TB WOODS CORP
GENERAL  TB Wood's Corporation (the "Company" or "TB Wood's") is an established designer, manufacturer and marketer of electronic and mechanical industrial power transmission products. The Company's products are sold to North American and international manufacturers and users of industrial equipment. Headquartered in Chambersburg, Pennsylvania, the 149 year-old business operates seven manufacturing and seven distribution facilities with approximately 830 employees in the United States, Canada, Mexico, Germany, Italy, and India. The Company has a network of more than 1,000 select independent and multi-branch distributors with over 3,000 locations in North America.  The Company's Internet website address is WWW.TBWOODS.COM. The Company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. In addition, you can access the Company's SEC filings from www.sec.gov.  HISTORY  TB Wood's Incorporated, the Company's principal operating subsidiary which was founded in 1857, entered the power transmission industry in 1900 and was incorporated in 1906 in Pennsylvania as T.B. Wood's Sons Company. TB Wood's Corporation was incorporated in 1995 to acquire the outstanding common stock of TB Wood's Incorporated. The Company classifies its industrial power transmission business into two segments, mechanical and electronics. Since 1992, the Company has introduced ten new mechanical products and product line extensions, including three mechanical belted drive products, four new coupling products, and gearboxes as a component of its mechanical business segment.  Since entering the electronics industrial power transmission business segment in 1968 the Company has introduced new electronic products and product line extensions and currently has 14 active electronic product families. Three of these introductions have occurred within the last four years. Most of these include extensions to our line of full-featured electronic variable frequency drives ("VFD") for controlling the speed of alternating current ("AC") induction motors. In 2001, the Company introduced a National Sanitation Foundation certified drive for use in Food Area Splash Zone applications and micro-sized VFD was introduced in 2003. In 2005, the Company introduced the "X4", a replacement product for certain of the Company's existing product lines. The Company remains focused on cost-effective VFDs for industrial Original Equipment Manufacturer ("OEM") applications and has continued to emphasize the National Electrical Manufacturers Association (NEMA) 4 industrial wash-down drive enclosure targeted for challenging plant environments.                                          4    The Company has used acquisitions and strategic alliances to enhance product offerings, gain access to technology and products, leverage fixed costs, and extend the Company's global reach. The Company's mechanical industrial power transmission business acquisitions include several lines of flexible couplings, gear couplings, and variable speed drives and Grupo Blaju S.A. de C.V., the leading Mexican manufacturer and marketer of belted drives. In the electronics industrial power transmission business segment the Company acquired Plant Engineering Consultants, Inc. ("PEC"), an established supplier of integrated electronic control systems for the fibers industry. In December 1997, the Company acquired Berges electronic GmbH in Germany, and its subsidiary Berges electronic S.r.l. in Italy, well-established VFD developers, manufacturers and marketers, serving primarily the European market. In 2003, the Company entered into an agreement with a European company to distribute its micro-drive products in North America.  INDUSTRY OVERVIEW  The industrial power transmission industry provides mechanical and electronic products used in manufacturing and material processing activities that transfer controlled power from an electric motor or internal combustion engine to a machine. The industrial power transmission industry consists of the following product categories: mechanical power transmission components, including belted drives, couplings, and gearboxes, and electronic drives. The Company now competes in belted drives ,couplings and electronic drives product categories.  The markets for some of the Company's products are cyclical, generally following changes in the overall economy. Consequently, during periods of economic expansion, the Company has experienced increased demand for its products, and during periods of economic contraction, the Company has experienced decreased demand for its products. Such changes in the general economy affect the Company's results of operations in relevant fiscal periods.  PRODUCTS  The products manufactured by the Company are classified into two segments for financial reporting purposes, mechanical and electronics industrial power transmission businesses. The mechanical business segment includes belted drives and couplings. The electronics business segment includes electronic drives and electronic drive systems. Products of these segments are sold to distributors, original equipment manufacturers, and end users for manufacturing and commercial applications. Net sales, in millions of dollars, for our primary business segments are provided below.  For further information on the Company's operating segments, refer to the consolidated financial statements and footnote No. 9 included in this Form 10-K.                                                 2005                         2004                         2003                                 ------------------------     -------------------------    -------------------------                                  Net Sales        %           Net Sales         %          Net Sales         %                                 -----------   ----------     -----------    -----------   -----------    ----------        Mechanical                           $ 72.4        65.3%          $ 63.7          62.8%       $  58.3         60.5% Electronics                            38.5        34.7%            37.8          37.2%          38.1         39.5%                                 -----------   ----------     -----------    -----------   -----------    ----------            Totals                   $ 110.9       100.0%         $ 101.5         100.0%        $ 96.4        100.0%                                 ===========   ==========     ===========    ===========   ===========    ==========    MECHANICAL PRODUCT OFFERING  The Company's mechanical product offering includes a full line of stock and made-to-order products including V-belt drives, synchronous drives, variable speed drives, and a broad line of flexible couplings, as well as hydrostatic drives, clutches, and brakes. These products are used in a variety of industrial applications to transmit power from electric motors and internal combustion engines to machines. The primary markets for these products are the construction, oilfield, specialized industrial machinery, food processing, material handling, pumps, compressors, mining, pulp and paper, and agricultural equipment industries.  ELECTRONIC PRODUCT OFFERING  The Company designs and manufactures AC electronic VFDs, Direct Current ("DC") electronic motor controllers, and integrated electronic drive systems that are marketed throughout North America and internationally. These products are used to control the speed, acceleration and other operating characteristics of electric motors in manufacturing processes. The Company's standard AC electronic VFD products, which represent most of its net sales of electronic drive products, are programmable to meet the needs of specific applications with particular strengths in food and beverage processing, materials handling, HVAC, oil production, textile/fibers, packaging, furniture making, and general machinery applications. The Company's electronic products are designed to meet both North American and European electrical standards. In 2005, the Company introduced the "X4", a replacement product for certain of the Company's existing product lines. Considerable investment was made in the development of this drive. In 2004, the Company introduced a new line of SE1/SW1 "micro-drive" products to complement our existing product line. The Company's integrated electronic drive systems consist of uniquely configured AC and/or DC electronic VFDs, programmable logic controllers, in-house custom designed printed circuit boards, and software. These systems are built in custom enclosures to meet the requirements of specific applications.                                         5    MARKETING AND DISTRIBUTION  The Company's products are sold principally throughout North America and to a lesser extent internationally. In North America, the Company sells to more than 1,000 authorized independent and multi-branch industrial distributors with over 3,000 locations that resell the Company's products to industrial consumers and OEMs. The Company also sells directly to over 300 OEMs. The Company's marketing alliances include licensing agreements and distribution agreements with distributors and manufacturers who, in some cases, market the Company's products under private label agreements. In North America, the Company has its own technical sales force of more than 40 people and several specialized manufacturers' representatives.  The Company operates distribution centers in Chambersburg, Pennsylvania; Reno, Nevada; Stratford, Ontario; Montreal, Quebec; Edmonton, Alberta; Mexico City, Mexico and Marienheide, Germany.  The Company's products are manufactured to maintain stock inventories and to meet forecasts from specific customers. On-time delivery is important. Order backlogs are generally less than one month's customer shipments and are not considered to be material in amount.  CUSTOMERS  The OEM market is served directly by the Company and through industrial distributors. The replacement market for the Company's products is served primarily through industrial distributors. The Company's distributors include, among others, Motion Industries and Kaman Industrial Technologies, who are among the largest distributors in the industrial power transmission industry. The Company's OEM customers include a number of Fortune 500 companies. Management believes that the Company is one of the leading suppliers of power transmission products, based on sales volume, to its distributors. The Company's five largest customers accounted for approximately 32%, 33% and 35% of the Company's consolidated revenue for fiscal years 2005, 2004 and 2003, respectively. One such customer, an industrial distributor with a large diversified customer base, accounted for approximately 18%, 15% and 18% of the Company's consolidated revenue for fiscal 2005, 2004 and 2003, respectively.  COMPETITION  The industrial power transmission industry is highly competitive. Competition in the AC and DC electronic drive product categories is based on product performance, physical size of the product, tolerance for hostile environments, application support, availability, and price. The Company's competitors in these electronic product categories include large multi-national companies in North America, Europe, and Asia, as well as many small, domestic niche manufacturers. The integrated electronic drive system market is driven by increased demand from end users for greater productivity and process control. This market includes sales of products used in the maintenance and replacement of existing systems, upgrades to existing systems, and new capacity expansion. Competition is based on process knowledge and engineering, software design, product durability, and price. Major VFD and systems competitors include Asea Brown Boveri (ABB), Rockwell Automation (Allen Bradley and Reliance Electric), Siemens Corp., and Yaskawa. The Company competes with several divisions of large industrial companies as well as many small to mid-sized independent companies in the mechanical product category. Competition in the mechanical product offering is based on availability, quality, price, product line breadth, engineering, and customer support. The Company's most significant competitors in the mechanical product category include Rockwell Automation, Inc. (Dodge), Emerson Electric Co. (Browning), Martin Sprocket & Gear, Inc., Poulies Maska, Inc., Rexnord Industries, Inc., and Lovejoy, Inc. Management believes that there are few significant foreign competitors in the North American mechanical product market because of a fragmented customer base, prohibitive freight costs as compared to selling price, and difficult access to existing distribution channels.                                         6    RESEARCH AND DEVELOPMENT  The Company's research and development efforts include the development of new products, the testing of products, and the enhancement of manufacturing techniques and processes. The Company's annual expenditures for research and development (including royalties and payments to third parties) were $3.1 million for 2005, $3.2 million for 2004, and $3.4 million for 2003, which, as a percent of net sales during the last three fiscal years, have been 2.8% for 2005, 3.1% for 2004, and 3.5% for 2003. The Company utilizes its Technology Center located in its Chambersburg facility to make the research and development investment more productive by making it easier for engineers to share insights and collaborate on projects. Electronic drive research is also conducted at its subsidiary in Italy.  RAW MATERIALS  The principal raw materials used in the Company's mechanical manufacturing operations are various types of scrap steel, including pig iron, metal stampings, castings, forgings and powdered metal components. The Company also designs, tools and out-sources special components made of aluminum, powdered metal, and polymers. The Company purchases the materials used in its mechanical manufacturing operations from a number of suppliers, and management believes that the availability of its materials is adequate and not significantly dependent on any one supplier. Scrap metal prices, which had escalated dramatically throughout 2004 rising to $420 per ton at December 31, 2004, decreased throughout 2005 to close the year at $300 per ton. In 2005 and 2004, scrap metal costs averaged approximately $320 per ton, significantly above historical levels. As a result, the Company implemented price increases for its mechanical products during 2004 and 2005 to partially offset these higher costs.  The Company generally uses standard purchased components in all of its electronic products. The Company also purchases specialized components designed by its engineers. Purchased components include power transistors, capacitors, printed circuit boards, microprocessors and associated semiconductor integrated circuits, aluminum heat sinks, plastic enclosures and sheet metal stampings. These electronic parts and components are purchased from a number of suppliers and management has taken steps to qualify multiple sources for key items, where possible.  PATENTS AND TRADEMARKS  The Company owns patents relating to its coupling, composite, synchronous drive, open belted variable speed drive, electronic drive, and clutch/brake product lines. The Company also owns several patents relating to the design of its products. From time to time, the Company will grant licenses to others to use certain of its patents and will obtain licenses under the patents of others. In addition, the Company owns or has the right to use, registered United States trademarks for the following principal products among others: Sure-Flex(R), Formflex(R), Ultra-V(R), E-trAC(R), Ultracon(R), Dura-Flex(R), E-Trol(R), Petro-trAC(R), Sure-Grip(R), All-Pro(R), Wood's@Work(R), QT Power Chain(R), Win-Trac(R) and PDA-Trac(R).  EMPLOYEES  As of December 31, 2005, the Company employed 830 people. The National Metal Workers' Union of Mexico represents approximately 140 production employees in the Company's Mexican facilities pursuant to collective bargaining agreements that are subject to annual renewals. At the Company's Stratford, Ontario facility four employees are represented by the United Steelworkers of America pursuant to a collective bargaining agreement that expires in January 2007. The Company offers training programs to improve employees' operating, management and team-building skills.  ENVIRONMENTAL MATTERS  As with most industrial companies, the Company's operations and properties are required to comply with, and are subject to liability under federal, state, local, and foreign laws, regulations, and ordinances relating to the use, storage, handling, generation, treatment, emission, release, discharge, and disposal of certain materials, substances, and wastes. The nature of the Company's operations exposes it to the risk of claims with respect to environmental matters and there can be no assurance that material costs will not be incurred in connection with such liabilities or claims.  When the Company acquired its Mt. Pleasant Facility from Dana Corporation in 1993, the Asset Purchase Agreement (the "Asset Purchase Agreement") included an environmental indemnity provision. Pursuant to this provision, Dana Corporation agreed to indemnify the Company with respect to any environmental liabilities to the extent they arose out of environmental conditions first occurring on or before the closing date, including the presence or release of any hazardous substances at, in, or under the Mt. Pleasant Facility and with respect to the identification of the Mt. Pleasant Facility on the Michigan list of inactive hazardous waste sites. The Dana Corporation is conducting a limited remediation with respect to volatile organic compounds found in soils and groundwater. The Company has not been notified by the Michigan Department of Natural Resources or any other governmental agency or person that it has any responsibility for investigating or remediating such environmental conditions. Although the Company has no reason to believe Dana Corporation cannot or will not fulfill its remediation and indemnification obligations under the Asset Purchase Agreement, even after its March 2006 bankruptcy filing, if Dana Corporation is unable to fulfill such commitments, the Company may incur additional costs.                                         7    The Company believes that its facilities are in substantial compliance with current regulatory standards applicable to air emissions under the Clean Air Act Amendments of 1990 ("CAAA"). At this time, the Company cannot estimate when other new air standards will be imposed or what technologies or changes in processes the Company may have to install or undertake to achieve compliance with any applicable new requirements at its facilities. The Company has no reason to believe that such expenditures are likely to be material. Similarly, based upon the Company's experience to date, the Company believes that the future cost of currently anticipated compliance with existing environmental laws relating to wastewater, hazardous waste, and employee and community right-to-know should not have a material adverse effect on the Company's financial condition.  GEOGRAPHICAL INFORMATION  See footnote 9 "Business Segment Information" to the consolidated financial statements for information on sales and long lived assets by geographical area.  RECENT DEVELOPMENTS  In October 2005, the Company purchased 1.5 million shares of its common stock in a "Dutch Auction" self-tender at a purchase price of $7.50 per share, which was funded through issuance of $15.0 million of new senior subordinated notes with detachable warrants. In January 2005, the Company entered into a new senior secured lending arrangement, which was further amended in July 2005 to permit the self-tender. All these transactions are more fully described in footnotes 4 "Debt" and 6 "Shareholders' Equity" to the consolidated financial statements.  The Company continues to evaluate its operating locations to ensure that it can achieve the maximum amount of efficiencies. As noted below, the Company has closed manufacturing facilities that it believed were no longer necessary and consolidated its manufacturing operations located at Stratford, Ontario, Canada, Mexico City, Mexico and Trenton, Tennessee facility ("Trenton") to other locations, principally its San Luis Potosi, Mexico facility where it has recently enhanced its manufacturing capabilities in a new state of the art manufacturing facility.  In September 2004, the Company closed its manufacturing plant located in Trenton as part of its cost reduction plan for its Mechanical Division. Substantially all of the equipment used in the operations of the Trenton facility has been transferred to other machining facilities operated by the Company. Management believes this relocation has had a positive competitive effect on the Company's ability to produce certain of its Mechanical Division product offerings. Costs incurred in connection with this plant shutdown approximated $1.5 million and were principally recognized during the second half of 2004. These costs primarily consisted of "stay-pay" incentives, equipment relocation expenses, and additional costs associated with the relocation of operations, including training and technical assistance for new employees.  During 2003, the Company relocated its manufacturing operations formerly conducted in Mexico City to San Luis Potosi, Mexico. It continues to maintain its finished goods warehouse, sales, and customer service operations for the Latin American market in Mexico City. Certain of the manufacturing activities associated with the Mexico City operations have been outsourced to local suppliers. The closure costs of the Mexico City operations approximated $0.3 million.  In February 2006, Thomas Foley was elected Chairman of the Board of Directors, a position he previously held from the inception of the Company in 1995 and before that with TB Wood's Incorporated since 1985, until August 2003, when he took a leave of absence from the Company. Mr. Foley rejoined the Board in April 2004 prior to his election as Chairman.  In April 2004, the Company appointed William T. Fejes, Jr. President and Chief Executive Officer and a Company director. Upon Mr. Fejes' employment, James R. Swenson was appointed to the position of Chairman of the Board of Directors.  In November 2003, Michael L. Hurt, the Company's former President and Chief Executive Officer, retired from the Company and James R. Swenson, a director of the Company was appointed Interim President and Chief Executive Officer. In September 2003, Joseph C. Horvath was appointed as Vice President and Chief Financial Officer of the Company, succeeding Thomas F. Tatarczuch, who retired as the Company's Vice President, Finance.                                         8
Investing in our securities involves risks. You should carefully consider the following risk factors and the other information in this prospectus, including our consolidated financial statements and related notes, before you decide to purchase our common stock. If any of the following risks occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment. We may amend or supplement the risk factors described below from time to time by other reports we file with the SEC in the future.  RISKS RELATED TO OUR COMPANY  CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVES, DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS.  Our executives, directors and principal stockholders beneficially own, in the aggregate, securities representing approximately 51% of the voting power of our outstanding common stock. Accordingly, these stockholders can exercise significant influence over our business policies and affairs, including the composition of our board of directors and any action requiring the approval of our stockholders, including the adoption of amendments to our certificate of incorporation and the approval of significant corporate transactions, including mergers or sales of substantially all of our assets. This concentration of ownership will limit your ability to influence corporate actions. The concentration of ownership may also delay, defer or even prevent a change in control of our Company and may make some transactions more difficult or impossible without the support of these stockholders. We cannot assure that the interests of these stockholders will not conflict with your interests. In addition, our interests may conflict with these stockholders in a number of areas relating to our past and ongoing relationships, including the timing and manner of any sales or distributions by these stockholders of all or any portion of their ownership interest in us, and the evaluation of, and activities concerning, business opportunities that may be presented to TB us and our affiliates and to our directors associated with TB Wood's.  THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.  Historically, the market price of our common stock has fluctuated over a wide range. In fiscal year 2005, our common stock traded in a range from $ 4.77 to $ 8.87 and at March 3, 2006 our stock price was $ 12.12. It is likely that the price of our common stock will fluctuate in the future. The market price of companies with small-capitalization like ours may from time to time experience significant price and volume fluctuations unrelated to the operating performance. In particular, the market price of our common stock may fluctuate significantly due to a variety of factors, including the sale or purchase of a significant block of shares, or overall movement of stock market indices. In addition, the occurrence of any of the other risks described in Item 1A could have a material and adverse impact on the market price of our common stock.  WE HAVE REPORTED LOSSES IN THE PAST AND MAY REPORT LOSSES IN FUTURE PERIODS.  Although we have reported operating income for fiscal years 2001 through 2005, we have reported net losses for fiscal years 2002 and 2003. In addition, 2004 operating results would have reflected a net loss had the Company not recognized a non-recurring, non-cash gain related to the termination of a post-retirement benefit plan. Although 2005 was profitable, we cannot assure you that we will continue to operate profitability, and if we do not, we may not be able to meet our debt service requirement, working capital requirements, capital expenditure plans or other cash needs. Our inability to meet those needs could have a material adverse effect on our business, results of operations and financial condition.  WE MAY NOT PAY DIVIDENDS ON OUR COMMON STOCK AT ANY TIME IN THE FORESEEABLE FUTURE.  Our ability to declare and pay dividends is restricted by covenants in our senior secured credit facility and the purchase agreement governing our senior subordinated notes, and may be further limited by instruments governing future outstanding indebtedness we or our subsidiaries may incur. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial conditions, cash requirement, contractual restrictions and other factors that our board of directors may deem relevant.                                         9    OUR SENIOR SECURED CREDIT FACILITY AND THE PURCHASE AGREEMENT GOVERNING OUR SENIOR SUBORDINATED NOTES IMPOSE CERTAIN RESTRICTIONS. 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.  The operating and financial restrictions in our debt agreements, including our senior secured credit facility and the purchase agreement governing our senior subordinated notes, may adversely affect our ability to finance future operations or capital needs or to engage in other business activities. Our debt agreements contain certain covenants and financial tests that limit the way we conduct business, including covenants limiting our ability to incur or guarantee additional indebtedness, pay dividends and make other distributions, pre-pay any subordinated indebtedness, make investments and other restricted payments, make capital expenditures, make acquisitions and sell assets. These covenants may prevent us from raising additional financing, competing effectively or taking advantage of new business opportunities. Under our debt agreements, we are also required to maintain specific financial ratios and satisfy certain financial tests. If we cannot comply with these covenants or meet these ratios and other tests, it could result in a default under one or more of our debt agreements, and unless we are able to negotiate an amendment, forbearance or waiver, we could be required to repay all amounts then outstanding, which could have a material adverse effect on our business, results of operations and financial condition depending upon our outstanding balance at the time.  WE MAY BE ADVERSELY IMPACTED BY CHANGES IN INTEREST RATES.  The effective interest rate payable on approximately half of our borrowings is variable and may be influenced by our operating performance and degree of leverage, as well as by actions of the Federal Reserve Bank Board in establishing from time to time the Federal Funds Interest rate that underlies the cost of funds borrowed by the Company. Refer to Item 7A of this Form 10-k for additional discussion of the interest risks.  RISKS RELATED TO OUR BUSINESS  WE OPERATE IN THE HIGHLY COMPETITIVE ELECTRONIC AND MECHANICAL INDUSTRIAL TRANSMISSION INDUSTRY.  The industrial power transmission industry is highly competitive. Our competitors include both large multi-national companies in North American, Europe and Asia as well as many small domestic niche manufacturers. Our operating results depend in part on continued successful research, development and marketing of new and or improved products and services, particularly in the electronics business, and there can be no assurance that we will continue to successfully introduce new products and services. We are small compared to many of our competitors, which are divisions of large, multi-national corporations, and may not have the same access to resources.  OUR BUSINESS IS CYCLICAL.  Our business is dependent on macro-economic factors, including industrial and consumer spending, and is therefore impacted by the cyclical strength of the economy generally, interest rates and other factors. Economic factors adversely affecting original equipment manufacturer production and consumer spending could adversely impact us. During periods of expansion in original equipment manufacturer production, we generally have benefited from increased demand for our products. Conversely, during recessionary periods, we have been adversely affected by reduced demand for our products.  The markets for some of our products are cyclical, generally following changes in the overall economy. Consequently during periods of economic expansion, we have experienced increased demand for its products and during periods of economic contraction, we have experienced decreased demand for its products. Such changes in the general economy affect our results of operations in relevant fiscal periods.  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.  We depend on revenues from several significant customers, and any loss, cancellation, or reduction of, or delay in, purchases by these customers could harm our business. Several significant customers represent a significant portion of our revenues. Our success will depend on our continued ability to develop and manage relationships with these customers. We expect that significant customer concentration will continue for the foreseeable future.  Several of our customers are distributors to a broad number of end users which helps to mitigate risk; however, a distributor could elect to discontinue using the Company as a supplier source.                                         10    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.  Off-shore customers and the relocating of our customers' operating facilities away from our production source could lead us to being a higher cost producer. In addition, some of our operations depend on production facilities located abroad. Operations that are located outside of the United States may be subject to increased risks of disrupted production which could cause delays in shipments and loss of customers and revenues. Our manufacturing facilities abroad may be more susceptible to changes in laws and policies in host countries and economic and political upheaval than our domestic facilities. Any such disruption could cause delays in shipments of products and the loss of sales and customers, and insurance proceeds may not adequately compensate us.  OUR DEPENDENCE ON, AND THE PRICE OF, RAW MATERIALS MAY ADVERSELY AFFECT OUR PROFITS.  We use a variety of raw materials and components in our business and significant shortages or price increases could increase our operating costs and adversely impact the competitive position of our products. We have experienced significant volatility and upward cost pressure for scrap steel and ancillary steel-based components, our primary raw materials. If we are unable to pass on raw materials price increases to our customers, our future profitability may be materially adversely affected.  WE MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL, HEALTH AND SAFETY LAWS AND REGULATIONS.  Our operations and properties are subject to federal, state, and local laws, regulations, and ordinances relating to environmental, health and safety risks. The nature of our operations exposes us to the risk of claims with respect to environmental, health and safety matters and any failure to comply with any environmental, health and safety regulations could subject us to future liability, including, fines, penalties and the suspension of production.  OUR OPERATIONS ABROAD SUBJECT US TO FOREIGN CURRENCY FLUCTUATIONS.  Our consolidated financial statements are denominated in U.S. dollars and accordingly, changes in the exchange rates between our subsidiaries' local currency and the U.S. dollar will affect the translation of such subsidiaries financial results into U.S. dollars for the purposes of reporting consolidated financial results.  The net assets, net earnings and cash flows from our operations in Mexico, Canada, Germany, Italy and India are based on the U.S. dollar equivalent of such amounts measured in the applicable functional currency. These foreign operations have the potential to impact our financial position due to fluctuations in the local currency arising from the process of re-measuring the local functional currency in the U.S. dollar. Refer to Item 7A of this Form 10-k for additional discussion on exchange rate risks.  OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FUTURE SUCCESS.  Our future success depends to a significant extent upon the continued service of our executive officers and other key management and technical personnel and on our ability to continue to attract, retain and motivate qualified personnel. Recruiting and retaining skilled personnel has become even more competitive as the domestic economy has improved in recent years. The loss of services of one or more of our key employees or our failure to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and results of operations.  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.  We continue to take action to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002. Our management, including our Chief Executive Officer and Chief Financial Officer, cannot guarantee that our internal controls and disclosure controls will prevent all possible errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.                                         11
Not applicable.
The Company owns and operates the following facilities:     Location                                  Operations                                                       Sq. Feet - ----------------------------            ----------------------------------------------------------     ----------------    Chambersburg, Pennsylvania                Foundry production of iron; manufacturing, engineering            440,000                                             and central distribution of mechanical and electronic                                             products; and corporate headquarters. Scotland, Pennsylvania                    Manufacturing of electronic products.                              51,300 Stratford, Ontario, Canada                Central distribution and administrative offices for                46,000                                             Canada. San Marcos, Texas                         Manufacturing and engineering of mechanical products.              51,000 Mt. Pleasant, Michigan                    Manufacturing of mechanical products.                              30,000 Chattanooga, Tennessee                    Manufacturing, engineering, and sales of integrated                60,000                                             electronic drive systems.    In addition, the Company leases manufacturing facilities in San Luis Potosi, Mexico (71,800 sq. ft.); Naturns, Italy (19,500 sq. ft.); and Bangalore, India (5,000 sq. ft.). The Company also leases distribution facilities in Reno, Nevada; Marienheide, Germany; Montreal, Quebec; Edmonton, Alberta; and Mexico City, Mexico. The Company believes that its facilities are adequate for its current needs.
The Company is a party to various legal actions arising in the ordinary course of business. The Company does not believe that the outcome of any of these actions will have a materially adverse affect on the consolidated financial position of the Company.
No matter was submitted for a vote of the security holders during the fiscal quarter ended December 31, 2005.                                         12                                         PART II
The Company is traded on NASDAQ under the symbol "TBWC". The high and low prices as reported by the NASDAQ National Market for the Common Stock, and dividends paid on Common Stock, during the period from January 3, 2004 through December 31, 2005 were as follows:                                                                        Price                         Dividends                                                          --------------------------    -------------------------                                                            High             Low         Declared            Paid                                                          --------        ---------     -----------        --------       Fiscal Year 2004                1st quarter                $ 9.00           $ 8.09           $ .09            $.09                                 2nd quarter                  9.00             6.21             .09             .09                                 3rd quarter                  8.04             5.27             .09             .09                                 4th quarter                  6.78             5.10              --              --  Fiscal 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              --              --    On March 3, 2006, there were 150 shareholders of record of the Company's Common Stock and the closing sales price was $12.12 per share.  On October 20, 2005, Company accepted for payment 1,500,000 shares of its Common Stock, at a price of $7.50 per share, pursuant to its "Dutch Auction" self-tender offer. As a result of the completion of the self-tender offer, the Company then had 3,700,647 shares of common stock issued and outstanding. The shares of common stock accepted for purchase represent approximately 28.84% of TB Wood's 5,200,647 shares of common stock issued and outstanding prior to the completion of the self-tender offer.  The Company suspended the payment of dividends for the fourth quarter of 2004. The declaration of any dividend, including the amount thereof, is at the discretion of the Board of Directors of the Company, and will depend on the Company's then current financial condition, results of operations, capital requirements, compliance with loan agreements and such other factors as the Board of Directors deems relevant.  There were no sales of unregistered securities during the period of January 1, 2005 through December 31, 2005.  Information regarding the Company's equity compensation plans is set forth in the Company's Proxy Statement for the 2006 Annual Meeting in the Section entitled "Other Forms of Compensation" and is incorporated herein by reference.
The following tables set forth selected historical financial and operating data for the Company for each of the five years through fiscal year 2005 and have been derived from the Company's financial statements which have been audited by the Company's independent registered public accounting firm. The information set forth below should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operation."  In 2004, the Company adopted a policy to change its fiscal year to a calendar year, effective with the calendar year commencing January 1, 2005. Prior to fiscal year 2005, the Company's 52/53-week fiscal year ended on the Friday closest to the last day of December. This change is not expected to have a material affect on the Company's reported results of operations. Fiscal year ends 2005 and 2004 were 52 week years while fiscal year 2003 was a 53 week year. Fiscal year-ends were as follows:     2005                    December 31, 2005 2004                    December 31, 2004 2003                    January 2, 2004 2002                    December 27, 2002 2001                    December 28, 2001                                           13    SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)                      Fiscal Year                       2005         2004            2003          2002          2001 - ----------------------------------------------- -----------  ------------    -----------   -----------   -----------       Net sales                                        $  110,897     $ 101,515       $ 96,415     $ 104,383     $ 108,805  Gross profit                                         33,705        27,723         29,397        33,145        37,037 Selling, general and administrative expense          27,717        28,371         28,635        29,178        31,010 Non- recurring gain on termination of benefit     plan                                                 --         9,258             --            --            -- Minority interest                                        --            --             --           151         1,147 Operating income                                      5,988         8,610            762         3,816         4,880  Net income (loss)                                $    2,380     $   4,618       $   (360)    $  (1,050)    $   2,906                                                 ===========  ============    ===========   ===========   =========== Cash Flow    Cash provided by operations                   $   12,285     $   4,200       $  2,589     $  12,450     $  13,291    Capital expenditures                          $    3,062     $   2,009       $  2,227     $   3,481     $   4,110  Adjusted working capital (1)                     $   20,709     $  23,789       $ 24,834     $  20,955     $  26,315 Total assets                                     $   67,753     $  69,370       $ 76,407     $  77,576     $  87,632  Current portion of long-term debt                $    4,138     $   7,605       $     53     $  18,363     $    843 Long-term debt, less current portion                 25,829        16,708         25,371         5,436        27,802                                                 -----------  ------------    -----------   -----------   ----------- Total debt                                       $   29,967     $  24,313       $ 25,424     $  23,799     $  28,645                                                 ===========  ============    ===========   ===========   =========== Shareholders' equity                             $   21,518     $  29,735       $ 25,418     $  26,413     $  28,445 Per Share Data    Net income (loss)                             $     0.48     $    0.89       $  (0.07)    $   (0.20)    $    0.54    Cash dividends paid                           $     0.00     $    0.27       $   0.36     $    0.36     $    0.36 Weighted average shares outstanding                   4,961         5,166          5,180         5,232         5,355    (1) Adjusted working capital is total current assets less current liabilities excluding the current portion of long-term debt shown above.
The Company is a worldwide manufacturer of mechanical and electronic products used in the process of power transmission for industrial and other commercial applications. Fiscal year 2005 continued to reflect strong demand in the Company's marketplace, particularly for its Mechanical Division products, following a prolonged slump in the industrial markets that began in the second half of 2000. Sales to the Company's largest distribution customer increased by $5.0 million in 2005 as a result of the strong economic climate, and the gap between such sales and the customer's sale-through of the Company's product was reduced considerably to $1.2 million compared to approximately $5.0 million during 2004.  The significant volatility and upward cost pressure for the Company's primary raw materials that occurred in 2004, principally the costs of scrap steel and ancillary steel-based components used in the manufacture of its mechanical products, began to moderate in 2005, with unit costs ending lower than the preceding year. This enabled the Company to restore a substantial portion of margins lost due to lagging price increases in previous periods. Overall, the average cost for such materials was comparable in both periods.  The Company continued to address other cost reduction activities through expanded lean manufacturing initiatives. In 2004 the Company recognized approximately $1.5 million of closure costs associated with the closure of its Trenton, Tennessee facility while no similar costs were incurred in 2005. Management remains focused on ways to better utilize the Company's worldwide productive capacity, as well as leverage its technical capabilities to add more value to the Company's products and services.  The following tables, derived from the Company's audited consolidated financial statements, present selected elements of the Company's operating results, and the changes thereto, for each of the two most recent years compared to the results for the immediately preceding year.                                         14    YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004 (in thousands)                                                             2005          2004        Dollar Change      % Change                                                      -----------   -----------    -------------     -----------      SALES   Mechanical 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 SALES   Mechanical 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 PROFIT    Mechanical 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 SALES    Mechanical Business                                      65.3%         62.8%    Electronics Business                                     34.7%         37.2%                                                      -----------   -----------     Total Sales                                            100.0%        100.0%  COST OF SALES AS A PERCENTAGE OF SALES    Mechanical 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 SALES    Mechanical 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%    The continuing strength in general economic conditions helped the Company experience a $9.4 million increase in revenues in 2005. The revenue growth can be attributed to three major factors: increased demand or volume for the Company's products, increased prices for those products, and foreign currency fluctuations relative to the United States dollar and the local currency utilized by the Company's foreign subsidiaries.  The Company's Mechanical Division experienced increased selling volume of $5.8 million, nearly two-thirds of its total revenue growth. The Company believes that the strong economic recovery, buoyed in part by the market for the Company's products used in oil production, contributed substantially to this increased demand. The Company was also able to increase prices in 2005 for certain of its Mechanical products, contributing approximately $2.1 million to increased revenues for the year. The remainder of the Mechanical Division sales growth related to a stronger Canadian dollar. The Company also experienced a $0.6 million increase in sales of its electronic products attributable to increased sales of products used to produce petroleum and the successful introduction of the Company's new "X-4" AC drive. The remaining increase in sales revenues related to minor price changes and currency fluctuations.  Overall gross profit as a percent of net sales increased to 30.4% in 2005 compared to 27.3 % in 2004. This gain can be attributed to $2.0 million of price increases, or 1.9 points, and the absence in 2005 of $1.5 million in non-recurring closure costs associated with the closure of the Trenton facility incurred in 2004, or 1.4 points. Gains from currency of approximately $0.3 million and reduced LIFO costs of $0.8 million were largely offset by the higher cost of goods sold for products produced in previous years being recognized in 2005, as the Company made substantial reductions in its inventories from year ago levels.                                         15    Gross profits of the Company's Mechanical Division increased approximately $4.2 million, to 27.8% of sales in 2005 compared to 25.0% of sales in 2004, principally due to selling price increases, higher sales volume levels and the elimination of the non-recurring costs described above, offset by the effects of increased sales of lower margin products, and higher unit costs of goods sold in the current period attributable to goods made in previous years. 2005 production levels were kept lower than sales volume in order to reduce investment in inventory, which declined by $3.4 million. The Electronic Business gross profit increased $1.8 million, to 35.2% of sales compared to 31.2% of sales in 2004. The 4.0 points of margin improvement can be attributable primarily to a lower overall production cost structure, as the Company realized a full year of reduced unit costs attributable to cost savings initiatives undertaken in the second half of 2004. In addition, minor sales volume and product mix gains contributed approximately 1.0 point to this margin improvement.  Selling, general and administrative expenses declined $0.7 million in 2005 compared to the previous fiscal year. Due to increased revenue levels, the above decline in these costs resulted in selling, general and administrative expenses being 25.0% of sales in 2005 compared to 27.9% of sales in 2004. The primary reason for the lower costs in 2005 was the $1.1 million decrease in salaries and benefit costs in 2005 principally resulting from restructuring of corporate sales and marketing costs in the second half of 2004, and a $0.3 million decrease in insurance costs. The effects of these cost savings initiatives were offset by the elimination of $0.6 million of amortized gains recognized in 2004 prior to the termination of the Company's post-employment healthcare insurance program in the fourth quarter of 2004, and to a lesser extent $0.3 million in management incentive expense recognized in 2005 related to overall improved operating performance.  In 2004, the Company continued steps to maintain total healthcare spending at affordable levels. In connection with these efforts, when the Company announced the termination of its post-employment healthcare benefit plan in the fourth quarter of 2004, the Company recognized a pre-tax gain aggregating $9.3 million. This item is presented as a non-recurring gain in the Company's income statement for the year ended December 31, 2004. The Company also recorded $3.6 million deferred tax expense arising from the reduction of a previously recognized deferred tax asset associated with these benefits, resulting in a $1.09 increase in earnings per share in 2004 associated with the plan termination gain.  Interest expense increased to $2.3 million in 2005 compared to $1.6 million in 2004. In January 2005, the Company refinanced its variable rate secured revolving credit and term loan agreement, and amended the agreement in July 2005, when the Company extended the agreement for an additional two years to April 2009. This new agreement carries higher stated interest rates. In addition, in October 2005, the Company completed a self tender offer to acquire 1.5 million shares of the Company's then outstanding common stock. This transaction was funded under the terms of a securities purchase agreement whereby the Company obtained $15.0 million from the sale of 12% fixed rate unsecured notes and detachable warrants to acquire shares of Company's common stock. Approximately $0.4 million of increased interest costs can be attributable to the higher secured credit agreement stated rates, as well as general market rate interest cost changes. The remaining $0.3 million increase in interest costs can be attributable to the terms of the unsecured credit agreement.  The Company's effective tax rate increased to 35% of pre-tax income in 2005, compared to a rate of 34% for 2004, each approximating the statutory rates.  After taking into consideration all of the above matters, net income for 2005 was $2.4 million, or $0.48 per share on both a basic and diluted basis. This compares to a net income for 2004 of $4.6 million, or $0.89 per share. After taking into account $5.7 million of non-recurring gain related to the termination of the Company's post-employment healthcare benefit plan, described above, the Company would have had a net loss of $1.1 million in 2004 on a proforma basis.                                         16    YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED JANUARY 2, 2004  (in thousands)                                                              2004           2003       Dollar Change     % Change                                                      -----------   -------------   -------------     ---------      SALES   Mechanical Business                                    $63,732         $58,343         $ 5,389           9.2%   Electronics Business                                    37,783          38,072            (289)         (0.8%)                                                      -----------   -------------   -------------     ---------    Total Sales                                           101,515          96,415           5,100           5.3%  COST OF SALES   Mechanical Business                                     47,788          40,942           6,846          16.7%   Electronics Business                                    26,004          26,076             (72)         (0.3%)                                                      -----------   -------------   -------------     ---------   Total Cost of Sales                                     73,792          67,018           6,774          10.1%  GROSS PROFIT    Mechanical Business                                    15,944          17,401          (1,457)         (8.4%)    Electronics Business                                   11,779          11,996            (217)         (1.8%)                                                      -----------   -------------   -------------     ---------    Total Gross Profit                                     27,723          29,397          (1,674)         (5.7%)  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES              28,371          28,635            (264)         (0.9%)  SALES AS A PERCENTAGE OF TOTAL SALES    Mechanical Business                                     62.8%           60.5%    Electronics Business                                    37.2%           39.5%                                                      -----------   -------------    Total Sales                                            100.0%          100.0%  COST OF SALES AS A PERCENTAGE OF SALES    Mechanical Business                                     75.0%           70.2%    Electronics Business                                    68.8%           68.5%    Total Cost of Sales                                     72.7%           69.5%  GROSS PROFIT AS A PERCENTAGE OF SALES    Mechanical Business                                     25.0%           29.8%    Electronics Business                                    31.2%           31.5%    Total Gross Profit                                      27.3%           30.5%  SG&A EXPENSE AS A PERCENTAGE OF SALES                      27.9%           29.7%    The improvement in general economic conditions and corresponding increased demand for its Mechanical Division products helped the Company experience a $5.1 million increase in revenues in 2004. The increased demand enabled the Company to increase prices in 2004, contributing approximately $3.4 million to increased revenues for the year. In addition, the continued strengthening of the Euro, and to a lesser extent, the Canadian dollar, contributed approximately $1.8 million of the increased revenues, principally in the Company's Electronics Business. Volume was relatively flat with higher Mechanical Products sales being offset by lower demand for Electronics Products. Overall volume was affected by the inventory management practices of the Company's largest distribution customer who reduced its inventories of the Company's products approximately $5.0 million during 2004, and reduced its total purchases approximately $0.5 million compared to the prior year.  Mechanical Business sales increased by $5.4 million in 2004 due to $2.5 million of improved volume, $2.5 million from price increases, and $0.4 million of favorable currency fluctuation. The increased Mechanical Division revenues were offset by a slight decline in total Electronics Division revenues. The Electronics Division reported lower sales volumes totaling approximately $2.6 million, offset by $0.9 million of price increases and $1.4 million of favorable currency translation.  Overall gross profit as a percent of net sales decreased to 27.3 % in 2004 from 30.5 % in the previous year as the price increases implemented in 2004 ($3.4 million) and favorable currency fluctuations on gross profits ($0.6 million) were offset by sharply increased manufacturing costs. This was particularly true in the Company's Mechanical Products business. During 2004, in addition to the incremental costs associated with higher volumes, the Company experienced significant raw material cost increases, including $1.7 million of scrap iron costs associated with the Company's foundry operations and approximately $1.5 million in non-recurring costs were incurred in connection with the closure of the Company's Trenton, Tennessee manufacturing facility.                                         17   Gross profits of the Mechanical Business declined approximately $1.5 million, from 29.8% of sales in 2003 to 25.0% of sales in 2004, principally due to increases in raw material costs and the non-recurring costs described above and the $0.7 million effect of lower production levels, particularly in the second half of the year, as compared to the prior year. The Electronic Business gross profit declined slightly from 31.5% of sales in 2003 to 31.2% of sales in 2004, or $0.2 million, as favorable currency fluctuations and nominal price increases were more than offset by reduced fixed cost absorption as a result of reduced sales and related production volumes.  Selling, general and administrative expenses declined $0.3 million in 2004 compared to the previous fiscal year. Due to increased revenue levels, the above decline in these costs resulted in selling, general and administrative expenses being 27.9% of sales in 2004 compared to 29.7% of sales in 2003. Reasons contributing to this decline include the recognition of approximately $1.0 million of costs associated with the change in the Company's chief executive and financial officers and recognition of $0.5 million of credit losses related to business activities in Latin America during the second half of fiscal 2003. The non-recurrence of these costs in 2004 was offset in part by higher salary and benefit costs for the Company's administrative force and increased freight costs related to higher Mechanical products volume and fuel price increases. In addition, in 2004 the Company recognized approximately $0.5 million of non-recurring costs associated with restructuring its corporate sales and marketing structure.  In 2004, the Company continued to take steps to maintain spending for employee and retiree healthcare at affordable levels. In connection with these efforts, as communicated to retirees in the fourth quarter of 2004, increased insurance costs effective with the 2005 plan enrollment would be passed on to retirees. As a result, a substantial number of the retirees opted to participate in an insurance program independent of the Company's offering and for which the Company bears no future funding obligation. Accordingly, the remaining accumulated plan benefit obligation, as determined by the plan's actuary, was substantially reduced from $2.6 million at December 31, 2003 to $0.4 million at December 31, 2004 and the plan was terminated. Therefore, the Company has recognized a pre-tax gain aggregating $9.26 million, equivalent to the reduction in the accumulated plan benefit obligation together with the recognition of unrecognized prior service benefits and actuarial net gains arising from similar actions taken in previous years. This item is presented as a non-recurring gain in the Company's income statement for the year ended December 31, 2004. The Company also recorded $3.61 million deferred tax expense arising from the reduction of a previously recognized deferred tax asset associated with these benefits, resulting in a $1.09 increase in earnings per share in 2004 associated with the termination gain.  Interest expense is the primary component of other expenses and was $1.6 million for 2004, an increase of $0.6 million compared to 2003. This increase reflects higher effective interest rates, increased borrowings to fund operating costs, and increased amortization of debt agreement costs incurred in connection with a loan amendment taking place in the first quarter of 2004. As more fully described in Note 4 "Debt" to the Company's consolidated financial statements, effective January 7, 2005, the Company entered into a new two year secured revolving credit agreement. The new agreement carries higher interest rates.  The Company's effective tax rate approximated the statutory rate in 2004 and income tax expense increased to $2.4 million from $0.3 million in the prior year when the Company incurred income tax expense associated with the profitability of operations in Europe and Canada. Start up costs and losses associated with Mexico manufacturing facility during both 2004 and 2003 have not provided an income tax benefit, but are available to be carried forward and offset future income in Mexico.  After taking into consideration all of the above matters, net income for 2004 was $4.6 million, or $0.89 per share on both a basic and diluted basis. This compares to a net loss for 2003 of $(0.4) million, or $(0.07) per share.  CRITICAL ACCOUNTING POLICIES  Management's discussion and analysis of the Company's financial statements and results of operations are based upon the Company's Consolidated Financial Statements included as part of this document. The preparation of these Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, the Company evaluates these estimates, including those related to bad debts, inventories, intangible assets, post-retirement benefits, income taxes, and contingencies and litigation. The Company bases these estimates on historical experiences and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.                                         18    The Company believes the following critical accounting policies affect management's more significant judgments and estimates used in the preparation of its Consolidated Financial Statements. For a detailed discussion on the application of these and other accounting policies see Note 2 to the attached Consolidated Financial Statements. Certain of our accounting policies require the application of significant judgement by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates. These judgements are based on our historical experience, terms of existing contracts, current economic trends in the industry, information provided by our customers, and information available from outside sources, as appropriate. Our critical accounting policies include:  Allowance for Doubtful Accounts: The majority of the Company's accounts receivable are due from selected authorized industrial distributors who resell the Company's products to OEMs and end users for replacement parts. Accounts receivable potentially subject the Company to concentrations of credit risk. Credit is extended based on evaluation of a customer's financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30 days and are stated at amounts due from the customers net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligations to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowances for doubtful accounts.  Product Warranty: In the ordinary course of business, the Company warrants its products against defect in design, materials, and workmanship over various time periods. Warranty reserve and allowance for product returns is established based upon management's best estimates of amounts necessary to settle future and existing claims on products sold as of the balance sheet date. The warranty reserve and allowance for product returns is not significant to the financial position of the Company for all periods presented.  Inventory: Inventories are valued at the lower of cost or market. Cost is determined on the last-in first-out basis for a majority of US inventories and the first-in first-out method for all remaining inventories. The Company has recorded a reserve for obsolete or otherwise unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.  Impairment of Goodwill and Long Lived Assets: The Company periodically evaluates the realizable value of long-lived assets including property, plant and equipment, relying on a number of factors including operating results, budgets, economic projections and anticipated future cash flows. The Company's past business acquisitions resulted in the recognition of goodwill, which may result in future impairment expenses. The Company's other intangible assets which primarily consist of product application software, affects the amount of future period amortization expense. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect the Company's Consolidated Financial Statements.  Revenue Recognition: The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin No. 104 "Revenue Recognition in Financial Statements" issued by the Securities and Exchange Commission. Revenue is recognized at the time product is shipped and title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed and collectibility of the related receivable is reasonably assured. The Company establishes allowances to cover anticipated doubtful accounts, sales discounts, product warranty, and returns based upon historical experience. Shipping and handling costs charged to customers are included as a component of net sales.  Postretirement Benefit Obligation: For periods prior to 2005, the Company, in consultation with an actuarial firm specializing in the valuation of postretirement benefit obligations, selected certain actuarial assumptions to base the actuarial valuation of the Company's post retirement benefit obligation, such as the discount rate (interest rate used to determine present value of obligations payable in the future), initial health care cost trend rate, the ultimate care cost trend rate, and mortality tables to determine the expected future mortality of plan participants. As a result of actions to terminate its post-retirement benefit plans, the Company does not expect that any future costs or cash contributions related to post-retirement benefits for retirees or former employees to be material.  Income Taxes: Under the requirements of SFAS No. 109, "Accounting for Income Taxes," we record deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities, which, if actual experience varies, could result in material adjustments to deferred tax assets and liabilities.                                         19    LIQUIDITY AND CAPITAL RESOURCES  The Company's contractual obligations as of December 31, 2005 are as follows (dollars in thousands):                                                            Less                            More        Contractual Obligations in                     Than 1       1-3       3-5      Than 5                Thousands                    Total      Year       Years     Years      Years - ---------------------------------------   --------   --------   --------   -------   -------       Long-Term Debt Obligations                 $30,716    $ 4,138     $3,199    $2,957    $20,422 Operating Lease Obligations                  5,770      1,225      1,851     1,157      1,537                                           --------   --------   --------   -------    ------- Total                                      $36,486    $ 5,363     $5,050    $4,114    $21,959                                           ========   ========   ========   =======    =======    At December 31, 2005, current and long-term debt totaled approximately $30.0 million, compared to $24.3 million at December 31, 2004, and was comprised of $1.0 million and $8.8 million in revolving and term debt, respectively, under a senior secured credit facility; $5.3 million in tax-exempt revenue bonds; and $0.6 million of principally foreign revolving and term credits, together with $14.3 million of unsecured subordinated term debt. The Company's effective borrowing rates at December 31, 2005 and 2004 for its long-term obligations were approximately 9.49% and 4.58% respectively.  On January 7, 2005, the Company entered into a new senior secured loan and security agreement (the "Loan Agreement") that provided for up to an $18.3 million revolving line of credit and two term loans totaling $13.0 million (Term Loan A--$10.0 million and Term Loan B--$3.0 million). The proceeds were used to retire amounts outstanding under the Company's outstanding revolving line of credit as well as to fund existing letters of credit that support $5.3 million of industrial revenue bonds and certain obligations under various self-insured workers compensation insurance policies. The borrowings under the Loan Agreement are secured by substantially all of the Company's domestic assets and pledges of 65% of the outstanding stock of the Company's Canadian, German and Mexican subsidiaries. The Loan Agreement was amended on July 29, 2005 to extend the term for an additional two years through April 2009 and permit the Company to borrow up to $15.0 million to fund the purchase of up to 1.5 million shares of outstanding common stock and repay Term Loan B, the outstanding balance of which was approximately $2.0 million.  All borrowings under the Loan Agreement bear variable interest of a margin plus LIBOR or U.S. Prime Rate, and the remaining Term Loan A is repayable in monthly principal installments totaling $0.13 million. The average borrowing rates for the Company's short-term borrowings under the senior secured credit arrangement at December 31, 2005 and 2004 were 7.97% and 5.38% respectively. Based on the 2005 operating results, the interest rates for both the revolving and term loans are expected to be reduced by 50 basis points beginning in the second quarter of 2006. At December 31, 2005 the Company had remaining borrowing capacity of $9.3 million. Had the Loan Agreement been in place at December 31, 2004, the unused borrowing capacity available to the Company would have been approximately $2.4 million.  The Loan Agreement contains restrictive financial covenants that require the Company to comply with certain financial tests including, among other things, maintaining minimum tangible net worth, having a minimum earnings before interest, taxes and depreciation and amortization ("EBITDA"), and meeting certain specified leverage and operating ratios, all as defined in the Loan Agreement. The Loan Agreement also contains other restrictive covenants that restrict outside investments, capital expenditures, and dividends. While the Company was in compliance with the debt covenants at December 31, 2005, the limitation on dividends is such that the first quarter dividend for 2006 would be the earliest dividend that could be declared.  The Company previously borrowed approximately $3.0 million and $2.3 million by issuing Variable Rate Demand Revenue Bonds under the authority of the industrial development corporations of the City of San Marcos, Texas and City of Chattanooga, Tennessee, respectively. These bonds bear variable interest rates (3.49% at December 31, 2005) and mature in April 2024 and April 2022. The bonds were issued to finance production facilities for the Company's manufacturing operations located in those cities, and are secured by letters of credit issued under the terms of the Company's senior secured borrowing agreement.                                         20    On October 20, 2005 the Company entered into a Securities Purchase Agreement in exchange for the issuance of $15.0 million of senior subordinated notes valued at $14.24 million and detachable warrants, valued at $0.76 million, to purchase 174,000 shares of the company's common stock. The senior subordinated notes have a stated rate of 12% (effective rate of 12.64%), are due on October 12, 2012, and contain customary financial covenants similar to, but less restrictive than the Company's senior secured bank indebtedness described above. The proceeds from the sale of the notes and detachable warrants were used to acquire 1.5 million shares of the Company's common stock at a purchase price of $11.25 million, repay approximately $2.0 million of term debt under the Company's senior secured borrowing agreement, pay $1.0 million of transaction costs related to the stock purchase and related financing transaction, with the balance providing additional working capital.  The Company has generated positive cash flows from operations in each of the last five years. During 2005, the Company generated $12.3 million cash from operating activities, which compares to $4.2 million for the same period in the prior year. The primary reason for this fluctuation was $4.3 of increased cash flow from operating results, together with $3.8 of increased cash flow from reduced investment in net operating assets in 2005 compared to 2004. The major reason for the 2005 improvement in cash generated from operating results was the Company generating $4.8 million of positive cash flow from continued focus on inventory reduction, compared to $1.2 million in 2004. Management currently expects that inventory will grow moderately in 2006 in line with demand, while at the same time the Company works to further improve inventory turns through better processes and lean manufacturing initiatives. In addition, cash generated from operating activities relative to reported earnings, increased in 2005 as net income in 2004 included a $5.7 million non-cash after-tax gain related to the termination of the Company's post-retirement health care benefits plan. The Company's total working capital was $16.6 million at December 31, 2005, compared to $16.2 million on December 31, 2004.  The Company used $2.5 million and $2.7 million for investing activities during the years ended December 31, 2005 and 2004, respectively. This spending was primarily for capital expenditures of $3.1 million in 2005 and $2.0 million in 2004. The Company's capital investments have been at maintenance levels to support new product introductions, improve product quality, and reduce operating costs. Following a period of limited capital investment, in 2006 the Company plans to spend $5.0 million on capital improvements for expanded machine tool capacity, improved operating efficiencies and normal capital maintenance projects. While this is currently in excess of the $3.25 million permitted under its borrowing agreements, management believes its lenders to be supportive of this capital plan. The amount of commitments for capital expenditures at December 31, 2005 was not significant.  Cash used in financing activities increased to $6.7 million in 2005 compared to $2.5 million in 2004 as the Company expended $11.5 million in purchase and transaction costs to acquire 1.5 million shares of its common stock in a self-tender auction and repay approximately $2.0 million of amounts previously borrowed under its secured revolving credit term loans, all funded through a new unsecured borrowing with detachable warrants that totaled $15.0 million. In addition, with its earlier refinancing on January 7, 2005 described above, the Company borrowed $18.3 million of revolving debt and $13.0 million of term financing that was used to repay previously outstanding revolving credit. During 2005, $2.4 million of such term debt was repaid as scheduled. The Company did not pay any dividends in 2005 compared to $1.4 million of dividends paid in 2004. In the fourth quarter of 2004, the Company suspended its dividend pending the negotiation of its new credit facility, which restricted dividend payments throughout 2005. The Company's future ability to declare and pay dividends is ultimately dependent upon its ability to operate at profitable levels and demonstrate compliance with its borrowing agreements.  The effect of changes in foreign currency rates reduced cash by $0.2 million in 2005 compared to generating an increase in cash of $0.8 million in 2004 as the dollar strengthened compared to the Euro, offset by a continued weakening against the Canadian dollar and to a lesser extent, the Mexican peso. As a result of all of the above items, the Company generated a net increase in cash of $2.9 million in 2005 compared to the net decrease in cash of $0.2 million experienced in 2004. The Company believes that the combination of cash generated by operations and available borrowing capacity is adequate to finance the Company's operations for the foreseeable future.  OFF-BALANCE SHEET ARRANGEMENTS  The Company had no "Off-Balance Sheet" arrangements as of December 31, 2005 and 2004 as that term is described by the Securities and Exchange Commission.  INFLATION AND CHANGING PRICES  Inflation during the last three years has not had a significant effect on operations. The use of the last-in, first-out (LIFO) method of accounting for the majority of inventories and accelerated depreciation methods for financial reporting and income tax purposes result in a substantial recognition of the effects of inflation in the financial statements.                                         21    The major impact of inflation is on buildings and improvements, where the gap between historic cost and replacement cost continues for these long-lived assets. The related depreciation expense associated with these assets increases if adjustments were to be made for the cumulative effect of inflation.  The Company believes the most positive means to combat inflation and advance the interests of investors lies in the continued application of basic business principles, which include improving productivity, increasing working capital turnover and offering products and services which can command appropriate prices in the marketplace.  RECENT ACCOUNTING PRONOUNCEMENTS  In December 2004, the FASB issued Statement of Accounting Standards No. 123 (revised 2004) "Share-Based Payment", a revision of FASB Statement No. 123 "Accounting for Stock Based Compensation" which the Company adopted in the third quarter of 2005. This statement did not have any significant effect on the Company's 2005 financial statements as the Company had previously adopted FASB Statement No. 123 to account for stock-based compensation cost using the fair value method in 2003. As the Company has already adopted FASB Statement No. 123 the only effects of the revised Statement No. 123 upon the Company are expanded disclosure related to its stock based compensation plan.  In November 2004, the FASB issued Statement of Accounting Standards No. 151 "Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) which the Company is required to adopt for the fiscal year ending December 31, 2006. The Statement introduces the concept of "normal capacity" and requires the allocation of fixed production overheads to inventory based upon the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period in which they are incurred. The Company does not expect this statement to have any significant effect upon its 2006 consolidated financial statements based on current operating and product demand levels.
Market risk is the potential change in an asset's or financial instrument's value caused, for example, by fluctuations in interest and currency exchange rates. The Company's primary market risk exposures are unfavorable movements in exchange rates between the U.S. dollar and each of the Euro, Canadian dollar and Mexican peso, and the interest rate. Monitoring and managing these risks is a continual process carried out by senior management. Market risk is managed based on an ongoing assessment of trends in interest rates, foreign exchange rates, and economic developments, giving consideration to possible effects on both total return and reported earnings. The Company's financial advisors, both internal and external, provide ongoing advice regarding trends that affect management's assessment. Management does not currently hedge its interest or foreign currency exchange risks.  Foreign Currency Exchange Rate Sensitivity  The Company has operations in several foreign countries, and approximately $28.5 million of the Company's revenue from continuing operations was derived from the Company's operations outside the United States. Accordingly, exposure exists to potentially adverse movements in foreign currency rates. No foreign exchange forward contracts to hedge the risk of change in foreign currency exchange rates were entered into during 2005 and 2004. The Company used a foreign exchange forward contract with regard to the Canadian dollar in 2003.  The Company's consolidated financial statements are denominated in U.S. dollars and accordingly, changes in the exchange rates between Company subsidiaries' local currency and the U.S. dollar will affect the translation of such subsidiaries financial results into U.S. dollars for the purposes of reporting the consolidated financial results. The Company does not hedge these matters because cash flows from international operations are generally re-invested locally. It is estimated that a 10% change in foreign exchange rates would impact reported net income by less than $0.1 million.                                         22    Interest Rate Sensitivity  The effective interest rate payable on the Company's borrowings is influenced by the Company's operating performance and degree of leverage, LIBOR, as well as by actions of the Federal Reserve Bank Board in establishing from time to time the Federal Funds Interest Rate that underlies the cost of funds borrowed by the Company. In 2005 as in 2004, in response to improved economic conditions and inflationary tendencies, the Federal Reserve took several actions to increase interest rates. This, along with similar actions of other central banks, led to a rise in LIBOR. As a result the effective interest rate that the Company paid on its borrowings under its revolving and term secured credit facility increased in 2005. This, coupled with the Company's separate borrowings under the terms of a higher rate subordinated debt in October 2005, contributed to a corresponding increase in the Company's interest expense. To the extent that the Federal Funds Interest Rate and LIBOR continue to rise in the future, the effective interest rate on Company's revolving and term secured facility will increase, and the Company's interest expense will increase accordingly if borrowing levels remain constant. Based on the balance outstanding under the Company's secured credit facility at December 31, 2005, a 1% change in the effective interest rate would have changed interest expense by $0.1 million.                                         23
Page                                                                                                               ------   Report of Independent Registered Public Accounting Firm......................................................    25  Consolidated Balance Sheets as of December 31, 2005 and December 31, 2004....................................    26  Consolidated Statements of Operations for the Years Ended December 31, 2005,      December 31, 2004, and January 2, 2004..................................................................    27  Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2005,      December 31, 2004, and January 2, 2004..................................................................    27  Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2005,      December 31, 2004, and January 2, 2004..................................................................    28  Consolidated Statements of Cash Flows for the Years Ended  December 31, 2005,      December 31, 2004, and January 2, 2004..................................................................    29  Notes to Consolidated Financial Statements...................................................................    30                                          24                 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To The Board of Directors and Shareholders of TB Wood's Corporation:  We have audited the accompanying consolidated balance sheets of TB Wood's Corporation and subsidiaries ("the Company") as of December 31, 2005 and 2004 and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform an audit of internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TB Wood's Corporation and subsidiaries as of December 31, 2005 and December 31, 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.  We have also audited schedule II for each of the three years in the period ended December 31, 2005. In our opinion, this schedule when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information therein.  Grant Thornton LLP  Baltimore, Maryland March 9, 2006.                                         25                         TB WOOD'S CORPORATION AND SUBSIDIARIES                             CONSOLIDATED BALANCE SHEETS     (in thousands, except per share and share amounts)                                   2005                2004 - ---------------------------------------------------------                       ---------------     ---------------    ASSETS Current Assets:    Cash and cash equivalents                                                         $    3,419          $      556    Accounts receivable, less allowances of $495 and $880                                                     13,353                                                                                          14,827    Inventories at current costs                                                          21,620              26,500     less LIFO reserve                                                                    (6,041)             (6,082)                                                                                 ---------------     ---------------                                                                                          15,579              20,418     Other Current Assets                                                                  3,061               3,742                                                                                 ---------------     ---------------           Total Current Assets                                                           36,886              38,069 Property, Plant, and Equipment:    Machinery and equipment                                                               60,732              60,445    Land, buildings, and improvements                                                     19,684              21,680                                                                                 ---------------     ---------------                                                                                          80,416              82,125    Less accumulated depreciation                                                         57,361              57,666                                                                                 ---------------     ---------------            Total Property, Plant and Equipment                                           23,055              24,459                                                                                 ---------------     --------------- Other Assets:    Goodwill                                                                               5,676               5,902    Loan issue costs, net of amortization                                                  1,564                 316      Other                                                                                  572                 624                                                                                 ---------------     ---------------           Total Other Assets                                                              7,812               6,842                                                                                 ---------------     ---------------                                                                                        $ 67,753            $ 69,370                                                                                 ===============     =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:    Accounts payable                                                                       8,465               7,803    Accrued expenses                                                                       6,996               6,343    Current maturities of long-term debt                                                   4,138               7,605    Deferred income taxes                                                                    716                 134                                                                                 ---------------    ----------------          Total current liabilities                                                       20,315              21,885  Long-term debt, less current maturities                                                  25,829              16,708 Postretirement benefit obligation, less current portion                                      --                 235 Deferred income taxes                                                                        91                 807 Commitments 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 3,703,386 and 5,172,690 outstanding at December 31, 2005       and December 31, 2004                                                                  57                  57    Additional paid-in capital                                                            28,153              27,095    Retained earnings                                                                      9,216               6,943    Accumulated other comprehensive (loss) income                                           (151)                158    Treasury  stock at cost;  1,936,412 and 467,108 shares at December 31, 2005       and December 31, 2004                                                             (15,757)             (4,518)                                                                                 ---------------    ----------------       Total shareholders' equity                                                         21,518              29,735                                                                                 ---------------    ----------------                                                                                        $ 67,753            $ 69,370                                                                                 ===============    ================    The accompanying notes are an integral part of these consolidated financial statements.                                         26                         TB WOOD'S CORPORATION AND SUBSIDIARIES                        CONSOLIDATED STATEMENTS OF OPERATIONS     (in thousands, except per share amounts)                                       2005          2004           2003 - ------------------------------------------------------------                -----------   -----------    -----------     Net sales                                                                      $110,897      $101,515        $96,415 Cost of sales                                                                    77,192        73,792         67,018                                                                             -----------   -----------    -----------    Gross profit                                                                  33,705        27,723         29,397 Selling, general, and administrative expenses                                    27,717        28,371         28,635 Gain on termination of post-retirement benefit plan (Note 7)                         --         9,258             --                                                                             -----------   -----------    -----------    Operating income                                                               5,988         8,610            762 Other income (expense):    Interest and other finance costs                                              (2,319)       (1,585)          (952)    Other, net                                                                        --            --            148                                                                             -----------   -----------    -----------    Other (expense), net                                                          (2,319)       (1,585)          (804)                                                                             -----------   -----------    -----------  Income (loss) before income taxes                                                 3,669           7,025          (42) Income taxes                                                                      1,289         2,407            318                                                                             -----------   -----------    ----------- Net income (loss)                                                              $  2,380      $  4,618       $   (360)                                                                             ===========   ===========    ===========  INCOME (LOSS) PER SHARE OF  COMMON STOCK Basic:  Net income (loss)                                                                $0.48         $0.89         $(0.07)                                                                             ===========   ===========    ===========  Weighted average shares of common stock and equivalents                          4,933         5,164          5,180                                                                             ===========   ===========    ===========  Diluted:  Net income (loss)                                                                $0.48         $0.89         $(0.07)                                                                             ===========   ===========    ===========  Weighted average shares of common stock and equivalents                          4,961         5,166          5,180                                                                             ===========   ===========    ===========                     CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME      (in thousands)                                                                2005           2004            2003 - ----------------------------------------                                    ----------    -----------    -----------     Net income (loss)                                                              $ 2,380       $  4,618    $      (360) Other comprehensive income: Foreign currency translation adjustment                                           (309)           768          1,601 - ----------------------------------------                                    ----------    -----------    ----------- Comprehensive income                                                           $ 2,071       $  5,386     $    1,241                                                                             ==========    ===========    ===========   The accompanying notes are an integral part of these consolidated financial statements.                                         27                         TB WOOD'S CORPORATION AND SUBSIDIARIES             CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                                                                                                   Accumulated                                                                         Additional               Other                                                   Common      Common     Paid-In    Retained  Comprehensive    Treasury (in thousands, except share amounts)              Shares       Stock     Capital    Earnings  Income (Loss)    Stock - ---------------------------------------        -----------   --------   ---------   --------- -------------   ---------        Balance at December 27, 2002                     5,240,869        $57     $26,726      $6,029     $ (2,211)     $(4,188)                                                                                                                      -- Net (loss)                                              --         --          --        (360)          --           -- Stock issued for employee benefit plans             19,133         --           2         (34)          --          143 Dividends declared                                      --         --          --      (1,871)          --           -- Treasury stock purchases                          (106,449)        --          --          --           --         (658) Stock options granted                                   --         --         182          --           --           -- Foreign currency translation adjustment                 --         --          --          --        1,601           --                                               ------------ ---------- ----------- ----------- ------------- -----------  Balance at December January 2, 2004              5,153,553         57      26,910       3,764         (610)      (4,703)  Net (loss)                                              --         --          --       4,618           --           -- Stock issued for employee benefit plans             19,137         --          --         (46)          --          185 Dividends 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             30,696         --          --        (107)          --          293 Dividends 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                     3,703,386         $57    $28,153      $9,216     $   (151)    $(15,757)                                              ============= ========== =========== =========== ============= ===========   The accompanying notes are an integral part of these consolidated financial statements.                                         28                         TB WOOD'S CORPORATION AND SUBSIDIARIES                        CONSOLIDATED STATEMENTS OF CASH FLOWS   (in thousands)                                                            2005             2004             2003 - -------------------------------------------------------------------- ---------------- ---------------- ---------------     CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)                                                       $   2,380        $   4,618          $  (360) Adjustments to reconcile net income (loss) to net cash provided by    operating activities:    Depreciation and amortization                                            4,765            5,423            5,840    Change in deferred income taxes                                           (228)           1,755            1,483    Stock options and employee stock benefit expense                           429              270              242    Gain on termination of post-retirement plan                               (270)          (9,258)               -    Other, net                                                                (247)             (10)              46    Changes in operating assets and liabilities:       Accounts receivable                                                  (1,474)             714              152       Inventories                                                           4,839            1,216           (1,677)       Other current assets                                                    681             (152)            (789)       Accounts payable                                                        662              634           (1,250)       Accrued and other liabilities                                           748           (1,010)          (1,098)                                                                     -------------    -------------     ------------ Net cash provided by operating activities                                  12,285            4,200            2,589  CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures                                                       (3,062)          (2,009)          (2,227) Proceeds from sales of fixed assets                                           428               69              182 Other, net                                                                    137             (803)            (847)                                                                     -------------    -------------     ------------    Net cash used in investing activities                                   (2,497)          (2,743)          (2,892)  CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facilities                                 111,551           37,739           45,270 Repayments of revolving credit facilities                                (128,794)         (38,870)         (44,157) Proceeds from term loans                                                   12,200               33              584 Repayments of term loans                                                   (4,395)             (14)             (72) Proceeds from subordinated debt and detachable warrants, net of    issue costs                                                             14,260               --               -- Payment of dividends                                                            -           (1,393)          (1,871) Treasury Stock (Purchased) Issued, net                                    (11,532)              55             (606)                                                                     -------------    -------------     ------------    Net cash used in financing activities                                   (6,710)          (2,450)            (852)  Effect of changes in foreign exchange rates                                  (215)             768            1,601                                                                     -------------    -------------     ------------ Increase (decrease) in cash and cash equivalents                            2,863             (225)             446 Cash and cash equivalents at beginning of year                                556              781              335                                                                     -------------    -------------     ------------ Cash and cash equivalents at end of year                              $     3,419     $        556        $     781                                                                     =============    =============     ============ Income taxes paid (refunded), net                                    $        245     $          22       $    (225)                                                                     =============    =============     ============ Interest paid during the year                                         $     2,466      $     1,564       $     983                                                                     =============    =============     ============   The accompanying notes are an integral part of these consolidated financial statements.                                         29                         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  TB Wood's Corporation and subsidiaries (collectively "TB Wood's" or the "Company") is an established designer, manufacturer, and marketer of electronic and mechanical industrial power transmission products that are sold to distributors, domestic and international Original Equipment Manufacturers ("OEMs"), and end users of industrial equipment. Principal products of the Company include electronic drives, integrated electronic drive systems, mechanical belted drives, and flexible couplings. The Company has operations in the United States, Canada, Mexico, Germany, Italy and India. The accompanying consolidated financial statements include the accounts of TB Wood's Corporation, its wholly owned subsidiaries, and its majority-owned joint venture. All inter-company accounts and transactions have been eliminated in consolidation.  Prior to fiscal year 2005, the Company's 52/53-week fiscal year ended on the Friday closest to the last day of December. Effective in 2005, the Company changed to a calendar fiscal year ending on December 31. Fiscal years ended on December 31, 2005 and 2004 were 52 week fiscal years, and the fiscal year ended January 2, 2004 was a 53 week fiscal year.  2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  CASH EQUIVALENTS  The Company considers all highly liquid investments with an original maturity of three months or less, and all bond instruments which are readily convertible to known amounts of cash, to be cash equivalents. Cash equivalents of $1,110 and $401 were held in foreign bank accounts of our subsidiaries and joint venture as at December 31, 2005 and 2004 respectively.  ACCOUNTS RECEIVABLE  The majority of the Company's accounts receivable are due from selected authorized industrial distributors who resell the Company's products to OEMs and end users for replacement parts. Accounts receivable potentially subject the Company to concentrations of credit risk. Credit is extended based on evaluation of a customer's financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30 days and are stated at amounts due from the customers net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company determines its allowances considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligations to the Company, and the condition of the general economy and the industry as a whole. The Company believes that its allowance for doubtful accounts is adequate to cover any potential losses on its credit risk exposure. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowances for doubtful accounts.  INVENTORIES  Inventories located in the United States are stated at the lower of current cost or market, principally using the last-in, first-out ("LIFO") method. Inventories for foreign operations are stated at the lower of cost or market using the first-in, first-out ("FIFO") method. Market is defined as net realizable value. Cost includes raw materials, direct labor, and manufacturing overhead. A summary of inventories at December 31, 2005 and 2004 follows:                                                                                      2005               2004                                                                               -------------      -------------    Finished goods                                                                      $11,159            $14,296 Work in process                                                                       3,452              3,714 Raw materials                                                                         7,009              8,490                                                                               -------------      -------------                                                                                      21,620             26,500 less LIFO reserve                                                                    (6,041)            (6,082)                                                                               -------------      ------------- Total                                                                               $15,579            $20,418                                                                               =============      =============                                          30   Approximately 71% and 74% of total inventories at December 31, 2005 and 2004, respectively, were valued using the LIFO method. In the year ended December 31, 2005, the LIFO reserve decreased by ($41), which decreased the Cost of Goods Sold by the same amount. In the year ended December 31, 2004 the LIFO reserve increased by $749 which increased the Cost of Goods Sold by the same amount.  The Company writes down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.  PROPERTY, PLANT AND EQUIPMENT  Property, plant and equipment are stated at cost. The Company depreciates its property, plant, and equipment, including any equipment acquired under the terms of capital leases, principally using the straight-line method over the estimated useful lives of the assets. Major renewals and improvements to property, plant and equipment that extend the useful life of the assets are capitalized while maintenance and repair costs are charged to expense as incurred. The depreciable lives of the major classes of property, plant and equipment are summarized as follows:           Asset Type                            Lives - ---------------------------         -------------------------   Machinery and equipment                   3 - 15 years Buildings and improvements               10 - 40 years   LONG-LIVED ASSETS, INCLUDING GOODWILL  Goodwill and other intangible assets deemed to have an indefinite life are subject to an annual impairment test to determine if any adjustment for diminution in value is necessary. The Company conducts its impairment tests by reviewing whether events or changes in circumstances have occurred that could indicate that the carrying amount of an asset may not be recoverable and the value of its long-lived assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the expected future net cash flows generated by the assets. If the assets are considered to be impaired, the impairment is recognized by the amount by which the carrying amount of the asset exceeds its fair value. A reconciliation of the Goodwill account is as follows:                                                       Mechanical    Electronics      Total                                                   -------------- -------------  -------------     Goodwill, balance at December 27, 2002                    $3,389        $1,783         $5,172     Addition due to earn out payment                         114            --            114     Change due to foreign currency translation                --           368           368                                                   -------------- -------------  ------------- Goodwill, balance at January 2, 2004                       3,503          2,151         5,654     Addition due to earn out payment                          94             --            94     Adjustment for impairment                                 --            (24)          (24)     Change due to foreign currency translation                --            178           178                                                   -------------- -------------  ------------- Goodwill, balance at December 31, 2004                    $3,597         $2,305        $5,902      Addition due to earn out payment                         67             --            67       Change due to foreign currency translation              --           (293)         (293)                                                   -------------- -------------  ------------- Goodwill balance at December 31, 2005                     $3,664         $2,012        $5,676                                                   ============== ============== =============   REVENUE RECOGNITION  The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin No. 104 "Revenue Recognition in Financial Statements" issued by the Securities and Exchange Commission. Revenue is recognized at the time product is shipped and title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed and collectibility of the related receivable is reasonably assured. The Company establishes allowances to cover anticipated doubtful accounts, sales discounts, product warranty, and returns based upon historical experience. Shipping and handling costs charged to customers are included as a component of net sales. Shipping and handling costs incurred in the delivery of products to customers were $6,402, $6,747 and $5,907 for fiscal 2005, 2004 and 2003, respectively, and are included as a component of selling, general and administrative expenses.                                         31    MAJOR CUSTOMERS  The Company's five largest customers accounted for approximately 32%, 33%, and 35% of net sales for fiscal years 2005, 2004, and 2003, respectively. Of these customers, one accounted for approximately 18%, 15%, and 18% of net sales for 2005, 2004, and 2003, respectively. The loss of one or more of these customers could have an adverse effect on the Company's performance and operations. Foreign and export sales accounted for 26%, 27%, and 29% of total sales in fiscal years 2005, 2004, and 2003, respectively.  PRODUCT WARRANTY  In the ordinary course of business, the Company warrants its products against defect in design, materials, and workmanship over various time periods. Warranty reserve and allowance for product returns are established based upon management's best estimates of amounts necessary to settle future and existing claims on products sold as of the balance sheet date.  SELF-INSURANCE  Beginning in fiscal 2001, the Company's workers' compensation insurance policies have the potential for retrospective premium adjustments based upon actual claims incurred. Insurance administrators assist the Company in estimating the fully developed workers' compensation liability insurance reserves that are accrued by the Company. In the opinion of management, adequate provision has been made for all incurred claims. At December 31, 2005, the Company's bank had issued letters of credit totaling $1,532 to cover incurred but unpaid claims and other costs related to its workers' compensation liability.  POST RETIREMENT BENEFITS OBLIGATIONS  Prior to terminating is post-retirement benefits for healthcare and life insurance, the Company, in consultation with an actuarial firm specializing in the valuation of postretirement benefit obligations, selected certain actuarial assumptions to base the actuarial valuation of the Company's post retirement benefit obligation, such as the discount rate (interest rate used to determine present value of obligations payable in the future), initial health care cost trend rate, the ultimate care cost trend rate, and mortality tables to determine the expected future mortality of plan participants. As a result of actions to terminate its post-retirement benefit plans, the Company does not expect that any future costs or cash contributions related to post-retirement benefits for retirees or former employees to be material  FOREIGN CURRENCY TRANSLATION  The financial statements of the Company's foreign subsidiaries have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation" and SFAS No. 130, "Reporting Comprehensive Income." Translation adjustments are included in other comprehensive income. All balance sheet accounts of foreign subsidiaries are translated into U.S. dollars at the current exchange rate at the balance sheet date. Statement of operations items are translated at the average foreign currency exchange rates. The resulting foreign currency translation adjustment is recorded in accumulated other comprehensive income (loss). The Company has no other components of comprehensive income (loss). Gains and losses from foreign currency transactions are included in the consolidated statements of income.  FAIR VALUE OF FINANCIAL INSTRUMENTS  The fair value of financial instruments classified as current assets or liabilities, including cash and cash equivalents, accounts receivable, and accounts payable, approximate carrying value due to the short-term maturity of the instruments. The fair value of secured short-term and long-term debt amounts approximate their carrying value and are based on their effective interest rates compared to current market rates. The Company's unsecured subordinated term-debt carries a fixed stated rate. Adjusted for changes in the interest rate for 5-year U.S. Treasury Bill from the time that the stated rate was determined to December 31, 2005, the current fair value of such securities would be reduced by $0.2 million.  RESEARCH AND DEVELOPMENT COST  Research and development costs consist substantially of projects related to new product development within the electronics business and are expensed as incurred. Total research and development costs were $3,090 in 2005, $3,150 in 2004, and $3,381 in 2003.  STOCK BASED COMPENSATION  The Company adopted Financial Accounting Standards Board (FASB) Statement of Accounting Standard (SFAS) No. 123 as amended by SFAS No. 148, as of December 28, 2002 (beginning of fiscal 2003) to account for stock-based compensation cost using the fair value method. The Company selected the modified prospective method of accounting for this cost, and uses the Black-Scholes option-pricing model to calculate the fair value of its stock-based compensation plan.                                         32    INCOME TAXES  The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  NET INCOME PER SHARE  Basic Earnings Per Share ("EPS") is computed by dividing net income (loss) by weighted average shares outstanding. No dilution for any potentially dilutive securities is included in basic EPS. Diluted EPS is computed by dividing net income (loss) by weighted average shares and common equivalent shares outstanding. The computation of weighted average shares outstanding for fiscal years 2005, 2004 and 2003 is as follows:                                                                             2005          2004         2003                                                                       -----------   -----------  -----------     Common shares outstanding for basic EPS                                     4,933         5,164       5,180 Shares issued upon assumed exercise of outstanding  stock options and warrants                                                    28             2          --                                                                       -----------   -----------  ----------- Weighted average number of common and common  equivalent shares outstanding for diluted EPS                              4,961         5,166        5,180                                                                       ===========   ============ ============   Outstanding options of 649,418, 675,928 and 874,050 shares for fiscal 2005, 2004 and 2003, respectively, are excluded from the calculation of weighted average shares outstanding because they are anti-dilutive.  USE OF ESTIMATES  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  RECLASSIFICATIONS  Certain prior period amounts have been reclassified to conform to the current year presentation.  RECENT ACCOUNTING PRONOUNCEMENTS  In December 2004, the FASB issued Statement of Accounting Standards No. 123 (revised 2004) "Share-Based Payment", a revision of FASB Statement No. 123 "Accounting for Stock Based Compensation" which the Company adopted in the third quarter of 2005. This statement did not have any significant effect on the Company's 2005 financial statements as the Company had previously adopted FASB Statement No. 123 to account for stock-based compensation cost using the fair value method in 2003. As the Company has already adopted FASB Statement No. 123 the only effects of the revised Statement No. 123 upon the Company are expanded disclosure related to its stock based compensation plan.  In November 2004, the FASB issued Statement of Accounting Standards No. 151 "Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) which the Company is required to adopt for the fiscal year ending December 31, 2006. The Statement introduces the concept of "normal capacity" and requires the allocation of fixed production overheads to inventory based upon the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period in which they are incurred. The Company does not expect this statement to have any significant effect upon its 2006 consolidated financial statements based on current operating and product demand levels.                                         33    3. OTHER CURRENT ASSETS AND ACCRUED LIABILITIES  Components of other current assets at December 31, 2005 and 2004 were as follows:                                                                                       2005             2004                                                                                 --------------   -------------    Refundable foreign value added tax                                                      $  970       $   1,606 Maintenance and repair supplies                                                            597             572 Prepaid insurance and deposits                                                             505             236 Prepaid expenses and other                                                                 989           1,328                                                                                 --------------   ------------- Total                                                                                  $ 3,061         $ 3,742                                                                                 ==============   =============   Components of accrued expenses at December 31, 2005 and 2004 were as follows:                                                                                       2005             2004                                                                                 --------------   -------------    Accrued payroll and other compensation                                                  $2,339         $ 2,468 Accrued income taxes                                                                     1,672             886 Accrued workers' compensation                                                              195             286 Accrued customer rebates                                                                 1,116             851 Accrued warranty reserves                                                                  564             478 Accrued professional fees                                                                  270             574 Other accrued liabilities                                                                  840             800                                                                                 --------------   ------------- Total                                                                                   $6,996          $6,343                                                                                 ==============   =============   4. DEBT  Debt obligations at December 31, 2005 and December 31, 2004 were as follows:                                                                                       2005             2004                                                                                 --------------   -------------    Revolving line of credit--secured                                                       $1,035        $ 18,200 Term Loans--secured                                                                      8,805              -- Industrial revenue bonds--secured                                                        5,290           5,290 Other revolving and term loans, principally with foreign banks                             586             823 Senior Subordinated Notes, net of unamortized discount--unsecured                       14,251              --                                                                                 --------------   -------------                                                                                         29,967          24,313 Less current maturities                                                                 (4,138)         (7,605)                                                                                 --------------   -------------                                                                                        $25,829         $16,708                                                                                 ==============   =============   At December 31, 2005 current and long-term debt totaled approximately $30.0 million, compared to $24.3 million at December 31, 2004, and was comprised of $1.0 million and $8.8 million in revolving and term debt, respectively, under a senior secured credit facility; $5.3 million in tax-exempt revenue bonds; and $0.6 million of principally foreign revolving and term credits, together with $14.3 million of unsecured subordinated term debt. The Company's effective borrowing rates at December 31, 2005 and 2004 for its long-term obligations were approximately 9.49% and 4.58% respectively.  On January 7, 2005, the Company entered into a new senior secured loan and security agreement (the "Loan Agreement") that provided for up to an $18.3 million revolving line of credit and two term loans totaling $13.0 million (Term Loan A--$10.0 million and Term Loan B--$3.0 million). The proceeds were used to retire amounts outstanding under the Company's outstanding revolving line of credit as well as to fund existing letters of credit that support $5.3 million of industrial revenue bonds and certain obligations under various self-insured workers compensation insurance policies. The borrowings under the Loan Agreement are secured by substantially all of the Company's domestic assets and pledges of 65% of the outstanding stock of the Company's Canadian, German and Mexican subsidiaries. The Loan Agreement was amended on July 29, 2005 to extend the term for an additional two years through April 2009 and permit the Company to borrow up to $15.0 million to fund the purchase of up to 1.5 million shares of outstanding common stock and repay Term Loan B, the outstanding balance of which was approximately $2.0 million.                                         34    All borrowings under the Loan Agreement bear variable interest of a margin plus LIBOR or U.S. Prime Rate, and the remaining Term Loan A is repayable in monthly principal installments totaling $0.13 million. The average borrowing rates for the Company's short-term borrowings under the senior secured credit arrangement at December 31, 2005 and 2004 were 7.97% and 5.38% respectively. Based on the 2005 operating results, the interest rates for both the revolving and term loans are expected to be reduced by 50 basis points beginning in the second quarter of 2006. At December 31, 2005 the Company had remaining borrowing capacity of $9.3 million. Had the Loan Agreement been in place at December 31, 2004, the unused borrowing capacity available to the Company would have been approximately $2.4 million.  The Loan Agreement contains restrictive financial covenants that require the Company to comply with certain financial tests including, among other things, maintaining minimum tangible net worth, having a minimum earnings before interest, taxes and depreciation and amortization ("EBITDA"), and meeting certain specified leverage and operating ratios, all as defined in the Loan Agreement. The Loan Agreement also contains other restrictive covenants that restrict outside investments, capital expenditures, and dividends. While the Company was in compliance with the debt covenants at December 31, 2005, the limitation on dividends is such that the first quarter dividend for 2006 would be the earliest dividend that could be declared.  The Company previously borrowed approximately $3.0 million and $2.3 million by issuing Variable Rate Demand Revenue Bonds under the authority of the industrial development corporations of the City of San Marcos, Texas and City of Chattanooga, Tennessee, respectively. These bonds bear variable interest rates (3.49% at December 31, 2005) and mature in April 2024 and April 2022. The bonds were issued to finance production facilities for the Company's manufacturing operations located in those cities, and are secured by letters of credit issued under the terms of the Company's senior secured borrowing agreement.  On October 20, 2005 the Company entered into a Securities Purchase Agreement in exchange for the issuance of $15.0 million of senior subordinated notes valued at $14.24 million and detachable warrants, valued at $0.76 million, to purchase 174,000 shares of the company's common stock. The senior subordinated notes have a stated rate of 12% (effective rate of 12.64%), are due on October 12, 2012, and contain customary financial covenants similar to, but less restrictive than the Company's senior secured bank indebtedness described above. The proceeds from the sale of the notes and detachable warrants were used to acquire 1.5 million shares of the Company's common stock at a purchase price of $11.25 million, repay approximately $2.0 million of term debt under the Company's senior secured borrowing agreement, pay $1.0 million of transaction costs related to the stock purchase and related financing transaction, with the balance providing additional working capital.  In addition to the above borrowing arrangements, $0.5 million at December 31, 2005 and $0.7 million at December 31, 2004 were outstanding under the terms of an unsecured revolving credit facility and a term loan, each borrowed by the Company's Italian subsidiary. Interest only was payable on the term loan during 2004, and principal repayments commenced beginning in 2005. The rates for these loans ranged from 1.3% to 3.2%.  Aggregate future maturities of debt as of December 31, 2005 are as follows:  2006                                           $  4,138 2007                                              1,599 2008                                              1,600 2009                                              2,892 2010                                                 65 Thereafter                                       20,422                                            ------------                                                  30,716 Less: Unamortized discount                         (749)                                            ------------                                                 $29,967                                            ============   5. INCOME TAXES  The components of the income tax provision (benefit) for fiscal years 2005, 2004, and 2003 are shown below:                                                                  2005               2004               2003                                                            --------------    --------------     --------------     Current:  Federal and state                                          $       1,069        $      103         $   (1,209)  Foreign                                                              448               549                 44                                                            --------------    --------------     --------------                                                                     1,517               652             (1,165) Deferred income tax (benefit) provision                              (228)            1,755              1,483                                                            --------------    --------------     -------------- Total provision for income taxes                             $      1,289        $    2,407         $      318                                                            ==============    ==============     ==============                                          35    A reconciliation of the provision for income taxes on income before cumulative effect of change in accounting principle at the statutory federal income tax rate to the Company's tax provision as reported in the accompanying consolidated statements of operations is shown below:                                                                   2005               2004               2003                                                            --------------    --------------     --------------     Federal statutory income tax (benefit) expense                  $   1,247        $    2,388          $     (14) State income taxes, net of federal income tax benefit                (115)              211                 (2) Foreign taxes, net of related credits                                 473               107                645 Research and development credits                                     (295)             (207)                -- Change in estimate with respect to federal and state liabilities                                                          (140)             (143)              (311) Other                                                                 119                51                 --                                                            --------------    --------------     --------------                                                                 $   1,289        $    2,407         $      318                                                            ==============    ==============     ==============   In 2005, 2004, and 2003 earnings (loss) before income taxes included $831, $952, and $(1,003), respectively, of earnings or losses generated by the Company's foreign operations. No federal or state income tax benefit or provision has been provided on the undistributed earnings of certain of these foreign operations, as the earnings will continue to be indefinitely reinvested. It is not practical to estimate the additional income taxes, including any foreign withholding taxes that might be payable with the eventual remittance of such earnings.  The provision for income taxes in fiscal 2003 includes a tax benefit related to revised estimates of the Company's income tax liability as well as certain income tax credits. The Company has not recognized any income tax benefit related to the income tax losses incurred by its Mexican subsidiary currently because there is uncertainty as to whether that subsidiary will realize those benefits in the future. As the Mexican subsidiary realizes these income tax benefits in the future, a reduction of income taxes will be recognized.  Under SFAS No. 109, deferred tax assets or liabilities at the end of each period are determined by applying the current tax rate to temporary difference between the financial reporting and income tax bases of assets and liabilities. The components of deferred income taxes at December 31, 2005 and 2004 are as follows:                                                                 2005               2004                                                           -------------      -------------    Deferred income tax liabilities:     Book basis in long-lived assets over tax basis              $  (839)           $(1,283)     LIFO inventory basis difference                              (1,426)            (2,486)     Other                                                           (17)                --                                                           -------------      ------------- Total deferred income tax liabilities                            (2,282)            (3,769) Deferred income tax assets:     Accrued liabilities not currently deductible                    458                801     Allowance for doubtful accounts and inventory       reserves                                                      460                759     Net operating loss and tax credit carryforwards                 557              1,189     Other                                                            --                 79                                                           -------------      ------------- Total deferred income tax assets                                  1,475              2,828                                                           -------------      ------------- Net deferred income tax (liability)                             $  (807)           $  (941)                                                           =============      ==============   As of December 31, 2005, the Company has net operating loss and foreign tax credit carryforwards totaling approximately $166, and $391, respectively. These credits expire beginning 2014 through 2025. The ability of the Company to benefit from the carryforwards is dependent on the Company's ability to generate sufficient taxable income prior to the expiration dates.                                         36    6.  SHAREHOLDERS' EQUITY  The table below summaries the transactions in the Company's Common Stock held in the treasury in numbers of shares during fiscal 2005 and 2004.                                                                  2005               2004                                                           -------------      -------------    Balance at beginning of year, number of shares                  467,108            486,245 Purchases during the year                                     1,500,000                 -- Transfers to 401(k) Profit Sharing Plan                         (18,673)           (10,290) Transfers to Employee Stock Purchase Plan                       (12,023)            (8,847)                                                           -------------       ------------- Balance at end of year, number of shares                      1,936,412            467,108                                                           =============       =============   On October 20, 2005, Company accepted for payment 1,500,000 shares of its Common Stock, at a price of $7.50 per share, pursuant to its "Dutch Auction" self-tender offer. As a result of the completion of the self-tender offer, the Company had 3,700,647 shares of common stock issued and outstanding. The shares of common stock accepted for purchased represent approximately 28.84% of TB Wood's 5,200,647 shares of common stock issued and outstanding as of October 20, 2005. The total share purchase price was $11.25 million, together with $0.28 million of transaction cost, and was funded through the issuance of 12% senior subordinated notes in the amount of $15.0 million and detachable warrants to purchase 174,000 shares of the Company's common stock, valued at $0.76 million.  7. BENEFIT PLANS  COMPENSATION PLANS  The Company maintains a discretionary compensation plan for certain salaried employees that provides for incentive awards based on certain levels of earnings, as defined. In 2005, the Company accrued $0.35 million for such incentives, which were paid in 2006. No amounts were accrued under the plan in fiscal years 2004 and 2003.  PROFIT-SHARING PLANS  The Company maintains a defined contribution 401(k) profit-sharing plan covering substantially all United States employees. Under this plan, the Company, on a discretionary basis, matches a specified percentage of each eligible employee's contribution and, at the election of the employee, the matching contribution may be in the form of either cash, shares of the Company's common stock, or a combination thereof. The Company contributed cash of approximately $448, $302, and $207 for fiscal years 2005, 2004 and 2003, respectively, and contributed 18,673 shares of common stock held in treasury in 2005, 10,290 shares in 2004, and 7,887 shares in 2003. During portions of 2003 and 2002, the Company suspended the matching portion. In addition, the Company has a noncontributory profit-sharing plan covering its Canadian employees for which $28, $24, and $23 was charged to expense for fiscal years 2005, 2004, and 2003, respectively.  EMPLOYEE STOCK PURCHASE PLAN  The Company's Employee Stock Purchase Plan ("ESPP") enables employees of the Company to subscribe for shares of common stock on quarterly offering dates, at a purchase price which is the lesser of 85% of the fair value of the shares on either the first or last day of the quarterly period. Pursuant to the ESPP, 12,023 shares were issued to employees during 2005, 8,847 during 2004, and 11,246 during 2003. Employee contributions to the ESPP were $59, $55, and $50 for fiscal years 2005, 2004 and 2003, respectively. As of December 31, 2005, 406,389 shares remain available for future issuance.  STOCK OPTIONS  The Company has a stock-based incentive compensation plan (the "Plan"), the purpose of which is to assist the Company in attracting and retaining valued personnel by offering them a greater stake in the Company's success and a closer identity with the Company, and to encourage ownership of the Company's common stock by such personnel. The Plan is administered by a committee (the "Committee") designated by the board of directors. Awards under the Plan may be made to all officers and key employees of the Company through January 31, 2006.                                         37   The Committee may grant stock options and shares of common stock in the form of either deferred stock or restricted stock, as defined in the Plan. Options granted under the Plan may be either incentive stock options ("ISOs") or nonqualified stock options. ISOs are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code. Unless an option is specifically designated at the time of the grant as an ISO, options under the Plan will be nonqualified. The Committee determines the exercise price of the options. The maximum term of an option granted under the Plan shall not exceed ten years from the date of grant or, in the case of an ISO, five years from the date of grant if the recipient on the date of grant owns directly, or indirectly, shares possessing more than 10% of the total combined voting power of all classes of stock of the Company. No option may be exercisable sooner than six months from the date the option is granted. Stock option activity for the fiscal years 2005, 2004 and 2003 is as follows:                                                                               Number of shares     Weighted average                                                                            subject to option     exercise price                                                                           ------------------    ----------------    Options outstanding at December 27, 2002                                             783,000              $13.25     Granted                                                                          197,550                8.62     Canceled                                                                        (106,500)              22.73     Exercised                                                                             --                  --                                                                           ------------------    ---------------- Options outstanding at January 2, 2004                                               874,050               11.73     Granted                                                                          187,800                9.75     Canceled                                                                        (383,399)              11.91     Exercised                                                                             --                  --                                                                           ------------------    ---------------- Options outstanding at December 31, 2004                                             678,451               11.08     Granted                                                                          184,000                7.08     Canceled                                                                        (197,000               12.82     Exercised                                                                             --                  --                                                                           ------------------    ---------------- Options outstanding at December 31, 2005                                             665,451              $ 9.46                                                                           ==================    ================   In January 2006, the Company awarded additional options for 87,000 shares at a weighted exercise price of $8.88 per share.  The following table sets forth the range of exercise price, number of shares, weighted average exercise price, and remaining contractual lives by groups of similar price and grant dates as of December 31, 2005.                  Options Outstanding                                        Options Exercisable - --------------------------------------------------------    ----------------------------------------------                                               Weighted           Weighted                       Weighted      Range of                Number of         average            average         Number of      average   exercise price              shares        exercise price    contractual life     shares     exercise price - ------------------          -----------    --------------    ----------------   ----------   --------------       $ 4.80 -    $ 7.50              158,217            $ 6.18          10.0 years       16,034           $ 6.21 $ 7.51 -    $ 9.00              182,550            $ 8.23          10.0 years      104,214           $ 8.19 $ 9.01 -    $11.00              113,183            $ 9.46          7.88 years       48,818           $ 9.38 $11.01 -    $13.00              159,351            $12.11          6.80 years      136,519           $12.14 $13.01  -   $21.00               52,150            $15.68          10.0 years       35,816           $16.87                             -----------                                         ---------- Total Options Outstanding       665,451            $ 9.46          8.03 years      341,401           $10.76                             ===========                                         ==========   Following the fair value method to account for stock-based compensation cost, the Company employs the modified prospective method of accounting to calculate the fair value of its stock-based compensation plan, applying the following weighted-average assumptions to the Black-Scholes option-pricing model for grants in 2005, 2004, and 2003:                                                                  2005             2004             2003                                                        ------------------ ---------------- ----------------     Risk free interest rate                                        4.50%           4.40%            4.25% Expected lives                                               10 years      5 & 10 years      5 & 10 years Expected volatility                                           28.8%           30.3%             28.8% Dividend yield                                                 0.0%            4.3%              5.1%   The fair value, net of tax, of options granted in 2005, 2004 and 2003 using the Black-Scholes method was $313, $211, and $219, respectively, which is being recognized as expense ratably over the three year vesting period of the options.                                         38   POSTRETIREMENT BENEFITS  As of December 31, 2005, the Company has terminated all of its post-retirement benefit programs. In the second quarter of 2005, the Company announced to employees that it was discontinuing its sponsorship of an unfunded defined benefit post employment group term life insurance plan that provided life insurance coverage for active employees and retirees. As a result the company recognized a non-recurring gain of $270 in the second quarter from the termination of this program, which was recorded as a reduction of selling, general and administrative expense.  In 2004 the Company continued to take steps to maintain spending for healthcare benefits at affordable levels. In order to achieve this, the Company terminated its post-retirement healthcare benefit program, as communicated to retirees in the fourth quarter of 2004. As a result, the Company recognized a pre-tax gain aggregating $9.26 million, equivalent to the reduction in the accumulated plan benefit obligation together with the recognition of unrecognized prior service benefits and actuarial net gains arising from similar actions taken in previous years. This item is presented as a non-recurring gain in the Company's income statement for the year ended December 31, 2004. The Company also recorded $3.61 million deferred tax expense arising from the reduction of a previously recognized deferred tax asset associated with these benefits, resulting in a $1.09 increase in earnings per share in 2004 associated with the termination gain. Prior to the termination of the aforementioned benefit plan and resulting non-recurring gain, selling, general and administrative expenses included a net credit reducing such costs principally relating to the amortization of actuarial gains and deferred credits arising during the operation of the benefit plan in the amounts of $0.78 million and $0.49 million in 2004 and 2003, respectively.  At December 31, 2004, the total obligation for all post-retirement benefits was $0.39 million, relating principally to life insurance program that was terminated in 2005. At December 31, 2005, remaining commitments for any post-employment obligations are immaterial, and relate principally to commitments under certain severance obligations.  8. COMMITMENTS AND CONTINGENCIES  LEGAL PROCEEDINGS  The Company is subject to a number of legal actions arising in the ordinary course of business. In management's opinion, the ultimate resolution of these actions will not materially affect the Company's financial position or results of operations.  ENVIRONMENTAL RISKS  The Company's operations and properties are subject to federal, state, and local laws, regulations, and ordinances relating to certain materials, substances, and wastes. The nature of the Company's operations exposes it to the risk of claims with respect to environmental matters. Based on the Company's experience to date, management believes that the future cost of compliance with existing environmental requirements will not have a material adverse effect on the Company's operations or financial position.  OPERATING LEASE COMMITMENTS  The Company leases warehouse and office space, office equipment, and other items under non-cancelable operating leases. The expense for non-cancelable operating leases was approximately $1,289, $1,304, and $1,239 for fiscal 2005, 2004 and 2003, respectively. At December 31, 2005 future minimum lease payments under non-cancelable operating leases are as follows:     2006                                                  $ 1,225 2007                                                    1,062 2008                                                      789 2009                                                      578 2010                                                      579 2011 and thereafter                                     1,537                                                  ------------                                                       $ 5,770                                                  ============                                          39   9. BUSINESS SEGMENT INFORMATION  DESCRIPTION OF THE TYPES OF PRODUCTS FROM WHICH EACH SEGMENT DERIVES ITS REVENUES  The Company is engaged principally in the design, manufacture, and sale of industrial power transmission products. The products manufactured by the Company are classified into two segments, mechanical business and electronics business. The mechanical business segment includes belted drives, couplings, gear motors and gearboxes. The electronics business segment includes electronic drives and electric drive systems. Products of these segments are sold to distributors, OEM's, and end users for manufacturing and commercial applications.  MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS  The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as described in the summary of significant accounting policies. Inter-segment sales are not material.  FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS  The Company's reportable segments are business units that manufacture and market separate and distinct products and are managed separately because each business requires different processes, technologies, and market strategies. The following table summarizes revenues, operating income, depreciation and amortization, total assets, and expenditures for long-lived assets by business segment for fiscal 2005, 2004, and 2003:                                                                          2005              2004             2003                                                                    -----------        -----------      -----------     SALES   Mechanical Business                                                $  72,361          $  63,732        $  58,343   Electronics Business                                                  38,536             37,783           38,072                                                                    -----------        -----------      -----------                                                                        110,897            101,515           96,415                                                                    -----------        -----------      ----------- OPERATING INCOME (LOSS), EXCLUSIVE OF GAIN ON BENEFIT PLAN TERMINATION   Mechanical Business                                                    4,885                951            2,155   Electronics Business                                                   1,103             (1,599)          (1,393)                                                                    -----------        -----------      -----------                                                                          5,988               (648)             762                                                                    -----------        -----------      ----------- DEPRECIATION AND AMORTIZATION   Mechanical Business                                                    2,578              2,884            2,940   Electronics Business                                                   1,158              1,443            2,023   Corporate (before divisional allocation)                               1,029              1,096              877                                                                    -----------        -----------      -----------                                                                          4,765              5,423            5,840                                                                    -----------        -----------      ----------- ASSETS    Mechanical Business                                                  42,097             43,541           44,241    Electronics Business                                                 20,760             22,136           26,207    Corporate                                                             4,896              3,693            5,959                                                                    -----------        -----------      -----------                                                                         67,753             69,370           76,407                                                                    -----------        -----------      ----------- EXPENDITURES FOR LONG-LIVED ASSETS    Mechanical Business                                                   1,002              1,652            1,114    Electronics Business                                                  1,398                254              400    Corporate                                                               662                103              713                                                                    -----------        -----------      -----------                                                                      $   3,062          $   2,009         $  2,227                                                                    ===========        ===========      ===========   The following table reconciles segment profit to consolidated income before income taxes and extraordinary items:                                                                           2005              2004             2003                                                                    -----------        -----------      -----------     Total operating profit (loss) for reportable segments                 $  5,988            $  (648)         $   762 Interest expense, net                                                   (2,319)            (1,585)            (952) Gain on benefit plan termination/other unallocated amounts                   -              9,258              148                                                                    -----------        -----------      ----------- Income (loss) before income taxes                                      $ 3,669          $   7,025            $ (42)                                                                    ===========        ===========      ===========                                          40   The following table reconciles segment assets to consolidated total assets as of December 31, 2005 and December 31, 2004:                                                                      2005              2004                                                               ------------       -----------    Total assets for reportable segments                             $  62,857         $  65,677 Corporate fixed assets                                               3,739             3,818 Deferred taxes                                                          --                -- Interdivision elimination                                            1,157              (125)                                                               ------------       ----------- Consolidated total                                                $ 67,753          $ 69,370                                                               ============       ===========   Information regarding the Company's domestic and foreign operations is as follows:                                                                                       Long-Lived                                                                    Net Sales          Assets                                                                  ------------      ------------    2005 United States                                                         $82,402           $22,896 Canada                                                                 10,291               308 Germany                                                                 4,561             2,024 Italy                                                                   9,940               381 Mexico                                                                  2,803             3,084 India                                                                     900                38                                                                  ------------      ------------ Consolidated                                                         $110,897           $28,731                                                                  ============      ============ 2004 United States                                                         $74,186           $23,670 Canada                                                                  8,937               328 Germany                                                                 4,627             2,320 Italy                                                                   9,980               674 Mexico                                                                  2,878             3,326 India                                                                     907                43                                                                  ------------      ------------ Consolidated                                                         $101,515           $30,361                                                                  ============      ============ 2003 United States                                                       $  70,390           $27,525 Canada                                                                  8,235               322 Germany                                                                 5,084             2,139 Italy                                                                   9,257               840 Mexico                                                                  2,803             1,960 India                                                                     646                70                                                                  ------------      ------------ Consolidated                                                          $96,415           $32,856                                                                  ============      ============   11. QUARTERLY FINANCIAL DATA (UNAUDITED)    2005                                             First              Second               Third              Fourth                                                ---------           ---------           ---------           ---------      Sales                                            $27,711            $27,844              $27,673            $27,669 Gross Profit                                       8,153              8,276                8,254              9,022 Gross Profit %                                      29.4%              29.7%                29.8%              32.6% Net income                                           372                497                  565                946 Basic and diluted net income per share            $ 0.07             $ 0.10                $0.11             $ 0.23 Dividends declared and paid per share                 --                 --                   --                 --    2004                                             First              Second               Third              Fourth                                                ---------           ---------           ---------           ---------       Sales                                            $26,081            $25,459              $25,279            $24,696 Gross Profit                                       7,514              8,248                6,229              5,732 Gross Profit %                                      28.8%              32.4%                24.6%              23.2% Net income (loss)                                    134                 95               (1,346)             5,735 Basic and diluted net income (loss) per       share                                       $ 0.03             $ 0.02              $( 0.26)           $  1.11 Dividends declared and paid per share             $ 0.09             $ 0.09               $ 0.09            $    --                                          41
None.
The Company's Principal Executive Officer and Principal Financial Officer evaluated the Company's disclosure controls and procedures as of December 31, 2005. This evaluation determined that the disclosure controls and procedures in place at the Company ensure that material information relating to the registrant, including consolidated subsidiaries, is made known to the Principal Executive and Principal Financial Officers by others within the entities for the period ended December 31, 2005 to ensure disclosure on a timely basis in conformance with applicable rules and regulations. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
None.                                      PART III
The information called for by this Item regarding directors and executive officers is set forth in the Company's Proxy Statement for the 2006 Annual Meeting in the Sections entitled "Election of Directors," "Management" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference.  The Company has adopted a Code of Conduct that applies to all of our directors and employees including, our principal executive officer and principal financial officer and all of our employees performing financial and accounting functions. The Code of Conduct is posted to the Company's website www.tbwoods.com and may be found under the "Corporate Governance" section. The Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Conduct by posting such information on our website at the location specified above.
The information called for by this Item is set forth in the Company's Proxy Statement for the 2006 Annual Meeting in the Section entitled "Executive Compensation and Report of the Compensation Committee" and is incorporated herein by reference.
The information called for by this Item is set forth in the Company's Proxy Statement for the 2006 Annual Meeting in the Section entitled "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference.
The information called for by this Item is set forth in the Company's Proxy Statement for the 2006 Annual Meeting in the Section entitled "Executive Compensation and Report of the Compensation Committee" and is incorporated herein by reference.
The information called for by this Item is set forth in the Company's Proxy Statement for the 2006 Annual Meeting in the Section entitled "Ratification of Appointment of Independent Registered Public Accounting Firm" and is incorporated herein by reference.                                         42                                        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 26 through 39 hereof and the report thereon of           Grant Thornton LLP appearing on page 25 hereof.  (2)       Financial Statement Schedule            Schedule II for the fiscal year ended December 31, 2005 on page 48           hereof and the report thereon of Grant Thornton LLP appearing on page           25 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)       Exhibits  3.1       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.           Macfarland, 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).                                         43   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           Harold L. Coder III and other key employees dated February 5, 2004.           (incorporated by reference to Form 10-K, for fiscal year 2002, Exhibit           10.67)  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)                                         44   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  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  10.28     Employment agreement between William T. Fejes, Jr., and TB Wood's           Incorporated dated April 27, 2004  10.29     Employment Agreement between Thomas C. Foley and TB Wood's Corporation           dated August 19, 2004. (incorporated by reference to Form 8-K dated           August 25, 2004, Exhibit 10.1)  10.30     Employment Agreement between James R. Swenson and TB Wood's           Corporation dated August 19, 2004. (incorporated by reference to Form           8-K, dated August 25, 2004, Exhibit 10.2)  10.31     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.  10.32     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  10.33     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  10.34     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))  10.35     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))  10.36     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)  10.37     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)  10.38     Common Stock Purchase Warrant, dated October 27, 2005, between TB           Wood's Corporation and AEA Mezzanine Fund LP.  10.39     Common Stock Purchase Warrant, dated October 27, 2005, between TB           Wood's Corporation and AEA Mezzanine (Unleveraged) Fund LP.  10.40     Guaranty, dated October 27, 2005, by TB Wood's Corporation  10.41     Registration Rights Agreement, dated October 27, 2005, between TB           Wood's Corporation, AEA Mezzanine Fund LP and AEA Mezzanine           (Unleveraged) Fund LP  10.42     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.  21        Subsidiaries and Joint Venture of Registrant  23.1      Consent of Independent Public Accountants                                         45   31.1      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                                         46   SIGNATURES  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chambersburg and Commonwealth of Pennsylvania, on March 24, 2006.                                                       TB WOOD'S CORPORATION                                                       By: /s/Joseph C. Horvath                                                          -----------------------                                                          Joseph C. Horvath                                                          Chief Financial Officer  Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.      /s/ THOMAS C. FOLEY                       Chairman & Director                     March 24, 2006 - ------------------------- Thomas C. Foley  /s/ WILLIAM T. FEJES, JR.                 President and CEO                       March 24, 2006 - ------------------------- William T. Fejes, Jr.                     (Principal Executive Officer)  /s/ JAMES R. SWENSON                      Director                                March 24, 2006 - ------------------------- James R. Swenson  /s/ RICK LAZIO                            Director                                March 24, 2006 - ------------------------- Rick Lazio  /s/ FRANK D. OSBORN                       Director                                March 24, 2006 - ------------------------- Frank D. Osborn  /s/MICHAEL R. ZIMMERMAN                   Director                                March 24, 2006 - ------------------------- Michael  R. Zimmerman  /s/ JOSEPH C. HORVATH                     Chief Financial Officer                 March 24, 2006 - -------------------------                 (Principal Financial Officer and Joseph C. Horvath                         Principal Accounting Officer)                                          47                         TB WOOD'S CORPORATION AND SUBSIDIARIES                                     SCHEDULE II                         VALUATION AND QUALIFYING ACCOUNTS                   Column A                    Column B             Column C              Column D       Column E                                                                  Additions                                                         ----------------------------                                            Balance at     Charged to      Charged                                             beginning     costs and      to other                    Balance at                Description                  of period      expenses      accounts     Deductions    end of period - ---------------------------------------    ----------     ----------     --------     ----------    -------------       Year ended January 2, 2004:   Allowance for doubtful accounts                 509        $   644         $(25)          (140)        $    988   Allowance for discounts and claims              136                                                         136   Allowance for inventory obsolescence (1)      2,368           (155)          62           (620)           1,655                                            ----------     ----------     --------     ----------    -------------                                               $3,013            $489         $ 37          $(760)          $2,779                                            ==========     ==========     ========     ==========    ============= Year ended December 31, 2004:   Allowance for doubtful accounts                 988          $  89         $ (8)          (234)         $   835   Allowance for discounts and claims              136            (91)                                          45   Allowance for inventory obsolescence   (1)                                           1,655            358           28           (203)           1,838                                            ----------     ----------     --------     ----------    -------------                                                $2,779         $  356         $ 20       $   (437)          $2,718                                            ===========    ===========    ========     ==========    ============= Year ended December 31, 2005   Allowance for doubtful accounts              $   835         $  143        $ 13           (541)        $   450   Allowance for discounts and claims                45              -                         --              45   Allowance for inventory obsolescence                                                  1,838            576          (30)       (1,199)          1,185                                             ----------     ----------     --------    ----------   -------------                                                 $2,718         $  719        $ (17)   $   (1,740)         $1,680                                             ==========     ==========     ========    ==========   =============   (1) Beginning and end of period balances reported for 2003 have been adjusted to reflect a reclassification of a previously omitted reserve account.     EX-10 2 ex10-36.txt EX10-36.TXT                                                                       EXHIBIT 10.36                          SENIOR SUBORDINATED PROMISSORY NOTE   THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS   THIS NOTE IS SUBJECT TO THE SUBORDINATION AND INTERCREDITOR AGREEMENT, DATED AS OF OCTOBER 12, 2005, AMONG MANUFACTURERS AND TRADERS TRUST COMPANY, AS THE SENIOR AGENT, AND AEA MEZZANINE FUNDING LLC AND AEA MEZZANINE (UNLEVERAGED) FUND LP, AS SUBORDINATED LENDERS, AND TB WOOD'S INCORPORATED, PLANT ENGINEERING CONSULTANTS, LLC AND TB WOOD'S ENTERPRISES, INC., AS THE BORROWERS, UNDER WHICH THIS NOTE AND THE BORROWERS' OBLIGATIONS HEREUNDER, AS WELL AS ANY LIEN OF SUBORDINATED LENDERS IN ANY PROPERTY SECURING THIS NOTE, ARE SUBORDINATED IN THE MANNER AND TO THE EXTENT SET FORTH THEREIN TO THE PRIOR PAYMENT OF CERTAIN OBLIGATIONS TO THE HOLDERS OF SENIOR INDEBTEDNESS AS DEFINED THEREIN.                                TB WOOD'S INCORPORATED                        PLANT ENGINEERING CONSULTANTS, LLC                            TB WOOD'S ENTERPRISES, INC.                        12% SENIOR SUBORDINATED PROMISSORY NOTE                               DUE OCTOBER 11, 2012    $10,185,086.06                                                New York, New York                                                                 October 27, 2012       FOR VALUE RECEIVED, the undersigned, 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 (collectively, the "BORROWERS" and individually, a "BORROWER"), hereby jointly and severally promise to pay to the order of AEA Mezzanine Funding LLC, a Delaware limited liability company, or its registered assigns (the "HOLDER"), the principal sum of TEN MILLION ONE HUNDRED EIGHTY FIVE THOUSAND EIGHTY SIX DOLLARS AND SIX HUNDREDTHS ($10,185,086.06) on October 11, 2012 (the "MATURITY DATE"), with interest thereon from time to time as provided herein.  1. Purchase Agreement. This Senior Subordinated Promissory Note (the "NOTE") is issued by the Borrowers, on the date hereof, pursuant to the Securities Purchase Agreement (the "PURCHASE AGREEMENT"), dated as of October 12, 2005, by and among the Borrowers, AEA Mezzanine Funding LLC, AEA Mezzanine Fund LP, AEA Mezzanine (Unleveraged) Fund LP, TB Wood's Corporation, and T.B. Wood's Canada Ltd., and is subject to the terms thereof. This Note, together with all other promissory notes issued under the Purchase Agreement, and all promissory notes issued pursuant to paragraph 12 hereof or thereof are hereinafter referred to as the "NOTES." The Holder is entitled to the benefits of this Note and the Purchase Agreement, as it relates to the Note, and may enforce the agreements of the Borrowers contained herein and therein and exercise the remedies provided for hereby and thereby or otherwise available in respect hereto and thereto. Capitalized terms used herein without definition are used herein with the meanings ascribed to such terms in the Purchase Agreement.  2. Interest.       (a) Basic Interest. The Borrowers, jointly and severally, promise to pay interest on the principal amount of this Note at the rate of 12% per annum (the "INTEREST RATE"). Interest on this Note shall accrue from and including the date of issuance through and until repayment of the principal amount of this Note and payment of all interest in full, and shall be computed on the basis of a 360-day year of twelve 30-day months. Interest shall be paid quarterly on each March 31, June 30, September 30 and December 31 of each year or, if any such date shall not be a Business Day, on the next succeeding Business Day to occur after such date (each date upon which interest shall be so payable, an "INTEREST PAYMENT DATE"), beginning on December 31, 2005, by wire transfer of immediately available funds to an account at a bank designated in writing by the Holder. In the absence of any such written designation, any such interest payment shall be deemed made on the date a check in the applicable amount payable to the order of Holder is received by the Holder at its last address as reflected in Borrowers' note register; if no such address appears, then to such Holder in care of the last address in such note register of any predecessor holder of this Note (or its predecessor).                                         2        (b) Default Rate of Interest. Notwithstanding the foregoing provisions of this Section 2, but subject to applicable law, any overdue principal of and overdue interest on this Note shall bear interest, payable on demand in immediately available funds, for each day from the date payment thereof was due to the date of actual payment, at a rate equal to the sum of (i) the Interest Rate and (ii) an additional 2% per annum, and, upon and during the occurrence of an Event of Default (as hereinafter defined), this Note shall bear interest, from the date of the occurrence of such Event of Default until such Event of Default is cured or waived, payable on demand in immediately available funds, at a rate equal to the sum of (i) the Interest Rate and (ii) an additional 2% per annum. Subject to applicable law, any interest that shall accrue on overdue interest on this Note as provided in the preceding sentence and shall not have been paid in full on or before the next Interest Payment Date to occur after the date on which the overdue interest became due and payable shall itself be deemed to be overdue interest on this Note to which the preceding sentence shall apply.       (c) No Usurious Interest. In the event that any interest rate(s) or premiums provided for in this Section 2 shall be determined to be unlawful, such interest rate(s) shall be computed at the highest rate permitted by applicable law. Any payment by the Borrowers of any interest amount in excess of that permitted by law shall be considered a mistake, with the excess being applied to the principal amount of this Note without prepayment premium or penalty; if no such principal amount is outstanding, such excess shall be returned to Borrowers.  3. Mandatory Prepayment/Redemption.       (a) Upon the occurrence of a Change of Control (as hereinafter defined), the Borrowers shall, at the election of the Holder, prepay the outstanding principal amount of this Note at a redemption price equal to 101% of the outstanding principal amount of this Note (the "CHANGE OF CONTROL REDEMPTION PRICE"), together with interest accrued and unpaid thereon through the date of such prepayment and reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment. The Borrowers shall give written notice, in the manner specified in Section 15 hereof, to the Holder of the occurrence of a Change of Control at least fifteen (15) Business Days prior to the occurrence thereof; provided, however, that, if the Change of Control resulted from the acquisition of legal or beneficial ownership of 25% or more of the voting Equity Interests of Parent as contemplated by Section 3(b)(ii)(A) below by any executor, administrator, testamentary trustee, heir, legatee, beneficiary and/or distributee (collectively, "BENEFICIARIES") of Thomas C. Foley following his death, such notice shall be given within five (5) Business Days following his death. If the Holder makes the election pursuant to this Section 3(a), Borrowers shall pay the Change of Control Redemption Price, together with interest accrued and unpaid thereon and the expenses contemplated above, on the date that such Change of Control occurs; provided, however, that, if the Change of Control resulted from the acquisition of legal or beneficial ownership of 25% or more of the voting Equity Interests of Parent as contemplated by Section 3(b)(ii)(A) below by any Beneficiary of Thomas C. Foley following his death, the Borrower shall pay the Change of Control Redemption Price, together with interest accrued and unpaid thereon and the expenses contemplated above, on the date that is the earlier of (i) 270 days following Holder's election pursuant to this Section 3(a) and (ii) the date the outstanding principal of and all accrued interest on this Note is accelerated pursuant to Section 6(b). Until such payment is made in full, interest shall accrue and be paid in accordance with the terms of Section 2 and this Note shall be deemed outstanding for all purposes.                                         3        (b) The term "CHANGE OF CONTROL" shall mean the occurrence of any of the following (i) any event or condition as a result of which the power, direct or indirect (A) to vote 100% of the Equity Interests having ordinary voting power for the election of directors (or the individuals performing similar functions) of any direct or indirect Subsidiary of Parent (other than TB Wood's (India) Private Limited) or (B) to direct or cause the direction of the management and policies (by contract or otherwise) of any direct or indirect Subsidiary of Parent (other than TB Wood's (India) Private Limited) is not held legally and beneficially by Parent, (ii) (A) any Person (other than Thomas C. Foley or any Person controlled by Thomas C. Foley, the term "control" having the same meaning as such term in the definition of "Affiliate") or group of Persons (within the meaning of Section 13(d) or Section 14(a) of the Exchange Act) shall have acquired legal or beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Commission under the Exchange Act) of 25% or more of the voting Equity Interests of Parent, or (B) within a period of twelve (12) consecutive months, individuals who were directors of Parent on the first day of such period shall cease to constitute a majority of the board of directors of Parent (other than those directors who have been previously approved in the ordinary course by the directors then in office), (iii) the combination of Parent, with another Person, as a result of which (A) any Person (other than Thomas C. Foley or any Person controlled (as defined above) by Thomas C. Foley) or group of Persons (as defined above) becomes the legal or beneficial ownership (as defined above) of 25% or more of the voting Equity Interests of the combined entity or (B) the directors of the Parent constitute less than a majority of the Board of Directors of the combined entity, (iv) the sale or other disposition of all or substantially all of the assets of any of the Borrowers or of one or more of their respective Subsidiaries that, individually or in the aggregate, constitute a material part of the business, operations or assets of the TBW Companies, taken as a whole, and (v) the liquidation, dissolution or winding up of any of the TBW Companies that, individually or in the aggregate, constitute a material part of the business, operations or assets of the TBW Companies, taken as a whole.  4. Optional Prepayment/Redemption.       (a) Upon notice given to the Holder as provided in Section 4(b), the Borrowers, at their option, may prepay all or any portion of the principal amount of this Note at any time after October 31, 2007, by paying to the Holder an amount equal to the redemption prices (the "OPTIONAL REDEMPTION PRICES") set forth below (expressed as a percentage of the outstanding principal amount being prepaid, from time to time) together with interest accrued and unpaid thereon to the date fixed for such prepayment, and reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment; provided, however, each prepayment of less than the full outstanding balance of the principal amount of this Note shall be in an aggregate principal amount of this Note of $1,000,000 or a whole multiple thereof, and provided, further, that unless this Note and all Notes shall be paid in full, the aggregate principal balance of the Notes outstanding at any time shall be at least $5,000,000. If such prepayment is to be made by the Borrowers to the Holder during any of the periods set forth below, the Optional Redemption Price shall be determined based upon the percentage of the outstanding principal amount of this Note and which corresponds to the period in question:                                         4                  Period                                Optional Redemption Price - -----------------------------------                 -------------------------   November 1, 2007 to October 31, 2008                          106% November 1, 2008 to October 31, 2009                          104% November 1, 2009 to October 31, 2010                          102% November 1, 2010 and thereafter                               100%        (b) The Borrowers shall give written notice of prepayment of this Note, or any portion thereof, pursuant to this Section 4 not less than 15 nor more than 60 days prior to the date fixed for such prepayment. Such notice of prepayment pursuant to this Section 4 shall be given in the manner specified in Section 15 hereof. Upon notice of prepayment pursuant to this Section 4 being given by the Borrowers, the Borrowers, jointly and severally, covenant and agree that they will prepay, on the date therein fixed for prepayment, this Note or the portion hereof so called for prepayment, at the applicable Optional Redemption Price set forth above with respect to the outstanding principal amount of this Note or the portion thereof so called for prepayment, together with interest accrued and unpaid thereon to the date fixed for such prepayment, and the costs and expenses referred to in Section 4(a).       (c) All optional prepayments under this Section 4 shall include payment of accrued interest on the principal amount of this Note so prepaid and shall be applied first to all costs, expenses and indemnities payable under the Purchase Agreement, then to payment of default interest, if any, then to payment of the basic interest, and thereafter to principal.  5. Amendment. This Note may not be amended, modified, supplemented or terminated orally.  6. Defaults and Remedies.       (a) Events of Default. An "EVENT OF DEFAULT" shall occur if:            (i) the Borrowers shall default in the payment of the principal or premium of this Note, when and as the same shall become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise; or                                         5             (ii) the Borrowers shall default in the payment of any installment of interest according to its terms, when and as the same shall become due and payable and such default shall continue for a period of 5 days, and such failure shall continue for a period of 5 days after request for payment thereof by the Holder; or            (iii) the TBW Parties shall default in the due observance or performance of any covenant to be observed or performed pursuant to Section 8.1(a), 8.1(b), 8.1(c), 8.1(d), 8.1(g), 8.1(j), 8.2(a), 8.3, 8.10, 8.11 or Article 9 of the Purchase Agreement; or            (iv) any of the TBW Parties shall default in the due observance or performance of any other covenant, condition or agreement on the part of such TBW Party to be observed or performed pursuant to the terms hereof or pursuant to the terms of the Purchase Agreement or any of the other Transaction Documents (other than those referred to in clauses (i), (ii) or (iii) of this Section 6(a)), and such default shall continue for 30 days (or, in the case of a breach under Section 8.1(e), 8.1(f), 8.1(h), 8.1(i), 8.1(k), 8.1(l), 8.1(m) or 8.1(n), 15 days) default of after the earliest of (A) the date any of the TBW Parties is required pursuant to any of the Transaction Documents or otherwise to give notice thereof to the Holder (whether or not such notice is actually given) or (B) the date of written notice thereof, specifying such default and, if such default is capable of being remedied, requesting that the same be remedied, shall have been given to the Borrowers by the Holder; or            (v) any representation, warranty or certification made by or on behalf of any of the TBW Parties in the Purchase Agreement, this Note, any of the Transaction Documents or in any certificate or other document delivered pursuant hereto or thereto shall have been incorrect when made; or            (vi) any event or condition shall occur that results in (A) the acceleration of the maturity of any Indebtedness of any of the TBW Parties, or (B) a default of any Indebtedness of any of the TBW Companies, which continues beyond any applicable period of cure and which would permit the holder to accelerate (automatically or upon notice and declaration) such Indebtedness, in either case in a principal amount aggregating $500,000 or more; or            (vii) any uninsured damage to or loss, theft or destruction of any assets of any of the TBW Companies shall occur that is in excess of $500,000; or            (viii) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (a) relief in respect of any of the TBW Companies, or of a substantial part of its property or assets, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (b) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any of the TBW Companies, or for a substantial part of its property or assets, or (c) the winding up or liquidation of any of the TBW Companies; and such proceeding or petition shall continue undismissed for 60 days, or an order or decree approving or ordering any of the foregoing shall be entered; or                                         6             (ix) any of the TBW Companies shall (a) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (b) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in paragraph (viii) of this Section 6(a), (c) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any of the TBW Companies, or for a substantial part of its property or assets, (d) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (e) make a general assignment for the benefit of creditors, (f) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (g) take any action for the purpose of effecting any of the foregoing;            (x) one or more judgments for the payment of money in an aggregate amount in excess of $500,000 (to the extent not covered by insurance) shall be rendered against any of the TBW Companies and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of any of the TBW Companies to enforce any such judgment; or            (xi) an event or condition shall occur or exist which results in a material adverse effect on the Condition of the Companies.       (b) Acceleration. If an Event of Default occurs under Section 6(a)(viii) or (ix), then the outstanding principal of, all accrued interest on this Note, and any other amounts due under this Note shall automatically become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived. If any other Event of Default occurs and is continuing the Holder, by written notice to the Borrowers, may declare the principal of, accrued interest on this Note, and any other amounts due under this Note to be immediately due and payable. Upon such declaration, such principal, interest and other amounts shall become immediately due and payable. The Holder may rescind an acceleration and its consequences if all existing Events of Default have been cured or waived, except nonpayment of principal, interest or other amounts that have become due solely because of the acceleration, and if the rescission would not conflict with any judgment or decree. Any notice or rescission shall be given in the manner specified in Section 15 of this Note. Notwithstanding any provision in this Note to the contrary and to the extent permitted by applicable law, if an Event of Default occurs by reason of any willful action (or inaction) taken (or not taken) by or on behalf of any of the TBW Companies with the intention of avoiding payment of the Optional Redemption Price that the Borrowers would have had to pay if the Borrowers then had elected to optionally redeem this Note pursuant to Section 4 of this Note, then upon acceleration of this Note, an equivalent Optional Redemption Price shall also become and be immediately due and payable; provided that if such acceleration occurs before November 1, 2007, the Optional Redemption Price shall be deemed to be 112% of the then outstanding principal amount of this Note.                                         7   7. Subordination. This Note shall at all times be wholly subordinate and junior in right of payment to all Senior Indebtedness to the extent and in the manner provided in the Subordination Agreement.  8. Use of Proceeds. The Borrowers shall use the principal amount of this Note in accordance with the permitted uses described in Section 8.10 of the Purchase Agreement.  9. Suits for Enforcement.       (a) Upon the occurrence of any one or more Events of Default, the Holder of this Note may proceed to protect and enforce its rights hereunder by suit in equity, action at law or by other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the Purchase Agreement or this Note or in aid of the exercise of any power granted in the Purchase Agreement or this Note, or may proceed to enforce the payment of this Note, or to enforce any other legal or equitable right of the Holders of this Note.       (b) In case of any default under this Note, the Borrowers will pay to the Holder such amounts as shall be sufficient to cover the costs and expenses of such Holder due to such default, as provided in Article 7 of the Purchase Agreement.  10. Remedies Cumulative. No remedy herein conferred upon the Holder is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise.  11. Remedies Not Waived. No course of dealing between any of the Borrowers and the Holder or any delay on the part of the Holder in exercising any rights hereunder shall operate as a waiver of any right.  12. Transfer.       (a) The term "HOLDER" as used herein shall also include any transferee of this Note whose name has been recorded by the Borrowers in the Note Register. Each transferee of this Note acknowledges that this Note has not been registered under the Securities Act, and may be transferred only pursuant to an effective registration under the Securities Act or pursuant to an applicable exemption from the registration requirements of the Securities Act.                                         8        (b) The Borrowers shall maintain a register (the "NOTE REGISTER") in its principal offices for the purpose of registering the Note and any transfer or partial transfer thereof, which register shall reflect and identify, at all times, the ownership of record of any interest in the Note. Upon the issuance of this Note, the Borrowers shall record the name and address of the initial purchaser of this Note in the Note Register as the first Holder. Upon surrender for registration of transfer or exchange of this Note at the principal offices of the Borrowers, the Borrowers shall, at their expense, execute and deliver one or more new Notes of like tenor and of denominations of at least $500,000 (except as may be necessary to reflect any principal amount not evenly divisible by $500,000) of a like aggregate principal amount, registered in the name of the Holder or a transferee or transferees. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by written instrument of transfer duly executed by the Holder of such Note or such holder's attorney duly authorized in writing.       (c) This Note may be transferred or assigned, in whole or in part, by the Holder at any time.  13. Replacement of Note. On receipt by the Borrowers of an affidavit of an authorized representative of the Holder stating the circumstances of the loss, theft, destruction or mutilation of this Note (and in the case of any such mutilation, on surrender and cancellation of such Note), the Borrowers, at their expense, will promptly execute and deliver, in lieu thereof, a new Note of like tenor. If required by the Borrowers, such Holder must provide indemnity sufficient in the reasonable judgment of the Borrowers to protect the Borrowers from any loss that they may suffer if a lost, stolen or destroyed Note is replaced.  14. Covenants Bind Successors and Assigns. All the covenants, stipulations, promises and agreements in this Note contained by or on behalf of the Borrowers shall bind its successors and assigns, whether so expressed or not.  15. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier (with receipt confirmed), courier service or personal delivery at the addresses specified in Section 11.2 of the Purchase Agreement. All such notices and communications shall be deemed to have been duly given when: delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; if mailed, five Business Days after being deposited in the mail, postage prepaid; or if telecopied, when receipt is acknowledged.  16. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY, CONSTRUED IN ACCORDANCE WITH, AND ENFORCED UNDER, THE LAW OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS OR INSTRUMENTS ENTERED INTO AND PERFORMED ENTIRELY WITHIN SUCH STATE.                                         9   17. Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. Any term or provision of this Note or any other Transaction Document to the contrary notwithstanding, the maximum aggregate amount of the obligations for which each Borrower shall be liable shall not exceed the maximum amount for which such Borrower can be liable without rendering this Note, as it relates to such Borrower, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer.  18. Obligations of the Borrowers. All obligations of the Borrowers under this Note shall be joint and several.                      [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]                                          10   19. Headings. The headings in this Note are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.                                       TB WOOD'S INCORPORATED                                       By: ________________________________________                                           Name:                                           Title:                                      PLANT ENGINEERING CONSULTANTS, LLC                                       By: ________________________________________                                           Name:                                           Title:                                      TB WOOD'S ENTERPRISES, INC.                                       By: ________________________________________                                           Name:                                           Title:     EX-10 3 ex10-37.txt EX10-37.TXT                                                                       EXHIBIT 10.37                         SENIOR SUBORDINATED PROMISSORY NOTE   THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS   THIS NOTE IS SUBJECT TO THE SUBORDINATION AND INTERCREDITOR AGREEMENT, DATED AS OF OCTOBER 12, 2005, AMONG MANUFACTURERS AND TRADERS TRUST COMPANY, AS THE SENIOR AGENT, AND AEA MEZZANINE FUNDING LLC AND AEA MEZZANINE (UNLEVERAGED) FUND LP, AS SUBORDINATED LENDERS, AND TB WOOD'S INCORPORATED, PLANT ENGINEERING CONSULTANTS, LLC AND TB WOOD'S ENTERPRISES, INC., AS THE BORROWERS, UNDER WHICH THIS NOTE AND THE BORROWERS' OBLIGATIONS HEREUNDER, AS WELL AS ANY LIEN OF SUBORDINATED LENDERS IN ANY PROPERTY SECURING THIS NOTE, ARE SUBORDINATED IN THE MANNER AND TO THE EXTENT SET FORTH THEREIN TO THE PRIOR PAYMENT OF CERTAIN OBLIGATIONS TO THE HOLDERS OF SENIOR INDEBTEDNESS AS DEFINED THEREIN.                                TB WOOD'S INCORPORATED                        PLANT ENGINEERING CONSULTANTS, LLC                            TB WOOD'S ENTERPRISES, INC.                        12% SENIOR SUBORDINATED PROMISSORY NOTE                               DUE OCTOBER 11, 2012    $4,814,913.94                                                 New York, New York                                                                 October 27, 2012       FOR VALUE RECEIVED, the undersigned, 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 (collectively, the "BORROWERS" and individually, a "BORROWER"), hereby jointly and severally promise to pay to the order of AEA Mezzanine (Unleveraged) Fund LP, a Delaware limited partnership, or its registered assigns (the "HOLDER"), the principal sum of FOUR MILLION EIGHT HUNDRED FOURTEEN THOUSAND NINE HUNDRED THIRTEEN AND NINETY FOUR HUNDREDTHS DOLLARS ($4,814,913.94) on October 11, 2012 (the "MATURITY DATE"), with interest thereon from time to time as provided herein.  1. Purchase Agreement. This Senior Subordinated Promissory Note (the "NOTE") is issued by the Borrowers, on the date hereof, pursuant to the Securities Purchase Agreement (the "PURCHASE AGREEMENT"), dated as of October 12, 2005, by and among the Borrowers, AEA Mezzanine Funding LLC, AEA Mezzanine Fund LP, AEA Mezzanine (Unleveraged) Fund LP, TB Wood's Corporation, and T.B. Wood's Canada Ltd., and is subject to the terms thereof. This Note, together with all other promissory notes issued under the Purchase Agreement, and all promissory notes issued pursuant to paragraph 12 hereof or thereof are hereinafter referred to as the "NOTES." The Holder is entitled to the benefits of this Note and the Purchase Agreement, as it relates to the Note, and may enforce the agreements of the Borrowers contained herein and therein and exercise the remedies provided for hereby and thereby or otherwise available in respect hereto and thereto. Capitalized terms used herein without definition are used herein with the meanings ascribed to such terms in the Purchase Agreement.  2. Interest.  (a) Basic Interest. The Borrowers, jointly and severally, promise to pay interest on the principal amount of this Note at the rate of 12% per annum (the "INTEREST RATE"). Interest on this Note shall accrue from and including the date of issuance through and until repayment of the principal amount of this Note and payment of all interest in full, and shall be computed on the basis of a 360-day year of twelve 30-day months. Interest shall be paid quarterly on each March 31, June 30, September 30 and December 31 of each year or, if any such date shall not be a Business Day, on the next succeeding Business Day to occur after such date (each date upon which interest shall be so payable, an "INTEREST PAYMENT DATE"), beginning on December 31, 2005, by wire transfer of immediately available funds to an account at a bank designated in writing by the Holder. In the absence of any such written designation, any such interest payment shall be deemed made on the date a check in the applicable amount payable to the order of Holder is received by the Holder at its last address as reflected in Borrowers' note register; if no such address appears, then to such Holder in care of the last address in such note register of any predecessor holder of this Note (or its predecessor).                                         2        (b) Default Rate of Interest. Notwithstanding the foregoing provisions of this Section 2, but subject to applicable law, any overdue principal of and overdue interest on this Note shall bear interest, payable on demand in immediately available funds, for each day from the date payment thereof was due to the date of actual payment, at a rate equal to the sum of (i) the Interest Rate and (ii) an additional 2% per annum, and, upon and during the occurrence of an Event of Default (as hereinafter defined), this Note shall bear interest, from the date of the occurrence of such Event of Default until such Event of Default is cured or waived, payable on demand in immediately available funds, at a rate equal to the sum of (i) the Interest Rate and (ii) an additional 2% per annum. Subject to applicable law, any interest that shall accrue on overdue interest on this Note as provided in the preceding sentence and shall not have been paid in full on or before the next Interest Payment Date to occur after the date on which the overdue interest became due and payable shall itself be deemed to be overdue interest on this Note to which the preceding sentence shall apply.       (c) No Usurious Interest. In the event that any interest rate(s) or premiums provided for in this Section 2 shall be determined to be unlawful, such interest rate(s) shall be computed at the highest rate permitted by applicable law. Any payment by the Borrowers of any interest amount in excess of that permitted by law shall be considered a mistake, with the excess being applied to the principal amount of this Note without prepayment premium or penalty; if no such principal amount is outstanding, such excess shall be returned to Borrowers.  3. Mandatory Prepayment/Redemption.       (a) Upon the occurrence of a Change of Control (as hereinafter defined), the Borrowers shall, at the election of the Holder, prepay the outstanding principal amount of this Note at a redemption price equal to 101% of the outstanding principal amount of this Note (the "CHANGE OF CONTROL REDEMPTION PRICE"), together with interest accrued and unpaid thereon through the date of such prepayment and reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment. The Borrowers shall give written notice, in the manner specified in Section 15 hereof, to the Holder of the occurrence of a Change of Control at least fifteen (15) Business Days prior to the occurrence thereof; provided, however, that, if the Change of Control resulted from the acquisition of legal or beneficial ownership of 25% or more of the voting Equity Interests of Parent as contemplated by Section 3(b)(ii)(A) below by any executor, administrator, testamentary trustee, heir, legatee, beneficiary and/or distributee (collectively, "BENEFICIARIES") of Thomas C. Foley following his death, such notice shall be given within five (5) Business Days following his death. If the Holder makes the election pursuant to this Section 3(a), Borrowers shall pay the Change of Control Redemption Price, together with interest accrued and unpaid thereon and the expenses contemplated above, on the date that such Change of Control occurs; provided, however, that, if the Change of Control resulted from the acquisition of legal or beneficial ownership of 25% or more of the voting Equity Interests of Parent as contemplated by Section 3(b)(ii)(A) below by any Beneficiary of Thomas C. Foley following his death, the Borrower shall pay the Change of Control Redemption Price, together with interest accrued and unpaid thereon and the expenses contemplated above, on the date that is the earlier of (i) 270 days following Holder's election pursuant to this Section 3(a) and (ii) the date the outstanding principal of and all accrued interest on this Note is accelerated pursuant to Section 6(b). Until such payment is made in full, interest shall accrue and be paid in accordance with the terms of Section 2 and this Note shall be deemed outstanding for all purposes.                                         3        (b) The term "CHANGE OF CONTROL" shall mean the occurrence of any of the following (i) any event or condition as a result of which the power, direct or indirect (A) to vote 100% of the Equity Interests having ordinary voting power for the election of directors (or the individuals performing similar functions) of any direct or indirect Subsidiary of Parent (other than TB Wood's (India) Private Limited) or (B) to direct or cause the direction of the management and policies (by contract or otherwise) of any direct or indirect Subsidiary of Parent (other than TB Wood's (India) Private Limited) is not held legally and beneficially by Parent, (ii) (A) any Person (other than Thomas C. Foley or any Person controlled by Thomas C. Foley, the term "control" having the same meaning as such term in the definition of "Affiliate") or group of Persons (within the meaning of Section 13(d) or Section 14(a) of the Exchange Act) shall have acquired legal or beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Commission under the Exchange Act) of 25% or more of the voting Equity Interests of Parent, or (B) within a period of twelve (12) consecutive months, individuals who were directors of Parent on the first day of such period shall cease to constitute a majority of the board of directors of Parent (other than those directors who have been previously approved in the ordinary course by the directors then in office), (iii) the combination of Parent, with another Person, as a result of which (A) any Person (other than Thomas C. Foley or any Person controlled (as defined above) by Thomas C. Foley) or group of Persons (as defined above) becomes the legal or beneficial ownership (as defined above) of 25% or more of the voting Equity Interests of the combined entity or (B) the directors of the Parent constitute less than a majority of the Board of Directors of the combined entity, (iv) the sale or other disposition of all or substantially all of the assets of any of the Borrowers or of one or more of their respective Subsidiaries that, individually or in the aggregate, constitute a material part of the business, operations or assets of the TBW Companies, taken as a whole, and (v) the liquidation, dissolution or winding up of any of the TBW Companies that, individually or in the aggregate, constitute a material part of the business, operations or assets of the TBW Companies, taken as a whole.                                          4   4. Optional Prepayment/Redemption.       (a) Upon notice given to the Holder as provided in Section 4(b), the Borrowers, at their option, may prepay all or any portion of the principal amount of this Note at any time after October 31, 2007, by paying to the Holder an amount equal to the redemption prices (the "OPTIONAL REDEMPTION PRICES") set forth below (expressed as a percentage of the outstanding principal amount being prepaid, from time to time) together with interest accrued and unpaid thereon to the date fixed for such prepayment, and reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment; provided, however, each prepayment of less than the full outstanding balance of the principal amount of this Note shall be in an aggregate principal amount of this Note of $1,000,000 or a whole multiple thereof, and provided, further, that unless this Note and all Notes shall be paid in full, the aggregate principal balance of the Notes outstanding at any time shall be at least $5,000,000. If such prepayment is to be made by the Borrowers to the Holder during any of the periods set forth below, the Optional Redemption Price shall be determined based upon the percentage of the outstanding principal amount of this Note and which corresponds to the period in question:                 Period                                Optional Redemption Price - ------------------------------------               -------------------------   November 1, 2007 to October 31, 2008                          106% November 1, 2008 to October 31, 2009                          104% November 1, 2009 to October 31, 2010                          102% November 1, 2010 and thereafter                               100%        (b) The Borrowers shall give written notice of prepayment of this Note, or any portion thereof, pursuant to this Section 4 not less than 15 nor more than 60 days prior to the date fixed for such prepayment. Such notice of prepayment pursuant to this Section 4 shall be given in the manner specified in Section 15 hereof. Upon notice of prepayment pursuant to this Section 4 being given by the Borrowers, the Borrowers, jointly and severally, covenant and agree that they will prepay, on the date therein fixed for prepayment, this Note or the portion hereof so called for prepayment, at the applicable Optional Redemption Price set forth above with respect to the outstanding principal amount of this Note or the portion thereof so called for prepayment, together with interest accrued and unpaid thereon to the date fixed for such prepayment, and the costs and expenses referred to in Section 4(a).       (c) All optional prepayments under this Section 4 shall include payment of accrued interest on the principal amount of this Note so prepaid and shall be applied first to all costs, expenses and indemnities payable under the Purchase Agreement, then to payment of default interest, if any, then to payment of the basic interest, and thereafter to principal.  5. Amendment. This Note may not be amended, modified, supplemented or terminated orally.  6. Defaults and Remedies.       (a) Events of Default. An "EVENT OF DEFAULT" shall occur if:                                         5             (i) the Borrowers shall default in the payment of the principal or premium of this Note, when and as the same shall become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise; or            (ii) the Borrowers shall default in the payment of any installment of interest according to its terms, when and as the same shall become due and payable and such default shall continue for a period of 5 days, and such failure shall continue for a period of 5 days after request for payment thereof by the Holder; or            (iii) the TBW Parties shall default in the due observance or performance of any covenant to be observed or performed pursuant to Section 8.1(a), 8.1(b), 8.1(c), 8.1(d), 8.1(g), 8.1(j), 8.2(a), 8.3, 8.10, 8.11 or Article 9 of the Purchase Agreement; or            (iv) any of the TBW Parties shall default in the due observance or performance of any other covenant, condition or agreement on the part of such TBW Party to be observed or performed pursuant to the terms hereof or pursuant to the terms of the Purchase Agreement or any of the other Transaction Documents (other than those referred to in clauses (i), (ii) or (iii) of this Section 6(a)), and such default shall continue for 30 days (or, in the case of a breach under Section 8.1(e), 8.1(f), 8.1(h), 8.1(i), 8.1(k), 8.1(l), 8.1(m) or 8.1(n), 15 days) default of after the earliest of (A) the date any of the TBW Parties is required pursuant to any of the Transaction Documents or otherwise to give notice thereof to the Holder (whether or not such notice is actually given) or (B) the date of written notice thereof, specifying such default and, if such default is capable of being remedied, requesting that the same be remedied, shall have been given to the Borrowers by the Holder; or            (v) any representation, warranty or certification made by or on behalf of any of the TBW Parties in the Purchase Agreement, this Note, any of the Transaction Documents or in any certificate or other document delivered pursuant hereto or thereto shall have been incorrect when made; or            (vi) any event or condition shall occur that results in (A) the acceleration of the maturity of any Indebtedness of any of the TBW Parties, or (B) a default of any Indebtedness of any of the TBW Companies, which continues beyond any applicable period of cure and which would permit the holder to accelerate (automatically or upon notice and declaration) such Indebtedness, in either case in a principal amount aggregating $500,000 or more; or            (vii) any uninsured damage to or loss, theft or destruction of any assets of any of the TBW Companies shall occur that is in excess of $500,000; or                                         6             (viii) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (a) relief in respect of any of the TBW Companies, or of a substantial part of its property or assets, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (b) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any of the TBW Companies, or for a substantial part of its property or assets, or (c) the winding up or liquidation of any of the TBW Companies; and such proceeding or petition shall continue undismissed for 60 days, or an order or decree approving or ordering any of the foregoing shall be entered; or            (ix) any of the TBW Companies shall (a) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (b) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in paragraph (viii) of this Section 6(a), (c) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any of the TBW Companies, or for a substantial part of its property or assets, (d) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (e) make a general assignment for the benefit of creditors, (f) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (g) take any action for the purpose of effecting any of the foregoing;            (x) one or more judgments for the payment of money in an aggregate amount in excess of $500,000 (to the extent not covered by insurance) shall be rendered against any of the TBW Companies and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of any of the TBW Companies to enforce any such judgment; or            (xi) an event or condition shall occur or exist which results in a material adverse effect on the Condition of the Companies.       (b) Acceleration. If an Event of Default occurs under Section 6(a)(viii) or (ix), then the outstanding principal of, all accrued interest on this Note, and any other amounts due under this Note shall automatically become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived. If any other Event of Default occurs and is continuing the Holder, by written notice to the Borrowers, may declare the principal of, accrued interest on this Note, and any other amounts due under this Note to be immediately due and payable. Upon such declaration, such principal, interest and other amounts shall become immediately due and payable. The Holder may rescind an acceleration and its consequences if all existing Events of Default have been cured or waived, except nonpayment of principal, interest or other amounts that have become due solely because of the acceleration, and if the rescission would not conflict with any judgment or decree. Any notice or rescission shall be given in the manner specified in Section 15 of this Note. Notwithstanding any provision in this Note to the contrary and to the extent permitted by applicable law, if an Event of Default occurs by reason of any willful action (or inaction) taken (or not taken) by or on behalf of any of the TBW Companies with the intention of avoiding payment of the Optional Redemption Price that the Borrowers would have had to pay if the Borrowers then had elected to optionally redeem this Note pursuant to Section 4 of this Note, then upon acceleration of this Note, an equivalent Optional Redemption Price shall also become and be immediately due and payable; provided that if such acceleration occurs before November 1, 2007, the Optional Redemption Price shall be deemed to be 112% of the then outstanding principal amount of this Note.                                         7   7. Subordination. This Note shall at all times be wholly subordinate and junior in right of payment to all Senior Indebtedness to the extent and in the manner provided in the Subordination Agreement.  8. Use of Proceeds. The Borrowers shall use the principal amount of this Note in accordance with the permitted uses described in Section 8.10 of the Purchase Agreement.  9. Suits for Enforcement.       (a) Upon the occurrence of any one or more Events of Default, the Holder of this Note may proceed to protect and enforce its rights hereunder by suit in equity, action at law or by other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in the Purchase Agreement or this Note or in aid of the exercise of any power granted in the Purchase Agreement or this Note, or may proceed to enforce the payment of this Note, or to enforce any other legal or equitable right of the Holders of this Note.       (b) In case of any default under this Note, the Borrowers will pay to the Holder such amounts as shall be sufficient to cover the costs and expenses of such Holder due to such default, as provided in Article 7 of the Purchase Agreement.  10. Remedies Cumulative. No remedy herein conferred upon the Holder is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise.  11. Remedies Not Waived. No course of dealing between any of the Borrowers and the Holder or any delay on the part of the Holder in exercising any rights hereunder shall operate as a waiver of any right.  12. Transfer.       (a) The term "HOLDER" as used herein shall also include any transferee of this Note whose name has been recorded by the Borrowers in the Note Register. Each transferee of this Note acknowledges that this Note has not been registered under the Securities Act, and may be transferred only pursuant to an effective registration under the Securities Act or pursuant to an applicable exemption from the registration requirements of the Securities Act.                                         8        (b) The Borrowers shall maintain a register (the "NOTE REGISTER") in its principal offices for the purpose of registering the Note and any transfer or partial transfer thereof, which register shall reflect and identify, at all times, the ownership of record of any interest in the Note. Upon the issuance of this Note, the Borrowers shall record the name and address of the initial purchaser of this Note in the Note Register as the first Holder. Upon surrender for registration of transfer or exchange of this Note at the principal offices of the Borrowers, the Borrowers shall, at their expense, execute and deliver one or more new Notes of like tenor and of denominations of at least $500,000 (except as may be necessary to reflect any principal amount not evenly divisible by $500,000) of a like aggregate principal amount, registered in the name of the Holder or a transferee or transferees. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by written instrument of transfer duly executed by the Holder of such Note or such holder's attorney duly authorized in writing.       (c) This Note may be transferred or assigned, in whole or in part, by the Holder at any time.  13. Replacement of Note. On receipt by the Borrowers of an affidavit of an authorized representative of the Holder stating the circumstances of the loss, theft, destruction or mutilation of this Note (and in the case of any such mutilation, on surrender and cancellation of such Note), the Borrowers, at their expense, will promptly execute and deliver, in lieu thereof, a new Note of like tenor. If required by the Borrowers, such Holder must provide indemnity sufficient in the reasonable judgment of the Borrowers to protect the Borrowers from any loss that they may suffer if a lost, stolen or destroyed Note is replaced.  14. Covenants Bind Successors and Assigns. All the covenants, stipulations, promises and agreements in this Note contained by or on behalf of the Borrowers shall bind its successors and assigns, whether so expressed or not.  15. Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier (with receipt confirmed), courier service or personal delivery at the addresses specified in Section 11.2 of the Purchase Agreement. All such notices and communications shall be deemed to have been duly given when: delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; if mailed, five Business Days after being deposited in the mail, postage prepaid; or if telecopied, when receipt is acknowledged.  16. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY, CONSTRUED IN ACCORDANCE WITH, AND ENFORCED UNDER, THE LAW OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS OR INSTRUMENTS ENTERED INTO AND PERFORMED ENTIRELY WITHIN SUCH STATE.                                         9   17. Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. Any term or provision of this Note or any other Transaction Document to the contrary notwithstanding, the maximum aggregate amount of the obligations for which each Borrower shall be liable shall not exceed the maximum amount for which such Borrower can be liable without rendering this Note, as it relates to such Borrower, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer.  18. Obligations of the Borrowers. All obligations of the Borrowers under this Note shall be joint and several.                    [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]                                          10   19. Headings. The headings in this Note are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.                                       TB WOOD'S INCORPORATED                                       By: ________________________________________                                           Name:                                           Title:                                      PLANT ENGINEERING CONSULTANTS, LLC                                       By: ________________________________________                                           Name:                                           Title:                                      TB WOOD'S ENTERPRISES, INC.                                       By: ________________________________________                                           Name:                                           Title:     EX-10 4 ex10-38.txt EX10-38.TXT                                                                       EXHIBIT 10.38                                         WARRANT                                                                   October 27, 2005    THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.                                                      Warrant to Purchase                                                   118,147                                                   Shares (subject to adjustment)                                                   of Common Stock                                TB WOOD'S CORPORATION                            COMMON STOCK PURCHASE WARRANT                             Void after October 27, 2015        TB Wood's Corporation (the "Company"), a Delaware corporation, hereby certifies that for value received, AEA Mezzanine Fund LP, a Delaware limited partnership, or its successors or assigns (the "Holder"), is entitled to purchase, subject to the terms and conditions hereinafter set forth, an aggregate of 118,147 fully paid and nonassessable shares of Common Stock (as hereinafter defined) of the Company, at an exercise price of $5.30 per share, subject to adjustment as provided herein (the "Purchase Price"), at any time or from time to time beginning on the date hereof and prior to 5:00 p.m., New York City time, on October 27, 2015 (the "Expiration Date").        This Warrant is issued pursuant to the Securities Purchase Agreement (the "Purchase Agreement"), dated as of October 12, 2005, by and among TB Wood's Incorporated, Plant Engineering Consultants, LLC, TB Wood's Enterprises, Inc., AEA Mezzanine Funding LLC, AEA Mezzanine Fund LP, AEA Mezzanine (Unleveraged) Fund LP, Company, and T.B. Wood's Canada Ltd., and is subject to the terms thereof. Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to such terms in the Purchase Agreement. The Holder is entitled to the rights and subject to the obligations contained in the Purchase Agreement, the Co-Sale Agreement and the Registration Rights Agreement relating to this Warrant and the shares of Common Stock issuable upon exercise of this Warrant.         1. Definitions. For the purposes of this Warrant, the following terms shall have the meanings indicated below:       "Applicable Price" shall mean the higher of (a) the Current Market Price per share of Common Stock and (b) the Purchase Price on the relevant date.       "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law or executive order to close.       "Closing Price" shall mean, with respect to each share of Common Stock for any day, (a) the last reported sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case as reported on the principal national securities exchange on which the Common Stock is listed or admitted for trading or (b) if the Common Stock is not listed or admitted for trading on any national securities exchange, the last reported sale price or, in case no such sale takes place on such day, the average of the highest reported bid and the lowest reported asked quotation for the Common Stock, in either case as reported on the Nasdaq or a similar service if Nasdaq is no longer reporting such information.       "Co-Investor Warrants" shall mean all warrants, other than the Warrant, to purchase Common Stock issued pursuant to the Purchase Agreement and any subsequent warrants issued pursuant to the terms of such warrants.       "Common Stock" means the common stock, par value $.01 per share, of the Company, and any class of stock resulting from successive changes or reclassification of such Common Stock.       "Company" has the meaning ascribed to such term in the first paragraph of this Warrant.       "Current Market Price" shall be determined in accordance with Subsection 3(e).       "Exercise Date" has the meaning ascribed to such term in Subsection 2(d).       "Expiration Date" has the meaning ascribed to such term in the first paragraph of this Warrant.       "Holder" has the meaning ascribed to such term in the first paragraph and Section 9 of this Warrant.                                         2        "Issuable Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrant.       "Issued Warrant Shares" means any shares of Common Stock issued upon exercise of the Warrant.       "Nasdaq" shall mean the Automated Quotation System of the National Association of Securities Dealers, Inc.       "Person" shall mean any individual, firm, corporation, limited liability company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity.       "Purchase Agreement" has the meaning ascribed to such term in the second paragraph of this Warrant.       "Purchase Price" has the meaning ascribed to such term in the first paragraph of this Warrant, as adjusted in accordance with the terms of Section 3.       "Warrant" shall mean this Warrant and any subsequent Warrant issued pursuant to the terms of this Warrant.       "Warrant Register" has the meaning ascribed to such term in Subsection 9(c).       2. Exercise of Warrant.            (a) Exercise. This Warrant may be exercised, in whole or in part, at any time or from time to time during the period beginning on the date hereof and ending on the Expiration Date, by surrendering to the Company at its principal office this Warrant, with the form of Election to Purchase Shares (the "Election to Purchase Shares") attached hereto as Exhibit A duly executed by the Holder and accompanied by payment of the Purchase Price for the number of shares of Common Stock specified in such form.            (b) Delivery of Shares; Payment of Purchase Price. (i) As soon as practicable after surrender of this Warrant and receipt of payment, the Company shall promptly issue and deliver to the Holder a certificate or certificates for the number of shares of Common Stock set forth in the Election to Purchase Shares, in such name or names as may be designated by such Holder, along with a check for the amount of cash to be paid in lieu of issuance of fractional shares, if any. Payment of the Purchase Price may be made as follows (or by any combination of the following): (A) in United States currency by cash or delivery of a certified check, bank draft or postal or express money order payable to the order of the Company, (B) by assigning to the Company all or any part of the unpaid principal amount of the Note held by the Holder in a principal amount equal to the Purchase Price, or (C) by surrender of a number of shares of Common Stock held by the Holder equal to the quotient obtained by dividing (x) the aggregate Purchase Price payable with respect to the portion of this Warrant then being exercised by (y) the Current Market Price per share of Common Stock on the Exercise Date.                                         3             (ii) Alternative Cashless Exercise. Notwithstanding any provision herein to the contrary, in lieu of exercising this Warrant as set forth above, the Holder may exercise this Warrant, in whole or in part, by electing to receive that number of shares of Common Stock as determined below by surrendering to the Company at its principal office this Warrant, with the applicable Election to Purchase Shares duly executed by the Holder, in which event the Company shall issue to the Holder the number of shares of Common Stock computed using the following formula:                                 CS = WCS x (MP-PP)                                     ------------                                         MP where:      CS    equals the number of shares of Common Stock to be issued to the Holder      WCS   equals the Issuable Warrant Shares purchasable under the Warrant      MP    equals the Common Stock Current Market Price per share (on the           Exercise Date)      PP    equals the Purchase Price  Following the surrender of this Warrant pursuant to this Section 2(b)(ii), the Company shall promptly issue and deliver to the Holder a certificate or certificates for that number of shares of Common Stock, as calculated above in such name or names as may be designated by the Holder.            (c) Partial Exercise. If this Warrant is exercised for less than all of the shares of Common Stock purchasable under this Warrant, the Company shall cancel this Warrant upon surrender hereof and shall execute and deliver to the Holder a new Warrant of like tenor for the balance of the shares of Common Stock purchasable hereunder.            (d) When Exercise Effective. The exercise of this Warrant shall be deemed to have been effective immediately prior to the close of business on the Business Day on which this Warrant is surrendered to and the Purchase Price is received by the Company as provided in this Section 2 (the "Exercise Date") and the Person in whose name any certificate for shares of Common Stock shall be issuable upon such exercise, as provided in Subsection 2(b), shall be deemed to be the record holder of such shares of Common Stock for all purposes on the Exercise Date.                                         4             (e) Issued Warrant Shares Fully Paid, Nonassessable. The Company shall take all actions necessary to ensure that following exercise of this Warrant in accordance with the provisions of this Section 2, the Issued Warrant Shares issued hereunder shall, without further action by the Holder, be fully paid and nonassessable.            (f) Continued Validity. A Holder of shares of Common Stock issued upon the exercise of this Warrant, in whole or in part, shall continue to be entitled to all of the rights and subject to all of the obligations set forth in Section 9.       3. Adjustment of Purchase Price and Number of Shares. The Purchase Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted from time to time in the following manner upon the occurrence of the following events:            (a) Dividend, Subdivision, Combination or Reclassification of Common Stock. If the Company shall, at any time or from time to time, after October 12, 2005, (i) declare a dividend on the Common Stock payable in shares of its capital stock (including Common Stock), (ii) subdivide the outstanding Common Stock into a larger number of shares of Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares of its Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then in each such case, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date shall be proportionately adjusted so that the Holder of any Warrant exercised after such date shall be entitled to receive, upon payment of the same aggregate amount as would have been payable before such date, the aggregate number and kind of shares of capital stock which, if such Warrant had been exercised immediately prior to such date, such Holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. Any such adjustment shall become effective immediately after the record date of such dividend or the effective date of such subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. If a dividend is declared and such dividend is not paid, the Purchase Price shall again be adjusted to be the Purchase Price and number and kind of shares of capital stock, in effect immediately prior to such record date (giving effect to all adjustments that otherwise would be required to be made pursuant to this Section 3 from and after such record date).                                         5             (b) Issuance of Rights to Purchase Common Stock Below Current Market Price or Purchase Price. If the Company shall, at any time or from time to time, after October 12, 2005, fix a record date for the issuance of rights, options or warrants to all holders of Common Stock entitling them to subscribe for or purchase Common Stock, or securities convertible into or exchangeable for Common Stock at a price per share of Common Stock or having a conversion price per share of Common Stock if a security is convertible into or exchangeable for Common Stock (determined in either such case by dividing (x) the total consideration payable to the Company upon exercise, conversion or exchange of such rights, options, warrants or other securities convertible into or exchangeable for Common Stock by (y) the total number of shares of Common Stock covered by such rights, options, warrants or other securities convertible into or exchangeable for Common Stock) which is lower than either the Current Market Price per share of Common Stock on such record date (or, if an ex-dividend date has been established for such record date, on the day next preceding such ex-dividend date) or the Purchase Price, then, the Purchase Price shall be reduced to the price determined by multiplying the Purchase Price in effect on such record date by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so to be offered (or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at the Applicable Price in effect immediately prior to such record date and the denominator of which shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock to be offered for subscription or purchase (or into which the convertible securities to be so offered are initially convertible). In case such price for subscription or purchase may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be determined in good faith by the Board of Directors of the Company. Any such adjustment shall become effective immediately after the record date for such rights or warrants. Such adjustment shall be made successively whenever such a record date is fixed. If such rights or warrants are not issued, or expire or terminate without the exercise of such rights or warrants and no securities are issued pursuant thereto, the Purchase Price shall be adjusted to the Purchase Price that otherwise would be in effect but for the fact that such record date had been fixed.            (c) Certain Distributions. If the Company shall, at any time or from time to time, after October 12, 2005, fix a record date for the distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness, assets or other property (other than dividends payable in capital stock for which adjustment is made under Subsection 3(a)) or subscription rights, options or warrants (excluding those referred to in Subsection 3(b)), then the Purchase Price shall be reduced to the price determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction (which shall in no event be less than zero), the numerator of which shall be the Current Market Price per share of Common Stock on such record date (or, if an ex-dividend date has been established for such record date, on the next day preceding such ex-dividend date), less the fair market value (as determined in good faith by the Board of Directors of the Company) of the portion of the assets, evidences of indebtedness, other property, subscription rights or warrants so to be distributed applicable to one share of Common Stock and the denominator of which shall be such Current Market Price per share of Common Stock. Any such adjustment shall become effective immediately after the record date for such distribution. Such adjustments shall be made successively whenever such a record date is fixed. In the event that such distribution is not so made, the Purchase Price shall be adjusted to the Purchase Price in effect immediately prior to such record date (giving effect to all adjustments that otherwise would be required to be made pursuant to this Section 3 from and after such record date).                                         6             (d) Issuance of Common Stock Below Current Market Price or Purchase Price.                 (i) If the Company shall, at any time and from time to time, after October 12, 2005, directly or indirectly, sell or issue shares of Common Stock (regardless of whether originally issued or from the Company's treasury), or rights, options, warrants (other than this Warrant or any Co-Investor Warrant) or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock) at a price per share of Common Stock (determined, in the case of rights, options, warrants or convertible or exchangeable securities (collectively, "Securities"), by dividing (x) the total consideration received or receivable by the Company in consideration of the sale or issuance of such Securities, plus the total consideration payable to the Company upon exercise or conversion or exchange thereof, by (y) the total number of shares of Common Stock covered by such Securities) which is lower than either the Current Market Price per share of Common Stock or the Purchase Price in effect immediately prior to such sale or issuance, then, subject to clause 3(d)(ii), the Purchase Price shall be reduced to a price determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such sale or issuance plus the number of shares of Common Stock which the aggregate consideration received (in the case of Securities, determined as provided below) for such sale or issuance would purchase at the Applicable Price in effect immediately prior to such sale or issuance and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such sale or issuance. Such adjustment shall be made successively whenever such sale or issuance is made. For the purposes of such adjustments, the shares of Common Stock which the holder of any such Securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of such sale or issuance of such Securities and the consideration "received" by the Company therefor shall be deemed to be the consideration actually received or receivable by the Company (plus any underwriting discounts or commissions in connection therewith) for such Securities, plus the consideration stated in such Securities to be payable to the Company for the shares of Common Stock covered thereby. If the Company shall sell or issue shares of Common Stock for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the "price per share of Common Stock" and the "consideration" received or receivable by or payable to the Company for purposes of the first sentence and the immediately preceding sentence of this Subsection 3(d)(i), the fair value of such property shall be determined in good faith by the Board of Directors of the Company. Except as provided below, the determination of whether any adjustment is required under this Subsection 3(d)(i) by reason of the sale or issuance of Securities and the amount of such adjustment, if any, shall be made only at the time of such issuance or sale and not at the subsequent time of issuance of shares of Common Stock upon the exercise, conversion or exchange of such Securities.                                         7                  (ii) No adjustment shall be made to the Purchase Price pursuant to clause 3(d)(i) in connection with the (A) issuance of securities in any of the transactions described in Subsections 3(a), (b) and (c) hereof; (B) issuance of shares of Common Stock upon exercise of this Warrant or the Co-Investor Warrants; (C) issuance of shares of Common Stock upon the exercise of Management Options (as defined in the Purchase Agreement) or the grant of Management Options provided that the aggregate number of shares of Common Stock issued and issuable pursuant to all Management Options does not exceed 700,000 shares of Common Stock (subject to appropriate adjustment for the events set forth in Section 3(a)); (D) issuance of up to 25,000 shares of Common Stock (subject to appropriate adjustment for the events set forth in Section 3(a)) per calendar year under the TB Woods' Corporation Employee Stock Purchase Plan, dated March 1, 1997, as such plan is in effect on the date hereof; (E) issuance of shares of Common Stock to the Company's 401(k) plan to fund Company matching contributions pursuant to the Company's 401(k) plan, as in effect on the date hereof, provided that the amount of matching contribution satisfied by the issuance of each such share shall not be less than the then Current Market Price per share of Common Stock; and (F) issuance of up to 370,000 shares of Common Stock (subject to appropriate adjustment for the events set forth in Section 3(a)) pursuant to any acquisition by the Company or any of its Subsidiaries (as defined in the Purchase Agreement) by merger or an exchange transaction, provided that (1) the issuance of such shares of Common Stock shall have been registered under the Securities Act on a Form S-1, S-2, S-3 or S-4 or any successor form, and (2) such shares of Common Stock shall have been issued as consideration in such transaction on terms approved by the Board, and the Board shall have received a fairness opinion from a reputable investment banking firm that such transaction is fair to the Company and its stockholders.                 (iii) In the event of any change in the number of shares of Common Stock deliverable or any change in the consideration payable to the Company upon exercise, conversion or exchange of any Securities (including, without limitation, by operation of the anti-dilution provisions of such Securities other than those anti-dilution provisions contained within the Securities that are substantially similar to the provisions of Section 3(a) hereof), any adjustment to the Purchase Price which was made upon the issuance of such Securities, and any subsequent adjustments based thereon, shall be recomputed to reflect such change and, except as provided below, no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise, conversion or exchange of any such Securities. The Company shall make all necessary adjustments (including successive adjustments if required) to the Purchase Price in accordance with Section 3. Upon the expiration or termination of the right to exercise, convert or exchange any Securities, any adjustment to the Purchase Price which was made upon the issuance of such Securities, and any subsequent adjustments based thereon, shall be recomputed to reflect the issuance of only the number of shares of Common Stock actually issued upon the exercise, conversion or exchange of such Securities and the actual consideration received therefor (as determined in this Section 3).                                         8             (e) Determination of Current Market Price. For the purpose of any computation under Subsections (b), (c) or (d) of this Section 3 or any other provision of this Warrant, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily Closing Prices per share of Common Stock for the 10 consecutive trading days commencing 15 trading days before such date. If on any such date the shares of Common Stock are not listed or admitted for trading on any national securities exchange or quoted by Nasdaq or a similar service, then the Company, on the one hand, and Purchasers on the other hand, shall each promptly appoint as an appraiser an individual who shall be a member of a nationally recognized investment banking firm. Each appraiser shall be instructed to, within 30 days of appointment, determine the Current Market Price per share of Common Stock which shall be deemed to be equal to the fair market value per share of Common Stock as of such date. If the two appraisers are unable to agree on the Current Market Price per share of Common Stock within such 30 day period, then the two appraisers, within 10 days after the end of such 30 day period shall jointly select a third appraiser. The third appraiser shall, within 30 days of its appointment, determine, in good faith, the Current Market Price per share of Common Stock and such determination shall be controlling. If any party fails to appoint an appraiser or if one of the two initial appraisers fails after appointment to submit its appraisal within the required period, the appraisal submitted by the remaining appraiser shall be controlling. The cost of the foregoing appraisals shall be shared one-half by the Company and one-half by Purchasers, provided, however, in the event a third appraiser is utilized and one of the two initial appraisals (but not the other initial appraisal) is greater than or less than the appraisal by such third appraiser by 10% or more, then the cost of all of the foregoing appraisals shall be borne by the party who appointed the appraiser who made such initial appraisal.            (f) De Minimis Adjustments. No adjustment shall be made under this Section 3 if the amount of such adjustment would result in a change in the number of shares issuable under this Warrant of less than one percent (1%), but in such case any adjustment that would otherwise be required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, which together with any adjustment so carried forward, would result in a change of at least one percent (1%). Notwithstanding the provisions of the first sentence of this Subsection 3(f), any adjustment postponed pursuant to this Subsection 3(f) shall be made no later than the earlier of (i) three years from the date of the transaction that would, but for the provisions of the first sentence of this Section 3(f), have required such adjustment, (ii) an Exercise Date or (iii) the Expiration Date.            (g) Adjustments to Other Shares. In the event that at any time, as a result of an adjustment made pursuant to Subsection 3(a), the Holder shall become entitled to receive, upon exercise of this Warrant, any shares of capital stock or other securities of the Company other than shares of Common Stock, the number of such other shares or other securities so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in Subsections 3(a), (b), (c) and (d), inclusive, and the provisions of Sections 2, 5, 6 and 7 with respect to the shares of Common Stock shall apply on like terms to any such other shares or other securities.                                         9             (h) Adjustment of Number of Shares Issuable Upon Exercise. Upon each adjustment of the Purchase Price as a result of the calculations made in Subsections 3(a), (b), (c) or (d), this Warrant shall thereafter evidence the right to receive, at the adjusted Purchase Price, that number of shares of Common Stock (calculated to the nearest one-hundredth) obtained by dividing (x) the product of the aggregate number of shares of Common Stock covered by this Warrant immediately prior to such adjustment and the Purchase Price in effect immediately prior to such adjustment of the Purchase Price by (y) the Purchase Price in effect immediately after such adjustment of the Purchase Price.            (i) Reorganization, Reclassification, Merger and Sale of Assets. If there occurs any capital reorganization or any reclassification of the Common Stock of the Company, the consolidation or merger of the Company with or into another Person (other than a merger or consolidation of the Company in which the Company is the continuing corporation and which does not result in any reclassification or change of outstanding shares of its Common Stock) or the sale or conveyance of all or substantially all of the assets of the Company to another Person at any time after October 12, 2005, then the Holder will thereafter be entitled to receive, upon the exercise of this Warrant in accordance with the terms hereof, the same kind and amounts of securities (including shares of stock) or other assets, or both, which were issuable or distributable to the holders of outstanding Common Stock of the Company upon such reorganization, reclassification, consolidation, merger, sale or conveyance, in respect of that number of shares of Common Stock then deliverable upon the exercise of this Warrant if this Warrant had been exercised immediately prior to such reorganization, reclassification, consolidation, merger, sale or conveyance; and, in any such case, appropriate adjustments (as determined in good faith by the Board of Directors of the Company) shall be made to assure that the provisions hereof (including, without limitation, provisions with respect to changes in, and other adjustments of, the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be practicable, in relation to any securities or other assets thereafter deliverable upon exercise of this Warrant.            (j) Special Adjustment. If, as of November 16, 2005, the Company purchased less than 1,500,000 Tendered Shares, as such term is defined in the Purchase Agreement (the "MAXIMUM TENDERED SHARES"), then this Warrant shall evidence the right to receive an additional number of shares of Common Stock (subject to adjustment as provided herein ab initio) computed using the following formula:                                       AS =  MTS  -  MTS                                           ---                                            A where:                                         10         AS    equals the additional number of shares of Common Stock for which this            Warrant will be exercisable        MTS   equals the number of Maximum Tendered Shares less the aggregate            number of Tendered Shares actually purchased by the Company as of            November 16, 2005       A     equals 0.97284       4. Certificate as to Adjustments. Whenever the Purchase Price or the number of shares of Common Stock issuable, or the securities or other property deliverable, upon the exercise of this Warrant shall be adjusted pursuant to the provisions hereof, the Company shall promptly give written notice thereof to the Holder, in accordance with Section 13, in the form of a certificate signed by the Chairman of the Board, President or one of the Vice Presidents of the Company, and by the Chief Financial Officer, Treasurer or one of the Assistant Treasurers of the Company, stating the adjusted Purchase Price, the number of shares of Common Stock issuable, or the securities or other property deliverable, upon exercise of the Warrant and setting forth in reasonable detail the method of calculation and the facts requiring such adjustment and upon which such calculation is based. Each adjustment shall remain in effect until a subsequent adjustment is required.       5. Fractional Shares. Notwithstanding an adjustment pursuant to Section 3(h) in the number of shares of Common Stock covered by this Warrant or any other provision of this Warrant, the Company shall not be required to issue fractions of shares upon exercise of this Warrant or to distribute certificates which evidence fractional shares. In lieu of fractional shares, the Company may make payment to the Holder, at the time of exercise of this Warrant as herein provided, of an amount in cash equal to such fraction multiplied by the greater of the Current Market Price of a share of Common Stock on the Exercise Date and the Purchase Price.       6. Notice of Proposed Actions. In case the Company shall propose at any time or from time to time (a) to declare or pay any dividend payable in stock of any class to the holders of Common Stock or to make any other distribution to the holders of Common Stock (other than a regularly scheduled cash dividend), (b) to offer to the holders of Common Stock rights or warrants to subscribe for or to purchase any additional shares of Common Stock or shares of stock of any class or any other securities, rights, warrants or options, (c) to effect any reclassification of its Common Stock, (d) to effect any consolidation, merger or sale, transfer or other disposition of all or substantially all of the property, assets or business of the Company which would, if consummated, adjust the Purchase Price or the securities issuable upon exercise of the Warrants, (e) to effect the liquidation, dissolution or winding up of the Company, or (f) to take any other action that would require a vote of the Company's stockholders, then, in each such case, the Company shall give to the Holder, in accordance with Section 13, a written notice of such proposed action, which shall specify (i) the record date for the purposes of such stock dividend, distribution of rights or warrants or vote of the stockholders of the Company, or if a record is not to be taken, the date as of which the holders of shares of Common Stock of record to be entitled to such dividend, distribution of rights or warrants, or vote is to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, transfer, disposition, liquidation, dissolution or winding up is expected to become effective, and such notice shall be so given as promptly as possible but in any event at least ten (10) Business Days prior to the applicable record, determination or effective date specified in such notice.                                         11        7. No Dilution or Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will at all times reserve and keep available the maximum number of its authorized shares of Common Stock, free from all preemptive rights therein, which will be sufficient to permit the full exercise of this Warrant, and (c) will take all such action as may be necessary or appropriate in order that all shares of Common Stock as may be issued pursuant to the exercise of this Warrant will, upon issuance, be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof.       8. Replacement of Warrants. On receipt by the Company of an affidavit of an authorized representative of the Holder stating the circumstances of the loss, theft, destruction or mutilation of this Warrant (and in the case of any such mutilation, on surrender and cancellation of such Warrant), the Company at its expense will promptly execute and deliver, in lieu thereof, a new Warrant of like tenor which shall be exercisable for a like number of shares of Common Stock. If required by the Company, such Holder must provide an indemnity bond or other indemnity sufficient in the judgment of the Company to protect the Company from any loss which it may suffer if a lost, stolen or destroyed Warrant is replaced.       9. Restrictions on Transfer.            (a) Subject to the provisions of this Section 9, this Warrant may be transferred or assigned, in whole or in part, by the Holder at any time, and from time to time. The term "Holder" as used herein shall also include any transferee of this Warrant whose name has been recorded by the Company in the Warrant Register (as hereinafter defined). Each transferee of the Warrant or the Common Stock issuable upon the exercise of the Warrant acknowledges that the Warrant or the Common Stock issuable upon the exercise of the Warrant has not been registered under the Securities Act and may be transferred only pursuant to an effective registration under the Securities Act or pursuant to an applicable exemption from the registration requirements of the Securities Act.                                         12             (b) With respect to a transfer that should occur prior to the time that the Warrant or the Common Stock issuable upon the exercise thereof is registered under the Securities Act, such Holder shall request an opinion of counsel (which shall be rendered by counsel reasonably acceptable to the Company) that the proposed transfer may be effected without registration or qualification under any Federal or state securities or blue sky law. Counsel shall, as promptly as practicable, notify the Company and the Holder of such opinion and of the terms and conditions, if any, to be observed in such transfer, whereupon the Holder shall be entitled to transfer this Warrant or such shares of Common Stock (or portion thereof), subject to any other provisions and limitations of this Warrant. In the event this Warrant shall be exercised as an incident to such transfer, such exercise shall relate back and for all purposes of this Warrant be deemed to have occurred as of the date of such notice regardless of delays incurred by reason of the provisions of this Section 9 which may result in the actual exercise on any later date.            (c) The Company shall maintain a register (the "Warrant Register") in its principal office for the purpose of registering the Warrant and any transfer thereof, which register shall reflect and identify, at all times, the ownership of any interest in the Warrant. Upon the issuance of this Warrant, the Company shall record the name of the initial purchaser of this Warrant in the Warrant Register as the first Holder. Upon surrender for registration of transfer or exchange of this Warrant together with a properly executed Form of Assignment attached hereto as Exhibit B at the principal office of the Company, the Company shall, at its expense, execute and deliver one or more new Warrants of like tenor which shall be exercisable for a like aggregate number of shares of Common Stock, registered in the name of the Holder or a transferee or transferees.       10. No Rights or Liability as a Stockholder. This Warrant does not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company. No provisions hereof, in the absence of affirmative action by the Holder hereof to purchase Common Stock, and no enumeration herein of the rights or privileges of the Holder shall give rise to any liability of such Holder as a stockholder of the Company.       11. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder hereof for any issue or transfer tax, or other incidental expense, in respect of the issuance or delivery of such certificates or the securities represented thereby, all of which taxes and expenses shall be paid by the Company.       12. Amendment or Waiver. This Warrant and any term hereof may be amended, waived, discharged or terminated only by and with the written consent of the Company and the Holder.       13. Notices. Any notice or other communication (or delivery) required or permitted hereunder shall be made in writing and shall be by registered mail, return receipt requested, telecopier, courier service or personal delivery to the Company at its principal office as specified in Section 11.2 of the Purchase Agreement and to the Holder at its address as it appears in the Warrant Register. All such notices and communications (and deliveries) shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied.                                         13        14. Certain Remedies. The Holder shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Warrant and to enforce specifically the terms and provisions of this Warrant in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which such Holder may be entitled at law or in equity.       15. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED IN ACCORDANCE WITH, AND ENFORCED UNDER, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS OR INSTRUMENTS ENTERED INTO AND PERFORMED ENTIRELY WITHIN SUCH STATE.       16. Headings. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.                      [Remainder of Page Intentionally Left Blank]                                          14                                       TB WOOD'S CORPORATION                                       By:                                           -------------------------------------                                           Name:                                           Title:                                [SIGNATURE PAGE TO WARRANT]                                                             Exhibit A to Common                                                         Stock Purchase Warrant                                                         ------------------------                                      [FORM OF]                             ELECTION TO PURCHASE SHARES       The undersigned hereby irrevocably elects to exercise the Warrant to purchase _____ shares of Common Stock, par value $.01 per share ("Common Stock"), of TB Wood's Corporation (the "Company") and hereby [makes payment of $_______ therefor] [or] [makes payment therefor by assignment to the Company pursuant to Section 2(b)(i)(B) of the Warrant of $_____________ aggregate principal amount of Note (as defined in the Warrant)] [or] [makes payment therefore by surrendering pursuant to Section 2(b)(i)(C) _____ shares of Common Stock of the Company] [or] [makes payment therefor by cancellation pursuant to Section 2(b)(ii) of a portion of the Warrant with respect to _________ shares of Common Stock]. The undersigned hereby requests that certificates for such shares be issued and delivered as follows:   ISSUE TO:_______________________________________________________________________                                      (NAME)  ________________________________________________________________________________                           (ADDRESS, INCLUDING ZIP CODE)  ________________________________________________________________________________                   (SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)  DELIVER TO:_____________________________________________________________________                                      (NAME)                            (ADDRESS, INCLUDING ZIP CODE)       If the number of shares of Common Stock purchased hereby is less than the number of shares of Common Stock covered by the Warrant, the undersigned requests that a new Warrant representing the number of shares of Common Stock not purchased be issued and delivered as follows:  ISSUE TO:_______________________________________________________________________                                 (NAME OF HOLDER)  ________________________________________________________________________________                           (ADDRESS, INCLUDING ZIP CODE)  DELIVER TO:_____________________________________________________________________                                 (NAME OF HOLDER)  ________________________________________________________________________________                           (ADDRESS, INCLUDING ZIP CODE)  Dated:______________________________      [NAME OF HOLDER]                                            By:  _________________________________                                                Name:                                                Title: _________________________ 1   Name of Holder must conform in all respects to name of Holder as specified     on the face of the Warrant.                                                                 Exhibit B to Common                                                           Stock Purchase Warrant                                 [FORM OF] ASSIGNMENT        FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto the Assignee named below all of the rights of the undersigned to purchase Common Stock, par value $.01 per share ("Common Stock"), of TB Wood's Corporation represented by the Warrant, with respect to the number of shares of Common Stock set forth below:   Name of Assignee      Address        No. of Shares           and does hereby irrevocably constitute and appoint ____________________________ Attorney to make such transfer on the books of TB Wood's Corporation maintained for that purpose, with full power of substitution in the premises.    Dated:______________________________      [NAME OF HOLDER1]                                            By:  _________________________________                                                Name:                                                Title:    _________________________ 1   Name of Holder must conform in all respects to name of Holder as specified     on the face of the Warrant.     EX-10 5 ex10-39.txt EX10-39.TXT                                                                       EXHIBIT 10.39                                       WARRANT                                                                   October 27, 2005    THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.                                                      Warrant to Purchase                                                   55,853                                                   Shares (subject to adjustment)                                                   of Common Stock                                TB WOOD'S CORPORATION                            COMMON STOCK PURCHASE WARRANT                             Void after October 27, 2015        TB Wood's Corporation (the "Company"), a Delaware corporation, hereby certifies that for value received, AEA Mezzanine (Unleveraged) Fund LP, a Delaware limited partnership, or its successors or assigns (the "Holder"), is entitled to purchase, subject to the terms and conditions hereinafter set forth, an aggregate of 55,853 fully paid and nonassessable shares of Common Stock (as hereinafter defined) of the Company, at an exercise price of $5.30 per share, subject to adjustment as provided herein (the "Purchase Price"), at any time or from time to time beginning on the date hereof and prior to 5:00 p.m., New York City time, on October 27, 2015 (the "Expiration Date").        This Warrant is issued pursuant to the Securities Purchase Agreement (the "Purchase Agreement"), dated as of October 12, 2005, by and among TB Wood's Incorporated, Plant Engineering Consultants, LLC, TB Wood's Enterprises, Inc., AEA Mezzanine Funding LLC, AEA Mezzanine Fund LP, AEA Mezzanine (Unleveraged) Fund LP, Company, and T.B. Wood's Canada Ltd., and is subject to the terms thereof. Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to such terms in the Purchase Agreement. The Holder is entitled to the rights and subject to the obligations contained in the Purchase Agreement, the Co-Sale Agreement and the Registration Rights Agreement relating to this Warrant and the shares of Common Stock issuable upon exercise of this Warrant.         1. Definitions. For the purposes of this Warrant, the following terms shall have the meanings indicated below:       "Applicable Price" shall mean the higher of (a) the Current Market Price per share of Common Stock and (b) the Purchase Price on the relevant date.       "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law or executive order to close.       "Closing Price" shall mean, with respect to each share of Common Stock for any day, (a) the last reported sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case as reported on the principal national securities exchange on which the Common Stock is listed or admitted for trading or (b) if the Common Stock is not listed or admitted for trading on any national securities exchange, the last reported sale price or, in case no such sale takes place on such day, the average of the highest reported bid and the lowest reported asked quotation for the Common Stock, in either case as reported on the Nasdaq or a similar service if Nasdaq is no longer reporting such information.       "Co-Investor Warrants" shall mean all warrants, other than the Warrant, to purchase Common Stock issued pursuant to the Purchase Agreement and any subsequent warrants issued pursuant to the terms of such warrants.       "Common Stock" means the common stock, par value $.01 per share, of the Company, and any class of stock resulting from successive changes or reclassification of such Common Stock.       "Company" has the meaning ascribed to such term in the first paragraph of this Warrant.       "Current Market Price" shall be determined in accordance with Subsection 3(e).       "Exercise Date" has the meaning ascribed to such term in Subsection 2(d).       "Expiration Date" has the meaning ascribed to such term in the first paragraph of this Warrant.                                         2        "Holder" has the meaning ascribed to such term in the first paragraph and Section 9 of this Warrant.       "Issuable Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrant.       "Issued Warrant Shares" means any shares of Common Stock issued upon exercise of the Warrant.       "Nasdaq" shall mean the Automated Quotation System of the National Association of Securities Dealers, Inc.       "Person" shall mean any individual, firm, corporation, limited liability company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity.       "Purchase Agreement" has the meaning ascribed to such term in the second paragraph of this Warrant.       "Purchase Price" has the meaning ascribed to such term in the first paragraph of this Warrant, as adjusted in accordance with the terms of Section 3.       "Warrant" shall mean this Warrant and any subsequent Warrant issued pursuant to the terms of this Warrant.       "Warrant Register" has the meaning ascribed to such term in Subsection 9(c).       2. Exercise of Warrant.            (a) Exercise. This Warrant may be exercised, in whole or in part, at any time or from time to time during the period beginning on the date hereof and ending on the Expiration Date, by surrendering to the Company at its principal office this Warrant, with the form of Election to Purchase Shares (the "Election to Purchase Shares") attached hereto as Exhibit A duly executed by the Holder and accompanied by payment of the Purchase Price for the number of shares of Common Stock specified in such form.                                         3             (b) Delivery of Shares; Payment of Purchase Price. (i) As soon as practicable after surrender of this Warrant and receipt of payment, the Company shall promptly issue and deliver to the Holder a certificate or certificates for the number of shares of Common Stock set forth in the Election to Purchase Shares, in such name or names as may be designated by such Holder, along with a check for the amount of cash to be paid in lieu of issuance of fractional shares, if any. Payment of the Purchase Price may be made as follows (or by any combination of the following): (A) in United States currency by cash or delivery of a certified check, bank draft or postal or express money order payable to the order of the Company, (B) by assigning to the Company all or any part of the unpaid principal amount of the Note held by the Holder in a principal amount equal to the Purchase Price, or (C) by surrender of a number of shares of Common Stock held by the Holder equal to the quotient obtained by dividing (x) the aggregate Purchase Price payable with respect to the portion of this Warrant then being exercised by (y) the Current Market Price per share of Common Stock on the Exercise Date.                    (ii) Alternative Cashless Exercise. Notwithstanding any provision herein to the contrary, in lieu of exercising this Warrant as set forth above, the Holder may exercise this Warrant, in whole or in part, by electing to receive that number of shares of Common Stock as determined below by surrendering to the Company at its principal office this Warrant, with the applicable Election to Purchase Shares duly executed by the Holder, in which event the Company shall issue to the Holder the number of shares of Common Stock computed using the following formula:                                  CS = WCS x (MP-PP)                                     -------------                                          MP  where:       CS     equals the number of shares of Common Stock to be issued to the             Holder       WCS    equals the Issuable Warrant Shares purchasable under the Warrant       MP     equals the Common Stock Current Market Price per share (on the             Exercise Date)       PP     equals the Purchase Price  Following the surrender of this Warrant pursuant to this Section 2(b)(ii), the Company shall promptly issue and deliver to the Holder a certificate or certificates for that number of shares of Common Stock, as calculated above in such name or names as may be designated by the Holder.            (c) Partial Exercise. If this Warrant is exercised for less than all of the shares of Common Stock purchasable under this Warrant, the Company shall cancel this Warrant upon surrender hereof and shall execute and deliver to the Holder a new Warrant of like tenor for the balance of the shares of Common Stock purchasable hereunder.            (d) When Exercise Effective. The exercise of this Warrant shall be deemed to have been effective immediately prior to the close of business on the Business Day on which this Warrant is surrendered to and the Purchase Price is received by the Company as provided in this Section 2 (the "Exercise Date") and the Person in whose name any certificate for shares of Common Stock shall be issuable upon such exercise, as provided in Subsection 2(b), shall be deemed to be the record holder of such shares of Common Stock for all purposes on the Exercise Date.                                         4             (e) Issued Warrant Shares Fully Paid, Nonassessable. The Company shall take all actions necessary to ensure that following exercise of this Warrant in accordance with the provisions of this Section 2, the Issued Warrant Shares issued hereunder shall, without further action by the Holder, be fully paid and nonassessable.            (f) Continued Validity. A Holder of shares of Common Stock issued upon the exercise of this Warrant, in whole or in part, shall continue to be entitled to all of the rights and subject to all of the obligations set forth in Section 9.       3. Adjustment of Purchase Price and Number of Shares. The Purchase Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted from time to time in the following manner upon the occurrence of the following events:            (a) Dividend, Subdivision, Combination or Reclassification of Common Stock. If the Company shall, at any time or from time to time, after October 12, 2005, (i) declare a dividend on the Common Stock payable in shares of its capital stock (including Common Stock), (ii) subdivide the outstanding Common Stock into a larger number of shares of Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares of its Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then in each such case, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date shall be proportionately adjusted so that the Holder of any Warrant exercised after such date shall be entitled to receive, upon payment of the same aggregate amount as would have been payable before such date, the aggregate number and kind of shares of capital stock which, if such Warrant had been exercised immediately prior to such date, such Holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. Any such adjustment shall become effective immediately after the record date of such dividend or the effective date of such subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. If a dividend is declared and such dividend is not paid, the Purchase Price shall again be adjusted to be the Purchase Price and number and kind of shares of capital stock, in effect immediately prior to such record date (giving effect to all adjustments that otherwise would be required to be made pursuant to this Section 3 from and after such record date).                                         5             (b) Issuance of Rights to Purchase Common Stock Below Current Market Price or Purchase Price. If the Company shall, at any time or from time to time, after October 12, 2005, fix a record date for the issuance of rights, options or warrants to all holders of Common Stock entitling them to subscribe for or purchase Common Stock, or securities convertible into or exchangeable for Common Stock at a price per share of Common Stock or having a conversion price per share of Common Stock if a security is convertible into or exchangeable for Common Stock (determined in either such case by dividing (x) the total consideration payable to the Company upon exercise, conversion or exchange of such rights, options, warrants or other securities convertible into or exchangeable for Common Stock by (y) the total number of shares of Common Stock covered by such rights, options, warrants or other securities convertible into or exchangeable for Common Stock) which is lower than either the Current Market Price per share of Common Stock on such record date (or, if an ex-dividend date has been established for such record date, on the day next preceding such ex-dividend date) or the Purchase Price, then, the Purchase Price shall be reduced to the price determined by multiplying the Purchase Price in effect on such record date by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so to be offered (or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at the Applicable Price in effect immediately prior to such record date and the denominator of which shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock to be offered for subscription or purchase (or into which the convertible securities to be so offered are initially convertible). In case such price for subscription or purchase may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be determined in good faith by the Board of Directors of the Company. Any such adjustment shall become effective immediately after the record date for such rights or warrants. Such adjustment shall be made successively whenever such a record date is fixed. If such rights or warrants are not issued, or expire or terminate without the exercise of such rights or warrants and no securities are issued pursuant thereto, the Purchase Price shall be adjusted to the Purchase Price that otherwise would be in effect but for the fact that such record date had been fixed.            (c) Certain Distributions. If the Company shall, at any time or from time to time, after October 12, 2005, fix a record date for the distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness, assets or other property (other than dividends payable in capital stock for which adjustment is made under Subsection 3(a)) or subscription rights, options or warrants (excluding those referred to in Subsection 3(b)), then the Purchase Price shall be reduced to the price determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction (which shall in no event be less than zero), the numerator of which shall be the Current Market Price per share of Common Stock on such record date (or, if an ex-dividend date has been established for such record date, on the next day preceding such ex-dividend date), less the fair market value (as determined in good faith by the Board of Directors of the Company) of the portion of the assets, evidences of indebtedness, other property, subscription rights or warrants so to be distributed applicable to one share of Common Stock and the denominator of which shall be such Current Market Price per share of Common Stock. Any such adjustment shall become effective immediately after the record date for such distribution. Such adjustments shall be made successively whenever such a record date is fixed. In the event that such distribution is not so made, the Purchase Price shall be adjusted to the Purchase Price in effect immediately prior to such record date (giving effect to all adjustments that otherwise would be required to be made pursuant to this Section 3 from and after such record date).                                         6             (d) Issuance of Common Stock Below Current Market Price or Purchase Price.                 (i) If the Company shall, at any time and from time to time, after October 12, 2005, directly or indirectly, sell or issue shares of Common Stock (regardless of whether originally issued or from the Company's treasury), or rights, options, warrants (other than this Warrant or any Co-Investor Warrant) or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock) at a price per share of Common Stock (determined, in the case of rights, options, warrants or convertible or exchangeable securities (collectively, "Securities"), by dividing (x) the total consideration received or receivable by the Company in consideration of the sale or issuance of such Securities, plus the total consideration payable to the Company upon exercise or conversion or exchange thereof, by (y) the total number of shares of Common Stock covered by such Securities) which is lower than either the Current Market Price per share of Common Stock or the Purchase Price in effect immediately prior to such sale or issuance, then, subject to clause 3(d)(ii), the Purchase Price shall be reduced to a price determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such sale or issuance plus the number of shares of Common Stock which the aggregate consideration received (in the case of Securities, determined as provided below) for such sale or issuance would purchase at the Applicable Price in effect immediately prior to such sale or issuance and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such sale or issuance. Such adjustment shall be made successively whenever such sale or issuance is made. For the purposes of such adjustments, the shares of Common Stock which the holder of any such Securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of such sale or issuance of such Securities and the consideration "received" by the Company therefor shall be deemed to be the consideration actually received or receivable by the Company (plus any underwriting discounts or commissions in connection therewith) for such Securities, plus the consideration stated in such Securities to be payable to the Company for the shares of Common Stock covered thereby. If the Company shall sell or issue shares of Common Stock for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the "price per share of Common Stock" and the "consideration" received or receivable by or payable to the Company for purposes of the first sentence and the immediately preceding sentence of this Subsection 3(d)(i), the fair value of such property shall be determined in good faith by the Board of Directors of the Company. Except as provided below, the determination of whether any adjustment is required under this Subsection 3(d)(i) by reason of the sale or issuance of Securities and the amount of such adjustment, if any, shall be made only at the time of such issuance or sale and not at the subsequent time of issuance of shares of Common Stock upon the exercise, conversion or exchange of such Securities.                                         7                  (ii) No adjustment shall be made to the Purchase Price pursuant to clause 3(d)(i) in connection with the (A) issuance of securities in any of the transactions described in Subsections 3(a), (b) and (c) hereof; (B) issuance of shares of Common Stock upon exercise of this Warrant or the Co-Investor Warrants; (C) issuance of shares of Common Stock upon the exercise of Management Options (as defined in the Purchase Agreement) or the grant of Management Options provided that the aggregate number of shares of Common Stock issued and issuable pursuant to all Management Options does not exceed 700,000 shares of Common Stock (subject to appropriate adjustment for the events set forth in Section 3(a)); (D) issuance of up to 25,000 shares of Common Stock (subject to appropriate adjustment for the events set forth in Section 3(a)) per calendar year under the TB Woods' Corporation Employee Stock Purchase Plan, dated March 1, 1997, as such plan is in effect on the date hereof; (E) issuance of shares of Common Stock to the Company's 401(k) plan to fund Company matching contributions pursuant to the Company's 401(k) plan, as in effect on the date hereof, provided that the amount of matching contribution satisfied by the issuance of each such share shall not be less than the then Current Market Price per share of Common Stock; and (F) issuance of up to 370,000 shares of Common Stock (subject to appropriate adjustment for the events set forth in Section 3(a)) pursuant to any acquisition by the Company or any of its Subsidiaries (as defined in the Purchase Agreement) by merger or an exchange transaction, provided that (1) the issuance of such shares of Common Stock shall have been registered under the Securities Act on a Form S-1, S-2, S-3 or S-4 or any successor form, and (2) such shares of Common Stock shall have been issued as consideration in such transaction on terms approved by the Board, and the Board shall have received a fairness opinion from a reputable investment banking firm that such transaction is fair to the Company and its stockholders.                 (iii) In the event of any change in the number of shares of Common Stock deliverable or any change in the consideration payable to the Company upon exercise, conversion or exchange of any Securities (including, without limitation, by operation of the anti-dilution provisions of such Securities other than those anti-dilution provisions contained within the Securities that are substantially similar to the provisions of Section 3(a) hereof), any adjustment to the Purchase Price which was made upon the issuance of such Securities, and any subsequent adjustments based thereon, shall be recomputed to reflect such change and, except as provided below, no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise, conversion or exchange of any such Securities. The Company shall make all necessary adjustments (including successive adjustments if required) to the Purchase Price in accordance with Section 3. Upon the expiration or termination of the right to exercise, convert or exchange any Securities, any adjustment to the Purchase Price which was made upon the issuance of such Securities, and any subsequent adjustments based thereon, shall be recomputed to reflect the issuance of only the number of shares of Common Stock actually issued upon the exercise, conversion or exchange of such Securities and the actual consideration received therefor (as determined in this Section 3).                                         8             (e) Determination of Current Market Price. For the purpose of any computation under Subsections (b), (c) or (d) of this Section 3 or any other provision of this Warrant, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily Closing Prices per share of Common Stock for the 10 consecutive trading days commencing 15 trading days before such date. If on any such date the shares of Common Stock are not listed or admitted for trading on any national securities exchange or quoted by Nasdaq or a similar service, then the Company, on the one hand, and Purchasers on the other hand, shall each promptly appoint as an appraiser an individual who shall be a member of a nationally recognized investment banking firm. Each appraiser shall be instructed to, within 30 days of appointment, determine the Current Market Price per share of Common Stock which shall be deemed to be equal to the fair market value per share of Common Stock as of such date. If the two appraisers are unable to agree on the Current Market Price per share of Common Stock within such 30 day period, then the two appraisers, within 10 days after the end of such 30 day period shall jointly select a third appraiser. The third appraiser shall, within 30 days of its appointment, determine, in good faith, the Current Market Price per share of Common Stock and such determination shall be controlling. If any party fails to appoint an appraiser or if one of the two initial appraisers fails after appointment to submit its appraisal within the required period, the appraisal submitted by the remaining appraiser shall be controlling. The cost of the foregoing appraisals shall be shared one-half by the Company and one-half by Purchasers, provided, however, in the event a third appraiser is utilized and one of the two initial appraisals (but not the other initial appraisal) is greater than or less than the appraisal by such third appraiser by 10% or more, then the cost of all of the foregoing appraisals shall be borne by the party who appointed the appraiser who made such initial appraisal.            (f) De Minimis Adjustments. No adjustment shall be made under this Section 3 if the amount of such adjustment would result in a change in the number of shares issuable under this Warrant of less than one percent (1%), but in such case any adjustment that would otherwise be required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, which together with any adjustment so carried forward, would result in a change of at least one percent (1%). Notwithstanding the provisions of the first sentence of this Subsection 3(f), any adjustment postponed pursuant to this Subsection 3(f) shall be made no later than the earlier of (i) three years from the date of the transaction that would, but for the provisions of the first sentence of this Section 3(f), have required such adjustment, (ii) an Exercise Date or (iii) the Expiration Date.            (g) Adjustments to Other Shares. In the event that at any time, as a result of an adjustment made pursuant to Subsection 3(a), the Holder shall become entitled to receive, upon exercise of this Warrant, any shares of capital stock or other securities of the Company other than shares of Common Stock, the number of such other shares or other securities so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in Subsections 3(a), (b), (c) and (d), inclusive, and the provisions of Sections 2, 5, 6 and 7 with respect to the shares of Common Stock shall apply on like terms to any such other shares or other securities.                                         9             (h) Adjustment of Number of Shares Issuable Upon Exercise. Upon each adjustment of the Purchase Price as a result of the calculations made in Subsections 3(a), (b), (c) or (d), this Warrant shall thereafter evidence the right to receive, at the adjusted Purchase Price, that number of shares of Common Stock (calculated to the nearest one-hundredth) obtained by dividing (x) the product of the aggregate number of shares of Common Stock covered by this Warrant immediately prior to such adjustment and the Purchase Price in effect immediately prior to such adjustment of the Purchase Price by (y) the Purchase Price in effect immediately after such adjustment of the Purchase Price.            (i) Reorganization, Reclassification, Merger and Sale of Assets. If there occurs any capital reorganization or any reclassification of the Common Stock of the Company, the consolidation or merger of the Company with or into another Person (other than a merger or consolidation of the Company in which the Company is the continuing corporation and which does not result in any reclassification or change of outstanding shares of its Common Stock) or the sale or conveyance of all or substantially all of the assets of the Company to another Person at any time after October 12, 2005, then the Holder will thereafter be entitled to receive, upon the exercise of this Warrant in accordance with the terms hereof, the same kind and amounts of securities (including shares of stock) or other assets, or both, which were issuable or distributable to the holders of outstanding Common Stock of the Company upon such reorganization, reclassification, consolidation, merger, sale or conveyance, in respect of that number of shares of Common Stock then deliverable upon the exercise of this Warrant if this Warrant had been exercised immediately prior to such reorganization, reclassification, consolidation, merger, sale or conveyance; and, in any such case, appropriate adjustments (as determined in good faith by the Board of Directors of the Company) shall be made to assure that the provisions hereof (including, without limitation, provisions with respect to changes in, and other adjustments of, the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be practicable, in relation to any securities or other assets thereafter deliverable upon exercise of this Warrant.            (j) Special Adjustment. If, as of November 16, 2005, the Company purchased less than 1,500,000 Tendered Shares, as such term is defined in the Purchase Agreement (the "MAXIMUM TENDERED SHARES"), then this Warrant shall evidence the right to receive an additional number of shares of Common Stock (subject to adjustment as provided herein ab initio) computed using the following formula:                                       AS =  MTS -  MTS                                           ---                                            A                                         10   where:           AS       equals the additional number of shares of Common Stock for                   which this Warrant will be exercisable            MTS      equals the number of Maximum Tendered Shares less the                   aggregate number of Tendered Shares actually purchased by the                   Company as of November 16, 2005           A        equals 0.98716       4. Certificate as to Adjustments. Whenever the Purchase Price or the number of shares of Common Stock issuable, or the securities or other property deliverable, upon the exercise of this Warrant shall be adjusted pursuant to the provisions hereof, the Company shall promptly give written notice thereof to the Holder, in accordance with Section 13, in the form of a certificate signed by the Chairman of the Board, President or one of the Vice Presidents of the Company, and by the Chief Financial Officer, Treasurer or one of the Assistant Treasurers of the Company, stating the adjusted Purchase Price, the number of shares of Common Stock issuable, or the securities or other property deliverable, upon exercise of the Warrant and setting forth in reasonable detail the method of calculation and the facts requiring such adjustment and upon which such calculation is based. Each adjustment shall remain in effect until a subsequent adjustment is required.       5. Fractional Shares. Notwithstanding an adjustment pursuant to Section 3(h) in the number of shares of Common Stock covered by this Warrant or any other provision of this Warrant, the Company shall not be required to issue fractions of shares upon exercise of this Warrant or to distribute certificates which evidence fractional shares. In lieu of fractional shares, the Company may make payment to the Holder, at the time of exercise of this Warrant as herein provided, of an amount in cash equal to such fraction multiplied by the greater of the Current Market Price of a share of Common Stock on the Exercise Date and the Purchase Price.       6. Notice of Proposed Actions. In case the Company shall propose at any time or from time to time (a) to declare or pay any dividend payable in stock of any class to the holders of Common Stock or to make any other distribution to the holders of Common Stock (other than a regularly scheduled cash dividend), (b) to offer to the holders of Common Stock rights or warrants to subscribe for or to purchase any additional shares of Common Stock or shares of stock of any class or any other securities, rights, warrants or options, (c) to effect any reclassification of its Common Stock, (d) to effect any consolidation, merger or sale, transfer or other disposition of all or substantially all of the property, assets or business of the Company which would, if consummated, adjust the Purchase Price or the securities issuable upon exercise of the Warrants, (e) to effect the liquidation, dissolution or winding up of the Company, or (f) to take any other action that would require a vote of the Company's stockholders, then, in each such case, the Company shall give to the Holder, in accordance with Section 13, a written notice of such proposed action, which shall specify (i) the record date for the purposes of such stock dividend, distribution of rights or warrants or vote of the stockholders of the Company, or if a record is not to be taken, the date as of which the holders of shares of Common Stock of record to be entitled to such dividend, distribution of rights or warrants, or vote is to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, transfer, disposition, liquidation, dissolution or winding up is expected to become effective, and such notice shall be so given as promptly as possible but in any event at least ten (10) Business Days prior to the applicable record, determination or effective date specified in such notice.                                         11        7. No Dilution or Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will at all times reserve and keep available the maximum number of its authorized shares of Common Stock, free from all preemptive rights therein, which will be sufficient to permit the full exercise of this Warrant, and (c) will take all such action as may be necessary or appropriate in order that all shares of Common Stock as may be issued pursuant to the exercise of this Warrant will, upon issuance, be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof.       8. Replacement of Warrants. On receipt by the Company of an affidavit of an authorized representative of the Holder stating the circumstances of the loss, theft, destruction or mutilation of this Warrant (and in the case of any such mutilation, on surrender and cancellation of such Warrant), the Company at its expense will promptly execute and deliver, in lieu thereof, a new Warrant of like tenor which shall be exercisable for a like number of shares of Common Stock. If required by the Company, such Holder must provide an indemnity bond or other indemnity sufficient in the judgment of the Company to protect the Company from any loss which it may suffer if a lost, stolen or destroyed Warrant is replaced.       9. Restrictions on Transfer.            (a) Subject to the provisions of this Section 9, this Warrant may be transferred or assigned, in whole or in part, by the Holder at any time, and from time to time. The term "Holder" as used herein shall also include any transferee of this Warrant whose name has been recorded by the Company in the Warrant Register (as hereinafter defined). Each transferee of the Warrant or the Common Stock issuable upon the exercise of the Warrant acknowledges that the Warrant or the Common Stock issuable upon the exercise of the Warrant has not been registered under the Securities Act and may be transferred only pursuant to an effective registration under the Securities Act or pursuant to an applicable exemption from the registration requirements of the Securities Act.                                         12             (b) With respect to a transfer that should occur prior to the time that the Warrant or the Common Stock issuable upon the exercise thereof is registered under the Securities Act, such Holder shall request an opinion of counsel (which shall be rendered by counsel reasonably acceptable to the Company) that the proposed transfer may be effected without registration or qualification under any Federal or state securities or blue sky law. Counsel shall, as promptly as practicable, notify the Company and the Holder of such opinion and of the terms and conditions, if any, to be observed in such transfer, whereupon the Holder shall be entitled to transfer this Warrant or such shares of Common Stock (or portion thereof), subject to any other provisions and limitations of this Warrant. In the event this Warrant shall be exercised as an incident to such transfer, such exercise shall relate back and for all purposes of this Warrant be deemed to have occurred as of the date of such notice regardless of delays incurred by reason of the provisions of this Section 9 which may result in the actual exercise on any later date.            (c) The Company shall maintain a register (the "Warrant Register") in its principal office for the purpose of registering the Warrant and any transfer thereof, which register shall reflect and identify, at all times, the ownership of any interest in the Warrant. Upon the issuance of this Warrant, the Company shall record the name of the initial purchaser of this Warrant in the Warrant Register as the first Holder. Upon surrender for registration of transfer or exchange of this Warrant together with a properly executed Form of Assignment attached hereto as Exhibit B at the principal office of the Company, the Company shall, at its expense, execute and deliver one or more new Warrants of like tenor which shall be exercisable for a like aggregate number of shares of Common Stock, registered in the name of the Holder or a transferee or transferees.       10. No Rights or Liability as a Stockholder. This Warrant does not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company. No provisions hereof, in the absence of affirmative action by the Holder hereof to purchase Common Stock, and no enumeration herein of the rights or privileges of the Holder shall give rise to any liability of such Holder as a stockholder of the Company.       11. Charges, Taxes and Expenses. Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder hereof for any issue or transfer tax, or other incidental expense, in respect of the issuance or delivery of such certificates or the securities represented thereby, all of which taxes and expenses shall be paid by the Company.       12. Amendment or Waiver. This Warrant and any term hereof may be amended, waived, discharged or terminated only by and with the written consent of the Company and the Holder.                                         13        13. Notices. Any notice or other communication (or delivery) required or permitted hereunder shall be made in writing and shall be by registered mail, return receipt requested, telecopier, courier service or personal delivery to the Company at its principal office as specified in Section 11.2 of the Purchase Agreement and to the Holder at its address as it appears in the Warrant Register. All such notices and communications (and deliveries) shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied.       14. Certain Remedies. The Holder shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Warrant and to enforce specifically the terms and provisions of this Warrant in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which such Holder may be entitled at law or in equity.       15. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED IN ACCORDANCE WITH, AND ENFORCED UNDER, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS OR INSTRUMENTS ENTERED INTO AND PERFORMED ENTIRELY WITHIN SUCH STATE.       16. Headings. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.                     [Remainder of Page Intentionally Left Blank]                                          14                                             TB WOOD'S CORPORATION                                            By:___________________________________                                              Name:                                              Title:                                [SIGNATURE PAGE TO WARRANT]                                                           Exhibit A to Common                                                       Stock Purchase Warrant                                                       --------------------------                                     [FORM OF]                             ELECTION TO PURCHASE SHARES       The undersigned hereby irrevocably elects to exercise the Warrant to purchase _____ shares of Common Stock, par value $.01 per share ("Common Stock"), of TB Wood's Corporation (the "Company") and hereby [makes payment of $_______ therefor] [or] [makes payment therefor by assignment to the Company pursuant to Section 2(b)(i)(B) of the Warrant of $_____________ aggregate principal amount of Note (as defined in the Warrant)] [or] [makes payment therefore by surrendering pursuant to Section 2(b)(i)(C) _____ shares of Common Stock of the Company] [or] [makes payment therefor by cancellation pursuant to Section 2(b)(ii) of a portion of the Warrant with respect to _________ shares of Common Stock]. The undersigned hereby requests that certificates for such shares be issued and delivered as follows:  ISSUE TO:_______________________________________________________________________                                      (NAME)  ________________________________________________________________________________                           (ADDRESS, INCLUDING ZIP CODE)  ________________________________________________________________________________                   (SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)  DELIVER TO:_____________________________________________________________________                                      (NAME)  ________________________________________________________________________________                           (ADDRESS, INCLUDING ZIP CODE)       If the number of shares of Common Stock purchased hereby is less than the number of shares of Common Stock covered by the Warrant, the undersigned requests that a new Warrant representing the number of shares of Common Stock not purchased be issued and delivered as follows:  ISSUE TO:_______________________________________________________________________                                 (NAME OF HOLDER)  ________________________________________________________________________________                           (ADDRESS, INCLUDING ZIP CODE)  DELIVER TO:_____________________________________________________________________                                 (NAME OF HOLDER)  ________________________________________________________________________________                           (ADDRESS, INCLUDING ZIP CODE)  Dated:______________________________      [NAME OF HOLDER]                                            By:  _________________________________                                                Name:                                                Title: _________________________ 1   Name of Holder must conform in all respects to name of Holder as specified     on the face of the Warrant.                                                         Exhibit B to Common                                                       Stock Purchase Warrant                                                       --------------------------                                [FORM OF] ASSIGNMENT        FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto the Assignee named below all of the rights of the undersigned to purchase Common Stock, par value $.01 per share ("Common Stock"), of TB Wood's Corporation represented by the Warrant, with respect to the number of shares of Common Stock set forth below:   Name of Assignee        Address      No. of Shares            and does hereby irrevocably constitute and appoint ____________________________ Attorney to make such transfer on the books of TB Wood's Corporation maintained for that purpose, with full power of substitution in the premises.   Dated: _____________________________      [NAME OF HOLDER1]                                            By:  _________________________________                                                Name:                                                Title:    _________________________ 1   Name of Holder must conform in all respects to name of Holder as specified     on the face of the Warrant.     EX-10 6 ex10-40.txt EX10-40.TXT                                                                       EXHIBIT 10.40                                       GUARANTY       GUARANTY (this "GUARANTY"), dated as of October 27, 2005, is made by TB WOOD'S CORPORATION ("Guarantor"), a Delaware corporation.                                 W I T N E S S E T H:       WHEREAS, pursuant to the terms, and subject to the conditions, of the Securities Purchase Agreement (the "PURCHASE AGREEMENT"), dated as of October 12, 2005, by and among TB Wood's Incorporated, a Pennsylvania corporation, Plant Engineering Consultants, LLC, a Tennessee limited liability company, TB Wood's Enterprises, Inc., a Delaware corporation (collectively, the "BORROWERS"), AEA Mezzanine Funding LLC ("AEAM FUNDING"), a Delaware limited liability company, AEA Mezzanine Fund LP ("AEAMF"), a Delaware limited partnership, AEA Mezzanine (Unleveraged) Fund LP ("AEAUMF" and collectively with AEAM Funding and AEAM, the "PURCHASERS" and individually, a "PURCHASER"), a Delaware limited partnership, Guarantor and T.B. Wood's Canada Ltd., an Ontario corporation, (a) AEAM Funding is purchasing from the Borrowers a Senior Subordinated Promissory Note (the "AEAM FUNDING NOTE") of the Borrowers in the principal amount of $10,185,086.06; (b) AEAMF is purchasing from Guarantor a warrant (the "AEAMF WARRANT") to purchase an aggregate of 118,147 shares of common stock of Guarantor, $.01 par value per share (the "COMMON STOCK"); and (c) AEAUMF is purchasing from (i) the Borrowers a Senior Subordinated Promissory Note (the "AEAUMF NOTE" and collectively with the AEAM Funding Note, the "NOTES" and individually, a "NOTE") of the Borrowers in the principal amount of $4,814,913.94 and (ii) Guarantor a warrant (the "AEAUMF WARRANT" and collectively with the AEAMF Warrant, the "WARRANTS" and individually, a "WARRANT") to purchase an aggregate of 55,853 shares of Common Stock;       WHEREAS, in order to induce the Purchasers to purchase the Notes and the Warrants, Guarantor will execute and deliver this Guaranty pursuant to which Guarantor will guaranty, among other things, payment of all of the Obligations, as hereinafter defined; and       WHEREAS, it is of material benefit to Guarantor that the Purchasers purchase the Notes and the Warrants and provide to Guarantor and the Borrowers the capital represented thereby.       Accordingly, Guarantor agrees for the benefit of the Purchasers, as follows:       1. CERTAIN TERMS.            (a) "OBLIGATIONS" means all (i) acts, performances and obligations when due of the Borrowers under the Notes, (ii) costs and expenses (including, without limitation, attorneys' fees and disbursements) incurred in connection with the enforcement of this Guaranty and (iii) Indemnification Obligations.            (b) "INDEMNIFICATION OBLIGATIONS" means all acts, performances and obligations when due of the Borrowers under Section 7 of the Purchase Agreement, including, without limitation, the costs and expenses (including, without limitation, attorneys' fees and disbursements) incurred in connection with the enforcement of this Guaranty.         2. GUARANTY. Guarantor hereby absolutely, unconditionally and irrevocably guaranties to each Purchaser the full and punctual payment when due of all Obligations owed to such Purchaser, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, and such guaranty is not conditional or contingent upon pursuit by any of the Purchasers of any prior action or proceeding for collection, or for any other remedies any of the Purchasers may have, against the Borrowers or any other Person.       3. CONSENT. Guarantor hereby consents and agrees that the whole or any part of the security now or hereafter held for any Obligation may be exchanged, compromised, released or surrendered from time to time; that the time or place of payment of any Obligation or of any security therefor may be exchanged or extended, in whole or in part, to a time certain or otherwise, and may be renewed or accelerated, in whole or in part; that any of the Purchasers may be granted indulgences generally; that any of the provisions of the Notes may be renewed, extended, modified, increased, accelerated, compromised, refinanced or waived; that any borrower may be granted indulgences or released from liability; that neither the insolvency, bankruptcy and/or dissolution of any borrower or Guarantor shall affect the obligations hereunder of Guarantor; that neither the invalidity or unenforceability of any of the Obligations shall affect the obligations hereunder of Guarantor; that no claim need be asserted against any trustee in bankruptcy or receiver or other representative in the event any borrower or Guarantor is adjudicated bankrupt or becomes insolvent; and that any property to the credit of any borrower or any guarantor or other party liable for payment of any of the Obligations or liable upon any security therefor may be released from time to time, in whole or in part, at, before or after the stated, extended or accelerated maturity of such Obligations, all of which (i) may be effected without notice to or further assent by Guarantor and (ii) shall not affect the obligations of Guarantor under this Guaranty.       4. WAIVER. Guarantor hereby expressly waives:            (a) Notice of acceptance of this Guaranty;            (b) Presentment and demand for payment of any Obligation;            (c) Protest and notice of dishonor or default to Guarantor or to any other party with respect to any Obligation or any security for any Obligation;            (d) Demand for payment under this Guaranty;            (e) Notice of disposition of any security for any Obligation; and            (f) Any defense by reason of impairment of: (i) any security now or hereafter held for any Obligation; or (ii) recourse against any party liable for the payment of any Obligation.                                         2        5. GUARANTY OF PAYMENT. This Guaranty is a guaranty of payment and not of collection. Guarantor: (a) waives any claim to marshaling of assets; (b) waives any right to require that an action be brought against any borrower or any other Person prior to action against Guarantor hereunder; and (c) waives any right to require that resort be had to any security, as applicable, for the Notes or any other Obligations guaranteed hereunder prior to action by any of the Purchasers against Guarantor hereunder. Guarantor shall be released from all liability hereunder only upon payment in full of all the Obligations.       6. BINDING EFFECT. The provisions of this Guaranty shall be binding upon Guarantor and its successors and assigns, and shall inure to the benefit of each of the Purchasers and their respective successors and assigns; it being understood that each of the Purchasers is free to assign its respective rights, benefits, duties and obligations under this Guaranty without the consent of any other party, and Guarantor may not assign its rights, benefits, duties and obligations under this Guaranty without the prior written consent of the Purchasers.       7. RIGHT OF SET OFF. Each Purchaser agrees that to the extent that Guarantor has made payment hereunder of all or any portion of principal and interest required under the Note held by such Purchaser, the full amount of such payment shall be deducted from amounts allocable and payable to such Purchaser pursuant to such Note.       8. LIMITATION OF GUARANTY. Any term or provision of this Guaranty or any other Transaction Document to the contrary notwithstanding, the maximum aggregate amount of the Obligations for which Guarantor shall be liable shall not exceed the maximum amount for which Guarantor can be liable without rendering this Guaranty or any other Transaction Document, as it relates to Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer.       9. REINSTATEMENT. This Guaranty shall remain in full force and effect and continue to be effective or be reinstated, as the case may be, if at any time payment or performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Obligations or such part thereof, whether as a "voidable preference," "fraudulent transfer," or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Obligations shall, to the fullest extent permitted by law, be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.       10. SUBROGATION. After (and not before) all amounts payable under or in respect of the Notes have been indefeasibly paid in cash, in the event principal and interest is thereafter paid with respect to the Notes, Guarantor shall be subrogated to the rights of the Purchasers to receive payments in respect of the Notes, but only to the extent of amounts paid by Guarantor pursuant to this Guaranty.                                         3        11. AMENDMENT. Neither this Guaranty nor any provision hereof shall be amended, modified, changed, discharged or terminated except by an instrument in writing signed by the Purchasers and the Guarantor.       12. LAW. THIS GUARANTY SHALL BE GOVERNED BY, CONSTRUED IN ACCORDANCE WITH, AND ENFORCED UNDER, THE LAW OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS OR INSTRUMENTS ENTERED INTO AND PERFORMED ENTIRELY WITHIN SUCH STATE.       13. SEVERABILITY. Wherever possible, each provision of this Guaranty shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be invalid under such laws, such provision shall be ineffective only to the extent of such prohibition or invalidity, without affecting the remainder of such provision or the remaining provisions of this Guaranty, which shall be binding and enforceable to the fullest extent allowable by law.       14. WAIVER. Waiver by any of the Purchasers of a breach of this Guaranty shall not operate as a waiver of any subsequent breach thereof.       15. SIGNATURES; COUNTERPARTS. Telefacsimile transmissions of any executed original document and/or retransmission of any executed telefacsimile transmission shall be deemed to be the same as the delivery of an executed original. At the request of any party hereto, the other parties hereto shall confirm telefacsimile transmissions by executing duplicate original documents and delivering the same to the requesting party or parties. This Guaranty may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same instrument.       16. NOTICES. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier (with receipt confirmed), courier service or personal delivery:            (a) if to Guarantor:                   c/o TB Wood's Corporation                  440 North Fifth Avenue                  Chambersburg, PA  17201-1778                  Fax No.: (717) 264-2869                  Attention: William T. Fejes, Jr.                   with a copy to:                   Dechert LLP                  4000 Bell Atlantic Tower                  1717 Arch Street                  Philadelphia, PA  19103                  Fax No.: (215) 994-2222                  Attention:  David Schulman, Esq.                                         4             (b) if to AEA Mezzanine Funding LLC:                   AEA Mezzanine Funding LLC c/o AEA Mezzanine                  Partners LP c/o AEA Mezzanine Management LP                  200 First Stamford Place Stamford, Connecticut                  06902 Fax No.: (203) 564-2661 Attention:                  Joseph D. Carrabino, Jr.            (c) if to AEA Mezzanine Fund LP:                   AEA Mezzanine Fund LP c/o AEA Mezzanine                  Partners LP c/o AEA Mezzanine Management LP                  200 First Stamford Place Stamford, Connecticut                  06902 Fax No.: (203) 564-2661 Attention:                  Joseph D. Carrabino, Jr.            (d) if to AEA Mezzanine (Unleveraged) Fund LP:                   AEA Mezzanine (Unleveraged) Fund LP c/o AEA                  Mezzanine Partners LP c/o AEA Mezzanine                  Management LP 200 First Stamford Place                  Stamford, Connecticut 06902 Fax No.: (203)                  564-2661 Attention: Joseph D. Carrabino, Jr.                   in the case of (b), (c) and (d) above, with a copy to:                   Morrison Cohen LLP                  909 Third Avenue                  New York, New York  10022                  Fax No.: (212) 735-8708                  Attention:  David A. Scherl, Esq.                                         5   or to such other address or addresses as shall have been furnished in writing to the other parties hereto.       All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; if mailed, five business days after being deposited in the mail, postage prepaid; or if telecopied, when receipt is acknowledged.       17. CONSENTS AND WAIVERS RELATING TO LEGAL PROCEEDINGS.            (a) EACH PARTY TO THIS GUARANTY HEREBY IRREVOCABLY AGREES THAT THE ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND HEREBY EXPRESSLY SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT THE SUCH COURTS ARE AN INCONVENIENT FORUM. EACH PARTY HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 16 SUCH SERVICE TO BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING.            (b) GUARANTOR WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS GUARANTY, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. GUARANTOR (X) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OF THE PURCHASERS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE PURCHASERS WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (Y) ACKNOWLEDGES THAT THE PURCHASERS HAVE BEEN INDUCED TO ENTER INTO THE PURCHASE AGREEMENT BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED HEREIN.                    [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]         IN WITNESS WHEREOF, the undersigned has executed this Guaranty as of the date first above written.                                             TB WOOD'S CORPORATION                                             By:  _________________________________                                                Name:                                                Title:                            [SIGNATURE PAGE TO PARENT GUARANTY]     EX-10 7 ex10-41.txt EX10-41.TXT                                                                       EXHIBIT 10.41                             REGISTRATION RIGHTS AGREEMENT       AGREEMENT (this "AGREEMENT"), dated as of October 27, 2005, by and among TB WOOD'S CORPORATION ("PARENT"), a Delaware corporation, AEA MEZZANINE FUND LP ("AEAMF"), a Delaware limited partnership, and AEA MEZZANINE (UNLEVERAGED) FUND LP ("AEAUMF" and collectively with AEAMF, the "INSTITUTIONAL INVESTORS" and individually, an "INSTITUTIONAL INVESTOR").                                 W I T N E S S E T H :       WHEREAS, pursuant to the terms, and subject to the conditions, of the Securities Purchase Agreement (the "PURCHASE AGREEMENT"), dated as of October 12, 2005, by and among TB Wood's Incorporated, a Pennsylvania corporation, Plant Engineering Consultants, LLC, a Tennessee limited liability company, TB Wood's Enterprises, Inc., a Delaware corporation (collectively, the "BORROWERS"), AEA Mezzanine Funding LLC ("AEAM FUNDING"), a Delaware limited liability company, the Institutional Investors, Parent and T.B. Wood's Canada Ltd., an Ontario corporation, (a) AEAM Funding is purchasing from the Borrowers a Senior Subordinated Promissory of the Borrowers in the principal amount of $10,185,086.06; (b) AEAMF is purchasing from Parent a warrant (the "AEAMF WARRANT") to purchase an aggregate of 118,147 shares of common stock of Parent, $.01 par value per share (the "COMMON STOCK"); and (c) AEAUMF is purchasing from (i) the Borrowers a Senior Subordinated Promissory Note of the Borrowers in the principal amount of $4,814,913.94 and (ii) Parent a warrant (the "AEAUMF WARRANT" and collectively with the AEAMF Warrant, the "WARRANTS" and individually, a "WARRANT") to purchase an aggregate of 55,853 shares of Common Stock;       WHEREAS, Parent and the other parties hereto desire to provide for the circumstances under which Parent will register securities of Parent on behalf of such other parties.       NOW, THEREFORE, as an inducement to the Institutional Investors to consummate the transactions contemplated by the Purchase Agreement and in consideration of the premises and of the mutual covenants and obligations hereinafter set forth, Parent hereby covenants and agrees with the other parties hereto, and with each subsequent holder of the Warrants, as follows:       SECTION 1. DEFINITIONS. As used herein, the following terms shall have the following ----------- respective meanings:            "CERTIFICATE OF INCORPORATION" shall mean the Certificate of      Incorporation of Parent, as amended, in effect on the date hereof.            "COMMISSION" shall mean the Securities and Exchange Commission, or any      other Federal agency at the time administering the Securities Act.            "COMMON STOCK" shall mean, collectively, the shares of common stock,      $.01 par value per share, of Parent, and any class or series of common      stock of Parent authorized after the date hereof, or any other class or      series of stock resulting from successive changes or reclassifications of      any class or series of common stock of Parent.              "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as      amended, or any similar Federal statute, and the rules and regulations of      the Commission thereunder, all as the same shall be in effect at the time.            "INSTITUTIONAL INVESTORS" shall mean AEAMF, AEAUMF and their      respective successors and assigns.            "PERSON" shall mean any individual, firm, corporation, limited      liability company, partnership, trust, incorporated or unincorporated      association, joint venture, joint stock company, Governmental Authority or      other entity of any kind, and shall include any successor (by merger or      otherwise) of such entity.            "REGISTRATION EXPENSES" shall mean the expenses so described in      Section 4 hereof.            "REGISTRABLE STOCK" shall mean the shares of Common Stock underlying      the Warrants, and any capital stock or other securities issued or issuable      with respect to such Common Stock by way of a stock dividend or stock split      or in connection with a combination of shares, recapitalization, merger,      conversion, consolidation or other reorganization.            "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or      any similar Federal statute, and the rules and regulations of the      Commission thereunder, all as the same shall be in effect at the time.            "SELLING EXPENSES" shall mean the expenses so described in Section 4      hereof.            "WARRANTS" shall have the meaning ascribed to such term in the first      Whereas clause.                                         2        SECTION 2. INCIDENTAL REGISTRATION; FORM S-3 REGISTRATION.            (a) If Parent at any time proposes to register any of its securities under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Form S-8 or another form not available for registering Registrable Stock for sale to the public), each such time it will give written notice to all holders of Registrable Stock of its intention to do so. Upon the written request of any such holder, given within 20 days after the date of any such notice, to register any of its Registrable Stock (which request shall specify the aggregate number of shares of Registrable Stock to be registered and will also state the intended method of disposition thereof), Parent will cause the Registrable Stock as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by Parent, all to the extent requisite to permit the sale or other disposition by the holder (in accordance with its written request) of such Registrable Stock so registered. Parent may withdraw any such registration statement before it becomes effective or postpone the offering of securities contemplated by such registration statement without any obligation to the holders of any Registrable Stock. In the event that any registration pursuant to this Section 2 shall be, in whole or in part, an underwritten public offering of Common Stock, any request by a holder pursuant to this Section 2 to register Registrable Stock shall specify that either (i) such Registrable Stock is to be included in the underwriting on the same terms and conditions as the shares of Common Stock otherwise being sold through underwriters under such registration or (ii) such Registrable Stock is to be sold in the open market without any underwriting, on terms and conditions comparable to those normally applicable to offerings of common stock in reasonably similar circumstances. The number of shares of Registrable Stock to be included in such an underwriting may be reduced (pro rata among the requesting holders) if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by Parent therein; provided, however, that if any shares are to be included in such underwriting for the account of any Person other than Parent, the number of shares to be included by any such Person shall be reduced first. With respect to the first proviso of the preceding sentence, if Parent elects to reduce pro rata the amount of Registrable Stock proposed to be offered in the underwriting for the accounts of all Persons other than Parent, for purposes of making any such reduction, each holder of Registrable Stock which is a partnership, together with the affiliates, partners, employees, retired partners and retired employees of such holder, the estates and family members of any such partners, employees, retired partners and retired employees and of their spouses, and any trusts for the benefit of any of the foregoing Persons shall be deemed to be a single "Person," and any pro rata reduction with respect to such "Person" shall be based upon the aggregate number of shares of Registrable Stock owned by all entities and individuals included as such "Person", as defined in this sentence (and the aggregate number so allocated to such "Person" shall be allocated among the entities and individuals included in such "Person" in such manner as such holder of Registrable Stock may reasonably determine). Notwithstanding anything to the contrary contained in this Section 2, in the event that there is an underwritten offering of securities of Parent pursuant to a registration covering Registrable Stock and a selling holder of Registrable Stock does not elect to sell his, her or its Registrable Stock to the underwriters of Parent's securities in connection with such offering, such holder shall refrain from selling such Registrable Stock not registered pursuant to this Section 2 during the period of distribution of Parent's securities by such underwriters and the period in which the underwriting syndicate participates in the after market; provided, however, that such holder shall, in no event, be entitled to sell its Registrable Stock during the 10-day period prior to, and during the 180-day period beginning on the effective date of such registration statement if requested by the managing underwriter or underwriters.                                         3             (b) If, at a time when Form S-3 is available for such registration, Parent shall receive from any Institutional Investor a written request or requests that Parent effect a registration on Form S-3 of any of such holder's Registrable Stock, Parent will promptly give written notice of the proposed registration to all other holders of Registrable Stock and, as soon as practicable, effect such registration and all such related qualifications and compliances as may be requested and as would permit or facilitate the sale and distribution of all Registrable Stock as are specified in such request and any written requests of other holders given within 20 days after receipt of such notice. Parent shall not be required to file a registration statement under Form S-3 if counsel to Parent opines to the requesting Institutional Investors that the filing of such a registration statement would require the disclosure of material non-public information about Parent, the disclosure of which could have a material adverse effect on the business or financial condition of Parent, in which event no such registration statement shall be filed until the earlier of the lapse of 90 days from the issuance of the opinion of Parent counsel or such date that such information is no longer required to be disclosed, is not material or non-public, or its disclosure would not have a material adverse effect on the business or financial condition of Parent; provided, however, that Parent may not exercise its right under this clause more than once in any 12-month period. Parent shall have no obligation to effect a registration under this Section 2(b) (1) unless either (i) all the outstanding shares of Registrable Stock are requested to be sold pursuant to such registration or (ii) the aggregate offering price of the securities requested to be sold pursuant to such registration is, in the good faith judgment of Parent, expected to be equal to or greater than $1,000,000, and (2) more than four (4) occasions; provided, however, that as to such occasion such obligation shall be deemed satisfied only when a registration statement covering all shares of Registerable Stock specified in requests received as aforesaid, for sale in accordance with the method of disposition specified by the requesting Institutional Investor, shall have become effective and, if such method of disposition is a firm commitment underwritten public offering, all such shares shall have been sold pursuant thereto.       SECTION 3. REGISTRATION PROCEDURES. If and whenever Parent is required by the provisions of Section 2 hereof to effect the registration of any shares of Registrable Stock under the Securities Act, Parent will, as expeditiously as possible:            (a) prepare and file with the Commission a registration statement (which, in the case of an underwritten public offering pursuant to Section 2 hereof, shall be on Form S-1 or other form of general applicability satisfactory to the managing underwriter selected as therein provided) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective (provided that before filing a registration statement or any amendments or supplements thereto, Parent will furnish to the counsel selected by the holders of a majority of the Registrable Stock covered by such registration statement copies of all such documents and include any comments of such counsel in such documents pertaining to the disclosure relating to the holders of Registrable Stock and the sale by such holders of the Registrable Stock) for the period of the distribution contemplated thereby (determined as hereinafter provided); provided, that Parent may discontinue any registration of shares for its own account which is being effected pursuant to Section 2 herein at any time prior to the effective date of the registration statement relating thereto;            (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified in Section 3(a) above and as to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Stock covered by such registration statement in accordance with the sellers' intended method of disposition set forth in such registration statement for such period;                                         4             (c) furnish to each seller and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus and any amendment or supplement thereto) and such other documents as such Persons may reasonably request in order to facilitate the public sale or other disposition of the Registrable Stock covered by such registration statement;            (d) use its best efforts to register or qualify the Registrable Stock covered by such registration statement under the securities or blue sky laws of such jurisdictions as the sellers of Registrable Stock or, in the case of an underwritten public offering, the managing underwriter shall reasonably request and do any and all other acts and things which are reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Stock owned by such seller (provided that Parent will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection or (ii) consent to general service of process (i.e., service of process which is not limited solely to securities law violations) in any such jurisdiction);            (e) immediately notify each seller under such registration statement and each underwriter, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing and, at the request of any seller, Parent will promptly prepare a supplement or amendment to such registration statement so that, as thereafter delivered to the purchasers of such Registrable Stock, such registration statement will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading;            (f) furnish, at the request of any seller, on the date that Registrable Stock is delivered to the underwriters for sale pursuant to such registration, a letter dated such date from the independent public accountants retained by Parent, addressed to the underwriters and to such seller, (A) stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of Parent included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to the registration in respect of which such letter is being given as such underwriters or such seller may reasonably request; and (B) containing "cold comfort" language covering such matters of the type customarily covered by "cold comfort" letters as the holders of a majority in nominal value of the Registrable Stock being sold reasonably request;            (g) make available for inspection by each seller, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant or other agent retained by such seller or underwriter, all pertinent financial and other records, pertinent corporate documents and properties of Parent, and cause Parent's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement;                                         5             (h) use its best efforts to cause all such Registrable Stock to be listed on a recognized U.S. stock exchange or traded on a U.S. inter-dealer quotation system and, if similar securities issued by Parent are already so listed, on each securities exchange or inter-dealer quotation system on which similar securities issued by Parent are then listed or traded;            (i) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission or any other applicable regulatory authority, and make available to its security holders, as soon as reasonably practicable after the effective date of the registration statement, an earnings statement covering the period of at least twelve months beginning with the first day of Parent's first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder;            (j) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related offering document or suspending the qualification of any Registrable Stock included in such registration statement or offering document for sale in any jurisdiction, Parent will use its best efforts promptly to obtain the withdrawal of such order;            (k) use its best efforts to cause such Registrable Stock covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the sellers thereof to consummate the disposition of such Registrable Stock; and            (l) take all such other actions as the holders of a majority in nominal value of Registrable Stock being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Stock (including, without limitation, effecting a stock split or a combination of shares).       For purposes of Sections 3(a) and (b) above, the period of distribution of Registrable Stock in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Registrable Stock in any other registration shall be deemed to extend until the earlier of the sale of all Registrable Stock covered thereby or nine months after the effective date thereof.       In connection with each registration hereunder, the selling holders of Registrable Stock will furnish to Parent in writing such information with respect to themselves and the proposed distribution by them as shall be necessary in order to assure compliance with Federal and applicable state securities laws.                                         6        In connection with each registration pursuant to Section 2 hereof covering an underwritten public offering, Parent agrees to enter into such customary agreements (including, without limitation) as the managing underwriter selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between major underwriters and companies of Parent's size and investment stature, provided that such agreement shall not contain any such provision applicable to Parent which is inconsistent with the provisions hereof.       SECTION 4. EXPENSES. All expenses incurred by Parent in complying with Section 2 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for Parent, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars and costs of insurance and fees and expenses of one counsel for the sellers of Registrable Stock, but excluding any Selling Expenses, are herein called "Registration Expenses". All underwriting discounts and selling commissions applicable to the sale of Registrable Stock are herein called "Selling Expenses." Parent will pay all Registration Expenses in connection with each registration statement filed pursuant to Section 2 hereof. All Selling Expenses incurred in connection with any sale of Registrable Stock by any participating seller shall be borne by such participating seller, or by such Persons other than Parent (except to the extent Parent shall be a seller) as they may agree.       SECTION 5. INDEMNIFICATION.            (a) Indemnification by Parent. In the event of a registration of any of the Registrable Stock under the Securities Act pursuant to Section 2 hereof, Parent will indemnify and hold harmless each seller of such Registrable Stock thereunder and each underwriter of such Registrable Stock thereunder and their respective officers, directors and employees and each other Person, if any, who controls such seller or underwriter within the meaning of the Securities Act, against any and all losses, claims, damages, expenses or liabilities, joint or several, to which such Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Stock was registered under the Securities Act pursuant to Section 2, any preliminary prospectus or final prospectus contained therein, any amendment or supplement thereof, any materials or information provided to investors by, or with the approval of, Parent in connection with the marketing of the offering of the Registrable Stock, including any roadshow or investor presentations made to investors by Parent (whether in person or electronically), or any application, filing or other material filed, registered, distributed or otherwise furnished by Parent or with the consent of Parent in connection with the securities laws of any state or political subdivision thereof, including any blue sky application, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such Person for any reasonable legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, expense or action; provided, however, that Parent will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, preliminary or final prospectus or amendment or supplement in reliance upon and in conformity with written information furnished to Parent by such Person, specifically for inclusion in any such document; or (ii) an untrue statement or alleged untrue statement, omission or alleged omission in a prospectus if such untrue statement or alleged untrue statement, omission or alleged omission is corrected in an amendment or supplement to the prospectus which amendment or supplement is delivered to such Person in a timely manner and such Person thereafter fails to deliver such prospectus as so amended or supplemented prior to or concurrently with the sale of such Registrable Stock to the Person asserting such loss, claim, damage or liability.                                         7             (b) Indemnification by Holders of Registrable Stock Which Are Registered. In the event of a registration of any of the Registrable Stock under the Securities Act pursuant to Section 2 hereof, each seller of such Registrable Stock thereunder, severally and not jointly, will indemnify and hold harmless to the fullest extent permitted by law Parent and each Person, if any, who controls Parent within the meaning of the Securities Act, each officer of Parent who signs the registration statement, each director of Parent, each underwriter and each Person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages, expenses or liabilities, to which Parent or such officer or director or underwriter or controlling Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, expenses or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Registrable Stock was registered under the Securities Act pursuant to Section 2, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse Parent and each such officer, director, underwriter and controlling Person for any reasonable legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that such seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such seller, as such, furnished in writing to Parent by such seller specifically for use in such registration statement or prospectus; provided, further, however, that the liability of each seller hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense which is equal to the proportion that the public offering price of the shares sold by such seller under such registration statement bears to the total public offering price of all securities sold thereunder, but not to exceed the net proceeds received by such seller from the sale of Registrable Stock covered by such registration statement.                                         8             (c) Conduct of Indemnification Proceedings. Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party under this Section 5 unless, and only to the extent that, such omission results in the indemnified party's forfeiture of substantive rights or defenses. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 5 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected; provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred.       Notwithstanding the foregoing, any indemnified party shall have the right to retain its own counsel in any such action, but the fees and disbursements of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party shall have failed to retain counsel for the indemnified party as aforesaid, (ii) the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or that the interests of the indemnified party conflict with the interests of the indemnifying party, or (iii) the indemnifying party and such indemnified party shall have mutually agreed to the retention of such counsel. It is understood that the indemnifying party shall not, in connection with any action or related actions in the same jurisdiction, be liable for the fees and disbursements of more than one separate firm qualified in such jurisdiction to act as counsel for the indemnified party. The indemnifying party shall not (i) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding, or (ii) be liable for any settlement of any proceeding effected without its written consent, (which consent shall not be unreasonably withheld) be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment.                                         9             (d) Contribution. If the indemnification provided for in Section 5(a) or 5(b) is unavailable to or insufficient to hold harmless an indemnified party under such paragraphs in respect of any losses, claims, damages or liabilities or actions referred to therein, then each indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or actions in such proportion as appropriate to reflect the relative fault of Parent, on the one hand, and the sellers of such Registrable Stock, on the other, in connection with the statement or omissions which resulted in such losses, claims, damages, liabilities or actions, as well as any other relevant equitable considerations including, without limitation, the failure to give any notice under Section 5(b). The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by Parent, on the one hand, or by the sellers of such Registrable Stock, on the other hand, and to the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.       Parent and the sellers of Registrable Stock agree that it would not be just and equitable if contribution pursuant to this Section 5 were determined by pro rata allocation (even if all of the sellers of Registrable Stock were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or action referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this and the immediately preceding paragraph, the sellers of such Registrable Stock shall not be required to contribute any amount in excess of the amount, if any, by which the total price at which the Common Stock sold by each of them was offered to the public exceeds the amount of any damages which they would have otherwise been required to pay by reason of such untrue or alleged untrue statement of omission, but not to exceed the net proceeds received by such seller on the sale of Registrable Stock covered by such Registration Statement. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who is not guilty of such fraudulent misrepresentation. The indemnification of underwriters provided for in this Section 5 shall be on such other terms and conditions as are at the time customary and reasonably required by such underwriters and the indemnification of the sellers of Registrable Stock in such underwriting shall, at the sellers' request, be modified to conform to such terms and conditions.       The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and will survive the transfer of securities.                                         10        SECTION 6. CHANGES IN COMMON STOCK. If, and as often as, there are any changes in the Common Stock by way of stock split, stock dividend, combination or reclassification, or through merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof, as may be required, so that the rights and privileges granted by this Agreement shall continue with respect to the Common Stock as so changed.       SECTION 7. REPRESENTATIONS AND WARRANTIES OF PARENT. Parent represents and warrants to each of the other parties hereto as follows (which representations and warranties shall survive the execution and delivery of this Agreement):            (a) The execution, delivery and performance of this Agreement by Parent have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Certificate of Incorporation or By-laws of Parent, or any provision of any indenture, agreement or other instrument to which it or any of its properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of Parent or any of its subsidiaries, except for such violations, conflicts or defaults that would not materially adversely affect the ability of Parent to perform its obligations hereunder.            (b) This Agreement has been duly executed and delivered by Parent and constitutes the legal, valid and binding obligation of Parent, enforceable in accordance with its terms.       SECTION 8. RULE 144 REPORTING. Parent agrees with each of the other parties hereto as follows: ------------------            (a) Parent shall use reasonable best efforts to make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act, at all times.            (b) Parent shall use reasonable best efforts to file with the Commission in a timely manner all reports and other documents as the Commission may prescribe under Section 13(a) or 15(d) of the Exchange Act.            (c) Parent shall furnish to each holder of Registrable Stock forthwith upon request a written statement by Parent as to its compliance with the reporting requirements of Rule 144, and of the Securities Act and the Exchange Act.       SECTION 9. MISCELLANEOUS.            (a) For purposes of this Agreement a holder of a Warrant shall be deemed to hold the Registrable Stock underlying such Warrant. The obligations and rights under Section 3 shall terminate as to an Institutional Investor if such Institutional Investor is not longer an "affiliate" as used in Rule 144 and is permitted to sell all Registrable Stock then held by it pursuant to Rule 144(k).                                         11             (b) All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. Without limiting the generality of the foregoing, the registration rights conferred herein on the holders of Registrable Stock shall inure to the benefit of any and all subsequent holders from time to time of Registrable Stock.            (c) All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier (with receipt confirmed), courier service or personal delivery:            (i) if to AEA Mezzanine Fund LP:                   AEA Mezzanine Fund LP c/o AEA Mezzanine                  Partners LP c/o AEA Mezzanine Management LP                  200 First Stamford Place Stamford, Connecticut                  06902 Fax No.: (203) 564-2661 Attention:                  Joseph D. Carrabino, Jr.             (ii) if to AEA Mezzanine (Unleveraged) Fund LP:                   AEA Mezzanine (Unleveraged) Fund LP c/o AEA                  Mezzanine Partners LP c/o AEA Mezzanine                  Management LP 200 First Stamford Place                  Stamford, Connecticut 06902 Fax No.: (203)                  564-2661 Attention: Joseph D. Carrabino, Jr.                   in the case of (i) and (ii) above, with a copy to:                   Morrison Cohen LLP                  909 Third Avenue                  New York, New York  10022                  Fax No.: (212) 735-8708                  Attention:  David A. Scherl, Esq.                                          12             (iii) if to Parent:                   TB Wood's Corporation                  440 North Fifth Avenue                  Chambersburg, PA  17201-1778                  Fax No.: (717) 264-2869                  Attention: William T. Fejes, Jr.                   with a copy to:                   Dechert LLP                  4000 Bell Atlantic Tower                  1717 Arch Street                  Philadelphia, PA  19103                  Fax No.: (215) 994-2222                  Attention:  David Schulman, Esq.   or to such other address or addresses as shall have been furnished in writing to the other parties hereto.       All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; if mailed, five Business Days (as defined in the Purchase Agreement) after being deposited in the mail, postage prepaid; or if telecopied, when receipt is acknowledged.            (d) THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED IN ACCORDANCE WITH, AND ENFORCED UNDER, THE LAW OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS OR INSTRUMENTS ENTERED INTO AND PERFORMED ENTIRELY WITHIN SUCH STATE.            (e) (I) EACH PARTY TO THIS AGREEMENT HEREBY IRREVOCABLY AGREES THAT ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND HEREBY EXPRESSLY SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT SUCH COURTS ARE AN INCONVENIENT FORUM. EACH PARTY HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 9(C), SUCH SERVICE TO BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING.                                         13             (II) PARENT WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. EXCEPT AS PROHIBITED BY LAW, PARENT HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. PARENT (X) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE INSTITUTIONAL INVESTORS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH INSTITUTIONAL INVESTOR WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (Y) ACKNOWLEDGES THAT THE INSTITUTIONAL INVESTORS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED HEREIN.            (f) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and may not be modified or amended except in writing executed by the parties hereto.            (g) Telefacsimile transmissions of any executed original document and/or retransmission of any executed telefacsimile transmission shall be deemed to be the same as the delivery of an executed original. At the request of any party hereto, the other parties hereto shall confirm telefacsimile transmissions by executing duplicate original documents and delivering the same to the requesting party or parties. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.            (h) Parent (on the one hand) and the Institutional Investors (on the other hand) agree that any amendment to the Federal securities laws (and regulations promulgated thereunder (and related registration forms), and related state securities laws shall not affect the substantive registration requirements (and other obligations of Parent) set forth in this Agreement; and, following any such amendment, Parent shall continue to be required to cause the registration of Registrable Stock (and pay all Registration Expenses and provide indemnification) under the Federal securities laws, as amended, in a manner consistent to carry out the intent and purposes of (and on terms as similar as practicable as the terms set forth in) this Agreement.                                         14             (i) If any one or more of the provisions contained in this Agreement, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions of this Agreement. The parties hereto further agree to replace such invalid, illegal or unenforceable provision of this Agreement with a valid, legal and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid, illegal or unenforceable provision.                     [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]                                         15         IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written.                                            TB WOOD'S CORPORATION                                             By:  _________________________________                                                Name:                                                Title:                                             AEA MEZZANINE FUND LP                                            By:  AEA Mezzanine Partners LP,                                                its General Partner                                            By:  AEA Mezzanine Management GP LLC,                                                its General Partner                                             By:  _________________________________                                                Name:                                                Title:                                            AEA MEZZANINE (UNLEVERAGED) FUND LP                                            By:  AEA Mezzanine Partners LP,                                                its General Partner                                            By:  AEA Mezzanine Management GP LLC,                                                its General Partner                                             By:  _________________________________                                                Name:                                                Title:                    [SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]     EX-10 8 ex10-42.txt EX10-42.TXT                                                                       EXHIBIT 10.42                       SUBORDINATION AND INTERCREDITOR AGREEMENT       This Subordination and Intercreditor Agreement (this "Agreement") is dated as of October 12, 2005 by and among MANUFACTURERS AND TRADERS TRUST COMPANY ("Senior Agent"), AEA MEZZANINE FUNDING LLC ("AEAM Funding"), and AEA MEZZANINE (UNLEVERAGED) FUND LP (together with AEAM Funding, collectively, "Subordinated Lenders"), and the BORROWERS identified below.                                     BACKGROUND       Senior Agent (for itself and on behalf of the Senior Lenders) and Subordinated Lenders desire to set forth the relative priority of the repayment of the Senior Indebtedness and Subordinated Indebtedness and various other rights and claims associated therewith, as well as certain other agreements and undertakings between them.                                     AGREEMENTS       NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto covenant, promise and agree as follows:       1. DEFINITIONS.       1.1 GENERAL TERMS. For purposes of this Agreement, the following terms shall have the following meanings:       "BORROWERS" shall mean TB Wood's Incorporated, Plant Engineering Consultants, LLC and TB Wood's Enterprises, Inc. and their respective successors and assigns.       "COLLATERAL" shall mean all of the property and interests in property, tangible or intangible, real or personal, now owned or hereafter acquired by the Borrowers or any Obligor in or upon which Senior Agent (on behalf of the Senior Lenders) at any time has a Lien, and including, without limitation, all proceeds and products of such property and interests in property.       "CREDITOR AGREEMENTS" shall mean, collectively, the Senior Lending Agreements and the Subordinated Lending Agreements.       "CREDITOR" or "CREDITORS" shall mean, individually, any of the Senior Lenders (or, if applicable, the Senior Agent acting on their behalf) and Subordinated Lenders and their respective successors and assigns, and collectively, all of the Senior Lenders and Subordinated Lenders and their respective successors and assigns.       "EVENT OF DEFAULT" shall have the meaning given to the term "Event of Default" in the Loan Agreement.       "INSOLVENCY EVENT" shall have the meaning set forth in Section 2.4 hereof.         "LIEN" shall mean any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance (including, but not limited to, easements, rights of way and the like), lien (statutory or other), security agreement or transfer intended as security including, without limitation, any conditional sale or other title retention agreement and the interest of a lessor under a capital lease or any financing lease having substantially the same economic effect as any of the foregoing.       "LOAN AGREEMENT" shall mean the Loan and Security Agreement, dated as of January 7, 2005 among Borrowers, the Guarantors defined therein, Senior Agent (identified therein as the Collateral Agent), Senior Lenders and other parties thereto, as the same has been amended by the First Amendment to Loan and Security Agreement, dated as of July 29, 2005 and as may be, in compliance with this Agreement, amended, supplemented, modified or restated from time to time.       "NOTES" shall mean the notes issued from time to time by Borrowers to Senior Lenders (or, if applicable, to Senior Agent on their behalf) pursuant to the Loan Agreement, together with any extensions thereof, modifications or amendments thereto or replacements and substitutions therefor, and securities issued in exchange therefore, provided that such extensions, modifications, amendments, replacements and substitutions have been made in compliance with this Agreement.       "OBLIGOR" shall mean any Person that owes payment or other performance of the obligation of a Borrower or Borrowers to a Creditor, has provided property to secure payment or other performance of such obligation, or is otherwise accountable in whole or in part for payment or other performance of such obligation through a guaranty or otherwise.       "PAID IN FULL" or "PAYMENT IN FULL" means the final payment in full in cash (or another form acceptable to the Senior Lenders in their sole discretion) of the Notes and the termination of the lending commitments under the Senior Lending Agreements.       "PERMITTED SUBORDINATED INDEBTEDNESS PAYMENTS" means (i) payments of Subordinated Indebtedness Costs and Expenses, (ii) subject to Sections 2.4 and 2.5 hereof, payments on or after the Subordinated Maturity Date (and Senior Lenders hereby covenant and agree not to enter into any agreement with any Borrower or other Obligor which would prohibit the Borrower or any other Obligor from making such payments on or after the Subordinated Maturity Date), and (iii) payments of regularly scheduled cash interest and default interest on the Subordinated Indebtedness due and payable on a non-accelerated basis, in each case in accordance with the terms of the Subordinated Lending Agreements, as in effect on the date hereof or as modified in accordance with the terms of this Agreement.       "PERSON" shall mean an individual, a partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, a limited liability company, a limited liability partnership or other entity, or a government or any agency, instrumentality or political subdivision thereof.                                         2        "REORGANIZATION SUBORDINATED SECURITIES" shall mean any debt or equity securities of the Borrowers or any other Person that are distributed to any Subordinated Lender in respect of the Subordinated Indebtedness pursuant to a confirmed plan of reorganization or adjustment and that (a) are subordinated in right of payment to the Senior Indebtedness (or any debt or equity securities issued in substitution of all or any portion of the Senior Indebtedness) to at least the same extent as the Subordinated Indebtedness is subordinated to the Senior Indebtedness, (b) do not have the benefit of any obligation of any Person (whether as issuer, guarantor or otherwise) unless the Senior Indebtedness has at least the same benefit, but on a senior basis, of the obligation of such Person, and (c) do not have any terms, and are not subject to or entitled to the benefit of any agreement or instrument that has terms, that are more burdensome to the issuer of or other obligor on such debt or equity securities than are the terms of the Senior Indebtedness.       "SECURED LENDER REMEDIES" shall mean any action which results in or is intended to result in the sale, foreclosure, realization upon, or a liquidation of any of the Collateral including, without limitation, the exercise or any of the rights or remedies of a "secured party" under Article 9 of the Uniform Commercial Code, such as, without limitation, the notification of account debtors.       "SENIOR COVENANT DEFAULT" shall mean any "Event of Default" under the Senior Lending Agreements, other than a Senior Payment Default.       "SENIOR INDEBTEDNESS" shall mean all Obligations (as defined in the Loan Agreement) of any kind owed by Borrowers or Obligors to Senior Agent or Senior Lenders from time to time under or pursuant to any of the Senior Lending Agreements, including, without limitation, all principal, interest, charges, expenses, fees and other sums (including all interest, charges, expenses, fees and other sums accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of any Borrower) chargeable to Borrowers or Obligors by Senior Agent or Senior Lenders under or pursuant to any of the Senior Lending Agreements, and further including all reimbursement and indemnity obligations owing to Senior Agent or Senior Lenders under or pursuant to any of the Senior Lending Agreements; provided, however, in no event (including, without limitation, for purposes of Section 4.3 and Section 10) shall the principal amount of the Senior Indebtedness exceed the sum of (i) the principal amount outstanding on the date hereof under the Notes and any unfunded loan commitments under the Senior Lending Agreements as in effect on the date hereof reduced by the amount of any payments and commitment reductions under the Senior Lending Agreements to the extent that such payments and reductions may not be reborrowed in accordance with the terms of the Senior Lending Agreements, plus (ii) $5,000,000.       "SENIOR LENDING AGREEMENTS" shall mean collectively the Loan Agreement, the Notes and the Other Documents (as defined in the Loan Agreement), as the same may be amended, supplemented, modified or restated in compliance with the terms of this Agreement.       "SENIOR PAYMENT DEFAULT" shall mean any "Event of Default" under the Senior Lending Agreements resulting from the breach by Borrowers of any obligation to make a payment of interest, principal or other monetary obligation to Senior Agent or Senior Lenders.                                         3        "SENIOR SUBORDINATED NOTES" shall mean the promissory notes issued by Borrowers to Subordinated Lenders pursuant to the Subordinated Loan Agreement, together with any extensions thereof, modifications or amendments thereto or replacements and substitutions therefore, and securities issued in exchange therefor.       "STANDSTILL NOTICE" shall have the meaning set forth in Section 2.2 hereof.       "STANDSTILL PERIOD" shall have the meaning set forth in Section 2.2 hereof.       "SUBORDINATED EVENT OF DEFAULT" shall mean an "Event of Default" as defined in the Subordinated Lending Agreements.       "SUBORDINATED INDEBTEDNESS COSTS AND EXPENSES" means reasonable out-of-pocket costs, expenses and fees payable by the Borrowers to each Subordinated Lender pursuant to the terms of the Subordinated Lending Agreements as in effect on the date of this Agreement or as modified in accordance with the terms of this Agreement.       "SUBORDINATED INDEBTEDNESS" shall mean all obligations, liabilities and indebtedness of any kind owed by Borrowers or Obligors to Subordinated Lenders from time to time under or pursuant to any of the Subordinated Lending Agreements, including, without limitation, all principal, interest, charges, expenses, fees and other sums (including all interest, charges, expenses, fees and other sums accruing after commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of any Borrower) chargeable to Borrowers or Obligors by Subordinated Lenders under or pursuant to any of the Subordinated Lending Agreements, and further including all reimbursement and indemnity obligations owing to Subordinated Lenders under or pursuant to any of the Subordinated Lending Agreements.       "SUBORDINATED INDEBTEDNESS DEFAULT NOTICE" shall mean a written notice delivered by a Subordinated Lender to Senior Agent notifying Senior Agent that a Subordinated Event of Default has occurred and identifying the Subordinated Event(s) of Default.       "SUBORDINATED LENDING AGREEMENTS" shall mean, collectively, the Subordinated Loan Agreement, the Senior Subordinated Notes, and the other Transaction Documents (as defined in the Subordinated Loan Agreement), each as from time to time in effect.       "SUBORDINATED LOAN AGREEMENT" shall mean the Securities Purchase Agreement dated as of the date hereof among Borrowers, Subordinated Lenders and AEA Mezzanine Fund LP, as the same may be amended, supplemented, modified or restated from time to time.       "SUBORDINATED MATURITY DATE" shall have the meaning given to the term "Maturity Date" in the Senior Subordinated Notes.       1.2 OTHER TERMS. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement.                                         4        1.3 CERTAIN MATTERS OF CONSTRUCTION. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of the same and any successor statutes and regulations. Except as expressly set forth herein, all references to any instruments or agreements, including, without limitation, references to any of the Creditor Agreements shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof to the extent made in compliance with this Agreement.       2. SUBORDINATION PROVISIONS.       2.1 PAYMENTS. Notwithstanding any provision of the Subordinated Lending Agreements to the contrary, the Subordinated Indebtedness is and shall be expressly junior and subordinated in right of payment to all Senior Indebtedness outstanding from time to time in accordance with the terms of this Agreement until such time as the Senior Indebtedness has been Paid in Full. Borrowers shall not make any payment of any kind, in cash, securities or other property (including any prepayment) on the Subordinated Indebtedness until such time as the Senior Indebtedness shall have been Paid in Full except with the prior written consent of Senior Agent which consent may be granted or withheld in the sole discretion of Senior Agent; provided, however, that so long as no Standstill Notice (as defined below) shall have been given by Senior Agent and be in effect, Borrowers may pay, and Subordinated Lenders may receive, Permitted Subordinated Indebtedness Payments, when due, on the Subordinated Indebtedness.       2.2 STANDSTILL. Following the occurrence of an Event of Default under the Senior Lending Agreements and receipt by Subordinated Lenders of written notice from Senior Agent that such an Event of Default has occurred and that Senior Agent has elected to exercise its rights under this Section 2.2 (such notice, the "Standstill Notice"), Borrowers shall not make any payment of any kind on the Subordinated Indebtedness and Subordinated Lenders shall not be entitled to receive any such payment in respect of the Subordinated Indebtedness; provided, however, that notwithstanding the foregoing restriction, Borrowers may pay any then due and payable (on a non-accelerated basis) Permitted Subordinated Indebtedness Payments (including, without limitation, any and all such Permitted Subordinated Indebtedness Payments that came due after the receipt by Subordinated Lenders of such Standstill Notice but were not paid as a result of such receipt of such Standstill Notice) on the earlier to occur of (x) the date on which all such Events of Default specified in each Standstill Notice delivered in accordance with the terms hereof and then in effect shall have been cured or waived and (y) the expiration of a period of (i) 180 days in the case of a Senior Covenant Default (so long as no Standstill Notice in respect of a Senior Payment Default is not then in effect, it being understood that if such a Standstill Notice is then in effect payment may not be made until the expiration of the period covered by such Standstill Notice), or (ii) 360 days in the case of a Senior Payment Default from delivery of the Standstill Notice in respect of such Event of Default, subject in all cases, however, to Sections 2.4 and 2.5 below (a "Standstill Period"). Notwithstanding any provision of this Section 2.2 to the contrary, (i) no Borrower shall be prohibited from making, and no Subordinated Lender shall be prohibited from receiving and retaining, as a result of any Senior Covenant Default(s), Permitted Subordinated Indebtedness Payments for more than an aggregate of 180 days within any period of 365 consecutive days; (ii) no Senior Covenant Default existing on the date any Standstill Notice is given shall, unless the same shall have ceased to exist for a period of at least 90 consecutive days, be used as a basis for any subsequent Standstill Notice; (iii) not more than two (2) Standstill Notices in respect of Senior Covenant Defaults shall be given within any period of 365 consecutive days; and (iv) the failure of any Borrower to make any payment with respect to the Subordinated Indebtedness by reason of the operation of this Section 2.2 shall not be construed as preventing the occurrence of an Event of Default under the applicable Subordinated Lending Agreement.                                         5        2.3 LIMITATION ON ACCELERATION. Subordinated Lenders shall not be entitled to accelerate the maturity of the Subordinated Indebtedness, commence any action or proceeding to recover any amounts due or to become due with respect to the Subordinated Indebtedness or exercise any other rights or remedies in respect of the collection of the Subordinated Indebtedness during any Standstill Period. Subordinated Lenders may, subject, however, in all events to the foregoing limitation and to Section 2.2, only exercise any of the foregoing options, rights, or remedies upon the earliest to occur of the following: (i) acceleration of the Senior Indebtedness; (ii) the commencement of any Insolvency Event; or (iii) the passage of one hundred twenty (120) days from delivery of a Subordinated Indebtedness Default Notice to Senior Agent (which notice may be given during any Standstill Period). Notwithstanding the foregoing, each Subordinated Lender may commence legal action to the extent (but only to such extent) necessary to toll the running of any applicable statute of limitation.       2.4 PRIOR PAYMENT OF SENIOR INDEBTEDNESS IN BANKRUPTCY, ETC. In the event of any insolvency or bankruptcy proceedings relative to a Borrower or an Obligor, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, or, in the event of any proceedings for voluntary liquidation, dissolution or other winding up of a Borrower or Obligor, or distribution or marshalling of a Borrower's or an Obligor's assets, or any composition with creditors of a Borrower, whether or not involving insolvency or bankruptcy, or if a Borrower shall cease its operations, call a meeting of its creditors or no longer do business as a going concern (each individually or collectively, an "Insolvency Event"), then all Senior Indebtedness shall be Paid in Full before any payment of any kind shall be made on account of any Subordinated Indebtedness; provided, however, that Subordinated Lender shall not be prohibited by the provisions hereof from receiving a distribution of Reorganization Subordinated Securities. Any such payment resulting from an Insolvency Event which would, but for the provisions hereof, be payable or deliverable in respect of the Subordinated Indebtedness, shall be paid or delivered directly to Senior Agent for the benefit of Senior Lenders until all Senior Indebtedness shall have been Paid in Full. Following the Payment in Full of the Senior Indebtedness, any payment of any kind which may be payable or deliverable in respect of the Subordinated Indebtedness shall be paid or delivered directly to the Subordinated Lenders for application in satisfaction of the Subordinated Indebtedness until such time as all the Subordinated Indebtedness shall have been paid in full in cash or another form acceptable to the Subordinated Lenders.       2.5 ACCELERATION. In the event that the Senior Indebtedness becomes due and payable, whether by acceleration, maturity or otherwise, no payment of any kind shall thereafter be made on account of the Subordinated Indebtedness until all Senior Indebtedness shall be Paid in Full; provided, however, if such acceleration or other event is rescinded or no longer in effect, payments in respect of the Subordinated Indebtedness (including, without limitations, payments that were not paid as a result of the provisions of this Section 2.5) may be made in accordance with the terms of this Agreement.                                         6        2.6 POWER OF ATTORNEY. In the event that a Subordinated Lenders fail to file a proof of claim with respect to the Subordinated Indebtedness in any bankruptcy or insolvency proceeding relative to a Borrower prior to the date which is ten (10) days prior to any claims bar date in such proceeding, Senior Agent or any person whom it may designate may, but shall not be obligated to, file such proofs of claim with respect to the Subordinated Indebtedness held by Subordinated Lenders and Subordinated Lenders hereby irrevocably appoint Senior Agent or any such designee attorney in fact for such Subordinated Lenders with full power to act in the place and stead of such Subordinated Lenders for such purpose and to receive and collect any and all dividends or other payments made thereon and to apply the same on account of the Senior Indebtedness. Borrowers and Subordinated Lenders will execute and deliver to Senior Agent such instruments as may be required by Senior Agent to effectuate the aforesaid power of attorney and to effect collection of any and all dividends or other payments which may be made at any time after the occurrence of an Insolvency Event. Notwithstanding anything to the contrary contained in the foregoing or otherwise in this Agreement, Subordinated Lenders shall at all times (prior to the exercise by Senior Agent or its designee of the rights of Senior Agent to file a proof of claim with respect to the Subordinated Indebtedness as provided for in this paragraph) have the right to file its own proof of claim with respect to the Subordinated Indebtedness and shall at all times have the right to exercise in its sole discretion any voting rights that may arise in any such bankruptcy or insolvency proceedings with respect to the Subordinated Indebtedness and/or as a result of the filing of any proof of claim with respect to the Subordinated Indebtedness (including, without limitation, any proof of claim filed by Senior Agent or its designee under the provisions of this paragraph) in any such proceeding.       2.7 PAYMENTS HELD IN TRUST. If any payment in respect of the Subordinated Indebtedness or the proceeds of any Collateral be collected or received by Subordinated Lenders at a time when Subordinated Lender is not permitted to receive any such payment or proceeds pursuant to the terms of this Agreement, then Subordinated Lenders will forthwith deliver, or cause to be delivered, the same to Senior Agent in precisely the form held by Subordinated Lenders (except for any necessary endorsement) and until so delivered, the same shall be held in trust by Subordinated Lenders as the property of Senior Agent.       2.8 SUBROGATION. Subject to the prior payment in full in cash of the Senior Indebtedness, to the extent that Senior Agent has received any payment on the Senior Indebtedness which, but for this Agreement, would have been applied to the Subordinated Indebtedness, the rights of the Subordinated Lenders, to the extent permitted by applicable law or principles of equity, shall be subrogated to the then or thereafter rights of Senior Lenders including, without limitation, the right to receive any payment made on the Senior Indebtedness until the principal of, interest on and other charges due under the Subordinated Indebtedness shall be Paid in Full; and, for the purposes of such subrogation, no payment to Senior Agent or Senior Lenders to which the Subordinated Lenders would be entitled except for the provisions of this Agreement shall, as between Borrowers, their respective creditors (other than Senior Lenders) and Subordinated Lenders, be deemed to be a payment by Borrowers to or on account of Senior Indebtedness, it being understood that the provisions hereof are and are intended solely for the purpose of defining the relative rights of the Subordinated Lenders on the one hand, and Senior Lenders on the other hand.                                         7        2.9 SCOPE OF SUBORDINATION. The provisions of this Agreement are solely to define the relative rights of any holder of Subordinated Indebtedness and Senior Agent and Senior Lenders. Nothing in this Agreement shall impair, as between Borrowers and Subordinated Lenders, the joint and several, unconditional and absolute obligation of Borrowers to punctually pay the principal, interest and any other amounts and obligations owing under the Subordinated Note and Subordinated Lending Agreements in accordance with the terms thereof, subject to the rights of Senior Agent and Senior Lenders under this Agreement.       3. SECURITY.       3.1 STATUS. Subordinated Lenders acknowledge and agree that Senior Agent, for the benefit of Senior Lenders, holds a security interest or lien in the Collateral. Subordinated Lenders represent that they do not hold any lien or security interest in any of the Collateral and covenant and agree that unless first obtaining the written consent of Senior Agent (and not -withstanding any other provision of this Agreement) they shall not at any time receive, obtain or hold a lien or security interest of any kind in all or any portion of the Collateral; provided, however, that the foregoing shall not, subject to Section 2.3 hereof, be deemed to prohibit Subordinated Lenders from commencing an action or other legal proceeding and obtaining a judgment in connection therewith.       3.2 PERFECTION. Subordinated Lender agrees that it will not contest the validity, perfection, priority or enforceability of the Liens of Senior Agent in the Collateral and that as between Senior Agent and Senior Lenders on the one hand, and Subordinated Lenders on the other hand, the terms of this Agreement shall govern even if part or all of the Senior Indebtedness or the Liens of Senior Agent securing payment and performance thereof are avoided, disallowed, set aside or otherwise invalidated in any judicial proceeding or otherwise.       3.3 MANAGEMENT OF COLLATERAL. Until all amounts owing upon Senior Indebtedness shall have been Paid in Full, Senior Agent and Senior Lenders shall have the exclusive right to manage, perform and enforce the terms of the Senior Lending Agreements (including without limitation making all lending decisions and taking all action with respect to the Collateral) and to exercise and enforce (or refrain from enforcing) all privileges and rights thereunder according to its discretion and exercise of its business judgment, including, without limitation, the exclusive right to enforce or settle insurance claims, take or retake control or possession of the Collateral, hold, apply, or release to Obligors proceeds (including insurance proceeds) of Collateral, and to hold, prepare for sale, process, sell, lease, dispose of, or liquidate or otherwise enforce their rights as to any or all Collateral.       3.4 NOTICE AND WAIVER OF MARSHALLING. Subordinated Lenders hereby waive any right to compel any marshaling of any of the Collateral. Senior Agent shall have the right, subject only to the terms of the Senior Lending Agreements and any applicable law, to proceed against any and all Collateral in any order and apply, in its discretion, proceeds of Collateral (unless released, in Senior Agent's discretion, to Obligors) in any order to the Senior Indebtedness.                                         8        4. MISCELLANEOUS.       4.1 PROVISIONS OF SUBORDINATED NOTES. From and after the date hereof, Borrowers and Subordinated Lenders shall cause the Senior Subordinated Notes to contain a provision to the following effect:           "This Note is subject to the Subordination and Intercreditor          Agreement, dated as of October 12, 2005, among Manufacturers and          Traders Trust Company, as the Senior Agent, and AEA Mezzanine Funding          LLC and AEA Mezzanine (Unleveraged) Fund LP, as Subordinated Lenders,          and TB Wood's Incorporated, Plant Engineering Consultants, LLC and TB          Wood's Enterprises, Inc., as the Borrowers, under which this Note and          the Borrowers' obligations hereunder, as well as any lien of          Subordinated Lenders in any property securing this Note, are          subordinated in the manner and to the extent set forth therein to the          prior payment of certain obligations to the holders of Senior          Indebtedness as defined therein."  Proof of compliance with the foregoing shall be promptly given to Senior Agent.       4.2 SURVIVAL OF RIGHTS. The right of Senior Agent to enforce the provisions of this Agreement shall not be prejudiced or impaired by any act or omitted act of Borrowers, Senior Agent or Senior Lenders, including without limitation, forbearance, waiver, consent, compromise, amendment, extension, renewal, or taking or release of security in respect of any Senior Indebtedness or noncompliance by Borrowers with such provisions, regardless of the actual or imputed knowledge of Senior Agent or Senior Lenders. No amendment, modification, supplement, extension, renewal, restatement or refinancing of any Senior Indebtedness in compliance with this Agreement or the Subordinated Indebtedness, or any action or inaction which Senior Agent may take or fail to take in respect of the any Senior Lending Agreements or any action or inaction (including without limitation any disposition or release of any Collateral), or any action or inaction which Subordinated Lender may take following a Standstill Period, shall alter, impair or affect the subordination provisions or other terms of this Agreement.       4.3 BANKRUPTCY FINANCING ISSUES. This Agreement shall continue in full force and effect after the filing of any petition ("Petition") by or against a Borrower or an Obligor under the United States Bankruptcy Code or in respect of any receivership proceeding under any state or federal law (any such bankruptcy, reorganization or receivership, a "Proceeding"), including all converted or succeeding cases in respect thereof. All references herein to any Borrower or any Obligor shall be deemed to apply to such Person as debtor-in-possession and to a trustee for such Person. If a Borrower or any Obligor shall become subject to a Proceeding, and Senior Agent/Senior Lenders shall desire to permit the use of cash collateral or to provide post-Petition financing from Senior Lenders, any such financing shall be treated as creating Senior Indebtedness and all Liens of Senior Agent, whether created before or after the commencement of any such Proceeding shall secure and continue to secure all such Senior Indebtedness.                                         9        4.4 NO AMENDMENT OF SUBORDINATED LENDING AGREEMENTS. Until the Senior Indebtedness has been Paid in Full, neither Borrowers nor Subordinated Lenders shall, without the prior written consent of Senior Agent, (1) enter into any amendment to or modification of any Subordinated Lending Agreements which (a) increases the maximum principal amount or interest rate thereunder, (b) adds any new "event of default" thereunder or (c) advances the maturity of the Subordinated Indebtedness, or (d) makes more restrictive any financial covenant contained therein, or (2) enter into any amendment to or modification of any Subordinated Lending Agreement which causes any other covenant or agreement of Borrowers thereunder to be more restrictive than the terms of the Senior Lending Agreements. Notwithstanding the foregoing to the contrary, Subordinated Lenders may modify the covenants set forth in the Subordinated Loan Agreement in a manner which is consistent with or conforms to amendments or modifications made in the Loan Agreement, and which in the case of the financial covenants set forth in Section 9.8 of the Subordinated Loan Agreement, preserves the proportional difference between such covenant requirements, as the case may be, and the requirements of the corresponding financial covenants, as the case may be, set forth in the Loan Agreement.       4.5 AMENDMENTS TO SENIOR LENDING AGREEMENTS. Nothing contained in this Agreement, or in any other agreement or instrument binding upon any of the parties hereto, shall in any manner limit or restrict the ability of Senior Agent or Senior Lenders to waive, amend or modify the terms and conditions of the Senior Lending Agreements, in such manner as Senior Agent or Senior Lenders and Borrowers shall mutually determine, and none of such actions shall in any manner affect or impair the subordination established by this Agreement in respect of the Subordinated Indebtedness; provided, however, that in no event shall any amendment or modification (a) cause the principal amount of the Senior Indebtedness owing by the Borrowers to exceed the amount set forth in the proviso of the definition of "Senior Indebtedness," (b) (apart from the imposition of the default rate in accordance with the terms of the Senior Lending Agreements) increase the interest rate with respect to the Senior Indebtedness by more than 150 basis points, (c) extend the final maturity of the Senior Indebtedness by more than two (2) years, (d) shorten the time of payment with respect to any principal amount of the Senior Indebtedness, or (e) prohibit or restrict the payment of principal of, interest on, or other amounts payable with respect to, the Subordinated Indebtedness, in a manner that is more restrictive than the prohibitions and restrictions contained in the Senior Lending Agreements as in effect on the date hereof.       4.6 NOTICES. Any notice or other communication required or permitted pursuant to this Agreement shall be deemed given (a) when personally delivered to any officer of the party to whom it is addressed, (b) upon actual receipt thereof when sent, by a recognized overnight delivery service or (c) upon actual receipt thereof when sent by telecopier to the number set forth below with electronic confirmation of receipt, in each case addressed to each party at its address or telecopier number set forth below or at such other address or telecopier number as has been furnished in writing by a party to the other by like notice:           Notices shall be addressed as follows:                                         10     If to Senior Agent:                       Manufacturers and Traders Trust Company                                           601 Dresher Road, Third Floor                                           Horsham, PA  19044                                           Attention:     Mr. James P. Zicolello, Vice President                                           Facsimile:     215-956-7081  With a copy to:                           Blank Rome LLP                                           One Logan Square                                           Philadelphia, PA  19103                                           Attention:     Harvey I. Forman, Esquire                                           Facsimile:     215-569-5522  If to Subordinated Lenders:               AEA Mezzanine Funding LLC                                           c/o AEA Mezzanine Partners LP                                           c/o AEA Mezzanine Management LP                                           200 First Stamford Place                                           Stamford, Connecticut 06902                                           Fax No.: (203) 564-2661                                           Attention:  Joseph D. Carrabino, Jr.                                           AEA Mezzanine (Unleveraged) Fund LP                                           c/o AEA Mezzanine Partners LP                                           c/o AEA Mezzanine Management LP                                           200 First Stamford Place                                           Stamford, Connecticut 06902                                           Fax No.: (203) 564-2661                                           Attention:  Joseph D. Carrabino, Jr.  in each case, with a copy to:             Morrison Cohen LLP                                           909 Third Avenue                                           New York, New York  10022                                           Fax No.: (212) 735-8708                                           Attention:  David A. Scherl, Esq.  If to the Borrowers:                      c/o TB Wood's Corporation                                           440 North Fifth Avenue                                           Chambersburg, PA  17201-1778                                           Fax No.: (717) 264-2869                                           Attention: William T. Fejes, Jr.                                          11     with a copy to:                           Dechert LLP                                           4000 Bell Atlantic Tower                                           1717 Arch Street                                           Philadelphia, PA  19103                                           Fax No.: (215) 994-2222                                           Attention:  David Schulman, Esq.        4.7 BINDING EFFECT; OTHER. This Agreement shall be a continuing agreement, shall be binding upon and shall inure to the benefit of the parties hereto from time to time and their respective successors and assigns, shall be irrevocable and shall remain in full force and effect until the Senior Indebtedness shall have been Paid in Full, but shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof of any amount paid by or on behalf of Borrowers with regard to the Senior Indebtedness is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of a Borrower, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee, custodian, or similar officer, for a Borrower or any substantial part of its property, or otherwise, all as though such payments had not been made. A Subordinated Lender shall not sell or assign its interest in the Subordinated Lending Agreements to any person other than to an affiliate of the Subordinated Lender, a fund under management by the Subordinated Lender or another Subordinated Lender except as provided for and permitted under Section 5.1 below. Any waiver hereunder must be evidenced by a signed writing of the party to be bound thereby, and shall only be effective in the specific instance. Any amendment hereunder must be evidenced by a signed writing of all of the parties hereto. This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Pennsylvania without regard to principles of conflicts of law. The headings in this Agreement are for convenience of reference only, and shall not alter or otherwise affect the meaning hereof.       5. REPRESENTATIONS, WARRANTIES AND ADDITIONAL AGREEMENTS.       5.1 SUBORDINATED LENDER REPRESENTATIONS. Subordinated Lenders represent and warrant to Senior Lenders that Subordinated Lenders and AEA Mezzanine Fund LP are the sole holders of the Subordinated Indebtedness and that a full and current copy of all Subordinated Lending Agreements has been delivered to Senior Agent. Subordinated Lenders agree that they shall not assign or transfer any of the Subordinated Indebtedness (except for any assignment or transfer to an affiliate of Subordinated Lender, or a fund under management by Subordinated Lender) without (i) prior notice thereof to Senior Agent and (ii) any such assignment or transfer being made expressly subject to the terms of this Agreement. Each Subordinated Lender further warrants to Senior Lenders that it has full right, power and authority to enter into this Agreement.       5.2 SENIOR LENDER REPRESENTATIONS. Senior Agent and Senior Lenders represent and warrant to Subordinated Lenders that Senior Lenders are the holder of the Senior Indebtedness and Senior Agent is the holder of Liens which secure or will secure the Senior Indebtedness and that a full and current copy of the Loan Agreement and Notes has been delivered to Subordinated Lenders. Senior Lenders agree that if the Senior Lenders shall assign or transfer any of the Senior Indebtedness or Liens, (i) notice thereof shall be given to Subordinated Lender and (ii) such assignment or transfer shall be made expressly subject to the terms and provisions of this Agreement. Senior Agent further warrants to Subordinated Lenders that it has full right, power and authority to enter into this Agreement.                                         12        6. PROCEEDINGS. ANY ACTION OR PROCEEDING TO ENFORCE OR ARISING OUT OF THIS AGREEMENT MAY BE COMMENCED IN THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA LOCATED IN MONTGOMERY COUNTY, OR IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA SITTING IN PHILADELPHIA, PENNSYLVANIA. EACH PARTY HERETO WAIVES PERSONAL SERVICE OF PROCESS AND AGREES THAT A SUMMONS AND COMPLAINT COMMENCING AN ACTION OR PROCEEDING IN ANY SUCH COURT SHALL BE PROPERLY SERVED AND SHALL CONFER PERSONAL JURISDICTION IF SERVED BY REGISTERED OR CERTIFIED MAIL OR NATIONALLY RECOGNIZED OVERNIGHT COURIER TO SUCH PARTY, AT THE ADDRESS SET FORTH IN SECTION 4.9 HEREOF.       7. WAIVER OF JURY TRIAL. EACH PARTY HERETO KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHT TO TRIAL BY JURY THEY MAY HAVE IN ANY ACTION OR PROCEEDING, IN LAW OR IN EQUITY, IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH.       8. BORROWERS' ACKNOWLEDGEMENT. Borrowers agree that (i) nothing contained in this Agreement shall be deemed to amend, modify, supersede or otherwise alter the terms of the respective agreements between Borrowers and each Creditor except to the extent that payments to Subordinated Lenders may be restricted hereby and (ii) this Agreement is solely for the benefit of the Creditors and shall not give Borrowers, their respective successors or assigns, or any other person any rights with respect to any Creditor.       9. RELATIONSHIP. Nothing herein contained is intended to create a joint venture or partnership between Subordinated Lenders and Senior Lenders (or Senior Agent) or (except to the extent payments or proceeds are to be held by Subordinated Lenders for the benefit of Senior Agent) a fiduciary relationship among such parties.       10. REPLACEMENT FINANCING. In the event that Senior Lenders or Borrowers at any time terminate the financing arrangements with respect to the Senior Indebtedness, then the provisions hereof shall inure to the benefit of any financial institution(s) or other Person obtained by Borrowers to provide replacement financing for Borrowers and, in connection with such replacement financing, Subordinated Lenders shall, if requested by such replacement lender, execute with such replacement lender a subordination agreement on substantially the same terms and conditions of this Agreement. No financing documentation that replaces the Senior Lending Agreements and pursuant to which the Senior Indebtedness under the Senior Lending Agreements is refinanced, as such financing documentation may be amended, supplemented or otherwise modified from time to time in compliance with this Agreement, shall, for the purposes hereof, contain, either initially or by amendment or other modification, any terms, conditions, covenants or defaults other than those which (a) exist at the time of such refinancing in the Senior Lending Agreements or (b) could be included in the Senior Lending Agreements by an amendment or other modification that would not be prohibited by the terms of this Agreement.                                         13        11. MISCELLANEOUS. This Agreement contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous communications with respect hereto. No modification hereof shall be binding or enforceable unless signed by the party against whom enforcement may be sought.       12. COUNTERPARTS; FACSIMILE. This Agreement may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto.                                [SIGNATURE PAGES FOLLOW]                                         14         IN WITNESS WHEREOF, the Subordinated Lenders, Borrowers, and the Senior Agent have caused this Agreement to be executed as of the date first above written.                                    SENIOR AGENT:                                            MANUFACTURERS AND TRADERS TRUST                                           COMPANY                                            By:  _________________________________                                                Name:                                                Title:                                             SUBORDINATED LENDERS:                                            AEA MEZZANINE FUNDING LLC                                             By:  _________________________________                                                Name:  Joseph D. Carrabino, Jr.                                                Title:  President                                            AEA MEZZANINE (UNLEVERAGED)                                           FUND LP                                            By:  AEA Mezzanine Partners LP,                                                its General Partner                                            By:  AEA Mezzanine Management GP LLC,                                                its General Partner                                            By:  _________________________________                                                Name:  Joseph D. Carrabino, Jr.                                                Title:  President                    [FIRST SIGNATURE PAGE TO SUBORDINATION AGREEMENT]                                        S-1                                         BORROWERS:                                            TB WOOD'S INCORPORATED                                             By:  _________________________________                                                Name:                                                Title:                                             PLANT ENGINEERING CONSULTANTS, LLC                                             By:  _________________________________                                                Name:                                                Title:                                             TB WOOD'S ENTERPRISES, INC.                                             By:  _________________________________                                                Name:                                                Title:                    [SECOND SIGNATURE PAGE TO SUBORDINATION AGREEMENT]                                        S-2    EX-21 9 ex21.txt EX21.TXT                                                                          EXHIBIT 21                    SUBSIDIARIES AND JOINT VENTURE OF REGISTRANT                TB WOOD'S CORPORATION, SUBSIDIARIES AND JOINT VENTURE                                  DECEMBER 31, 2005  Registrant: TB Wood's Corporation (Delaware)     Subsidiary:  TB Wood's Incorporated (Pennsylvania)         Subsidiaries:  Plant Engineering Consultants, LLC (Tennessee)                        T.B. Wood's Canada Ltd (Canada)                        Industrial Blaju, S.A. de C.V. (Mexico)                        Berges electronic GmbH (Germany                        Subsidiary: Berges electronic S.r.l. (Italy)                        TB Wood's Enterprises, Inc. (Delaware)         Joint Venture:  TB Wood's (India) Private Limited (India)      EX-23 10 ex23-1.txt EX23-1.TXT                                                                        EXHIBIT 23.1         CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  We have issued our report dated March 9, 2006, accompanying the consolidated financial statements and schedule included in the Annual Report of TB Wood's Corporation on Form 10-K for the year ended December 31, 2005. We hereby consent to the incorporation by reference of said reports in the Registration Statements of TB Wood's Corporation on Forms S-8 (File No. 33-87936, effective May 9, 2002, File No. 333-31785 and 333-31787, effective July 22, 1997 and File No. 33-07231, effective June 28, 1996).  Grant Thornton LLP  Baltimore, Maryland March 20, 2006       EX-31 11 ex31-1.txt EX31-1.TXT                                                                        EXHIBIT 31.1        CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT             RULE 13a-14(a) AS ADOPTED PURSUANT TO SECTION 302 OF THE                            SARBANES-OXLEY ACT OF 2002  I, William T. Fejes, Jr., certify that:       1.    I have reviewed this annual report on Form 10-K of TB Wood's            Corporation;       2.    Based on my knowledge, this annual report does not contain any untrue            statements of a material fact or omit to state a material fact            necessary to make the statements made, in light of the circumstances            under which such statements were made, not misleading with respect to            the periods presented in this annual report;       3.    Based on my knowledge, the financial statements, and other financial            information included in this annual report, fairly present in all            material respects the financial condition, results of operations and            cash flows of the registrant, as of, and for the periods presented in            this annual report;       4.    The registrant's other certifying officer and I are responsible for            establishing and maintaining disclosure controls and procedures (as            defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant            and we have:       a)    designed such disclosure controls and procedures, or caused such            disclosure controls and procedures to be designed under our            supervision, to ensure that material information relating to the            registrant, including its consolidated subsidiaries, is made known to            us by others within those entities, particularly during the period in            which this annual report is being prepared;      b)    evaluated the effectiveness of the registrant's disclosure controls            and procedures and presented in this report our conclusions about the            effectiveness of the disclosure controls and procedures, as of the            end of the period covered by this annual report based on such            evaluation; and      c)    disclosed in the report any change in the registrant's internal            control over financial reporting that occurred during the            registrant's most recent fiscal quarter (the registrant's fourth            fiscal quarter in the case of an annual report) that has materially            affected, or is reasonably likely to materially affect, the            registrant's internal control over financial reporting; and       5.    The registrant's other certifying officer and I have disclosed, based            upon our most recent evaluation of internal control over financial            reporting, to the registrant's auditors and the audit committee of            the registrant's Board of Directors (or persons fulfilling the            equivalent function):       a)    all significant deficiencies and material weaknesses in the design or            operation of internal control over financial reporting which are            reasonably likely to adversely affect the registrant's ability to            record, process, summarize and report financial information; and      b)    any fraud, whether or not material, that involves management or other            employees who have a significant role in the registrant's internal            control over financial reporting.  Date:   March 24, 2006  /s/ William T. Fejes, Jr. - ------------------------- President and CEO (Principal Executive Officer)      EX-31 12 ex31-2.txt EX31-2.TXT                                                                        EXHIBIT 31.2        CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT             RULE 13a-14(a) AS ADOPTED PURSUANT TO SECTION 302 OF THE                            SARBANES-OXLEY ACT OF 2002  I, Joseph C. Horvath, certify that:       1.    I have reviewed this annual report on Form 10-K of TB Wood's            Corporation;       2.    Based on my knowledge, this annual report does not contain any untrue            statements of a material fact or omit to state a material fact            necessary to make the statements made, in light of the circumstances            under which such statements were made, not misleading with respect to            the periods presented in this annual report;       3.    Based on my knowledge, the financial statements, and other financial            information included in this annual report, fairly present in all            material respects the financial condition, results of operations and            cash flows of the registrant, as of, and for the periods presented in            this annual report;       4.    The registrant's other certifying officer and I are responsible for            establishing and maintaining disclosure controls and procedures (as            defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant            and we have:       a)    designed such disclosure controls and procedures, or caused such            disclosure controls and procedures to be designed under our            supervision, to ensure that material information relating to the            registrant, including its consolidated subsidiaries, is made known to            us by others within those entities, particularly during the period in            which this annual report is being prepared;      b)    evaluated the effectiveness of the registrant's disclosure controls            and procedures and presented in this report our conclusions about the            effectiveness of the disclosure controls and procedures, as of the            end of the period covered by this annual report based on such            evaluation; and      c)    disclosed in the report any change in the registrant's internal            control over financial reporting that occurred during the            registrant's most recent fiscal quarter (the registrant's fourth            fiscal quarter in the case of an annual report) that has materially            affected, or is reasonably likely to materially affect, the            registrant's internal control over financial reporting; and       5.    The registrant's other certifying officer and I have disclosed, based            upon our most recent evaluation of internal control over financial            reporting, to the registrant's auditors and the audit committee of            the registrant's Board of Directors (or persons fulfilling the            equivalent function):       a)    all significant deficiencies and material weaknesses in the design or            operation of internal control over financial reporting which are            reasonably likely to adversely affect the registrant's ability to            record, process, summarize and report financial information; and      b)    any fraud, whether or not material, that involves management or other            employees who have a significant role in the registrant's internal            control over financial reporting.  Date:   March 24, 2006  /s/Joseph C. Horvath - ----------------------- Chief Financial Officer  (Principal Financial Officer and Principal Accounting Officer)      EX-32 13 ex32.txt EX32.TXT                                                                          EXHIBIT 32                   STATEMENT PURSUANT TO 18 U.S.C. SECTION 1350 AS             REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In connection with the Annual Report of TB Wood's Corporation (the "Company") on Form 10-K for the fiscal year ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify that to the best of our knowledge:  1.  The Report fully complies with the requirements of section 13(a) or 15(d) of     the Securities and Exchange Act of 1934; and  2.  The information contained in the report fairly presents, in all material     respects, the financial condition and results of operations of the Company.  March 24, 2006  /s/William T. Fejes, Jr.   President and CEO                 ------------------------                 William T. Fejes, Jr.  March 24, 2006  /s/Joseph C. Horvath    Chief Financial Officer                 --------------------                 Joseph C. Horvath  A signed original of this written statement required by Section 906 has been provided to TB Wood's Corporation and will be retained by TB Wood's Corporation and furnished to the Securities and Exchange Commission or its staff upon request.      -----END PRIVACY-ENHANCED MESSAGE-----