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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 333-124944
 
 ALTRA INDUSTRIAL MOTION, INC.
  Delaware
    
    30-0283143(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)14 Hayward Street, Quincy, Massachusetts
    
    02171(Address of Principal Executive Offices)
    
    (Zip Code)
 (617) 328-3300
 NONE
 NONE
 o þ
 þ o
 þ o
 þ
  o o þ
 o þ
   The registrant meets the conditions set forth in General Instruction I 1(a) and (b) of Form 10-K
and is therefore filing this form with the reduced disclosure format.




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##### 



TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    4Item 1A.
    
    Risk Factors
    
    
    14Item 1B.
    
    Unresolved Staff Comments
    
    
    23Item 2.
    
    Properties
    
    
    24Item 3.
    
    Legal Matters
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25PART IIItem 5.
    
    Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Repurchases of Equity Securities
    
    
    25Item 6.
    
    Selected
Historical Financial Data
    
    
    25Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    41Item 8.
    
    Financial Statements and Supplementary Data
    
    
    43Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    87Item 9A.
    
    Controls and Procedures
    
    
    87Item 9B.
    
    Other Information
    
    
    87PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    87Item 11.
    
    Executive Compensation
    
    
    87Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    87Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    87Item 14.
    
    Principal Accountant Fees and Services
    
    
    87PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    88SIGNATURES
    
    
    
    
    92EX-10.28 First Amendment to Credit AgreementEX-10.29 Second Amendment to Credit AgreementEX-10.30 Third Amendment to Credit AgreementEX-10.31 Fourth Amendment to Credit AgreementEX-21.1 SubsidiariesEX-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.
  2




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FORWARD-LOOKING STATEMENTS
   3




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Item 1. Business
 Our Company
    http://www.sec.gov
 www.altramotion.com
 Our Industry
   4




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Our Strengths
 Leading Market Shares and Brand Names.
 Large Installed Base and Diversified OEM Customers Supporting Aftermarket Sales.
 Diversified End-Markets.
 Strong Relationship with Distributors and OEMs.
 Experienced, High-Caliber Management Team.
 The Altra Business System(ABS).
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Proven Product Development Capabilities.
 Our Business Strategy
  
    
    Leverage Our Sales and Distribution Network.We intend to
continue to leverage our relationships with our
distributors to gain shelf space, further integrate our
recently acquired brands with our core brands and sell new
products. We seek to capitalize on customer brand
preference for our products to generate pull-through
aftermarket demand from our distribution channel. We
believe this strategy also allows our distributors to
achieve high profit margins, further enhancing our
preferred positions with them.
    
    Focus our Strategic Marketing on New Growth Opportunities.
We intend to expand our emphasis on strategic marketing to
focus on new growth opportunities in key end-user markets.
Through a systematic process that leverages our core brands
and products, we seek to identify attractive markets and
product niches, collect customer and market data, identify
market drivers, tailor product and service solutions to
specific market and customer requirements and deploy
resources to gain market share and drive future sales
growth.
    
    Accelerate New Product and Technology Development.We are
highly focused on developing new products across our
business in response to customer needs in various markets.We expect new products developed by us during the past
three years to generate approximately $60 million in
revenues in 2007.
    
    Capitalize on Growth and Sourcing Opportunities in the
Asia-Pacific Market.We intend to leverage our established
sales offices in China, Taiwan and Singapore, as well as
add representation in Japan and South Korea. We also intend
to expand our manufacturing presence in Asia beyond our
current plant in Shenzhen, China, to increase sales in the
high-growth Asia-Pacific region. This region also offers
opportunities for low-cost country sourcing of materials.
During 2006, we sourced approximately 17% of our purchases
from low-cost countries, resulting in average cost
reductions of over 45% for these products. Within the next
five year, we intend to utilize our sourcing office in
Shanghai to significantly increase our current level of
low-cost country sourced purchases. We may also consider
opportunities to outsource some of our production from
North American and Western European locations to Asia.
    
    Continue to Improve Operational and Manufacturing
Efficiencies through ABS.We believe we can continue to
improve profitability through cost control, overhead
rationalization, global process optimization, continued
implementation of lean manufacturing techniques and
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strategic pricing initiatives. Our operating plan, based
on manufacturing centers of excellence, provides additional
opportunities to reduce costs by sharing best practices
across geographies and business lines and by consolidating
purchasing processes. We have implemented these principles
with our recent acquisitions of Hay Hall Holdings Limited,
or Hay Hall and Bear Linear LLC, or Warner Linear, and
intend to apply such principles to future acquisitions. We
have been operating Bear Linear as a division under the
name Warner Linear.
    
    Pursue Strategic Acquisitions that Complement our Strong
Platform.Management believes that there may be a number of
attractive potential acquisition candidates in the future,
in part due to the fragmented nature of the industry. We
plan to continue our disciplined pursuit of strategic
acquisitions to accelerate our growth, enhance our industry
leadership and create value. On February 17, 2007, our
parent company, Altra Holdings, Inc., or Altra Holdings,
entered into an agreement and plan of merger to acquire all
of the issued and outstanding shares of capital stock of TB
Woods Corporation, or TB Woods. With our extensive MPT
and motion control products, our strong customer and
distributor relationships and our know-how in implementing
lean enterprise initiatives through ABS, we have an ideal
platform for acquiring and successfully integrating related
businesses, as evidenced through our acquisition and
integration of Hay Hall and Bear Linear. Altra Holdings
intends to cause TB Woods, to become our wholly-owned
subsidiary. We expect to finance the acquisition, in part,
through the tack-on offering of our 9% senior secured notes due 2011, or the 9% senior
secured notes, borrowings under our senior revolving credit facility
and cash on hand. The transaction is expected to close in
April 2007.
 Products
   Products
    
    Principal Brands
    
    Principal Markets
    

    Sample ApplicationsClutches and Brakes
    
    Warner Electric, Wichita Clutch,
Formsprag Clutch, Stieber Clutch,
Matrix International,
Inertia Dynamics, Twiflex Limited,
Industrial Clutch,
Marland Clutch
    
    Aerospace, energy,
material handling,
metals, turf and
garden, mining
    
    Elevators,
forklifts, lawn
mowers, oil well
drawworks, punch
presses, conveyorsGearing
    
    Boston Gear, Nuttall
Gear, Delroyd Worm
Gear,
    
    Food processing,
material handling,
metals, transportation
    
    Conveyors, ethanol
mixers, packaging
machinery, rail car
wheel drives
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Products
    
    Principal Brands
    
    Principal Markets
    Sample ApplicationsEngineered Couplings
    
    Ameridrives, Bibby
Transmissions
    
    Energy, metals, plastics
    
    Extruders,
turbines, steel
strip millsEngineered Bearing
Assemblies
    
    Kilian Manufacturing
    
    Aerospace, material
handling, transportation
    
    Cargo rollers, steering
columns, conveyorsPower Transmission
Components
    
    Warner Electric,
Boston Gear, Huco
Dynatork, Warner
Linear, Matrix
International,
Saftek
    
    Material handling,
metals, turf and garden
    
    Conveyors, lawn
mowers, machine
tools
 Clutches and Brakes.
 
    
    Electromagnetic Clutches and Brakes.Our industrial
products include clutches and brakes with specially
designed controls for material handling, forklift,
elevator, medical mobility, mobile off-highway, baggage
handling and plant productivity applications. We also offer
a line of clutch and brake products for walk-behind mowers,
residential lawn tractors and commercial mowers. While
industrial applications are predominant, we also
manufacture several vehicular niche applications including
on-road refrigeration compressor clutches and agricultural
equipment clutches. We market our electromagnetic products
under the Warner Electric, Inertia Dynamics and Matrix
brand names.
    
    Overrunning Clutches.Specific product lines include the
Formsprag and Stieber indexing and backstopping clutches.
Primary industrial applications include conveyors, gear
reducers, hoists and cranes, mining machinery, machine
tools, paper machinery, packaging machinery, pumping
equipment and other specialty machinery. We market and sell
these products under the Formsprag, Marland and Stieber
brand names.
    
    Heavy Duty Clutches and Brakes.Our heavy duty clutch and
brake product lines serve various markets including metal
forming, off-shore and land-based oil and gas drilling
platforms, mining material handling, marine applications
and various off-highway and construction equipment
segments. Our line of heavy duty pneumatic, hydraulic and
caliper clutches and brakes are marketed under the Wichita
Clutch and Twiflex brand names.
 Gearing.
 Engineered Couplings.
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Engineered Bearing Assemblies.
 Power Transmission Components.
 
    
    Warner Linear.Warner Linear is a designer and manufacturer
of rugged service electromechanical linear actuators for
off-highway vehicles, agriculture, turf care, special
vehicles, medical equipment, industrial and marine
applications.
    
    Huco Dynatork.Huco Dynatork is a leading manufacturer and
supplier of a complete range of precision couplings,
universal joints, rod ends and linkages.
    
    Saftek.Saftek manufactures a broad range of high quality
non-asbestos friction materials for industrial, marine,
construction, agricultural and vintage and classic cars and
motorcycles.
    
    Other Accessories.Our Boston Gear, Warner Electric and
Matrix businesses make or market several other accessories
such as sensors, sleeve bearings, AC/ DC motors, adjustable
speed drives, shaft accessories, face tooth couplings and
fluid power components that are used in numerous end
markets.
 Research and Development and Product Engineering
  
    
    lowering the cost of manufacturing our existing products;
    
    redesigning existing product lines to increase their
efficiency or enhance their performance; and
    
    developing new product applications.
  9




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Sales and Marketing
   Distribution
   Competition
  10




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Seasonality
  Intellectual Property
    Backlog
  Employees
  11




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Suppliers and Raw Materials
  Regulation
  Environmental and Health and Safety Matters
   12




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Executive Officers of Registrant
  Michael L. Hurt
 Carl R. Christenson
 13




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David A. Wall
 Gerald Ferris
 Timothy McGowan
 Edward L. Novotny
 Craig Schuele
 
 Item 1A. Risk Factors
 We operate in the highly competitive mechanical power transmission industry and if we are not able
to compete successfully our business may be significantly harmed.
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Changes in general economic conditions or the cyclical nature of our markets could harm our
operations and financial performance.
  We rely on independent distributors and the loss of these distributors could adversely affect our
business.
  We must continue to invest in new technologies and manufacturing techniques; however, our ability
to develop or adapt to changing technology and manufacturing techniques is uncertain and our
failure to do so could place us at a competitive disadvantage.
   
    
    product quality and availability;
    
    price competitiveness;
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
    
    technical expertise and development capability;
    
    reliability and timeliness of delivery;
    
    product design capability;
    
    manufacturing expertise; and
    
    sales support and customer service.
  Our operations are subject to international risks that could affect our operating results.
  
    
    fluctuations in currency exchange rates;
    
    exchange rate controls;
    
    tariffs or other trade protection measures and import or export licensing requirements;
    
    potentially negative consequences from changes in tax laws;
    
    interest rates;
    
    unexpected changes in regulatory requirements;
    
    changes in foreign intellectual property law;
    
    differing labor regulations;
    
    requirements relating to withholding taxes on remittances and other payments by
subsidiaries;
    
    restrictions on our ability to own or operate subsidiaries, make investments or
acquire new businesses in various jurisdictions;
    
    potential political instability and the actions of foreign governments; and
    
    restrictions on our ability to repatriate dividends from our subsidiaries.
  16




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Our operations depend on production facilities throughout the world, many of which are located
outside the United States and are subject to increased risks of disrupted production causing delays
in shipments and loss of customers and revenue.
  Material weaknesses in our internal controls over financial reporting have been identified which
could result in a decrease in the value of your investment.
   If we are unable to complete our assessment as to the adequacy of our internal controls over
financial reporting as of December 31, 2007 as required by Section 404 of the Sarbanes-Oxley Act of
2002, or if material weaknesses are identified and reported, investors could lose confidence in the
reliability of our financial statements, which could result in a decrease in the value of your
investment and make it more difficult for us to raise capital in the future.
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We rely on estimated forecasts of our OEM customers needs, and inaccuracies in such forecasts
could materially adversely affect our business.
  The materials used to produce our products are subject to price fluctuations that could increase
costs of production and adversely affect our profitability.
  We face potential product liability claims relating to products we manufacture or distribute, which
could result in our having to expend significant time and expense to defend these claims and to pay
material claims or settlement amounts.
  We may be subject to work stoppages at our facilities, or our customers may be subjected to work
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stoppages, which could seriously impact our operations and the profitability of our business.
    Changes in employment laws could increase our costs and may adversely affect our business.
   We depend on the services of key executives, the loss of who could materially harm our business.
  If we lose certain of our key sales, marketing or engineering personnel, our business may be
adversely affected.
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We are subject to environmental laws that could impose significant costs on us and the failure to
comply with such laws could subject us to sanctions and material fines and expenses.
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We face additional costs associated with our post-retirement and post-employment obligations to
employees which could have an adverse effect on our financial condition.
     Our future success depends on our ability to integrate acquired companies and manage our growth
effectively.
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We may not be able to protect our intellectual property rights, brands or technology effectively,
which could allow competitors to duplicate or replicate our technology and could adversely affect
our ability to compete.
  Goodwill comprises a significant portion of our total assets, and if we determine that goodwill has
become impaired in the future, net income in such years may be materially and adversely affected.
  Unplanned repairs or equipment outages could interrupt production and reduce income or cash flow.
  Our operations are highly dependent on information technology infrastructure and failures could
significantly affect our business.
  Our leverage could adversely affect our financial health and make us vulnerable to adverse economic
and industry conditions.
  22




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
    
    make it more challenging for us to obtain additional financing to fund our business
strategy and acquisitions, debt service requirements, capital expenditures and working
capital;
    
    increase our vulnerability to interest rate changes and general adverse economic and
industry conditions;
    
    require us to dedicate a substantial portion of our cash flow from operations to
service our indebtedness, thereby reducing the availability of our cash flow to
finance acquisitions and to fund working capital, capital expenditures, research and
development efforts and other general corporate activities;
    
    make it difficult for us to fulfill our obligations under our credit and other debt
agreements;
    
    limit our flexibility in planning for, or reacting to, changes in our business and our
markets; and
    
    place us at a competitive disadvantage relative to our competitors that have less debt.
 1 1 4
 We are subject to tax laws and regulations in many jurisdictions and the inability to successfully
defend claims from taxing authorities related to our current or acquired businesses could adversely
affect our operating results and financial position.
  Genstar Capital Partners III, L.P. and Stargen III, L.P. (together, the Genstar Funds) have
significant influence and may have conflicts of interest with our other stockholders in the future.
  
 Item 1B. Unresolved Staff Comments
  23




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Item 2. Properties
  Location
    
    Brand
    
    Major Products
    
    Sq. Feet
    
    Owned/Leased
    
    Lease ExpirationAltraUnited StatesSouth Beloit, Illinois
    
    Warner Electric
    
    Electromagnetic Clutches & Brakes
    
    
    104,228
    
    
    Owned
    
    N/AColumbia City, Indiana
    
    Warner Electric
    
    Electromagnetic
Clutches & Brakes
    
    
    76,200
    
    
    Owned
    
    N/AWarren, Michigan
    
    Formsprag
    
    Overrunning Clutches
    
    
    79,000
    
    
    Owned
    
    N/ASyracuse, New York
    
    Kilian Manufacturing
    
    Engineered Bearing
Assemblies
    
    
    90,400
    
    
    Owned
    
    N/AErie, Pennsylvania
    
    Ameridrives
    
    Couplings
    
    
    76,200
    
    
    Owned
    
    N/AWichita Falls, Texas
    
    Wichita Clutch
    
    Heavy Duty Clutches
and Brakes
    
    
    90,400
    
    
    Owned
    
    N/AQuincy, Massachusetts
(1)(2)
    
    Altra, Boston Gear
    
    
    
    
    30,350
    
    
    Leased
    
    February 12, 2008Niagara Falls, New York
    
    Nuttall Gear
    
    Gearing
    
    
    155,509
    
    
    Leased
    
    March 31, 2008Torrington, Connecticut
    
    Inertia Dynamics
    
    Electromagnetic
Clutches & Brakes
    
    
    32,000
    
    
    Leased
    
    May 31, 2007Charlotte, North
Carolina
    
    Boston Gear
    
    Gearing & Power
Transmission
Components
    
    
    35,000
    
    
    Owned
    
    N/AInternationalToronto, Canada
    
    Kilian Manufacturing
    
    Engineered Bearing
Assemblies
    
    
    29,000
    
    
    Owned
    
    N/ABedford, England
    
    Wichita Clutch
    
    Heavy Duty Clutches
& Brakes
    
    
    49,000
    
    
    Owned
    
    N/AAllones, France
    
    Warner Electric
    
    Electromagnetic
Clutches & Brakes
    
    
    38,751
    
    
    Owned
    
    N/ASaint Barthelemy,
France
    
    Warner Electric
    
    Electromagnetic
Clutches & Brakes
    
    
    57,609
    
    
    Owned
    
    N/AToronto, Canada
    
    Kilian Manufacturing
    
    Engineered Bearing
Assemblies
    
    
    30,120
    
    
    Leased
    
    (3)Shenzhen, China
    
    Warner Electric
    
    Electromagnetic
Clutches & Precision Components
    
    
    26,100
    
    
    Owned
    
    N/A
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Location
    
    Brand
    
    Major Products
    
    Sq. Feet
    
    Owned/Leased
    
    Lease ExpirationGarching, Germany
    
    Stieber
    
    Overrunning Clutches
    
    
    32,292
    
    
    Leased
    
    (4)Heidelberg, Germany
    
    Stieber
    
    Overrunning Clutches
    
    
    57,609
    
    
    Owned
    
    N/ADewsbury, England
    
    Bibby Transmissions
    
    Couplings
    
    
    26,100
    
    
    Owned
    
    N/ABrechin, Scotland
    
    Matrix International
    
    Clutch Brakes,
Couplings
    
    
    52,500
    
    
    Leased
    
    February 28, 2011Twickenham, England
    
    Twiflex
    
    Heavy Duty Clutches
and Brakes
    
    
    27,500
    
    
    Leased
    
    September 30, 2009Hertford, England
    
    Huco Dynatork
    
    Couplings, Power
Transmission
Components
    
    
    13,565
    
    
    Leased
    
    July 31, 2007Telford, England
    
    Saftek
    
    Friction Material
    
    
    4,400
    
    
    Leased
    
    August 31, 2008
 
 (1)
    
    Certain employees at these locations provide general and administrative services for
our other locations.(2)
    
    Corporate Headquarters and selective Boston Gear functions.(3)
    
    Month to month lease.(4)
    
    Must give the lessor twelve month notice for termination. 
 Item 3. Legal Matters
  
 Item 4. Submission of Matters to a vote of security holders
  
 PART II
 
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters, and Issuer
Repurchase of Equity Securities
  
 Item 6. Selected Historical Financial Data
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PredecessorPeriodFrom
    
    
    
    PeriodDecember
    
    
    
    FromAltra Year
    
    
    Altra Year
    
    
    1, 2004
    
    
    
    January 1ended
    
    
    ended
    
    
    Through
    
    
    
    Through
    
    
    Year EndedDecember
    
    
    December
    
    
    December
    
    
    
    November 30,
    
    
    December 31,31, 2006
    
    
    31, 2005
    
    
    31, 2004
    
    
    
    2004
    
    
    2003
    
    
    2002(dollars in thousands)Income Statement Data:Net sales
    
    $
    462,285
    
    
    $
    363,465
    
    
    $
    28,625
    
    
    
    $
    275,037
    
    
    $
    266,863
    
    
    $
    253,217Cost of sales
    
    
    336,836
    
    
    
    271,952
    
    
    
    23,847
    
    
    
    
    209,253
    
    
    
    207,941
    
    
    
    190,465Gross profit
    
    
    125,449
    
    
    
    91,513
    
    
    
    4,778
    
    
    
    
    65,784
    
    
    
    58,922
    
    
    
    62,752Selling, general and
administrative expenses
    
    
    83,256
    
    
    
    61,520
    
    
    
    8,973
    
    
    
    
    45,321
    
    
    
    49,513
    
    
    
    48,303Research and development
expenses
    
    
    4,938
    
    
    
    4,683
    
    
    
    378
    
    
    
    
    3,947
    
    
    
    3,455
    
    
    
    3,103Gain on curtailment of
post-retirement benefit plan
    
    
    (3,838
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructuring charge, asset
impairment and transition
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    947
    
    
    
    11,085
    
    
    
    27,825Gain on sale of assets
    
    
    
    
    
    
    (99
    )
    
    
    
    
    
    
    
    (1,300
    )
    
    
    
    
    
    
    Income (loss) from operations
    
    
    41,093
    
    
    
    25,409
    
    
    
    (4,573
    )
    
    
    
    16,869
    
    
    
    (5,131
    )
    
    
    (16,479
    )Interest expense, net
    
    
    23,522
    
    
    
    17,065
    
    
    
    1,410
    
    
    
    
    4,294
    
    
    
    5,368
    
    
    
    5,489Other expense (income)
    
    
    856
    
    
    
    (17
    )
    
    
    
    
    
    
    
    148
    
    
    
    465
    
    
    
    (312
    )Income (loss) before income
taxes and discontinued
operations and cumulative
effect of change in
accounting principles
    
    
    16,715
    
    
    
    8,361
    
    
    
    (5,983
    )
    
    
    
    12,427
    
    
    
    (10,964
    )
    
    
    (21,656
    )Provision (benefit) for
income taxes
    
    
    6,352
    
    
    
    3,917
    
    
    
    (221
    )
    
    
    
    5,532
    
    
    
    (1,658
    )
    
    
    2,455Loss from disposal of
discontinued operations, net
of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (700
    )Income (loss) from
operations and disposal of
discontinued operations, net
of income taxes
    
    
    10,363
    
    
    
    4,444
    
    
    
    (5,762
    )
    
    
    
    6,895
    
    
    
    (9,306
    )
    
    
    (24,811
    )Cumulative effect of change
in accounting
principlegoodwill
impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83,412
    )Net income (loss)
    
    $
    10,363
    
    
    $
    4,444
    
    
    $
    (5,762
    )
    
    
    $
    6,895
    
    
    $
    (9,306
    )
    
    $
    (108,223
    )Other Financial Data:Depreciation and amortization
    
    $
    14,611
    
    
    $
    11,533
    
    
    $
    919
    
    
    
    $
    6,074
    
    
    $
    8,653
    
    
    $
    9,547Purchases of fixed assets
    
    
    9,408
    
    
    
    6,199
    
    
    
    289
    
    
    
    
    3,489
    
    
    
    5,294
    
    
    
    5,911Cash flow provided by (used
in):Operating activities
    
    
    13,413
    
    
    
    13,835
    
    
    
    5,623
    
    
    
    
    3,604
    
    
    
    (14,289
    )
    
    
    21,934Investing activities
    
    
    (63,163
    )
    
    
    (5,197
    )
    
    
    (180,401
    )
    
    
    
    953
    
    
    
    (1,573
    )
    
    
    (4,585
    )Financing activities
    
    
    81,552
    
    
    
    (2,783
    )
    
    
    179,649
    
    
    
    
    (6,696
    )
    
    
    12,746
    
    
    
    (13,037
    )
 26




---



##### Table of Contents



PredecessorDecember
    
    December
    
    December 31,
    
    
    December 31,31, 2006
    
    31, 2005
    
    2004
    
    
    2003
    
    2002Balance Sheet Data:Cash and cash equivalents
    
    $
    42,527
    
    
    $
    10,060
    
    
    $
    4,729
    
    
    
    $
    3,163
    
    
    $
    5,214Property, plant and equipment, net
    
    
    82,387
    
    
    
    66,393
    
    
    
    68,006
    
    
    
    
    61,605
    
    
    
    69,827Total assets
    
    
    409,368
    
    
    
    297,404
    
    
    
    299,051
    
    
    
    
    174,324
    
    
    
    173,034Long-term debt
    
    
    228,555
    
    
    
    159,574
    
    
    
    158,740
    
    
    
    
    1,025
    
    
    
    46,183Total stockholders equity (deficit)/Invested capital
    
    
    79,519
    
    
    
    38,613
    
    
    
    42,879
    
    
    
    
    (3,004
    )
    
    
    (9,418
    )
 
 Item 7. 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. and its Predecessor should be read together with the Selected Historical Financial
Data, and the financial statements of Altra Industrial Motion, Inc. and its Predecessor and related
notes included elsewhere in this Form 10-K. 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 and Risk Factors.
 General
     History and the Acquisitions
  27




---



##### Table of Contents



28




---



##### Table of Contents



Cost Savings and Productivity Enhancement Initiatives
  
    
    In 2005, we re-negotiated two of our U.S. collective bargaining
agreements which we estimate provide for savings of $0.8 million
annually.
    
    In 2006, we re-negotiated one of our U.S. collective bargaining
agreements which we estimate provides for savings of $2.2 million
annually.
 Critical Accounting Policies
   Revenue Recognition.
  Inventory.
 Retirement Benefits.
 29




---



##### Table of Contents



Goodwill and Intangible Assets. Business Combinations. Goodwill and Other Intangible Assets.
   30




---



##### Table of Contents



Long-lived Assets.
 Income Taxes.
 Non-GAAP Financial Measures
   31




---



##### Table of Contents




    
    cash expenditures, or future requirements, for capital expenditures or contractual
commitments;
    
    changes in, or cash requirements for, working capital needs;
    
    the significant interest expense, or the cash requirements necessary to service
interest or principal payments, on debts;
    
    tax distributions that would represent a reduction in cash available to us; and
    
    any cash requirements for assets being depreciated and amortized that may have to
be replaced in the future.
   Results of Operations
 PredecessorCombined12 Months
    
    
    From Inceptionended
    
    
    (December 1,
    
    
    
    11 monthsYear ended
    
    
    Year ended
    
    
    December
    
    
    2004) through
    
    
    
    endedDecember
    
    
    December 31,
    
    
    31, 2004
    
    
    December 31,
    
    
    
    November 30,31, 2006
    
    
    2005
    
    
    (Unaudited)
    
    
    2004
    
    
    
    2004(Dollars in thousands)Net sales
    
    $
    462,285
    
    
    $
    363,465
    
    
    $
    303,662
    
    
    $
    28,625
    
    
    
    $
    275,037Cost of sales
    
    
    336,836
    
    
    
    271,952
    
    
    
    233,100
    
    
    
    23,847
    
    
    
    
    209,253Gross profit
    
    
    125,449
    
    
    
    91,513
    
    
    
    70,562
    
    
    
    4,778
    
    
    
    
    65,784Gross profit percentage
    
    
    27.1
    %
    
    
    25.2
    %
    
    
    23.2
    %
    
    
    16.7
    %
    
    
    
    23.9
    %Selling, general and administrative expenses
    
    
    83,256
    
    
    
    61,520
    
    
    
    54,294
    
    
    
    8,973
    
    
    
    
    45,321Research and development expenses
    
    
    4,938
    
    
    
    4,683
    
    
    
    4,325
    
    
    
    378
    
    
    
    
    3,947Restructuring charge, asset impairment and
transition expenses
    
    
    
    
    
    
    
    
    
    
    947
    
    
    
    
    
    
    
    
    947
 32




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##### Table of Contents



PredecessorCombined12 Months
    
    
    From Inceptionended
    
    
    (December 1,
    
    
    
    11 monthsYear ended
    
    
    Year ended
    
    
    December
    
    
    2004) through
    
    
    
    endedDecember
    
    
    December 31,
    
    
    31, 2004
    
    
    December 31,
    
    
    
    November 30,31, 2006
    
    
    2005
    
    
    (Unaudited)
    
    
    2004
    
    
    
    2004(Dollars in thousands)Gain on curtailment of post-retirement
benefit plan
    
    
    (3,838
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of fixed assets
    
    
    
    
    
    
    (99
    )
    
    
    (1,300
    )
    
    
    
    
    
    
    
    (1,300
    )Income (loss) from operations
    
    
    41,093
    
    
    
    25,409
    
    
    
    12,296
    
    
    
    (4,573
    )
    
    
    
    16,869Interest expense
    
    
    23,522
    
    
    
    17,065
    
    
    
    5,704
    
    
    
    1,410
    
    
    
    
    4,294Other non-operating expense (income), net
    
    
    856
    
    
    
    (17
    )
    
    
    148
    
    
    
    
    
    
    
    
    148Income (loss) before income taxes
    
    
    16,715
    
    
    
    8,361
    
    
    
    6,444
    
    
    
    (5,983
    )
    
    
    
    12,427Provision (benefit) for income taxes
    
    
    6,352
    
    
    
    3,917
    
    
    
    5,311
    
    
    
    (221
    )
    
    
    
    5,532Net income (loss)
    
    $
    10,363
    
    
    $
    4,444
    
    
    $
    1,133
    
    
    $
    (5,762
    )
    
    
    $
    6,895
 Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
 Net sales.
 Gross profit.
 Selling, general and administrative expenses.
 Research and development expenses.
 EBITDA.
 33




---



##### Table of Contents



Interest expense. 1 4 1 4
 Other non-operating (income) expense.
 Provision for income taxes.
 Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
 Net sales.
 Gross profit.
 Selling, general and administrative expenses.
 Research and development expenses.
 Gain on sale of assets.
 34




---



##### Table of Contents



EBITDA.
 Interest expense.
 Provision for income taxes.
 Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
 Net sales.
 Gross profit.
 Selling, general and administrative expenses.
 Research and development expenses.
 Restructuring charge, asset impairment and transition expenses.
 35




---



##### Table of Contents



EBITDA.
 Interest expense.
 (Gain) on sale of assets.
 36




---



##### Table of Contents



Other non-operating (income) expense.
 Provision for income taxes.
 Liquidity and Capital Resources
 Overview
  Borrowings
 1 4 1 4
 1 4
 1 4 1 4
   37




---



##### Table of Contents



1 4
 1 4 1 4
   Net Cash
   38




---



##### Table of Contents



1 4 1 4
 Capital Expenditures
 .
  Pension Plans
  Off-Balance Sheet Arrangements
  Contractual Obligations
  Payments Due by Period2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    TotalSenior secured notes(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    165.0
    
    
    $
    165.0Senior notes(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    64.6
    
    
    $
    64.6Operating leases
    
    $
    4.1
    
    
    $
    2.9
    
    
    $
    1.9
    
    
    $
    0.9
    
    
    $
    0.6
    
    
    $
    1.5
    
    
    $
    11.9Capital leases
    
    
    0.5
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    1.5Mortgage(3)
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    2.1
    
    
    
    2.6Senior Revolving Credit Facility(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    4.7
    
    
    $
    3.4
    
    
    $
    2.4
    
    
    $
    1.1
    
    
    $
    0.8
    
    
    $
    233.2
    
    
    $
    245.7
 
  39




---



##### Table of Contents



1 4 1 4 1 4
 
  Income Taxes
  Seasonality
  Inflation
  Recent Accounting Pronouncements
  40




---



##### Table of Contents



Item 7A. Qualitative and Quantitative Information about Market Risk
  41




---



##### Table of Contents



Currency translation.
 Currency transaction exposure.
 Interest rate risk.
 The Sarbanes-Oxley Act of 2002 and Material Weakness in Internal Control
  42




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  Report of
    Independent Registered Public Accounting Firm
  
          
    43




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC
  Consolidated
    Balance Sheets
 Dollars
    in thousands
  December 31,2006


2005ASSETSCurrent assets:Cash and cash equivalents

$
42,527


$
10,060Trade receivables, less allowance
    for doubtful accounts of $2,017 and $1,797


61,506



46,441Inventories, less allowance for
    obsolete materials of $10,163 and $6,843


75,769



54,654Deferred income taxes


6,783



2,779Prepaid expenses and other


7,532



1,973Total current assets


194,117



115,907Property, plant and equipment, net


82,387



66,393Intangible assets, net


59,662



44,751Goodwill


65,397



65,345Deferred income taxes


2,135



Other assets


5,670



5,008Total assets

$
409,368


$
297,404LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
34,053


$
30,724Accrued payroll


15,557



16,016Accruals and other liabilities


13,709



5,940Taxes Payable


6,549



2,932Deferred income taxes


1,382



33Current portion of long-term debt


573



186Total current liabilities


71,823



55,831Long-term debt, less current
    portion and net of unaccreted discount


228,555



159,574Deferred income taxes


7,130



7,550Pension liabilities


15,169



21,735Other post retirement benefits


3,262



12,500Other long term liabilities


3,910



1,601Commitments and Contingencies (see
    Note 15)






Stockholders equity:Common stock (1,000 shares
    authorized, issued & outstanding, $0.001 par value)






Additional paid-in capital


48,814



48,814Due to (from) Parent


24,724



(1,610
)Retained earnings (deficit)


9,045



(1,318
)Accumulated other comprehensive
    loss


(3,064
)


(7,273
)Total stockholders equity


79,519



38,613Total liabilities and
    stockholders equity

$
409,368


$
297,404    44




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Consolidated
    Statements of Operations and Comprehensive Income (Loss)
 Dollars
    in thousands
  From



PredecessorInception



(Note 1)(December 1, 2004)



11 MonthsYear-Ended


Year-Ended


through



EndedDecember 31,


December 31,


December 31,



November 30,2006


2005


2004



2004Consolidated Statement of
    OperationsNet sales

$
462,285


$
363,465


$
28,625



$
275,037Cost of sales


336,836



271,952



23,847




209,253Gross profit


125,449



91,513



4,778




65,784Selling, general and
    administrative expenses


83,256



61,520



8,973




45,321Research and development expenses


4,938



4,683



378




3,947Restructuring charge, asset
    impairment and transition expenses















947Gain on curtailment of
    post-retirement benefit plan


(3,838
)











Gain on sale of fixed assets






(99
)







(1,300
)Income (loss) from operations


41,093



25,409



(4,573
)



16,869Interest expense, net


23,522



17,065



1,410




4,294Other non-operating expense
    (income), net


856



(17
)







148Income (loss) before income taxes


16,715



8,361



(5,983
)



12,427Provision (benefit) for income
    taxes


6,352



3,917



(221
)



5,532Net income (loss)

$
10,363


$
4,444


$
(5,762
)


$
6,895Consolidated Statement of
    Comprehensive Income (Loss)Minimum pension liability
    adjustment


696



(700
)


(722
)



(6,031
)Foreign currency translation
    adjustment


677



(6,400
)


549




478Other comprehensive income (loss)


1,373



(7,100
)


(173
)



(5,553
)Comprehensive income (loss)

$
11,736


$
(2,656
)

$
(5,935
)


$
1,342    45




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Consolidated
    Statements of Stockholders Equity
 Dollars
    in thousands
  AccumulatedOtherInvested


Comprehensive


Net InvestedCapital


Loss


CapitalFor the
    PredecessorBalance at December 31, 2003

$
30,221


$
(33,225
)

$
(3,004
)Net income


6,895







6,895Contribution from affiliates


7,922







7,922Other comprehensive income, net of
    $3,697 tax benefit






(5,553
)


(5,553
)Balance at November 30, 2004

$
45,038


$
(38,778
)

$
6,260   AccumulatedAdditional


Retained





OtherCommon


Paid-In


Earnings


Due to


ComprehensiveStock


Capital


(Deficit)


(From) Parent


Loss


TotalFor the
    CompanyInitial capital contribution

$



$
39,994


$



$



$



$
39,994Common stock issuance related to
    acquisition






8,820















8,820Net loss










(5,762
)










(5,762
)Other comprehensive loss


















(173
)


(173
)Balance at December 31, 2004






48,814



(5,762
)






(173
)


42,879Net income










4,444











4,444Payments made on behalf of parent
    company














(1,610
)






(1,610
)Other comprehensive loss, net of
    $1,938 tax benefit


















(7,100
)


(7,100
)Balance at December 31, 2005

$



$
48,814


$
(1,318
)

$
(1,610
)

$
(7,273
)

$
38,613Net Income










10,363











10,363Net Proceeds received from parent
    company














26,334







26,334Cumulative foreign currency
    translation adjustment, net of $880 tax expense


















677



677Minimum pension liability
    adjustment and cumulative transition to SFAS No. 158,
    net of $2,165 tax expense


















3,532



3,532Balance at December 31, 2006

$



$
48,814


$
9,045


$
24,724


$
(3,064
)

$
79,519    46




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##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Consolidated
    Statements of Cash Flows
 Dollars in thousands
  FromInception



Predecessor(December 1,



(Note 1)2004



11 MonthsYear-Ended


Year-Ended


through



EndedDecember 31,


December 31,


December 31,



November 30,2006


2005


2004)



2004Cash flows from operating
    activities:Net income (loss)

$
10,363


$
4,444


$
(5,762
)


$
6,895Adjustments to reconcile net income
    (loss) to cash provided by operating activities:Depreciation


10,821



8,574



673




6,074Amortization of intangible assets


3,790



2,959



246




Amortization of deferred loan costs


968



621



49




Loss on foreign currency, net


1,079












Accretion of debt discount


942



942



79




Gain on sale of fixed assets






(99
)







(1,300
)Amortization of inventory
    step-up


2,278



1,699



1,699




Stock-based compensation


1,945












Gain on curtailment of
    post-retirement benefit plan


(3,838
)











Provision (benefit) for deferred
    taxes


1,190



248



(1,031
)



117Changes in operating assets and
    liabilities:Trade receivables


(330
)


(2,654
)


(324
)



(4,197
)Inventories


(3,973
)


(1,353
)


(412
)



(6,418
)Accounts payable and accrued
    liabilities


(10,277
)


(1,832
)


9,473




3,734Other current assets and liabilities


(2,297
)


2,226



(2,126
)



1,477Other operating assets and
    liabilities


752



(1,940
)


3,059




(2,778
)Net cash provided by operating
    activities


13,413



13,835



5,623




3,604Cash flows from investing
    activities:Purchases of fixed assets


(9,408
)


(6,199
)


(289
)



(3,489
)Acquisitions, net of $775 and
    $2,367 of cash acquired in 2006 and 2004, respectively


(53,755
)


1,607



(180,112
)



Payment of additional Kilian
    purchase price






(730
)







Proceeds from sale of fixed assets






125








4,442Net cash (used in) provided by
    investing activities


(63,163
)


(5,197
)


(180,401
)



953Cash flows from financing
    activities:Contributed capital










39,994




Proceeds from issuance of senior
    secured subordinated notes










158,400




Proceeds from issuance of senior
    notes


57,625












Payments of debt acquired in
    acquisitions










(12,178
)



Payment of debt issuance costs


(2,731
)


(338
)


(6,747
)



Net payments received from (made on
    behalf of) parent company


24,389



(1,610
)







Borrowings under revolving credit
    agreement


5,057



4,408



4,988




Payments on revolving credit
    agreement


(5,057
)


(4,408
)


(4,988
)



Proceeds from mortgages


2,510












Payment of capital leases


(241
)


(835
)


(37
)



Contribution from affiliates















7,922Change in affiliate debt















(14,618
)Net cash provided by (used in)
    financing activities


81,552



(2,783
)


179,432




(6,696
)Effect of exchange rates on cash


665



(524
)


75




159Increase (decrease) in cash and
    cash equivalents


32,467



5,331



4,729




(1,980
)Cash and cash equivalents,
    beginning of period


10,060



4,729








3,163Cash and cash equivalents, end of
    period

$
42,527


$
10,060


$
4,729



$
1,183Cash paid during the period
    for:Interest

$
23,660


$
15,448


$




$
2,796Income Taxes

$
2,341


$
1,761


$




$
446Non-Cash Financing:Acquisition of capital equipment
    under capital lease

$
613


$



$




$
    47




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##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial Statements
 Dollars
    in thousands, unless otherwise noted
  1.
    Description
    of Business and Summary of Significant Accounting
    Policies  Basis
    of Preparation and Description of Business
        Principles
    of Consolidation
    Reclassification
    Fair
    Value of Financial Instruments
    Use of
    Estimates
   48




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   1.
    Description
    of Business and Summary of Significant Accounting Policies
    (Continued)  Foreign
    currency translation
      Cash
    and Cash Equivalents
    Trade
    Receivables
    Inventories
  first-in, work-in-process
    Property,
    Plant and Equipment
      Buildings and improvements

15 to 45 yearsMachinery and equipment

2 to 15 years    49




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   1.
    Description
    of Business and Summary of Significant Accounting Policies
    (Continued)  Intangible
    Assets
    Goodwill
    Impairment
    of Goodwill and Indefinite-Lived Intangible Assets
    Impairment
    of Long-Lived Assets Other Than Goodwill and Indefinite-Lived
    Intangible Assets
    Debt
    Issuance Costs
   50




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   1.
    Description
    of Business and Summary of Significant Accounting Policies
    (Continued)  Revenue
    Recognition
      Shipping
    and Handling Costs
    Warranty
    Costs
    Self-Insurance
    Research
    and Development
    Advertising
    Stock-Based
    Compensation
     51




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   1.
    Description
    of Business and Summary of Significant Accounting Policies
    (Continued)    The Valuation of
    Privately-held-Company Equity Securities Issued as Compensation
  
    Historical and expected future earnings performance
    The liquidation preferences and dividend rights of the preferred
    stock
    Milestones achieved by the company
    Marketplace and major competition
    Market barriers to entry
    The Companys workforce and related skills
    Customer and vendor characteristics
    Strategic relationships with suppliers
    Risk factors and uncertainties facing the Company  Income
    Taxes
     52




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   1.
    Description
    of Business and Summary of Significant Accounting Policies
    (Continued)   Accumulated
    Other Comprehensive Income (Loss)
    CumulativeMinimum


Foreign


Accumulatedpension


Currency


Otherliability/SFAS


Translation


ComprehensiveNo. 158 liability


Adjustment


Income (Loss)For the
    PredecessorBalance at December 31, 2003

$
(36,820
)

$
3,595


$
(33,225
)Minimum pension liability
    adjustment


478







478Cumulative foreign currency
    translation adjustment






(6,031
)


(6,031
)Balance at November 30, 2004

$
(36,342
)

$
(2,436
)

$
(38,778
)For the
    CompanyOpening balance December 2004










Minimum pension liability
    adjustment


(722
)






(722
)Cumulative foreign currency
    translation adjustment






549



549Balance at December 31, 2004


(722
)


549



(173
)Minimum pension liability
    adjustment


(700
)






(700
)Cumulative foreign currency
    translation adjustment






(6,400
)


(6,400
)Balance at December 31, 2005


(1,422
)


(5,851
)


(7,273
)Minimum pension liability
    adjustment


696







696Cumulative foreign currency
    translation adjustment






677



677Cumulative adjustment for
    transition to SFAS No. 158


2,836







2,836Balance at December 31, 2006

$
2,110


$
(5,174
)

$
(3,064
)    2.
    Recent
    Accounting Pronouncements     53




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##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   2.
    Recent
    Accounting Pronouncements (Continued)       3.
    Acquisitions       54




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##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   3.
    Acquisitions
    (Continued)    Total purchase price, including
    closing costs of approximately $1.8 million

$
51,030Cash and cash equivalents


775Trade receivables


12,111Inventories


17,004Prepaid expenses and other


510Property, plant and equipment


13,670Intangible assets


16,352Total assets acquired


60,422Accounts payable, accrued payroll,
    and accruals and other current liabilities


12,971Other liabilities


8,784Total liabilities assumed


21,755Net assets acquired


38,667Excess purchase price over the
    fair value of net assets acquired

$
12,363       Patents, subject to amortization

$
110Customer relationships, subject to
    amortization


9,312Trade names and trademarks, not
    subject to amortization


6,930Total intangible assets

$
16,352            55




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##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   3.
    Acquisitions
    (Continued)    Year to Date


Year to DateEnded


EndedDecember 31,


December 31,(Pro Forma, unaudited)

2006


2005Total Revenues

$
471,618


$
426,446Net income

$
12,286


$
1,042     Business
    Combinations.
 56




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##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   3.
    Acquisitions
    (Continued)     Predecessor


Kilian


TotalTotal purchase price, including
    closing costs of approximately $2.6 million

$
178,519


$
9,594



188,113Cash and cash equivalents


1,183



1,184



2,367Trade receivables


39,163



6,096



45,259Inventories


52,761



5,108



57,869Prepaid expenses and other


4,770



207



4,977Property, plant and equipment


59,320



9,111



68,431Intangible assets


49,004







49,004Deferred income taxes 
    long term


8,262



104



8,366Other assets


150







150Total assets acquired


214,613



21,810



236,423Accounts payable, accrued payroll,
    and accruals and other current liabilities


46,422



3,125



49,547Bank debt






12,178



12,178Pensions, other post retirement
    benefits and other liabilities


34,166







34,166Total liabilities assumed


80,588



15,303



95,891Net assets acquired


134,025



6,507



140,532Excess purchase price over the
    fair value of net assets acquired

$
44,494


$
3,087


$
47,581     Predecessor


Kilian


TotalCustomer relationships

$
27,802


$



$
27,802Product technology and patents


5,122







5,122Total intangible assets subject to
    amortization


32,924







32,924Trade names and trademarks, not
    subject to amortization


16,080







16,080Total intangible assets

$
49,004


$



$
49,004      57




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##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   3.
    Acquisitions
    (Continued)    (Pro Forma, unaudited)

2004Total Revenues

$
343,308Net loss


(541
)   4.
    Inventories    2006


2005Raw materials

$
29,962


$
22,512Work in process


19,112



13,876Finished goods


36,858



25,10985,932



61,497Less  Allowance for
    excess, slow-moving and obsolete inventory


(10,163
)


(6,843
)$
75,769


$
54,654   5.
    Property,
    Plant and Equipment    2006


2005Land

$
9,599


$
7,892Buildings and improvements


19,849



16,500Machinery and equipment


71,866



50,402101,314



74,794Less  Accumulated
    depreciation


(18,927
)


(8,401
)$
82,387


$
66,393  58




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  6.
    Goodwill
    and Intangible Assets    GoodwillBalance December 31, 2005

$
65,345Additions related to Hay Hall
    acquisition


12,363Additions related to Bear Linear
    acquisition


4,231Other adjustments, net


(18,819
)Impact of changes in foreign
    currency


2,277Balance December 31, 2006

$
65,397     December 31, 2006


December 31, 2005Accumulated





AccumulatedCost


Amortization


Cost


AmortizationOther IntangiblesIntangible assets not subject to
    amortization:Tradenames and trademarks

$
23,010


$



$
16,080


$
Intangible assets subject to
    amortization:Customer relationships


37,114



5,679



27,802



2,515Product technology and patents


5,232



1,316



5,122



690Impact of changes in foreign
    currency


1,301







(1,048
)


Total intangible assets

$
66,657


$
6,995


$
47,956


$
3,205        59




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   7.
    Warranty
    Costs    Year-Ended


Year-EndedDecember 31,


December 31,2006


2005Balance at beginning of period

$
1,876


$
1,528Accrued warranty costs


1,666



1,265Payments and adjustments


(1,459
)


(917
)Balance at end of period

$
2,083


$
1,876   8.
    Income
    Taxes    Predecessor(Note 1)December 1,



11 Months2004 through



EndedDecember 31,


December 31,


December 31,



November 30,2006


2005


2004



2004Domestic

$
17,946


$
4,635


$
(6,337
)


$
9,125Foreign


(1,231
)


3,726



354




3,302$
16,715


$
8,361


$
(5,983
)


$
12,427     Predecessor(Note 1)December 1,



11 Months2004 through



EndedDecember 31,


December 31,


December 31,



November 30,2006


2005


2004



2004Current:Federal

$
3,171


$
1,631


$




$
3,851Foreign and state


1,991



2,038



810




1,5645,162



3,669



810




5,415Deferred:Federal


998



532



(564
)



98Foreign and state


192



(284
)


(467
)



191,190



248



(1,031
)



117Provision (benefit) for income
    taxes

$
6,352


$
3,917


$
(221
)


$
5,532  60




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  8.
    Income Taxes (Continued)    Predecessor(Note 1)FromInception(December 1,



11 Months2004) through



EndedDecember 31,


December 31,


December 31,



November 30,2006


2005


2004



2004Tax at U.S. federal income
    tax rate

$
5,850


$
2,926


$
(2,094
)


$
4,371State taxes, net of federal income
    tax effect


682



373



(67
)



366Valuation allowance










2,011




895Foreign taxes, net


944



786








Interest


(1,361
)











Other


237



(168
)


(71
)



(100
)Provision (benefit) for income
    taxes

$
6,352


$
3,917


$
(221
)


$
5,532     December 31,


December 31,2006


2005Deferred tax assets:Post-retirement obligations

$
5,247


$
12,050Goodwill


7,555



789Inventory


2,036



1,217Expenses not currently deductible


5,852



6,651Net operating loss carryover


2,899



1,740Other


557



883Total deferred tax assets


24,146



23,330Valuation allowance for deferred
    tax assets


(1,252
)


(16,389
)Net deferred tax assets


22,894



6,941Deferred tax liabilities:Property, plant and equipment


9,650



6,264Intangible assets


11,730



5,278Other


1,108



203Total deferred tax liabilities


22,488



11,745Net deferred tax assets
    (liabilities)

$
406


$
(4,804
)    61




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  8.
    Income Taxes (Continued)           9.
    Pension
    and Other Employee Benefits  Defined
    Benefit (Pension) and Postretirement Benefit Plans
  non-U.S. employees
   62




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##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  9.
    Pension and Other Employee Benefits (Continued)      Pension as of December 31, 2006Prior to


As ReportedAdopting


at December 31,SFAS No. 158


2006Plan Funded Status:Benefit obligation

$
(26,121
)

$
(26,121
)Allowance for future salary
    increases






Projected benefit obligation


(26,121
)


(26,121
)Fair value of assets


10,952



10,952Funded Status

$
(15,169
)

$
(15,169
)Unrecognized loss


1,154



N/AUnrecognized prior service cost


43



N/AAccrued benefit cost


(13,972
)


N/ABalance Sheet:Prepaid benefit cost

$




N/AIntangible asset


43



N/AAccrued benefit cost


(15,122
)


N/ANet liability

$
(15,079
)

$
(15,169
)Corresponding charges to equity
    accounts:Retained earnings

$
13,972


$
13,972Accumulated other comprehensive
    income (loss)


1,154



1,197Total charges to equity

$
15,126


$
15,169   63




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  9.
    Pension and Other Employee Benefits (Continued)  Post-Retirement Benefits as of December 31, 2006Prior to


As ReportedAdopting


at December 31,SFAS No. 158


2006Plan Funded Status:Benefit obligation

$
(3,549
)

$
(3,549
)Fair value of assets






Funded Status


(3,549
)


(3,549
)Unrecognized gain


(1,016
)


N/AUnrecognized prior service cost


(3,602
)


N/AAccrued benefit cost


(8,167
)


N/ABalance Sheet:Prepaid benefit cost


N/A



N/AIntangible asset


N/A



N/AAccrued benefit cost


N/A



N/ANet liability

$
N/A


$
(3,549
)Corresponding charges to equity
    accounts:Retained earnings


N/A



8,167Accumulated other comprehensive
    income (loss)


N/A



(4,618
)Total charges to equity

$
N/A


$
3,549       Pension Benefits


Post Retirement BenefitsYear Ended


Year Ended


Year Ended


Year EndedDecember 31,


December 31,


December 31,


December 31,2006


2005


2006


2005Change in benefit
    obligation:Obligation at beginning of period

$
27,697


$
24,706


$
10,983


$
12,570Service cost


513



591



140



295Interest cost


1,491



1,362



315



549Amendments


57



55



(2,564
)


(2,088
)Curtailments


119







(3,838
)


Actuarial loss (gain)


(1,188
)


1,610



(1,291
)


(218
)Foreign exchange effect


326



(424
)






Benefits paid


(2,894
)


(203
)


(196
)


(125
)Obligation at end of period


26,121


$
27,697


$
3,549


$
10,983 64




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 9.  Pension and Other
    Employee Benefits (Continued)
  Pension Benefits


Post Retirement BenefitsYear Ended


Year Ended


Year Ended


Year EndedDecember 31,


December 31,


December 31,


December 31,2006


2005


2006


2005Change in plan
    assets:Fair value of plan assets,
    beginning of period

$
5,832


$
4,647


$



$
Actual return on plan assets


821



309







Employer contribution


7,193



961



196



125Benefits paid


(2,894
)


(85
)


(196
)


(125
)Fair value of plan assets, end of
    period

$
10,952


$
5,832


$



$
Funded status

$
(15,169
)

$
(21,865
)

$
(3,549
)

$
(10,983
)Amounts Recognized in the
    balance sheet consist of:Non current assets

$



$
(49
)

$



$
Current liabilities






(7,448
)


(287
)


Non-current liabilities


(15,169
)


(14,368
)


(3,262
)


(12,500
)Total

$
(15,169
)

$
(21,865
)

$
(3,549
)

$
(12,500
)       Pension Benefits2006


2005Pension Benefits


5.75
%


5.5
%Other Postretirement Benefits


5.75
%


5.5
%  65




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  9.
    Pension and Other Employee Benefits (Continued)    Pension Benefits


Post Retirement BenefitsPredecessor












Predecessor(Note 1)












(Note 1)From












FromInception












Inception(December 1,












(December 1,2004)



11 Months








2004)



11 MonthsYear Ended


Year Ended


through



Ended


Year Ended


Year Ended


through



EndedDecember 31,


December 31,


December 31,



November 30,


December 31,


December 31,


December 31,



November 30,2006


2005


2004



2004


2006


2005


2004



2004Service cost

$
513


$
591


$
35



$
530


$
140


$
295


$
30



$
269Interest cost


1,491



1,362



112




8,352



315



549



59




1,654Recognized net actuarial loss















2,783



(113
)











183Expected return on plan assets


(829
)


(431
)


(31
)



(9,747
)















Settlement/Curtailment


119
















(3,838
)











Amortization


6



72








14



(640
)


(423
)







(19
)Net periodic benefit cost

$
1,300


$
1,594


$
116



$
1,932


$
(4,136
)

$
421


$
89



$
2,087     Pension Benefits


Postretirement BenefitsPredecessor












Predecessor(Note 1)












(Note 1)From












FromInception












Inception(December 1,












(December 1,2004)



11 Months


Year


Year


2004)



11 MonthsYear Ended


Year Ended


through



Ended


Ended


Ended


through



EndedDecember 31,


December 31,


December 31,



November 30,


December 31,


December 31,


December 31,



November 30,2006


2005


2004



2004


2006


2005


2004



2004Discount rate


5.5
%


5.5
%


6.0
%



6.2
%


5.5
%


5.5
%


6.0
%



6.3
%Expected return on plan assets


8.5
%


8.5
%


8.5
%



8.5
%


N/A



N/A



N/A




N/ACompensation rate increase


N/A



N/A



N/A




N/A



N/A



N/A



N/A




N/A    66




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  9.
    Pension and Other Employee Benefits (Continued)    1-Percentage-


1-Percentage-Point


PointIncrease


DecreaseEffect on service and interest
    cost components for the period January 1, 2006 through
    December 31, 2006

$
67


$
(51
)Effect on the December 31,
    2006 post-retirement benefit obligation

$
324


$
(266
)       Allocation Percentage of Plan Assets at Year-End2006


2006


2005Asset Category

Actual


Target


ActualEquity securities


59
%


65
%


67
%Fixed income securities


41
%


35
%


33
%    67




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  9.
    Pension and Other Employee Benefits (Continued)  Expected
    cash flows
    Pension


PostretirementBenefits


BenefitsExpected benefit payments (from
    plan assets)


2007


$
594


$
2872008



801



3022009



1,035



2982010



1,228



2992011



1,392



2822012-2016



9,586



1,049       Defined
    Contribution Plans
  U.S.-based
    10.
    Long-Term
    Debt  Revolving
    Credit Agreement
   68




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   10.
    Long-Term
    Debt (Continued)          9% Senior
    Secured Notes
        11.25% Senior
    Notes
   69




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   10.
    Long-Term
    Debt (Continued)          Mortgage
    Capital
    Leases (see also Note 15)
    Cash
    Obligations
    11.
    Stockholders
    Equity     70




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   12.
    Related-Party
    Transactions  Bear
    Linear Acquisition
    Kilian
    Acquisition
    Management
    Agreement
  out-of-pocket
  Transition
    Services Agreement
    Predecessor
    Related Party Transactions
   71




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   12.
    Related-Party
    Transactions (Continued)         13.  Concentrations
    of Credit, Business Risks and Workforce
       72




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
    Net Sales


Property, Plant and EquipmentPredecessor(Note 1)December 1,



11 MonthsYear-Ended


Year-Ended


2004 through



EndedDecember 31,


December 31,


December 31,



November 30,


December 31,


December 31,2006


2005


2004



2004


2006


2005North America (primarily U.S.)

$
332,647


$
288,883


$
23,071



$
207,731


$
50,673


$
47,587Europe


113,799



59,176



4,632




54,141



29,865



16,968Asia and other


15,839



15,406



922




13,165



1,849



1,838Total

$
462,285


$
363,465


$
28,625



$
275,037


$
82,387


$
66,393           14.
    Predecessor
    Restructuring, Asset Impairment and Transition
    Expenses    11 Months EndedNovember 30,2004Accrued restructuring charge

$
Impairment or loss on sale of
    fixed assets


306Period cost transition expenses


641$
947    73




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   14.
    Predecessor
    Restructuring, Asset Impairment and Transition Expenses
    (Continued)    United
    States Programs
              European
    and Asian Programs
   74




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   14.
    Predecessor
    Restructuring, Asset Impairment and Transition Expenses
    (Continued)     11 Months EndedNovember 30,2004United States programs:Speed reducer product line
    consolidation

$
Electronic clutch brake
    consolidation


306Total United States programs

$
306Total non-cash asset impairment
    and loss on sale of assets

$
306     11 Months EndedNovember 30,2004United States programs:Speed reducer product line
    consolidation

$
Electronic clutch brake
    consolidation


641Sprag clutch consolidation


Heavy duty clutch consolidation


Administrative streamlining


Total United States programs

$
641Europe and Asia electronic clutch
    brake consolidation


Total transition expense

$
641     11 Months EndedNovember 30,2004Training

$
Relocation


Moving costs


Severance


Duplicate employees


ERP system integration


Other


641Total transition expense

$
641  75




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
   14.
    Predecessor
    Restructuring, Asset Impairment and Transition Expenses
    (Continued)    11 Months EndedNovember 30,2004United States programs:Speed reducer product line
    consolidation

$
331Electronic clutch brake
    consolidation


711Sprag clutch consolidation


89Heavy duty clutch consolidation


158Administrative streamlining


8Total United States programs

$
1,297Europe and Asia electronic clutch
    brake consolidation


288Cash charged against the
    restructuring reserve

$
1,585Transition expense


641Total cash utilized

$
2,226     11 Months EndedNovember 30,2004Balance at beginning of period

$
1,606Cash payments


(1,585
)Balance at end of period

$
21   76




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  15.
    Commitments
    and Contingencies  Minimum
    Lease Obligations
    Year Ending December 31:

Operating Leases


Capital Leases2007

$
4,149


$
5732008


2,938



4332009


1,943



3932010


875



1462011


555



64Thereafter


1,464



Total lease obligations

$
11,924



1,609Less amounts representing interest






(61
)Present value of minimum capital
    lease obligations





$
1,548     General
    Litigation
   77




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  16.
    Guarantor
    Subsidiaries    Condensed
    Consolidating Balance Sheets of the Company
    December 31, 2006
  December 31, 2006NonIssuer


Guarantor


Guarantor


Eliminations


ConsolidatedASSETSCurrent assets:Cash and cash equivalents

$
41,016


$
(5,488
)

$
6,999


$



$
42,527Trade receivables, less allowance
    for doubtful accounts






37,780



23,726







61,506Loan receivable from related parties


9,866



36,681







(46,547
)


Inventories, less allowances for
    obsolete materials






50,573



25,196







75,769Deferred income taxes






7,159



(376
)






6,783Prepaid expenses and other


1,875



3,353



2,304







7,532Total current assets


52,757



130,058



57,849



(46,547
)


194,117Property, plant and equipment, net






48,762



33,625







82,387Intangible assets, net






36,708



22,954







59,662Goodwill






41,660



23,737







65,397Deferred income taxes






2,120



15







2,135Other assets


5,302



279



89







5,670Investments in subsidiaries


258,221











(258,221
)


$
316,280


$
259,587


$
138,269


$
(304,768
)

$
409,368LIABILITIES AND
    STOCKHOLDERS (DEFICIT) EQUITYCurrent liabilities:Accounts payable

$



$
18,316


$
15,737


$



$
34,053Accrued payroll


330



9,714



5,513







15,557Accruals and other current
    liabilities


7,485



3,428



2,796







13,709Taxes payable


3,935



1,509



1,105







6,549Deferred income taxes










1,382







1,382Current portion of long-term debt






254



319







573Loans payable from related parties










46,547



(46,547
)


Total current liabilities


11,750



33,221



73,399



(46,547
)


71,823Long-term debt, less current portion


225,011



349



3,195







228,555Deferred income taxes






(1,156
)


8,286







7,130Pension liabilities






11,797



3,372







15,169Other post-retirement benefits






3,262











3,262Other long-term liabilities






682



3,228







3,910Total liabilities


236,761



48,155



91,480



(46,547
)


329,849Total stockholders equity


79,519



211,432



46,789



(258,221
)


79,519$
316,280


$
259,587


$
138,269


$
(304,768
)

$
409,368  78




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Condensed
    Consolidating Balance Sheets of the Company
    December 31, 2005
  December 31, 2005NonIssuer


Guarantor


Guarantor


Eliminations


ConsolidatedASSETSCurrent assets:Cash and cash equivalents

$
8,819


$
(2,713
)

$
3,954


$



$
10,060Trade receivables, less allowance
    for doubtful accounts






32,892



13,549







46,441Loan receivable from related
    parties






34,306



4,301



(38,607
)


Inventories, less allowances for
    obsolete materials






43,562



11,092







54,654Deferred income taxes






2,652



127







2,779Prepaid expenses and other


25



934



1,014







1,973Total current assets


8,844



111,633



34,037



(38,607
)


115,907Property, plant and equipment, net






45,405



20,988







66,393Intangible assets, net






36,729



8,022







44,751Goodwill






53,784



11,561







65,345Other assets


4,804



167



37







5,008Investments in subsidiaries


225,974











(225,974
)


$
239,622


$
247,718


$
74,645


$
(264,581
)

$
297,404LIABILITIES AND
    STOCKHOLDERS (DEFICIT) EQUITYCurrent liabilities:Accounts payable

$
44


$
21,931


$
8,749


$



$
30,724Accrued payroll






12,487



3,529







16,016Accruals and other current
    liabilities


2,499



1,613



1,828







5,940Taxes payable


438



1,404



1,090







2,932Deferred income taxes










33







33Current portion of long-term debt






186











186Loans payable from related parties


38,607











(38,607
)


Total current liabilities


41,688



37,621



15,229



(38,607
)


55,831Long-term debt, less current
    portion


159,421



153











159,574Deferred income taxes






1,719



5,831







7,550Pension liabilities






18,872



2,863







21,735Other post-retirement benefits






12,500











12,500Other long-term liabilities






107



1,494







1,601Total liabilities


200,009



70,972



25,417



(38,607
)


258,791Total stockholders equity


38,613



176,746



49,228



(225,974
)


38,613$
239,622


$
247,718


$
74,645


$
(264,581
)

$
297,404  79




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Condensed
    Consolidating Statements of Operations of the Company
    Year ended December 31, 2006
  Year Ended December 31, 2006Non-Issuer


Guarantor


Guarantor


Eliminations


ConsolidatedNet sales

$



$
325,684


$
152,641


$
(16,040
)

$
462,285Cost of sales






237,138



115,738



(16,040
)


336,836Gross profit






88,546



36,903







125,449Selling, general and
    administrative expenses


4,005



50,082



29,169







83,256Research and development costs






2,689



2,249







4,938Other post-retirement benefit plan
    curtailment






(3,838
)










(3,838
)Income from operations


(4,005
)


39,613



5,485







41,093Interest expense (income)


17,444



(124
)


6,202







23,522Other non-operating expense
    (income)


435



(93
)


514







856Equity in earnings of subsidiaries


32,247











(32,247
)


Income before income taxes


10,363



39,830



(1,231
)


(32,247
)


16,715Provision for income taxes






5,144



1,208







6,352Net (loss) income

$
10,363


$
34,686


$
(2,439
)

$
(32,247
)

$
10,363   Condensed
    Consolidating Statements of Operations of the Company
    Year ended December 31, 2005
  Year Ended December 31, 2005Non-Issuer


Guarantor


Guarantor


Eliminations


ConsolidatedNet sales

$



$
279,292


$
93,201


$
(9,028
)

$
363,465Cost of sales






211,898



69,082



(9,028
)


271,952Gross profit






67,394



24,119







91,513Selling, general and
    administrative expenses






43,729



17,692







61,421Research and development expenses






2,478



2,205







4,683Income from operations






21,187



4,222







25,409Interest expense (income)


16,908



(339
)


496







17,065Other non-operating expense
    (income)


(17
)














(17
)Equity in earnings of subsidiaries


21,335











(21,335
)


Income before income taxes


4,444



21,526



3,726



(21,335
)


8,361Provision for income taxes






2,655



1,262







3,917Net income

$
4,444


$
18,871


$
2,464


$
(21,335
)

$
4,444  80




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Condensed
    Consolidating Statements of Operations of the Company
    Period from Inception (December 1, 2004) through
    December 31, 2004
  Period from Inception (December 1, 2004) to
    December 31, 2004Non-Issuer


Guarantor


Guarantor


Eliminations


ConsolidatedNet sales

$



$
22,591


$
6,850


$
(816
)

$
28,625Cost of sales






19,115



5,548



(816
)


23,847Gross profit






3,476



1,302







4,778Selling, general and
    administrative expenses


4,855



3,480



638







8,973Research and development expenses






176



202







378(Loss) income from operations


(4,855
)


(180
)


462







(4,573
)Interest expense (income)


1,384



(82
)


108







1,410Equity in earnings of subsidiaries


256











(256
)


Income (loss) before income taxes


(5,983
)


(98
)


354



(256
)


(5,983
)(Benefit) provision for income
    taxes


(221
)














(221
)Net (loss) income

$
(5,762
)

$
(98
)

$
354


$
(256
)

$
(5,762
)   Condensed
    Consolidating Statements of Operations of the Predecessor
    Period from January 1, 2004 through November 30,
    2004
  Predecessor (Note 1)Period from January 1, 2004 to November 30, 2004Guarantor


Non-Guarantor


Eliminations


ConsolidatedNet sales

$
212,005


$
72,402


$
(9,370
)

$
275,037Cost of sales


166,989



51,634



(9,370
)


209,253Gross profit


45,016



20,768







65,784Selling, general and
    administrative expenses


31,538



13,783







45,321Research and development expenses


1,972



1,975







3,947Gain on sale of assets


(1,300
)










(1,300
)Restructuring charge, asset
    impairment and
    transition expenses


947











947Income from operations


11,859



5,010







16,869Interest expense


2,751



1,543







4,294Other non-operating expense
    (income)


(17
)


165







148Equity in income of subsidiaries


1,742







(1,742
)


Income before income taxes


10,867



3,302



(1,742
)


12,427Provision for income taxes


3,972



1,560







5,532Net income

$
6,895


$
1,742


$
(1,742
)

$
6,895  81




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Condensed
    Consolidating Statements of Cash Flows of the Company
    Year ended December 31, 2006
  Non-Issuer


Guarantor


Guarantor


Eliminations


ConsolidatedCash flows from operating
    activities:Net income

$
10,363


$
34,686


$
(2,439
)

$
(32,247
)

$
10,363Undistributed equity in earnings of
    subsidiaries


(32,247
)










32,247



Adjustments to reconcile net loss
    to cash provided by operating activities:Depreciation






6,593



4,228







10,821Amortization of intangible assets






3,469



321







3,790Amortization and write-off of
    deferred loan costs


968















968Accretion of debt discount


942















942Amortization of inventory fair
    value adjustment






245



2,033







2,278Provision for deferred taxes






2,341



(1,151
)






1,190Stock-based compensation


1,945















1,945Loss on foreign currency, net


415







664







1,079Gain on curtailment of
    post-retirement benefit plan






(3,838
)










(3,838
)Changes in operating assets and
    liabilities:Trade receivables






(2,363
)


2,033







(330
)Inventories






(4,285
)


312







(3,973
)Accounts payable and accrued
    liabilities


8,769



(15,905
)


(3,141
)






(10,277
)Other current assets and liabilities


(1,849
)


128



(576
)






(2,297
)Other operating assets and
    liabilities


1,265



280



(793
)






752Net cash (used in) provided by
    continuing operating activities

$
(9,429
)

$
21,351


$
1,491






$
13,413Cash flows from investing
    activities:Purchases of fixed assets






(7,213
)


(2,195
)






(9,408
)Acquisitions, net of cash acquired






(13,065
)


(40,690
)






(53,755
)Net cash used in investing
    activities

$



$
(20,278
)

$
(42,885
)





$
(63,163
)Cash flows from financing
    activities:Proceeds from issuance of senior
    notes, net of costs


57,625















57,625Proceeds from mortgages










2,510







2,510Payment of debt issuance costs


(2,731
)














(2,731
)Payment on behalf of parent company


24,389















24,389Borrowings under revolving credit
    agreements


5,057















5,057Payments on revolving credit
    agreements


(5,057
)














(5,057
)Payment of capital leases






(183
)


(58
)






(241
)Change in affiliated debt


(37,657
)


(3,665
)


41,322







Net cash provided by (used in)
    financing activities

$
41,626


$
(3,848
)

$
43,774







81,552Effect of exchange rates on cash










665







665Increase (decrease) in cash and
    cash equivalents


32,197



(2,775
)


3,045







32,467Cash and cash equivalents,
    beginning of the period


8,819



(2,713
)


3,954







10,060Cash and cash equivalents, end of
    period

$
41,016


$
(5,488
)

$
6,999


$



$
42,527  82




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Condensed
    Consolidating Statements of Cash Flows of the Company
    Year Ended December 31, 2005
  Non-Issuer


Guarantor


Guarantor


Eliminations


ConsolidatedCash flows from operating
    activities:Net income

$
4,444


$
18,871


$
2,464


$
(21,335
)

$
4,444Undistributed equity in earnings of
    subsidiaries


(21,335
)










21,335



Adjustments to reconcile net loss
    to cash provided by operating activities:Depreciation






5,845



2,729







8,574Amortization of intangible assets






2,261



698







2,959Amortization and write-off of
    deferred loan costs


621















621Accretion of debt discount


942















942Amortization of inventory fair
    value adjustment






1,270



429







1,699Gain on sale of fixed assets










(99
)






(99
)Provision for deferred taxes






568



(320
)






248Changes in operating assets and
    liabilities:Trade receivables






(1,608
)


(1,046
)






(2,654
)Inventories






(2,894
)


1,541







(1,353
)Accounts payable and accrued
    liabilities


(882
)


(6,632
)


5,682







(1,832
)Other current assets and liabilities


(26
)


2,727



475







2,226Other operating assets and
    liabilities


(1,746
)


87



(281
)






(1,940
)Net cash (used in) provided by
    continuing operating activities


(17,982
)


20,495



11,322







13,835Cash flows from investing
    activities:Purchases of fixed assets






(4,099
)


(2,100
)






(6,199
)Acquisitions, net of cash acquired






1,607











1,607Payment of additional Kilian
    purchase price






(730
)










(730
)Proceeds from sale of fixed assets






20



105







125Net cash used in investing
    activities






(3,202
)


(1,995
)






(5,197
)Cash flows from financing
    activities:Payment of debt issuance costs


(338
)














(338
)Payment on behalf of parent company


(1,610
)














(1,610
)Borrowings under revolving credit
    agreements


4,408















4,408Payments on revolving credit
    agreements


(4,408
)














(4,408
)Payment of capital leases






(169
)


(666
)






(835
)Change in affiliated debt


26,530



(17,924
)


(8,606
)






Net cash provided by (used in)
    financing activities


24,582



(18,093
)


(9,272
)






(2,783
)Effect of exchange rates on cash










(524
)






(524
)Increase (decrease) in cash and
    cash equivalents


6,600



(800
)


(469
)






5,331Cash and cash equivalents,
    beginning of the period


2,219



(1,913
)


4,423







4,729Cash and cash equivalents, end of
    period

$
8,819


$
(2,713
)

$
3,954


$



$
10,060  83




---



##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Condensed
    Consolidating Statements of Cash Flows of the Company
    Period from Inception (December 1, 2004) through
    December 31, 2004
  Non-Issuer


Guarantor


Guarantor


Eliminations


ConsolidatedCash flows from operating
    activities:Net (loss) income

$
(5,762
)

$
(98
)

$
354


$
(256
)

$
(5,762
)Undistributed equity in earnings of
    subsidiaries


(256
)










256



Adjustments to reconcile net loss
    to cash provided by operating activities:Depreciation






551



122







673Amortization of intangible assets






196



50







246Amortization and write-off of
    deferred loan costs


49















49Accretion of debt discount


79















79Amortization of inventory fair
    value adjustment






1,270



429







1,699Benefit for deferred taxes






(1,031
)










(1,031
)Changes in operating assets and
    liabilities:Trade receivables






(1,403
)


1,079







(324
)Inventories






994



(1,406
)






(412
)Accounts payable and accrued
    liabilities


1,900



8,899



(1,326
)






9,473Other current assets and liabilities






(2,222
)


96







(2,126
)Other operating assets and
    liabilities


3,357



(356
)


58







3,059Net cash (used in) provided by
    continuing operating activities


(633
)


6,800



(544
)






5,623Cash flows from investing
    activities:Purchases of fixed assets






(243
)


(46
)






(289
)Acquisitions, net of cash acquired


(182,479
)


(1,949
)


4,316







(180,112
)Net cash used in investing
    activities


(182,479
)


(2,192
)


4,270







(180,401
)Cash flows from financing
    activities:Contributed capital


39,994















39,994Proceeds from issuance of senior
    subordinated notes


158,400















158,400Payment of debt acquired in
    acquisitions


(12,178
)














(12,178
)Payment of debt issuance costs


(6,747
)














(6,747
)Payment of capital leases






(37
)










(37
)Borrowings under revolving credit
    agreements


4,988















4,988Payments on revolving credit
    agreements


(4,988
)














(4,988
)Change in affiliated debt


5,862



(6,484
)


622







Net cash provided by (used in)
    financing activities


185,331



(6,521
)


622







179,432Effect of exchange rates on cash










75







75Increase (decrease) in cash and
    cash equivalents


2,219



(1,913
)


4,423







4,729Cash and cash equivalents,
    beginning of the period


















Cash and cash equivalents, end of
    period

$
2,219


$
(1,913
)

$
4,423


$



$
4,729  84




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##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  Condensed
    Consolidating Statements of Cash Flows of the Predecessor
    Period from January 1, 2004 through November 30,
    2004
  Non-Guarantor


Guarantor


Eliminations


ConsolidatedCash flows from operating
    activities:Net income

$
6,895


$
1,742


$
(1,742
)

$
6,895Adjustments to reconcile net loss
    to cash provided by operating activities:Depreciation


5,038



1,036







6,074Gain on sale of fixed assets


(1,300
)










(1,300
)Provision for deferred taxes


102



15







117Changes in operating assets and
    liabilities:Trade receivables


(492
)


(3,705
)






(4,197
)Inventories


(2,610
)


(3,808
)






(6,418
)Accounts payable and accrued
    liabilities


4,825



(1,091
)






3,734Other current assets and
    liabilities


2,883



(1,406
)






1,477Other operating assets and
    liabilities


(2,794
)


16







(2,778
)Net cash provided by (used in)
    operating activities


12,547



(7,201
)


(1,742
)


3,604Cash flows from investing
    activities:Purchases of fixed assets


(2,533
)


(956
)






(3,489
)Sale of fixed assets


4,442











4,442Net cash provided by (used in)
    investing activities


1,909



(956
)






953Cash flows from financing
    activities:Change in affiliated debt


(13,697
)


(921
)






(14,618
)Contribution from affiliates


2,019



4,161



1,742



7,922Net cash (used in) provided by
    financing activities


(11,678
)


3,240



1,742



(6,696
)Effect of exchange rates on cash






159







159Increase (decrease) in cash and
    cash equivalents


2,778



(4,758
)






(1,980
)Cash and cash equivalents,
    beginning of the period


(125
)


3,288







3,163Cash and cash equivalents, end of
    period

$
2,653


$
(1,470
)

$



$
1,183  85




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##### Table of Contents



ALTRA
    INDUSTRIAL MOTION, INC.
  Notes to
    Consolidated Financial
    Statements  (Continued)
  17.
    Unaudited
    Quarterly Results of Operations (in thousands):  Year
    ending December 31, 2006
  Fourth


Third


Second


FirstNet Sales

$
114,774


$
112,953


$
119,774


$
114,784Gross Profit


30,897



30,425



32,273



31,854Net (loss) income


(1,587
)


3,949



3,917



4,084   Year
    ending December 31, 2005
  Fourth


Third


Second


FirstNet Sales

$
90,205


$
85,056


$
92,902


$
95,302Gross Profit


25,075



21,396



23,162



21,880Net income


2,012



414



1,822



196   Year
    ending December 31, 2004
  Predecessor (Note 1)Period fromInception



Period from(December 1)



October 1, 2004to



toDecember 31,



November 30,2004



2004


Third


Second


FirstNet Sales

$
28,625



$
46,770


$
72,413


$
77,963


$
77,891Gross Profit


4,778




10,088



17,838



18,459



19,399Net income (loss)


(5,762
)



843



(1,241
)


2,516



4,777   18.
    Subsequent
    Event   86




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##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.    Item 9A.
    Controls
    and Procedures  Rules 13(a)-15(e)
  Rules 13(a)-15(f)
  Item 9B.
    Other
    Information   PART III  Form 10-K
  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services    2006


2005Audit Fees

$
2,562


$
2,102Audit-Related Fees






433Tax Fees


109



49All Other Fees






Total

$
2,671


$
2,584  87




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##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  (a)
    List of
    documents filed as part of this report:  (1) Financial
    Statements
    (2) Financial
    Statement Schedules
    (3) Exhibits
  ExhibitNumber

Description2
.1*

LLC Purchase Agreement, dated as
    of October 25, 2004, among Warner Electric Holding, Inc.,
    Colfax Corporation and Altra Industrial Motion, Inc.]2
.2*

Assignment and Assumption
    Agreement, dated as of November 21, 2004, between Altra
    Holdings, Inc. and Altra Industrial Motion, Inc.]4
.1*

Indenture, dated as of
    November 30, 2004, among Altra Industrial Motion, Inc., the
    Guarantors party thereto and The Bank of New York Trust Company,
    N.A., as trustee4
.2*

Form of 9% Senior Secured
    Notes due 2011 (included in Exhibit 4.1)4
.4*

Indenture, dated as of
    February 8, 2006, among Altra Industrial Motion, Inc., the
    guarantors party thereto, The Bank of New York, as trustee and
    paying agent and The Bank of New York (Luxembourg) S.A., as
    Luxembourg paying agent4
.5*

Form of
    111/4% Senior
    Notes due 20134
.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 purchasers4
.7*

First Supplemental Indenture,
    dated as of February 7, 2006, among Altra Industrial
    Motion, Inc., the guarantors party thereto and The Bank of New
    York Trust Company, N.A. as trustee4
.8*

Second Supplemental Indenture,
    dated as of February 8, 2006, among Altra Industrial
    Motion, Inc., the guarantors party thereto and The Bank of New
    York Trust Company, N.A. as trustee4
.9*

Third Supplemental Indenture,
    dated as of April 24, 2006, among Altra Industrial Motion,
    Inc., the guarantors party thereto and The Bank of New York
    Trust Company, N.A. as trustee4
.10*

First Supplemental Indenture,
    dated as of April 24, 2006, among Altra Industrial Motion,
    Inc., the guarantors party thereto and The Bank of New York
    Trust Company, N.A. as trustee10
.1*

Agreement, dated as of
    October 24, 2004, between Ameridrives International, L.P.
    and United Steel Workers of America Local
    3199-10 88




---



##### Table of Contents



ExhibitNumber

Description10
.2*

Labor Agreement, dated as of
    December 3, 2001, between Warner Electric LLC (formerly
    Warner Electric Inc.) and International Union, United
    Automobile, Aerospace, and Agricultural Implement Workers of
    America, Local No. 15510
.3*

Labor Agreement, dated as of
    January 30, 2005, between Warner Electric LLC (formerly
    Warner Electric Inc.) and United Steelworkers of America and
    Local Union No. 324510
.4*

Labor Agreement between, dated as
    of August 9, 2004 between Warner Electric LLC (formerly
    Warner Electric Inc.) and International Association of
    Machinists and Aerospace Works, AFL-CIO, and Aeronautical
    Industrial District Lode 776, Local Lodge 277110
.5*

Transition Services Agreement,
    dated as of November 30, 2004, among Warner Electric
    Holding, Inc., Colfax Corporation and Altra Industrial Motion,
    Inc.10
.6*

Trademarks and Technology License
    Agreement, dated November 30, 2004, among Colfax
    Corporation, Altra Holdings, Inc. and Altra Industrial Motion,
    Inc.10
.7*

Lease Agreement, dated as of
    February 13, 2004, between Quincy Hayward Street, LLC and
    Boston Gear LLC10
.8*

Lease Agreement, dated as of
    April 1, 1993, between Textron, Inc. and Nuttall Gear LLC10
.9*

Lease Agreement, dated as of
    January 29, 2003, between Olds Properties Corporation and
    Warner Electric LLC10
.10*

Ontario Net Industrial Single
    Lease, dated November 4, 1994, between Slough Estates
    Canada Limited and Kilian Manufacturing Corporation, with
    extension dated June 22, 199910
.11*

Lease Agreement, dated as of
    January 1, 2003, between Warner Shui Hing Limited and
    Bogang Economic Development Company. (English language summary)10
.12*

Lease Agreement, dated
    August 5, 1981, between Stieber GmbH and Schmidt Lacke
    GmbH. (English language summary)10
.13*

Lease Agreement, dated as of
    December 21, 1984, between Stieber GmbH and Carola
    Grundstucksverwaltungsgesellschft GmbH. (English language
    summary)10
.14*

Employment Agreement, dated as of
    January 6, 2005, between Altra Industrial Motion, Inc. and
    Michael L. Hurt10
.15*

Employment Agreement, dated as of
    January 6, 2005, between Altra Industrial Motion, Inc. and
    Carl Christenson10
.16*

Employment Agreement, dated as of
    January 12, 2005, between Altra Industrial Motion, Inc. and
    David Wall10
.17*

Form of Transition Agreement10
.18*

Advisory Services Agreement, dated
    as of November 30, 2004, among Altra Holdings, Inc., Altra
    Industrial Motion, Inc. and Genstar Capital L.P.10
.19*

Altra Holdings, Inc. 2004 Equity
    Incentive Plan10
.20*

Form of Restricted Stock Award
    Agreement10
.21*

Stock Purchase Agreement dated as
    of November 30, 2004, between Altra Holdings, Inc. and
    Altra Industrial Motion, Inc.10
.22*

Credit Agreement, dated as of
    November 30, 2004, among Altra Industrial Motion, Inc. and
    certain subsidiaries of the Company, as Guarantors, the
    financial institutions listed therein, as Lenders, and Wells
    Fargo Bank, as Lead Arranger10
.23*

Security Agreement, dated as of
    November 30, 2004, among Altra Industrial Motion, Inc., the
    other Grantors listed therein and The Bank of New York Trust
    Company, N.A.10
.24*

Patent Security Agreement, dated
    as of November 30, 2004, among Kilian Manufacturing
    Corporation, Warner Electric Technology LLC, Formsprag LLC,
    Boston Gear LLC, Ameridrives International, L.P. and The Bank of
    New York Trust Company, N.A.10
.25*

Trademark Security Agreement,
    dated as of November 30, 2004, among Warner Electric
    Technology LLC, Boston Gear LLC and The Bank of New York Trust
    Company, N.A. 89




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##### Table of Contents



ExhibitNumber

Description10
.26*

Intercreditor and Lien
    Subordination Agreement, dated as of November 30, 2004,
    among Wells Fargo Foothill, Inc., The Bank of New York Trust
    Company, N.A. and Altra Industrial Motion, Inc.10
.27*

Share Purchase Agreement, dated as
    of November 7, 2005, among Altra Industrial Motion, Inc.
    and the stockholders of Hay Hall Holdings Limited listed therein10
.28

First Amendment to Credit
    Agreement, dated as of December 30, 2004, among Altra
    Industrial Motion, Inc., the financial institutions listed
    therein, as Lenders, and Wells Fargo Foothill, Inc.10
.29

Second Amendment to Credit
    Agreement, dated as of January 14, 2005, among Altra
    Industrial Motion, Inc., the financial institutions listed
    therein, as Lenders, and Wells Fargo Foothill, Inc.10
.30

Third Amendment to Credit
    Agreement, dated as of January 31, 2005, among Altra
    Industrial Motion, Inc., the financial institutions listed
    therein, as Lenders, and Wells Fargo Foothill, Inc.10
.31

Fouth Amendment to Credit
    Agreement, dated as of February 16, 2007, among Altra
    Industrial Motion, Inc., the financial institutions listed
    therein, as Lenders, and Wells Fargo Foothill, Inc.21
.1

Subsidiaries of Altra Industrial
    Motion, Inc.31
.1

Certification of Chief Executive
    Officer31
.2

Certification of Chief Financial
    Officer32
.1

Certification of Chief Executive
    Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 200232
.2

Certification of Chief Financial
    Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002     *
    
    Filed previously. 90




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##### Table of Contents



Item 21(b)
  Altra
    Industrial Motion, Inc.
  SCHEDULE II-Valuation
    and Qualifying Accounts
  Balance atBeginning of








Balance atReserve for Inventory Obsolescence:

Period


Additions


Deductions


End of PeriodPredecessor-For the year ended
    November 30, 2004

$
6,813


$
1,459


$
(2,084
)

$
6,188From Inception (December
    1) through December 31, 2004


6,188



545



(372
)


6,361For the year ended
    December 31, 2005


6,361



2,385



(1,903
)


6,843For the year ended
    December 31, 2006

$
6,843


$
5,596


$
(2,276
)

$
10,163   Balance atBeginning of








Balance atReserve for Uncollectible Accounts:

Period


Additions


Deductions


End of PeriodPredecessor-For the year ended
    November 30, 2004

$
1,616


$
589


$
(772
)

$
1,433From Inception (December
    1) through December 31, 2004


1,433



135



(145
)


1,424For the year ended
    December 31, 2005


1,424



687



(314
)


1,797For the year ended
    December 31, 2006

$
1,797


$
923


$
(703
)

$
2,017   Balance atBeginningof








Balance atIncome Tax Assets Valuation Allowance:

Period


Additions


Deductions


End of PeriodPredecessor-For the year ended
    November 30, 2004

$
17,834


$
895


$



$
18,729From Inception (December
    1) through December 31, 2004(1)


18,462







(88
)


18,374For the year ended
    December 31, 2005


18,374






$
(1,985
)


16,389For the year ended
    December 31, 2006

$
16,389


$
1,252


$
(16,389
)

$
1,252     (1)
    
    The difference between the balance at the end of the period
    ending November 30, 2004 and the balance at
    December 1, 2004 is the result of purchase accounting for
    the PTH Acquisition. 91




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##### Table of Contents



SIGNATURES      By:
    /s/  Michael
    L. Hurt 
 Title:
    Chairman and Chief Executive Officer    By:
    /s/  David
    Wall 
 Title:
    Chief Financial Officer   92