-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WsKnKuEeE5rxdnQTwYhPLbyUZe/JRnTXllirPttawmBMWpUV/yobJ75ulxfaRP+4 p1dKwJi5UwWB0augS0nW9w== 0000950116-00-000643.txt : 20000329 0000950116-00-000643.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950116-00-000643 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TB WOODS CORP CENTRAL INDEX KEY: 0001000227 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 251771145 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14056 FILM NUMBER: 580997 BUSINESS ADDRESS: STREET 1: 440 N FIFTH AVE CITY: CHAMBERSBURG STATE: PA ZIP: 17201 BUSINESS PHONE: 7172647161 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to ____ Commission file number 1-14182 TB Wood's Corporation (Exact name of registrant as specified in its charter) Delaware 25-1771145 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 440 North Fifth Avenue, Chambersburg, PA 17201 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (717) 264-7161 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each Exchange on Which Registered Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant based on the closing price on February 11, 2000, was $50,238,873. On February 15, 2000, there were 5,467,403 shares of the registrant's common stock outstanding. 1 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders are incorporated by reference into Part III hereof. Only those specific portions so incorporated are to be deemed filed as part of this Form 10-K. 2 TB WOOD'S CORPORATION FISCAL YEAR 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I................................................................................................................... 4 Item 1. Business.................................................................................................4 Item 2. Properties...............................................................................................9 Item 3. Legal Proceedings........................................................................................9 Item 4. Submission of Matters to a Vote of Security Holders......................................................9 PART II..................................................................................................................10 Item 5. Market for Registrant's Common Equity and Related Shareholder Matters...................................10 Item 6. Selected Financial Data.................................................................................10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation....................11 Item 8. Financial Statements and Supplementary Data.............................................................15 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....................38 PART III.................................................................................................................39 Item 10. Directors and Executive Officers of the Registrant.....................................................39 Item 11. Executive Compensation.................................................................................39 Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................39 Item 13. Certain Relationships and Related Transactions.........................................................39 PART IV..................................................................................................................40 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................40 SIGNATURES...............................................................................................................43
3 PART I Item 1. Business. 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 143 year-old business operates 11 production facilities with over 1,100 employees in the United States, Canada, Mexico, Germany, India and Italy. The Company has a network of more than 1,000 select independent distributors with over 3,000 locations in North America. History TB Wood's Incorporated was founded in 1857, and entered the power transmission industry at the turn of the century. The Company was incorporated in 1995. In January 1996, a subsidiary of the Company merged with TB Wood's Incorporated ("TBW"), the original Pennsylvania Corporation that was formed in 1857, with TBW as the surviving corporation in the merger. Since 1992, the Company has introduced 25 new electronic products or product line extensions, including seven such introductions in the most recent two years. These include a new line of full-featured drives which improve motor performance; extension to 20 horsepower of the Company's successful line of micro-inverters; and drives for motor sizes up to 700 horsepower. The Company introduced a unique and high performance integrated motor-drive combination; and a line of customizable, cost-effective drives targeted for industrial Original Equipment Manufacturer ("OEM") applications. Since 1992, the company has introduced nine new mechanical products and product line extensions, including three mechanical belted drive products and four new coupling products. The Company uses acquisitions and strategic alliances to enhance product offerings, gain access to technology and products, leverage fixed costs, and extend the Company's global reach. Since 1993 the Company has completed eight acquisitions. In the electronics business the Company acquired Plant Engineering Consultants, Inc., an established supplier of integrated drive systems for the fibers industry; Ambi-Tech Industries, Inc., a leading manufacturer of electronic brakes; and Graseby Controls Inc., a supplier of high-frequency drives for machine tool applications. In December 1997, the Company acquired Berges electronic GmbH in Germany, and its subsidiary Berges electronic S.r.l. in Italy. The Berges companies are well-established drive developers, manufacturers and marketers, and are located in the two most important machinery markets in Europe. The Company's mechanical business acquisitions include several lines of flexible couplings and variable speed drives from Dana Corporation; Grupo Blaju S.A. de C.V., the leading Mexican manufacturer and marketer of belted drives; and Deck Manufacturing, a producer of gear couplings. During July, 1999, the Company entered into a joint venture with Electron, located in Littleton, Colorado in the belted drive business to leverage fixed costs, provide additional foundry capacity, and open new customer opportunities. The Company has strategic alliances with companies in Finland, France, Switzerland, Australia, New Zealand and Japan. Industry Overview The power transmission industry provides electronic and mechanical products used in manufacturing and material processing activities that transfer controlled power from a motor or engine to a machine. The power transmission industry consists of three product categories: mechanical power transmission components, gear boxes and electronic drives. The Company competes in the electronic drives and mechanical power transmission component's product categories. 4 Products The products manufactured by the Company are classified into two segments, mechanical business and electronics business. 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. For further product information, refer to the consolidated financial statements and footnote No. 9 included in this Form 10-K.
1999 1998 1997 ---- ---- ---- Net Sales % Net Sales % Net Sales % --------- ----- --------- ----- --------- ------ Electronic Power $49.7 40.2% $57.0 42.6% $44.0 35.5% Transmission Products Mechanical Power 74.0 59.8% 76.9 57.4% 80.0 64.5% Transmission Products $123.7 100.0% $133.9 100.0% $124.0 100.0%
Electronic Product Offering The Company designs and manufactures Alternating Current ("AC") and Direct Current ("DC") electronic drives 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 drive products, which represent most of its net sales of electronic drive product offering, are programmable to meet the needs of specific applications with particular strengths in food processing, materials handling, packaging and general machinery applications. The Company's electronic products are designed to meet both North American and European standards. The Company's integrated electronic drive systems consist of uniquely configured AC and/or DC electronic drives, programmable logic controllers and in-house designed custom software. These systems are packaged in custom enclosures to meet the requirements of specific applications. 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, open belted 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 motors and engines to machines. The primary markets for these products are the construction, oil field and specialized industrial machinery, food processing, material handling, pumps, compressors, mining, pulp and paper and agricultural equipment industries. 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 selected, authorized, industrial distributors who resell the Company's products to industrial consumers and Original Equipment Manufacturers ("OEMs"). The Company also sells directly to approximately 1,300 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. 5 The Company operates central distribution centers in Chambersburg, Pennsylvania; Stratford, Ontario and Mexico City, Mexico and regional distribution centers in Atlanta, Georgia; Elk Grove, Illinois; Dallas, Texas; Los Angeles, California; Portland, Oregon; Littleton, Colorado; Montreal, Quebec; Orlando, Florida; Edmonton, Alberta; Marienheide, Germany; Bangalore, India; and Naturns, Italy. The Company's products are manufactured to maintain stock inventories and 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 Company's products are consumed principally by industrial users. The Company's OEM customers include a number of Fortune 500 companies. The Company's distributor customers include, among others, Motion Industries and Kaman Industrial Technologies who are among the largest distributors in the power transmission industry. In addition, the Company's distributors also sell to OEMs. 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 29% of the Company's net sales in 1999. Competition The 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 speed 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 systems competitors include Asea Brown Boveri, Allen Bradley and Siemens Corp. 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, size capability, engineering and customer support. The Company's most significant competitors in the mechanical product category include Rockwell, Emerson Electric Co. Inc., Martin Sprocket and Gear, Rexnord Corp. and Lovejoy Industries Inc. Management believes that there are no 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. 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) as a percent of net sales during the last three fiscal years have been 3.0% for 1999, 2.6% for 1998, and 3.0% for 1997. The Company is completing a new Technology Center at the Chambersburg facility which is designed to make the research and development investment more productive by making it easier for engineers to share insights and collaborate on projects. 6 Raw Materials The Company uses standard purchased components in all of its electronics products. The Company also purchases specialized components designed by its engineers. Purchased components include power transistors, capacitors, printed circuit boards, 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. The principal raw materials used in the Company's mechanical manufacturing operations are various types of steel, including pig iron, metal stampings, castings, forging 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. 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: Sure-Flex(R), Formflex(R), Ultra-V(R), Roto-Cone(R), Var-A-Cone(TM), True Tube(TM), E-trAC(R), Ultracon(R), Fiberlink(TM), Dura-Flex, Disc-O-Torque, DST, E-Trol, HST, IST, NLS, Roto-Cam, Softron, and Sure-Grip. Employees As of December 31, 1999, the Company employed over 1,100 people. Over 30 of the Company's hourly employees located at its Stratford, Ontario, Canada facility are represented by the United Steelworkers of Canada pursuant to a collective bargaining agreement dated January 20, 1998 that expires on January 19, 2001. Over 110 of the Company's employees located at its Mexico City, Mexico facility are represented by the National Metal Workers' Union of Mexico pursuant to a collective bargaining agreement that expires on January 31, 2001. The Company has created the TB Wood's Institute, which 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. Both the Mt. Pleasant, Michigan (the "Mt. Pleasant Facility") and the Chambersburg, Pennsylvania (the "Chambersburg Facility") facilities had been listed on the Comprehensive Environmental Response, Compensation, and Liability Information System ("CERCLIS") (a list of sites maintained by the United States Environmental Protection Agency ("USEPA") for which a determination was to be made concerning whether investigation or remediation under CERCLA would be required). Both have been designated by USEPA as requiring no further action under CERCLA; therefore, the Company does not believe that material expenditures for these sites will be incurred under the CERCLA program. However, this does not assure that such expenditures would not be required under other federal and/or state programs. The Mt. Pleasant Facility is currently listed on Michigan's inactive hazardous waste site list pursuant to the Michigan version of CERCLA (formerly known as "Act 307", amended and recodified on June 5, 1995 as Part 201 of the Natural Resources and Environmental Protection Act ("Part 201")). The Mt. Pleasant Facility was first placed on the Michigan hazardous waste site list in 1991, when the Facility was owned by Dana Corporation. When the Company acquired 7 the Mt. Pleasant Facility from Dana Corporation, the Asset Purchase Agreement dated March 31, 1993 (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 fulfill its remediation and indemnification obligations under the Asset Purchase Agreement, if Dana Corporation is unable to fulfill such commitments, then the Company may incur additional costs. 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. Recent Developments Self-Tender Offer On December 17, 1999, the Company completed a "Dutch Auction" self-tender offer. On November 12, 1999, the Company commenced the tender offer for up to 400,000 shares of its Common Stock, or approximately 6.8% of its then-outstanding shares, at a purchase price not greater than $12.50 nor less than $9.00 per share. A total of 424,398 shares were tendered at $9.00 per share. Due to the over-subscription, shares tendered were pro-rated. The Company purchased 400,000 shares at $9.00 per share, resulting in a final pro-ration factor of 94%. Following the purchase of shares of Common Stock tendered, the Company had approximately 5,462,228 shares of Common Stock issued and outstanding. The funds required to complete the offer and pay related expenses were provided from borrowings incurred by the Company under its $52,500,000 unsecured revolving credit facility (the "Credit Facility") arranged by PNC Bank, N.A. ("PNC") bearing a variable interest rate that is currently at LIBOR plus 112.5 basis points and maturing October 2003. 8 Item 2. Properties. The Company owns and operates the following facilities:
Location Operations Sq. Feet -------- ---------- -------- Chambersburg, Foundry production of iron, and manufacturing and engineering 440,000 Pennsylvania of mechanical products. Central distribution, administrative offices and corporate headquarters. Scotland, Pennsylvania Manufacturing and engineering of electronic products. 51,300 Trenton, Tennessee Manufacturing of mechanical products. 60,000 Stratford, Ontario Manufacturing of mechanical products. Central distribution and 46,000 administrative offices for 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 electronic 60,000 drive systems. Headquarters of PEC. Marienheide, Germany Manufacturing, engineering and sales of electronic products. 9,800* Central distribution and administrative offices for Berges electronic GmbH. Naturns, Italy Manufacturing of electrical products. 19,500* Elk Grove, Illinois Distribution center. 21,700 Bangalore, India Manufacturing, engineering and sales of integrated electronic 4,500* drive systems.
- ------------------------------ *Includes certain leased space In addition, the Company leases manufacturing facilities in Mexico City, Mexico. The Company also has distribution facilities in: Atlanta, Georgia; Dallas, Texas; Montreal, Quebec; Edmonton, Alberta; Los Angeles, California; Portland, Oregon; Littleton, Colorado; and Orlando, Florida. Item 3. Legal Proceedings. 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. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted for a vote of the security holders during the fiscal quarter ended December 31, 1999. 9 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. The Company consummated the Initial Public Offering ("IPO") of its common stock on February 8, 1996 and its Common Stock is listed on the New York Stock Exchange. The high and low prices for the Common Stock, and dividends paid on Common Stock, during the period from January 2, 1998 through December 31, 1999 were as follows:
Sales Price Dividends ----------- --------- High Low Declared Paid in Cash ---- --- -------- ------------ Fiscal Year 1998 ---------------- 1st quarter $23.12 $20.50 $.08 $.08 2nd quarter 24.50 20.81 .09 .09 3rd quarter 21.06 14.56 .09 .09 4th quarter 14.81 11.75 .09 .09 Fiscal Year 1999 ---------------- 1st quarter $12.75 $10.88 $.09 $.09 2nd quarter 12.00 10.63 .09 .09 3rd quarter 11.00 9.63 .09 .09 4th quarter 10.50 8.25 .09 .09
On February 11, 2000 there were 166 registered shareholders of the Company's Common Stock, and the high and low sales prices for the Common Stock were both $9.19. During fiscal year 1999, the Company declared and paid total dividends of $.36 on the shares of its Common Stock. The Company declared a $.09 dividend on January 7, 2000 and paid it on January 31, 2000. The declaration of any dividend, including the amount thereof, will be 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 and capital requirements, and such other factors as the Board of Directors deems relevant. There were no sales of unregistered securities during the period of January 2, 1999 through December 31, 1999. Item 6. Selected Financial Data. The following tables set forth selected historical financial and operating data for the Company for each of the five years through fiscal year 1999 and have been derived from the Company's financial statements which have been audited by the Company's independent public accountants. 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." 10 Effective fiscal year 1995, the Company changed its year-end to the Friday closest to the last day of December. Fiscal year-ends are as follows: 1999 December 31, 1999 1998 January 1, 1999 1997 January 2, 1998 1996 January 3, 1997 1995 December 29, 1995 1994 & prior December 31 of calendar year.
Selected Financial Data (in thousands, except per share data) Fiscal Year 1999 1998 1997 1996 1995 Revenue and Income: Net sales $123,737 $133,949 $124,027 $102,505 $102,307 Gross profit 44,357 47,589 45,012 37,747 36,111 Operating income 12,108 15,566 16,951 12,573 12,593 Minority interest 808 0 0 0 0 Operating income after minority interest 11,300 15,566 16,951 12,573 12,593 Net income 5,367 7,890 8,689 4,640 4,599 -------------- -------------- ------------ ------------ ----------- Cash Flow Cash provided by operations $10,050 $6,228 $16,829 $9,090 $9,214 Capital expenditures 8,316 7,481 5,824 3,762 4,531 -------------- -------------- ------------ ------------ ----------- Assets and Liabilities: Working capital* $34,245 $34,644 $27,682 $26,962 $26,160 Total assets 102,866 96,025 89,617 73,395 66,631 Total debt 36,924 32,469 26,539 22,227 41,463 Shareholders' equity (deficit) 27,692 28,515 23,606 16,875 (7,488) -------------- -------------- ------------ ------------ ----------- Per Share Data Net income $0.91 $1.33 $1.47 $0.83 $1.21 Cash dividends paid .36 .35 .32 .24 - Book value 4.72 4.81 3.99 3.01 (1.97) -------------- -------------- ------------ ------------ ----------- Weighted average shares outstanding 5,910 5,932 5,921 5,600 3,810
* Working capital is defined as the sum of accounts receivable, inventory, and other current assets, less accounts payable and accrued expenses. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation Year Ended December 31, 1999 Compared to Year Ended January 1, 1999 Net sales for fiscal 1999 decreased to $123.7 million from $133.9 million in 1998, a decrease of $10.2 million, or 7.6%. Based on data received from industry trade associations, this reduction compares to, and management believes was caused by, changes in the marketplace caused by overall economic conditions. Gross profit for 1999 decreased to $44.4 million from $47.6 million in 1998, a decrease of $3.2 million, or 6.7%. Gross profit as a percent of net sales increased to 35.9% from 35.5%, due primarily to activities to reduce raw materials and component costs, benefits from the belted drives joint venture, lower machine set-up costs, increased output per man hour of wage costs, and closing the Greensboro, North Carolina facility. These favorable results were partially offset by wage inflation and lower fixed cost absorption, which resulted in the decrease of gross profit. 11 Selling, general, and administrative ("SG&A") expense for fiscal 1999 increased to $32.2 million from $32.0 million in 1998, an increase of $0.2 million or 0.6%. SG&A expense as a percent of net sales increased to 26.1% from 23.9%, primarily as a result of lower sales. The major challenge in 1999 was to control SG&A expenses in absolute dollars while spending on new product projects which may generate benefits in future years. Other expense (excluding minority interest) for fiscal 1999 increased to $2.6 million from $2.4 million in 1998, an increase of $0.2 million or 8.3%. Other expense for 1999 included $350 thousand of one-time charges to terminate the proposed acquisition of Lincoln Motors. Interest expense, a component of total other expense, decreased to $1.9 million in 1999 from $2.0 million in 1998. This decrease was due primarily to lower interest rates. The effective tax rate for 1999 was 38.5%. Details of the provision for income taxes are discussed in Note 5 to the financial statements. Net income for fiscal 1999 decreased to $5.4 million from $7.9 million in 1998, a decrease of $2.5 million, or 31.6%. The primary reason for this reduction was the lower sales volume. Year Ended January 1, 1999 Compared to Year Ended January 2, 1998 Net sales for fiscal 1998 increased to $133.9 million from $124.0 million in 1997, an increase of $9.9 million, or 8.0%. The increase in sales was primarily due to increased electronics business sales resulting from the acquisition of Berges electronic GmbH on December 1, 1997. The year 1998 started off with record sales in the first quarter, but beginning in the second quarter, a softening in our North American market resulted in lower sales levels for the remainder of the year. Gross profit for 1998 increased to $47.6 million from $45.0 million in 1997, an increase of $2.6 million, or 5.7%. Gross profit as a percent of net sales decreased to 35.5% from 36.3%, due primarily to lower margins in the mechanical business resulting from expenditures for tooling and start-up costs related to new business, training of new employees, and consolidation of the gear coupling product line in our San Marcos facility. Selling, general, and administrative expense for fiscal 1998 increased to $32.0 million from $28.1 million in 1997, an increase of $3.9 million or 14.1%. SG&A expense as a percent of net sales increased to 23.9% from 22.6%, primarily as a result of higher SG&A expense as a percent of sales at Berges electronic GmbH which was not included in 1997 operating results. Other expense for fiscal 1998 decreased to $2.4 million from $2.5 million in 1997, a decrease of $0.1 million or 1.9%. Interest expense, a component of total other expense, increased to $2.0 million in 1998 from $1.7 million in 1997. This increase was due primarily to higher debt levels in 1998, offset by lower interest rates. The effective tax rate for 1998 was 40.0%. Details of the provision for income taxes are discussed in Note 5 to the financial statements. Net income for fiscal 1998 decreased to $7.9 million from $8.7 million in 1997, a decrease of $.8 million, or 9.2%. 12 Year Ended January 2, 1998 Compared to Year Ended January 3, 1997 Net sales for fiscal 1997 increased to $124.0 million from $102.5 million in 1996, an increase of $21.5 million or 21.0%. The improvement was broad-based with sales from existing businesses increasing $15.8 million or 15.4% and sales from businesses acquired in late 1996 and 1997 contributing an additional $5.7 million. Gross profit increased to $45.0 million from $37.7 million in 1996, an increase of $7.3 million or 19.2%. Gross profit as a percent of net sales decreased to 36.3% from 36.8%, due primarily to shifts in product mix and higher costs of sales in the mechanical business resulting from the integration of the gear coupling acquisition. SG&A expense for fiscal 1997 increased to $28.1 million from $25.2 million in 1996, an increase of $2.9 million or 11.5%. SG&A expense as a percent of net sales decreased to 22.6% from 24.6%, primarily as a result of the significantly higher sales volume and implementation of cost reduction initiatives. Other expense, excluding extraordinary items, for fiscal 1997 decreased to $2.5 million from $2.6 million in 1996, a decrease of $0.1 million or 4.2%. Interest expense, a component of total other expense, decreased to $1.7 million in 1997 from $2.0 million in 1996. This decrease was due primarily to lower borrowings in the first part of 1997. The effective tax rate for 1997 was 40.0%. Details of the provision for income taxes are discussed in Note 5 to the financial statements. In 1996, an extraordinary item of $1.3 million, net of tax, was related to early repayment of debt with the proceeds from the Initial Public Offering ("IPO"). Net income for fiscal 1997 increased to $8.7 million from $6.3 million in 1996, before one-time charges, an increase of $2.4 million, or 38.1%. Liquidity and Capital Resources The Company's principal sources of funds are cash flows from operations and borrowings under the Company's revolving credit agreement. Cash provided from operations in 1999 was $10.1 million, an increase of $3.9 million from the prior year. Net cash used for investing activities during fiscal years 1999, 1998, and 1997 was $7.8 million, $7.7 million and $16.7 million, respectively. The Company's investing activities in 1999 and 1998 were primarily capital expenditures. In 1997, the Company acquired Graseby Controls, Inc. through a purchase of stock, and acquired the assets of Berges electronic GmbH for a total of $9.9 million, net of acquired cash. Capital expenditures for fiscal years 1999, 1998, and 1997 were $8.3 million, $7.5 million, and $5.8 million, respectively. During the last three fiscal years, the Company has made significant capital investments in computer controlled surface mount production ("SMT") lines for populating semiconductors onto circuit boards, test and production equipment at the Company's foundry in Chambersburg, and other equipment to improve and modernize production facilities. In 1999, the Company completed the new San Marcos, Texas facility and upgraded some of the machine tool equipment base for mechanical product business. In 1998, the Company initiated two major facility projects: 1) an engineering center in Chambersburg scheduled for completion in mid-2000 and 2) a new plant in San Marcos, Texas to manufacture flexible couplings, which was operational in the first quarter of 1999. In 1997, the Company purchased a $2.1 million facility for its electronics systems business in Chattanooga, Tennessee. These capital expenditures are intended to reduce costs, improve product quality, and provide additional capacity for meeting the Company's growth objectives. In March 1999, the Company borrowed $3.0 million by using Variable Rate Demand Revenue Bonds, under the authority of the Industrial Development Corporation City of San Marcos, Texas to finance a new facility for the mechanical products business. In April 1997, the Company borrowed $2.6 million by issuing Variable Rate Demand Revenue Bonds, under the authority of The Industrial Revenue Board of the City of Chattanooga, Tennessee, to finance a new facility for the electronics systems business. 13 The Company paid $2.1 million in dividends during 1999. The Company paid a $0.09 per share dividend in the first, second, third, and fourth quarters of 1999, and declared a $0.09 dividend on January 7, 2000 and paid it on January 31, 2000. The Company paid $2.1 million in dividends during 1998. The Company paid an $0.08 per share dividend in the first quarter and a $0.09 per share dividend in the second, third, and fourth quarters of 1998. The Company believes that it will have sufficient cash flows from operations and available borrowings to meet its future short-term and long-term cash needs for interest, operating expenses, and capital expenditures. Derivative Financial Instruments Market risk is the potential change in an instrument's value caused, for example, by fluctuations in interest and currency exchange rates. The Company's primary market risk exposures are interest rate and unfavorable movements in exchange rates between the U.S. dollar and each of the Mexican peso, Canadian dollar, German deutsche mark, Indian rupee and Italian lira. 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. Interest Rate Derivatives at 1999 2000 2001 --------------------------------------------------------------------- Interest Rate Swap: Variable to Fixed Fixed Rate U.S. $.................... 10,000 10,000 10,000 Average Pay Rate..................... 5.75% 5.75% 5.75% Year 2000 The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a two-digit year is commonly referred to as the Year 2000 compliance issue. The Company implemented a five-step process to evaluate the impact of the Year 2000 compliance issue. These steps involve an inventory of Company systems, an evaluation and analysis of systems regarding the Year 2000 compliance impact, implementation of modifications to specified systems, unit testing, and finally, systems or integration testing to validate compliance. The Company relies upon third-party vendors which supply goods and services to the Company and, although the Company has consulted with various vendors in order to minimize the risk of the Year 2000 compliance issue, such third parties may be affected by the Year 2000 compliance issue. While the Company believes its actions have ameliorated the Year 2000 risk, there can be no assurance that the Company's internal systems or equipment or those of third parties on which the Company relies will be Year 2000 compliant or that the Company's or third parties' contingency plans will mitigate the effects of noncompliance. No problems have been experienced as of yet because of this issue. There is still uncertainty regarding the scope of the Year 2000 compliance issue and, at this time, the Company is unable to quantify the impact of potential Year 2000 compliance failures. As of the date of this filing, the Company has not experienced any material Year 2000 problems in any of the Company's facilities or operations. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires derivatives to be recorded on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in values of derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133." SFAS No. 137 delays the standard effective date to the beginning of the first quarter of the fiscal year beginning after June 15, 2000. Adoption of this statement is not expected to have a material effect on the Company's financial statements. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995, except for the historical information contained herein, this annual report contains forward-looking statements about matters which involve risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and other factors discussed in the Company's filings with the Securities and Exchange Commission. 14 Item 8. Financial Statements and Supplementary Data.
Page ---- Report of Independent Public Accountants..................................................................... 16 Consolidated Balance Sheets as of December 31, 1999 and January 1, 1999...................................... 17 Consolidated Statements of Operations for the Years Ended December 31, 1999, January 1, 1999, and January 2, 1998 ................................................................................. 18 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1999, January 1, 1999, and January 2, 1998................................................................. 18 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, January 1, 1999, and January 2, 1998 ................................................................ 19 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, January 1, 1999, and January 2, 1998 ................................................................................. 20 Notes to Consolidated Financial Statements................................................................... 21
15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of TB Wood's Corporation: We have audited the accompanying consolidated balance sheets of TB Wood's Corporation (a Delaware corporation) and Subsidiaries as of December 31, 1999 and January 1, 1999 and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 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, 1999 and January 1, 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Atlanta, Georgia February 11, 2000 16 TB Wood's Corporation And Subsidiaries Consolidated Balance Sheets
(in thousands, except per share and share amounts) 1999 1998 - -------------------------------------------------------------------------------------- ----------- --------------- ASSETS Current Assets: Cash and cash equivalents $ 1,245 $ 2,521 Accounts receivable, less allowances for doubtful accounts, discounts, and claims of $402 and $414 in 1999 and 1998, respectively 18,593 17,428 Inventories: Finished goods 22,970 21,433 Work in process 9,708 8,370 Raw materials 7,465 5,982 LIFO reserve (5,983) (5,930) ----------- --------------- 34,160 29,855 Other current assets 1,834 2,705 ----------- --------------- Total current assets 55,832 52,509 ----------- --------------- Property, Plant, and Equipment: Machinery and equipment 50,280 43,131 Land, buildings, and improvements 13,653 12,118 ----------- --------------- 63,933 55,249 Less accumulated depreciation 32,326 27,553 ----------- --------------- 31,607 27,696 ----------- --------------- Other Assets: Deferred income taxes (Note 5) 3,454 3,570 Goodwill, net of accumulated amortization of $1,672 and $1,418 in 1999 and 1998, respectively 9,805 10,059 Other 2,168 2,191 ----------- --------------- Total other assets 15,427 15,820 ----------- --------------- $102,866 $96,025 =========== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt (Note 4) $ 273 $ 378 Accounts payable 12,407 6,332 Checks outstanding 1,003 1,705 Accrued expenses (Note 3) 7,935 9,012 Deferred income taxes (Note 5) 1,034 1,589 ----------- --------------- Total current liabilities 22,652 19,016 ----------- --------------- Long-term debt, less current maturities (Note 4) 36,651 32,091 Postretirement benefit obligation, less current portion 15,134 16,403 Minority interest 737 0 Commitments and Contingencies (Note 7) Shareholders' Equity : Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued or outstanding 0 0 Common stock, $.01 par value; 40,000,000 shares authorized, 5,887,698 issued and 5,465,814 outstanding in 1999, and 5,909,286 issued and 5,899,168 outstanding in 1998 59 59 Common stock in treasury at cost; 421,884 in 1999 and 10,118 in 1998 (3,811) (158) Additional paid-in capital 29,086 28,821 Retained Earnings 4,001 1,136 Accumulated other comprehensive income (1,643) (1,343) ----------- --------------- Total shareholders' equity 27,692 28,515 ----------- --------------- $102,866 $96,025 =========== ===============
The accompanying notes are an integral part of these consolidated financial statements. 17 TB Wood's Corporation And Subsidiaries Consolidated Statements of Operations
(in thousands, except per share amounts) 1999 1998 1997 - ----------------------------------------- ---- ---- ---- Net sales $123,737 $133,949 $124,027 Cost of sales 79,380 86,360 79,015 ----------------- --------------- --------------- Gross profit 44,357 47,589 45,012 Selling, general, and administrative expenses 32,249 32,023 28,061 ----------------- --------------- --------------- Operating income 12,108 15,566 16,951 Other (expense) income: Minority Interest 808 0 0 ----------------- --------------- --------------- Operating income after minority interest 11,300 15,566 16,951 ----------------- --------------- --------------- Interest expense and other finance charges (1,915) (2,040) (1,695) Other, net (657) (380) (773) ----------------- --------------- --------------- Other expense, net (2,572) (2,420) (2,468) ----------------- --------------- --------------- Income before provision for income taxes 8,728 13,146 14,483 Provision for income taxes (Note 5) 3,361 5,256 5,794 ----------------- --------------- --------------- Net income $ 5,367 $ 7,890 $ 8,689 ================= =============== =============== Per share of common stock: Basic: Net income per common share $ 0.91 $ 1.34 $ 1.49 ================= =============== =============== Weighted average shares of common stock and equivalents outstanding 5,896 5,874 5,833 ================= =============== =============== Diluted: Net income per common share $ 0.91 $ 1.33 $ 1.47 ================= =============== =============== Weighted average shares of common stock and equivalents outstanding 5,910 5,932 5,921 ================= =============== ===============
Statements of Comprehensive Income
1999 1998 1997 ---- ---- ---- Net Income $5,367 $7,890 $8,689 Other comprehensive income, net of tax: Foreign currency translation adjustment, net of tax of $188, $760, and $122 in 1999, 1998, and 1997, respectively (300) (1,140) (168) -------------- --------------- --------------- Comprehensive income $5,067 $6,750 $8,521 ================= =============== ===============
The accompanying notes are an integral part of these consolidated financial statements. 18 TB Wood's Corporation And Subsidiaries Consolidated Statements of Changes in Shareholders' Equity
Retained Accumulated Additional Earnings Other Common Treasury Paid-In (Accumulated Comprehensive (in thousands) Stock Stock Capital Deficit) Income (Loss) - -------------- ----- ----- ------- -------- ------------- Balance, January 3, 1997 $ 58 $ 0 $ 28,158 $ (11,306) $ (35) Net income 0 0 0 8,689 0 Stock issuance for 401(k) plan 0 0 100 0 0 Dividends declared 0 0 0 (1,400) 0 Stock option compensation and proceeds from Options exercised 0 95 82 0 0 Treasury stock, net 0 (276) 0 (391) 0 Foreign currency translation adjustment 0 0 0 0 (168) - ----------------------------------------- ------------ ----------- -------------- -------------- ----------------- Balance, January 2, 1998 58 (181) 28,340 (4,408) (203) Net income 0 0 0 7,890 0 Dividends declared 0 0 0 (2,056) 0 Stock option compensation and proceeds from Options exercised 1 467 481 (257) 0 Treasury stock, net 0 (444) 0 (33) 0 Foreign currency translation adjustment 0 0 0 0 (1,140) - ----------------------------------------- ------------ ----------- -------------- -------------- ----------------- Balance January 1, 1999 59 (158) 28,821 1,136 (1,343) Net income 0 0 0 5,367 0 Stock issuance for 401(k) plan 0 323 0 (35) 0 Dividends declared 0 0 0 (2,120) 0 Stock option compensation and proceeds from Options exercised 0 426 265 (329) 0 Treasury stock, net 0 (4,402) 0 (18) 0 Foreign currency translation adjustment 0 0 0 0 (300) - ----------------------------------------- ------------ ----------- -------------- -------------- ----------------- Balance December 31, 1999 $ 59 $(3,811) $29,086 $ 4,001 $(1,643) ============ =========== ============== ============== =================
The accompanying notes are an integral part of these consolidated financial statements. 19 TB Wood's Corporation And Subsidiaries Consolidated Statements Of Cash Flows
(in thousands) 1999 1998 1997 - -------------------------------------------------------------------------- ---------------- --------------- --------------- Cash Flows from Operating Activities: Net income $5,367 $7,890 $8,689 ---------------- --------------- --------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,706 4,687 4,097 Change in deferred income taxes, net (439) 1,892 837 Stock option compensation and employee stock benefit expense 648 1,222 101 Net (gain) loss on sale of assets (99) 5 10 Minority interest 808 0 0 Other, net (43) (28) 0 Changes in working capital, net of effects of acquisitions: Accounts receivable (1,165) 2,746 (173) Inventories (4,305) (4,157) 1,876 Other current assets 871 (2,402) (227) Accounts payable 6,075 (2,278) 1,531 Accrued and other liabilities (2,374) (3,349) 88 ---------------- --------------- --------------- Total adjustments 4,683 (1,662) 8,140 ---------------- --------------- --------------- Net cash provided by operating activities 10,050 6,228 16,829 ---------------- --------------- --------------- Cash Flows from Investing Activities: Acquisitions, net of cash acquired 0 0 (9,914) Capital expenditures (8,316) (7,481) (5,824) Proceeds from sales of fixed assets 791 414 65 Other, net (257) (658) (1,003) ---------------- --------------- --------------- Net cash used in investing activities (7,782) (7,725) (16,676) ---------------- --------------- --------------- Cash Flows from Financing Activities: Change in checks outstanding (702) 90 83 Proceeds from (repayments of) long-term debt, net 2,633 (357) 2,003 Proceeds from the PNC revolving credit facility, net (Note 4) 2,200 6,287 2,300 Payment of dividends (2,120) (2,056) (1,866) Proceeds from issuance of stock upon option exercise 250 70 17 Purchase of Treasury Stock, net (4,994) (754) (276) Other (511) (674) 0 ---------------- --------------- --------------- Net cash (used in) provided by financing activities (3,244) 2,606 2,261 ---------------- --------------- --------------- Effect of changes in foreign exchange rates (300) (1,140) (168) ---------------- --------------- --------------- (Decrease) increase in cash and cash equivalents (1,276) (31) 2,246 Cash and cash equivalents at beginning of year 2,521 2,552 306 ---------------- --------------- --------------- Cash and cash equivalents at end of year $1,245 $2,521 $2,552 ================ =============== =============== Income taxes paid during the year $2,052 $3,819 $6,307 ================ =============== =============== Interest paid during the year $1,915 $2,040 $1,573 ================ =============== ===============
The accompanying notes are an integral part of these consolidated financial statements 20 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, "Wood's" or the "Company") is an established designer, manufacturer, and marketer of electronic and mechanical industrial power transmission products which are sold to distributors, domestic and international manufacturers and 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 throughout 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 have been eliminated in consolidation. Year-End Fiscal year-ends are as follows: 1999......................December 31, 1999 1998......................January 1, 1999 1997......................January 2, 1998 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Restricted Cash At December 31, 1999, $1,091 of cash is restricted under the Variable Rate Demand Revenue Bonds (Note 4). This cash may be used for building renovations, improvements, or other capital expenditures related to new production facilities for the electronics systems business and a new production facility for the mechanical division. Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Property, Plant, and Equipment The Company depreciates its property, plant, and equipment principally using the straight-line method over the estimated useful lives of the assets. Equipment under capital leases is depreciated over the asset's estimated useful life and is included in machinery and equipment. Maintenance and repair costs are charged to expense as incurred, while major renewals and improvements are capitalized. When property and equipment are retired or otherwise disposed of, the related carrying value and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. 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 21 Inventories Inventories are stated at the lower of cost or market primarily using the last-in, first-out ("LIFO") method. Market is defined as net realizable value. Cost includes raw materials, direct labor, and manufacturing overhead. Approximately 79% and 77% of total inventories in years ending December 31, 1999 and January 1, 1999, respectively, were valued using the LIFO method. TB Wood's-Canada, TB Wood's-Mexico and TB Wood's-Berges inventories are stated at the lower of cost or market using the first-in, first-out ("FIFO") method. Self-Insurance The Company maintains workers' compensation insurance policies which have the potential for retrospective premium adjustments and a partially self-insured group health insurance policy which is subject to specific retention levels. Insurance administrators assist the Company in estimating the fully developed workers' compensation liability and group health insurance reserves which are accrued by the Company. In the opinion of management, adequate provision has been made for all incurred claims. At December 31, 1999 the Company has issued letters of credit totaling $735 to cover incurred claims and other costs related to the workers' compensation. 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." Translation adjustments, which result from the process of translating financial statements into U.S. dollars, are accumulated as a separate component of other comprehensive income. Exchange gains and losses resulting from foreign currency transactions, primarily intercompany sales of products, are included in other expense in the accompanying statements of operations and are not material. Goodwill The excess of cost over the net assets acquired ("Goodwill") is being amortized on a straight-line basis over a period of 40 years. Goodwill relates to the acquisition of TB Wood's Incorporated ("Wood's-US") in 1986 and the acquisition of certain other businesses and product lines (Note 8). Long-Lived Assets and Intangible Assets The Company reviews the carrying values assigned to long-lived assets and certain identifiable intangible assets based on expectations of undiscounted future cash flows and operating income generated by the long-lived assets or the tangible assets underlying certain identifiable intangible assets in determining whether the carrying amount of such assets is recoverable. Shareholders' Equity In 1996, the board of directors authorized, subject to certain business and market conditions, the purchase of up to 200,000 of the Company's common shares. At December 31, 1999 the number of treasury shares purchased under this authorization was 162,432. The number of treasury shares issued to employees under option and purchase plans was 12,456 and under the 401(k) profit-sharing plan was 21,557 for 1999. The Board of Directors authorized a self-tender "Dutch Auction" for 400,000 of the Company's common shares at a price not to exceed $12.50 per share and not lower than $9.00 per share. On December 17, 1999, the Company accepted 400,000 shares at $9.00 per share and incurred related costs. 22 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 short-term and long-term debt and deferred compensation amounts approximate carrying value and are based on their effective interest rates compared to current market rates. 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. Cyclical Industry 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 the relevant fiscal periods. Research and Development Costs 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 are $3,659 in 1999, $3,482 in 1998, and $3,733 in 1997. Major Customers The Company's five largest customers accounted for approximately 29%, 25%, and 30% of net sales for fiscal years 1999, 1998, and 1997, respectively. Of these customers, one accounted for close to 20% of net sales for the year ended December 31, 1999. The loss of one or more of these customers would have an adverse effect on the Company's performance and operations. Foreign and export sales accounted for 23% and 22% of total sales in fiscal years 1999 and 1998, respectively. Inter company transactions are consummated on terms equivalent to those that prevail in arms-length transactions. Supply of Electronic Raw Materials and Purchased Components Historically, the electronics component industry, which supplies components for the Company's electronic products, has from time to time experienced heavy demand for certain components during periods of growth in the consumer electronic industry. The rapid growth of the AC electronic drive market has also created heavy demand for power control electronics. While certain of the Company's components are obtained from a single or limited number of sources, the Company has potential alternate suppliers for most of the specialty components used in its manufacturing operations. There can be no assurance, however, that the Company will not experience shortages of raw materials or components essential to the production of its products or be forced to seek alternative sources of supply, which may increase costs or adversely affect the Company's ability to obtain and fulfill orders for its products. 23 Net Income Per Share In March 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share", which the Company adopted for the year ended January 2, 1998. Basic earnings per share ("EPS") is computed by dividing reported earnings available to common shareholders by weighted average shares outstanding. No dilution for any potentially dilutive securities is included in basic EPS. Diluted EPS is computed by dividing reported earnings available to common shareholders by weighted average shares and common equivalent shares outstanding. The difference between primary and fully diluted net income per share is not material for any of the periods presented and has therefore been excluded. The computation of weighted average shares outstanding and net income per share is as follows for fiscal years 1999, 1998, and 1997:
1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Common shares outstanding for basic EPS......................................... 5,896 5,874 5,833 Shares issued upon assumed exercise of outstanding stock options................ 14 58 88 ------------------------------------- Weighted average number of common and common equivalent shares outstanding........................................................... 5,910 5,932 5,921 =====================================
Recent Accounting Pronouncements Effective fiscal 1997, the Company adopted SFAS No. 129, "Disclosure of Information and Capital Structure." SFAS No. 129 requires disclosure of the pertinent rights and privileges of all securities other than ordinary common stock. The Company has disclosed such information in its annual reports filed in Form 10-K. In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", effective for fiscal years beginning after December 15, 1997. The statement addresses the reporting and display of changes in equity that result from transactions and other economic events, excluding transactions with owners. The Company adopted SFAS No. 130 in 1998. Effective fiscal 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company has disclosed such information in Note 9 to the consolidated financial statements. Effective January 3, 1998, the Company adopted SFAS No. 132, "Employers' Disclosure about Pension and Other Postretirement Benefits." (See Note 6). In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires derivatives to be recorded on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in values of derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133." SFAS No. 137 delays the standard effective date to the beginning of the first quarter of the fiscal year beginning after June 15, 2000. Adoption of this statement is not expected to have a material effect on the Company's financial statements. 24 Reclassifications Certain prior period amounts have been reclassified to conform with the current period presentation. 3. ACCRUED EXPENSES Components of accrued expenses were as follows: 1999 1998 - --------------------------------------------------------- ----------- ---------- Accrued payroll and other compensation $2,311 $1,987 Accrued workers' compensation 404 934 Other accrued liabilities 5,220 6,091 ----------- ---------- Total $7,935 $9,012 =========== ========== 4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations as at the end of each fiscal period consist of the following: 1999 1998 - --------------------------------------------------------- ---------- ---------- Unsecured Revolving Line of Credit $30,777 $28,954 Capital lease obligations 597 965 Industrial revenue bonds 5,550 2,550 ---------- ---------- 36,924 32,469 Less current maturities (273) (378) ---------- ---------- $36,651 $32,091 ========== ========== Aggregate future maturities of long-term debt and capital lease obligations as of December 31, 1999 are as follows: 2000 273 2001 241 2002 62 2003 30,798 2004 0 Thereafter 5,550 --------------- $36,924 =============== The Company has a $52,500 unsecured revolving credit facility arranged by PNC Bank, N.A. ("PNC") bearing variable interest of LIBOR plus 112.5 basis points, maturing October 2003. The credit facility contains numerous restrictive financial covenants which require the Company to comply with certain financial tests including, among other things, maintaining minimum tangible net worth, as defined, and maintaining certain specified ratios. The credit facility also contains other restrictive covenants that include, among other things, restrictions on outside investments and restrictions on capital expenditures. In April 1997, the Company borrowed approximately $2.6 million by issuing Variable Rate Demand Revenue Bonds under the authority of the Industrial Revenue Board of the City of Chattanooga, bearing variable interest of 5.65% at December 31, 1999 maturing April 2022. The bonds were issued to finance the new production facility for the electronics systems business. 25 In August 1998, the Company entered into an interest rate swap agreement that effectively converted the underlying variable rate debt in the unsecured revolving credit facility to fixed rate debt. The notional principal amount of the swap agreement is $10,000 with an effective fixed rate of 5.75%. The swap agreement is settled each month and will expire in July 2001. In February 1999, the Company borrowed approximately $3.0 million by issuing Variable Rate Demand Revenue Bonds under the authority of the Industrial Development Corporation City of San Marcos, bearing variable interest of 5.65% at December 31, 1999, maturing April 2024. The bonds were issued to finance a new production facility for the mechanical division. The gross proceeds from (repayments of) the revolving credit facilities are as follows:
1999 1998 1997 - --------------------------------------------------- ---------------- --------------- --------------- Proceeds from revolving credit facility 47,400 40,300 46,400 Repayments of revolving credit facility (45,200) (34,013) (44,100) ---------------- --------------- ---------------
5. INCOME TAXES The components of the provision (benefit) for income taxes are shown below:
1999 1998 1997 - --------------------------------------------------- ---------------- --------------- --------------- Current: Federal and state $2,105 $2,300 $4,365 Foreign 817 1,064 592 ---------------- --------------- --------------- 2,922 3,364 4,957 ---------------- --------------- --------------- Deferred: Federal and state 439 1,892 837 Foreign 0 0 0 ---------------- --------------- --------------- 439 1,892 837 ---------------- --------------- --------------- Provision for income taxes $3,361 $5,256 $5,794 ================ =============== ===============
Under SFAS No. 109, deferred tax assets or liabilities at the end of each period are determined by applying the current tax rate to the difference between the financial reporting and income tax bases of assets and liabilities. The deferred tax benefit is determined based on changes in deferred tax items exclusive of deferred tax implications of the early extinguishment of debt and reclassifications between deferred and current taxes. 26 The components of deferred income taxes are as follows: 1999 1998 - --------------------------------------------------- ----------- ---------------- Deferred income tax liabilities: Book basis in property over tax basis $(2,709) $(2,337) LIFO inventory basis differences (2,680) (3,042) Other (604) (1,337) --------- ---------------- Total deferred income tax liabilities (5,993) (6,716) --------- ---------------- Deferred income tax assets: Postretirement benefits not currently deductible 6,019 6,772 Accrued liabilities not currently deductible 821 1,050 Allowance for doubtful accounts and inventory reserves 861 742 Other 712 133 --------- ---------------- Total deferred income tax assets 8,413 8,697 --------- ---------------- Net deferred income tax asset $2,420 $1,981 ========= ================ A reconciliation of the provision for income taxes at the statutory federal income tax rate to the Company's tax provision as reported in the accompanying statements of operations is shown below: 1999 1998 1997 - ---------------------------------- ----------- --------------- ---------------- Federal statutory income tax $2,966 $4,470 $4,924 State income taxes, net of federal income tax benefit 139 592 651 Foreign taxes and other, net 256 194 219 --------- --------------- ---------------- $3,361 $5,256 $5,794 ========= =============== ================ In 1999, 1998, and 1997 earnings before income taxes included $2,541, $2,862, and $1,259, respectively, of earnings generated by the Company's foreign operations. No federal or state income taxes have been provided on such earnings, since undistributed earnings have been reinvested and are not expected to be remitted to the parent company. In September 1997, the Internal Revenue Service completed its review of the Company's 1995, 1994, and 1993 federal income tax returns. The review did not have a material effect on the Company's operations. The Internal Revenue Service is currently in review of the Company's 1996 federal income tax return. 6. BENEFIT PLANS Compensation Plans Wood's maintains a discretionary compensation plan for its salaried and hourly employees which provides for incentive awards based on certain levels of earnings, as defined. Amounts awarded under the plan and charged to expense in the accompanying statements of operations were $709, $1,238, and $2,002, for fiscal years 1999, 1998, and 1997 respectively. 27 Profit-Sharing Plans Since January 1, 1988, the Company has maintained a separate defined contribution 401(k) profit-sharing plan covering all domestic employees. Under this plan, the Company matches a specified percentage of each eligible employee's contribution and 50% of the match is invested in funds designated by the employee and 50% of the match is used to purchase company common shares on the open market. The Company contributed 21,557 shares of common stock held in treasury in 1999, 35,990 in 1998, and 5,797 in 1997. Amounts contributed by the Company under this profit-sharing plan were approximately $249, $580, and $530 for fiscal years 1999, 1998, and 1997, respectively. In addition, the Company has a noncontributory profit-sharing plan covering its Canadian employees for which $38, $17, and $37 were charged to expense for the fiscal years 1999, 1998, and 1997, 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 90% of the fair value of the shares on the first or last day of the quarterly period. Employee contributions to the ESPP were $124, $152 and $63 for 1999, 1998, and 1997 respectively. Pursuant to the ESPP, 12,456 shares were issued to employees during 1999, 8,775 during 1998 and 4,436 shares during 1997. At the annual meeting on April 11, 1997, the Company's shareholders approved the reservation of 500,000 shares to be issued under the ESPP. As of December 31, 1999, 474,333 shares are available for future issuance. Stock Options In March 1991, the Company granted nonqualified stock options to the president of the Company to purchase 157,893 shares of the Company's common stock at an option price of $6.33 per share. The options vested 30% in January 1993, 15% in each of January 1994, 1995, 1996, and 1997, and 10% in January 1998. The option agreement was amended on March 30, 1992 to set the option price at $1.58 per share plus an amount equal to the average yield on the 30-year U.S. Treasury bond maturing on the day closest to the fifteenth anniversary of the option measurement date as defined in the agreement. The options are exercisable on or after the seventh anniversary of the measurement date and expire one year thereafter. During 1992, the controlling shareholder granted an additional 47,367 options on the controlling shareholder's shares to a director, with terms similar to the 1991 options, as amended. Also in 1992, the Company granted an additional 30,000 options to an employee with terms similar to the 1991 options, as amended, with vesting beginning in 1994. The options are exercisable beginning on the seventh anniversary of the measurement date, as defined, and expire on the eighth anniversary of the measurement date. The option agreements contain various fair value puts and calls, with fair value to be determined by the board of directors or an independent appraiser. All of the above options have expired or have been exercised as of December 31, 1999. As a result of the above amendment, beginning in March 1992, the Company began accounting for the options under variable plan accounting, whereby increases in the value of the Company's common stock above the option price resulted in the recording of compensation expense by the Company. Through December 31, 1994, the Company recorded no compensation expense related to the options as, in the opinion of management, the fair value of the Company's common stock was equal to or below the option price, as adjusted. Due to increases in the estimated fair value of the Company's common stock, as determined by an independent appraiser, the Company recorded stock option compensation expense of $675 for the year ended December 29, 1995. Additional stock option compensation expense of approximately $230 will be recorded in future periods based on the vesting schedule of options. In July 1995, the option agreements were amended to remove features of the options that resulted in variable plan accounting. Accordingly, subsequent to July 1, 1995, the options are being accounted for as fixed options whereby future increases in the value of the Company's common stock will not result in additional stock option compensation expense. 28 In February 1994, the Company granted an additional 105,000 options with terms similar to those discussed above, except that the February 1994 options do not have a put feature and have an option price which escalates during the vesting period at a fixed rate of 6% per year. The February 1994 options are exercisable at a fixed exercise price for a one-year period following the vesting period. The Company accounts for the February 1994 options as fixed options whereby future increases in the value of the Company's common stock do not result in the recording of compensation expense by the Company. The option agreements contain various fair value puts and calls, with fair value to be determined by the board of directors or an independent appraiser. In December 1994, the controlling shareholder of the Company granted 89,004 options on the controlling shareholder's shares to certain members of management which contain terms similar to the February 1994 options, except that the option price escalates during the vesting period at a fixed rate of 7.86% per year. The Company adopted a 1996 stock-based incentive compensation plan (the "1996 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 1996 Plan is administered by a committee (the "Committee") designated by the board of directors. The aggregate maximum number of shares of common stock available for awards under the 1996 Plan is 500,000, subject to adjustment to reflect changes in the Company's capitalization. Awards under the 1996 Plan may be made to all officers and key employees of the Company. No awards can be made under the 1996 Plan after January 31, 2006. The Committee may grant shares of common stock in the form of either deferred stock or restricted stock, as defined in the 1996 Plan. Options granted under the 1996 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 grant as an ISO, options under the 1996 Plan will be nonqualified. The exercise price of the options will be determined by the Committee. The maximum term of an option or Stock Appreciation Right ("SAR") granted under the 1996 Plan shall not exceed ten years from the date of grant or 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 or SAR may be exercisable sooner than six months from the date the option or SAR is granted. The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation", for its stock options. SFAS No. 123 requires companies to estimate the value of all stock-based compensation using a recognized pricing model. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the method of accounting in APB No. 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value-based method of accounting defined in the statement had been applied. The Company has elected to continue to account for options under APB No. 25. In June 1997, the Company granted options to purchase 46,250 shares of common stock at an option price of $14 per share and 92,500 at an option price of $23. The options vest evenly over a three-year period from the grant date. The options may be exercised as they vest. The $14 options expire ten years from the grant date, and the $23 options expire five years from the grant date. In February and August 1998, the Company granted options to purchase 50,550 and 25,000 shares of common stock, respectively, at an option price of $21 and $17.88 per share, respectively, and 101,100 and 50,000 options, respectively, at $28 per share. The options vest evenly over a three-year period from the grant date. The options may be exercised as they vest. The $21 and $17.88 options expire ten years from the grant date and the $28 options expire five years from the grant date. No compensation expense was incurred in 1998 because the strike price was higher than the market price. 29 In January 1999, the Company granted options to purchase 53,250 shares of common stock at an option price of $12 per share and 106,500 options at $18 per share. The options vest evenly over a three-year period from the grant date. The options may be exercised as they vest. The $12 options expire ten years from the grant date and the $18 options expire five years from the grant date. No compensation expense was incurred in 1999 because the strike price was higher than the market price. In February 2000, the Company granted options to purchase 79,250 shares of common stock at an option price of $9.50 per share and 158,500 options at $14.25 per share. The options vest evenly over a three-year period from the grant date. The options may be exercised as they vest. The $9.50 options expire in ten years from the grant date and the $14.25 options expire five years from the grant date. No compensation expense was incurred in 2000 because the strike price was higher than the market price. The Company has elected to account for its stock-based compensations plan under APB No. 25 using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- Risk free interest rate 5.5% 5.5% 5.5% Expected lives 5 & 10 years 5 &10 years 10 years Expected volatility 9.5% 25.7% 31.3% Dividend yield 4.0% 2.4% 2.3%
If the Company had accounted for these plans in accordance with SFAS No. 123, the Company's reported pro forma net income and pro forma net income per share for the fiscal years from 1997 to 1999 would have been as follows:
1999 1998 1997 ---- ---- ---- Net income as reported $5,367 $7,890 $8,689 Pro Forma 5,235 7,715 8,646 EPS as reported Basic 0.91 1.34 1.49 Diluted 0.91 1.33 1.47 Pro forma Basic 0.89 1.31 1.48 Diluted 0.89 1.30 1.46
30 Stock option activity for the years ended December 31, 1999, January 1, 1999, and January 2, 1998 is as follows: Number of shares Weighted average subject to option exercise price - -------------------------------------------------------------------------------- Options outstanding at January 3, 1997 280,918 $ 3.56 Granted 138,750 20.00 Canceled 0 0.00 Exercised (58,166) 2.94 Options outstanding at January 2, 1998 361,502 9.88 Granted 226,650 25.67 Canceled (6,000) 25.67 Exercised (80,887) 3.18 Options outstanding at January 1, 1999 501,265 17.92 Granted 159,750 16.00 Canceled (43,977) 4.69 Exercised (78,227) 6.28 Options outstanding at December 31, 1999 538,811 $ 20.20 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 date at December 31, 1999.
Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------ Weighted Weighted Weighted Range of average average Average exercise Number exercise contractual Number Exercise price of shares price life of shares Price - ------------------------------------------------------------------------------------------------------------ $ 3.87 - $ 7.74 34,961 $ 5.53 1.6 years 34,961 $ 5.53 $ 12.00 - $28.00 503,850 $ 21.22 4.9 years 159,650 $22.58 ----------- ----------- 538,811 194,611 =========== ===========
Postretirement Benefits The Company sponsors a defined benefit postretirement medical plan that provides coverage for retirees and their dependents. A portion of the plan is paid for by retiree cost sharing. The accounting for the plan anticipates future cost sharing increases to keep pace with health care inflation. The plan is unfunded. The Company adopted the provisions of SFAS No. 132, "Employers Disclosure About Pensions and Other Postretirement Benefits" effective January 3, 1998. 31 The following table summarizes the Company's postretirement benefit obligations and the assumptions used in determining postretirement benefit cost:
1999 1998 1997 - ------------------------------------------------- ------------------- ------------------------ -------------------- Benefit obligation at beginning of year $16,992 $18,031 $19,128 Service cost 138 205 185 Interest cost 343 503 483 Amortization (1,535) (1,501) (1,521) Retiree benefits (305) (246) (244) ------------------- ------------------------ -------------------- Benefit obligation at end of year $15,633 $16,992 $18,031 =================== ======================== ==================== Discount rate 7.75% 7.75% 7.75% ------------------- ------------------------ -------------------- Initial health care cost trend 6.50% 8.00% 8.00% ------------------- ------------------------ -------------------- Ultimate health care cost trend rate 5.00% 5.00% 5.00% ------------------- ------------------------ -------------------- Year ultimate health care cost trend rate reached 2004 2004 2004 ------------------- ------------------------ --------------------
Net periodic postretirement benefit includes the following components: 1999 1998 1997 ------------- ------------- ------------------ Service cost $ 138 $ 205 $ 185 Interest cost 343 503 483 Amortization (1,535) (1,501) (1,521) ------------- ------------- ------------------ Net benefit $(1,054) $(793) $(853) ============= ============= ================== In 1997, the Company changed the remaining amortization period for the unrecognized prior service cost from 14.4 years to 5.4 years. 7. 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. 32 Operating Lease Commitments The Company leases office space, office equipment, and other items under non-cancelable operating leases. The expense for non-cancelable operating leases was approximately $520, $385, and $642, for fiscal years 1999, 1998, and 1997, respectively. At December 31, 1999, future minimum lease payments under non-cancelable operating leases are as follows: 2000 $ 401 2001 274 2002 201 2003 197 2004 and thereafter 363 ---------------------- $1,436 ====================== 8. ACQUISITIONS AND JOINT VENTURES Acquisitions In February 1996, the Company exercised an option to purchase the outstanding shares of Grupo Blaju, S.A., de C.V. (subsequently renamed TB Wood's Mexico, S.A., de C.V.) and its subsidiaries for approximately $458, including legal and professional fees. There was no goodwill associated with the purchase. In October 1996, the Company purchased the assets of Ambi-Tech Industries, Inc., a leading manufacturer of electronic brakes for electric motors, for approximately $991 cash, including legal and professional fees, and an $800 note payable at 7% interest. Principal is due in five annual installments of $160 beginning September, 1997. Goodwill associated with the purchase is being amortized over 40 years using the straight-line method (Note 2). In November 1996, the Company acquired certain assets of Deck Manufacturing Corp. ("Deck"), an established designer and manufacturer of industrial disc and gear couplings, for approximately $1,471 of cash, including legal and professional fees. Goodwill associated with the purchase is being amortized over 40 years using the straight-line method (Note 2). The Company also loaned Deck $400 which is secured by the excess accounts receivable and the inventory not acquired. The note receivable is included in other assets. In May 1997, the Company purchased the stock of TB Wood's North Carolina ("Wood's-NC"), formerly Graseby Controls Inc., a subsidiary of Graseby plc, for cash of approximately $5,000. Wood's-NC manufactures and sells industrial AC drives, including the Volkmann(TM) brand of high-frequency AC drives, electronic brakes, and Soft Starts. Goodwill associated with the purchase is being amortized over 40 years using the straight-line method (Note 2). In November 1997, the Company purchased the stock of Berges electronic GmbH ("Berges") for cash of approximately $1,480 and assumed liabilities of $4,765. Berges designs, manufactures, and markets its own line of AC inverters for the European market and sells TB Wood's inverters on a private-label basis. Goodwill associated with the purchase is being amortized over 40 years using the straight-line method (Note 2). Joint Ventures In December 1997, the Company purchased a 65% ownership in a joint venture with TB Wood's (India) Private Limited ("TBWI") for $91. In November 1999, the Company increased its ownership percentage to 85.5% for $71. TBWI distributes domestically manufactured electrical components and performs system integration design in the India market. TBWI was not included in the 1997 financial statements as its impact was immaterial. 33 In July 1999, the Company entered into a joint venture agreement with Electron Corporation ("Electron"), forming a Pennsylvania limited partnership under the name TBWE Belt Drive Components LP (the "Joint Venture"). The parties also formed a Pennsylvania limited liability company under the name TBWE Belt Drive Systems LLC which serves as the general partner of the Joint Venture. The Company and Electron hold a limited partner interest in the Joint Venture of 75.35% and 24.15%, respectively. The general partner holds a 0.5% interest in the Joint Venture. The Company and Electron hold an interest in the general partnership of 75.6% and 24.4%, respectively. The operations of the Joint Venture have been consolidated with the Company as the Company has a controlling interest in the Joint Venture. The sole purpose of the Joint Venture is to manufacture, machine, market, distribute and engineer belted drive components and such other products having similar uses which may be developed by either the Company or Electron in the future. Operating income attributed to the Joint Venture from its inception through the year ending December 31, 1999 was $3,246; $808 of this amount is the minority partner's share. 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 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 and couplings. The electronics business segment includes electronic drives and electric drive systems. Products of these segments are sold to distributors, original equipment manufacturers 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. Intersegment 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. 34 The following table summarizes revenues, operating income, total assets and expenditures for long-lived assets by business segment for fiscal years 1999, 1998, and 1997:
Mechanical Electronics Business Business Total - --------------------------------------------- ------------------- ------------------- ------------------- 1999: Revenues from external customer $73,990 $49,747 $123,737 Operating profit after minority interest 8,734 2,566 11,300 Depreciation 2,844 1,464 4,308 Segment assets 55,290 40,990 96,280 Expenditures for long-lived assets 6,989 1,327 8,316 1998: Revenues from external customers $76,909 $57,040 $133,949 Operating profit 9,485 6,081 15,566 Depreciation 2,900 1,474 4,374 Segment assets 49,403 38,924 88,327 Expenditures for long-lived assets 5,359 2,122 7,481 1997: Revenues from external customers $79,988 $44,039 $124,027 Operating profit 11,925 5,026 16,951 Depreciation 2,860 1,021 3,881 Segment assets 44,108 32,040 76,148 Expenditures for long-lived assets 2,050 3,774 5,824
The following table reconciles segment profit to consolidated income before income taxes and extraordinary items for fiscal years 1999, 1998 and 1997:
1999 1998 1997 - ----------------------------------------------------- ----------------- ---------------- ------------------ Total operating profit for reportable segments $ 11,300 $ 15,566 $ 16,951 Interest, net (1,915) (2,040) (1,695) Other unallocated amounts (657) (380) (773) ----------------- ---------------- ------------------- Income before income taxes $ 8,728 $ 13,146 $ 14,483 ================= ================ ===================
The following table reconciles segment assets to consolidated total assets as of December 31, 1999 and January 1, 1999:
1999 1998 - ----------------------------------------------------------------------- ---------------- ----------------- Total assets for reportable segments $96,280 $ 88,327 Cash 1,245 2,521 Corporate fixed assets 1,749 1,351 Deferred tax 3,340 3,570 Other unallocated assets 252 256 ---------------- ----------------- Consolidated total $102,866 $ 96,025 ================ =================
35 Information regarding the Company's domestic and foreign operations is as follows: Net Long-Lived Sales Assets - --------------------------- ----------------------- --------------------- 1999: United States $ 94,873 $36,703 Canada 9,059 1,111 Germany 6,679 1,998 Italy 8,865 512 Mexico 3,675 990 India 586 98 ----------------------- --------------------- Consolidated $123,727 $41,412 ======================= ===================== 1998: United States $103,906 $33,206 Canada 8,739 869 Germany 7,708 2,105 Italy 9,979 525 Mexico 3,482 966 India 135 84 ----------------------- --------------------- Consolidated $133,949 $37,755 ======================= ===================== 1997: United States $107,186 $29,689 Canada 14,135 1,062 Germany 0 1,248 Italy 0 462 Mexico 2,706 749 ----------------------- --------------------- Consolidated $124,027 $33,210 ======================= ===================== 10. QUARTERLY FINANCIAL DATA
Fiscal Quarters 1999 First Second Third Fourth - --------------------------------------- -------------- ------------------- ---------------- ------------------ Sales $30,058 $30,723 $32,293 $30,663 Gross profit 11,080 10,517 11,536 11,224 Gross profit % 36.9% 34.2% 35.7% 36.6% Net income 1,176 1,287 1,495 1,409 Basic net income per share 0.20 0.22 0.25 0.24 Diluted net income per share 0.20 0.22 0.25 0.24 Dividends declared 0.09 0.09 0.09 0.09 Dividends paid 0.09 0.09 0.09 0.09 - --------------------------------------- -------------- ------------------- ---------------- ------------------
36
Fiscal Quarters 1998 First Second Third Fourth - ------------------------------------------------------------------------------------------------------------- Sales $36,051 $34,161 $34,150 $29,587 Gross profit 13,376 12,252 11,838 10,123 Gross profit % 37.1% 35.9% 34.7% 34.2% Net income 2,383 2,259 1,759 1,489 Basic net income per share .41 .39 .30 .25 Diluted net income per share .40 .38 .30 .25 Dividends declared .08 .09 .09 .09 Dividends paid .08 .09 .09 .09
Fiscal Quarters 1997 First Second Third Fourth - ------------------------------------------------------------------------------------------------------------- Sales $30,489 $31,739 $31,257 $30,542 Gross profit 10,951 11,507 11,487 11,067 Gross profit % 35.9% 36.3% 36.8% 36.2% Net income 2,137 2,145 2,199 2,208 Basic net income per share 0.37 0.37 0.38 0.38 Diluted net income per share 0.36 0.36 0.37 0.37 Dividends declared .08 .08 .08 .08 Dividends paid .08 .08 .08 .08 ======================================================================
37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None 38 PART III Item 10. Directors and Executive Officers of the Registrant. The information called for by this Item regarding directors and executive officers is set forth in the Company's definitive Proxy Statement for the 2000 Annual Meeting in the Sections entitled "Election of Directors," "Management" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. Item 11. Executive Compensation. The information called for by this Item is set forth in the Company's definitive Proxy Statement for the 2000 Annual Meeting in the Section entitled "Executive Compensation" and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information called for by this Item is set forth in the Company's definitive Proxy Statement for the 2000 Annual Meeting in the Section entitled "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information called for by this Item is set forth in the Company's definitive Proxy Statement for the 2000 Annual Meeting in the Section entitled "Certain Relationships and Related Transactions" and is incorporated herein by reference. 39 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (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 15 through 37 hereof and the report thereon of Arthur Andersen LLP appearing on page 16 hereof. (2) Financial Statement Schedule Schedule II for the fiscal year ended December 31, 1999 and the report thereon of Arthur Andersen LLP appearing on page 16 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 Number Description - ------ ----------- 3.1 Amended Certificate of Incorporation of the Company (incorporated by reference to TB Wood's Corporation Registration Statement filed on Form S-1, as amended, File No. 33-96498 ("Form S-1") Exhibit 3.1). 3.2 Amended and Restated By-laws of the Company (incorporated by reference to Form S-1 Exhibit 3.2). 4.1 Shareholders' Agreements by and among T. B. Wood's Sons Company, Thomas C. Foley and Gifford P. Foley, Barton J. Winokur, Kurt A. Herwald, Michael L. Hurt, Michael H. Iversen, David H. Halleen, Stanley L. Mann, Lee J. McCullough, Carl R. Christenson, Harold L. Coder, III, James E. Williams, Joseph S. Augustine, Bernard M. Goldsmith, Harvey R. Heller, Robert Patterson Saltsman, F. Philip Handy, F. Philip Handy, as Guardian of the Property of Kate Elizabeth Handy, F. Philip Handy, as Guardian of the Property of Philip Breckenridge Handy and F. Philip Handy, as Guardian of the Property of Abigail Slocum Handy (incorporated by reference to Form S-1 Exhibit 4.1). 4.2 Amendments to Shareholders' Agreements by and among TB Wood's Incorporated (formerly known as "T. B. Wood's Sons Company"), Thomas C. Foley and Gifford P. Foley, Barton J. Winokur, Kurt A. Herwald, Michael L. Hurt, Michael H. Iversen, David H. Halleen, Stanley L. Mann, Lee J. McCullough, Carl R. Chistenson, Harold L. Coder, III, James E. Williams, Joseph S. Augustine (incorporated by reference to Form S-1 Exhibit 4.2). 9.1 Voting Trust Agreement dated March 31, 1989, among T. B. Wood's Son's Company and Bernard M. Goldsmith, Harvey R. Heller, Robert Patterson Saltsman, F. Philip Handy, F. Philip Handy, as Guardian of the Property of Abigail Slocum Handy, Kate Elizabeth Handy, Philip Breckenridge Handy and F. Philip Handy, as Trustee (incorporated by reference to Form S-1 Exhibit 9.1). 10.1 Stock Purchase Agreement dated January 7, 1994 by and among T. B. Wood's Sons Company, Plant Engineering Consultants, Inc. and John Morris, Jesse Batten, Ralph Pedigo, Ronald Bingham, Walter Taeubel and Cook Family Trust (incorporated by reference to Form S-1 Exhibit 10.1). 10.2 Asset Purchase Agreement dated May 12, 1994 by and between T. B. Wood's Sons Company and Magnetic Power Systems, Inc. (incorporated by reference to Form S-1 Exhibit 10.2). 40 10.3 Non-Qualified Stock Option Agreements between 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 10.36). 10.4 Non-Qualified Stock Option Agreement dated as of March 15, 1991 between T. B. Wood's Sons Company and Michael L. Hurt, together with Addendum dated as of March 30, 1992 (incorporated by reference to Form S-1 Exhibit 10.37). 10.5 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). 10.6 TB Wood's Corporation 1996 Stock-Based Incentive Compensation Plan (incorporated by reference to Form S-1 Exhibit 10.39). 10.7 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). 10.8 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). 10.9 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). 10.10 Revolving Credit Agreement by and among TB Wood's Incorporated, Plant Engineering Consultants, Inc., Grupo Blaju, S.A., de C.V., TB Wood's Canada, Ltd. and the Banks Party thereto and PNC Bank, National Association, as Agent, dated October 10, 1996 (incorporated by reference to Form 10-K, for fiscal year 1996, Exhibit 10.44). 10.11 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). 10.12 Stock Purchase Agreement by and between TB Wood's Incorporated and Graseby Electro-Optics Inc. dated May 8, 1997 (incorporated by reference to Form 10-K, for fiscal year 1997, Exhibit 10.46). 10.13 Translated Stock Purchase Agreement by and among TB Wood's Incorporated and Berges Antriebstechnic GmbH and Karen Sarstedt, dated October 23, 1997 (incorporated by reference to Form 10-K, for fiscal year 1997, Exhibit 10.47). 10.14 Form of the Non-Qualified Stock Option Agreements 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 issued under the 1996 Plan (incorporated by reference to Form 10-K, for fiscal year 1997, Exhibit 10.48). 41 10.15 Form of the Non-Qualified Stock Option Agreements 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 issued under the 1996 Plan (incorporated by reference to Form 10-K, for fiscal year 1997, Exhibit 10.49). 10.16 Employment Agreement between TB Wood's Incorporated and Michael L. Hurt dated April 14, 1998 (incorporated by Form 10-K, for fiscal year 1998. 10.17 Supplemental Executive Retirement Plan between TB Wood's Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H. Iversen and other key employees dated May 7, 1998 (incorporated by reference to Form 10-K, for fiscal year 1998). 10.18 Form of the Non-Qualified Stock Option Agreements 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 issued under the 1996 Plan (incorporated by reference to Form 10-K, for fiscal year 1998). 10.19 Form of the Non-Qualified Stock Option Agreements 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 issued under the 1996 Plan (incorporated by reference to Form 10-K, for fiscal year 1998). 10.20 Form of the Non-Qualified Stock Option Agreements 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 issued under the 1996 Plan. 10.21 Form of the Non-Qualified Stock Option Agreements 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 issued under the 1996 Plan. 10.50 Joint Venture Agreement dated July 3, 1999 by and between TB Wood's Incorporated and The Electron Corp. 10.51 Operating Agreement of TBWE Belt Drive Systems LLC dated July 3, 1999 by and between TB Wood's Incorporated and The Electron Corp. 11.1 Statement regarding Computation of Per Share Earnings. 21.2 Subsidiaries and Joint Ventures of Registrant. 23.2 Consent of Independent Public Accountants. (b) Reports on Form 8-K. There were no reports on Form 8-K by the Registrant during the fourth quarter of fiscal year 1999. 27.0 Financial Data Schedule 42 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 30, 2000. TB WOOD'S CORPORATION By: /s/ MICHAEL L. HURT ------------------- Michael L. Hurt President 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 of the Board March 30, 2000 - ------------------- (Principal Executive Officer) Thomas C. Foley /s/ MICHAEL L. HURT President and Director March 30, 2000 - ------------------- (Principal Executive Officer) Michael L. Hurt /s/ JEAN-PIERRE L. CONTE Director March 30, 2000 - ------------------------ Jean-Pierre L. Conte /s/ ROBERT DOLE Director March 30, 2000 - --------------- Senator Robert Dole /s/ CRAIG R. STAPLETON Director March 30, 2000 - ---------------------- Craig R. Stapleton /s/ THOMAS F. TATARCZUCH Vice President-Finance, March 30, 2000 - ------------------------ (Principal Financial Officer and Thomas F. Tatarczuch Principal Accounting Officer) 43 TB Wood's Corporation And Subsidiaries Schedule II Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E Additions --------- Deductions (write-offs of bad Balance at Charged to debts, discounts and beginning of costs Charged to claims in excess Balance at Description period and expenses other accounts of provision)(1) end of period - ------------------------------------------------------------------------------------------------------------------------------------ Year ended January 2, 1998: Allowance for doubtful accounts $366 26 (58) $334 Allowance for discounts and 71 71 142 claims ------------------------------------------------------------------------------------------------ 437 97 0 (58) 476 ================================================================================================ Year ended January 1, 1999: Allowance for doubtful accounts $334 2 (74) $262 Allowance for discounts and 142 10 152 claims ------------------------------------------------------------------------------------------------ 476 12 (74) 414 ================================================================================================ Year ended December 31, 1999: Allowance for doubtful accounts $262 (30) $232 Allowance for discounts and 152 18 170 claims ------------------------------------------------------------------------------------------------ 414 18 (30) 402 ================================================================================================
- -------------- Note: (1) Represents write-off of accounts determined to be uncollectible, less recoveries of amounts previously written off. 44 EX-10.20 2 EXHIBIT 10.20 Exhibit 10.20 TB WOOD'S CORPORATION GRANT OF FAIR MARKET VALUE (FMV) NON-QUALIFIED STOCK OPTION 1. Grant of Option and Exercise Price. Subject to the terms and conditions set forth herein and in the TB Wood's Corporation 1996 Stock-Based Incentive Compensation Plan (the "Plan"), TB Wood's Corporation (the "Company") hereby grants to ___________________, (the "Optionee"), a stock option (the "Option") to purchase up to _______ shares of Common Stock of the Company, par value $.01 per share (the "Common Stock"), at an exercise price of $______ per share (the "Exercise Price"). The Option is a non-qualified stock option. 2. Vesting of Options. One-third of the shares of Common Stock subject to the option shall vest on the first anniversary of the date of grant of the Option (the "Grant Date"), an additional one-third of the shares of Common Stock subject to the option shall vest on the second anniversary of the Grant Date, and the final one-third of the shares of Common Stock subject to the option shall vest on the third anniversary of the Grant Date. 3. Time of Exercise. The Option may be exercised from time to time with respect to shares for which the Option has vested but no later than the tenth anniversary of the Grant Date. Upon the tenth anniversary of the Grant Date, the Optionee's right to exercise the Option shall terminate absolutely. 4. Payment for Shares of Common Stock. Upon exercise of an Option and before delivery of the shares of Common Stock, full payment for shares of Common Stock purchased upon the exercise of the Option shall be made in cash or, subject to the approval of the Company committee administering the Plan (the "Committee"), in whole or in part in shares of Common Stock valued at the fair market value on the date of exercise. 5. Manner of Exercise. The Option shall be exercised by giving written notice of exercise to the Company (Attn: Chief Financial Officer) at the Company's main office at 440 North Fifth Avenue, Chambersburg, Pennsylvania 17201-1778. Such notice of exercise must include a statement of preference as to the manner in which payment to the Company shall be made. Such notice shall be deemed to have been given when hand-delivered, telecopied or mailed, first-class postage prepaid, and shall be irrevocable once given. 6. Issuance of Certificates. As promptly as is reasonably practicable after the exercise of the Option as determined by the Company, a certificate for the shares of Common Stock issuable on the exercise of the Option shall be delivered to Optionee or to his personal representative, heir or legatee. 7. Nontransferability of Option. The Option may not be transferred or assigned by Optionee otherwise than by will or the laws of descent and distribution or be exercised other than by Optionee or, in the case of his death, by his personal representative, heir or legatee. 8. Taxes. Optionee shall be responsible to make appropriate provision for all taxes required to be withheld in connection with any Option, the exercise thereof and the transfer of the shares of Common Stock. Such responsibility shall extend to all applicable federal, state, local or foreign withholding taxes. In the case of exercise of the Option, the Company shall, at the election of Optionee, have the right to retain the number of shares of Common Stock whose aggregate fair market value equals the amount to be withheld in satisfaction of the applicable withholding taxes. 9. Termination of Employment. If the Optionee's employment by the Company (or a subsidiary thereof) is terminated for any reason, all unvested Options shall be forfeited and the Optionee shall have no further right to exercise such Options. If the Optionee's employment by the Company (or a subsidiary thereof) is terminated by reason of disability or retirement, all unexercised, vested Options may be exercised pursuant to the terms of the Option for a period of three months from the date of such termination of employment or until the expiration of the term of the Option, whichever period is shorter; provided, however, that if the Optionee's employment is terminated by death, all unexercised, vested Options may be exercised pursuant to the terms of the Option for a period of six months from the date of such termination of employment or until the expiration of the term of the Option, whichever period is shorter. If the Optionee's employment by the Company (or a subsidiary thereof) is terminated for any reason other than death, disability or retirement, all unexercised, vested options shall terminate three months from the date of such termination of employment. 10. Rights Prior to Exercise. Neither Optionee nor his personal representative, heir or legatee shall have any of the rights of a stockholder with respect to any Common Stock until the date of the issuance to him or her of a certificate for such Common Stock as provided herein. 11. Amendments. The Committee may from time to time amend the terms of this Option to the extent it deems appropriate to carry out the terms and provisions of the Plan. 12. Interpretation. The Committee shall have sole power to resolve any dispute or disagreement arising out of this Agreement. The interpretation and construction of any provision of this Option or the Plan made by the Committee shall be final and conclusive and, insofar as possible, shall be consistent with the requirements of a non-qualified stock option. 13. Option Not to Affect Employment. The Option granted hereunder shall not confer upon Optionee any right to continue in the employment of the Company or any Subsidiary. TB WOOD'S CORPORATION By:____________________________ Michael L. Hurt, President Dated as of February 8, 2000 EX-10.21 3 EXHIBIT 10.21 Exhibit 10.21 TB WOOD'S CORPORATION GRANT OF PREMIUM PRICED NON-QUALIFIED STOCK OPTION 1. Grant of Option and Exercise Price. Subject to the terms and conditions set forth herein and in the TB Wood's Corporation 1996 Stock-Based Incentive Compensation Plan (the "Plan"), TB Wood's Corporation (the "Company") hereby grants to _______________, (the "Optionee"), a stock option (the "Option") to purchase up to _________ shares of Common Stock of the Company, par value $.01 per share (the "Common Stock"), at an exercise price of $______ per share (the "Exercise Price"). The Option is a non-qualified stock option. 2. Vesting of Options. One-third of the shares of Common Stock subject to the option shall vest on the first anniversary of the date of grant of the Option (the "Grant Date"), an additional one-third of the shares of Common Stock subject to the option shall vest on the second anniversary of the Grant Date, and the final one-third of the shares of Common Stock subject to the option shall vest on the third anniversary of the Grant Date. 3. Time of Exercise. The Option may be exercised from time to time with respect to shares for which the Option has vested but no later than the fifth anniversary of the Grant Date. Upon the fifth anniversary of the Grant Date, the Optionee's right to exercise the Option shall terminate absolutely. 4. Payment for Shares of Common Stock. Upon exercise of an Option and before delivery of the shares of Common Stock, full payment for shares of Common Stock purchased upon the exercise of the Option shall be made in cash or, subject to the approval of the Company committee administering the Plan (the "Committee"), in whole or in part in shares of Common Stock valued at the fair market value on the date of exercise. 5. Manner of Exercise. The Option shall be exercised by giving written notice of exercise to the Company (Attn: Chief Financial Officer) at the Company's main office at 440 North Fifth Avenue, Chambersburg, Pennsylvania 17201-1778. Such notice of exercise must include a statement of preference as to the manner in which payment to the Company shall be made. Such notice shall be deemed to have been given when hand-delivered, telecopied or mailed, first-class postage prepaid, and shall be irrevocable once given. 6. Issuance of Certificates. As promptly as is reasonably practicable after the exercise of the Option as determined by the Company, a certificate for the shares of Common Stock issuable on the exercise of the Option shall be delivered to Optionee or to his personal representative, heir or legatee. 7. Nontransferability of Option. The Option may not be transferred or assigned by Optionee otherwise than by will or the laws of descent and distribution or be exercised other than by Optionee or, in the case of his death, by his personal representative, heir or legatee. 8. Taxes. Optionee shall be responsible to make appropriate provision for all taxes required to be withheld in connection with any Option, the exercise thereof and the transfer of the shares of Common Stock. Such responsibility shall extend to all applicable federal, state, local or foreign withholding taxes. In the case of exercise of the Option, the Company shall, at the election of Optionee, have the right to retain the number of shares of Common Stock whose aggregate fair market value equals the amount to be withheld in satisfaction of the applicable withholding taxes. 9. Termination of Employment. If the Optionee's employment by the Company (or a subsidiary thereof) is terminated for any reason, all unvested Options shall be forfeited and the Optionee shall have no further right to exercise such Options. If the Optionee's employment by the Company (or a subsidiary thereof) is terminated by reason of disability or retirement, all unexercised, vested Options may be exercised pursuant to the terms of the Option for a period of three months from the date of such termination of employment or until the expiration of the term of the Option, whichever period is shorter; provided, however, that if the Optionee's employment is terminated by death, all unexercised, vested Options may be exercised pursuant to the terms of the Option for a period of six months from the date of such termination of employment or until the expiration of the term of the Option, whichever period is shorter. If the Optionee's employment by the Company (or a subsidiary thereof) is terminated for any reason other than death, disability or retirement, all unexercised, vested options shall terminate three months from the date of such termination of employment. 10. Rights Prior to Exercise. Neither Optionee nor his personal representative, heir or legatee shall have any of the rights of a stockholder with respect to any Common Stock until the date of the issuance to him or her of a certificate for such Common Stock as provided herein. 11. Amendments. The Committee may from time to time amend the terms of this Option to the extent it deems appropriate to carry out the terms and provisions of the Plan. 12. Interpretation. The Committee shall have sole power to resolve any dispute or disagreement arising out of this Agreement. The interpretation and construction of any provision of this Option or the Plan made by the Committee shall be final and conclusive and, insofar as possible, shall be consistent with the requirements of a non-qualified stock option. 13. Option Not to Affect Employment. The Option granted hereunder shall not confer upon Optionee any right to continue in the employment of the Company or any Subsidiary. TB WOOD'S CORPORATION By:____________________________ Michael L. Hurt, President Dated as of February 8, 2000 EX-10.50 4 EXHIBIT 10.50 Exhibit 10.50 JOINT VENTURE AGREEMENT This Joint Venture Agreement is made as of this 1st day of July, 1999, by and between TB WOOD'S INCORPORATED, a Pennsylvania business corporation having offices at 440 North Fifth Avenue, Chambersburg, Pennsylvania 17201 ("TBW") and THE ELECTRON CORP., a Colorado corporation having offices at 5101 South Rio Grande Street, PO Box 318, Littleton, Colorado 80160 ("Electron"). TBW and Electron are referred to herein collectively as the "Venturers" and separately as a "Venturer". RECITALS: A. TBW and Electron have agreed to form a joint venture for the purpose of manufacturing and selling Belted Drive Components as defined herein. B. It is the intention of the Venturers that Electron will become the exclusive supplier of certain castings as identified in Schedule 1.1 (a) and, together with TBW, the exclusive supplier of certain castings as identified on Schedule 1.1 (b) for Belted Drive Components to the Venture pursuant to a requirements contract with TBW, the payment obligations of which will be assumed by the Venture and guaranteed by TBW. C. The Venturers agree that TBW will become the exclusive provider to the Venture of management, machining, sales, marketing, distribution and engineering services; the exclusive supplier to the Venture of certain finished components as described on Schedule 1.1 (c), and, together with Electron, the exclusive supplier of finished components as described in Schedules 1.1 (a) and 1.1 (b) pursuant to (i) a marketing and administrative services agreement; and (ii) a requirements contract with the Venture; and (iii) an assumption of the payment obligations under the Electron requirements contract by the Venture, which shall be guaranteed by TBW. D. The Venturers agree that certain products manufactured by them shall be sold in the Restricted Territory, as defined herein, only on behalf of and through the Venture. AGREEMENT: NOW, THEREFORE, in consideration of the forgoing recitals, which are made part of this Agreement, and the covenants, representations and warranties set forth herein, and intending to be legally bound hereby, the Venturers agree as follows: 1. Definitions. Capitalized terms used herein and not otherwise defined shall have the following meanings: 1.1 "Belted Drive Components" shall mean power transmission products of the types described on Schedule 1.1. 1.2 "Corrective Action Report(s)" shall mean written reports issued by or on behalf of the Venture to the Venturers (i) stating, in reasonable detail, the manner in which a casting produced by either Venturer or machining performed by TBW is defective, substandard or not otherwise in conformance with the product specifications adopted by or on behalf of the Venture; and (ii) proposing a plan of correction and a timetable within which the corrective action must be concluded. 1.3 "Cost of Goods Sold" shall mean the aggregate transfer costs of the items sold by the Venture as stated on Schedule 1.1 1.4 "Effective Date" shall mean July 1, 1999. 1.5 "Fail(s) to Perform" or "Failure to Perform" shall mean failure by either TBW or Electron to satisfy the criteria for dimensional and cosmetic specifications for Belted Drive Components established by the Venture or the failure to deliver Belted Drive Components as and when required by the Venture pursuant to the requirements contracts executed by each of TBW and Electron which failure, in either event, when annualized as of the time of such Failure to Perform, can reasonably be anticipated to result in a loss of business to the Venture of more than $500,000 in Net Sales per annum. 1.6 "G S and A Expenses" shall mean the general, sales and administrative expenses charged to the Venture by TBW through the M & AS Agreement as defined in Section 5.3 plus any uncollectible accounts receivable (as determinated in accordance with Sections 8.6 and 8.7 hereinafter). 1.7 "General Partner" shall mean TBWE Belt Drive Systems LLC. 1.8 "Initial Inventory" shall mean all of the Belted Drive Components held in the inventory of each of the Venturers as of the Effective Date. 1.9 "Interest(s)" shall mean the equity interest in each of the Venture and the General Partner held by each of the Venturers. 1.10 "Major Decisions" shall mean a decision of the Venture requiring the unanimous consent of the Managers of the General Partner pursuant to Section 15.6 of this Agreement. 1.11 "Manufacturing Rationalization" shall mean the integration of the Belted Drive Components operations of the Venturers and the Venture pursuant to the terms of Section 12 of this Agreement. 1.12 "M & AS Agreement" shall have the meaning ascribed to the term in Section 5.3 hereinafter. 1.13 "Net Sales" shall mean to be invoiced sales minus allowances, discounts, rebates and returns. 1.14 "Operating Income" shall mean Net Sales less (i) Cost of Goods Sold and (ii) G S and A Expenses. 1.15 "Quality Audit Committee" shall mean a committee organized by the Managers of the General Partner consisting of TBW's Vice President and General Manager of its Mechanical Division, TBW's Vice President of Quality and Electron's President and Chief Operating Officer which shall have the authority and responsibility stated in Section 11 of this Agreement. 1.16 "Restricted Territory" shall mean a territory comprising the United States, Mexico, Central America, South America and Canada. 1.17 "TBW Call Price" shall mean the purchase price for the acquisition by TBW of the Interest of Electron determined in accordance with Section 16.4. 1.18 "TBW Put Price" shall mean the purchase price for the acquisition by TBW of the Interest of Electron determined in accordance with Section 16.5. 1.19 "Trade Accounts Payable Balance" shall mean the unpaid balance of the payment obligations of the Venture to Electron for Initial Inventory and non-Initial Inventory for purposes of the calculations in Section 16. 2. Formation of Joint Venture and General Partner. The parties will form the Venture as a Pennsylvania limited partnership under the name TBWE Belt Drive Components LP. The parties will also form a Pennsylvania limited liability company under the name TBWE Belt Drive Systems LLC which shall serve as the general partner of the Venture. The registered office of the Venture and the General Partner shall be at 440 North Fifth Avenue, Chambersburg, Pennsylvania, or at such other office location as the Venturers may agree from time to time. 3. Purpose. The sole purpose of the Venture shall be to manufacture, machine, market, distribute and engineer Belted Drive Components and such other products having similar uses which may be developed by either TBW or Electron in the future and as may be approved, from time to time, by the Venturers acting in their reasonable discretion in the Restricted Territory. 4. Effective Date. The Venture and the General Partner shall be formed as of the Effective Date. 5. Exclusive Manufacture and Sales. All Belted Drive Components cast, manufactured, machined, marketed, distributed or engineered by either TBW or Electron in the Restricted Territory shall be marketed on behalf of and through the Venture, and, except as otherwise expressly provided herein, none of the Belted Drive Components shall be manufactured or sold independently of the Venture or to any third party in the Restricted Territory. For purposes of this Agreement, Belted Drive Components shall include the products identified on Schedule 1.1 and future products of the same type as the products described on Schedule 1.1 which may be developed by either TBW or Electron in the future. 5.1 Electron as Exclusive Supplier of Castings to TBW. From and after the Effective Date, Electron shall become the exclusive supplier of castings for Belted Drive Components to TBW, as set forth on Schedules 1.1 (a) and 1.1 (b), pursuant to a requirements contract entered into by and between Electron and TBW. The ultimate benefit and payment obligations of the Electron requirements contract shall be assigned by TBW to the Venture to enable TBW to satisfy its commitments to the Venture as provided in Section 5.2 hereinafter, and TBW shall guarantee the Venture's payment obligations after such assignment. 5.2 TBW as Exclusive Supplier of Certain Finished Products to the Venture. From and after the Effective Date, TBW will become the exclusive provider of certain finished products comprising Belted Drive Components to the Venture as set forth on Schedules 1.1 (b) and 1.1 (c) pursuant to a requirements contract entered into by and between the Venture and TBW. 5.3 TBW as Exclusive Provider of Marketing and Administrative Services. From and after the Effective Date, TBW will become the exclusive provider of administrative, internal accounting, routine legal, sales, marketing, distribution and certain engineering services to the Venture pursuant to a marketing and administrative services agreement (the "M&AS Agreement") entered into by and between TBW and the Venture. The M&AS Agreement shall provide for payment to TBW of a fee in an amount equivalent to 18.9% of Net Sales made by the Venture, provided that the dollar volume of Net Sales is no less than Forty-Four Million Sixty-One Thousand and 00/100 Dollars ($44,061,000.00) and no more than Fifty-Nine Million Six Hundred Eleven Thousand and 00/100 Dollars ($59,611,000.00). In the event that the Venture's Net Sales either are less than Forty-Four Million Sixty-One Thousand and 00/100 Dollars ($44,061,000.00) or exceed Fifty-Nine Million Six Hundred Eleven Thousand and 00/100 Dollars ($59,611,000.00), TBW's administrative fee shall be determined by unanimous vote of the Managers of the General Partner; provided, however, that the administrative fee shall not be less than fifteen percent (15%) nor more than twenty-three percent (23%) of Net Sales of the Venture. The Venturers hereby agree and acknowledge that the administrative fee being paid to TBW will be in lieu of any reimbursement of expenses incurred by TBW in performing its obligations under the M&AS Agreement, including expenses related to management supervision, internal accounting, computing, internal engineering and routine legal costs and expenses. 6. Transfer of Inventory to Venture. Electron agrees to sell finished goods and casting inventory to TBW and TBW agrees to sell finished goods and casting inventory to the Venture as follows: 6.1 Physical Audit and Verification of Inventory. On or before the Effective Date, Electron shall cause to be performed a physical audit of its Initial Inventory. TBW shall be entitled to monitor, attend and receive the results from the audit. TBW shall not be required to perform a physical inventory, but historically has made and shall continue to make regular periodic adjustments to its inventory based on daily reviews of its inventory. Electron shall be entitled to verify TBW's Initial Inventory. 6.2 Sale of Initial Inventory. The Initial Inventory shall be sold and transferred by TBW and Electron to the Venture for the transfer costs stated on Schedules 1.1 (a), 1.1 (b) and 1.1 (c). TBW and Electron shall be paid for their transfer of Initial Inventory as provided in Subsections 8.1 and 8.4 7.5 hereinafter. All of Electron's raw casting inventory items will be converted to finished goods and shall be available for sale by the Venture as soon as practicable after the Effective Date based on a schedule mutually acceptable to both Venturers. TBW will include Electron's inventory in TBW's inventory systems before sales of inventory are made by the Venture. 6.3 Location of Electron's Inventory. Upon written notice from TBW, Electron shall transfer all of its inventory of Belted Drive Components to its warehouse in Littleton, Colorado, and close its remaining warehouses. Electron will maintain its existing warehouse in Littleton, Colorado, for a period of one year after the Effective Date. 6.4 Return of Excess and Obsolete Initial Inventory. Any of the Initial Inventory transferred by TBW and Electron to the Venture that is (i) not sold by the Venture as of the first anniversary of the Effective Date and (ii) is determined by the General Partner to be excess or obsolete inventory (using TBW's customary methodology for determining excess and obsolete inventory) shall be returned by the Venture to TBW and, if appropriate based on which Venturer initially transferred such Initial Inventory, by TBW to Electron for the transfer costs stated on Schedules 1.1 (a), 1.1 (b) and 1.1 (c). 6.5 Reserve for Obsolete Inventory. The Venture shall establish and maintain a reserve for obsolete inventory in the amount of seventy-seven hundredths of one percent (0.77%) of the transfer cost of Initial Inventory and one-half of one percent (0.5%) of Net Sales of both Initial Inventory and non-Initial Inventory as stated on Schedules 1.1 (a), 1.1 (b) and 1.1 (c). 7. Purchase Price for Inventory. Except for the Initial Inventory, the Venture shall pay TBW and Electron for Belted Drive Components sold to the Venture as follows: 7.1 Price for Products Sold to TBW by Electron. The Venture shall pay Electron for castings sold by it to TBW and sold by TBW to the Venture at the transfer costs set forth on Schedules 1.1 (a) and 1.1 (b), plus a scrap and pig iron surcharge which will be reviewed each calendar quarter based on the change in the Chicago Market for plate and structural steel 2 feet and under. 7.2 Price for Products Sold to Venture by TBW. The Venture shall pay TBW for finished products manufactured by TBW and sold to the Venture and for the machining of all of the Venture's castings at the transfer costs set forth on Schedules 1.1 (b) and 1.1 (c), plus a scrap and pig iron surcharge which will be reviewed each calendar quarter based on the change in the Chicago Market for plate and structural steel 2 feet and under and the Chicago Market for pig iron. 7.3 Sale of Additional Products by TBW and/or Electron. Any new products not included in the initial Belted Drive Component product group shall be added only by the mutual agreement of both Venturers for a price and method of costing determined jointly by both of the Venturers. 7.4 Term of Cost Schedule. The transfer costs listed on Schedules 1.1 (a), 1.1 (b) and 1.1 (c) shall remain fixed for a period of three (3) years. After the third anniversary of the Effective Date the Managers of the General Partner will convene to review the cost schedule and make appropriate changes. In considering changes to the cost schedule, the Managers of the General Partner shall consider relevant indices published by the United States Department of Commerce and by industry manufacturing groups. The transfer costs on the cost schedule will not be changed or revised without a unanimous vote of all Managers of the General Partner. 8. Payment of Venture's Accounts Payable to TBW and Electron. The Venture shall pay TBW and Electron for the Initial Inventory and subsequent sales of non-Initial Inventory as follows: 8.1 Allocation of Payments During First Three Months: For the first three (3) months following the Effective Date, the Venture shall pay TBW and Electron for Initial Inventory and subsequent non-Initial Inventory sold by the Venture in the following percentages: (i) to TBW 75% (ii) to Electron 25% 8.2 Priority of Payments: Beginning on the first day of the fourth month following the Effective Date, all payments by the Venture to TBW and Electron for inventory sold to the Venture (or to TBW by Electron) shall be allocated (i) first to non-Initial Inventory and (ii) then to Initial Inventory. 8.3 Payment after the Third Month for non-Initial Inventory: Beginning on the first day of the fourth month following the Effective Date, the Venture shall pay TBW and Electron on account of their respective invoices (and in Electron's case for the invoices with respect to castings sold by Electron to TBW) for non-Initial Inventory in proportion to the accounts payable balances of the Venture owed to each of them as compared to the Venture's total accounts payable each month. 8.4 Payment after the third month for Initial Inventory: Beginning on the first day of the fourth month following the Effective Date, the Venture will pay TBW and Electron for Initial Inventory sold by the Venture in the following percentages of Net Sales: (i) to TBW 75.6% (ii) to Electron 24.4% 8.5 Time of Payment to TBW and Electron: The Venture shall pay TBW and Electron on account of their respective invoices on or before the last day of each month commencing on the last day of the third calendar month following the Effective Date for Belted Drive Components sold by the Venture during the period beginning on the sixteenth day of the second preceding month and ending on the 15th day of the immediately preceding month. Payment for any sales made before commencement of the first sixty day payment cycle shall be made on the last day of the second calendar month following the Effective Date. All payments to TBW and Electron pursuant to this Section 7 are subject to the creation of reserves pursuant to Sections 6.5 and 8.6 hereof. 8.6 Reserves for Uncollectible Accounts. The Venture shall establish a reserve for uncollectible accounts in the amount of two tenths of one percent (0.2%) of Net Sales made by the Venture. Accounts which are determined to be uncollectible in accordance with Section 8.7 shall be charged to the reserve, and, to the extent uncollectible accounts exceed the amount of the reserve, shall then be charged back to the Venturers. 8.7 Adjustments for Bad Debts. The Venture shall writeoff accounts determined by TBW, in accordance with its customary practices, not to be collectible in the normal course. 9. Product Characteristics. TBW shall determine the acceptable dimensional and cosmetic characteristics of all castings included in the Belted Drive Components and the physical specifications of the iron used in the production of such castings. TBW, in its reasonable discretion, shall determine whether castings included in the Belted Drive Components meet the dimensional and cosmetic characteristics established by TBW. All castings of Belted Drive Components produced by Electron shall conform to the physical specifications established by TBW. 10. Quality Assurance. The Venture shall charge back scrap and nonconforming, substandard or defective parts to each of TBW and Electron, as the case may be, by the issuance of Corrective Action Reports. The amounts charged back to either TBW or Electron, as the case may be, shall be determined as follows: 10.1 Initial Inventory. If a casting included in the Initial Inventory does not conform to the required specifications or if the machining of an item of Initial Inventory is not performed in accordance with specifications established by the Venture in accordance with Section 9 hereof, the party casting or machining the component shall be charged back an amount equivalent to the attributable transfer cost set forth on Schedules 1.1 (a), 1.1 (b) and 1.1 (c). 10.2 Nonconforming Castings. A casting produced after the Effective Date which does not conform to specifications established by the Venture, shall be charged back to the Venturer which produced the casting in an amount equivalent to the transfer cost established on Schedules 1.1 (a), 1.1 (b) and 1.1 (c) . 10.3 Nonconforming Machining. A conforming casting which is not machined in conformity with the Venture's specifications, shall be charged back to TBW at the transfer cost established on Schedule 1.1 (a), 1.1 (b) and 1.1 (c). In the event that TBW performs machining on a casting which does not conform to the Venture's specifications, the party who produced the casting will be charged back for both machining and casting at the transfer costs established on Schedules 1.1 (a), 1.1 (b) and 1.1 (c). TBW, in its reasonable discretion, may decline to perform machining on any casting it believes not to conform to the Venture's specifications. 10.4 Unattributed Nonconformity. If the Venture is unable to determine to whom the nonconformity of a product is attributable, TBW and Electron shall each be responsible for one-half of the cost of the charge back as determined by this Section 10. 11. Quality Audit Committee. The Venture shall form a Quality Audit Committee on the Effective Date which will review the manufacturing operations of each Venturer annually and make recommendations to the Venture to insure continuous improvement. 12. Manufacturing Rationalization. TBW and Electron shall use best efforts to complete the "Manufacturing Rationalization" as defined hereinafter on or before the first anniversary of the Effective Date. "Manufacturing Rationalization" shall mean and include the following components: 12.1 Electron will become the exclusive source to TBW for the castings to be produced by Electron as established in Schedules 1.1 (a) and 1.1 (b). 12.2 TBW will become the exclusive source to the Venture for the castings to be produced by TBW as established in Schedules 1.1 (b) and 1.1 (c). 12.3 The Venture may elect to use TBW's patterns relating to Belted Drive Components. The Venture shall reimburse the Venturers for the costs incurred by either Venturer in transferring or altering TBW's patterns in accordance with Schedule 12.3. Electron shall maintain TBW's patterns in good working condition. All TBW patterns used by Electron shall remain the property of TBW. Routine pattern maintenance will be the responsibility of the Venturer actually using the pattern. Pattern replacement costs will be billed to the Venture, subject to approval of the General Partner of the Venture. Charges to the Venture for pattern transfers and alterations shall be limited to those patterns transferred by TBW to Electron and alterations specifically required by the Venture because of casting design requirements. 12.4 Electron shall finish machining any castings that it is contributing to the Initial Inventory based on a schedule mutually agreeable to the Venturers. 12.5 In the event TBW elects to operate a machine shop in Littleton, Colorado, Electron shall enter into a lease for its Littleton machine shop at a fair market rental rate actually received by lessors of comparable space in the metropolitan Denver, Colorado area, and TBW shall have an option to purchase the machining equipment owned by Electron at its then current fair market value. 12.6 The costs of Manufacturing Rationalization shall be borne by the Venture. For purposes of this Agreement, costs of Manufacturing Rationalization shall include the following: (i) costs to prepare all drawings and remount and gate any patterns transferred to Electron by TBW and costs to alter patterns where TBW specifications require alterations; (ii) incremental transportation costs to transport castings from Blackwell, Oklahoma, to Chambersburg, Pennsylvania, and from Littleton, Colorado, to Stratford, Ontario, Canada and Chambersburg, Pennsylvania; (iii) tooling costs required due to changes in castings from TBW standard castings design to Electron castings design to manufacture the Belted Drive Components; (iv) costs associated with relocating equipment (including disassembly, transportation, reassembly and operator training, if required); and (v) one time expenses related to modifying or adding hardware and software. 13. Title to Fixed Assets and Other Items. Title to all fixed assets, plant, equipment and, except as provided in Section 17 hereinafter, intellectual property rights, patterns and tooling of each of TBW and Electron shall remain the property of TBW and Electron, respectively. 14. Insurance. TBW and Electron shall each name the other Venturer, the General Partner and the Venture as additional insureds on their respective product liability and public liability insurance policies which shall be in amounts commercially reasonable for the types of manufacturing activities conducted by the Venture. Initially, the limits of liability coverage shall not be less than One Million Dollars ($1,000,000.00) for product liability insurance and Three Million Dollars ($3,000,000.00) for public liability insurance per occurrence. 15. Salient Terms of Venture's Limited Partnership Agreement. The terms and conditions governing the Venture, including, without limitation, management, allocation of income and losses, distribution of profits, limitations on ownership and disposition of equity interests, financial reporting, meetings and term of existence will be addressed in the Venture's Limited Partnership Agreement which shall be executed by TBW and Electron on or before July 1, 1999. The Limited Partnership Agreement shall contain the following terms and conditions: 15.1 Ownership. The Interests in the Venture shall be held as follows: General Partner .50% Interest as general partner TBW 75.35% Interest as limited partner Electron 24.15% Interest as limited partner TBW shall hold a 75.6% Interest in the General Partner and Electron shall hold a 24.4% Interest in the General Partner. 15.2 Capital Accounts. TBW and Electron will each have capital accounts in both the General Partner and the Venture which will be established and maintained in accordance with the requirements of the Internal Revenue Code and the Regulations of the Internal Revenue Service. The initial capital account balance on the Effective Date in the General Partner will be Zero Dollars ($0.00) and in the Venture will be One Hundred Dollars ($100.00). 15.3 Allocation of Taxable Income and Tax Losses and Profits. The taxable income and tax losses of the Venture for each fiscal year shall be allocated, and all distributions of profits shall be made, as follows: (i) taxable income and tax losses of the Venture shall be allocated to each of the General Partner, TBW and Electron in proportion to their Interests; and (ii) all distributions of profits shall be made to each of the General Partner, TBW and Electron in proportion to their respective Interests and shall be made at the end of each calendar month or as soon as practicable thereafter. The cash account balance of the Venture, after provision for bad debt and obsolete inventory reserves, shall be brought to zero at the end of each calendar month. 15.4 General Partner. The general partner of the Venture shall be TBWE Belt Drive Systems LLC, whose managers shall be the following individuals and their successors: (i) President and Chief Operating Officer of Electron; (ii) Vice President/General Manager of TBW's Mechanical Division; and (iii) a senior executive of TBW selected, in its sole discretion, by TBW. 15.5 Meetings of Managers of the General Partner. During the first year following the Effective Date, the managers of the General Partner shall meet quarterly in person. After the first anniversary of the Effective Date, the managers of the General Partner shall meet no fewer than two (2) times per year. The managers shall hold an annual meeting which the Chairman and Chief Executive Officer of Electron and the President of TBW shall be invited. The Chairman and Chief Executive Officer of Electron and the President of TBW shall be given at least two (2) weeks notice of the annual meeting. In the event that either the Chairman and Chief Executive Officer of Electron or the President of TBW are unable to attend the annual meeting of the Managers of the General Partner, reasonable efforts shall be made to reschedule the meeting to accommodate the attendance of such persons. 15.6 Major Decisions. All "Major Decisions", as defined hereinafter, shall only be made by unanimous vote of all managers of the General Partner. TBW shall manage the daily affairs of the Venture pursuant to the M&AS Agreement in form and substance acceptable to both TBW and Electron. "Major Decisions" which shall be made only by unanimous agreement of all managers of the General Partner, and shall be limited to the following: (i) mortgaging, pledging or subjecting to a security interest on any portion of the Venture's assets, except for customary liens contained in or arising under any purchase money security interests or similar agreements binding the Venture's assets; (ii) admission of an additional or substitute joint venture member (except an assignee of a Venturer as permitted on Section 25 hereinafter); (iii) any transaction with an affiliate of either TBW or Electron, unless expressly permitted in this Joint Venture Agreement; (iv) merger or combination of the Venture with any other person; (v) binding the Venture to any contract or agreement regarding any matter beyond the scope of the Venture; (vi) any action regarding the assets or business of the Venture which benefits either Venturer or its respective affiliates to the detriment of the other Venturer or the Venture, including, without limitation, appropriation or use of proprietary information, business opportunities, funds or other assets; (vii) changing the transfer costs of Belted Drive Components to an amount different from the transfer costs set forth on Schedules 1.1 (a), 1.1 (b) and 1.1 (c); and (viii) borrowing any funds on behalf of the Venture on an unsecured basis, except trade debt incurred in the ordinary course of business and funds borrowed from either Venturer for working capital purposes. 15.7 Inability to Achieve Unanimous Agreement on Major Decisions. In the event that the managers of the General Partner are unable to achieve unanimous agreement on a Major Decision within thirty (30) days after the date of the meeting at which the issue requiring the Major Decision was presented for vote, the President of TBW and the Chairman and Chief Executive Officer of Electron shall have a period of sixty (60) days to deliberate and reach consensus. If the President of TBW and the Chairman and Chief Executive Officer of Electron are not able to reach consensus within ninety (90) days after the issue requiring a Major Decision was presented for vote, then either of the Venturers shall have the option of submitting the issue to binding arbitration, subject to the following limitations: (i) in the event the President of TBW and the Chairman and Chief Executive Officer of Electron agree to terminate the Venture rather than to proceed to arbitration, TBW shall have the option to acquire Electron's Interest in the Venture and in the General Partner for an aggregate purchase price equal to the average of the Call Price and the Put Price as determined in accordance with Sections 16.4 and 16.5 hereinafter; (ii) in the event Electron elects to submit the issue to arbitration and TBW declines to participate in the arbitration proceeding, TBW shall purchase Electron's Interest in the Venture and in the General Partner for an aggregate purchase price equal to the Call Price as determined in accordance with Section 16.4 hereinafter; and (iii) in the event TBW elects to submit the issue to arbitration and Electron declines to participate in the arbitration proceeding, TBW shall be entitled to acquire Electron's Interest in the Venture and in the General Partner for an aggregate purchase price equal to the Put Price as determined in accordance with Section 16.5 hereinafter. 15.8 Termination of Venture. The Venture and the General Partner shall terminate upon the occurrence of the earliest of the following events: (i) the Venturers agree to a termination of the Venture; (ii) all of the Venturers' interests in the Venture and in the General Partner are held by one of the Venturers; or (iii) the Venture is terminated unilaterally pursuant to Section 16 below. The Venture may be terminated at the election of either Venturer if the other Venturer Fails to Perform (as defined herein) and the defaulting Venturer has not implemented an acceptable corrective action plan within ten (10) days after issuance of a Corrective Action Report by or on behalf of the Venture. 15.9 Books and Records. The Venture shall maintain complete and accurate books of all transactions, expenses and income which shall be available to each of the Venturers at any time upon reasonable notice for review and copying. Either Venturer shall have the right to audit the books and records of the Venture at any reasonable time upon ten (10) days prior written notice to the Venture and the other Venturer. Any such audit requested by one of the Venturers shall be at the expense of the Venturer requesting the audit. Notwithstanding the foregoing sentence and as provided in Section 22 below, the Venture shall cause an annual audit to be performed by the Venture's independent accounting firm at the cost of the Venture. 16. Unilateral Termination of Joint Venture. Except as provided in Section 16.1 hereinafter, either Venturer may elect unilaterally to terminate the Venture. In the event that either Venturer should elect to terminate the Venture, the Interest of Electron in the Venture and in the General Partner shall be purchased by TBW as follows: 16.1 Unilateral Termination by TBW before First Anniversary of Effective Date. If TBW elects to terminate the Venture before the first anniversary of the Effective Date, TBW shall acquire Electron's Interest in the Venture and in the General Partner for a purchase price equivalent to the sum of Seven Million Twelve Thousand and 00/100 Dollars ($7,012,000.00) plus any Trade Accounts Payable Balance owed by the Venture to Electron. Electron shall not be entitled to terminate the Venture unilaterally during the first year after the Effective Date, except as provided in Section 16.2.1 below. 16.2 Termination by Either Venturer for Failure of Other Venturer to Perform before First Anniversary of Effective Date. If either Venturer shall elect to terminate the Venture because of the Failure to Perform of the other Venturer commencing before the First Anniversary of the Effective Date, TBW shall purchase Electron's Interest in the Venture and in the General Partner for the following purchase prices: 16.2.1 Failure of TBW to Perform: The Trade Accounts Payable Balance owed by the Venture to Electron plus ninety-seven and six-tenths percent (97.6%) of the operating income of the Venture from the Effective Date to the commencement date of TBW's Failure to Perform plus the product of Seven Million Twelve Thousand and 00/100 Dollars ($7,012,000.00) multiplied by a fraction having as a numerator the difference between the number 365 less the days elapsed between the Effective Date and the commencement date of TBW's Failure to Perform divided by the number 365. 16.2.2 Failure of Electron to Perform: The Trade Accounts Payable Balance owed by the Venture to Electron plus seventy-three and two-tenths percent (73.2%) of the Operating Income of the Venture from the Effective Date to the commencement date of Electron's Failure to Perform plus the product of Five Million Two Hundred Fifty-Nine Thousand and 00/100 Dollars ($5,259,000.00) multiplied by a fraction having as a numerator the difference between the number 365 less the days elapsed between the Effective Date and the commencement date of Electron's Failure to Perform divided by the number 365. 16.3 Unilateral Termination by TBW after the First Anniversary of the Effective Date but Before the Third Anniversary of the Effective Date. If TBW elects to terminate the Venture after the first anniversary of the Effective Date but before the third anniversary of the Effective Date, TBW shall acquire Electron's interest in the Venture and in the General Partner for a purchase price equivalent to the Trade Accounts Payable Balance owed by the Venture to Electron plus the greater of (i) Seven Million Twelve Thousand and 00/100 Dollars ($7,012,000.00) or (ii) ninety-seven and six-tenths percent (97.6%) of the Venture's Operating Income for the most recent period of twelve (12) consecutive calendar months. 16.4 Unilateral Termination by TBW after the Third Anniversary of the Effective Date. If TBW elects to terminate the Venture after the third anniversary of the Effective Date, TBW shall acquire Electron's Interest in the Venture and in the General Partner for a purchase price equivalent to ninety-seven and six-tenths percent (97.6%) of the Venture's Operating Income for the prior twelve (12) calendar months plus any Trade Accounts Payable Balance owed by the Venture to Electron (collectively the "Call Price"). 16.5 Unilateral Termination by Electron after the First Anniversary of the Effective Date. If Electron elects to terminate the Venture, TBW shall acquire Electron's interest in the Venture and in the General Partner for the sum of seventy-three and two-tenths percent (73.2%) of the Venture's Operating Income for the prior twelve (12) calendar months plus any Trade Accounts Payable Balance owed by the Venture to Electron (collectively the "Put Price"). For purposes of the purchase price calculations of this Section 16, the Trade Accounts Payable Balance allocable to Electron's Initial Inventory shall not exceed a sum equivalent to the dollar volume of Net Sales in calendar year 1998 of each such item of Initial Inventory multiplied by two (2). 17. Disposition of Assets Upon Termination of Venture. In the event the Venture is terminated by agreement of the Venturers, unilateral termination by either Venturer as provided for in Section 15.8 and 16 of this Agreement or otherwise ceases to exist , all assets of the Venture, including, but not limited to, intellectual property rights (if any), patterns, tooling (if any), inventory and accounts receivable, and all intellectual property rights, patterns and tooling of Electron required for or utilized in the manufacture of Belted Drive Components will become the exclusive property of TBW. 18. Electron's Agreement Not to Compete. 18.1 Agreement Not To Compete. Except as otherwise specifically provided in Subsection 18.2 hereinafter, Electron agrees that, 18.1.1 with respect to castings for Belted Drive Components, for a period of three (3) years after termination of the Venture (provided that termination is the result of unilateral termination by Electron, termination by mutual agreement or termination because of Electron's Failure to Perform); and 18.1.2 with respect to finished goods comprising Belted Drive Components, for a period of ten (10) years after termination of the Venture (provided that termination is the result of unilateral termination by Electron, termination by mutual agreement or termination because of Electron's Failure to Perform), Electron will not compete with either TBW or the Venture, either directly or indirectly, in the production, manufacture and sale of Belted Drive Components in the Restricted Territory. 18.2 Agreement Upon Unilateral Termination by TBW. Electron agrees that, in the event TBW terminates the Venture pursuant to Sections 16.1, 16.2.1, 16.3 or 16.4 above, Electron will not compete with either TBW or the Venture, either directly or indirectly, in the production, manufacture and sale of Belted Drive Components in the Restricted Territory with respect to finished goods comprising Belted Drive Components, for a period of ten (10) years after termination of the Venture. TBW acknowledges that should TBW terminate the Venture pursuant to Section 16.1, 16.2.1, 16.3 or 16.4 above, Electron shall be allowed to compete with TBW or the Venture, either directly or indirectly, in the production, manufacture and sale of castings for Belt Drive Components in the Restricted Territory provided that such sales by Electron are solely to customers who are not related persons, affiliates or under common control with Electron. 19. Ownership of Interest in Competing Business. TBW and Electron covenant, represent and warrant that, with the exception of Groupo Blaju, TBW's Mexican subsidiary, neither TBW nor Electron, nor any of their respective affiliates, currently own or will acquire, either directly or indirectly, an interest in any entity, division or person which shall manufacture and sell products substantially similar to the Belted Drive Components. In the event that either TBW or Electron in the future seeks to acquire a business or entity (other than Groupo Blaju) which manufactures and sells products substantially similar to the Belted Drive Components, either Venturer may acquire such operation, business or entity provided that the other Venturer is offered an equity interest proportionate to its share of the Venture. Except as expressly provided in Section 20.2 hereinafter, Groupo Blaju, and the manufacture and sale by it of any products competitive with the Venture, shall not be deemed part of the Venture, nor will sales by Groupo Blaju into the Restricted Territory be considered part of the Venture or subject to the limitations on competing businesses contained in this section. 20. Transactions With or Involving Groupo Blaju. 20.1 Sales to Groupo Blaju. The Venture shall sell Belted Drive Components to, and as required by, Groupo Blaju at a price of One hundred Twenty Percent (120%) of the cost of such Belted Drive Components to the Venture. 20.2 United States Designed Products Sold in Restricted Territory (Excluding Mexico) by Groupo Blaju. All Belted Drive Components designed in the United States, manufactured by Groupo Blaju and sold directly or indirectly in the Restricted Territory (with the exception of Mexico) shall be deemed to be Belted Drive Components manufactured by TBW for purposes of this Agreement. 20.3 Belted Drive Components Designed Elsewhere and Sold by Groupo Blaju. Except as provided in Section 20.2 above, all Belted Drive Components designed, manufactured and sold by Groupo Blaju (including, without limitation, IBSA and TIBSA brands) shall not be subject to the terms of this Agreement and may be sold by Groupo Blaju without restriction. 21. Corrective Action Plan. Either Venturer who is alleged to have Failed to Perform shall submit a corrective action of plan to the Venture within ten (10) days after issuance of a Corrective Action Report by the other Venturer on behalf of the Venture which shall state in reasonable detail the proposed corrective action. 22. Alternate Sources of Supply of Product. TBW, under its obligations under the M&AS Agreement and on behalf of the Venture, shall have the right to purchase castings from an alternate source or to manufacture castings comprising Belted Drive Components in the event that Electron Fails to Perform. Upon the occurrence of a Failure to Perform by Electron, and if either TBW (on behalf of the Venture) or the Venture purchases castings comprising Belted Drive Components from an alternate source, the Venture shall be reimbursed by Electron in an amount equivalent to (i) the difference between the cost to the Venture of acquiring substitute castings and the price listed on Schedules 1.1 (a) and 1.1 (b); plus (ii) a management fee in the amount of ten percent (10%) of the price listed on Schedules 1.1 (a) and 1.1 (b). In the event that Electron Fails to Perform and TBW manufactures replacement castings to be sold to the Venture, Electron shall reimburse TBW for the actual costs to TBW of producing the castings plus a management fee in the amount of ten percent (10%) of such costs. In the event TBW Fails to Perform, the Venture shall have the right to have castings machined by an alternate source, and TBW shall reimburse the Venture in an amount equivalent to (i) the difference between the actual costs to the Venture of machining and the price listed on Schedules 1.1 (b) and 1.1 (c); plus (ii) a management fee in the amount of ten percent (10%) of the costs of such machining. 23. TBW Marketing and Administrative Services Agreement. TBW shall enter into the M&AS Agreement with the Venture providing, among other things, for the following reporting services: (i) within thirty (30) days after the end of each calendar month, a product sales analysis for Belted Drive Components reporting, in reasonable detail, the Venture's sales for such month and any forecast of sales activity for the current month; (ii) within thirty (30) days after the end of each calendar month, a monthly profit and loss statement, balance sheet, statement of cash flows and accounts receivable aging for the Venture; (iii) (a) within thirty (30) days after the end of each calendar quarter unaudited financial statements as of the end of the such period, including a balance sheet and statement of income and interest holder's equity, prepared in accordance with generally accepted accounting principles and a schedule reflecting, for such period, the Venture's capital expenditures and a schedule showing the capital account balance of each partner of the Venture; and (b) within seventy-five (75) days after the end of each calendar year, audited financial statements as of the end of the such period, including a balance sheet and statement of income and Interest holder's equity, prepared in accordance with generally accepted accounting principles and accompanied by a report of the Venture's independent certified public accounting firm, a schedule reflecting, for such period, the Venture's capital expenditures and a schedule showing the capital account balance of each partner of the Venture; (iv) not less than fifteen (15) days before the date on which the Venture files its federal income tax return or any state or local income tax returns, a copy of the income tax returns proposed to be filed for the Venture; and (v) a monthly 12-month rolling sales forecast for the Venture. The Venture's independent certified public accounting firm shall be a nationally recognized accounting firm approved jointly by TBW and Electron. 24. Indemnification of Venturers. The Venture and the General Partner shall defend, indemnify and hold harmless TBW, Electron and their respective affiliates, officers, directors, partners, stockholders, employees or other agents from and against all claims, demands and liabilities (including attorneys fees) arising in connection with the Venture and the General Partner; provided, however, that the Venture and the General Partner shall not be obligated to defend, indemnify and hold harmless the Venturers with respect to any claim, demand or liability arising out of the Venturer's gross negligence, willful misconduct or intentional violation of applicable law or breach of this Agreement or breach of any requirements, management services or administrative services agreement between the Venturer and both the Venture and the General Partner. The agreement of indemnity is between each Venturer and the Venture, and neither Venturer shall be liable to indemnify the other Venturer except (i) for the material breach of any covenant, representation or warranty contained in this Agreement; or (ii) a material breach of any other term or condition of this Agreement. 25. Limitations on Assignability. The Venturers shall be entitled to assign their Interests in the Venture and the General Partner, provided that the proposed assignee has the financial strength, ability and industry experience necessary to perform competently and efficiently the obligations of the assigning Venturer under this Agreement. Except as expressly provided in the foregoing sentence, neither Venturer shall have the right to mortgage, pledge, assign, transfer or sell its Interest in the Venture and the General Partner without the consent of the other Venturer or delegate its duties in connection with the operation of the Venture without the consent of the other Venturer, and any attempted assignment, or any attempt to assign, convey or otherwise transfer or sell any interest in the Venture or the General Partner not in accordance with this Agreement, shall be null and void. 26. Termination of Venture. The Venture shall continue until terminated. In the event the Venture is terminated, TBW shall purchase the Interest of Electron in the Venture and in the General Partner for a purchase price determined in accordance with the formula stated in Section 15.7 (i) hereof. Upon termination, the Venture shall be dissolved and immediately commence to wind up its business and affairs, liquidate all assets and pay all debts and liabilities first owing to other than the Venturers, then those owing to the Venturers, and finally distribute equally to the Venturers any net proceeds, assets or funds remaining in the Venture. The Venturers agree to proceed with due diligence to complete dissolution, liquidation and distribution in a prompt manner. Notwithstanding anything to the contrary contained herein, this Agreement may be terminated immediately by either Venturer by written notice upon the occurrence of any of the following events: (i) the other Venturer seeks protection under the bankruptcy or insolvency laws of the United States of America or any other jurisdiction, (ii) a petition for bankruptcy or the appointment of a receiver or similar action is filed against the other Venturer and is not dismissed within ninety (90) days thereafter, or (iii) the other Venturer makes any assignment for the benefit of its creditors. Additionally, if either party hereto shall be dissolved an its business terminated, this Agreement shall automatically terminate upon the effectiveness of such dissolution. 27. Representations and Warranties of TBW. TBW represents and warrants to Electron as follows: 27.1 Corporate Authority and Approvals. 27.1.1 Organization and Standing of TBW. TBW is a corporation duly organized, validly existing under the laws of the Commonwealth of Pennsylvania, and has full corporate power to own its properties and to carry on its business as now being conducted. TBW is duly qualified, licensed, or domesticated and in good standing as a foreign corporation and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such license, qualification or authorization, and a list of those states where TBW is so licensed, qualified, or domesticated is set forth in Schedule 27.1.1. 27.1.2 Corporate Approvals. TBW has obtained all corporate authorizations and approvals required for the execution and delivery of this Agreement as well as the execution and delivery of all other documents, agreements, certificates or instruments which are to be executed by TBW in connection with this transaction (the "Other TBW Instruments") and the consummation of the transactions contemplated by this Agreement. This Agreement and the Other TBW Instruments have been duly executed and delivered by TBW are the valid and binding obligations of TBW, enforceable against TBW in accordance with their respective terms, except to the extent that enforceability may be limited or affected by bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other laws relating to or affecting generally the enforcement of debtor's or contracting parties' rights, and to the extent that the availability of the remedy of specific performance or of injunctive relief or other equitable relief with respect to the enforceability of such obligations is subject to the discretion of the court before which any proceeding therefor may be brought. 27.1.3 No Violation of Other TBW Instruments. Neither the execution and delivery of this Agreement or the Other TBW Instruments by TBW nor the consummation of the transactions contemplated hereby will conflict with, result in a breach of or constitute a default under the corporate charter or by-laws of TBW or any contract, instrument, agreement or understanding to which TBW is a party or by which it or any of its properties is bound, nor will it result in acceleration in the time for performance of any obligation under any contract or instrument, nor will it result in the creation or imposition of any lien, charge or encumbrance upon any asset transferred under this Agreement, nor give rise to any right of determination, nor will it result in the violation of any law, statute, ordinance, rule or regulation applicable to TBW. 27.2 Description and Condition of Inventory. TBW's inventories of Belted Drive Components are (i) usable and saleable in the ordinary course of business at prevailing market prices without discount; and (ii) owned free and clear of all liens, claims, charges and encumbrances of any kind or nature. 27.3 Litigation. There is no action, proceeding, governmental investigation or other legal or administrative proceeding pending or, to the knowledge of TBW, threatened, against or relating to TBW, or its officers or employees, or its properties, assets or business or the transactions contemplated by this Agreement or that would interfere with the performance by TBW of this Agreement. 27.4 Taxes. TBW has no tax deficiency or claim outstanding, proposed or, to its knowledge, assessed against it with respect to any taxes, including, without limitation, income, property, sales, use, franchise, added value, employee's income withholding and social security taxes, imposed by the United States or by any foreign country or by any state, municipality, subdivision or instrumentality of the United States or of any foreign country, or by any other taxing authority, and TBW has made timely filings of all tax returns due to all such taxing authorities. 27.5 Permits; Governmental Approvals. TBW possesses all material franchises, licenses, permits and other authority as are necessary for the conduct of TBW's business and is not in default in any material respect under any of such franchises, permits, licenses or other authority. No approval, consent, authorization or other order of, and no consent, designation, filing, registration, qualification or recordation with, any governmental authority is required in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. 27.6 Operations in Conformity With Law. TBW's operations, as presently conducted, are not in material violation of any law or regulation, including, without limitation, any applicable building code, zoning ordinance, law relating to the employment of labor (including provisions thereof relating to wages, hours, equal opportunity, collective bargaining, age, pregnancy, disability and sex discrimination and the payment of social security and other taxes), regulation of the Federal Occupational Safety and Health Administration, or any law regarding protection of the environment or the use, storage or disposal of hazardous wastes. Neither the warranties and representations made by TBW in this Agreement and the Other TBW Instruments, nor the financial statements furnished by TBW, nor any certificate or memorandum furnished or to be furnished by TBW, or on its behalf, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements herein or therein not misleading. All representations and warranties of TBW shall be true on and as of the Closing Date with substantially the same effect as if made on and as of such date. 28. Covenants of TBW. TBW shall hold in strict confidence all confidential data and information obtained from Electron, or any officer, agent or representative of Electron: 28.1 Expenses of Acquisition Transaction. TBW shall pay all of its expenses in connection with the transactions contemplated by this Agreement, including, without limitation, the fees and expenses of its legal counsel and accountants. 28.2 Notice of Breach of Representation or Warranty. Promptly upon TBW becoming aware of the occurrence of, or the impending or threatened occurrence of, any event which would cause or constitute a breach, or would have caused or constituted a breach had such event occurred prior to the date hereof, of any of the representations and warranties of TBW contained in or referred to in this Agreement, TBW shall give detailed written notice thereof to Electron. 29. Representations and Warranties of Electron. Electron represents and warrants that: 29.1 Corporate Authority and Approvals. 29.1.1 Organization and Standing of Electron. Electron is a corporation duly organized, validly existing under the laws of the State of Colorado, and has full corporate power to own its properties and to carry on its business as now being conducted. Electron is duly qualified, licensed, or domesticated and in good standing as a foreign corporation and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such license, qualification or authorization, and a list of those states where Electron is so licensed, qualified, or domesticated is set forth in Schedule 29.1.1. 29.1.2 Corporate Approvals. Electron has obtained all corporate authorizations and approvals required for the execution and delivery of this Agreement as well as the execution and delivery of all other documents, agreements, certificates or instruments which are to be executed by Electron in connection with this transaction (the "Other Electron Instruments") and the consummation of the transactions contemplated by this Agreement. This Agreement and the Other Electron Instruments have been duly executed and delivered by Electron and are the valid and binding obligations of Electron enforceable against Electron in accordance with their respective terms, except to the extent that enforceability may be limited or affected by bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other laws relating to or affecting generally the enforcement of debtor's or contracting parties' rights, and to the extent that the availability of the remedy of specific performance or of injunctive relief or other equitable relief with respect to the enforceability of such obligations is subject to the discretion of the court before which any proceeding therefor may be brought. 29.1.3 No Violation of Other Electron Instruments. Neither the execution and delivery of this Agreement or the Other Electron Instruments by Electron nor the consummation of the transactions contemplated hereby will conflict with, result in a breach of or constitute a default under the corporate charter or by-laws of Electron or any contract, instrument, agreement or understanding to which Electron is a party or by which it or any of its properties is bound, nor will it result in acceleration in the time for performance of any obligation under any contract or instrument, nor will it result in the creation or imposition of any lien, charge or encumbrance upon any asset transferred under this Agreement, nor give rise to any right of determination, nor will it result in the violation of any law, statute, ordinance, rule or regulation applicable to Electron. 29.2 Description and Condition of Inventory. Electron's inventories of Belted Drive Components are (i) usable and saleable in the ordinary course of business at prevailing market prices without discount; and (ii) owned free and clear of all liens, claims, charges and encumbrances of any kind or nature. 29.3 Litigation. There is no action, proceeding, governmental investigation or other legal or administrative proceeding pending or, to the knowledge of Electron, threatened, against or relating to Electron, or its officers or employees, or its properties, assets or business or the transactions contemplated by this Agreement or that would materially interfere with the performance by Electron of this Agreement. 29.4 Taxes. Electron has no tax deficiency or claim outstanding, proposed or, to its knowledge, assessed against it with respect to any taxes, including, without limitation, income, property, sales, use, franchise, added value, employee's income withholding and social security taxes, imposed by the United States or by any foreign country or by any state, municipality, subdivision or instrumentality of the United States or of any foreign country, or by any other taxing authority, and Electron has made timely filings of all tax returns due to all such taxing authorities. 29.5 Permits; Governmental Approvals. Electron possesses all material franchises, licenses, permits and other authority as are necessary for the conduct of Electron's business and is not in default in any material respect under any of such franchises, permits, licenses or other authority. No approval, consent, authorization or other order of, and no consent, designation, filing, registration, qualification or recordation with, any governmental authority is required in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. 29.6 Operations in Conformity With Law. Electron's operations, as presently conducted, are not in material violation of any law or regulation, including, without limitation, any applicable building code, zoning ordinance, law relating to the employment of labor (including provisions thereof relating to wages, hours, equal opportunity, collective bargaining, age, pregnancy, disability and sex discrimination and the payment of social security and other taxes), regulation of the Federal Occupational Safety and Health Administration, or any law regarding protection of the environment or the use, storage or disposal of hazardous wastes. Neither the warranties and representations made by Electron in this Agreement and the Other Electron Instruments, nor the financial statements furnished by Electron , nor any certificate or memorandum furnished or to be furnished by Electron, or on its behalf, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements herein or therein not misleading. All representations and warranties of the Electron shall be true on and as of the Closing Date with substantially the same effect as if made on and as of such date. 30. Covenants of Electron. Electron shall hold in strict confidence all confidential data and information obtained from TBW, or any officer, agent or representative of TBW. 30.1 Expenses of Acquisition Transaction. Electron shall pay all of its expenses in connection with the transactions contemplated by this Agreement, including, without limitation, the fees and expenses of its legal counsel and accountants. 30.2 Notice of Breach of Representation or Warranty. Promptly upon Electron becoming aware of the occurrence of, or the impending or threatened occurrence of, any event which would cause or constitute a breach, or would have caused or constituted a breach had such event occurred prior to the date hereof, of any of the representations and warranties of Electron contained in or referred to in this Agreement, Electron shall give detailed written notice thereof to TBW. 31. Notices. All notices or other communications required or to be given hereunder shall be in writing and shall be deemed duly given when received or presented for delivery to the person entitled thereto at the addresses set forth above, or at such other address as the Venturer may notify the other Venturer from time to time by written notice. 32. Modification. This agreement may not be amended, modified or rescinded, or any term or provision hereof waived, except by written agreement signed by all of the Venturers, or, in the case of a waiver, signed by the Venturer sought to be charged therewith. 33. Binding Effect. This agreement shall be binding upon and shall inure to the benefit of and be enforceable by the Venturers and their respective representatives, heirs, successors and permitted assigns, if any. 34. Governing Laws. This agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 35. Integration. This agreement and the Schedules and Exhibits hereto set forth the entire agreement and understanding among the Venturers relating to the subject matter hereof and all prior agreements, understandings and discussions relating to same are hereby made null and void. 36. Partial Invalidity. If any term or provision of this agreement is held by a court of competent jurisdiction to be invalid or unenforceable, in whole or in part, the rest and remainder of this agreement and the application of such provision to other circumstances and/or persons, shall remain valid and enforceable to the fullest extent permitted by law. 37. Arbitration of Disputes. Any action, dispute, claim, or controversy, whether sounding in contract, tort, or otherwise arising with respect to this Agreement or relating to the other agreements contemplated by this Agreement (the "Dispute" or "Disputes"), may, but is not required to, be resolved by arbitration as set forth below. If taken to arbitration, such disputes shall be resolved by binding arbitration in accordance with Title 9 of the United States Code and the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). In the event of any inconsistency between such Rules and these arbitration provisions, these provisions shall supersede such Rules. All statutes of limitation which would otherwise be applicable shall apply to any arbitration proceeding. In any arbitration proceeding subject to these provisions, the arbitrator is specifically empowered to decide pre-hearing motions which are substantially similar to pre-hearing motions to dismiss and motions for summary adjudication. Judgment upon the award rendered may be entered in any court having jurisdiction. A judgment entered on an arbitrator's award shall not be appealable by either of The Venturers or the Venture. Whenever an arbitration is elected, the parties shall select an arbitrator in the manner provided in subsection 37.1. 37.1 Whenever an arbitration is elected under Section 37 of this Agreement, the arbitrator shall be selected in accordance with the Commercial Arbitration Rules of the AAA. Any arbitrator selected under this subsection shall be knowledgeable in the subject matter of this Dispute. 37.2 In the event of any Dispute governed by this section, the party who does not prevail with respect to such Dispute shall pay all of its own expenses, the arbitrator's fees and all costs and fees (including attorneys' fees, administrative fees, arbitrator's fees, and court costs) of and to the prevailing party. 38. Consent to Jurisdiction and Venue. With regard to any matters not subject to arbitration as provided in Section 37 above, TBW and Electron hereby consent to the exclusive jurisdiction of the courts designated in this Section 38 hereinafter in any and all actions or proceedings arising hereunder or pursuant hereto, and irrevocably agree to service of process by personal service upon them or by certified or registered mail, return receipt requested, directed to the Venturers at their respective last know addresses. 38.1 Actions or Proceedings Commenced by TBW: TBW and Electron consent to the exclusive jurisdiction of the federal and state courts sitting in Colorado in any and all actions or proceedings commenced by TBW against Electron and arising hereunder or pursuant hereto. 38.2 Actions or Proceedings Commenced by Electron: TBW and Electron consent to the exclusive jurisdiction of the federal and state courts sitting in Pennsylvania in any and all actions or proceedings commenced by Electron against TBW and arising hereunder or pursuant hereto. 39. Headings. The headings and subheadings contained in the titling of this Agreement are intended to be used for convenience only and do not constitute part of this Agreement or a basis for the interpretation hereof. 40. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Venturers have executed this Joint Venture Agreement on the day and year first above written intending to be legally bound hereby. ATTEST: TB WOOD'S INCORPORATED _______________________________ By:________________________________ Emma K. Gross, Corporate Secretary Carl R. Christenson, Vice President and General Manager, Mechanical Division ATTEST: THE ELECTRON CORP. _______________________________ By:_________________________________ , Secretary Michael Norwood, President and Chief Operating Officer EX-10.51 5 EXHIBIT 10.51 Exhibit 10.51 OPERATING AGREEMENT OF TBWE BELT DRIVE SYSTEMS LLC A PENNSYLVANIA LIMITED LIABILITY COMPANY EFFECTIVE AS OF JULY 3, 1999 OPERATING AGREEMENT OF TBWE BELT DRIVE SYSTEMS LLC THIS Operating Agreement is made and entered into as of this 3rd day of July, 1999, by and between the Members whose signatures appear on the signature page hereof. For and in consideration of the mutual agreements and provisions herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE DEFINITIONS ----------- The following terms used in this Operating Agreement shall have the following meanings (unless otherwise expressly provided herein); 1.1 "Act" shall mean the Pennsylvania Limited Liability Company Law of 1994, codified at 15 Pa.C.S.A.ss.8901 et seq. 1.2 "Assignee" shall mean the owner of an Economic Interest who is not a Member. 1.3 "Certificate of Organization" shall mean the Certificate of Organization of TBWE Belt Drive Systems LLC as filed with the Secretary of the Commonwealth of Pennsylvania as the same may be amended from time to time. 1.4 "Company" shall refer to TBWE Belt Drive Systems LLC. 1.5 "Distributable Cash" means all cash, revenues and funds received by the Company, less the sum of the following to the extent paid or set aside by the Company: (i) all principal and interest payments on indebtedness of the Company and all other sums paid to lenders; (ii) all cash expenditures incurred incident to the normal operation of the Company's business; and (iii) such reserves as the Managers deem necessary to the proper operation of the Company's business. 82 1.6 "Economic Interest" shall mean a Member's or Assignee's share of the Company's Net Profits, Net Losses and distributions of the Company's assets pursuant to this Operating Agreement and the Act, but shall not include any right to participate in the management or affairs of the Company, including, the right to vote on, consent to or otherwise participate in any decision of the Members or Managers. 1.7 "Electron" shall mean The Electron Corp., a Colorado corporation. 1.8 "Gifting Member" shall mean any Member or Assignee who gifts, bequeaths or otherwise transfers for no consideration (by operation of law or otherwise, except with respect to bankruptcy) all or any part of its Membership Interest or Economic Interest. 1.9 "Joint Venture Agreement" shall mean the Agreement dated as of July 3, 1999, between TB Wood's Incorporated and The Electron Corp. to form "TBWE Belt Drive Components LP." 1.10 "Majority Interest" shall mean one or more interests of Members which taken together exceed 80% of the aggregate of all interests in Net Profits pursuant to Section 9.1. 1.11 "Manager" shall mean one or more managers and any other persons who succeed in that capacity. References to the Manager in the singular or as him, her, it, itself, or other like references shall also, where the context so requires, be deemed to include the plural or the masculine or feminine reference, as the case may be. 1.12 "Member" shall mean each of the parties who executes a counterpart of this Operating Agreement as a Member and each of the parties who may hereafter become Members. To the extent a Manager has purchased Membership Interests in the Company, such Manager will have all the rights of a Member with respect to such Membership Interests, and the term "Member" as used herein shall include a Manager to the extent such Manager has purchased such Membership Interests in the Company. If a Person is a Member immediately prior to the purchase or other acquisition by such Person of an Economic Interest, such Person shall have all the rights of a Member with respect to such purchased or otherwise acquired Membership Interest or Economic Interest, as the case may be. "Membership Interest" shall mean a Member's entire interest in the Company including such Member's Economic Interest and such other rights and privileges that the Member may enjoy by being a Member. 1.14 "Net Profits and Net Losses" shall mean for each taxable year of the Company an amount equal to the Company's net taxable income or tax loss, as the case may be, for the year as determined for federal income tax purposes in accordance with the accounting method and rules used by the Company. 83 1.15 "Operating Agreement" shall mean this Operating Agreement as originally executed and as amended from time to time. 1.16 "Person" shall mean any individual or Entity, and the heirs, executors, administrators, legal representatives, successors, and assigns of such "Person" where the context so permits. 1.17 "Selling Member" shall mean any Member or Assignee which sells, assigns, or otherwise transfers for consideration all or any portion of its Membership Interest or Economic Interest. 1.18 "TBW" shall mean TB Wood's Incorporated, a Pennsylvania corporation. 1.19 "Venture" shall mean TBWE Belt Drive Components LP. 1.20 "Venturer" shall mean either Electron or TBW. ARTICLE 2 FORMATION OF COMPANY -------------------- 2.1 Formation. On July 3, 1999, TBW and Electron formed a Pennsylvania limited liability company by executing and delivering the Certificate of Organization for the Company to the Pennsylvania Secretary of the Commonwealth in accordance with and pursuant to the Act. 2.2 Name. The name of the Company is TBWE Belt Drive Systems LLC. All Company business must be conducted in that name or such other names that comply with applicable law as the Managers may select from time to time. 2.3 Principal Place of Business. The principal place of business of the Company shall be 440 North Fifth Avenue, Chambersburg, Pennsylvania 17201. The Company may locate its places of business and registered office at any other place or places as the Managers may from time to time deem advisable. 2.4 Registered Office and Registered Agent. The Company's initial registered office shall be 440 North Fifth Avenue, Chambersburg, Pennsylvania 17201. The registered office may be changed from time to time by filing the address of the new registered office with the Secretary of the Commonwealth pursuant to the Act. 2.5 Foreign Qualification. Prior to the Company conducting business in any jurisdiction other than the Commonwealth of Pennsylvania, the Managers shall cause the Company to comply, to the extent procedures are available and those matters are reasonably within the control of the Managers, with all requirements necessary to qualify the Company as a foreign limited liability company in such jurisdiction. At the request of the Managers, each Member shall execute, acknowledge, swear to, and deliver all certificates and other instruments conforming with this Operating Agreement that are necessary or appropriate to qualify, continue and terminate the Company as a foreign limited liability company in all such jurisdictions in which the Company may conduct business. 2.6 Term. The Company shall be in existence until terminated by the Venturers in accordance with either the provisions of this Operating Agreement, the Joint Venture Agreement or the Act. 84 ARTICLE 3 BUSINESS OF COMPANY 3.1 Permitted Businesses. The business of the Company shall be: a. To acquire, improve, manage, operate and dispose of real and personal property and to accomplish any lawful business whatsoever, or which shall at any time appear conducive to or expedient for the protection or benefit of the Company and its assets, so long as such activities are within the scope of acting as the general partner of the Venture. b. To exercise all other powers necessary to or reasonably connected with the Company's business which may be legally exercised by limited liability companies under the Act, so long as such activities are within the scope of acting as the general partner of the Venture. c. To engage in all activities necessary, customary, convenient, or incident to any of the foregoing. ARTICLE 4 NAMES AND ADDRESSES OF MEMBERS ------------------------------ The names of the Members are as listed on Schedule 4 attached hereto. 85 ARTICLE 5 RIGHTS AND DUTIES OF MANAGERS ----------------------------- 5.1 Management. The business and affairs of the Company shall be managed by its Managers. Except for situations in which the approval of the Members is expressly required by this Operating Agreement or by non-waivable provisions of applicable law, and except in the event that the Managers are unable to reach a unanimous agreement on a Major Decision as more fully set forth below, in which case the provisions of Section 15.7 of the Joint Venture Agreement shall apply, the Managers shall have full and complete authority, power and discretion to manage and control the business, affairs and properties of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Company's business of acting as the general partner of the Venture. At any time when there is more than one Manager, any one Manager may take any action authorized to be taken by the Managers holding a Majority Interest unless a greater percentage vote is required by the Act or this Operating Agreement. 5.2 Number, Tenure and Qualifications. The Company shall initially have three (3) Managers consisting of the following individuals and their successors: (i) President and Chief Operating Officer of Electron; (ii) Vice President/General Manager of TBW Mechanical Division; and (iii) a senior executive of TBW selected, in its sole discretion, by TBW. The number of Managers of the Company shall be changed from time to time by the unanimous vote of all Members, but in no instance shall there be less than one Manager. Each Manager shall hold office until he is removed pursuant to Section 5.10. Managers shall be appointed and removed by the affirmative vote of all Members. 5.3 Major Decisions. By way of limiting the generality of Section 5.1, all Major Decisions, as defined hereinafter, affecting the Company or the Venture shall only be made by unanimous vote of all Managers. Major Decisions shall be limited to the following: (i) Mortgaging, pledging or subjection to a security interest on any portion of the Venture's assets, except for customary liens contained in or arising under any purchase money security interests or similar agreements binding the Venture's assets; (ii) admission of an additional or substitute joint venture member (except an assignee by TBW or Electron as permitted in Section 25 of the Joint Venture Agreement; (iii) any transaction with an affiliate of either TBW or Electron, unless specifically permitted in the Joint Venture Agreement; 86 (iv) merger or combination of the Venture with any other person; (v) binding the Venture to any contract or agreement beyond the scope of the Venture; (vi) any action regarding the assets or business of the Venture which benefits either Venturer or its respective affiliates to the detriment of the other Venturer or the Venture, including, without limitation, appropriation or use of proprietary information, business opportunities, funds or other assets; (vii) Changing the transfer costs of Belted Drive Components (as that term is defined in Section 1.1 of the Joint Venture Agreement) to an amount different from the prices set forth on Schedules 1.1 (a), 1.1 (b) and 1.1 (c) of the Joint Venture Agreement; (viii) borrowing any funds on behalf of the Venture on an unsecured basis, except trade debt incurred in the ordinary course of business and funds borrowed from either of the Venturers for working capital purposes. 5.4 Inability to Achieve Unanimous Agreement on Major Decisions. In the event the Managers are unable to unanimously agree on a Major Decision within thirty (30) days after the date of the meeting at which the issue requiring the Major Decision was presented, the procedure for resolving the impasse, as set forth in Section 15.7 of the Joint Venture Agreement and the Unilateral Termination provisions in Section 16 of the Joint Venture Agreement, shall be followed. 5.5 Additional Powers of Managers. Notwithstanding the provisions of Section 5.3, and without limiting the generality of Section 5.1, the Managers shall have power and authority, on behalf of the Company: 87 a. Subject to the limitations in Section 5.3, to execute on behalf of the Company all instruments and documents, including, but not limited to checks; drafts; notes and other negotiable instruments; mortgages or deeds of trust; security agreements; financing statements; documents providing for the acquisition, mortgage or disposition of the Company's property; assignments; bills of sale; leases; and any other instruments or documents necessary, in the opinion of the Managers, to the business of the Company; b. To enter into any and all other agreements on behalf of the Company as contemplated by the Joint Venture Agreement, with any other Person for any purpose, in such forms as the Managers may approve; and c. To do and perform all other acts as may be necessary or appropriate to the conduct of the Company's business. Unless authorized to do so by this Operating Agreement or by the Managers of the Company, no attorney-in-fact, employee or other agent of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable pecuniarily for any purpose. No Member shall have any power or authority to bind the Company unless the Member has been authorized by the Managers to act as an agent of the Company in accordance with the previous sentence. 5.6 Liability for Certain Acts. The Managers shall not be liable to the Company or to any Member or Assignee for any loss or damage sustained by the Company or any Member or Assignee, unless the loss or damage shall have been the result of fraud, deceit, gross negligence, willful misconduct, breach of this Operating Agreement or a wrongful taking by the Manager. 5.7 Managers and Members Have No Exclusive Duty to Company. The Managers shall not be required to manage the Company as their sole and exclusive function and they may have other business interests and may engage in other activities in addition to those relating to the Company. Neither the Company nor any Member or Assignee shall have any right, by virtue of this Operating Agreement, to share or participate in such other investments or activities of the Managers and/or Members or Assignee or to the income or proceeds derived therefrom. Neither the Managers nor any Members or Assignee shall incur any liability to the Company or to any of the Members or Assignees as a result of engaging in any other business or venture. 5.8 Indemnity of the Managers, Employees and Other Agents. Subject to Section 5.6, the Company shall indemnify the Managers and make advances for expenses to the maximum extent permitted under the Act. Notwithstanding any other provision of this Operating Agreement, no Manager shall be liable to any Member or Assignee or the Company with respect to any act performed or neglected to be performed in good faith in compliance with such Manager's duty of loyalty to the Company or its Members and in a manner which such Manager believed to be necessary or appropriate in connection with the ordinary and proper conduct of the Company's business or the preservation of its property, and consistent with the provisions of this Agreement and applicable law. The Company shall indemnify the Managers for and hold them harmless from any liability, whether civil or 88 criminal, and any loss, damage, or expense, including reasonable attorneys' fees, incurred in connection with the ordinary and proper conduct of the Company's business and the preservation of its business and property, or by reason of the fact that such person is or was a Manager; provided the Manager to be indemnified acted in good faith and in a manner such Manager believed to be consistent with the provisions of this Agreement; and provided further that with respect to any criminal action or proceeding, the Manager to be indemnified had no reasonable cause to believe the conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that indemnification is not available hereunder. The obligation of the Company to indemnify any Manager hereunder shall be satisfied out of Company assets only, and if the assets of the Company are insufficient to satisfy its obligation to indemnify any Manager, such Manager shall not be entitled to contribution from any Member. 5.9 Removal. At a meeting called expressly for that purpose, all or any lesser number of Managers may be removed at any time, with or without cause, by the unanimous vote of all Members determined without regard to any interest held by the Manager or an Affiliate of the Manager. 5.10 Vacancies. Any vacancy of a Manager's position occurring for any reason including an increase in the number of Managers, may be filled by the unanimous vote of all Members (determined without regard to any interest owned by a Manager who was removed pursuant to Section 5.9 during the preceding 24-month period). 5.11 Compensation, Reimbursement, Organization Expenses. No Member or Manager shall be entitled to compensation from the Company for services rendered to the Company in such capacity. Upon the submission of appropriate documentation each Manager shall be reimbursed by the Company for reasonable out-of-pocket expenses incurred by such Manager on behalf of the Company or at the Company's request. ARTICLE 6 RIGHTS AND OBLIGATIONS OF MEMBERS AND ASSIGNEES ----------------------------------------------- 6.1 Limitation of Liability. Each Member's or Assignee's liability shall be limited as set forth in this Operating Agreement, the Act and other applicable law. 6.2 Company Debt Liability. A Member or Assignee will not be personally liable for any debts or losses of the Company beyond his respective capital contributions and any obligation of the Member or Assignee under Section 8.1 or 8.2 to make capital contributions, except as otherwise required by law. 89 ARTICLE 7 MEETINGS OF MANAGERS AND MEMBERS -------------------------------- 7.1 Meetings. During the first year following the execution of this Operating Agreement, the Managers shall meet quarterly in person within or without the Commonwealth of Pennsylvania. After the first anniversary of this Agreement, the Managers shall meet no fewer than two (2) times per year. The Managers shall hold an annual meeting to which the Chairman and Chief Executive Officer of Electron and the President of TBW shall be invited to attend. The Chairman and Chief Executive Officer of Electron and the President of TBW shall be given at least two (2) weeks notice of the annual meeting. In the event that either the Chairman and Chief Executive Officer of Electron or the President of TBW are unable to attend the annual meeting of the Managers of the General Partner, reasonable efforts shall be made to reschedule the meeting to accommodate the attendance of such persons. The Members may meet at such other times and places within or without the Commonwealth of Pennsylvania as they shall mutually agree. 7.2 Manner of Acting. If a quorum is present, the affirmative vote of Members holding a Majority Interest shall be the act of the Members, unless the vote of a greater or lesser proportion or number is otherwise required by the Act, by the Certificate of Organization, or by this Operating Agreement. Unless otherwise expressly provided herein or required under applicable law, Members who have an interest (economic or otherwise) in the outcome of any particular matter upon which the Members vote or consent may vote or consent upon any such matter and their interest, vote or consent, as the case may be, shall be counted in the determination of whether the requisite matter was approved by the Members. A quorum shall consist of no less than one-half in number of all Members 7.3 Proxies. At all meetings of Members a Member may vote in person or by proxy executed in writing by the Member or by a duly authorized attorney-in-fact. Such proxy shall be filed with the Managers of the Company before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. 7.4 Actions by Consent. Any act required or permitted to be taken at any meeting of the Members may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, is signed by the Members having not fewer than the minimum number of votes that would be necessary to take the action at a meting at which all Members entitled to vote on the action were present and voted. Subject to the provisions required or permitted by the Act, the Members may participate in and hold a meeting of the Members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting may hear each other. Participation in such a meeting shall constitute presence in person at the meeting except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE 8 CONTRIBUTIONS TO THE COMPANY AND CAPITAL ACCOUNTS ------------------------------------------------- 8.1 Members' Capital Contributions. Each Member or Assignee shall contribute such amount as is set forth in Schedule 4 hereto as its share of the initial capital contribution. 90 8.2 Additional Contributions. Except as set forth in Section 8.1, no Member or Assignee shall be required to make any capital contributions. To the extent unanimously approved by the Managers, from time to time, the Members and Assignees may be permitted to make additional capital contributions if and to the extent they so desire, and if the Managers determine that such additional Capital Contributions are necessary or appropriate in connection with the conduct of the Company's business (including without limitation, expansion or diversification). In such event, the Members and Assignees shall have the opportunity (but not the obligation) to participate in such additional capital contributions on a pro rata basis in accordance with their interests in net profits. 8.3 Capital Accounts. a. A separate capital account will be maintained for each Member and Assignee. The manner in which capital accounts are to be maintained pursuant to this Section 8.3(a) shall comply with the requirements of Section 704(b) of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. b. Upon liquidation of the Company, liquidating distributions will be made in accordance with the positive capital account balances of the Members and Assignees, as determined after taking into account all capital account adjustments for the Company's taxable year during which the liquidation occurs. Liquidation proceeds will be paid in accordance with Section 11.2. Except as otherwise required in the Act (and subject to Section 8.1 and 8.2), no Member or Assignee shall have any liability to restore all or any portion of a deficit balance in such Member's or Assignee's capital account. ARTICLE 9 ALLOCATIONS, INCOME TAX, DISTRIBUTIONS, ELECTIONS AND REPORTS ------------------------------------------------------------- 9.1 Allocations of Profits and Losses from Operations. The Net Profits and Net Losses of the Company for each Fiscal Year will be allocated as follows: 9.2 Distributions. All distributions of Distributable Cash shall be made to the Members and Assignees in proportion to their respective capital account balances at the end of each calendar month or as soon as practicable thereafter. 9.3 Accounting Principles. The profits and losses of the Company shall be determined in accordance with accounting principles applied on a consistent basis using the accrual method of accounting. 9.4 Interest On and Return of Capital Contributions. No Member or Assignee shall be entitled to interest on its capital contribution or to return of its capital contribution, except as otherwise specifically provided for herein. 9.5 Loans to Company. Nothing in this Operating Agreement shall prevent any Member or Assignee from making secured or unsecured loans to the Company by agreement with the Company, subject to the restrictions in Section 5.3 hereof. 9.6 Accounting Period. The Company's accounting period shall be the calendar year. 91 ARTICLE 10 TRANSFERABILITY --------------- 10.1 General. Except as otherwise specifically provided herein neither a Member nor an Assignee shall have the right to: a. sell, assign, transfer, exchange or otherwise transfer for consideration, (collectively, "sell" or "sale"), b. gift, bequeath or otherwise transfer for no consideration whether or not by operation of law, except in the case of bankruptcy (collectively "gift") all or any part of its Membership Interest or Economic Interest; provided, however that the Members shall be entitled to assign their respective interests in the Company to a person who or which has the financial strength, ability and industry experience necessary to perform competently and efficiently the obligations of the assigning Member pursuant to this Agreement and the Joint Venture Agreement without the consent of all the other members. Each Member and Assignee hereby acknowledges the reasonableness of the restrictions on sale and gift of Membership Interests and Economic Interests imposed by this Operating Agreement in view of the Company purposes and the relationship of the Members and Assignees. Accordingly, the restrictions on sale and gift contained herein shall be specifically enforceable and any attempted assignment or any attempt to assign, convey or otherwise transfer or sell any interest in the Company not in accordance with this Agreement and the Joint Venture Agreement shall be null and void. In the event that any Member or Assignee pledges or otherwise encumbers any of its Membership Interest or Economic Interest as security for repayment of a liability, any such pledge or hypothecation shall be made pursuant to a pledge or hypothecation agreement that requires the pledgee or secured party to be bound by all the terms and conditions of this Article X. 10.2 Transferee Not Member in Absence of Consent. a. Notwithstanding anything contained herein to the contrary, if a proposed sale or gift of the Transferring Member's Membership Interest or Economic Interest to a transferee or donee which is not a Member immediately prior to the sale or gift is not authorized under Section 10.1 above, then the proposed transferee or donee shall have no right to participate in the management of the business and affairs of the Company or to become a Member. Such transferee or donee shall be merely an Assignee. No transfer of a Member's interest in the Company (including any transfer of the Economic Interest or any other transfer which has not been approved as provided herein) shall be effective unless and until written notice (including the name and address of the proposed, transferee or donee and the date of such transfer) has been provided to the Company and the non-transferring Member(s). 92 b. Upon and contemporaneously with any sale or gift of a Transferring Member's Economic Interest in the Company which does not at the same time transfer the balance of the rights associated with the Economic Interest transferred by the Transferring Member (including, without limitation, the rights of the Transferring Member to participate in the management of the business and affairs of the Company), the Company shall purchase from the Transferring Member, and the Transferring Member shall sell to the Company for a purchase price of $100.00, all remaining rights and interests retained by the Transferring Member which immediately prior to such sale or gift were associated with the transferred Economic Interest. ARTICLE 11 DISSOLUTION AND TERMINATION --------------------------- 11.1 Dissolution. The Company shall be dissolved upon the occurrence of any of the following events: a. the Members unanimously agree to a termination of the Company; b. all of the interest in the Company are held by one of the Members; or c. the Company is terminated pursuant to Sections 15.8 or 16 of the Joint Venture Agreement. Notwithstanding anything to the contrary contained herein, this Agreement may be terminated immediately by either Member by written notice upon the occurrence of any of the following events: (i) other Member seeks protection under the bankruptcy or insolvency laws of the United States of America or any other jurisdiction, (ii) a petition for bankruptcy or the appointment of a receiver or similar action filed against the other Member and is not dismissed within ninety (90) days thereafter, or (iii) other Member makes any assignment for the benefit of its creditors. Additionally, if the other Member shall be dissolved and its business terminated, this Agreement shall automatically terminate upon the effectiveness of such disposition. 93 11.2 Winding Up, Liquidation and Distribution of Assets. Upon dissolution, an accounting shall be made by the Company's independent accountants of the accounts of the Company and of the Company's assets, liabilities and operations, from the date of the last previous accounting until the date of dissolution. The Manager(s) shall immediately proceed to wind up the affairs of the Company. a. If the Company is dissolved and its affairs are to be wound up, the Manager(s) shall: (i) Sell or otherwise liquidate all of the Company's assets as promptly as practicable (except to the extent the Manager(s) may determine to distribute any assets to the Members and Assignees in kind), (ii) Allocate any net profit or net loss resulting from such sales to the Members' and Assignees' capital accounts in accordance with Article 9 hereof, (iii) Discharge all liabilities of the Company, paying first those debts and liabilities owing to persons other than the members, the those including liabilities to Members and Assignees who are also creditors, to the extent otherwise permitted by law, other than liabilities to Members and Assignees for distributions and the return of capital, and establish such reserves as may be reasonably necessary to provide for contingent liabilities of the Company (for purposes of determining the capital accounts of the Members and Assignees, the amounts of such reserves shall be deemed to be an expense of the Company), (iv) Distribute to the Members and Assignees the remaining assets in accordance with the positive balance (if any) of each Member's and Assignee's capital account (as determined after taking into account all capital account adjustments for the Company's taxable year during which the liquidation occurs), either in cash or in kind, as determined by the Manager(s), with any assets distributed in kind being valued for this purpose at their fair market value. Any such distributions to the Members and Assignees in respect of their capital accounts shall be made in accordance with the time requirements set forth in Section 1.704-1(b)(2)(ii)(b)(2) of the Treasury Regulations. b. Notwithstanding anything to the contrary in this Operating Agreement, upon a liquidation within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations, if any Member or Assignee has a deficit capital account (after giving effect to all contributions, distributions, allocations and other capital account adjustments for all taxable years, including the year during which such liquidation occurs), such Member or Assignee shall have no obligation to make any capital contribution, and the negative balance of such Member's or Assignee's capital account shall not be considered a debt owed by such Member or Assignee to the Company or to any other Person for any purpose whatsoever. c. Upon completion of the winding up, liquidation and distribution of the assets, the Company shall be deemed terminated. 94 d. The Manager(s) shall comply with any applicable requirements of applicable law pertaining to the winding up of the affairs of the Company and the final distribution of its assets. 11.3 Return of Contribution Nonrecourse to Other Members. Except as provided by law or as expressly provided in this Operating Agreement, upon dissolution, each Member and Assignee shall look solely to the assets of the Company for the return of its capital contribution. If the Company property remaining after the payment or discharge of the debts and liabilities of the Company is insufficient to return the cash contribution of one or more Members and Assignees, such Members or Assignees shall have no recourse against any other Member or Assignee. ARTICLE 12 MISCELLANEOUS PROVISIONS ------------------------ 12.1 Notices. Any notice, demand, or communication required or permitted to be given by any provision of this Operating Agreement shall be deemed to have been sufficiently given or served for all purposes if delivered personally to the party or to an executive officer of the party to whom the same is directed or, if sent by registered or certified mail, postage and charges prepaid, addressed to the Member's, Assignee's and/or Company's address, as appropriate, which is set forth below: If to Electron: Michael Norwood President and Chief Operating Officer The Electron Corp. 5101 South Rio Grande Street PO Box 318 Littleton, Colorado 80160 If to TBW: Carl R. Christenson Vice President and General Manager, Mechanical Division 440 North Fifth Avenue Chambersburg, Pennsylvania 17201 Except as otherwise provided herein, any such notice shall be deemed to be given three (3) business days after the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, addressed and sent as aforesaid. 12.2 Amendments. This Operating Agreement may not be amended except by the unanimous written agreement of all of the Members. 12.3 Heirs, Successors and Assigns. Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and inure to the benefit of the parties hereto and, to the extent permitted by this Operating Agreement, their respective heirs, legal representatives, successors and assigns. 95 12.4 Creditors. None of the provisions of this Operating Agreement shall be for the benefit of or enforceable by any creditors of the Company. 12.5 Controlling Law. This Company is created and established under and in accordance with the Act, as amended, and to the extent matters are not provided for herein the provisions of the Act shall control. This Agreement shall be construed and interpreted in accordance with, and be controlled by, the laws of the Commonwealth of Pennsylvania. 12.6 Arbitration of Disputes. 12.6.1 Arbitration: ----------- Any action, dispute, claim, or controversy, whether sounding in contract, tort, or otherwise arising with respect to this Agreement or relating to the other agreements contemplated by this Agreement (the "Dispute" or "Disputes"), may, but is not required to, be resolved by arbitration as set forth below. If taken to arbitration, such disputes shall be resolved by binding arbitration in accordance with Title 9 of the United States Code and the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). In the event of any inconsistency between such Rules and these arbitration provisions, these provisions shall supersede such Rules. All statutes of limitation which would otherwise be applicable shall apply to any arbitration proceeding. In any arbitration proceeding subject to these provisions, the arbitrator is specifically empowered to decide pre-hearing motions which are substantially similar to pre-hearing motions to dismiss and motions for summary adjudication. Judgment upon the award rendered may be entered in any court having jurisdiction. A judgment entered on an arbitrator's award shall not be appealable by either of the Members or the Company. Whenever an arbitration is elected, the parties shall select an arbitrator in the manner provided in subsection 12.6.2. 12.6.2 Selection of Arbitration: ------------------------ Whenever an arbitration is elected under Section 12.6.1 of this Agreement, the arbitrator shall be selected in accordance with the Commercial Arbitration Rules of the AAA. Any arbitrator selected under this subsection shall be knowledgeable in the subject matter of this Dispute. 12.6.3 Fees and Expenses: ----------------- In the event of any Dispute governed by this section, the party who does not prevail with respect to such Dispute shall pay all of its own expenses, the arbitrator's fees and all costs and fees (including attorneys' fees, administrative fees, arbitrator's fees, and court costs) of and to the prevailing party. 12.7 Consent to Jurisdiction and Venue. With regard to any matters not subject to arbitration as provided in Section 12.6 above, each of the Members hereby consent to the exclusive jurisdiction of the courts designated in this Section 12.7 hereinafter in any and all actions or proceedings arising hereunder or pursuant hereto, and irrevocably agree to service of process by personal service upon them or by certified or registered mail, return receipt requested, directed to the Members at their respective last know addresses. 96 12.7.1 Actions or Proceedings Commenced by TBW: TBW and Electron consent to the exclusive jurisdiction of the federal and state courts sitting in Colorado in any and all actions or proceedings commenced by TBW against Electron and arising hereunder or pursuant hereto. 12.7.2 Actions or Proceedings Commenced by Electron: TBW and Electron consent to the exclusive jurisdiction of the federal and state courts sitting in Pennsylvania in any and all actions or proceedings commenced by Electron against TBW and arising hereunder or pursuant hereto. 12.8 Counterparts. This Operating Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 97 CERTIFICATE The undersigned, with intent to be legally bound hereby, agree, acknowledge and certify that the foregoing Operating Agreement, consisting of 16 pages, excluding the Title Page and attached Schedule, constitutes the Operating Agreement of TBWE Belt Drive Systems LLC adopted by the Members of the Company as of July 3, 1999. Attest: THE ELECTRON CORP. _____________________ By__________________________________________ Michael Norwood, President and Chief Operating Officer Attest TB WOOD'S INCORPORATED _____________________ By__________________________________________ Emma K. Gross Carl R. Christenson, Vice President and Corporate Secretary General Manager, Mechanical Division 98 Schedule 4
Initial Member Initial Capital Contribution Initial Share of Total Capital - -------------- ---------------------------- ------------------------------ TB Wood's Incorporated $0.00 75.6% 440 North Fifth Avenue Chambersburg, PA 17201 The Electron Corporation $0.00 24.4% 5101 South Rio Grande Street PO Box 318 Littleton, CO 80160
99 EX-11.1 6 EXHIBIT 11.1 Exhibit 11.1 Statement Regarding Computation of Per Share Earnings TB Wood's Corporation and Subsidiaries December 31, 1999
1999 1998 1997 -------------------------------------------------------------------------------------- Net income $5,367 $7,890 $8,689 Basic: Net income per common share $0.91 $1.34 $1.49 Weighted average shares of common stock and equivalents outstanding $5,896 $5,874 $5,833 Diluted: Net income per common share $0.91 $1.33 $1.47 Weighted average shares of common stock and equivalents outstanding $5,910 $5,932 $5,921
EX-21.2 7 EXHIBIT 21.2 EXHIBIT 21.2 Subsidiaries and Joint Ventures of Registrant TB Wood's Corporation, Subsidiaries, and Joint Ventures December 31, 1999
Registrant: TB Wood's Corporation Delaware Subsidiary: TB Wood's Incorporated Pennsylvania Subsidiaries: Plant Engineering Consultants, Incorporated Tennessee T. B. Wood's Canada Ltd. Canada TB Wood's Mexico, S.A. de C.V. Mexico Berges electronic GmbH Germany Berges electronic, S.r.l. Italy TB Wood's (Deutschland) GmbH Germany TB Wood's Foreign Investment Company Delaware TB Wood's Foreign Sales Corporation Delaware Joint Ventures TB Wood's (India) Private Ltd. India TBWE Belt Drive Components LP Pennsylvania TBWE Belt Drive Systems LLC Pennsylvania
EX-23.2 8 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-07231, File No. 333-31785, and File No. 333-31787. ARTHUR ANDERSEN LLP Atlanta, Georgia February 11, 2000 EX-27 9 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE YEAR TO DATE PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS DEC-31-1999 DEC-31-1999 1,245 0 18,995 (402) 34,160 55,832 63,933 (33,326) 102,866 22,652 36,651 0 0 59 27,692 102,866 123,737 123,737 79,380 111,629 (2,572) 0 1,915 8,728 3,361 5,367 0 0 0 5,367 0.91 0.91 Revenues are reported net of credits in the Statement of Operations
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