      | 49,015 |   |   | — |
| Proceeds from issuance of senior notes                                                           |   |                                      | — |   |   | 57,625 |
| Proceeds from issuance of senior secured notes                                                   |   |                                      | 106,050 |   |   | — |
| Payment of debt issuance costs                                                                   |   |                                      | (3,692 | ) |   | (2,506) |
| Payments on senior notes                                                                         |   |                                      | (58,428 | ) |   | — |
| Borrowings under revolving credit agreement                                                      |   |                                      | 8,315 |   |   | 5,057 |
| Payments on revolving credit agreement                                                           |   |                                      | (9,847 | ) |   | (5,057) |
| Payments made on behalf of Parent Company, net                                                   |   |                                      | (1,475 | ) |   | (14,580) |
| Proceeds from mortgages                                                                          |   |                                      | — |   |   | 2,510 |
| Payments on mortgage                                                                             |   |                                      | (178 | ) |   | — |
| Payments on capital leases                                                                       |   |                                      | (534 | ) |   | (106) |
| Net cash provided by financing activities                                                        |   |                                      | 89,226 |   |   | 42,943 |
| Effect of exchange rates on cash                                                                 |   |                                      | 1,244 |   |   | 262 |
| Decrease in cash and cash equivalents                                                            |   |                                      | (12,493 | ) |   | (4,300) |
| Cash and cash equivalents, beginning of period                                                   |   |                                      | 42,527 |   |   | 10,060 |
| Cash and cash equivalents, end of period                                                         |   | $                                         | 30,034 |   | $ | 5,760 |
| **Cash paid during the period for:**                                                             |   |                                      |   |   |   |   |
| Interest                                                                                         |   | $                                         | 24,076 |   | $ | 12,997 |
| Income Taxes                                                                                     |   | $                                         | 10,338 |   | $ | 2,160 |
| **Non-Cash Financing:**                                                                          |   |                                      |   |   |   |   |
| Acquisition of capital equipment under capital lease                                             |   | $                                         | 1,655 |   | $ | 404 |

**See        accompanying notes.**

 

4

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

 

**1. Organization and        Nature of Operations**

        Headquartered in Quincy, Massachusetts, Altra Industrial Motion, Inc. (“the        Company”), is a leading multi-national designer, producer and marketer of a wide        range of mechanical power transmission products. The Company brings together strong brands        covering over 40 product lines with production facilities in nine countries and sales        coverage in over 70 countries. The Company’s leading brands include Boston Gear,        Warner Electric, TB Wood’s, Formsprag Clutch, Ameridrives Couplings, Industrial        Clutch, Kilian Manufacturing, Marland Clutch, Nuttall Gear, Stieber Clutch, Wichita Clutch,        Twiflex Limited, Bibby Transmissions, Matrix International, Inertia Dynamics, Huco Dynatork        and Warner Linear.

**2. Basis of        Presentation**

The Company was formed on November 30, 2004 following acquisitions of        certain subsidiaries of Colfax Corporation (“Colfax”) and The Kilian Company        (“Kilian”). During 2006, the Company acquired Hay Hall Holdings Limited        (“Hay Hall”) and Bear Linear (“Warner Linear”). On April 5, 2007,        the Company acquired TB Wood’s Corporation (“TB        Wood’s”).

The        accompanying unaudited condensed consolidated financial statements have been prepared in        accordance with generally accepted accounting principles in the United States. In the        opinion of management, the accompanying unaudited condensed consolidated financial        statements contain all adjustments, which include normal recurring adjustments, necessary        to present fairly the unaudited condensed consolidated financial statements as of September        29, 2007 and for the quarters and year to date periods ended September 29, 2007 and        2006.

The        Company follows a four, four, five week calendar per quarter with all quarters consisting        of thirteen weeks of operations with the fiscal year end always on December 31.

The        accompanying unaudited consolidated financial statements should be read in conjunction with        the audited consolidated financial statements for the year ended December 31, 2006,        contained in the Company’s Annual Report on Form 10-K for the year ended December 31,        2006.

        Certain prior period amounts have been reclassified in the condensed consolidated financial        statements to conform to the current period presentation.

 

5

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

**3. Acquisition**

On        April 5, 2007, the Company acquired all of the outstanding shares of TB Wood’s for        $24.80 per share, or aggregate consideration of $93.5 million. As part of the TB        Wood’s acquisition, the Company retired $18.7 million of TB Wood’s indebtedness        and paid $9.2 million to retire options under the TB Wood’s equity plan. TB        Wood’s is an established designer, manufacturer and marketer of mechanical and        electronic industrial power transmission products.

The        TB Wood’s acquisition has been accounted for in accordance with SFAS No. 141. The        closing date of the TB Wood’s acquisition was April 5, 2007, and as such, the        Company’s consolidated financial statements reflect TB Wood’s results of        operations from that date forward.

The        Company has not completed its final purchase price allocation. The preliminary value of the        acquired assets, assumed liabilities and identified intangibles from the acquisition of TB        Wood’s, as presented below, are based upon management’s estimates of fair value        as of the date of the acquisition. Goodwill and intangibles recorded in connection with the        acquisition of TB Wood’s have not yet been allocated across the business units        acquired nor have the values been finalized. The final purchase price allocations are not        expected to have a material impact on the Company’s financial position or results of        operations. The preliminary purchase price allocation is as follows:

 

| Total purchase price, including closing costs of approximately                    $2.0 million   |   | $      | 123,433 |   |
|--------------------------------------------------------------------------------------------------|--------|--------|---------|--------|
| Cash and cash equivalents                                                                        |   |   | 5,522   |   |
| Trade receivables                                                                                |   |   | 16,186  |   |
| Inventories                                                                                      |   |   | 29,215  |   |
| Prepaid expenses and other                                                                       |   |   | 1,786   |   |
| Property, plant and equipment                                                                    |   |   | 35,568  |   |
| Intangible assets                                                                                |   |   | 42,824  |   |
| Total assets acquired                                                                            |   | $      | 131,101 |   |
| Accounts payable, accrued payroll, and accruals and other                    current liabilities |   | $      | 22,970  |   |
| Other liabilities                                                                                |   |   | 41,658  |   |
| Total liabilities assumed                                                                        |   | $      | 64,628  |   |
| Net assets acquired                                                                              |   | $      | 66,473  |   |
| Excess purchase price over the fair value of net assets                    acquired              |   | $      | 56,960  |   |

 

The excess of the purchase        price over the fair value of the net assets acquired was recorded as goodwill.

The estimated amounts        recorded as intangible assets consist of the following:

 

| Customer relationships, subject to amortization                            |   | $      | 31,040 |   |
|----------------------------------------------------------------------------|--------|--------|--------|--------|
| Trade names and trademarks, not subject to                    amortization |   |   | 11,784 |   |
| Total intangible assets                                                    |   | $      | 42,824 |   |

 

 

        Customer relationships are subject to amortization over their preliminary estimated useful        lives of 16 years which is the Company’s preliminary estimate of how long the Company        will benefit from the acquired assets.

The        following table sets forth the unaudited pro forma results of operations of the Company for        the quarter and year to date periods ended September 29, 2007 and 2006 as if the Company        had acquired TB Wood’s at the beginning of the respective periods. The pro forma        information contains the actual operating results of the Company and TB Wood’s with        the results prior to April 5, 2007, for TB Wood’s, adjusted to include the pro forma        impact of (i) additional interest expense associated with debt issued on April 5, 2007 in        connection with the TB Wood’s Acquisition; (ii) additional depreciation expense as a        result of estimated depreciation on fair value of fixed assets; (iii) additional expense as        a result of estimated amortization of identifiable intangible assets; (iv) and an

 

6

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

adjustment to the tax        provision for the tax effect of the above adjustments. The unaudited pro-forma financial        information for the year to date period ended September 29, 2007 includes a non-recurring        charge to step-up the value of acquired inventory sold of $0.7 million. These pro forma        amounts do not purport to be indicative of the results that would have actually been        obtained if the acquisitions occurred at the beginning of the respective periods or that        may be obtained in the future.

         

 

 

|           |   | **Quarter Ended****September 29, 2007** |    | **Quarter Ended****September 29, 2006** |   | **Year to Date Ended****September 29, 2007** |   | **Year to Date Ended****September 29, 2006** |    |
|----------------|--------|-----------------------------------------|---------|-----------------------------------------|--------|----------------------------------------------|--------|----------------------------------------------|---------|
| Total revenues |   | $                                       | 156,976 |                                    | $      | 142,847                                      |   | $                                            | 482,737 |   | $ | 436,574 |   |
| Net income     |   | $                                       | 4,310   |                                    | $      | 3,444                                        |   | $                                            | 10,042  |   | $ | 9,436 |   |

 

        During 2006, the Company purchased all of the outstanding share capital of Hay Hall for        $51.0 million, including $1.8 million of closing costs. The Company completed its final        purchase price allocation during 2006, which resulted in the Company recording        approximately $12.4 million in goodwill. In addition, the Company recorded $16.4 million in        intangible assets.

**4. Inventories**

        Inventories located at certain subsidiaries acquired in connection with the TB Wood’s        acquisition are stated at the lower of current cost or market, principally using the        last-in, first-out (LIFO) method. All of the Company’s remaining subsidiaries are        stated at the lower of cost or market, using the first-in, first-out (FIFO) method. Market        is defined as net realizable value. Inventories at September 29, 2007 and December 31, 2006        consisted of the following:

         

 

|             |   | **September 29,****2007** |    | **December 31,****2006** |   |
|------------------|--------|---------------------------|---------|--------------------------|--------|
| Raw materials    |   | $                         | 35,946  |                     | $      | 26,731 |   |
| Work in process  |   |                      | 24,299  |                     |   | 19,112 |   |
| Finished goods   |   |                      | 47,396  |                     |   | 29,926 |   |
| Inventories, net |   | $                         | 107,641 |                     | $      | 75,769 |   |
|             |   |                      |    |                     |   |   |   |

 

Approximately 19% of total inventories at September 29, 2007 were valued        using the LIFO method. In the year to date and quarter to date period ended September 29,        2007, the LIFO reserve increased $0.3 million and $0.1 million, respectively, which was        recorded as a component of costs of sales in the accompanying condensed consolidated        statement of income and comprehensive income.         

 

7

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

 

**5. Goodwill and        Intangible Assets**

A        rollforward of goodwill from December 31, 2006 through September 29, 2007 was as        follows:

 

| **Goodwill**                                                                   |   |   |    |
|--------------------------------------------------------------------------------|--------|--------|---------|
| Balance December 31, 2006                                                      |   | $      | 65,397  |   |
| Additions related to TB Wood’s acquisition                               |   |   | 56,960  |   |
| Impact of additional tax contingencies                                         |   |   | 956     |   |
| Adjustments to acquisition related deferred tax                    liabilities |   |   | (2,309  | ) |
| Impact of changes in foreign currency                                          |   |   | 1,690   |   |
| Balance September 29, 2007                                                     |   | $      | 122,694 |   |

 

Other intangibles as of        September 29, 2007 and December 31, 2006 consisted of the following:

 

 

|                                           |   | **September 29, 2007** |    | **December 31, 2006**           |   |
|------------------------------------------------|--------|------------------------|---------|---------------------------------|--------|
| **Other Intangibles**                          |   | **Cost**               |    | **Accumulated****Amortization** |   | **Cost** |   | **Accumulated****Amortization** |   |
| Intangible assets not subject to amortization: |   |                   |    |                            |   |   |   |   |   |   |   |   |   |
| Tradenames and trademarks                      |   | $                      | 34,794  |                            | $      | — |   | $ | 23,010 |   | $ | — |   |
| Intangible assets subject to amortization:     |   |                   |    |                            |   |   |   |   |   |   |   |   |   |
| Customer relationships                         |   |                   | 68,154  |                            |   | 8,926 |   |   | 37,114 |   |   | 5,679 |   |
| Product technology and patents                 |   |                   | 5,232   |                            |   | 2,068 |   |   | 5,232 |   |   | 1,316 |   |
| Impact of changes in foreign currency          |   |                   | 2,342   |                            |   | — |   |   | 1,301 |   |   | — |   |
| Total intangible assets                        |   | $                      | 110,522 |                            | $      | 10,994 |   | $ | 66,657 |   | $ | 6,995 |   |

 

The Company recorded $1.5        million and $0.9 million of amortization expense for the quarters ended September 29, 2007        and 2006, respectively and $4.0 million and $2.8 million for the year to date periods ended        September 29, 2007 and 2006, respectively.

The estimated amortization        expense for intangible assets is approximately $5.9 million in each of the next five years        and then $32.9 million thereafter.

**6. Warranty        Costs**

Changes in the carrying        amount of accrued product warranty costs for the year to date periods ended September 29,        2007 and 2006 are as follows:

 

|                                             |   | **September 29, 2007** |   | **September 29, 2006** |   |
|--------------------------------------------------|--------|------------------------|--------|------------------------|--------|
| Balance at beginning of period                   |   | $                      | 2,083  |                   | $      | 1,876 |   |
| Balance assumed with TB Wood’s acquisition |   |                   | 224    |                   |   | — |   |
| Accrued warranty costs                           |   |                   | 1,428  |                   |   | 1,365 |   |
| Payments and adjustments                         |   |                   | (336   | )                      |   | (1,072 | ) |
| Balance at end of period                         |   | $                      | 3,399  |                   | $      | 2,169 |   |

 

 

**7. Income Taxes**

 

8

 

----

**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

The estimated effective        income tax rates recorded for the quarters ended September 29, 2007 and 2006 were recorded        based upon management’s best estimate of the effective tax rate for the entire year.        The change in the effective tax rate from 37.1% at September 29, 2006 to 35.3% at September        29, 2007, principally relates to a change in the earnings mix among tax jurisdictions. The        2007 tax rate differs from the statutory rate due to the impact of non-U.S. tax rates and        permanent differences.

 

The Company adopted the        provisions of FASB interpretation No. 48, “Accounting for Uncertainty in Income Taxes        – an interpretation of FASB 109” (“FIN 48”) as of January 1, 2007.        In accordance with the transition provisions of FIN 48, the cumulative effect of applying        the pronouncement has been reported as an adjustment to the January 1, 2007 balance of        retained earnings. As a result of the adoption, the Company recorded an increase to its tax        reserves and a decrease to retained earnings in the amount of $0.2 million. FIN 48 provides        a comprehensive model for the financial statement recognition, measurement, presentation        and disclosure of uncertain tax positions taken or expected to be taken in income tax        returns.

 

As of January 1, 2007,        the company had $2.3 million of unrecognized tax benefits, of which $1.2 million, if        recognized would reduce the company’s effective tax rate and $0.9 million would        result in a decrease in goodwill. As a result of the acquisition of TB Wood’s        completed during the second quarter, the Company increased its unrecognized tax benefits by        approximately $3.3 million.

 

At September 29, 2007,        the Company had $6.4 million of unrecognized tax benefits, of which $2.0 million, if        recognized would reduce the Company’s effective tax rate and $4.2 million would        result in a decrease to goodwill.

 

Included in the balance        of unrecognized tax benefits are amounts related to proposed tax filing positions which        were under review by foreign taxing authorities. Subsequent to September 29, 2007, the        Company received resolution from the foreign tax authorities regarding these tax positions.        As a result, the Company will reverse approximately $1.8 million of unrecognized tax        benefits, which will reduce the Company’s effective tax rate in the fourth quarter of        2007.

 

The Company and its        subsidiaries file consolidated and separate income tax returns in the U.S. federal        jurisdiction as well as in various state and foreign jurisdictions. In the normal course of        business, the Company is subject to examination by taxing authorities in all of these        jurisdictions. With the exception of certain foreign jurisdictions, the Company is no        longer subject to income tax examinations for the tax years prior to 2004 in these major        jurisdictions. Additionally, the Company has indemnification agreements with the sellers of        the Colfax and Hay Hall entities, which provides for reimbursement to the Company for        payments made in satisfaction of tax liabilities relating to pre-acquisition periods.

 

The Company recognizes        interest and penalties related to unrecognized tax benefits as a component of income tax        expense in the condensed consolidated statements of income and comprehensive income.. At        January 1, 2007 and September 29, 2007, the Company had $0.3 million and $1.6 million of        accrued interest and penalties, respectively.

         

**8. Pension and Other        Employee Benefits**

***Defined Benefit        (Pension) and Postretirement Benefit Plans***

The        Company sponsors various defined benefit (pension) and postretirement (medical and life        insurance coverage) plans for certain, primarily unionized, active employees (those in the        employment of the Company at or hired since November 30, 2004). Additionally, the Company        assumed all post-employment and post-retirement welfare benefit obligations with respect to        active U.S. employees.

 

9

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

The following table        represents the components of the net periodic benefit cost associated with the respective        plans for the year to date periods ended and quarters ended September 29, 2007 and        2006:

 

 

|                                                |   | **Quarter Ended**                             |    |
|-----------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                |   | **Pension Benefits**                          |    | **Other Benefits** |   |
|                                                |   | **September                    29****, 2007** |    | **September                    29****, 2006** |   | **September                    29****, 2007** |   | **September                    29****, 2006** |   |
| Service cost                                        |   | $                                             | 66      |   | $ | 66 |   | $ | 18 |   | $ | (40 | ) |
| Interest cost                                       |   |                                          | 327     |   |   | 334 |   |   | 49 |   |   | (36 | ) |
| Expected return on plan assets                      |   |                                          | (266    | ) |   | (207 | ) |   | — |   |   | — |   |
| Amortization of prior service cost (income)         |   |                                          | 2       |   |   | 2 |   |   | (243 | ) |   | (458 | ) |
| Amortization of net (gain)                          |   |                                          | — |   |   | — |   |   | (53 | ) |   | (140 | ) |
| Gain on curtailment of post-retirement benefit plan |   |                                          | — |   |   | — |   |   | — |   |   | (3,838 | ) |
| Net periodic benefit cost (income)                  |   | $                                             | 128     |   | $ | 195 |   | $ | (229 | ) | $ | (4,512 | ) |

 

 

|                                                |   | **Year to Date Ended**                   |    |
|-----------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                |   | **Pension Benefits**                          |    | **Other Benefits** |   |
|                                                |   | **September                    29****, 2007** |    | **September                    29****, 2006** |   | **September                    29****, 2007** |   | **September                    29****, 2006** |   |
| Service cost                                        |   | $                                             | 198     |   | $ | 369 |   | $ | 54 |   | $ | 128 |   |
| Interest cost                                       |   |                                          | 981     |   |   | 1,003 |   |   | 147 |   |   | 263 |   |
| Expected return on plan assets                      |   |                                          | (799    | ) |   | (622 | ) |   | — |   |   | — |   |
| Amortization of prior service cost (income)         |   |                                          | 5       |   |   | 5 |   |   | (730 | ) |   | (659 | ) |
| Amortization of net (gain)                          |   |                                          | — |   |   | — |   |   | (158 | ) |   | (105 | ) |
| Gain on curtailment of post-retirement benefit plan |   |                                          | — |   |   | — |   |   | — |   |   | (3,838 | ) |
| Net periodic benefit cost (income)                  |   | $                                             | 385     |   | $ | 755 |   | $ | (687 | ) | $ | (4,211 | ) |

 

 

**9. Long-Term        Debt**

***Revolving Credit        Agreement***

The        Company maintains a $30 million revolving borrowings facility with a commercial bank (the        “Revolving Credit Agreement”). The Revolving Credit Agreement is subject to        certain limitations resulting from the requirement of the Company to maintain certain        levels of collateralized assets, as defined in the Revolving Credit Agreement. The Company        may use up to $10.0 million of its availability under the Revolving Credit Agreement for        standby letters of credit issued on its behalf, the issuance of which will reduce the        amount of borrowings that would otherwise be available to the Company. The Company may        re-borrow any amounts paid to reduce the amount of outstanding borrowings; however, all        borrowings under the Revolving Credit Agreement must be repaid in full as of November 30,        2010.

        Substantially all of the Company’s assets have been pledged as collateral against        outstanding borrowings under the Revolving Credit Agreement. The Revolving Credit Agreement        requires the Company to maintain a minimum fixed charge coverage ratio (when availability        under the line falls below $12.5 million) and imposes customary affirmative covenants and        restrictions on the Company. The Company was in compliance with all requirements of the        Revolving Credit Agreement at September 29, 2007.

There        were no borrowings under the Revolving Credit Agreement at September 29, 2007 and December        31, 2006, however, as of both dates, the lender had issued $2.9 million of outstanding        letters of credit on behalf of the Company.

In        April 2007, the Company amended the Revolving Credit Agreement. The interest rate on any        outstanding borrowings on the line of credit were reduced to the lender’s Prime Rate        plus 25 basis points or LIBOR plus 175 basis points. The rate on all outstanding

 

10

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

letters of credit were        reduced to 1.5% and .25% on any unused availability under the Revolving Credit Agreement.        All borrowings under the amended plan must be repaid by November 30, 2010.

***TB Wood’s        Revolving Credit Agreement***

As        part of the TB Wood’s acquisition, the Company refinanced the existing line of credit        agreement with a commercial bank in connection with the acquisition of TB Wood’s. The        Company refinanced $13.0 million of debt associated with TB Wood’s line of credit and        $6.5 million in letters credit. As of September 29, 2007, there was $11.3 million        outstanding under the TB Wood’s Credit Agreement, and $6.5 million of outstanding        letters of credit.

***Overdraft        Agreements***

        Certain of our foreign subsidiaries maintain overdraft agreements with financial        institutions. There were no borrowings as of September 29, 2007 or December 31, 2006 under        any of the overdraft agreements.

***9% Senior Secured        Notes***

On        November 30, 2004, the Company issued 9% Senior Secured Notes (“Senior Secured        Notes”), with a face value of $165.0 million. Interest on the Senior Secured Notes is        payable semiannually, in arrears, on June 1 and December 1 of each year, beginning June 1,        2005, at an annual rate of 9%. The effective interest rate on the Senior Secured Notes is        approximately 10.0%, after consideration of the amortization of $6.6 million related to        initial offer discounts (included in long-term debt) and $2.8 million of deferred financing        costs (included in other assets). The Senior Secured Notes mature on December 1, 2011        unless previously redeemed by The Company.

The        Senior Secured Notes are guaranteed by the Company’s U.S. domestic subsidiaries and        are secured by a second priority lien, subject to first priority liens securing the        Revolving Credit Agreement, on substantially all of the Company’s assets. The Senior        Secured Notes contain numerous terms, covenants and conditions, which impose substantial        limitations on the Company. The Company was in compliance with all covenants of the        indenture governing the Senior Secured Notes at September 29, 2007.

In        connection with the acquisition of TB Wood’s on April 5, 2007, the Company completed        a follow-on offering issuing an additional $105.0 million of the Senior Secured Notes. The        additional $105.0 million has the same terms and conditions as the previously issued Senior        Secured Notes. The effective interest rate on the Senior Secured Notes, after the follow-on        offering is approximately 9.7% after consideration of the amortization of $5.5 million        discount, net and $6.5 million of total deferred financing costs.

***11.25% Senior        Notes***

On        February 8, 2006, the Company issued 11.25% Senior Notes (“Senior Notes”), with        a face value of £33 million. Interest on the Senior Notes is payable semiannually, in        arrears, on August 15 and February 15 of each year, beginning August 15, 2006, at an annual        rate of 11.25%. The effective interest rate on the Senior Notes is approximately 11.7%,        after consideration of the $2.5 million of deferred financing costs (included in other        assets). The Senior Secured Notes mature on February 13, 2013.

The Senior Notes are        guaranteed on a senior unsecured basis by the Company’s U.S. domestic subsidiaries.        The Senior Notes contain numerous terms, covenants and conditions, which impose substantial        limitations on the Company. The Company was in compliance with all covenants of the        indenture governing the Senior Notes at September 29, 2007.

In        February 2007, using proceeds from Altra Holdings, Inc.’s, (“Holdings”)        our parent, initial public offering, the Company redeemed £11.6 million aggregate        principal amount of the outstanding Senior Notes, at a redemption price of 111.25% of the        principal amount of the Senior Notes, plus accrued and unpaid interest. In connection with        the redemption the Company expensed $0.8 million of deferred financing costs and incurred        $2.6 million of pre-payment premium.

In        June 2007, using proceeds from Holding’s secondary public offering, the Company        redeemed £5.5 million aggregate principal amount of the outstanding Senior Notes at a        redemption price of 114.5% of the principal amount of the Senior Notes, plus accrued and        unpaid interest. In connection with the redemption the Company expensed $0.4 million of        deferred financing costs and incurred $0.8 million of pre-payment premium.

On        August 6, 2007, the Company redeemed £12.0 million aggregate principal amount of the        outstanding Senior Notes at a redemption price of 113.5% of the principal amount of the        Senior Notes, plus accrued and unpaid interest. In connection with the redemption, the        Company expensed $0.8 million of deferred financing costs and incurred $3.3 million of        pre-payment premium.

 

11

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

The        remaining principal amount of the Senior Notes matures on February 13, 2013, unless        previously redeemed by the Company prior to such maturity date. As of September 29, 2007,        the remaining principal balance outstanding was £3.9 million, or $7.9 million.

***Variable Rate Demand        Revenue Bonds***

In connection with the acquisition of TB        Wood’s, the Company assumed the Variable Rate Demand Revenue Bonds outstanding as of        the acquisition date. TB Wood’s has borrowed approximately $3.0 million and $2.3        million by issuing Variable Rate Demand Revenue Bonds under the authority of the industrial        development corporations of the City of San Marcos, Texas and City of Chattanooga,        Tennessee, respectively. These bonds bear variable interest rates and mature in April        2024 and April 2022. The bonds were issued to finance production facilities for TB        Wood’s manufacturing operations in those cities, and are secured by letters of credit        issued under the terms of the TB Wood’s Credit Agreement.

***Mortgage***

In        June 2006, the Company entered into a mortgage on its building in Heidelberg, Germany with        a local bank. As of September 29, 2007 and December 31, 2006, the mortgage has a principal        of €1.8 million, or $2.6 million and €2.0 million or $2.6 million, respectively        and an interest rate of 5.75% and is payable in monthly installments over 15 years.

***Capital        Leases***

The        Company leases certain equipment under capital lease arrangements, whose obligations are        included in both short-term and long-term debt. Capital lease obligations amounted to        approximately $3.3 million and $1.5 million at September 29, 2007 and December 31, 2006,        respectively. Assets under capital leases are included in property, plant and equipment        with the related amortization recorded as depreciation expense.

**10. Stockholder’s        Equity**

The        Company has authorized, issued and outstanding 1,000 shares of $0.001 par-value common        stock, all of which is held by Holdings, the Company’s parent and sole        shareholder.

***Stock-Based        Compensation***

In        2005 Holdings approved the 2004 Equity Incentive Plan that provides for various forms of        stock-based compensation to officers, senior-level employees and other persons who make        significant contributions to the success of the Company. Awards granted under the 2004        Equity Incentive Plan are for equity instruments of Holdings. As awards are granted in        connection with services performed for the benefit of the Company, the related compensation        expense is recognized in the accompanying financial statements on a straight-line basis        over the service period of the grant. All awards to date have been in the form of        restricted stock. Compensation expense recorded during the year to date periods ended        September 29, 2007 and 2006 were $1.1 million ($0.7 million net of tax) and $0.5 million        ($0.3 million, net of tax), respectively and $0.3 million ($0.2 million, net of tax) and        $0.5 million ($0.3 million, net of tax) in the quarters ended September 29, 2007 and 2006,        respectively.

In        July 2007, the Compensation Committee of Holding’s Board of Directors approved a        grant of 3,326 shares of restricted common stock to each of the Company’s        non-employee directors. The fair market value of the restricted shares was calculated using        the total number of shares granted multiplied by the average stock price on the date of        grant, $18.04, approximately $0.1 million. The shares will fully vest on March 14, 2008.        The expense will be recognized on a straight-line basis over the vesting period.

**11. Related-Party        Transactions**

***Joy Global        Sales***

One        of the Company’s directors is an executive of Joy Global, Inc. The Company sold        approximately $4.1 million and $2.8 million in goods to divisions of Joy Global, Inc.        during the year to date periods ended September 29, 2007 and 2006, respectively. Sales to        divisions of Joy Global were $1.4 million and $1.0 million for the quarters ended September        29, 2007 and 2006, respectively. Other than his position as an executive of Joy Global,        Inc., the Company’s director has no interest in sales transactions between the        Company and Joy Global, Inc.

***Management        Agreement***

The        Company entered into an advisory services agreement with Genstar Capital, L.P.        (“Genstar”), whereby Genstar agreed to provide certain management, business        strategy, consulting, financial advisory and acquisition related services to the        Company.

 

12

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

Pursuant to the agreement,        the Company was required to pay to Genstar an annual consulting fee of $1.0 million        (payable quarterly, in arrears at the end of each calendar quarter), reimbursement of        out-of-pocket expenses incurred in connection with the advisory services and an advisory        fee of 2.0% of the aggregate consideration relating to any acquisition or dispositions        completed by the Company. The Company recorded $0.3 million in management fees, included in        selling, general and administrative expenses for the quarter ended September 29, 2006 and        $0.8 million for the year to date period ended September 29, 2006. Genstar also received a        one-time transaction fee of $1.0 million for the Hay Hall acquisition and it is reflected        in selling, general and administrative expenses for the year to date period ended and        quarter ended September 29, 2006. In December 2006, the Genstar management agreement was        terminated. There are no amounts in accruals or other liabilities payable to Genstar as of        September 29, 2007.

| **12.** | **Concentrations of Credit, Business Risks and                    Workforce** |
|---------|-------------------------------------------------------------------------------|

        Financial instruments, which are potentially subject to concentrations of credit risk,        consist primarily of trade accounts receivable. The Company manages this risk by conducting        credit evaluations of customers prior to delivery or commencement of services. When the        Company enters into a sales contract, collateral is normally not required from the        customer. Payments are typically due within thirty days of billing. An allowance for        potential credit losses is maintained, and losses have historically been within        management’s expectations.

        Credit related losses may occur in the event of non-performance by counterparties to        financial instruments. Counterparties typically represent international or well established        financial institutions.

No        one customer represented 10% or more of the Company’s sales for the quarters ended or        year to date periods ended September 29, 2007 and 2006.

        Approximately 20.2% of the Company’s labor force (15.3% and 48.5% in the United        States and Europe, respectively) is represented by collective bargaining agreements.

         

One of our four U.S. collective bargaining        agreements expired in August 2007. An agreement was reached in September 2007 with the        union that extends the collective bargaining agreement through August 2010. The agreement        reached provides for certain wage increases over a three year period, transition of health        insurance premiums to a union administered plan and other benefits. In addition, the        defined benefit plan will be frozen effective December 31, 2007, with all eligible plan        participants transitioned to a 401 (k) defined contribution plan. This is considered a        pension curtailment in accordance with SFAS No. 88 (Employer’s Accounting for        Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits). The        Company evaluated the amendment to the defined benefit plan and concluded that there was no        curtailment gain/loss in connection with this change.

 

13

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

**13. Geographic        Information**

The        Company operates in a single business segment for the development, manufacturing and sales        of mechanical power transmission products. The Company’s chief operating decision        maker reviews consolidated operating results in order to make decisions about allocating        resources and assess performance for the entire Company. Net sales to third parties and        property, plant and equipment by geographic region are as follows (in thousands):

 

|                           |   | **Net Sales**                      |    |                                    |   |
|--------------------------------|--------|------------------------------------|---------|-----------------------------------------|--------|
|                           |   | **Quarter Ended****September 29,** |    | **Year to Date Ended****September 29,** |   | **Property, Plant and Equipment** |
|                           |   | **2007**                           |    | **2006**                                |   | **2007** |   | **2006** |   | **September 29,****2007** |   | **December 31,**

**2006** |   |
| North America (primarily U.S.) |   | $                                  | 111,281 |                                    | $      | 79,015 |   | $ | 322,457 |   | $ | 250,225 |   | $ | 84,494 |   | $ | 50,673 |   |
| Europe                         |   |                               | 38,730  |                                    |   | 29,405 |   |   | 112,986 |   |   | 84,812 |   |   | 30,191 |   |   | 29,865 |   |
| Asia and other                 |   |                               | 6,965   |                                    |   | 4,533 |   |   | 17,381 |   |   | 12,474 |   |   | 1,983 |   |   | 1,849 |   |
| Total                          |   | $                                  | 156,976 |                                    | $      | 112,953 |   | $ | 452,824 |   | $ | 347,511 |   | $ | 116,668 |   | $ | 82,387 |   |
|                                |        |                                    |         |                                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Net        sales to third parties are attributed to the geographic regions based on the country in        which the shipment originates. Amounts attributed to the geographic regions for long-lived        assets are based on the location of the entity, which holds such assets.

The net assets of foreign        subsidiaries at September 29, 2007 and December 31, 2006 were $70.6 million and $46.8        million, respectively.

The        Company has not provided specific product line sales as our general purpose financial        statements do not allow us to readily determine groups of similar product sales.

**14. Commitments and        Contingencies**

***General        Litigation***

The        Company is involved in various pending legal proceedings arising out of the ordinary course        of business. None of these legal proceedings are expected to have a material adverse effect        on the financial condition of the Company. With respect to these proceedings, management        believes that it will prevail, has adequate insurance coverage or has established        appropriate reserves to cover potential liabilities. Any costs that management estimates        may be paid related to these proceedings or claims are accrued when the liability is        considered probable and the amount can be reasonably estimated. There can be no assurance,        however, as to the ultimate outcome of any of these matters, and if all or substantially        all of these legal proceedings were to be determined adversely to the Company, there could        be a material adverse effect on the financial condition of the Company.

We have been indemnified        for certain pre-existing legal and environmental matters for matters prior to certain        acquisitions.

**15. Restructuring,        Asset Impairment and Transition Expenses**

        Beginning in the first quarter of 2007, the Company adopted a restructuring program        intended to improve operational efficiency by reducing headcount, consolidating its        operating facilities and relocating manufacturing to lower cost areas. The restructuring        charges for the quarter and year to date periods ended September 29, 2007 were        approximately $0.2 million and $1.2 million, respectively.

The        Company’s asset impairment and losses on sales of assets for the manufacturing        consolidation program for the year to date period ended September 29, 2007 were $0.1        million. The Company does not expect any significant additional asset impairment and losses        on sale of assets through the completion of this program.

The        Company’s total transition expense for the manufacturing consolidation program for        the year to date period ended and quarter ended September 29, 2007 was approximately $1.2        million and $0.2 million, respectively.

The        Company’s total restructuring expense, excluding non-cash loss on disposal of fixed        assets, by major component for the year to date period ended September 29, 2007:

 

14

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

 

|                        |   |   |   |
|-----------------------------|--------|--------|--------|
| Moving and relocation costs |   | $      | 683    |   |
| Severance                   |   |   | 251    |   |
| Other                       |   |   | 129    |   |
| Total                       |   | $      | 1,063  |   |

 

The Company        anticipates incurring additional costs with this program, at this time the Company is        unable to quantify the future costs.

 

The        following is a reconciliation of the accrued restructuring costs between December 31, 2006        and September 29, 2007:

|                                      |   |   |    |   |
|-------------------------------------------|--------|--------|---------|--------|
| Balance at December 31, 2006              |   | $      | — |   |
| Restructuring expenses incurred           |   |   | 1,180   |   |
| Cash payments                             |   |   | (930    | )      |
| Non-cash loss on disposal of fixed assets |   |   | (117    | )      |
| Balance at September 29, 2007             |   | $      | 133     |   |

 

In        connection with the Company’s acquisition of TB Wood’s, the Company adopted a        restructuring program intended to consolidate operating facilities and reduce duplicate        staffing. The estimated costs of this restructuring program were recorded as a part of        purchase accounting and increased goodwill. During the quarter ended September 29, 2007,        the Company added $0.7 million to the restructuring accrual for additional restructuring        expenses, primarily severance.

The following is a        reconciliation of TB Wood’s accrued restructuring costs between December 31, 2006 and        September 29, 2007:

 

| Balance at December 31, 2006                                                                          |   | $      | — |   |
|-------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|
| Accruals established as part of purchase accounting related to                    severance and other |   |   | 1,659   |   |
| Cash payments                                                                                         |   |   | (852    | )      |
| Balance at September 29, 2007                                                                         |   | $      | 807     |   |

 

This        is a preliminary estimate of costs associated with this restructuring program. The Company        expects to finalize the program by December 31, 2007 and to make payments through 2008.

 

15

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

 

**16. Subsequent        Event**

 

On        October 19, 2007, the Company acquired substantially all of the assets of All Power        Transmission Manufacturing, Inc. (“All Power”) for $7.3 million. Approximately        $5.0 million was paid at closing and the remaining $2.3 million of consideration was issued        in the form of a note payable, due in installments over a 2 year period.

         

One        of our four U.S. collective bargaining agreements expired in September 2007. In October        2007, an agreement was reached which extended the existing collective bargaining agreement.        The negotiations also resulted in a provision to close the Erie, Pennsylvania plant by        December 2008 through the transfer of manufacturing equipment to other existing facilities        and a ratable reduction in headcount.

**17. Guarantor        Subsidiaries**

The        following tables present separately the financial position, results of operations, and cash        flows for the Company: (a) the subsidiaries of the Company that are guarantors of the        Senior Secured Notes, which are all 100% owned U.S. domestic subsidiaries of the Company        (Guarantor Subsidiaries), and (b) the subsidiaries of the Company that are not guaranteeing        the Senior Secured Notes, which include all non-domestic subsidiaries of the Company        (Non-Guarantor Subsidiaries). Separate financial statements of the Guarantor Subsidiaries        are presented because their guarantees are full and unconditional and joint and several,        and the Company believes separate financial statements and other disclosures regarding the        Guarantor Subsidiaries are not material to investors.

 

16

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

**Condensed Consolidating Balance Sheets of the Company**

**September 29, 2007**

 

 

|                                                                                |   | **September 29, 2007** |    |
|-------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                |   | **Issuer**             |    | **Guarantor** |   | **Non-Guarantor** |   | **Eliminations** |   | **Consolidated** |   |
| **Assets**                                                                          |   |                   |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                     |   |                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                           |   | $                      | 23,768  |   | $ | (3,562 | ) | $ | 9,828 |   | $ | — |   | $ | 30,034 |   |
| Trade receivables, less allowance for doubtful                    accounts          |   |                   | — |   |   | 51,307 |   |   | 35,327 |   |   | — |   |   | 86,634 |   |
| Loans receivable from related parties                                               |   |                   | — |   |   | 67,968 |   |   | — |   |   | (67,968 | ) |   | — |   |
| Inventories, less allowances for obsolete materials                                 |   |                   | — |   |   | 72,273 |   |   | 35,368 |   |   | — |   |   | 107,641 |   |
| Deferred income taxes                                                               |   |                   | — |   |   | 3,431 |   |   | 3,591 |   |   | — |   |   | 7,022 |   |
| Prepaid expenses and other                                                          |   |                   | — |   |   | 2,566 |   |   | 3,201 |   |   | — |   |   | 5,767 |   |
| Total current assets                                                                |   |                   | 23,768  |   |   | 193,983 |   |   | 87,315 |   |   | (67,968 | ) |   | 237,098 |   |
| Property, plant and equipment, net                                                  |   |                   | — |   |   | 78,964 |   |   | 37,704 |   |   | — |   |   | 116,668 |   |
| Intangible assets, net                                                              |   |                   | — |   |   | 76,726 |   |   | 22,802 |   |   | — |   |   | 99,528 |   |
| Goodwill                                                                            |   |                   | — |   |   | 94,986 |   |   | 27,708 |   |   | — |   |   | 121,694 |   |
| Deferred income taxes                                                               |   |                   | — |   |   | 2,027 |   |   | 353 |   |   | — |   |   | 2,380 |   |
| Other assets                                                                        |   |                   | 6,048   |   |   | 420 |   |   | 28 |   |   | — |   |   | 6,496 |   |
| Investments in subsidiaries                                                         |   |                   | 419,301 |   |   | — |   |   | — |   |   | (419,301 | ) |   | — |   |
|                                                                                |   | $                      | 449,117 |   | $ | 447,106 |   | $ | 175,910 |   | $ | (487,269 | ) | $ | 584,864 |   |
| **Liabilities and stockholder’s equity**                                      |   |                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                |   |                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                                                    |   |                   | 413     |   | $ | 21,890 |   | $ | 18,103 |   |   | — |   | $ | 40,406 |   |
| Accrued payroll                                                                     |   |                   | 1,192   |   |   | 7,399 |   |   | 7,902 |   |   | — |   |   | 16,493 |   |
| Accruals and other current liabilities                                              |   |                   | 10,206  |   |   | 11,280 |   |   | 5,582 |   |   | — |   |   | 27,068 |   |
| Taxes payable                                                                       |   |                   | — |   |   | 4,516 |   |   | 2,240 |   |   | — |   |   | 6,756 |   |
| Deferred income taxes                                                               |   |                   | — |   |   | — |   |   | 1,382 |   |   | — |   |   | 1,382 |   |
| Current portion of capital leases and short-term bank                    borrowings |   |                   | — |   |   | 2,036 |   |   | 397 |   |   | — |   |   | 2,433 |   |
| Loans payable to related parties                                                    |   |                   | 17,259  |   |   | — |   |   | 50,709 |   |   | (67,968 | ) |   | — |   |
| Total current liabilities                                                           |   |                   | 29,070  |   |   | 47,121 |   |   | 86,315 |   |   | (67,968 | ) |   | 94,538 |   |
| Long-term debt, less current portion                                                |   |                   | 274,891 |   |   | 16,895 |   |   | 3,615 |   |   | — |   |   | 295,401 |   |
| Deferred income taxes                                                               |   |                   | — |   |   | 21,413 |   |   | 8,664 |   |   | — |   |   | 30,077 |   |
| Pension liabilities                                                                 |   |                   | — |   |   | 9,306 |   |   | 3,555 |   |   | — |   |   | 12,861 |   |
| Other post-retirement benefits                                                      |   |                   | — |   |   | 2,863 |   |   | — |   |   | — |   |   | 2,863 |   |
| Other long-term liabilities                                                         |   |                   | 333     |   |   | 764 |   |   | 3,204 |   |   | — |   |   | 4,301 |   |
| Total liabilities                                                                   |   |                   | 304,294 |   |   | 98,362 |   |   | 105,353 |   |   | (67,968 | ) |   | 440,041 |   |
| Total stockholder’s equity                                                    |   |                   | 144,823 |   |   | 348,744 |   |   | 70,557 |   |   | (419,301 | ) |   | 144,823 |   |
|                                                                                |   | $                      | 449,117 |   | $ | 445,467 |   | $ | 175,910 |   | $ | (487,269 | ) | $ | 584,864 |   |

 

 

17

 

----

**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

**Condensed Consolidating Balance Sheets of the Company**

**December 31, 2006**

 

 

|                                                                       |   | **December 31, 2006** |    |
|----------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                            |   | **Issuer**            |    | **Guarantor** |   | **Non****Guarantor** |   | **Eliminations** |   | **Consolidated** |   |
| **Assets**                                                                 |   |                  |    |   |   |   |   |   |   |   |   |
| Current assets:                                                            |   |                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                  |   | $                     | 41,016  |   | $ | (5,488 | ) | $ | 6,999 |   | $ | — |   | $ | 42,527 |   |
| Trade receivables, less allowance for doubtful                    accounts |   |                  | — |   |   | 37,780 |   |   | 23,726 |   |   | — |   |   | 61,506 |   |
| Loan receivable from related parties                                       |   |                  | 9,866   |   |   | 36,681 |   |   | — |   |   | (46,547 | ) |   | — |   |
| Inventories, less allowances for obsolete materials                        |   |                  | — |   |   | 50,573 |   |   | 25,196 |   |   | — |   |   | 75,769 |   |
| Deferred income taxes                                                      |   |                  | — |   |   | 7,159 |   |   | (376 | ) |   | — |   |   | 6,783 |   |
| Prepaid expenses and other                                                 |   |                  | 1,875   |   |   | 3,353 |   |   | 2,340 |   |   | — |   |   | 7,532 |   |
| Total current assets                                                       |   |                  | 52,757  |   |   | 130,058 |   |   | 57,849 |   |   | (46,547 | ) |   | 194,117 |   |
| Property, plant and equipment, net                                         |   |                  | — |   |   | 48,762 |   |   | 33,625 |   |   | — |   |   | 82,387 |   |
| Intangible assets, net                                                     |   |                  | — |   |   | 36,708 |   |   | 22,954 |   |   | — |   |   | 59,662 |   |
| Goodwill                                                                   |   |                  | — |   |   | 41,660 |   |   | 23,737 |   |   | — |   |   | 65,397 |   |
| Deferred income taxes                                                      |   |                  | — |   |   | 2,120 |   |   | 15 |   |   | — |   |   | 2,135 |   |
| Other assets                                                               |   |                  | 5,302   |   |   | 279 |   |   | 89 |   |   | — |   |   | 5,670 |   |
| Investments in subsidiaries                                                |   |                  | 258,221 |   |   | — |   |   | — |   |   | (258,221 | ) |   | — |   |
|                                                                       |   | $                     | 316,280 |   | $ | 259,587 |   | $ | 138,269 |   | $ | (304,768 | ) | $ | 409,368 |   |
| **Liabilities and stockholder’s equity**                             |   |                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                                                       |   |                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                                           |   | $                     | — |   | $ | 18,316 |   | $ | 15,737 |   | $ | — |   | $ | 34,053 |   |
| Accrued payroll                                                            |   |                  | 2,469   |   |   | 6,089 |   |   | 5,513 |   |   | — |   |   | 14,071 |   |
| Accruals and other current liabilities                                     |   |                  | 5,346   |   |   | 7,053 |   |   | 2,796 |   |   | — |   |   | 15,195 |   |
| Taxes payable                                                              |   |                  | — |   |   | 1,509 |   |   | 1,105 |   |   | — |   |   | 6,549 |   |
| Deferred income taxes                                                      |   |                  | — |   |   | — |   |   | 1,382 |   |   | — |   |   | 1,382 |   |
| Current portion of long-term debt                                          |   |                  | — |   |   | 254 |   |   | 319 |   |   | — |   |   | 573 |   |
| Loans payable to related parties                                           |   |                  | — |   |   | — |   |   | 46,547 |   |   | (46,547 | ) |   | — |   |
| Total current liabilities                                                  |   |                  | 11,750  |   |   | 33,221 |   |   | 73,399 |   |   | (46,547 | ) |   | 71,823 |   |
| Long-term debt, less current portion                                       |   |                  | 225,011 |   |   | 349 |   |   | 3,195 |   |   | — |   |   | 228,555 |   |
| Deferred income taxes                                                      |   |                  | — |   |   | (1,156 | ) |   | 8,286 |   |   | — |   |   | 7,130 |   |
| Pension liabilities                                                        |   |                  | — |   |   | 11,797 |   |   | 3,372 |   |   | — |   |   | 15,169 |   |
| Other post-retirement benefits                                             |   |                  | — |   |   | 3,262 |   |   | — |   |   | — |   |   | 3,262 |   |
| Other long-term liabilities                                                |   |                  | — |   |   | 682 |   |   | 3,228 |   |   | — |   |   | 3,910 |   |
| Total liabilities                                                          |   |                  | 236,761 |   |   | 48,155 |   |   | 91,480 |   |   | (46,547 | ) |   | 329,849 |   |
| Total stockholder’s equity                                           |   |                  | 79,519  |   |   | 211,432 |   |   | 46,789 |   |   | (258,221 | ) |   | 79,519 |   |
|                                                                       |   | $                     | 316,280 |   | $ | 259,587 |   | $ | 138,269 |   | $ | (304,768 | ) | $ | 409,368 |   |

 

 

18

 

----

**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

**Condensed Consolidating Statements of Operations of the        Company**

**Quarter ended September 29, 2007**

 

 

|                                         |   | **Quarter ended September 29, 2007** |    |
|----------------------------------------------|--------|--------------------------------------|---------|
|                                         |   | **Issuer**                           |    | **Guarantor** |   | **Non-****Guarantor** |   | **Eliminations** |   | **Consolidated** |   |
| Net sales                                    |   | $                                    | — |   | $ | 112,349 |   | $ | 59,676 |   | $ | (15,049 | ) | $ | 156,976 |   |
| Cost of sales                                |   |                                 | — |   |   | 84,392 |   |   | 42,577 |   |   | (15,049 | ) |   | 111,920 |   |
| Gross profit                                 |   |                                 | — |   |   | 27,957 |   |   | 17,099 |   |   | — |   |   | 45,056 |   |
| Selling, general and administrative expenses |   |                                 | — |   |   | 15,064 |   |   | 9,562 |   |   | — |   |   | 24,626 |   |
| Research and development expenses            |   |                                 | — |   |   | 1,275 |   |   | 970 |   |   | — |   |   | 2,245 |   |
| Restructuring charges                        |   |                                 | — |   |   | 162 |   |   | 27 |   |   | — |   |   | 189 |   |
| Income from operations                       |   |                                 | — |   |   | 11,456 |   |   | 6,540 |   |   | — |   |   | 17,996 |   |
| Interest expense, net                        |   |                                 | 11,620  |   |   | 162 |   |   | (393) |   |   | — |   |   | 11,389 |   |
| Other non-operating (income) expense, net    |   |                                 | (211    | ) |   | 350 |   |   | 159 |   |   | — |   |   | 298 |   |
| Equity in earnings of subsidiaries           |   |                                 | 15,719  |   |   | — |   |   | — |   |   | (15,719 | ) |   | — |   |
| Income before income taxes                   |   |                                 | 4,310   |   |   | 10,944 |   |   | 6,774 |   |   | (15,719 | ) |   | 6,309 |   |
| Provision for income taxes                   |   |                                 | — |   |   | (11) |   |   | 2,010 |   |   | — |   |   | 1,999 |   |
| Net income                                   |   | $                                    | 4,310   |   | $ | 10,955 |   | $ | 4,764 |   | $ | (15,719 | ) | $ | 4,310 |   |

 

**Condensed Consolidating Statements of Operations of the        Company**

**Year        to date ended September 29, 2007**

 

 

|                                         |   | **Year to Date ended September 29, 2007** |    |
|----------------------------------------------|--------|-------------------------------------------|---------|
|                                         |   | **Issuer**                                |    | **Guarantor** |   | **Non-****Guarantor** |   | **Eliminations** |   | **Consolidated** |   |
| Net sales                                    |   | $                                         | — |   | $ | 325,586 |   | $ | 162,340 |   | $ | (35,102 | ) | $ | 452,824 |   |
| Cost of sales                                |   |                                      | — |   |   | 240,702 |   |   | 118,216 |   |   | (35,102 | ) |   | 323,816 |   |
| Gross profit                                 |   |                                      | — |   |   | 84,884 |   |   | 44,124 |   |   | — |   |   | 129,008 |   |
| Selling, general and administrative expenses |   |                                      | — |   |   | 43,420 |   |   | 27,045 |   |   | — |   |   | 70,465 |   |
| Research and development expenses            |   |                                      | — |   |   | 3,231 |   |   | 2,512 |   |   | — |   |   | 5,743 |   |
| Restructuring charges                        |   |                                      | — |   |   | 775 |   |   | 405 |   |   | — |   |   | 1,180 |   |
| Income from operations                       |   |                                      | — |   |   | 37,458 |   |   | 14,162 |   |   | — |   |   | 51,620 |   |
| Interest expense (income), net               |   |                                      | 27,127  |   |   | 580 |   |   | 3,522 |   |   | — |   |   | 31,229 |   |
| Other non-operating (income) expense, net    |   |                                      | (362    | ) |   | 232 |   |   | 504 |   |   | — |   |   | 374 |   |
| Equity in earnings of subsidiaries           |   |                                      | 39,715  |   |   | — |   |   | — |   |   | (39,715 | ) |   | — |   |
| Income before income taxes                   |   |                                      | 12,950  |   |   | 36,646 |   |   | 10,136 |   |   | (39,715 | ) |   | 20,017 |   |
| Provision for income taxes                   |   |                                      | — |   |   | 4,050 |   |   | 3,017 |   |   | — |   |   | 7,067 |   |
| Net income                                   |   | $                                         | 12,950  |   | $ | 32,596 |   | $ | 7,119 |   | $ | (39,715 | ) | $ | 12,950 |   |

 

 

19

 

----

**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

**Condensed Consolidating Statements of Operations of the        Company**

**Quarter to Date ended September 29, 2006**

 

 

|                                                |   | **Quarter ended September 29, 2006** |    |
|-----------------------------------------------------|--------|--------------------------------------|---------|
|                                                |   | **Issuer**                           |    | **Guarantor** |   | **Non-****Guarantor** |   | **Eliminations** |   | **Consolidated** |   |
| Net sales                                           |   | $                                    | — |   | $ | 78,000 |   | $ | 40,031 |   | $ | (5,078 | ) | $ | 112,953 |   |
| Cost of sales                                       |   |                                 | — |   |   | 57,622 |   |   | 29,984 |   |   | (5,078 | ) |   | 82,528 |   |
| Gross profit                                        |   |                                 | — |   |   | 20,378 |   |   | 10,047 |   |   | — |   |   | 30,425 |   |
| Selling, general and administrative expenses        |   |                                 | 439     |   |   | 11,671 |   |   | 7,433 |   |   | — |   |   | 19,543 |   |
| Research and development expenses                   |   |                                 | — |   |   | 740 |   |   | 575 |   |   | — |   |   | 1,315 |   |
| Gain on curtailment of post-retirement benefit plan |   |                                 | — |   |   | (3,838 | ) |   | — |   |   | — |   |   | — |   |
| Income from operations                              |   |                                 | (439)   |   |   | 11,805 |   |   | 2,039 |   |   | — |   |   | 13,405 |   |
| Interest expense (income), net                      |   |                                 | 2,240   |   |   | (182 | ) |   | 4,287 |   |   | — |   |   | 6,345 |   |
| Other non-operating (income) expense, net           |   |                                 | 139     |   |   | 102 |   |   | 493 |   |   | — |   |   | 734 |   |
| Equity in earnings of subsidiaries                  |   |                                 | 6,767   |   |   | — |   |   | — |   |   | (6,767 | ) |   | — |   |
| Income before income taxes                          |   |                                 | 3,949   |   |   | 11,885 |   |   | (2,741 | ) |   | (6,767 | ) |   | 6,326 |   |
| Provision for income taxes                          |   |                                 | — |   |   | 1,358 |   |   | 1,019 |   |   | — |   |   | 2,377 |   |
| Net income                                          |   | $                                    | 3,949   |   | $ | 10,527 |   | $ | (3,760 | ) | $ | (6,767 | ) | $ | 3,949 |   |

 

 

**Condensed Consolidating Statements of Operations of the        Company**

**Year        to Date ended September 29, 2006**

 

 

|                                                                         |   | **Year to Date ended September 29, 2006** |    |
|------------------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                                         |   | **Issuer**                                |    | **Guarantor** |   | **Non-****Guarantor** |   | **Eliminations** |   | **Consolidated** |   |
| Net sales                                                                    |   | $                                         | — |   | $ | 234,964 |   | $ | 114,099 |   | $ | (10,552 | ) | $ | 347,511 |   |
| Cost of sales                                                                |   |                                      | — |   |   | 178,918 |   |   | 84,593 |   |   | (10,552 | ) |   | 252,959 |   |
| Gross profit                                                                 |   |                                      | — |   |   | 65,046 |   |   | 29,506 |   |   | — |   |   | 94,552 |   |
| Selling, general and administrative expenses                                 |   |                                      | 1,444   |   |   | 35,129 |   |   | 20,791 |   |   | — |   |   | 57,364 |   |
| Research and development expenses                                            |   |                                      | — |   |   | 2,118 |   |   | 1,689 |   |   | — |   |   | 3,807 |   |
| Gain on curtailment of post-retirement benefit                    obligation |   |                                      | — |   |   | (3,838 | ) |   | — |   |   | — |   |   | (3,838 | ) |
| Income (loss) from operations                                                |   |                                      | (1,444  | ) |   | 31,637 |   |   | 7,026 |   |   | — |   |   | 37,219 |   |
| Interest expense (income), net                                               |   |                                      | 13,339  |   |   | (140 | ) |   | 4,372 |   |   | — |   |   | 17,571 |   |
| Other non-operating (income) expense, net                                    |   |                                      | 377     |   |   | (32 | ) |   | 302 |   |   | — |   |   | 647 |   |
| Equity in earnings of subsidiaries                                           |   |                                      | 27,110  |   |   | — |   |   | — |   |   | (27,110 | ) |   | — |   |
| Income before income taxes                                                   |   |                                      | 11,950  |   |   | 31,809 |   |   | 2,352 |   |   | (27,110 | ) |   | 19,001 |   |
| Provision for income taxes                                                   |   |                                      | — |   |   | 5,130 |   |   | 1,921 |   |   | — |   |   | 7,051 |   |
| Net income                                                                   |   | $                                         | 11,950  |   | $ | 26,679 |   | $ | 431 |   | $ | (27,110 | ) | $ | 11,950 |   |

 

 

 

20

 

----

**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

**Condensed Consolidating Statements of Cash Flows of the        Company**

**Year        to Date ended September 29, 2007**

 

|                                      |  

**Issuer**                                                                                         |  

**Guarantor** | **Non-**

**Guarantor** |  

**Eliminations** |  

**Consolidated** |
|-------------------------------------------|------------------------------------------------------------------------------------------------------------|-----------------------|-------------------------|--------------------------|--------------------------|
| **Cash flows from operating activities:** |                                                                                                            |                  |                    |                     |                     |   |   |   |   |   |   |   |   |   |   |   |
|                                      | Net income                                                                                                 |                  | $                       | 12,950                   |                     | $ | 32,596 |   | $ | 7,119 |   | $ | (39,715 | ) | $ | 12,950 |   |   |
|                                      | Undistributed equity in earnings of subsidiaries                                                           |                  |                    | (39,715                  | )                        |   | — |   |   | — |   |   | 39,715 |   |   | — |   |   |
|                                      | Adjustments to reconcile net income to cash provided by (used                    in) operating activities: |                  |                    |                     |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                      | Depreciation                                                                                               |                  |                    | —                  |                     |   | 8,100 |   |   | 4,278 |   |   | — |   |   | 12,378 |   |   |
|                                      | Amortization of intangible assets                                                                          |                  |                    | —                  |                     |   | 2,830 |   |   | 1,169 |   |   | — |   |   | 3,999 |   |   |
|                                      | Amortization and write-off of deferred loan costs                                                          |                  |                    | 2,980                    |                     |   | — |   |   | — |   |   | — |   |   | 2,980 |   |   |
|                                      | Accretion of debt discount and premium                                                                     |                  |                    | 594                      |                     |   | — |   |   | — |   |   | — |   |   | 594 |   |   |
|                                      | Loss (gain) on foreign currency                                                                            |                  |                    | (212                     | )                        |   | — |   |   | 621 |   |   | — |   |   | 409 |   |   |
|                                      | Amortization of inventory fair value adjustment                                                            |                  |                    | —                  |                     |   | — |   |   | 651 |   |   | — |   |   | 651 |   |   |
|                                      | Loss on sale of fixed assets                                                                               |                  |                    | —                  |                     |   | — |   |   | 112 |   |   | — |   |   | 112 |   |   |
|                                      | Stock based compensation                                                                                   |                  |                    | 1,092                    |                     |   | — |   |   | — |   |   | — |   |   | 1,092 |   |   |
|                                      | Changes in operating assets and liabilities:                                                               |                  |                    |                     |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                      | Trade receivables                                                                                          |                  |                    | —                  |                     |   | (3,335 | ) |   | (3,549 | ) |   | — |   |   | (6,884 | ) |   |
|                                      | Inventories                                                                                                |                  |                    | —                  |                     |   | (233 | ) |   | (2,048 | ) |   | — |   |   | (2,281 | ) |   |
|                                      | Accounts payable and accrued liabilities                                                                   |                  |                    | 61                       |                     |   | (8,903 | ) |   | 440 |   |   | — |   |   | (8,402 | ) |   |
|                                      | Other current assets and liabilities                                                                       |                  |                    | 1,875                    |                     |   | 1,595 |   |   | 677 |   |   | — |   |   | 4,147 |   |   |
|                                      | Other operating assets and liabilities                                                                     |                  |                    | 299                      |                     |   | (360 | ) |   | 67 |   |   | — |   |   | 6 |   |   |
|                                      | Net cash provided by (used in) operating activities                                                        |                  |                    | (20,076                  | )                        |   | 32,290 |   |   | 9,537 |   |   | — |   |   | 21,751 |   |   |
|                                      | **Cash flows from investing activities:**                                                                  |                  |                    |                     |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                      | Purchases of fixed assets                                                                                  |                  |                    | —                  |                     |   | (4,876 | ) |   | (1,927 | ) |   | — |   |   | (6,803 | ) |   |
|                                      | Acquisition, net of cash acquired                                                                          |                  |                    | (117,911                 | )                        |   | — |   |   | — |   |   | — |   |   | (117,911 | ) |   |
|                                      | Net cash used in investing activities                                                                      |                  |                    | (117,911                 | )                        |   | (4,876 | ) |   | (1,927 | ) |   | — |   |   | (124,714 | ) |   |
|                                      | **Cash flows from financing activities:**                                                                  |                  |                    |                     |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                      | Capital contribution from Parent Company                                                                   |                  |                    | 49,015                   |                     |   | — |   |   | — |   |   | — |   |   | 49,015 |   |   |
|                                      | Proceeds from issuance of senior secured notes                                                             |                  |                    | 106,050                  |                     |   | — |   |   | — |   |   | — |   |   | 106,050 |   |   |
|                                      | Payment of debt issuance costs                                                                             |                  |                    | (3,692                   | )                        |   | — |   |   | — |   |   | — |   |   | (3,692 | ) |   |
|                                      | Payments on senior notes                                                                                   |                  |                    | (58,428                  | )                        |   | — |   |   | — |   |   | — |   |   | (58,428 | ) |   |
|                                      | Borrowings under revolving credit agreements                                                               |                  |                    | 8,315                    |                     |   | — |   |   | — |   |   | — |   |   | 8,315 |   |   |
|                                      | Payments on revolving credit agreements                                                                    |                  |                    | (8,315                   | )                        |   | (1,532 | ) |   | — |   |   | — |   |   | (9,847 | ) |   |
|                                      | Payments made on behalf of Parent Company                                                                  |                  |                    | (1,475                   | )                        |   | — |   |   | — |   |   | — |   |   | (1,475 | ) |   |
|                                      | Change in affiliate debt                                                                                   |                  |                    | 28,845                   |                     |   | (23,877 | ) |   | (4,968 | ) |   | — |   |   | — |   |   |
|                                      | Payments on mortgages                                                                                      |                  |                    | —                  |                     |   | — |   |   | (178 | ) |   | — |   |   | (178 | ) |   |
|                                      | Change in capital leases                                                                                   |                  |                    | —                  |                     |   | (79 | ) |   | (455 | ) |   | — |   |   | (534 | ) |   |
|                                      | Net cash provided by (used in) financing activities                                                        |                  |                    | 120,739                  |                     |   | (25,488 | ) |   | (6,025 | ) |   | — |   |   | 89,226 |   |   |
|                                      | Effect of exchange rates on cash                                                                           |                  |                    | —                  |                     |   | — |   |   | 1,244 |   |   | — |   |   | 1,244 |   |   |
|                                      | Increase (decrease) in cash and cash equivalents                                                           |                  |                    | (17,248                  | )                        |   | 1,926 |   |   | 2,829 |   |   | — |   |   | (12,493 | ) |   |
|                                      | Cash and cash equivalents, beginning of the period                                                         |                  |                    | 41,016                   |                     |   | (5,488 | ) |   | 6,999 |   |   | — |   |   | 42,527 |   |   |
|                                      | Cash and cash equivalents, end of period                                                                   |                  | $                       | 23,768                   |                     | $ | (3,562 | ) | $ | 9,828 |   | $ | — |   | $ | 30,034 |   |   |
|                                           |                                                                                                            |                       |                         |                          |                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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**ALTRA        INDUSTRIAL MOTION, INC.**

**Notes        to Unaudited Condensed Consolidated Interim Financial Statements**

**Dollars in thousands, unless otherwise noted**

 

 

**Condensed Consolidating Statements of Cash Flows of the        Company**

**Year        to Date Ended September 29, 2006**

 

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

 

 

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**Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of        Operations**

The        following discussion of the financial condition and results of operations of Altra        Industrial Motion, Inc. should be read together with the audited financial statements of        Altra Industrial Motion, Inc. and its Predecessor and related notes included in the        Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and the        Form S-4 filed with the Securities and Exchange Commission on August 9, 2007. The following        discussion includes forward-looking statements. For a discussion of important factors that        could cause actual results to differ materially from the results referred to in the        forward-looking statements, see “Forward-Looking Statements.” in the        Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and the        Form S-4 filed with the Securities and Exchange Commission on August 9, 2007.

**General**

We        are a leading multinational designer, producer and marketer of a wide range of mechanical        power transmission products. Our product portfolio includes industrial clutches and brakes,        enclosed gear drives, open gearing, couplings, machined-race bearings, belted drives and        other related products which are sold across a wide variety of industries. Our products        serve a wide variety of end markets including general industrial, material handling,        mining, power generation, transportation, automotive and turf and garden. We primarily sell        our products to OEMs such as John Deere, Carrier and General Electric and through        long-standing relationships with industrial distributors such as Motion Industries, Applied        Industrial Technologies, Kaman Industrial Technologies, Bearing Distributions, Inc. and        W.W. Grainger.

**Recent        Acquisition**

On        April 5, 2007, the Company completed its acquisition of TB Wood’s Corporation        (“TB Wood’s”) pursuant to a cash tender offer for all of the outstanding        shares of TB Wood’s common stock for $24.80 per share. This was followed by a short        form merger (the “Merger”) of Forest Acquisition Corporation, the        Company’s wholly-owned subsidiary, with and into TB Wood’s. This resulted in TB        Wood’s becoming a wholly-owned subsidiary of the Company. In connection with the        merger, all remaining outstanding shares of TB Wood’s common stock (other than those        held by shareholders who properly perfect dissenters’ rights under Delaware law),        were converted into the right to receive the same $24.80 cash price per share paid in the        tender offer (net of the holder without interest and less any required withholding        taxes).

**Critical Accounting        Policies**

The        preparation of our condensed consolidated financial statements and related disclosures in        conformity with accounting principles generally accepted in the United States of America        requires management to make judgments, assumptions and estimates that affect our reported        amounts of assets, revenues and expenses, as well as related disclosure of contingent        assets and liabilities. Management believes there have been no significant changes in our        critical accounting policies since December 31, 2006. See the discussion of critical        accounting policies in our Annual Report on Form 10-K for the year ended December 31,        2006.

**Recent Accounting        Pronouncements**

In        June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48,        “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB        Statement No. 109”, which prescribes a recognition threshold and measurement        attribute for the financial statement recognition and measurement of a tax position taken        or expected to be taken in a tax return. The Company adopted FIN 48 on January 1, 2007. See        Note 7 to the condensed consolidated financial statements for the impact of adoption of        this pronouncement.

**Non-GAAP Financial        Measures**

The        discussion of EBITDA (earnings before interest, income taxes, depreciation and        amortization) included in the discussion of Results of Operations below is being provided        because management considers EBITDA to be an important measure of financial performance.        Among other things, management believes that EBITDA provides useful information for our        investors because it is useful for trending, analyzing and benchmarking the performance and        value of our business. Management also believes that EBITDA is useful in assessing current        performance compared with our historical performance because significant line items within        our statements of operations such as depreciation, amortization and interest expense are        significantly impacted by acquisitions. Internally, EBITDA is used as a financial measure        to assess the operating performance and is an important measure in our incentive        compensation plans.

        EBITDA has important limitations, and should not be considered in isolation or as a        substitute for analysis of our results as reported under generally accepted accounting        principles in the United States (“GAAP”). For example, EBITDA does not        reflect:

 

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| **•** | cash expenditures, or future requirements, for capital                    expenditures or contractual commitments;                           |   |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **•** | changes in, or cash requirements for, working capital                    needs;                                                              |   |
| **•** | the significant interest expense, or the cash requirements                    necessary to service interest or principal payments, on debts; |
| **•** | tax distributions that would represent a reduction in cash                    available to us; and                                           |   |
| **•** | any cash requirements for assets being depreciated and amortized                    that may have to be replaced in the future.              |   |
|            |                                                                                                                                              |        |  |  |  |

        EBITDA is not a recognized measurement under GAAP, and when analyzing our operating        performance, investors should use EBITDA in addition to, and not as an alternative for,        operating income and net income (each as determined in accordance with GAAP). Because not        all companies use identical calculations, our presentation of EBITDA may not be comparable        to similarly titled measures of other companies. The amounts shown for EBITDA also differ        from the amounts calculated under similarly titled definitions in our debt instruments,        which are further adjusted to reflect certain other cash and non-cash charges and are used        to determine compliance with financial covenants and our ability to engage in certain        activities, such as incurring additional debt and making certain restricted payments.

To        compensate for the limitations of EBITDA we utilize several GAAP measures to review our        performance. These GAAP measures include, but are not limited to, net income, operating        income, cash provided by (used in) operations, cash provided by (used in) investing        activities and cash provided by (used in) financing activities. These important GAAP        measures allow our management to, among other things, review and understand our uses of        cash period to period, compare our operations with competitors on a consistent basis and        understand the revenues and expenses matched to each other for the applicable reporting        period. We believe that the use of these GAAP measures, supplemented by the use of EBITDA,        allows us to have a greater understanding of our performance and allows us to adapt to        changing trends and business opportunities.

**Results of        Operations**

 

 

|                                                |   | **Quarter Ended**      | **Year to Date Ended** |
|-----------------------------------------------------|--------|------------------------|------------------------|
|                                                |   | **September 29, 2007** |                   | **September 29, 2006** |   | **September 29, 2007** |   | **September 29,**

**2006** |   |
| Net sales                                           |   | $                      | 156,976                |   | $ | 112,953 |   | $ | 452,824 |   | $ | 347,511 |   |
| Cost of sales                                       |   |                   | 111,920                |   |   | 82,528 |   |   | 323,816 |   |   | 252,959 |   |
| Gross profit                                        |   |                   | 45,056                 |   |   | 30,425 |   |   | 129,008 |   |   | 94,552 |   |
| *Gross profit percentage*                           |   |                   | *28.7*                 | *%* |   | *26.9* | *%* |   | *28.5* | *%* |   | *27.2* | *%* |
| Selling, general and administrative expenses        |   |                   | 24,626                 |   |   | 19,543 |   |   | 70,456 |   |   | 57,364 |   |
| Research and development expenses                   |   |                   | 2,245                  |   |   | 1,315 |   |   | 5,743 |   |   | 3,807 |   |
| Restructuring charges                               |   |                   | 189                    |   |   | — |   |   | 1,180 |   |   | — |   |
| Gain on curtailment of post-retirement benefit plan |   |                   | —                |   |   | (3,838 | ) |   | — |   |   | (3,838 | ) |
| Income from operations                              |   |                   | 17,996                 |   |   | 13,405 |   |   | 51,620 |   |   | 37,219 |   |
| Interest expense, net                               |   |                   | 11,389                 |   |   | 6,345 |   |   | 31,229 |   |   | 17,751 |   |
| Other non-operating income, net                     |   |                   | 298                    |   |   | 734 |   |   | 374 |   |   | 647 |   |
| Income before income taxes                          |   |                   | 6,309                  |   |   | 6,326 |   |   | 20,017 |   |   | 19,001 |   |
| Provision for income taxes                          |   |                   | 1,999                  |   |   | 2,377 |   |   | 7,067 |   |   | 7,051 |   |
| Net income                                          |   | $                      | 4,310                  |   | $ | 3,949 |   | $ | 12,950 |   | $ | 11,950 |   |
|                                                     |        |                        |                        |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Quarter Ended        September 29, 2007 Compared with Quarter Ended September 29, 2006***

*Net sales.* Net sales increased by $44.0 million, or 39.0%, from $113.0 million for        the quarter ended September 29, 2006 to $157.0 million for the quarter ended September 29,        2007. The increase in sales was primarily due to the inclusion of TB Wood’s which        contributed $30.3 million. The remaining increase was driven by strong sales in the        aerospace and defense, material handling, motion control, energy and mining markets.

 

24

 

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*Gross profit.* Gross profit increased by $14.6 million, or 48.1%, from $30.4 million        (26.9% of net sales), for the quarter ended September 29, 2006 to $45.1 million (28.7% of        net sales) for the same period of 2007. The increase is primarily due to the inclusion of        TB Wood’s during the third quarter 2007, price increases, additional low cost country        material sourcing and implementation of productivity improvements.

*Selling, general and administrative expenses.* Selling, general and administrative        expenses increased by $5.1 million, or 26.0%, from $19.5 million for the quarter ended        September 29, 2006 to $24.6 million for the quarter ended September 29, 2007. The increase        in selling, general and administrative expenses is primarily due to the inclusion of TB        Wood’s in the quarter ended September 29, 2007, additional amortization of intangible        assets associated with the TB Wood’s acquisition and increased costs associated with        being a public company, partially offset by the termination of the management advisory fee        agreement and the elimination of certain duplicate costs related to the TB Wood’s        acquisition.

*Research and development expenses.* Research and development expenses increased by        $0.9 million or 70.7% from $1.3 million to $2.2 million. The increase in research and        development expense is primarily due to the inclusion of TB Wood’s in the quarter        ended September 29, 2007.

*Restructuring* During the first quarter of 2007, we initiated a restructuring program        intended to improve operational efficiency by reducing headcount, consolidating our        operating facilities and relocating manufacturing to lower cost areas. We recorded        approximately $0.2 million of restructuring expense in the third quarter of 2007.

*EBITDA.* To reconcile net income to EBITDA for the quarter ended September 29, 2007,        we added back to net income $2.0 million provision of income taxes, $11.4 million of        interest expense and $5.8 million of depreciation and amortization expenses. To reconcile        net income to EBITDA for the quarter ended September 29, 2006, we added back to net income        $2.4 million provision of income taxes, $6.3 million of interest expense and $3.6 million        of depreciation and amortization expenses. Taking into account the foregoing adjustments,        our resulting EBITDA was $23.5 million for the quarter ended September 29, 2007 and $16.2        million for the quarter ended September 29, 2006. The increase is due to the acquisition of        TB Wood’s and Warner Linear, price increases, volume, and cost savings measures.

*Interest expense.* We recorded interest expense of $11.4 million during the quarter        ended September 29, 2007, which was an increase of $5.0 million, from the quarter ended        September 29, 2006. The increase was due to $2.4 million of interest associated with the        Senior Secured Notes that were issued in the second quarter of 2007, $3.3 million        pre-payment premium and the write-off of $0.8 million of deferred financing costs        associated with the pay-down of the Senior Notes. This was offset by a lower average        outstanding balance of 11.25% bonds during Q3 2007. For a description of the Senior Secured        Notes and the Senior Notes, please see Note 9 to our Condensed Consolidated Financial        Statements in Item I of this Form 10-Q.

         

*Provision for income taxes.*The provision for        income taxes was $2.0 million or 31.7% of income before taxes for the quarter ended        September 30, 2007, versus a provision of $2.4 million, or 37.6% of income before taxes for        the quarter ended September 30, 2006. The 2007 provision as a percentage of income before        taxes was lower than that of 2006, primarily due to the effect of reductions of tax rates        in several foreign jurisdictions and change in earnings mix among tax        jurisdictions.

***Year to Date Ended September 29, 2007 Compared with Year to Date Ended September 29,        2006***

*Net sales.* Net sales increased by $105.3 million, or 30.3%, from $347.5 million for        the year to date period ended September 29, 2006 to $452.8 million for the year to date        period ended September 29, 2007. Without including the impact of Hay Hall, acquired        February 10, 2006, Warner Linear, acquired May 18, 2006, and TB Wood’s, acquired        April 5, 2007, sales increased by 9.0%. The increase in sales was driven by strong sales in        the aerospace and defense, material handling, motion control, energy and mining        markets.

*Gross profit.* Gross profit increased by $34.5 million, or 36.4%, from $94.6 million        (27.2% of net sales), for the year to date period ended September 29, 2006 to $129.0        million (28.5% of net sales) for the same period of 2007. The increase is primarily due to        the acquisition of TB Wood’s, the inclusion of Hay Hall and Warner Linear for the        full year to date period ended September 29, 2007, additional low cost country material        sourcing, price increases and implementation of productivity improvements.

*Selling, general and administrative expenses.* Selling, general and administrative        expenses increased by $13.1 million, or 22.8%, from $57.4 million for the year to date        period ended September 29, 2006 to $70.5 million for the year to date period ended        September 29, 2007. The increase in selling, general and administrative expenses is        primarily due to the acquisition of TB Wood’s, the inclusion of Hay Hall and Warner        Linear for the full year to date period ended September 29, 2007, additional amortization        of intangible assets associated with the TB Wood’s acquisition and increased costs        associated with being a public company, partially offset by the

 

25

 

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termination of the        management advisory fee agreement and the elimination of certain duplicate costs related to        the TB Wood’s acquisition.

*Research and development expenses.* Research and development expenses increased by        $1.9 million, or 50.9%, from $3.8 million to $5.7 million. The increase is mainly due to        the inclusion of TB Wood’s in the year to date period ended September 29, 2007.

*Restructuring* During the first quarter of 2007, we adopted a restructuring program        intended to improve operational efficiency by reducing headcount, consolidating our        operating facilities and relocating manufacturing to lower cost areas. We incurred        approximately $1.2 million of restructuring expense in the year to date period ended        September 29, 2007.

*EBITDA.* To reconcile net income to EBITDA for the year to date period ended        September 29, 2007, we added back to net income $7.1 million provision of income taxes,        $31.2 million of interest expense and $16.4 million of depreciation and amortization        expenses. To reconcile net income to EBITDA for the year to date period ended September 29,        2006, we added back to net income $6.5 million provision of income taxes, $19.4 million of        interest expense and $10.3 million of depreciation and amortization expenses. Taking into        account the foregoing adjustments, our resulting EBITDA was $67.6 million for the year to        date period ended September 29, 2007 and $46.9 million for the year to date period ended        September 29, 2006. The increase is due to the acquisitions of TB Wood’s, inclusion        of Hay Hall and Warner Linear for the full year to date period, price increases, volume,        cost savings measures and the termination of the management advisory services        agreement.

*Interest expense.* We recorded interest expense of $31.2 million during the year to        date period ended September 29, 2007, which was an increase of $11.8 million, from the year        to date period ended September 29, 2006. The increase was due to the $4.6 million in        interest associated with the additional $105.0 million of the Senior Secured notes being        outstanding for six months of 2007, the interest associated with Senior Notes outstanding        for an additional six weeks during the first quarter of 2007 of $0.8 million, the $7.5        million pre-payment premium and the write-off of $2.0 million of deferred financing costs        associated with the pay-down of the Senior Notes. The increase was partially offset by a        decrease in interest expense on the Senior Notes after the February redemption and June and        September pay-downs For a description of the Senior Notes and Senior Secured Notes, please        see Note 9 to our Condensed Consolidated Financial Statements in Item I of this Form        10-Q.

 

*Provision for income taxes.*The provision for        income taxes was $7.1 million, or 35.4%, of income before taxes for the year to date period        ended September 29, 2007, versus a provision of $6.5 million, or 37.8%, of income before        taxes, for the year to date period ended September 29, 2006. The reduction in the 2007        provision from the 2006 provision principally relates to the effect of reductions of tax        rates in several foreign jurisdictions and a change in earnings mix among tax        jurisdictions.

***Liquidity and        Capital Resources***

***Net Cash***

Cash        and cash equivalents totaled $30.0 million at September 29, 2007 compared to $42.5 million        at December 31, 2006. Net cash used in operating activities for the year to date period        ended September 29, 2007 resulted mainly from cash provided by net income of $12.9 million        and the add-back of non-cash depreciation, amortization, stock based compensation,        amortization of inventory fair value adjustment, disposal of fixed assets, loss on foreign        currency, accretion of debt discount/premium and deferred financing costs of $22.2 million        and a decrease in other current assets and liabilities of $4.1 million offset by a net        increase in trade receivables and inventories of $9.2 million and a decrease in accounts        payable and accrued liabilities of $8.4 million.

Net        cash used in investing activities of $124.7 million for the year to date period ended        September 29, 2007 resulted from $117.9 million, net used in the purchase of TB        Wood’s and $6.8 million used in the purchases of property, plant and equipment        primarily for investment in manufacturing equipment.

Net        cash provided by financing activities of $89.3 million for the year to date period ended        September 29, 2007 consisted primarily of proceeds from the issuance of Senior Secured        Notes for $106.1 million, proceeds from the secondary offering of $49.6 million and        borrowings from the revolving line of credit of $8.3 million. This was offset by the        payment of debt issuance costs of $3.7 million, payments on the revolving line of credit        for $9.8 million, the payment of $58.4 million on the Senior Notes, payment of public        offering costs of $2.0 million, payments on mortgages of $0.2 and payments of capital lease        obligations of $0.5 million.

Net        cash flow used in operating activities, for the year to date period ended September 29,        2006 resulted mainly from cash provided by net income of $10.7 million and the add-back of        non-cash depreciation, amortization, stock based compensation, accretion of debt discount,        amortization of deferred financing costs, amortization of inventory fair value adjustment,        disposal of fixed assets, loss on foreign currency, gain on curtailment of post-retirement        benefits and the provision for deferred taxes of $12.8 million,

 

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and a net increase in        other current assets and other operating assets of $0.5 million offset by an increase in        trade receivables and inventories of $3.7 million and a decrease in accounts payable and        accrued liabilities of $8.4 million.

Net        cash used in investing activities of $60.4 million for the year to date period ended        September 29, 2006 resulted from $50.7 million used in the purchase of Hay Hall, $3.6        million for the purchase of Bear Linear and $6.1 million used in the purchases of property,        plant and equipment primarily for investment in manufacturing equipment and for the        consolidation of our IT infrastructure.

Net        cash provided by financing activities of $42.9 million for the year to date period ended        September 29, 2006 resulted primarily from the proceeds of $57.6 million from the issuance        of the Senior Notes in connection with the Hay Hall Acquisition, proceeds from mortgages of        $2.5 million offset by payments made on behalf of our parent of $1.5 million, payments on        capital leases of $0.1 million and debt issuance costs of $2.5 million.

***Liquidity***

Our        primary source of liquidity will be cash flow from operations and borrowings under our        senior revolving credit facility. See Note 9 to the Condensed Consolidated Financial        Statements for explanation of our senior revolving credit facility. We expect that our        primary ongoing requirements for cash will be for working capital, debt service, capital        expenditures and pension plan funding.

We        incurred substantial indebtedness in connection with the Colfax Corporation, Hay Hall and        TB Wood’s acquisitions. As of September 29, 2007, taking into account these        transactions, we had approximately $300.8 million of total indebtedness outstanding        (including capital leases and mortgages). We expect our interest expense, arising from our        existing debt, to be approximately $28.7`  million on an annual        basis, through the maturity of the Senior Secured Notes, in 2011.

Our        senior revolving credit facility provides for senior secured financing of up to $30.0        million, including $10.0 million available for letters of credit. As of September 29, 2007,        there were no outstanding borrowings and $2.9 million of outstanding letters of credit        under our senior revolving credit facility.

We        had $11.3 million outstanding on the TB Wood’s revolving credit facility as of        September 29, 2007. No additional borrowing are allowed under this agreement. As of        September 29, 2007, there were $6.5 million of outstanding letters of credit.

We        made capital expenditures of approximately $6.8 million and $6.1 million in the year to        date periods ended September 29, 2007 and September 29, 2006, respectively. These capital        expenditures will support on-going business needs.

We        have cash funding requirements associated with our pension plan which are estimated to be        $0.6 million during the remainder of 2007, $3.8 million in 2008, and $1.9 million        thereafter.

Our        ability to make scheduled payments of principal and interest, to fund planned capital        expenditures and to meet our pension plan funding obligations will depend on our ability to        generate cash in the future. Based on our current level of operations, we believe that cash        flow from operations and available cash, together with available borrowings under our        senior revolving credit facility will be adequate to meet our future liquidity requirements        for at least the next two years. However, our ability to generate cash is subject to        general economic, financial, competitive, legislative, regulatory and other factors that        are beyond our control. See the section entitled “*Changes in general economic        conditions or the cyclical nature of our markets could harm our operations and financial        performance”* in our Annual Report on Form 10-K for the year ended December 31,        2006 for further discussion*.*

We        cannot assure you that our business will generate sufficient cash flow from operations,        that any revenue growth or operating improvements will be realized or that future        borrowings will be available under our senior secured credit facility in an amount        sufficient to enable us to service our indebtedness, including the notes, or to fund our        other liquidity needs. In addition, we cannot assure you that we will be able to refinance        any of our indebtedness, including our senior revolving credit facility and the notes as        they become due. Our ability to access capital in the long term will depend on the        availability of capital markets and pricing on commercially reasonable terms at the time we        are seeking funds. See the section entitled “Our substantial level of indebtedness        could adversely affect our financial condition, harm our ability to react to changes to our        business and prevent us from fulfilling our obligations on the notes.” in our Annual        Report on Form 10-K for the year ended December 31, 2006 for further discussion. In        addition, our ability to borrow funds under our senior revolving credit facility will        depend on our ability to satisfy the financial and non-financial covenants contained in        that facility.

***Contractual        Obligations***

        During the year to date period ended September 29, 2007 the Company redeemed £29.1        million aggregate principal amount of our outstanding Senior Notes. As of September 29,        2007, the remaining principal balance was £3.9 million, or approximately $7.9        million. The remaining principal balance is due February 13, 2013.

 

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In        April 2007, we completed a follow-on offering of an aggregate of $105.0 million of the        existing Senior Secured Notes. As of September 29, 2007, the remaining principal balance on        our Senior Secured Notes was $270.0 million. The balance is due December 1, 2011.

In        connection with the TB Wood’s acquisition, we assumed $5.3 million of variable rate        demand revenue bonds. $3.0 million of these bonds mature in 2024 and $2.3 million mature in        2022. In addition, we refinanced concurrent with the acquisition $13.0 million of TB        Wood’s revolving credit agreement. Payments of $0.4 million are due over the        remainder of 2007. Payments of $1.5 million are due in the years 2008 and 2009. The        remaining $7.9 million is due in 2010.

**Item 3.        Quantitative and Qualitative Disclosures about Market Risk**

        Information concerning market risk is contained in the Management’s Discussion and        Analysis of Financial Condition and Results of Operations contained in our Annual Report on        Form 10-K filed with the Securities and Exchange Commission for the year ended December 31,        2006 and Form S-4 filed with the Securities and Exchange Commission on August 9, 2007.        There were no material changes in our exposure to market risk from December 31, 2006.

**Item 4.        Controls and Procedures**

Our        management, with the participation of the Chief Executive Officer and Chief Financial        Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined        in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the        “Exchange Act”)), as of September 29, 2007.

In        designing and evaluating the disclosure controls and procedures, management recognizes that        any controls and procedures, no matter how well designed and operated, can provide only        reasonable assurance of achieving the desired control objectives.

Based        on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that        our disclosure controls and procedures are designed at a reasonable assurance level and are        effective to provide reasonable assurance that information we are required to disclose in        reports that we file or submit under the Exchange Act is recorded, processed, summarized        and reported within the time periods specified in Securities and Exchange Commission rules        and forms, and that such information is accumulated and communicated to our management,        including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow        timely decisions regarding required disclosure.

There        has been no change in our internal control over financial reporting (as defined in Rules        13(a)-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during our fiscal quarter        ended September 29, 2007, that has materially affected, or is reasonably likely to        materially affect, our internal control over financial reporting.

 

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**PART        II—OTHER INFORMATION**

**Item 1.        Legal Proceedings**

The        Company is involved in various pending legal proceedings arising out of the ordinary course        of business. None of these legal proceedings is expected to have a material adverse effect        on the financial condition of the Company. With respect to these proceedings, management        believes that it will prevail, has adequate insurance coverage or has established        appropriate reserves to cover potential liabilities. There can be no assurance, however, as        to the ultimate outcome of any of these matters, and if all or substantially all of these        legal proceedings were to be determined adversely to the Company, there could be a material        adverse effect on the financial condition of the Company.

**Item 1A.        Risk Factors**

The        reader should carefully consider the Risk Factors listed in our Annual Report on Form 10-K        for the year ended December 31, 2006 and the Form S-4 filed with the Securities and        Exchange Commission on August 9, 2007. These factors could cause our actual results to        differ materially from those stated in forward looking statements contained in this Form        10-Q and elsewhere. Management does not believe there have been any material changes in our        risk factors as stated in our Annual Report on Form 10-K for the year ended December 31,        2006 other than those contained in the risk factors section of the Company’s Form S-4        filed with the Securities and Exchange Commission on August 9, 2007 (which is incorporated        by reference).

**Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds**

None.

**Item 3.        Defaults Upon Senior Securities**

None.

**Item 4.        Submission of Matters to a Vote of Security Holders**

None

**Item 5.        Other Information**

None.

**Item 6.        Exhibits**

The following exhibits are        filed as part of this report:

 

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**EXHIBIT INDEX**

 

| **Exhibit****Number** | **Description**                                                                                                                                                                                                                                                                                   |
|-----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |                                                                                                                                                                                                                                                                                              |
| 2.1(1)                | Agreement and Plan of Merger, dated as of February 17, 2007,                    among Altra Holdings, Inc., Forest Acquisition Corporation and TB Wood’s                    Corporation.                                                                                                    |
| 2.2(2)                | Amendment No. 1 to the Agreement and Plan of Merger, dated as of                    March 11, 2007, among Altra Holdings, Inc., Forest Acquisition Corporation and                    TB Wood’s Corporation.                                                                                |
| 3.1(3)                | Certificate of Incorporation of the Registrant.                                                                                                                                                                                                                                                   |
| 3.3(3)                | Bylaws of the Registrant.                                                                                                                                                                                                                                                                         |
| 4.1(4)                | Indenture, dated as of November 30, 2004, among Altra                    Industrial Motion, Inc., the Guarantors party thereto and The Bank of New York                    Trust Company, N.A. as trustee.                                                                                   |
| 4.2(5)                | First Supplemental Indenture, dated as of February 7, 2006,                    among Altra Industrial Motion, Inc., the guarantors party thereto, and The Bank                    of New York Trust Company, N.A. as trustee.                                                                |
| 4.3(6)                | Second Supplemental Indenture, dated as of February 8,                    2006, among Altra Industrial Motion, Inc., the guarantors party thereto, and                    The Bank of New York Trust Company, N.A. as trustee.                                                               |
| 4.4(5)                | Third Supplemental Indenture, dated as of April 24, 2006,                    among Altra Industrial Motion, Inc., the guarantors party thereto, and The Bank                    of New York Trust Company, N.A. as trustee.                                                                  |
| 4.5(7)                | Fourth Supplemental Indenture, dated as of March 21, 2007, among                    Altra Industrial Motion, Inc., the guarantors party thereto, and The Bank of                    New York Trust Company, N.A. as trustee.                                                                      |
| 4.6(8)                | Fifth Supplemental Indenture, dated as of April 5, 2007, among                    Altra Industrial Motion, Inc., the guarantors party thereto, and The Bank of                    New York Trust Company, N.A. as trustee.                                                                        |
| 4.7(4)                | Form of 9% Senior Secured Notes due 2011.                                                                                                                                                                                                                                                    |
| 4.8(4)                | Registration Rights Agreement, dated as of November 30,                    2004, among Altra Industrial Motion, Inc., Jefferies & Company, Inc.,                    and the subsidiary guarantors party thereto.                                                                    |
| 4.9(9)                | Registration Rights Agreement, dated as of April 5, 2007, among                    Altra Industrial Motion, Inc., Jefferies & Company, Inc., and the                    subsidiary guarantors party thereto.                                                                             |
| 4.10(6)               | Indenture, dated as of February 8, 2006, among Altra                    Industrial Motion, Inc., the guarantors party thereto, The Bank of New York, as                    trustee and paying agent and The Bank of New York (Luxembourg) SA, as                    Luxembourg paying agent. |
| 4.11(5)               | First Supplemental Indenture, dated as of April 24, 2006,                    among Altra Industrial Motion, Inc., the guarantors party thereto, and The Bank                    of New York as trustee.                                                                                      |
| 4.12(7)               | Second Supplemental Indenture, dated as of March 26, 2007, among                    Altra Industrial Motion, Inc., the guarantors party thereto, and The Bank of                    New York, as trustee.                                                                                         |
| 4.13(8)               | Third Supplemental Indenture, dated as of April 5, 2007, among                    Altra Industrial Motion, Inc., the guarantors party thereto, and The Bank of                    New York, as trustee.                                                                                           |
| 4.14(6)               | Form of                    111/4% Senior Notes due 2013.                                                                                                                                                                                                                                     |
| 4.15(6)               | Registration Rights Agreement, dated as of February 8,                    2006, among Altra Industrial Motion, Inc., the guarantors party thereto, and                    Jefferies International Limited, as initial purchasers.                                                       |

 

 

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| 10.2(9) | Fifth Amendment to, and Consent and Waiver under, Credit                    Agreement and Joinder to Loan Documents, dated as of April 5, 2007, among Altra                    Industrial Motion, Inc., the financial institutions listed therein, as Lenders,                    and Wells Fargo Foothill, Inc. |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1*   | Certification of Chief Executive Officer Pursuant to Section 302                    of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                           |
| 31.2*   | Certification of Chief Financial Officer Pursuant to Section 302                    of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                           |
| 32.1**  | Certification of Chief Executive Officer Pursuant to Section 906                    of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                           |
| 32.2**  | Certification of Chief Financial Officer Pursuant to Section 906                    of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                           |

 

| *  | Filed herewith.     |   |
|----|---------------------|--------|
| ** | Furnished herewith. |

(1)           Incorporated        by reference to Altra Holdings, Inc.’s Current Report on Form 8-K filed with the        Securities and Exchange Commission on February 20, 2007.

(2)           Incorporated        by reference to Altra Holdings, Inc.’s Current Report on Form 8-K filed with the        Securities and Exchange Commission on March 13, 2007.

(3)           Incorporated        by reference Altra Industrial Motion, Inc.’s Registration Statement on Form 10, as        amended (No. 333-124944), filed with the Securities and Exchange Commission on May 16,        2005.

(4)           Incorporated        by reference to Altra Industrial Motion, Inc. Registration Statement on Form S-4 (File No.        333-124944) filed with the Securities and Exchange Commission on May 16, 2005.

(5)           Incorporated        by reference to Altra Industrial Motion, Inc.’s Annual Report on Form 10-K filed with        the Securities and Exchange Commission on May 15, 2006.

(6)           Incorporated        by reference to Altra Industrial Motion, Inc.’s Current Report on Form 8-K filed with        the Securities and Exchange Commission on February 14, 2006.

(7)           Incorporated        by reference to Altra Industrial Motion, Inc.’s Current Report on Form 8-K filed with        the Securities and Exchange Commission on March 26, 2007.

(8)           Incorporated        by reference to Altra Industrial Motion, Inc.’s Current Report on Form 8-K filed with        the Securities and Exchange Commission on April 11, 2007.

(9)           Incorporated        by reference to Altra Industrial Motion, Inc.’s Registration Statement on Form S-4        (File No. 333-142692-06) filed with the Securities and Exchange Commission on May 8,        2007.

 

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**SIGNATURES**

 

Pursuant to the requirements 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.

         

| ALTRA INDUSTRIAL MOTION, INC. |
|-------------------------------|

         

         

| November 13, 2007 | By:    | /s/ Michael L. Hurt                    |
|-------------------|--------|----------------------------------------|
|              | Name:  | Michael L. Hurt                        |
|              | Title  | Chairman and Chief Executive Officer   |
|              |   |                                   |
| November 13, 2007 | By:    | /s/ David Wall                         |
|              | Name:  | David Wall                             |
|              | Title: | VP Finance and Chief Financial Officer |

                                                                                                                       

 

 

 

 

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