##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal 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: 1-14182
 TB Woods Corporation
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    25-1771145
(I.R.S. Employer
Identification No.)440 North Fifth Avenue, Chambersburg, PA
(Address of principal executive offices)
    
    17201
(Zip Code)
 (717) 264-7161
  Title of each class
    
    Name of each exchange on which registeredNone
    
    
    
    N/A
  Common Stock, $.01 par value
  o þ
 o þ
 þ o
 o
  o o þ
 o þ
   Class
    
    February 20, 2007Common Stock, $.01 par value per share
    
    3,767,643 shares
 DOCUMENTS INCORPORATED BY REFERENCE




---



##### 



TB WOODS CORPORATION
 FISCAL YEAR 2006 FORM 10-K ANNUAL REPORT
 TABLE OF CONTENTS
 PART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    8Item 1B. Unresolved Staff Comments
    
    
    11Item 2. Properties
    
    
    11Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    
    11PART II
    
    
    12Item 5. Market for Registrants Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
    
    
    12Item 6. Selected Financial Data
    
    
    13Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    14Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 8. Financial Statements and Supplementary Data
    
    
    23Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    42Item 9A. Controls and Procedures
    
    
    42Item 9B. Other Information
    
    
    42PART III
    
    
    42Item 10. Directors, Executive Officers and Corporate Governance
    
    
    42Item 11. Executive Compensation
    
    
    45Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    54Item 13. Certain Relationships and Related Transactions
    
    
    56Item 14. Principal Accountant Fees and Services
    
    
    56PART IV
    
    
    57Item 15. Exhibits and Financial Statement Schedules
    
    
    57SIGNATURES
    
    
    62Exhibits
    
    
    63Subsidiaries and Joint Venture of RegistrantConsent of Independent Public AccountantsCertification of Principal Executive OfficerCertification of Principal Financial OfficerSection 1350 Certification
  2




---



##### Table of Contents



Safe Harbor Statement
  
 Item 1. Business
 General
  www.tbwoods.com
 History
   3




---



##### Table of Contents



Industry Overview
   Products
  2006
    
    2005
    
    2004Net Sales
    
    %
    
    Net Sales
    
    %
    
    Net Sales
    
    %Mechanical
    
    $
    79.7
    
    
    
    67.1
    %
    
    $
    72.4
    
    
    
    65.3
    %
    
    $
    63.7
    
    
    
    62.8
    %Electronics
    
    
    39.2
    
    
    
    32.9
    %
    
    
    38.5
    
    
    
    34.7
    %
    
    
    37.8
    
    
    
    37.2
    %Totals
    
    $
    118.9
    
    
    
    100.0
    %
    
    $
    110.9
    
    
    
    100.0
    %
    
    $
    101.5
    
    
    
    100.0
    %
  Mechanical Product Offering
  Electronic Product Offering
  4




---



##### Table of Contents



Marketing and Distribution
    Customers
  Competition
   5




---



##### Table of Contents



Research and Development
  Raw Materials
   Patents and Trademarks
 ® ® Ò Ò ® Ò ® Ò ® ® Ò Ò
 Employees
  Environmental Matters
  6




---



##### Table of Contents



Geographical Information
  Recent Developments
 .
   7




---



##### Table of Contents



Item 1A. Risk Factors
 In addition to the risks described elsewhere in this Annual Report on Form 10-K , the following
are important factors that could materially impact the Companys results of operations or financial
condition as well as the trading price of common stock. We may amend or supplement the risk factors
described below from time to time by other reports we file with the SEC.
 Risks Related to our Company
 Failure to complete the Merger could have a material adverse affect on our results of operations
and financial condition.
  Concentration of ownership among our existing executives, directors and principal stockholders may
prevent new investors from influencing significant corporate decisions.
  The price of our common stock has been and may continue to be volatile.
  Our senior secured credit facility and the purchase agreement governing our senior subordinated
notes impose certain restrictions on the operation of our business. A failure to comply with these
restrictions could lead to an event of default, resulting in an
acceleration of indebtedness, which may affect our ability to
finance future operations or capital needs, or to engage in other business activities.
 8




---



##### Table of Contents



.
 We may be adversely impacted by changes in interest rates.
  We have reported losses in the past and may report losses in future periods.
  Risks Related to our Business
 We operate in the highly competitive electronic and mechanical industrial transmission industry.
  Our business is cyclical.
  A significant portion of our revenues are generated from a limited number of customers and the
termination of one or more of our relationships with any of these customers could have a material
adverse effect on our business.
  9




---



##### Table of Contents



The relocation of customers to off-shore locations could result in increased costs of production
and subject us to increased economic risk if we shift operations to meet customer demands.
  Our dependence on, and the price of, raw materials may adversely affect our profits.
  We may be adversely affected by environmental, health and safety laws and regulations.
  Our operations abroad subject us to foreign currency fluctuations.
   Our inability to attract and retain key personnel could have a material adverse effect on our
future success.
 .
 While we believe our control systems are effective, there are inherent limitations in all control
systems, and misstatements due to error or fraud may occur and not be detected.
  10




---



##### Table of Contents



Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  Location
    
    Operations
    
    Square FeetChambersburg, Pennsylvania
    
    Foundry production of iron; manufacturing, engineering
and central distribution of mechanical and electronic
products; and corporate headquarters.
    
    
    440,000Scotland, Pennsylvania
    
    Manufacturing of electronic products.
    
    
    51,300Stratford, Ontario, Canada
    
    Central distribution and administrative offices for
Canada.
    
    
    46,000San Marcos, Texas
    
    Manufacturing and engineering of mechanical products.
    
    
    51,000Mt. Pleasant, Michigan
    
    Manufacturing of mechanical products.
    
    
    30,000Chattanooga, Tennessee
    
    Manufacturing, engineering, and sales of integrated
electronic drive systems.
    
    
    60,000
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  11




---



##### Table of Contents



Part II
 
 Item 5. Market for Registrants Common Equity Related Stockholder Matters and Issuer Purchases
of Equity Securities
  Price
    
    DividendsHigh
    
    Low
    
    Declared
    
    PaidFiscal Year 2005
    
    1st quarter
    
    $
    7.00
    
    
    $
    5.10
    
    
    $
    
    
    
    $
    2nd quarter
    
    
    8.87
    
    
    
    5.00
    
    
    
    
    
    
    
    3rd quarter
    
    
    7.39
    
    
    
    4.77
    
    
    
    
    
    
    
    4th quarter
    
    
    8.00
    
    
    
    6.09
    
    
    
    
    
    
    
    Fiscal Year 2006
    
    1st quarter
    
    $
    13.95
    
    
    $
    6.90
    
    
    $
    
    
    
    $
    2nd quarter
    
    
    14.98
    
    
    
    10.19
    
    
    
    
    
    
    
    3rd quarter
    
    
    12.31
    
    
    
    9.09
    
    
    
    .09
    
    
    
    .094th quarter
    
    
    17.74
    
    
    
    10.57
    
    
    
    .09
    
    
    
    .09
      Number of securitiesNumber of securities
    
    
    
    
    
    remaining available forto be issued upon
    
    Weighted average
    
    future issuance underexercise of
    
    exercise price of
    
    equity compensationoutstanding options,
    
    outstanding options,
    
    plans (excludingwarrants and rights
    
    warrants and rights
    
    reflected in column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity (stock
options)
compensation plans
approved by
security holders
    
    
    618,749
    
    
    $
    9.20
    
    
    
    Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    618,749
    
    
    $
    9.20
    
    
    
    
 12




---



##### Table of Contents



Comparison of Cumulative Total Returns
Among TB Woods, Russell 2000, and Peer
Group
 
 
 Item 6. Selected Financial Data
   2006
    
    
    December 31, 20062005
    
    
    December 31, 20052004
    
    
    December 31, 20042003
    
    
    January 2, 20042002
    
    
    December 27, 2002
 13




---



##### Table of Contents



(in thousands, except per share data)
 Fiscal Year
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002Net sales
    
    $
    118,935
    
    
    $
    110,897
    
    
    $
    101,515
    
    
    $
    96,415
    
    
    $
    104,383Gross profit
    
    
    38,145
    
    
    
    33,705
    
    
    
    27,723
    
    
    
    29,397
    
    
    
    33,145Selling, general and administrative
expense
    
    
    28,641
    
    
    
    27,717
    
    
    
    28,371
    
    
    
    28,635
    
    
    
    29,178Non- recurring gain on termination of
benefit plan
    
    
    
    
    
    
    
    
    
    
    9,258
    
    
    
    
    
    
    
    Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    151Operating income
    
    
    9,504
    
    
    
    5,988
    
    
    
    8,610
    
    
    
    762
    
    
    
    3,816Net income (loss)
    
    $
    4,114
    
    
    $
    2,380
    
    
    $
    4,618
    
    
    $
    (360
    )
    
    $
    (1,050
    )Cash FlowCash provided by operations
    
    $
    4,560
    
    
    $
    12,285
    
    
    $
    4,200
    
    
    $
    2,589
    
    
    $
    12,450Capital expenditures
    
    $
    5,377
    
    
    $
    3,062
    
    
    $
    2,009
    
    
    $
    2,227
    
    
    $
    3,481Adjusted working capital (1)
    
    $
    23,326
    
    
    $
    20,709
    
    
    $
    23,789
    
    
    $
    24,834
    
    
    $
    20,955Total assets
    
    $
    72,768
    
    
    $
    67,753
    
    
    $
    69,370
    
    
    $
    76,407
    
    
    $
    77,576Current portion of long-term debt
    
    $
    4,745
    
    
    $
    4,138
    
    
    $
    7,605
    
    
    $
    53
    
    
    $
    18,363Long-term debt, less current portion
    
    
    23,884
    
    
    
    25,829
    
    
    
    16,708
    
    
    
    25,371
    
    
    
    5,436Total debt
    
    $
    28,629
    
    
    $
    29,967
    
    
    $
    24,313
    
    
    $
    25,424
    
    
    $
    23,799Shareholders equity
    
    $
    26,546
    
    
    $
    21,518
    
    
    $
    29,735
    
    
    $
    25,418
    
    
    $
    26,413Per Share DataBasic net income (loss)
    
    $
    1.10
    
    
    $
    0.48
    
    
    $
    0.89
    
    
    $
    (0.07
    )
    
    $
    (0.20
    )Diluted net income (loss)
    
    $
    1.05
    
    
    $
    0.48
    
    
    $
    0.89
    
    
    $
    (0.07
    )
    
    $
    (0.20
    )Cash dividends paid
    
    $
    0.18
    
    
    $
    0.00
    
    
    $
    0.27
    
    
    $
    0.36
    
    
    $
    0.36Weighted average dilutive shares
outstanding
    
    
    3,929
    
    
    
    4,961
    
    
    
    5,166
    
    
    
    5,180
    
    
    
    5,232
 
 (1)
    
    Adjusted working capital is total current assets less current liabilities
excluding the current portion of long-term debt shown above. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  14




---



##### Table of Contents



Year ended December 31, 2006 Compared to Year Ended December 31, 2005  (in thousands)
 2006
    
    2005
    
    Dollar Change
    
    % ChangeSalesMechanical Business
    
    $
    79,773
    
    
    $
    72,361
    
    
    $
    7,412
    
    
    
    10.2
    %Electronics Business
    
    
    39,162
    
    
    
    38,536
    
    
    
    626
    
    
    
    1.6
    %Total Sales
    
    $
    118,935
    
    
    $
    110,897
    
    
    $
    8,038
    
    
    
    7.2
    %Cost of SalesMechanical Business
    
    $
    55,512
    
    
    $
    52,213
    
    
    $
    3,299
    
    
    
    6.3
    %Electronics Business
    
    
    25,278
    
    
    
    24,979
    
    
    
    299
    
    
    
    1.2
    %Total Cost of Sales
    
    $
    80,790
    
    
    $
    77,192
    
    
    $
    3,598
    
    
    
    4.7
    %Gross ProfitMechanical Business
    
    $
    24,261
    
    
    $
    20,148
    
    
    $
    4,113
    
    
    
    20.4
    %Electronics Business
    
    
    13,884
    
    
    
    13,557
    
    
    
    327
    
    
    
    2.4
    %Total Gross Profit
    
    $
    38,145
    
    
    $
    33,705
    
    
    $
    4,440
    
    
    
    13.2
    %Selling, General and Administrative
Expenses
    
    $
    28,641
    
    
    $
    27,717
    
    
    $
    924
    
    
    
    3.3
    %Sales as a percentage of total salesMechanical Business
    
    
    67.1
    %
    
    
    65.3
    %Electronics Business
    
    
    32.9
    %
    
    
    34.7
    %Total Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales as a percentage of salesMechanical Business
    
    
    69.6
    %
    
    
    72.2
    %Electronics Business
    
    
    64.5
    %
    
    
    64.8
    %Total Cost of Sales
    
    
    67.9
    %
    
    
    69.6
    %Gross Profit as a percentage of salesMechanical Business
    
    
    30.4
    %
    
    
    27.8
    %Electronics Business
    
    
    35.5
    %
    
    
    35.2
    %Total Gross Profit
    
    
    32.1
    %
    
    
    30.4
    %SG&A Expense as a percentage of total
sales
    
    
    24.1
    %
    
    
    25.0
    %
    15




---



##### Table of Contents



Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 (in thousands)
 2005
    
    2004
    
    Dollar Change
    
    % ChangeSalesMechanical Business
    
    $
    72,361
    
    
    $
    63,732
    
    
    $
    8,629
    
    
    
    13.5
    %Electronics Business
    
    
    38,536
    
    
    
    37,783
    
    
    
    753
    
    
    
    2.0
    %Total Sales
    
    $
    110,897
    
    
    $
    101,515
    
    
    $
    9,382
    
    
    
    9.2
    %Cost of SalesMechanical Business
    
    $
    52,213
    
    
    $
    47,788
    
    
    $
    4,425
    
    
    
    9.3
    %Electronics Business
    
    
    24,979
    
    
    
    26,004
    
    
    
    (1,025
    )
    
    
    (3.9
    %)Total Cost of Sales
    
    $
    77,192
    
    
    $
    73,792
    
    
    $
    3,400
    
    
    
    4.6
    %Gross ProfitMechanical Business
    
    $
    20,148
    
    
    $
    15,944
    
    
    $
    4,204
    
    
    
    26.4
    %Electronics Business
    
    
    13,557
    
    
    
    11,779
    
    
    
    1,778
    
    
    
    15.1
    %Total Gross Profit
    
    $
    33,705
    
    
    $
    27,723
    
    
    $
    5,982
    
    
    
    21.6
    %Selling, General and Administrative
Expenses
    
    $
    27,717
    
    
    $
    28,371
    
    
    $
    (654
    )
    
    
    (2.3
    %)Sales as a percentage of total salesMechanical Business
    
    
    65.3
    %
    
    
    62.8
    %Electronics Business
    
    
    34.7
    %
    
    
    37.2
    %Total Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales as a percentage of salesMechanical Business
    
    
    72.2
    %
    
    
    75.0
    %Electronics Business
    
    
    64.8
    %
    
    
    68.8
    %Total Cost of Sales
    
    
    69.6
    %
    
    
    72.7
    %Gross Profit as a percentage of salesMechanical Business
    
    
    27.8
    %
    
    
    25.0
    %Electronics Business
    
    
    35.2
    %
    
    
    31.2
    %Total Gross Profit
    
    
    30.4
    %
    
    
    27.3
    %SG&A Expense as a percentage of total
sales
    
    
    25.0
    %
    
    
    27.9
    %
   16




---



##### Table of Contents



17




---



##### Table of Contents



Critical Accounting Policies
   Allowance for Doubtful Accounts
 Product Warranty:
 Inventory:
 Impairment of Goodwill and Long Lived Assets:
 Revenue Recognition:
 18




---



##### Table of Contents



Income Taxes:
 Liquidity and Capital Resources
  Less
    
    
    
    
    
    
    
    
    
    MoreContractual Obligations in
    
    
    
    
    
    Than 1
    
    1-3
    
    3-5
    
    Than 5Thousands
    
    Total
    
    Year
    
    Years
    
    Years
    
    YearsLong-Term Debt Obligations
    
    $
    29,300
    
    
    $
    4,744
    
    
    $
    4,036
    
    
    $
    147
    
    
    $
    20,373Operating Lease Obligations
    
    
    4,720
    
    
    
    1,093
    
    
    
    1,505
    
    
    
    1,072
    
    
    
    1,050Total
    
    $
    34,020
    
    
    $
    5,837
    
    
    $
    5,541
    
    
    $
    1,219
    
    
    $
    21,423
      19




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Inflation and Changing Prices
  20




---



##### Table of Contents



Recent Accounting Pronouncements
    
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
       21




---



##### Table of Contents



22




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 PageReport of Independent Registered Public Accounting Firm
    
    
    24Consolidated Balance Sheets as of December 31, 2006 and December 31, 2005
    
    
    25Consolidated Statements of Operations for the Years Ended December 31, 2006,
December 31, 2005, and December 31, 2004
    
    
    26Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2006,
December 31, 2005, and December 31, 2004
    
    
    26Consolidated Statements of Changes in Shareholders Equity for the Years Ended December 31, 2006,
December 31, 2005, and December 31, 2004
    
    
    27Consolidated Statements of Cash Flows for the Years Ended December 31, 2006,
December 31, 2005, and December 31, 2004
    
    
    28Notes to Consolidated Financial Statements
    
    
    29
 23




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
 :
      
 24




---



##### Table of Contents



TB Woods Corporation and Subsidiaries
 
 Consolidated Balance Sheets
 (in thousands, except per share and share amounts)
    
    2006
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    877
    
    
    $
    3,419Accounts receivable, less allowances of $494 and $495
    
    
    17,592
    
    
    
    14,827Inventory
    
    
    19,668
    
    
    
    15,579Other Current Assets
    
    
    2,532
    
    
    
    3,061Total Current Assets
    
    
    40,669
    
    
    
    36,886Property, Plant, and Equipment:Machinery and equipment
    
    
    65,232
    
    
    
    60,732Land, buildings, and improvements
    
    
    20,043
    
    
    
    19,68485,275
    
    
    
    80,416Less accumulated depreciation
    
    
    60,523
    
    
    
    57,361Total Property, Plant and Equipment
    
    
    24,752
    
    
    
    23,055Other Assets:Goodwill
    
    
    5,891
    
    
    
    5,676Loan issue costs, net of amortization
    
    
    1,267
    
    
    
    1,564Other
    
    
    189
    
    
    
    572Total Other Assets
    
    
    7,347
    
    
    
    7,812$
    72,768
    
    
    $
    67,753LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    
    9,043
    
    
    
    8,465Accrued expenses
    
    
    7,838
    
    
    
    6,996Current maturities of long-term debt
    
    
    4,745
    
    
    
    4,138Deferred income taxes
    
    
    462
    
    
    
    716Total current liabilities
    
    
    22,088
    
    
    
    20,315Long-term debt, less current maturities
    
    
    23,884
    
    
    
    25,829Deferred income taxes
    
    
    250
    
    
    
    91Commitments and contingencies (Note 8)
    
    
    
    
    
    
    Shareholders Equity:Preferred stock, $.01 par value; 100 shares
authorized; no shares issued
    
    
    
    
    
    
    Common stock, $.01 par value; 10,000,000 shares
authorized; 5,639,798 issued; and 3,743,486 and
3,703,902 outstanding at December 31, 2006 and
December 31, 2005
    
    
    57
    
    
    
    57Additional paid-in capital
    
    
    28,947
    
    
    
    28,153Retained earnings
    
    
    12,538
    
    
    
    9,216Accumulated other comprehensive (loss) income
    
    
    439
    
    
    
    (151
    )Treasury stock at cost; 1,896,312 and 1,935,896
shares at December 31, 2006 and December 31, 2005
    
    
    (15,435
    )
    
    
    (15,757
    )Total shareholders equity
    
    
    26,546
    
    
    
    21,518$
    72,768
    
    
    $
    67,753
  25




---



##### Table of Contents



TB Woods Corporation and Subsidiaries
 
 Consolidated Statements of Operations
 (in thousands, except per share amounts)
    
    2006
    
    2005
    
    2004Net sales
    
    $
    118,935
    
    
    $
    110,897
    
    
    $
    101,515Cost of sales
    
    
    80,790
    
    
    
    77,192
    
    
    
    73,792Gross profit
    
    
    38,145
    
    
    
    33,705
    
    
    
    27,723Selling, general, and administrative expenses
    
    
    28,641
    
    
    
    27,717
    
    
    
    28,371Gain on termination of post-retirement benefit plan (Note 7)
    
    
    
    
    
    
    
    
    
    
    9,258Operating income
    
    
    9,504
    
    
    
    5,988
    
    
    
    8,610Interest and other finance costs
    
    
    (3,628
    )
    
    
    (2,319
    )
    
    
    (1,585
    )Income before income taxes
    
    
    5,876
    
    
    
    3,669
    
    
    
    7,025Income taxes
    
    
    1,762
    
    
    
    1,289
    
    
    
    2,407Net income
    
    $
    4,114
    
    
    $
    2,380
    
    
    $
    4,618Income per share of common stockBasic:Net income
    
    $
    1.10
    
    
    $
    0.48
    
    
    $
    0.89Weighted average shares of common stock and equivalents
    
    
    3,731
    
    
    
    4,933
    
    
    
    5,164Diluted:Net income
    
    $
    1.05
    
    
    $
    0.48
    
    
    $
    0.89Weighted average shares of common stock and equivalents
    
    
    3,929
    
    
    
    4,961
    
    
    
    5,166
 
 Consolidated Statements of Comprehensive Income
 (in thousands)
    
    2006
    
    2005
    
    2004Net income
    
    $
    4,114
    
    
    $
    2,380
    
    
    $
    4,618Other comprehensive income:Foreign currency translation adjustment
    
    
    590
    
    
    
    (309
    )
    
    
    768Comprehensive income
    
    $
    4,704
    
    
    $
    2,071
    
    
    $
    5,386
  26




---



##### Table of Contents



TB Woods Corporation and Subsidiaries
 
 Consolidated Statements of Changes in Shareholders Equity
 AccumulatedAdditional
    
    
    
    
    
    OtherCommon
    
    Common
    
    Paid-In
    
    Retained
    
    Comprehensive
    
    Treasury(in thousands, except share amounts)
    
    Shares
    
    Stock
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    StockBalance at January 2, 2004
    
    
    5,153,553
    
    
    $
    57
    
    
    $
    26,910
    
    
    $
    3,764
    
    
    $
    (610
    )
    
    $
    (4,703
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,618
    
    
    
    
    
    
    
    Stock issued for employee benefit plans
    
    
    19,137
    
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    185Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,393
    )
    
    
    
    
    
    
    Stock options granted
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    768
    
    
    
    Balance at December 31, 2004
    
    
    5,172,690
    
    
    
    57
    
    
    
    27,095
    
    
    
    6,943
    
    
    
    158
    
    
    
    (4,518
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,380
    
    
    
    
    
    
    
    Stock issued for employee benefit plans
    
    
    31,212
    
    
    
    
    
    
    
    
    
    
    
    (107
    )
    
    
    
    
    
    
    293Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Treasury stock purchases
    
    
    (1,500,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,532
    )Stock options granted
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    
    
    
    
    Warrants issued
    
    
    
    
    
    
    
    
    
    
    755
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (309
    )
    
    
    Balance at December 31, 2005
    
    
    3,703,902
    
    
    
    57
    
    
    
    28,153
    
    
    
    9,216
    
    
    
    (151
    )
    
    
    (15,757
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,114
    
    
    
    
    
    
    
    Stock issued for employee benefit plans
    
    
    21,811
    
    
    
    
    
    
    
    43
    
    
    
    (9
    )
    
    
    
    
    
    
    177Options exercised
    
    
    17,773
    
    
    
    
    
    
    
    42
    
    
    
    (108
    )
    
    
    
    
    
    
    145Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (675
    )
    
    
    
    
    
    
    Stock options granted
    
    
    
    
    
    
    
    
    
    
    709
    
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    590
    
    
    
    Balance at December 31, 2006
    
    
    3,743,486
    
    
    $
    57
    
    
    $
    28,947
    
    
    $
    12,538
    
    
    $
    439
    
    
    $
    (15,435
    )
  27




---



##### Table of Contents



TB Woods Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (in thousands)
    
    2006
    
    2005
    
    2004Cash Flows from Operating Activities:Net income
    
    $
    4,114
    
    
    $
    2,380
    
    
    $
    4,618Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,517
    
    
    
    4,765
    
    
    
    5,423Change in deferred income taxes
    
    
    (80
    )
    
    
    (228
    )
    
    
    1,755Stock options and employee stock benefit expense
    
    
    920
    
    
    
    429
    
    
    
    270Gain on termination of post-retirement plan
    
    
    
    
    
    
    (270
    )
    
    
    (9,258
    )Other, net
    
    
    (6
    )
    
    
    (247
    )
    
    
    (10
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,765
    )
    
    
    (1,474
    )
    
    
    714Inventories
    
    
    (4,089
    )
    
    
    4,839
    
    
    
    1,216Other current assets
    
    
    529
    
    
    
    681
    
    
    
    (152
    )Accounts payable
    
    
    578
    
    
    
    662
    
    
    
    634Accrued and other liabilities
    
    
    842
    
    
    
    748
    
    
    
    (1,010
    )Net cash provided by operating activities
    
    
    4,560
    
    
    
    12,285
    
    
    
    4,200Cash Flows from Investing Activities:Capital expenditures
    
    
    (5,377
    )
    
    
    (3,062
    )
    
    
    (2,009
    )Proceeds from sales of fixed assets
    
    
    
    
    
    
    428
    
    
    
    69Other, net
    
    
    (88
    )
    
    
    137
    
    
    
    (803
    )Net cash used in investing activities
    
    
    (5,465
    )
    
    
    (2,497
    )
    
    
    (2,743
    )Cash Flows from Financing Activities:Proceeds from revolving credit facilities
    
    
    118,401
    
    
    
    111,551
    
    
    
    37,739Repayments of revolving credit facilities
    
    
    (118,334
    )
    
    
    (128,794
    )
    
    
    (38,870
    )Proceeds from term loans
    
    
    88
    
    
    
    12,200
    
    
    
    33Repayments of term loans
    
    
    (1,618
    )
    
    
    (4,395
    )
    
    
    (14
    )Proceeds from subordinated debt and detachable
warrants, net of issue costs
    
    
    
    
    
    
    14,260
    
    
    
    Payment of dividends
    
    
    (675
    )
    
    
    
    
    
    
    (1,393
    )Proceeds from exercise of stock options
    
    
    5
    
    
    
    
    
    
    
    Proceeds from stock issued under employee stock program
    
    
    74
    
    
    
    59
    
    
    
    55Treasury stock purchased
    
    
    
    
    
    
    (11,591
    )
    
    
    Net cash used in financing activities
    
    
    (2,059
    )
    
    
    (6,710
    )
    
    
    (2,450
    )Effect of changes in foreign exchange rates
    
    
    422
    
    
    
    (215
    )
    
    
    768Increase (decrease) in cash and cash equivalents
    
    
    (2,542
    )
    
    
    2,863
    
    
    
    (225
    )Cash and cash equivalents at beginning of year
    
    
    3,419
    
    
    
    556
    
    
    
    781Cash and cash equivalents at end of year
    
    $
    877
    
    
    $
    3,419
    
    
    $
    556Income taxes paid (refunded), net
    
    $
    1,632
    
    
    $
    245
    
    
    $
    22Interest paid during the year
    
    $
    3,527
    
    
    $
    2,466
    
    
    $
    1,564
  28




---



##### Table of Contents



TB Woods Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements
 (in thousands, except per share amounts)
 1. Nature of Business and Principles of Consolidation
   2. Summary of Significant Accounting Policies
 Cash Equivalents
  Accounts Receivable
  Inventory
  2006
    
    2005Finished goods
    
    $
    13,709
    
    
    $
    11,159Work in process
    
    
    3,475
    
    
    
    3,452Raw materials
    
    
    9,194
    
    
    
    7,009Total inventories at FIFO
    
    
    26,378
    
    
    
    21,620less LIFO reserve
    
    
    (6,710
    )
    
    
    (6,041
    )Total inventories at LIFO
    
    $
    19,668
    
    
    $
    15,579
 29




---



##### Table of Contents



Property, Plant and Equipment
  Asset Type
    
    LivesMachinery and equipment
    
    3  15 yearsBuildings and improvements
    
    10  40 years
 Long-Lived Assets, including Goodwill
  Mechanical
    
    Electronics
    
    TotalGoodwill, balance at January 2, 2004
    
    $
    3,503
    
    
    $
    2,151
    
    
    $
    5,654Addition due to earn out payment
    
    
    94
    
    
    
    
    
    
    
    94Adjustment for impairment
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )Change due to foreign currency translation
    
    
    
    
    
    
    178
    
    
    
    178Goodwill, balance at December 31, 2004
    
    
    3,597
    
    
    
    2,305
    
    
    
    5,902Addition due to earn out payment
    
    
    67
    
    
    
    
    
    
    
    67Change due to foreign currency translation
    
    
    
    
    
    
    (293
    )
    
    
    (293
    )Goodwill balance at December 31, 2005
    
    
    3,664
    
    
    
    2,012
    
    
    
    5,676Change due to foreign currency translation
    
    
    
    
    
    
    215
    
    
    
    215Goodwill balance at December 31, 2006
    
    $
    3,664
    
    
    $
    2,227
    
    
    $
    5,891
 Revenue Recognition
  30




---



##### Table of Contents



Major Customers
  Product Warranty
  Self-Insurance
  Post Retirement Benefits Obligations
  Foreign Currency Translation
  Fair Value of Financial Instruments
  Research and Development Cost
  31




---



##### Table of Contents



Stock Based Compensation
 Accounting for Stock-Based Compensation Share Based Payment
 Income Taxes
  Net Income Per Share
  2006
    
    2005
    
    2004Common shares outstanding for basic EPS
    
    
    3,731
    
    
    
    4,933
    
    
    
    5,164Shares issued upon assumed exercise of outstanding
stock options and warrants
    
    
    198
    
    
    
    28
    
    
    
    2Weighted average number of common and common
equivalent shares outstanding for diluted EPS
    
    
    3,929
    
    
    
    4,961
    
    
    
    5,166
  Use of Estimates
  Reclassifications
  Recent Accounting Pronouncements
  32




---



##### Table of Contents



3. Other Current Assets and Accrued Liabilities
  2006
    
    2005Refundable foreign value added tax
    
    $
    812
    
    
    $
    970Maintenance and repair supplies
    
    
    610
    
    
    
    597Prepaid insurance and deposits
    
    
    221
    
    
    
    505Prepaid expenses and other
    
    
    889
    
    
    
    989Total
    
    $
    2,532
    
    
    $
    3,061
  2006
    
    2005Accrued payroll and other compensation
    
    $
    2,803
    
    
    $
    2,339Accrued income taxes
    
    
    1,471
    
    
    
    1,672Accrued workers compensation
    
    
    255
    
    
    
    195Accrued customer rebates
    
    
    1,178
    
    
    
    1,116Accrued warranty reserves
    
    
    727
    
    
    
    564Accrued professional fees
    
    
    452
    
    
    
    270Other accrued liabilities
    
    
    952
    
    
    
    840Total
    
    $
    7,838
    
    
    $
    6,996
 4. Debt
  2006
    
    2005Revolving line of creditsecured
    
    $
    1,102
    
    
    $
    1,035Term Loanssecured
    
    
    7,305
    
    
    
    8,805Industrial revenue bondssecured
    
    
    5,290
    
    
    
    5,290Other revolving and term loans, principally with foreign banks
    
    
    603
    
    
    
    586Senior Subordinated Notes, net of unamortized discountunsecured
    
    
    14,329
    
    
    
    14,25128,629
    
    
    
    29,967Less current maturities
    
    
    (4,745
    )
    
    
    (4,138
    )$
    23,884
    
    
    $
    25,829
   33




---



##### Table of Contents



2007
    
    $
    4,7442008
    
    
    1,6362009
    
    
    2,4002010
    
    
    732011
    
    
    74Thereafter
    
    
    20,37229,300Less: Unamortized discount
    
    
    (671
    )$
    28,629
 34




---



##### Table of Contents



5. Income Taxes
  2006
    
    2005
    
    2004Current:Federal and state
    
    $
    (7
    )
    
    $
    1,069
    
    
    $
    103Foreign
    
    
    1,797
    
    
    
    448
    
    
    
    5491,790
    
    
    
    1,517
    
    
    
    652Deferred income tax (benefit) provision
    
    
    (28
    )
    
    
    (228
    )
    
    
    1,755Total provision for income taxes
    
    $
    1,762
    
    
    $
    1,289
    
    
    $
    2,407
  2006
    
    2005
    
    2004Federal statutory income tax expense
    
    $
    1,998
    
    
    $
    1,247
    
    
    $
    2,388State income taxes, net of federal income tax benefit
    
    
    (21
    )
    
    
    (115
    )
    
    
    211Foreign taxes, net of related credits
    
    
    130
    
    
    
    473
    
    
    
    107Research and development credits
    
    
    (135
    )
    
    
    (295
    )
    
    
    (207
    )Change in estimate with respect to federal and state
liabilities
    
    
    (90
    )
    
    
    (140
    )
    
    
    (143
    )Other
    
    
    (120
    )
    
    
    119
    
    
    
    51$
    1,762
    
    
    $
    1,289
    
    
    $
    2,407
   2006
    
    2005Deferred income tax liabilities:Book basis in long-lived assets over tax basis
    
    $
    (900
    )
    
    $
    (839
    )LIFO inventory basis difference
    
    
    (1,260
    )
    
    
    (1,426
    )Other
    
    
    
    
    
    
    (17
    )Total deferred income tax liabilities
    
    
    (2,160
    )
    
    
    (2,282
    )Deferred income tax assets:Accrued liabilities not currently deductible
    
    
    762
    
    
    
    458Allowance for doubtful accounts and inventory
reserves
    
    
    460
    
    
    
    460Net operating loss and tax credit carryforwards
    
    
    175
    
    
    
    557Other
    
    
    51
    
    
    
    Total deferred income tax assets
    
    
    1,448
    
    
    
    1,475Net deferred income tax liability
    
    $
    (712
    )
    
    $
    (807
    )
  35




---



##### Table of Contents



6. Shareholders Equity
  2006
    
    2005Balance at beginning of year, number of shares
    
    
    1,935,896
    
    
    
    467,108Purchases during the year
    
    
    
    
    
    
    1,500,000Transfers to 401(k) Profit Sharing Plan
    
    
    (11,812
    )
    
    
    (19,189
    )Transfers to Employee Stock Purchase Plan
    
    
    (9,999
    )
    
    
    (12,023
    )Transfers for Exercise of Options
    
    
    (17,773
    )
    
    
    Balance at end of year, number of shares
    
    
    1,896,312
    
    
    
    1,935,896
  7. Benefit Plans
 Compensation Plans
  Profit-Sharing Plans
  Employee Stock Purchase Plan
  Stock Options
  36




---



##### Table of Contents



2006
    
    2005
    
    2004Risk free interest rate
    
    
    4.70
    %
    
    
    4.50
    %
    
    
    4.40
    %Expected lives
    
    10 years
    
    10 years
    
    5 & 10 yearsExpected volatility
    
    
    60.8
    %
    
    
    28.8
    %
    
    
    30.3
    %Dividend yield
    
    
    4.8
    %
    
    
    0.0
    %
    
    
    4.3
    %
   WeightedWeighted
    
    averageNumber of
    
    average
    
    remaining
    
    Aggregateshares subject
    
    exercise
    
    contractual term
    
    Intrinsicto option
    
    price
    
    (in years)
    
    ValueOptions outstanding at January 2, 2004
    
    
    874,050
    
    
    $
    11.73Granted
    
    
    187,800
    
    
    
    9.75Canceled
    
    
    (383,399
    )
    
    
    11.91Exercised
    
    
    
    
    
    
    Options outstanding at December 31, 2004
    
    
    678,451
    
    
    
    11.08Granted
    
    
    184,000
    
    
    
    7.08Canceled
    
    
    (197,000
    )
    
    
    12.82Exercised
    
    
    
    
    
    
    Options outstanding at December 31, 2005
    
    
    665,451
    
    
    
    9.46Granted
    
    
    99,000
    
    
    
    9.37Canceled
    
    
    (88,269
    )
    
    
    12.45Exercised
    
    
    (57,433
    )
    
    
    8.94Options outstanding at December 31, 2006
    
    
    618,749
    
    
    $
    9.20
    
    
    
    6.25
    
    
    $
    4,399Options vested or expected to vest at
December 31, 2006
    
    
    618,749
    
    
    $
    9.20
    
    
    
    6.25
    
    
    $
    4,399Options exercisable at December 31, 2006
    
    
    358,383
    
    
    $
    9.77
    
    
    
    4.75
    
    
    $
    2,221
 37




---



##### Table of Contents



Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number of
    
    average
    
    average
    
    Number of
    
    averageexercise price
    
    shares
    
    exercise price
    
    contractual life
    
    shares
    
    exercise price$
    4.80   -
    
    
    $
    7.50
    
    
    
    146,018
    
    
    $
    6.16
    
    
    10.0 years
    
    
    61,235
    
    
    $
    6.17$
    7.51   -
    
    
    $
    9.00
    
    
    
    210,716
    
    
    $
    8.08
    
    
    10.0 years
    
    
    117,586
    
    
    $
    8.24$
    9.01   -
    
    
    $
    11.00
    
    
    
    94,782
    
    
    $
    9.46
    
    
    7.80 years
    
    
    64,892
    
    
    $
    9.40$
     11.01   -
    
    
    $
    13.00
    
    
    
    119,349
    
    
    $
    12.11
    
    
    5.90 years
    
    
    80,353
    
    
    $
    12.37$
    13.01   -
    
    
    $
    21.00
    
    
    
    47,884
    
    
    $
    15.58
    
    
    10.0 years
    
    
    34,317
    
    
    $
    16.00Total Options    Outstanding
    
    
    618,749
    
    
    
    
    
    
    
    
    
    
    
    358,383
 Postretirement Benefits
   8. Commitments and Contingencies
 Legal Proceedings
  Environmental Risks
 .
 38




---



##### Table of Contents



Operating Lease Commitments
  2007
    
    $
    1,0932008
    
    
    8772009
    
    
    6282010
    
    
    5552011
    
    
    5172012 and thereafter
    
    
    1,050$
    4,720
 9. Business Segment Information
 Description of the Types of Products from which each Segment Derives its Revenues
  Measurement of Segment Profit or Loss and Segment Assets
  Factors Management Used to Identify the Companys Reportable Segments
  2006
    
    2005
    
    2004SalesMechanical Business
    
    $
    79,773
    
    
    $
    72,361
    
    
    $
    63,732Electronics Business
    
    
    39,162
    
    
    
    38,536
    
    
    
    37,783118,935
    
    
    
    110,897
    
    
    
    101,515Operating income (loss), exclusive of
gain on benefit plan terminationMechanical Business
    
    
    7,727
    
    
    
    4,885
    
    
    
    951Electronics Business
    
    
    1,777
    
    
    
    1,103
    
    
    
    (1,599
    )9,504
    
    
    
    5,988
    
    
    
    (648
    )Depreciation and amortizationMechanical Business
    
    
    2,261
    
    
    
    2,578
    
    
    
    2,884Electronics Business
    
    
    1,196
    
    
    
    1,158
    
    
    
    1,443Corporate (before divisional allocation)
    
    
    1,060
    
    
    
    1,029
    
    
    
    1,0964,517
    
    
    
    4,765
    
    
    
    5,423AssetsMechanical Business
    
    
    45,406
    
    
    
    42,097
    
    
    
    43,541Electronics Business
    
    
    22,786
    
    
    
    20,760
    
    
    
    22,136Corporate
    
    
    4,576
    
    
    
    4,896
    
    
    
    3,69372,768
    
    
    
    67,753
    
    
    
    69,370
 39




---



##### Table of Contents



2006
    
    2005
    
    2004Expenditures for long-lived assetsMechanical Business
    
    
    4,158
    
    
    
    1,002
    
    
    
    1,652Electronics Business
    
    
    760
    
    
    
    1,398
    
    
    
    254Corporate
    
    
    459
    
    
    
    662
    
    
    
    103$
    5,377
    
    
    $
    3,062
    
    
    $
    2,009
  2006
    
    2005
    
    2004Total operating profit (loss) for reportable segments
    
    $
    9,504
    
    
    $
    5,988
    
    
    $
    (648
    )Interest expense
    
    
    (3,628
    )
    
    
    (2,319
    )
    
    
    (1,585
    )Gain on benefit plan termination
    
    
    
    
    
    
    
    
    
    
    9,258Income before income taxes
    
    $
    5,876
    
    
    $
    3,669
    
    
    $
    7,025
  2006
    
    2005Total assets for reportable segments
    
    $
    68,192
    
    
    $
    62,857Corporate fixed assets
    
    
    4,705
    
    
    
    3,739Interdivision elimination
    
    
    (129
    )
    
    
    1,157Consolidated total
    
    $
    72,768
    
    
    $
    67,753
  Long-LivedNet Sales
    
    Assets2006United States
    
    $
    87,866
    
    
    $
    24,005Canada
    
    
    11,113
    
    
    
    318Germany
    
    
    4,899
    
    
    
    2,236Italy
    
    
    10,571
    
    
    
    574Mexico
    
    
    2,978
    
    
    
    3,474India
    
    
    1,508
    
    
    
    36Consolidated
    
    $
    118,935
    
    
    $
    30,6432005United States
    
    $
    82,402
    
    
    $
    22,896Canada
    
    
    10,291
    
    
    
    308Germany
    
    
    4,561
    
    
    
    2,024Italy
    
    
    9,940
    
    
    
    381Mexico
    
    
    2,808
    
    
    
    3,084India
    
    
    900
    
    
    
    38Consolidated
    
    $
    110,897
    
    
    $
    28,7312004United States
    
    $
    74,186
    
    
    $
    23,670Canada
    
    
    8,937
    
    
    
    328Germany
    
    
    4,627
    
    
    
    2,320Italy
    
    
    9,980
    
    
    
    674Mexico
    
    
    2,878
    
    
    
    3,326India
    
    
    907
    
    
    
    43Consolidated
    
    $
    101,515
    
    
    $
    30,361
 40




---



##### Table of Contents



10. Subsequent EventMerger Transaction
    11. Quarterly Financial Data (Unaudited)
 2006
    
    First
    
    Second
    
    Third
    
    FourthSales
    
    $
    29,419
    
    
    $
    29,750
    
    
    $
    29,894
    
    
    $
    29,872Gross Profit
    
    
    9,104
    
    
    
    9,495
    
    
    
    9,668
    
    
    
    9,878Gross Profit %
    
    
    30.9
    %
    
    
    31.9
    %
    
    
    32.3
    %
    
    
    33.1
    %Net income
    
    
    642
    
    
    
    947
    
    
    
    1,294
    
    
    
    1,231Basic net income per share
    
    $
    0.17
    
    
    $
    0.25
    
    
    $
    0.35
    
    
    $
    0.33Diluted net income per share
    
    $
    0.17
    
    
    $
    0.24
    
    
    $
    0.33
    
    
    $
    0.31Dividends declared and paid
per share
    
    
    
    
    
    
    
    
    
    $
    0.09
    
    
    $
    0.09
 2005
    
    First
    
    Second
    
    Third
    
    FourthSales
    
    $
    27,711
    
    
    $
    27,844
    
    
    $
    27,673
    
    
    $
    27,669Gross Profit
    
    
    8,153
    
    
    
    8,276
    
    
    
    8,254
    
    
    
    9,022Gross Profit %
    
    
    29.4
    %
    
    
    29.7
    %
    
    
    29.8
    %
    
    
    32.6
    %Net income
    
    
    372
    
    
    
    497
    
    
    
    565
    
    
    
    946Basic net income per share
    
    $
    0.07
    
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.20Diluted net income per share
    
    $
    0.07
    
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.20Dividends declared and paid
per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  41




---



##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
  
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
 Directors and Executive Officers of the Company
  Name
    
    Age
    
    TitleG. John Krediet
    
    56
    
    Chairman of the Board of DirectorsWilliam T. Fejes, Jr.
    
    51
    
    President, Chief Executive Officer and DirectorJoseph C. Horvath
    
    52
    
    Vice President, Chief Financial Officer and Corporate SecretaryAnthony A. Chien
    
    44
    
    Vice President, Marketing, Engineering and EuropeHarold L. Coder, III
    
    55
    
    Vice President, SalesAnthony J. Metz
    
    40
    
    Vice President, Human Resources and LEANRick A. Lazio
    
    48
    
    DirectorFrank D. Osborn
    
    59
    
    DirectorJames R. Swenson
    
    67
    
    DirectorMichael R. Zimmerman
    
    53
    
    Director
  42




---



##### Table of Contents



43




---



##### Table of Contents



Section 16(a) Beneficial Ownership Reporting Compliance
  The Board of Directors and Board Committees
  Director Independence
  Audit Committee
    Compensation Committee
   44




---



##### Table of Contents



Nominating and Corporate Governance
    
 Item 11. Executive Compensation
 Compensation Discussion and Analysis
 Compensation Philosophy
   Components of Executive Compensation
  Base Salary
   45




---



##### Table of Contents



Non-Equity Incentive Plan Compensation
    Equity-Based Incentives
   46




---



##### Table of Contents



Other Compensation
  Employment Agreements
     Deductibility of Compensation
  47




---



##### Table of Contents



Summary Compensation Table
 Option
    
    Non-EquityFiscal
    
    
    
    
    
    Awards
    
    Incentive Plan
    
    All OtherName
    
    Year
    
    Salary
    
    ($) (1)
    
    Compensation
    
    Compensation
    
    Total ($)William T. Fejes,
Jr., President and
Chief Executive
Officer
    
    
    2006
    
    
    $
    305,182
    
    
    $
    65,480
    
    
    $
    174,700
    
    
    $
    26,150
    (2)
    
    $
    571,512Joseph C. Horvath,
Vice President,
Secretary and Chief
Financial Officer
    
    
    2006
    
    
    $
    182,393
    
    
    $
    32,740
    
    
    $
    54,500
    
    
    $
    22,751
    (3)
    
    $
    292,384Anthony A. Chien,
Vice President
Marketing,
Engineering and
Europe
    
    
    2006
    
    
    $
    194,988
    
    
    $
    32,740
    
    
    $
    61,000
    
    
    $
    17,194
    (4)
    
    $
    305,922Harold L. Coder,
III, Vice
President, Sales
    
    
    2006
    
    
    $
    151,410
    
    
    $
    32,740
    
    
    $
    49,500
    
    
    $
    16,540
    (5)
    
    $
    250,190Anthony J. Metz,
Vice President,
Human Resources and
LEAN
    
    
    2006
    
    
    $
    116,251
    
    
    $
    32,740
    
    
    $
    37,900
    
    
    $
    19,540
    (6)
    
    $
    206,231Thomas. C. Foley,
Former Chairman of
the Board
    
    
    2006
    
    
    $
    266,563
    
    
    $
    277,599
    (7)
    
    $
    125,000
    
    
    $
    42,150
    (8)
    
    $
    711,312
 
 (1)
    
    Unless otherwise indicated, the values associated with option awards in 2006 reflect the
grant date fair value of options awarded in 2006. See footnote 7.(2)
    
    All Other Compensation for Mr. Fejes includes a $12,000 car allowance, $5,384 in country club
dues and $6,600 in matching contributions to his 401(k) retirement account.(3)
    
    All Other Compensation for Mr. Horvath includes a $9,000 car allowance, $5,434 in country
club dues and $6,600 in matching contributions to his 401(k) retirement account.(4)
    
    All Other Compensation for Mr. Chien includes a $9,000 car allowance and $6,600 in matching
contributions to his 401(k) retirement account.(5)
    
    All Other Compensation for Mr. Coder includes a $9,000 car allowance and $5,301 in matching
contributions to his 401(k) retirement account.(6)
    
    All Other Compensation for Mr. Metz includes a $9,000 car allowance, $5,384 in country club
dues and $4,127 in matching contributions to his 401(k) retirement account.(7)
    
    Option Awards for Thomas C. Foley includes $31,760 for options granted in 2006, as set forth
below, which vest in three equal amounts on each successive anniversary date of the option
grant, and $244,859 associated with the modifications of all options granted to Thomas C.
Foley, who left the Company to enter into government service, permitting him to retain his rights under his
existing option agreements.(8)
    
    All Other Compensation for Thomas C. Foley includes $41,250 for reimbursement of office
expenses.  48




---



##### Table of Contents



GRANTS OF PLAN BASED AWARDS
 All OtherOption
    
    ExerciseAwards;
    
    or Base
    
    Grant DateNumber of
    
    Price of
    
    Fair Value2006
    
    Estimated Future Payouts
    
    
    
    
    
    
    
    
    
    
    
    
    
    Securities
    
    Option
    
    of StockGrant
    
    Under Non-Equity Incentive
    
    Estimated Future Payouts Under
    
    Underlying
    
    Awards
    
    OptionName
    
    Date
    
    Plan Awards
    
    Equity Incentive Plan Awards
    
    Options (2)
    
    (2), (3)
    
    AwardsThreshold
    
    Target
    
    Maximum
    
    Threshold
    
    Target
    
    Maximum$
    
    $
    
    $
    
    $
    
    $
    
    $William T. Fejes,
Jr.,
    
    
    N/A
    
    
    
    
    
    
    $
    233,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President and Chief
    
    Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    $
    7.61
    
    
    $
    44,960Executive Officer (4)
    
    Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    $
    11.62
    
    
    $
    20,520Joseph C. Horvath,
    
    
    N/A
    
    
    
    
    
    
    $
    79,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vice-President,
    
    Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    $
    7.61
    
    
    $
    22,480Secretary and Chief
Financial Officer
(4)
    
    Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    $
    11.62
    
    
    $
    10,260Anthony A. Chien,
    
    
    N/A
    
    
    
    
    
    
    $
    85,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vice President
    
    Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    $
    7.61
    
    
    $
    22,480Marketing,Engineering
and Europe
    
    Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    $
    11.62
    
    
    $
    10,2602Harold L. Coder, III,
    
    
    N/A
    
    
    
    
    
    
    $
    66,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vice-President, Sales
    
    Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    $
    7.61
    
    
    $
    22,480Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    $
    11.62
    
    
    $
    10,260Anthony J. Metz,
Vice
    
    
    N/A
    
    
    
    
    
    
    $
    51,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President, Human
    
    Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    $
    7.61
    
    
    $
    22,480Resources and LEAN
    
    Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    $
    11.62
    
    
    $
    10,260Thomas. C. Foley,
    
    Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    $
    7.61
    
    
    $
    22,480Former
Chairman of
    
    Jan 13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    $
    11.62
    
    
$
10,260the Board
    
    Sept 29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,800
    
    
    $
    10.58
    
    
    $
    244,859
 
 (1)
    
    Due to the pending merger with Altra, the Company has not estimated future payouts under
its equity incentive plans for 2007. These plans will be terminated in advance of closing of
the Merger.(2)
    
    Represents stock options granted or modified in 2006. Please see footnotes 1 and 7 to the
Summary Compensation Table.(3)
    
    Stock options granted to Thomas C. Foley at September 29, 2006 represent a modification of
all options previously granted to him, permitting Mr. Foley to retain his option rights
to acquire 89,800 options beyond his service date. The exercise price represents the weighted
exercise price of all such options.(4)
    
    On February 16, 2007, the Compensation Committee also approved transaction bonus plan letter
agreements for the Chief Executive Officer and Chief Financial Officer to encourage such
officers to remain with TB Woods and to continue to provide leadership until the Merger is
completed. Under these agreements, William T. Fejes, Jr. and Joseph C. Horvath will receive
$300,000 and $150,000, respectively, upon closing of the Merger. These amounts are not
included in the target plan award amounts.  49




---



##### Table of Contents



Outstanding Equity Awards at Fiscal Year-End
  Equity IncentivePlan Awards:Number of
    
    Number of
    
    Number ofSecurities
    
    Securities
    
    SecuritiesUnderlying
    
    Underlying
    
    UnderlyingUnexercised
    
    Unexercised
    
    Unexercised
    
    OptionOptions (#)
    
    Options (#)
    
    Unearned
    
    Exercise
    
    OptionName
    
    Exercisable
    
    Unexercisable
    
    Options (#)
    
    Price ($)
    
    Expiration DateWilliam T. Fejes, Jr., President
and Chief Executive Officer
    
    
    33,333
    
    
    
    16,667
    
    
    
    
    
    
    $
    7.91
    
    
    
    4/27/201416,667
    
    
    
    8,333
    
    
    
    
    
    
    $
    11.86
    
    
    
    4/27/20148,889
    
    
    
    17,778
    
    
    
    
    
    
    $
    6.39
    
    
    
    2/11/20154,444
    
    
    
    8,889
    
    
    
    
    
    
    $
    9.59
    
    
    
    2/11/2015
    
    
    
    8,000
    
    
    
    
    
    
    $
    7.61
    
    
    
    1/31/2016
    
    
    
    4,000
    
    
    
    
    
    
    $
    11.42
    
    
    
    1/31/2016Joseph C. Horvath, Vice
President, Secretary and Chief
Financial Officer
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    $
    8.20
    
    
    
    10/22/201312,,500
    
    
    
    
    
    
    
    
    
    
    $
    12.30
    
    
    
    10/22/20134,000
    
    
    
    2,000
    
    
    
    
    
    
    $
    8.72
    
    
    
    2/05/20142,000
    
    
    
    1,000
    
    
    
    
    
    
    $
    13.08
    
    
    
    2/05/20142,000
    
    
    
    4,000
    
    
    
    
    
    
    $
    6.39
    
    
    
    2/11/20151,000
    
    
    
    2,000
    
    
    
    
    
    
    $
    9.59
    
    
    
    2/11/20154,000
    
    
    
    
    
    
    $
    7.61
    
    
    
    1/31/20162,000
    
    
    
    
    
    
    $
    11.42
    
    
    
    1/31/2016Anthony A. Chien,, Vice
President Marketing,
Engineering and Europe
    
    
    8,333
    
    
    
    16,667
    
    
    
    
    
    
    $
    8.20
    
    
    
    7/26/20154,167
    
    
    
    8,333
    
    
    
    
    
    
    $
    12.30
    
    
    
    7/26/2015
    
    
    
    8,000
    
    
    
    
    
    
    $
    7.61
    
    
    
    1/31/2016
    
    
    
    4,000
    
    
    
    
    
    
    $
    11.42
    
    
    
    1/31/2016Harold L. Coder, III,
Vice President, Sales
    
    
    1,650
    
    
    
    
    
    
    
    
    
    
    $
    14.00
    
    
    
    6/17/20072,000
    
    
    
    
    
    
    
    
    
    
    $
    21.00
    
    
    
    2/01/20082,000
    
    
    
    
    
    
    
    
    
    
    $
    12.00
    
    
    
    1/26/20092,000
    
    
    
    
    
    
    
    
    
    
    $
    9.50
    
    
    
    2/01/20102,000
    
    
    
    
    
    
    
    
    
    
    $
    7.75
    
    
    
    1/25/20112,000
    
    
    
    
    
    
    
    
    
    
    $
    8.50
    
    
    
    1/31/20124,000
    
    
    
    
    
    
    
    
    
    
    $
    12.75
    
    
    
    1/31/20072,000
    
    
    
    
    
    
    
    
    
    
    $
    6.21
    
    
    
    1/31/20134,000
    
    
    
    
    
    
    
    
    
    
    $
    9.32
    
    
    
    1/31/20084,000
    
    
    
    2,000
    
    
    
    
    
    
    $
    8.72
    
    
    
    2/05/20142,000
    
    
    
    1,000
    
    
    
    
    
    
    $
    13.08
    
    
    
    2/05/20142,000
    
    
    
    4,000
    
    
    
    
    
    
    $
    6.39
    
    
    
    2/11/20151,000
    
    
    
    2,000
    
    
    
    
    
    
    $
    9.59
    
    
    
    2/11/2015
    
    
    
    4,000
    
    
    
    
    
    
    $
    7.61
    
    
    
    1/31/2016
    
    
    
    2,000
    
    
    
    
    
    
    $
    11.42
    
    
    
    1/31/2016
 50




---



##### Table of Contents



Equity IncentivePlan Awards:Number of
    
    Number of
    
    Number ofSecurities
    
    Securities
    
    SecuritiesUnderlying
    
    Underlying
    
    UnderlyingUnexercised
    
    Unexercised
    
    Unexercised
    
    OptionOptions (#)
    
    Options (#)
    
    Unearned
    
    Exercise
    
    OptionName
    
    Exercisable
    
    Unexercisable
    
    Options (#)
    
    Price ($)
    
    Expiration DateAnthony J. Metz, Vice
President, Human Resources
and LEAN
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    $
    8.31
    
    
    
    4/25/2010800
    
    
    
    
    
    
    
    
    
    
    $
    7.75
    
    
    
    1/25/2011800
    
    
    
    
    
    
    
    
    
    
    $
    8.50
    
    
    
    1/31/20121,600
    
    
    
    
    
    
    
    
    
    
    $
    12.75
    
    
    
    1/31/2007800
    
    
    
    
    
    
    
    
    
    
    $
    6.21
    
    
    
    1/31/20131,600
    
    
    
    
    
    
    
    
    
    
    $
    9.32
    
    
    
    1/31/20081,333
    
    
    
    667
    
    
    
    
    
    
    $
    8.72
    
    
    
    2/05/2014667
    
    
    
    333
    
    
    
    
    
    
    $
    13.08
    
    
    
    2/05/20142,000
    
    
    
    4,000
    
    
    
    
    
    
    $
    6.39
    
    
    
    2/11/20151,000
    
    
    
    2,000
    
    
    
    
    
    
    $
    9.59
    
    
    
    2/11/2015
    
    
    
    4,000
    
    
    
    
    
    
    $
    7.61
    
    
    
    1/31/2016
    
    
    
    2,000
    
    
    
    
    
    
    $
    11.42
    
    
    
    1/31/2016Thomas. C. Foley,
Former Chairman of the Board
    
    
    6,250
    
    
    
    
    
    
    
    
    
    
    $
    14.00
    
    
    
    6/17/20076,250
    
    
    
    
    
    
    
    
    
    
    $
    21.00
    
    
    
    2/01/20086,250
    
    
    
    
    
    
    
    
    
    
    $
    12.00
    
    
    
    1/26/20096,250
    
    
    
    
    
    
    
    
    
    
    $
    9.50
    
    
    
    2/01/20103,300
    
    
    
    
    
    
    
    
    
    
    $
    7.75
    
    
    
    1/25/20116,250
    
    
    
    
    
    
    
    
    
    
    $
    8.50
    
    
    
    1/31/201212,500
    
    
    
    
    
    
    
    
    
    
    $
    12.75
    
    
    
    1/31/20076,250
    
    
    
    
    
    
    
    
    
    
    $
    6.21
    
    
    
    1/31/20131,2500
    
    
    
    
    
    
    
    
    
    
    $
    9.32
    
    
    
    1/31/20084,000
    
    
    
    2,000
    
    
    
    
    
    
    $
    7.91
    
    
    
    4/27/20142,000
    
    
    
    1,000
    
    
    
    
    
    
    $
    11.86
    
    
    
    4/27/20142,000
    
    
    
    4,000
    
    
    
    
    
    
    $
    6.39
    
    
    
    2/11/20151,000
    
    
    
    2,000
    
    
    
    
    
    
    $
    9.59
    
    
    
    2/11/2015
    
    
    
    4,000
    
    
    
    
    
    
    $
    7.61
    
    
    
    1/31/2016
    
    
    
    2,000
    
    
    
    
    
    
    $
    11.42
    
    
    
    1/31/2016
 Option Exercises and Stock Vested
  Pension Benefits
  Nonqualified Deferred Compensation
  51




---



##### Table of Contents



Director Compensation
 Fees Earned
    
    
    
    
    
    
    
    
    
    Non-Equityor Paid in
    
    Stock Awards
    
    Option Awards
    
    Incentive Plan
    
    All OtherName
    
    Cash ($)
    
    ($)
    
    ($)
    
    Compensation
    
    Compensation
    
    Total ($)G. John Krediet, Chairman
    
    $
    40,750
    
    
    
    
    
    
    $
    60,320
    
    
    
    
    
    
    
    
    
    
    $
    101,070William T. Fejes, Jr. (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rick Lazio
    
    $
    59,000
    
    
    
    
    
    
    $
    32,740
    
    
    
    
    
    
    
    
    
    
    $
    91,740Frank D. Osborn
    
    $
    59,000
    
    
    
    
    
    
    $
    32,740
    
    
    
    
    
    
    
    
    
    
    $
    91,740James R. Swenson (2)
    
    $
    18,188
    
    
    
    
    
    
    $
    32,740
    
    
    
    
    
    
    $
    75,938
    
    
    $
    126,326Michael R. Zimmerman
    
    $
    58,500
    
    
    
    
    
    
    $
    35,380
    
    
    
    
    
    
    
    
    
    
    $
    93,380
 
 (1)
    
    Mr. Fejes does not receive additional compensation for his services as Director; refer to
Summary Compensation Table for Mr. Fejes compensation as the Companys Chief Executive
Officer.(2)
    
    Through October 2006, Mr. Swenson received a salary as an employee of the Company in lieu of
a fee for serving on the Board of Directors. In connection with the October meeting of the
Board of Directors, Mr. Swenson discontinued his service as an employee of the Company but
maintained his seat on the Board of Directors and subsequently was compensated at standard
director fee levels.    52




---



##### Table of Contents



COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
   
 53




---



##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
 SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
  Number of Shares of
    
    Percent ofName and Address(1)
    
    Common Stock(2)
    
    Class(3)Thomas C. Foley
62 Khakum Wood Road, Greenwich, CT 06831
    
    
    1,868,781
    (4)
    
    
    45.34
    %Jeffrey L. Gendell
55 Railroad Avenue, Greenwich, CT 06830
    
    
    291,148
    (5)
    
    
    7.06
    %Dimensional Fund Advisers, Inc.
1299 Ocean Avenue, Santa Monica, CA 90401
    
    
    267,257
    (6)
    
    
    6.48
    %FMR Corp.
82 Devonshire Street, Boston, MA 02109
    
    
    253,195
    (7)
    
    
    6.14
    %G. John Krediet
    
    
    0
    
    
    
    *William T. Fejes, Jr.
    
    
    82,158
    
    
    
    1.99
    %Joseph C. Horvath
    
    
    54,838
    
    
    
    1.33
    %Anthony A. Chien
    
    
    15,642
    
    
    
    *Harold L. Coder, III
    
    
    40,264
    
    
    
    *Anthony J. Metz
    
    
    18,071
    
    
    
    *James R. Swenson
    
    
    38,007
    
    
    
    *Frank D. Osborn
    
    
    41,000
    
    
    
    *Rick A. Lazio
    
    
    43,000
    
    
    
    1.04
    %Michael R. Zimmerman
    
    
    2,000
    
    
    
    *All directors and named executive officers, as a group
    
    
    334,980
    
    
    
    8.13
    %
 
 *
    
    Represents less than 1%. 54




---



##### Table of Contents



(1)
    
    This table is based upon information supplied by the officers, directors and principal
stockholders, including, in particular, reports filed on Schedule 13G, Form 4 and Form 5 with
the Securities and Exchange Commission.(2)
    
    Includes options exercisable within sixty days of February 20, 2007 for the following number
of shares: G. John Krediet
    
    
    0James R. Swenson
    
    
    32,000Frank D. Osborn
    
    
    26,000Rick Lazio
    
    
    26,000Michael R. Zimmerman
    
    
    2,000William T. Fejes, Jr.
    
    
    80,667Joseph C. Horvath
    
    
    54,500Harold L. Coder
    
    
    34,650Anthony A. Chien
    
    
    14,500Anthony J. Metz
    
    
    16,000All executive officers and
directors as a group
    
    
    286,317Thomas C. Foley
    
    
    67,300
 
 (3)
    
    For the purpose of calculating the percentage of outstanding shares of the named person or
group, total Shares of Common Stock Outstanding includes 3,767,643 shares of common stock
outstanding as of February 20, 2007 and the respective amount of shares of common stock
subject to options held by the named person or group that are currently exercisable or
exercisable within sixty days of February 20, 2007, as set forth in Note 2 above.(4)
    
    The foregoing amount includes 85,500 shares of Common Stock donated by Thomas C. Foley to the
Foley Family Foundation, a charitable trust he controls.(5)
    
    As of December 31, 2006, Jeffrey L. Gendell shared the power to vote or direct the vote and
to dispose or direct the disposition of 242,525 shared with Tontine Capital Management, L.L.C.
(TCM) and Tontine Capital Partners L.P. (TCP). He also shared the power to vote or direct the
vote of 48,623 shares with Tontine Overseas Associates, L.L.C. (TOA). Mr. Gendell is the
managing member of TCM and TOA, and in that capacity directs their operations. TCM is the
general partner of TCP, in which capacity it has the power to direct the affairs of TCP,
including decisions respecting the disposition of the proceeds from the sale of the shares of
the Company. Each of the clients of TOA has the power to direct the receipt of dividends from
or the proceeds of sale of such shares.(6)
    
    As of December 31, 2006, Dimensional Fund Advisers, Inc. had sole power to dispose of the
267,257 shares of Common Stock owned by four investment companies registered under the
Investment Company Act of 1940, as amended. Dimension Fund Advisers, Inc. had the sole power
to vote or direct the voting of the 267,257 shares of 55




---



##### Table of Contents



Common Stock owned by the aforementioned
investment companies. Dimension disclaims beneficial ownership of such securities.(7)
    
    As of December 31, 2006, FMR Corp. had sole power to dispose of the 253,195 shares of Common
Stock owned by Fidelity Low Priced Stock Fund (Fidelity), an investment company registered
under the Investment Company Act of 1940. The Board of Trustees of Fidelity has the sole power
to vote or direct the voting of the shares owned directly by Fidelity.  
 Item 13. Certain Relationships and Related Transactions
 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
   
 Item 14. Principal Accountant Fees and Services
  Description of Service
    
    2006
    
    
    2005Audit fees
    
    $
    252,150
    
    
    $
    225,630Audit related fees(1)
    
    
    19,500
    
    
    
    17,000Audit and audit related fees
    
    
    271,650
    
    
    
    242,630Tax fees(2)
    
    
    
    
    
    
    All other fees
    
    
    28,900
    
    
    
    Total fees
    
    $
    300,550
    
    
    $
    242,630
 
 (1)
    
    Audit related fees consisted of fees for services imposed by the requirements of the Public
Company Accounting Oversight Board.(2)
    
    Domestic tax services. 56




---



##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 Number
    
    Description(a)
    
    The following documents are filed as a part of this report:(1)
    
    All financial statements;The consolidated financial
statements of the Company and its subsidiaries on pages 25
through 41 hereof and the report thereon of Grant Thornton LLP
appearing on page 24 hereof.(2)
    
    Financial Statement ScheduleSchedule II for the fiscal
year ended December 31, 2006 on page 61 hereof and the report
thereon of Grant Thornton LLP appearing on page 24 hereof. All other schedules have been
omitted because they are not applicable or are not required. All other required schedules
are included in the Consolidated Financial Statements or notes therein.(3)
    
    Exhibits3.1
    
    Restated Certificate of Incorporation of the Company (incorporated by reference to Form 10-Q
for quarter ended June 28, 2002, Exhibit 3.1)3.2
    
    Amended and Restated By-laws of the Company (incorporated by reference to Form S-1 Exhibit
3.2)10.1
    
    Asset Purchase Agreement between T. B. Woods Sons Company and Dana Corporation dated March
31, 1993 (includes Schedule 7.11 On-Site Environmental Procedures) (incorporated by reference
to Form S-1 Exhibit 10.38)10.2
    
    TB Woods Corporation 1996 Stock-Based Incentive Compensation Plan (the 1996 Plan)
(incorporated by reference to Form S-1 Exhibit 10.39).10.3
    
    Amendments to the Non-Qualified Stock Option Agreements between TB Woods Incorporated
(formerly known as T. B. Woods Sons Company) and Joseph S. Augustine, Michael H. Iversen,
David H. Halleen, Stanley L. Mann, Lee J. McCullough, Carl R. Christenson, Harold L. Coder,
III and James E. Williams (incorporated by reference to Form S-1 Exhibit 10.40).10.4
    
    Second Addendum dated July 1, 1995 to the Non-Qualified Stock Option Agreement dated as of
March 15, 1991 between TB Woods Incorporated (formerly known as T. B. Woods Sons Company)
and Michael L. Hurt (incorporated by reference to Form S-1 Exhibit 10.41).10.5
    
    Stock Purchase Agreement by and among TB Woods Incorporated and Grupo Blaju, S.A. de C.V.
and Jorge R. Kiewek, Ninfa D. de Callejas and Marcela Kiewek G., dated February 14, 1996
(incorporated by reference to Form 10-K, for fiscal year 1995, Exhibit 10.43).10.6
    
    TB Woods Employee Stock Purchase Plan, dated March 1, 1997 (incorporated by reference to
Form 10-K, for fiscal year 1996, Exhibit 10.45).10.7
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H.
Iversen, Willard C. Macfarland, Jr., and other key employees dated June 17, 1997 and between
TB Woods Corporation and Robert J. Dole dated July 29, 1997 (incorporated by reference to
Form 10-K, for fiscal year 1997, Exhibit 10.48).10.8
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H.
Iversen, Willard C. Macfarland, Jr., and other key employees dated January 29, 1998
(incorporated by reference to Form 10-K, for fiscal year 1997, Exhibit 10.49).10.9
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H.
Iversen, Willard C.
 57




---



##### Table of Contents



Number
    
    DescriptionMacfarland, Jr., and other key employees dated January 26, 1999 (incorporated by reference
to Form 10-K, for fiscal year 1998 Exhibit 10.18).10.10
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H.
Iversen, Willard C. Macfarland, Jr., and other key employees dated January 26, 1999
(incorporated by reference to Form 10-K, for fiscal year 1998 Exhibit 10.19).10.11
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H.
Iversen, Willard C. Macfarland, Jr. and other key employees dated February 8, 2000
(incorporated by reference to Form 10-K for fiscal year 2000 Exhibit 10.20).10.12
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H.
Iversen, Willard C. Macfarland, Jr. and other key employees dated February 8, 2000
(incorporated by reference to Form 10-K for fiscal 2000 Exhibit 10.21).10.13
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Thomas F.
Tatarczuch, Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees dated
January 25, 2001 (incorporated by reference to Form 10-K for fiscal 2000 Exhibit 10.22).10.14
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Thomas F.
Tatarczuch, Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees dated
January 25, 2001 (incorporated by reference to Form 10-K for fiscal 2000 Exhibit 10.23).10.15
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Preben H. Petersen dated February 26, 2001 (incorporated by reference
to Form 10-K for fiscal 2000 Exhibit 10.24).10.16
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Preben H. Petersen dated February 26, 2001 (incorporated by reference
to Form 10-K for fiscal 2000 Exhibit 10.25).10.17
    
    Form of the Non-Qualified Stock Option agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Preben H. Petersen, Thomas F.
Tatarczuch, Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees dated
January 31, 2002. (incorporated by reference to Form 10-K for fiscal year 2001, Exhibit
10.58)10.18
    
    Form of the Non-Qualified Stock Option agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Preben H. Petersen, Thomas F.
Tatarczuch, Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees dated
January 31, 2002. (incorporated by reference to Form 10-K, for fiscal year 2001, Exhibit
10.59)10.19
    
    TB Woods Corporation 1996 Stock Based Incentive Compensation Plan as amended. (incorporated
by reference to Form 10-K, for fiscal year 2001, Exhibit 10.60)10.20
    
    Form of the Non-Qualified Stock Option agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Preben H. Petersen, Thomas F.
Tatarczuch, Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees dated
January 31, 2003. (incorporated by reference to Form 10-K, for fiscal year 2002, Exhibit
10.62)10.21
    
    Form of the Non-Qualified Stock Option agreements issued under the 1996 Plan between TB
Woods Corporation and Thomas C. Foley, Michael L. Hurt, Preben H. Petersen, Thomas F.
Tatarczuch, Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees dated
January 31, 2003. (incorporated by reference to Form 10-K, for fiscal year 2002, Exhibit
10.63)10.22
    
    Separation Agreement by and between Michael L. Hurt and TB Woods Incorporated dated
November 7, 2003. (incorporated by reference to Form 10-K, for fiscal year 2002, Exhibit
10.65)10.23
    
    Employment agreement between Joseph C. Horvath and TB Woods Incorporated dated November 14,
2003. (incorporated by reference to Form 10-K, for fiscal year 2002, Exhibit 10.66)10.24
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Preben H. Petersen, Willard C. Macfarland, Jr., Joseph C. Horvath,
Michael H. Iversen, and
 58




---



##### Table of Contents



Number
    
    DescriptionHarold L. Coder III and other key employees dated February 5, 2004. (incorporated by
reference to Form 10-K, for fiscal year 2002, Exhibit 10.67)10.25
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and Preben H. Petersen, Willard C. Macfarland, Jr., Joseph C. Horvath,
Michael H. Iversen, and Harold L. Coder III and other key employees dated February 5, 2004.
(incorporated by reference to Form 10-K, for fiscal year 2002, Exhibit 10.68)10.26
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and William T. Fejes, Jr., and Thomas C. Foley dated April 27, 2004
(incorporated by reference to Form 10-K, for fiscal year 2004, Exhibit 10.26)10.27
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and William T. Fejes, Jr., and Thomas C. Foley dated April 27, 2004
(incorporated by reference to Form 10-K, for fiscal year 2004, Exhibit 10.27)10.28
    
    Employment agreement between William T. Fejes, Jr., and TB Woods Incorporated dated April
27, 2004 (incorporated by reference to Form 10-K, for fiscal year 2004, Exhibit 10.28)10.29
    
    Loan and Security Agreement by and among Manufacturers and Traders Trust Company (Collateral
and Funding Agent), PNC Bank, National Association (Administrative Agent), TB Woods
Incorporated, Plant Engineering Consultants, LLC, and TB Woods Enterprises, Inc. (Borrowers),
and TB Woods Corporation and T.B.Woods Canada Ltd (Guarantors), dated January 7, 2005
(incorporated by reference to Form 10-K, for fiscal year 2004, Exhibit 10.31)10.30
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and James R. Swenson, William T. Fejes, Jr., Thomas C. Foley, Joseph C.
Horvath, and Harold L. Coder III, and other key employees dated February 11, 2005
(incorporated by reference to Form 10-K, for fiscal year 2004, Exhibit 10.32)10.31
    
    Form of the Non-Qualified Stock Option Agreements issued under the 1996 Plan between TB
Woods Corporation and James R. Swenson, William T. Fejes, Jr., Thomas C. Foley, Joseph C.
Horvath, and Harold L. Coder III, and other key employees dated February 11, 2005
(incorporated by reference to Form 10-K, for fiscal year 2004, Exhibit 10.33)10.32
    
    First Amendment to Loan and Security Agreement, dated July 29, 2005, by and among
Manufacturers and Traders Trust Company (Collateral and Funding Agent), PNC Bank, National
Association (Administrative Agent), TB Woods Incorporated, Plant Engineering Consultants,
LLC, and TB Woods Enterprises, Inc. (Borrowers), and TB Woods Corporation and T.B. Woods
Canada, Ltd (Guarantors) (incorporated by reference to Schedule TO, dated August 9, 2005,
Exhibit (b)(2))10.33
    
    Securities Purchase Agreement dated October 12, 2005 among TB Woods Incorporated, a
Pennsylvania corporation, Plant Engineering Consultants, LLC, a Tennessee limited liability
company, and TB Woods Enterprises, Inc., a Delaware corporation (as borrowers), AEA Mezzanine
Funding LLC, a Delaware limited liability company, AEA Mezzanine Fund LP, a Delaware limited
partnership, and AEA Mezzanine (Unleveraged) Fund LP, a Delaware limited partnership (as
purchasers), the Company and T.B. Woods Canada Ltd., an Ontario corporation (as Guarantors)
(incorporated by reference to Amendment No. 4 to Schedule TO, dated October 12, 2005, Exhibit
(b)(3))10.34
    
    12% Senior Subordinated Promissory Note, due October 11, 2012, between TB Woods
Incorporated, Plant Engineering Consultants, LLC and TB Woods Enterprises, Inc. (as
borrowers) and AEA Mezzanine Funding LLC (holder) (incorporated by reference to Form 10-K, for
fiscal year 2005, Exhibit 10.36)10.35
    
    12% Senior Subordinated Promissory Note, due October 11, 2012, between TB Woods
Incorporated, Plant Engineering Consultants, LLC and TB Woods Enterprises, Inc. (as
borrowers) and AEA Mezzanine (Unleveraged) Fund LP (holder) (incorporated by reference to Form
10-K, for fiscal year 2005, Exhibit 10.37)10.36
    
    Common Stock Purchase Warrant, dated October 27, 2005, between TB Woods Corporation and AEA
Mezzanine Fund LP. (incorporated by reference to Form 10-K, for fiscal year 2005, Exhibit
10.38)10.37
    
    Common Stock Purchase Warrant, dated October 27, 2005, between TB Woods Corporation and AEA
Mezzanine (Unleveraged) Fund LP. (incorporated by reference to Form 10-K, for fiscal year
2005, Exhibit 10.39)10.38
    
    Guaranty, dated October 27, 2005, by TB Woods Corporation (incorporated by reference to
Form 10-K, for fiscal year 2005, Exhibit 10.40)
 59




---



##### Table of Contents



Number
    
    Description10.39
    
    Registration Rights Agreement, dated October 27, 2005, between TB Woods Corporation, AEA
Mezzanine Fund LP and AEA Mezzanine (Unleveraged) Fund LP (incorporated by reference to Form
10-K, for fiscal year 2005, Exhibit 10.41)10.40
    
    Subordination and Intercreditor Agreement, dated October 12, 2005, between Manufacturers and
Traders Trust Company, AEA Mezzanine Funding LLC and AEA Mezzanine (Unleveraged) Fund LP and
the Borrowers as defined therein. (incorporated by reference to Form 10-K, for fiscal year
2005, Exhibit 10.42)10.41
    
    Agreement and Plan of Merger among Altra Holdings, Inc., Forest Acquisition Corporation and
TB Woods Corporation, dated as of February 17, 2007 (incorporated by reference to Exhibit 2.1
to Form 8-K filed February 20, 2007)10.42
    
    Support Agreement among Altra Holdings, Inc., Forest Acquisition Corporation and Thomas C.
Foley, dated as of February 17, 2007 (incorporated by reference to Exhibit 10.1 to Form 8-K
filed February 20, 2007)10.43
    
    Agreement among AEA Mezzanine Funding LLC, AEA Mezzanine (Unleveraged) Fund LP, TB Woods
Corporation, TB Woods Incorporated, Plant Engineering Consultants, LLC and TB Woods
Enterprises, Inc., dated as of February 17, 2007 (incorporated by reference to Exhibit 10.2 to
Form 8-K filed February 20, 2007)10.44
    
    Form of Change in Control Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K
filed February 20, 2007)10.45
    
    Transaction Bonus Plan Agreement among TB Woods Corporation and William T. Fejes, Jr.,
dated as of February 16, 2007 (incorporated by reference to Exhibit 10.4 to Form 8-K filed
February 20, 2007)10.46
    
    Transaction Bonus Plan Agreement among TB Woods Corporation and Joseph C. Horvath, dated as
of February 16, 2007 (incorporated by reference to Exhibit 10.5 to Form 8-K filed February 20,
2007)10.47
    
    Form of Indemnity Agreement (incorporated by reference to Exhibit 10.6 to Form 8-K filed
February 20, 2007)21
    
    Subsidiaries and Joint Venture of Registrant23.1
    
    Consent of Independent Public Accountants31.1
    
    Certification of Principal Executive Officer required by 13a-14(a)31.2
    
    Certification of Principal Financial Officer required by 13a-14(a)32
    
    Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
 60




---



##### Table of Contents



TB Woods Corporation and Subsidiaries
 Schedule II
Valuation and Qualifying Accounts
 Column A
    
    Column B
    
    Column C
    
    Column D
    
    Column EAdditionsBalance at
    
    Charged to
    
    Chargedbeginning of
    
    costs and
    
    to other
    
    
    
    
    
    Balance atDescription
    
    period
    
    expenses
    
    accounts
    
    Deductions
    
    end of periodYear ended December 31, 2004:Allowance for doubtful accounts
    
    $
    1,124
    
    
    $
    (2
    )
    
    $
    (8
    )
    
    $
    (234
    )
    
    $
    880Allowance for inventory obsolescence
    
    
    1,655
    
    
    
    358
    
    
    
    28
    
    
    
    (203
    )
    
    
    1,838$
    2,779
    
    
    $
    356
    
    
    $
    20
    
    
    $
    (437
    )
    
    $
    2,779Year ended December 31, 2005:Allowance for doubtful accounts
    
    $
    880
    
    
    $
    143
    
    
    $
    13
    
    
    $
    (541
    )
    
    $
    485Allowance for inventory obsolescence
    
    
    1,838
    
    
    
    576
    
    
    
    (30
    )
    
    
    (1,199
    )
    
    
    1,185$
    2,718
    
    
    $
    719
    
    
    $
    (17
    )
    
    $
    (1,740
    )
    
    $
    1,680Year ended December 31, 2006:Allowance for doubtful accounts
    
    $
    485
    
    
    $
    41
    
    
    $
    9
    
    
    $
    (51
    )
    
    $
    494Allowance for inventory obsolescence
    
    
    1,185
    
    
    
    512
    
    
    
    6
    
    
    
    (356
    )
    
    
    1,347$
    1,680
    
    
    $
    553
    
    
    $
    15
    
    
    $
    (407
    )
    
    $
    1,841
 61




---



##### Table of Contents



TB WOODS CORPORATIONBy:
    
    /s/ Joseph C. HorvathJoseph C. HorvathChief Financial OfficerDate:
    
    March 12, 2007
  /s/ G. JOHN KREDIET
    
    Chairman & Director
    
    March 12, 2007G. John Krediet/s/ WILLIAM T. FEJES, JR.
    
    President and CEO
    
    March 12, 2007William T. Fejes, Jr.
    
    (Principal
Executive Officer)/s/ JAMES R. SWENSON
    
    Director
    
    March 12, 2007James R. Swenson/s/ RICK LAZIO
    
    Director
    
    March 12, 2007Rick Lazio/s/ FRANK D. OSBORN
    
    Director
    
    March 12, 2007Frank D. Osborn/s/ MICHAEL R. ZIMMERMAN
    
    Director
    
    March 12, 2007Michael R. Zimmerman/s/ JOSEPH C. HORVATH
    
    Chief Financial Officer
    
    March 12, 2007Joseph C. Horvath
    
    (Principal
Financial Officer and
Principal Accounting Officer)
 62