-----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, Q22DOXAkrhJtU0j0Uh0aaBL2mKLqkAVBl3rvEtCEb+UGFXyO7RbQT8DNZR3X3TWG 7O+QR0s6FdLJD7YVFeePQw== 0000950116-99-000663.txt : 19990403 0000950116-99-000663.hdr.sgml : 19990403 ACCESSION NUMBER: 0000950116-99-000663 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990101 FILED AS OF DATE: 19990401 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: 99585501 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 January 1, 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: Name of each Exchange on Title of each class 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 26, 1999, was $70,652,376. On February 26, 1999, there were 5,887,698 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1999 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. TB WOOD'S CORPORATION FISCAL YEAR 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I................................................................................................. 3 Item 1. Business.............................................................................. 3 Item 2. Properties............................................................................ 8 Item 3. Legal Proceedings..................................................................... 8 Item 4. Submission of Matters to a Vote of Security Holders................................... 8 PART II................................................................................................ 9 Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................. 9 Item 6. Selected Financial Data............................................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation..10 Item 8. Financial Statements and Supplementary Data...........................................14 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..35 PART III...............................................................................................36 Item 10. Directors and Executive Officers of the Registrant...................................36 Item 11. Executive Compensation...............................................................36 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................36 Item 13. Certain Relationships and Related Transactions.......................................36 PART IV................................................................................................37 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................37 SIGNATURES.............................................................................................40
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 142 year-old business operates eleven production facilities with over 1,100 employees in the United States, Canada, Mexico, Germany, and Italy. The Company has a network of more than 700 select independent distributors with over 1,900 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 23 new electronic products or product line extensions, including ten 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. In 1998, 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 it's 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. The Company has strategic alliances with companies in Finland, France, Switzerland, Australia 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. 3 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.
1998 1997 1996 ---- ---- ---- Net Sales % Net Sales % Net Sales % --------- - --------- - --------- - Electronic power $57.0 42.6% $44.0 35.5% $32.9 32.1% transmission products Mechanical power 76.9 57.4% 80.0 64.5% 69.6 67.9% transmission products $133.9 100.0% $124.0 100.0% $102.5 100.0%
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 electronic drive product offering net sales, 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 1,150 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 4 under private label agreements. The Company has its own technical sales force in North America of more than 40 people and several specialized manufacturers' representatives. 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; Montreal, Quebec; Edmonton, Alberta and Marienheide, Germany. 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 25% of the Company's net sales in 1998. Competition The power transmission industry is highly competitive. Competitive factors in the AC and DC electronic drive product categories include product performance, physical size of the product, tolerance for hostile environments, application support, availability and price. The Company's competitors in these 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 maintenance and replacement of existing systems, upgrades to existing systems and new capacity expansion. Competitive factors include 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. Competitive factors include availability, quality, price, size capability, engineering and customer support. The Company's most significant competitors in the mechanical product category include Dodge, 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 2.6% for 1998, 3.0% for 1997 and 3.2% for 1996, with a substantially higher percentage being spent on the electronics business. (For further information, refer to footnote No. 9 of the consolidated financial statements included in this Form 10-K.) A new Technology Center is being completed at the Chambersburg facility and is designed to make the research and development investment more productive by making it easier for engineers to share insights and collaborate on projects. 5 Raw Materials The Company uses purchased standard components in all of its electronics products. The Company also purchases components designed by its engineers. These 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 January 1, 1999, the Company employed over 1,100 people. Approximately 33 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. Approximately 115 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, 2000. 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 6 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 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 completing its investigation of the property and has proposed to the Michigan Department of National Resource that it conduct a limited remediation with respect to the 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. 7 Item 2. Properties. The Company owns and operates the following facilities:
Location Operations Sq. Feet -------- ---------- -------- Chambersburg, Pennsylvania Foundry production of iron, and manufacturing and engineering 440,000 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. 31,000* 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. Greensboro, North Carolina Manufacturing of electrical products 18,000 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
- ------------------------------ *Includes certain leased space In addition, the Company leases manufacturing facilities in: Mexico City, Mexico, and distribution facilities in: Atlanta, Georgia; Dallas, Texas; Montreal, Quebec; Edmonton, Alberta; Los Angeles, California and Portland, Oregon. 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 January 1, 1999. 8 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 3, 1997 though January 1, 1999 were as follows:
Sales Price Dividends ----------- --------- High Low Declared Paid in Cash ---- --- -------- ------------ Fiscal Year 1997 ---------------- 1st quarter $14.13 $10.75 - $.08 2nd quarter 16.50 12.75 .08 .08 3rd quarter 19.50 14.00 .08 .08 4th quarter 22.25 18.06 .08 .08 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
On February 26, 1999 there were 165 registered shareholders of the Company's Common Stock, and the high and low sales prices for the Common Stock were both $12.00. During fiscal year 1998, the Company declared and paid total dividends of $.35 on the shares of its Common Stock. The Company declared a $.09 dividend on January 5, 1999, and paid it on January 29, 1999. 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. 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 1998 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." 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: 1998 January 1, 1999 1997 January 2, 1998 1996 January 3, 1997 1995 December 29, 1995 1994 & prior December 31 of calendar year. 9
Selected Financial Data (in thousands, except per share data) Fiscal Year 1998 1997 1996 1995 1994 Revenue and Income Net sales $133,949 $124,027 $102,505 $102,307 $95,315 Gross profit 47,589 45,012 37,747 36,111 32,886 Operating income 15,566 16,951 12,573 12,593 9,795 Net income, before one-time charges* 7,890 8,689 6,294 4,599 3,077 ----------------------------------------------------------------- Cash Flow Cash provided by operations $6,362 $16,829 $9,090 $9,214 $5,379 Capital expenditures 7,481 5,824 3,762 4,531 2,722 ----------------------------------------------------------------- Assets and Liabilities Working capital** $34,644 $27,862 $26,962 $26,160 $24,931 Total assets 96,025 89,617 73,395 66,631 61,075 Total debt 32,469 26,539 22,227 41,463 42,661 Shareholders' equity (deficit) 28,515 23,606 16,875 (7,488) (12,866) ----------------------------------------------------------------- Per Share Data Net income, before one-time charges* $1.33 $1.47 $1.12 $1.21 $.82 Cash dividends declared .35 .24 .32 - - Book value 4.81 3.99 3.01 (1.97) (3.43) ----------------------------------------------------------------- Weighted average shares outstanding 5,932 5,921 5,600 3,810 3,750
* Before $1,654 of one-time charges in 1996 related to the write-off of a non-compete agreement and the early retirement of debt related to the IPO and $839 of one-time income in 1994 related to the sale of a product line ** 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 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 ("SG&A") 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 10 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%. 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 flow from operations and borrowings under the Company's revolving credit agreement. Cash provided from operations in 1998 was $6.4 million, a decrease of $10.5 million from the prior year. Net cash used for investing activities during fiscal years 1998, 1997, and 1996 was $7.9 million, $16.7 million, and $9.2 million, respectively. The Company's investing activities in 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. In 1996, the Company acquired the assets of Deck Manufacturing Corp. and Ambi-Tech, Inc., and purchased the stock of Grupo Blaju S.A. de C.V. for a total of $3.7 million in cash and notes. Also in 1996, the Company purchased 21% of T. B. Wood's Canada Ltd. for $1.6 million to make the Company's Canadian operations a wholly owned subsidiary. Capital expenditures for fiscal years 1998, 1997, and 1996 were $7.5 million, $5.8 million, and $3.8 million, respectively. During the last three fiscal years, the Company has made significant capital investments in computer controlled surface ("CNC") mount production lines for populating semi-conductors onto circuit boards, test and production equipment at the Company's foundry in Chambersburg, and other equipment to improve and modernize production facilities. In 1998, the Company initiated two major facility projects: 1) an engineering center in Chambersburg scheduled for completion in late 1999 and 2) a new plant in San Marcos, Texas to manufacture flexible couplings, which will be 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 11 intended to reduce costs, improve product quality, and provide additional capacity for meeting the Company's growth objectives. 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. On February 8, 1996, the Company completed an Initial Public Offering of its Common Stock that raised approximately $22.5 million in aggregate gross proceeds for the Company. The proceeds, net of issuance costs, of $19.8 million were used to repay debt. The Company paid $2.1 million in dividends during 1998. The Company paid a $.08 per share dividend in the first quarter and a $.09 per share dividend in the second, third, and fourth quarters of 1998, and declared a $.09 dividend on January 5, 1999, paid on January 29, 1999, to shareholders of record on January 15, 1999. The Company believes that it will have sufficient cash flow 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 by, for example, 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 affects 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%
The Securities and Exchange Commission has qualified Mexico as a highly inflationary economy under the provisions of SFAS No. 52, effective 1997. The re-measurement of the Company's operation is recorded in the accompanying Statement of Operations. 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. As the Year 2000 approaches and thereafter, such systems may be unable to accurately process certain date-based information. This could result in system failures or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions or engage in a variety of business activities. The Company has 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 shall have the effect of ameliorating year 2000 risk, there can be no assurance that 12 the Company's internal systems or equipment or those of third parties on which the Company relies will be Year 2000 compliant in a timely manner or that the Company's or third parties' contingency plans will mitigate the effects of noncompliance. The failure of the systems or equipment of the Company or third parties could result in the reduction or suspension of the Company's operations and could have a material adverse affect on the Company. Subject to the final results of the evaluation and analysis of the Year 2000 compliance issue, the Company believes that its Year 2000 compliance costs will not be material to its operations, liquidity or capital resources. 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. The Company's Year 2000 compliance program and possible contingency plans are still being developed and assessed in order to attempt to minimize the effect of failures within the Company's reasonable control. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized in earnings in the current period unless specific hedge accounting criteria are met. The Company plans to adopt SFAS No. 133 in the first quarter of fiscal 2000. Management is still assessing the impact of the adoption of this statement on the financial statements. Currently, management does not believe the adoption of this statement will have a material impact 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. 13 Item 8. Financial Statements and Supplementary Data.
Page ---- Report of Independent Public Accountants..................................................................... 15 Consolidated Balance Sheets as of January 1, 1999, January 2, 1998 and January 3, 1997....................... 16 Consolidated Statements of Operations for the Years Ended January 1, 1999, January 2, 1998, and January 3, 1997 ................................................................................ 17 Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years Ended January 1, 1999, January 2, 1998, and January 3, 1997 .............................................. 18 Consolidated Statements of Cash Flows for the Years Ended January 1, 1999, January 2, 1998, and January 3, 1997 ................................................................................ 19 Notes to Consolidated Financial Statements................................................................... 20
14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors 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 January 1, 1999 and January 2, 1998 and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity (deficit), and cash flows for each of the three years in the period ended January 1, 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 generally accepted auditing standards. 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 January 1, 1999 and January 2, 1998 and the results of their operations and their cash flows for each of the three years in the period ended January 1, 1999 in conformity with generally accepted accounting principles. 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 12, 1999 15 TB Wood's Corporation And Subsidiaries Consolidated Balance Sheets
(in thousands, except per share and share amounts) 1998 1997 1996 - ----------------------------------------------------------------------- ---------------- --------------- ---------- ASSETS Current Assets: Cash and cash equivalents $2,521 $2,552 $306 Accounts receivable, less allowances for doubtful accounts, discounts, and claims of $414, $476 and $437 in 1998, 1997 and 1996, 17,428 20,174 15,518 respectively Inventories: Finished goods 21,433 15417 16,293 Work in process 8,370 8,467 7,994 Raw materials 5,982 6,073 3,755 LIFO reserve (5,930) (3,819) (4,057) ---------------- --------------- ---------- 29,855 26,138 23,985 Other current assets 2,705 967 1,053 ---------------- --------------- ---------- Total current assets 52,509 49,831 40,862 ---------------- --------------- ---------- Property, Plant, and Equipment: Machinery and equipment 43,131 36,782 33,075 Land, buildings, and improvements 12,118 11,100 8,577 ---------------- --------------- ---------- 55,249 47,882 41,652 Less accumulated depreciation 27,553 23,794 21,154 ---------------- --------------- ---------- 27,696 24,088 20,498 ---------------- --------------- ---------- Other Assets: Deferred income taxes (Note 5) 3,570 4,602 5,249 Goodwill, net of accumulated amortization of $1,418, $1,123 and $958 in 1998, 1997 and 1996, respectively 10,059 9,122 4,603 Other 2,191 1,974 2,183 ---------------- --------------- ---------- Total other assets 15,820 15,698 12,035 ---------------- --------------- ---------- $96,025 $89,617 $73,395 ================ =============== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt (Note 4) $378 $611 $520 Accounts payable 6,332 8,610 5,210 Checks outstanding 1,705 1,615 1,532 Accrued expenses (Note 3) 9,012 10,987 8,384 Deferred income taxes (Note 5) 1,589 729 539 ---------------- --------------- ---------- Total current liabilities 19,016 22,552 16,185 ---------------- --------------- ---------- Long-term debt, less current maturities (Note 4) 32,091 25,928 21,707 Postretirement benefit obligation, less current portion 16,403 17,531 18,628 Commitments and Contingencies (Note 7): Shareholders' Equity : Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued or outstanding 0 0 0 Common stock, $.01 par value; 40,000,000 shares authorized, 5,909,286 issued and 5,899,168 outstanding in 1998, 5,859,286 issued and 5,849,772 outstanding in 1997 and 3,375,0000 shares issued and outstanding in 1996 59 58 58 Common stock in treasury at cost; 10,118 in 1998, 9,514 in 1997 and 0 in 1996 (158) (181) 0 Additional paid-in capital 28,821 28,340 28,158 Retained Earnings / Accumulated deficit 1,136 (4,408) (11,306) Accumulated other comprehensive income (1,343) (203) (35) ---------------- --------------- ---------- Total shareholders' equity 28,515 23,606 16,875 ---------------- --------------- ---------- $96,025 $89,617 $73,395 ================ =============== ==========
The accompanying notes are an integral part of these consolidated financial statements. 16 TB Wood's Corporation And Subsidiaries Consolidated Statements of Operations
(in thousands, except per share amounts) 1998 1997 1996 - ----------------------------------------- ---- ---- ---- Net sales $133,949 $124,027 $102,505 Cost of sales 86,360 79,015 64,758 ----------------- --------------- --------------- Gross profit 47,589 45,012 37,747 Selling, general, and administrative expenses 32,023 28,061 25,174 ----------------- --------------- --------------- Operating income 15,566 16,951 12,573 ----------------- --------------- --------------- Other (expense) income: Interest expense and other finance charges (2,040) (1,695) (1,982) Other, net (380) (773) (593) ----------------- --------------- --------------- Other expense, net (2,420) (2,468) (2,575) ----------------- --------------- --------------- Income before provision for income taxes and extraordinary item 13,146 14,483 9,998 Provision for income taxes (Note 5) 5,256 5,794 4,053 ----------------- --------------- --------------- Income before extraordinary item 7,890 8,689 5,945 Extraordinary item, early extinguishment of debt (less related income tax benefit of $870) 0 0 (1,305) ----------------- --------------- --------------- Net income $7,890 $8,689 $4,640 ================= =============== =============== Per share of common stock: Basic: Income before extraordinary item $ 1.34 $1.49 $1.08 Extraordinary item .00 .00 (.24) ----------------- --------------- --------------- Net income per common share $1.34 $1.49 $ .84 ================= =============== =============== Weighted average shares of common stock and equivalents outstanding 5,874 5,833 5,520 ----------------- --------------- --------------- Per diluted share of common stock: Income before extraordinary item $1.33 $1.47 $1.06 Extraordinary item .00 .00 (.23) ----------------- --------------- --------------- Net income per common share $1.33 $1.47 $.83 ================= =============== =============== Weighted average shares of common stock and equivalents outstanding 5,932 5,921 5,600 ================= =============== ===============
The accompanying notes are an integral part of these consolidated financial statements. 17 TB Wood's Corporation And Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (Deficit)
Foreign Additional Currency Common Treasury Paid-In Accumulated Translation (in thousands) Stock Warrants Stock Capital Deficit Adjustment - -------------- ----- -------- ----- ------- ------- ---------- Balance, December 29, 1995 33 500 0 6,104 (14,094) (31) Net income 0 0 0 0 4,640 0 Issuance of stock in connection with the Initial Public Offering 20 0 0 19,803 0 0 Investment in Wood's-Canada 0 0 0 (1,600) 0 0 Exercise of warrants 4 (500) 0 500 0 0 Gain on repayment of subordinated note 0 0 0 2,992 0 0 Dividends declared 0 0 0 0 (1,852) 0 Stock option compensation and proceeds from options exercised 1 0 0 359 0 0 Foreign currency translation adjustment 0 0 0 0 0 (4) - ----------------------------------------- ------------- ------------- ------------ ------------- ------------- ------------ Balance, January 3, 1997 58 0 0 28,158 (11,306) (35) Net income 0 0 0 0 8,689 0 Stock issuance for 401(k) plan 0 0 0 100 0 0 Dividends declared 0 0 0 0 (1,400) 0 Stock option compensation and proceeds from options exercised 0 0 95 82 0 0 Treasury stock, net 0 0 (276) 0 (391) 0 Foreign currency translation adjustment 0 0 0 0 0 (168) - ----------------------------------------- ------------- ------------- ------------ ------------- ------------- ------------ Balance, January 2, 1998 58 0 (181) 28,340 (4,408) (203) Net income 0 0 0 0 7,890 0 Stock issuance for 401(k) plan 0 0 0 0 0 0 Dividends declared 0 0 0 0 (2,056) 0 Stock option compensation and proceeds from options exercised 1 0 467 481 (257) 0 Treasury stock, net 0 0 (444) 0 (33) 0 Foreign currency translation adjustment 0 0 0 0 0 (1,140) - ----------------------------------------- ------------- ------------- ------------ ------------- ------------- ------------ Balance, January 1, 1999 $59 $0 $(158) $28,821 $1,136 $(1,343) ============= ============= ============ ============= ============= ============
The accompanying notes are an integral part of these consolidated financial statements. 18 TB Wood's Corporation And Subsidiaries Consolidated Statements Of Cash Flows
(in thousands) 1998 1997 1996 - -------------------------------------------------------------------------- ---------------- --------------- --------------- Cash Flows from Operating Activities: Net income $7,890 $8,689 $4,640 ---------------- --------------- --------------- Adjustments to reconcile net income to net cash provided by operating activity: Depreciation and amortization 4,374 4,097 3,427 Deferral of interest and management fees payable to affiliates 0 0 288 Change in deferred income taxes, net 1,892 837 (1,095) Stock option compensation expense 1,222 101 140 Net loss (gain) on sale of assets 5 10 (44) Write off of non-compete agreement 0 0 563 Extraordinary loss on early extinguishment of debt, net 0 0 1,305 Other (28) 0 0 Changes in working capital, net of effects of acquisitions: Accounts receivable 2,746 (173) (854) Inventories (4,157) 1,876 (1,615) Prepaid expenses and other current assets (1,955) (227) (751) Accounts payable (2,278) 1,531 631 Accrued and other liabilities (3,349) 88 2,455 ---------------- --------------- --------------- Total adjustments (1,528) 8,140 4,450 ---------------- --------------- --------------- Net cash provided by operating activities 6,362 16,829 9,090 ---------------- --------------- --------------- Cash Flows from Investing Activities: Acquisitions, net of cash acquired 0 (9,914) (2,920) Capital expenditures (7,481) (5,824) (3,762) Purchase of minority interest in subsidiary 0 0 (1,600) Proceeds from sales of fixed assets 414 65 128 Other, net (792) (1,003) (1,004) ---------------- --------------- --------------- Net cash used in investing activities (7,859) (16,676) (9,158) ---------------- --------------- --------------- Cash Flows from Financing Activities: Change in checks outstanding 90 83 (516) Repayments of subordinated note and associated taxes 0 0 (13,094) Repayments of proceeds from long-term debt, net (357) 2,003 (14,564) Repayments of original revolving credit facility, net 0 0 (10,721) Proceeds from the PNC revolving credit facility, net (Note 4) 6,287 2,300 20,200 Proceeds from public sale of common stock 0 0 19,823 Payment of dividends (2,056) (1,866) (1,386) Proceeds from issuance of stock upon option exercise 70 17 219 Treasury Stock (1,428) (276) 0 ---------------- --------------- --------------- Net cash provided by (used in) financing activities 2,606 2,261 (39) ---------------- --------------- --------------- Effect of changes in foreign exchange rates (1,140) (168) (4) ---------------- --------------- --------------- (Decrease) increase in cash and cash equivalents (31) 2,246 (111) Cash and cash equivalents at beginning of year 2,552 306 417 ---------------- --------------- --------------- Cash and cash equivalents at end of year $2,521 $2,552 $306 ================ =============== =============== Income taxes paid during the year $3,819 $6,307 $5,409 ================ =============== =============== Interest paid during the year $2,040 $1,573 $2,040 ================ =============== ===============
The accompanying notes are an integral part of these consolidated financial statements 19 TB Wood's Corporation And Subsidiaries Notes To Consolidated Financial Statements (in thousands, except per share and 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 and its wholly owned subsidiaries. All intercompany accounts have been eliminated in consolidation. Year-End Fiscal year-ends are as follows: 1998........................................January 1, 1999 1997........................................January 2, 1998 1996........................................January 3, 1997 The accompanying consolidated financial statements include the accounts of TB Wood's Corporation and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Restricted Cash At January 1, 1999, $410 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 a new production facility for the electronics systems business. The funds will be used to repay the bonds if not spent prior to April 2000. 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 20 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 77% and 78% of total inventories in years ending January 1, 1999 and January 2, 1998 were valued using the LIFO method. Wood's-Canada and Wood's-Mexico 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 January 1, 1999 the Company has issued letters of credit totaling $1,050 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 shareholders' equity (deficit). Exchange gains and losses resulting from foreign currency transactions, primarily inter-company sales of products are included in other income (expense) in the accompanying statements of operations and are not material. The Securities and Exchange Commission has qualified Mexico as a highly inflationary economy under the provisions of SFAS No. 52, effective 1997. The re-measurement of the Company's Mexico operation is recorded in the accompanying statement of operations. 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 January 1, 1999 the number of treasury shares purchased under this authorization was 90,225 and the number of treasury shares issued to employees under option and purchase plans was 8,775 and under the 401(k) profit-sharing plan was 4,436. 21 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. Major Customers The Company's five largest customers accounted for approximately 25%, 30%, and 29% of net sales for fiscal years 1998, 1997, and 1996, respectively. Of these customers, one accounted for close to 18% of net sales for the year ended January 1, 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 24.9%, 17.0%, and 17.7% of total sales in fiscal years 1998, 1997, and 1996, 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. Net Income Per Share In March 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Standards ("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. All prior year EPS amounts have been restated to conform to the provisions of SFAS No. 128. 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. 22 Year End 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: 1998 January 1, 1999 1997 January 2, 1998 1996 January 3, 1997 1995 December 29, 1995 1994 & prior December 31 of calendar year 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 all fiscal quarters beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized in earnings in the current period unless specific hedge accounting criteria are met. The Company plans to adopt SFAS No. 133 in the first quarter of fiscal 2000. Management is still assessing the impact of the adoption of this statement on the financial statements. Currently, management does not believe the adoption of this statement will have a material impact on the Company's financial statements. Reclassifications Certain prior period amounts have been reclassified to conform with the current period presentation. 23 3. ACCRUED EXPENSES Components of accrued expenses were as follows:
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Accrued payroll and other compensation $1,987 $3,428 $2,619 Other accrued liabilities 6,091 6,352 4,525 Accrued workers' compensation 934 1,207 1,240 ---------------------------------------- Total $9,012 $10,987 $8,384 ========================================
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:
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Unsecured Revolving Line of Credit $28,954 $22,500 $20,200 Note payable to a former shareholder of Wood's 0 0 321 Capital lease obligations 965 1,489 1.706 Industrial revenue bond 2,550 2,550 0 ------------------------------------------------ 32,469 26,539 22,227 Less current maturities (378) (611) (520) ------------------------------------------------ $32,091 $25,928 $21,707 ================================================
Aggregate future maturities of long-term debt and capital lease obligations as of January 1, 1999 are as follows: 1999 $378 2000 279 2001 225 2002 83 2003 28,954 Thereafter 2,550 --------- $32,469 In connection with the proceeds received from the offering of the Company's common stock on February 8, 1996 (Note 8), the Company repaid a term loan with Fleet Capital, a debt agreement with US Leasing, and a portion of a revolver loan with Fleet. An extraordinary loss of approximately $1,305, net of taxes, was incurred in the first quarter of 1996 as a result of the repayment of certain indebtedness. The Company has a $47,500 unsecured revolving credit facility arranged by PNC Bank, N.A ("PNC") bearing variable interest of LIBOR plus 112.5 basis points, maturing January 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 4.05% at January 1, 1999 maturing April 2022. The bonds were issued to finance the new production facility for the electronics systems business. 24 In August 1998, the company entered into an interest rate swap agreement that effectively converted 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. The gross proceeds from (repayments of) the revolving credit facilities are as follows:
1998 1997 1996 - --------------------------------------------------------------------------------------------------- Proceeds from the original Revolving credit facility $0 $0 $88,507 Repayments of original Revolving credit facility 0 0 (99,228) Proceeds from new Revolving credit facility 40,300 46,400 32,900 Repayments of new Revolving credit facility (34,013) (44,100) (12,700) ----------------------------------------
5. INCOME TAXES The components of the provision (benefit) for income taxes are shown below:
1998 1997 1996 - --------------------------------------------------------------------------------------------------- Current: Federal and state $2,300 $4,365 $4,407 Foreign 1,064 592 442 -------------------------------------- 3,364 4,957 4,849 -------------------------------------- Deferred: Federal and state 1.892 837 (796) Foreign 0 0 0 -------------------------------------- 1,892 837 (796) -------------------------------------- Provision for income taxes $5,256 $5,794 $4,053 ======================================
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. 25 The components of deferred income taxes are as follows:
1998 1997 1996 - --------------------------------------------------------------------------------------------------- Deferred income tax liabilities: Book basis in property over tax basis $(2,337) $(2,163) $(1,536) LIFO inventory basis differences (3,042) (3,046) (3,127) Long-term debt basis differences 0 0 0 Other (1,337) (1,085) (964) ---------------------------------------- Total deferred income tax liabilities (6,716) (6,294) (5,627) ---------------------------------------- Deferred income tax assets: Postretirement benefits not currently deductible 6,772 7,212 7,652 Accrued liabilities not currently deductible 1,050 1,498 1,394 Allowance for doubtful accounts and inventory reserves 742 825 662 Other 133 632 629 ---------------------------------------- Total deferred income tax assets 8,697 10,167 10,337 ---------------------------------------- Net deferred income tax asset $1,981 $3,873 $4,710 ========================================
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:
1998 1997 1996 - --------------------------------------------------------------------------------------------------- Federal statutory income tax $4,470 $4,924 $3,399 State income taxes, net of Federal income tax benefit 592 651 456 Foreign taxes and other, net 194 219 198 -------------------------------------- $5,256 $5,794 $4,053 ======================================
In 1998, 1997, and 1996 earnings before income taxes included $2,320, $1,259, and $884, 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 $1,238, $2,002, and $1,664, for fiscal years 1998, 1997, and 1996, respectively. 26 Profit-Sharing Plans Since January 1, 1988, the Company has maintained a separate defined contribution 401(k) profit-sharing plan covering all salaried and non-production unit-domestic hourly employees. Under this plan, the Company matches a specified percentage of each eligible employee's contribution and purchases Company common shares on the open market. The Company contributed 35,990 shares of common stock held in treasury in 1998, and 5,797 in 1997. Amounts contributed by the Company under this profit-sharing plan were approximately $580, $530, and $500, for fiscal years 1998, 1997, and 1996, respectively. In addition, the Company has a noncontributory profit-sharing plan covering its Canadian employees for which $17, $37, and $40 were charged to expense for the fiscal years 1998, 1997, and 1996, 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 lessor of 90% of the fair value of the shares on the first day or the last day of the quarterly period. Employee contributions to the ESPP were $152 and $63 for 1998 and 1997 respectively. Pursuant to the ESPP, 8,775 shares were issued to employees 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 January 1, 1999, 486,789 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. On March 30, 1992, the option agreement was amended 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. 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. 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 27 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 designated by the board of directors (the "Committee"). 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 (or "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. Effective fiscal year 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." 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. 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 at an option price of $21 per share, respectively and 101,100 and 50,000 options at $28 per share, respectively. The options vest evenly over a three-year period from the grant date. The options may be exercised as they vest. The $21 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. 28 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 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- Risk free interest rate 5.5% 5.5% 5.7% Expected lives 5 & 10 years 10 years 3 years Expected volatility 25.7% 31.3% 33.0% Dividend yield 2.4% 2.3% 0%
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 1995 to 1998 would have been as follows:
1998 1997 1996 ---- ---- ---- Net income as reported $7,890 $8,689 $4,640 Pro forma 7,715 8,646 4,629 Primary EPS as reported 1.33 1.47 .83 Pro forma 1.30 1.46 .83
Post-retirement Benefits The Company sponsors a defined benefit post-retirement 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. 29 The following table summarizes the Company's post-retirement benefit obligations and the assumptions used in determining post-retirement benefit cost.
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Benefit obligation at beginning of year $18,031 $19,128 $18,928 Service Cost 205 185 140 Interest Cost 503 483 762 Amortization (1,501) (1,521) (475) Retiree benefits (246) (244) (227) ----------------------------------------------------- Benefit obligation at end of year $16,992 $18,031 $19,128 ===================================================== Discount Rate 7.75% 7.75% 7.75% ----------------------------------------------------- Initial health care cost trend 8.00% 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 post-retirement benefit costs include the following components:
1998 1997 1996 -------------------------------------------- Service cost $205 $185 $140 Interest cost 503 483 762 Amortization (1,501) (1,521) (475) -------------------------------------------- Net benefit cost $(793) $(853) $427 ===========================================
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. 30 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 $385, $600, and $582, for fiscal years 1998, 1997, and 1996, respectively. At January 1, 1999, future minimum lease payments under non-cancelable operating leases are as follows: 1999 $439 2000 361 2001 210 2002 166 2003 and thereafter 443 ------ $1,619 ====== 8. ACQUISITIONS, MERGERS AND PUBLIC OFFERING 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 installment 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 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). In December 1997, the Company purchased a 65% ownership in a joint venture with TB Wood's Enertec ("Enertec") for $91. Enertec distributes domestically manufactured electrical components and performs system integration design in the India market. Enertec was not included in the 1997 financial statements as its impact was immaterial. 31 Merger In January 1996, the Company completed a merger (the "Merger") in contemplation of an initial public offering of the Company's common stock. Pursuant to the Merger, a subsidiary of a newly formed holding company merged with Wood's-U.S., with Wood's-U.S. as the surviving corporation. In the Merger, the shareholders of Wood's-U.S. received three shares of the holding company's stock in exchange for each share of Wood's-U.S. stock. The financial statements of the Company, prior to January 1996, have been restated to include the effects of the Merger. Initial Public Offering Effective February 8, 1996, the Company completed an Offering of its common stock that raised approximately $22,478 in aggregate gross proceeds for the Company. The net proceeds (after deducting issuance costs) of approximately $19,823 from the Offering were used to repay $4,767 of the Fleet Term Loan, $5,203 of the Senior Fleet Revolver Loan, and $10,000 of the USL Fixed and Floating Rate Notes. In addition, the Company paid approximately $616 to USL. In conjunction with the Offering, USL redeemed warrants to purchase 375,000 shares of the Company's stock which were included in the shares of common stock issued. The Company also purchased the remaining 21% interest of Wood's-Canada held by the shareholders of Wood's-U.S. for approximately $1,600. The effects of interest and other charges in fiscal 1996, prior to the Offering, are not material to the consolidated financial statements. 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. 32 The following table summarizes revenues, operating income, total assets and expenditures for long-lived assets by business segment for fiscal years 1998, 1997 and 1996:
Mechanical Electronics Business Business Total - -------------------------------------------------------------------------------------------------------- 1998: Revenues from external customers $76,909 $57,040 $133,949 Operating profit 9,485 6,081 15,566 Depreciation 2,605 1,474 4,079 Segment Assets 35,483 44,452 79,935 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 3,206 3,024 6,230 1996: Revenues from external customers $69,571 $32,934 $102,505 Operating profit 9,993 2,580 12,573 Depreciation 2,505 706 3,211 Expenditures for long-lived assets 2,734 1,028 3,762
The following table reconciles segment profit to consolidated income before income taxes and extraordinary items for fiscal years 1998, 1997 and 1996:
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Total operating profit for reportable segments $15,566 $16,951 $12,573 Interest, net (2,040) (1,695) (1,982) Other unallocated amounts (380) (773) (593) ------------------------------------------- Income before income taxes and Extraordinary items $13,146 $14,483 $9,998 ===========================================
The following table reconciles segment assets to consolidated total assets as of January 1, 1999 and January 2, 1998:
1998 1997 - --------------------------------------------------------------------------------------------------------- Total assets for reportable segments $79,935 $76,148 Cash 2,521 2,552 Corporate fixed assets 5,611 3,389 Goodwill 3,323 2,623 Deferred tax 3,570 4,602 Other unallocated assets 1,065 303 ------------------------- Consolidated total $96,025 $89,617 =========================
33 Information regarding the Company's domestic and foreign operations is as follows:
Net Long-Lived Sales Assets - ---------------------------------------------------------------------------------------------- 1998: United States $100,658 $33,206 Canada 11,987 869 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 1996 United States $87,717 $23,329 Canada 12,931 1,148 Mexico 1,857 624 ------------------------------------- Consolidated $102,505 $25,101
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
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(loss) before Extraordinary item 2,383 2,259 1,759 1,489 Per diluted share of common stock: Net income (loss) before Extraordinary item .40 .38 .30 .25 Net income .40 .38 .30 .25 Dividends declared .09 .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 Net income per Common share 0.36 0.36 0.37 0.37 ============================================================
34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None 35 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 1999 Annual Meeting in the Sections entitled "Election of Director," "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 1999 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 1999 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. None. 36 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 35 hereof and the report thereon of Arthur Andersen LLP appearing on page 15 hereof. (2) Financial Statement Schedule Schedule II for the fiscal year ended January 1, 1999 and the report of Arthur Andersen thereon. (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). 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). 37 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). 38 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. 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. 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. 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. 11.1 Statement regarding Computation of Per Share Earnings. 21.1 Subsidiaries of Registrant. 23.1 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 1998. 39 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 25, 1999. 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 April 1, 1999 - ------------------- (Principal Executive Officer) Thomas C. Foley /s/ MICHAEL L. HURT President and Director April 1, 1999 - ------------------- (Principal Executive Officer) Michael L. Hurt /s/ JEAN-PIERRE L. CONTE Director April 1, 1999 - ------------------------ Jean-Pierre L. Conte /s/ ROBERT DOLE Director April 1, 1999 - ------------------- Senator Robert Dole /s/ CRAIG R. STAPLETON Director April 1, 1999 - ---------------------- Craig R. Stapleton /s/ DAVID H. HALLEEN Vice President of Finance, April 1, 1999 - -------------------- (Principal Financial Officer and David H. Halleen Principal Accounting Officer) 40
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 debts, Balance at discounts and claims Balance at beginning of Charged to costs Charged to in excess of end of Description period and expenses other accounts provision)(1) period - ------------------------------------------------------------------------------------------------------------------------------------ Year ended January 3, 1997: Allowance for doubtful accounts $364 65 (63) $366 Allowance for discounts and claims 146 (75) 71 ------------------------------------------------------------------------------------------- 510 65 0 (138) 437 =========================================================================================== Year ended January 2, 1998: Allowance for doubtful accounts $366 26 (58) $334 Allowance for discounts and claims 71 71 142 ------------------------------------------------------------------------------------------- 437 97 0 (58) 476 =========================================================================================== Year ended January 1, 1999: Allowance for doubtful accounts 334 2 (74) $262 Allowance for discounts and claims 142 10 152 ------------------------------------------------------------------------------------------- 476 12 0 (74) 414 ===========================================================================================
- -------------- Note: (1) Represents write-off accounts to be uncollectible, less recoveries of amounts previously written off. 41 EX-10.16 2 EXHIBIT 10.16 EXHIBIT 10.16 T.B. WOOD'S, INC. EMPLOYMENT AGREEMENT This Employment Agreement dated as of April 14, 1998, (the "Employment Agreement") by and between T.B. Wood's, Inc. a Delaware corporation, with its principal offices and place of business in Chambersburg, PA (the "Employer") and Michael L. Hurt (the "Executive"). WHEREAS Employer wishes to employ Executive in a full time capacity as President ___ and Executive wishes to accept such employment subject to the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual promises set forth herein, the parties hereto each hereby agree to all the terms and conditions of this Employment Agreement as follows: 1. Compensation and Benefits ------------------------- A. Employer agrees to pay the Executive a salary of no less than $265,000 annually for the term of this Agreement, subject to the conditions set forth elsewhere in this Agreement. Notwithstanding the foregoing the parties may mutually adjust Executive's compensation without breaching or invalidating this Employment Agreement. The compensation due hereunder shall be payable on a semi-monthly basis. B. The Executive shall be eligible to and shall participate in any bonus or incentive compensation plans in which said Executive is participating on the date hereof and which are hereafter maintained by the Employer for its executive employees. C. The Executive shall be eligible to and shall participate in all employee benefit plans or programs of the Employer in which said Executive is participating on the date hereof and which are hereafter maintained by the Employer for its executive employees. Moreover, the Executive shall be entitled to reimbursement for reasonable travel and other expenses in accordance with the Employer's policies in effect, as amended from time to time, for its executive employees. D. Nothing contained in Section 1.B. or 1.C. of this Employment Agreement shall require or be interpreted to require Employer to establish, maintain, or continue any bonus or incentive compensation plan, or any other employee benefit plan or program. E. Executive's participation in any bonus or executive compensation plan or any employee benefit plan or program shall be subject to the terms and conditions of such plan or program as they may be amended from time to time. F. Executive understands and agrees that he shall not be entitled to any other compensation in addition to that provided under this agreement by reason of a change of ownership or control of the Employer, unless specifically set forth in another written agreement signed by Employer. G. Executive understands and agrees that except as expressly provided herein, compensation for services hereunder is contingent on Executive's performance of the obligations contained in this Employment Agreement. Therefore, except as otherwise expressly agreed by the Employer and the Executive in writing, if Executive terminates this Employment Agreement or his performance is not in compliance with his obligations hereunder, Employer will have no further obligation under this Agreement to provide any compensation or benefits beyond Executive's last day of active employment. Provided, however, that if any of the following shall occur, the Executive may, at said Executive's option, leave the employment of the Employer, and the Employer agrees to pay the Executive $350,000 per annum for a period of two years after Executive's last day of active employment. (1) a reduction by the Employer, without the Executive's consent, in the Executive's salary or other fixed compensation below that compensation expressly set forth in Section 1.A. hereof; (2) the failure of the Employer to offer Executive the opportunity to participate in any bonus or incentive compensation plan, or other employee benefit plan or program established and maintained by Employer for its executive employees in which the Executive is a participant on the date hereof, or for which he shall subsequently become eligible, if Employer establishes, maintains or continues (as the case may be) such plan or program for its other executive employees. (3) a significant reduction in the position or status of the Executive or a significant change in the location of the Executive's principal office after the date hereof without the Executive's consent. The Executive shall be deemed to have consented to any of the conditions described in Section 1.G.(1), 1.G.(2) or 1.G.(3) above unless the Executive shall object thereto in writing and resign his employment within 90 days after receiving written notice thereof. H. If the Employer decides it no longer needs the services of the Executive before the expiration of this Employment Agreement and prior to, but not in anticipation of, a transaction other than a public sale of the Company's common stock in which more than 50% of the Company's common stock is sold to parties other than current shareholders or affiliates of current shareholders (a "Change of Control Transaction"), the Employer agrees to pay the Executive the compensation provided under Section 1.A. of this Employment Agreement for twenty-four months after Executive's last day of active employment. However, if the Executive should subsequently enter into Competition with the Employer as described in Section 8 below, then no further payments shall be due to the Executive under this Employment Agreement after the date of the Executive having so entered into Competition with the Employer. If after a Change of Control Transaction the Employer decides it no longer needs the services of the Executive before the expiration of this Employment Agreement, the Employer agrees to pay the Executive $350,000 per annum for a period of two years after Executive's last day of active employment. 2. Duties. ------- The Executive will continue to be the President or other senior executive officer of the Employer and shall discharge the duties of such office(s) to the best of the Executive's ability and in accordance with the Employer's by-laws. The Executive shall continue to perform faithfully and diligently the foregoing duties on a full-time basis, consistent with the Employer's practices prior to the date hereof: (a) devoting the Executive's entire working time, ability, and attention to the business of the Employer; and (b) performing such other duties as shall be commensurate with the above stated executive capacity as President as the Employer shall from time to time specify. 3. Term of this Employment Agreement and Termination. -------------------------------------------------- A. The term of this Employment Agreement shall be from the date signed by the parties and ending on December 31, 2002. B. At any time that Good Cause (as defined below) exists or has arisen, the Employer may, at its election, terminate this Employment Agreement by so notifying the Executive in writing (the "Good Cause Notice") and 30 days after the giving of the Good Cause Notice, the Employer shall thereupon be released from its obligation to make the payments or provide the benefits described in Sections 1.A., 1.B., and 1.C. hereof from and after the effective date of such termination. For purposes of this Employment Agreement "Good Cause" shall mean the existence or occurrence of any of the following: (1) conviction of the Executive for a felony; (2) the occurrence of material loss or damage to the Employer as a result of the Executive's commission of any act or acts of theft, larceny, embezzlement, fraud, dishonesty, illegality, or moral turpitude as determined in good faith by the board of directors of the Employer, whose determination shall be final and binding; (3) any other material breach of any provisions of this Employment Agreement which the Executive fails to cure within 10 days of the Executive's receipt of written notice thereof; (4) the death of the Executive; (5) material disability of the Executive to such an extent that the Executive is precluded from performing the duties set forth in the Employment Agreement for a period of 180 days in the aggregate during any one-year period, provided that if the Executive becomes materially disabled as a result of alcohol or substance abuse, such period shall not extend beyond 10 days; or (6) gross insubordination or gross and willful violation of Employer's policies. 4. Confidentially. The Executive hereby acknowledges that the Employer has made available to the Executive certain customer lists, product design information, performance standards, and other confidential and/or proprietary information owned by or licensed to the Employer, including without limitation sensitive financial information, trade secrets, and proprietary designs ("Confidential Information"). Executive agrees that he will not use or disclose any trade secret that he may have acquired during his employment with the Employer so long as it remains a trade secret, and that for a period of two years after the date that this Employment Agreement is terminated for any reason, he will not use or disclose any other Confidential Information that he may have acquired during his employment with Employer. The rights of the Employer as a result of these agreements are in addition to the rights of the Employer under common law or applicable statutes for the protection of trade secrets or confidential information. 5. Specific Remedy. If the Executive commits a material breach of any of the provisions of Section 4, the Employer shall have, in addition to the other remedies provided by law, the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Employer and that money damages will not provide an adequate remedy to the Employer. 6. Representations and Warranties. The Executive represents and warrants that entry into or continued performance of the Employment Agreement has neither caused nor required, nor will it cause or require, the Executive to breach any obligation to, or agreement or confidence with, any other person. 7. Business Opportunities. During the term of the Employment Agreement, if the Executive (or if to the knowledge of the Executive any agent, employee, officer, or independent contractor of or retained by the Executive) becomes aware of any project, investment, venture, business, or other opportunity (any of the preceding, an "Opportunity") that is similar to, competitive with, related to, or in the same field as the Employer, or any project, investment, venture, or business of the Employer, then the Executive shall use good-faith efforts to cause the Employer to have the opportunity to invest in, participate in, or otherwise become affiliated with such Opportunity. Executive shall not make any such Opportunity available to himself or any member of his immediate family without first requesting and receiving the written permission of the Employer. 8. Competition. During the term of the Employment Agreement, the Executive shall not, without the written permission of the Employer, own an interest in, operate or participate in, or be connected as an officer, director, employee, agent, independent contractor, partner, or principal with any business entity or person producing, designing, providing, or soliciting orders for, or selling, distributing, or marketing products, goods, equipment, and/or services which compete with the Employer's products, goods, equipment, and/or services (any such activities being in "Competition" with the Employer). In the event this Employment Agreement is terminated by Executive, Executive agrees that he shall, for a period of two years after the date of termination, refrain from acting as an executive or providing any management or other advisory services to or for any business or portion of a business for which belted drives, couplings, AC inverters and drives, and any other product lines Employer acquires after the date of this Agreement, but before Executive terminates his employment by Employer, collectively account for more than twenty-five percent of the revenues of such business or portion of a business. Executive agrees that his services are unique and extraordinary and of such a character that the loss of such services would cause irreparable injury to the Employer. Executive further agrees that the restrictions contained herein are reasonable, and that they do not restrict him any more than is reasonably necessary to protect the legitimate business interests of the Employer. Executive agrees that he will not take any customer lists of the Employer after leaving his employ and that he will, for so long as he is employed hereunder and for a period of two (2) years following termination of his employment, refrain from soliciting or accepting, or attempting to solicit or accept directly or by assisting others, any business from any of the Employer's customers, including actively sought prospective customers, with whom Executive had material contact during his employment for purposes of providing products or services that are competitive with those provided by the Employer. 9. Modification and Prior Understandings. -------------------------------------- A. This Employment Agreement may not be modified except by a contract in writing executed by the party(ies) thereto against whom enforcement of such modification is sought. The Employment Agreement is intended as a final and complete expression of the agreement of Employer and Executive with respect to such terms as are included in this Employment Agreement and supersedes all negotiations, stipulations, understandings, agreements, representations, and warranties, if any, with respect to the subject matter hereof or thereof. B. This Employment Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under the Employment Agreement may be assigned or transferred by the Executive other than rights to compensation and benefits thereunder, which may be transferred by will or operation of law, subject to the limitations of the Employment Agreement. C. Any notices required or permitted to be given under the Employment Agreement shall be in writing and shall be deemed to have been given when delivered personally or delivered by courier, or delivered by certified or registered mail sent postage prepaid, return receipt requested, duly addressed to the party concerned at the address indicated below or to such changed address as such party may subsequently by similar process give notice of: If to the Employer: T.B. Wood's, Inc. 440 North Fifth Avenue Chambersburg, PA 17201 If to the Executive: Michael L. Hurt 58 Cornertown Road Chambersburg, PA 17201 D. In the event of the Executive's death or a judicial determination of the Executive's incompetence, reference in the Employment Agreement to the Executive shall be deemed, where appropriate, to refer to the Executive's estate or other legal representative. E. Any controversy or dispute arising out of or relating to the Employment Agreement which is not voluntarily settled by the parties shall be submitted to and settled by arbitration in Pennsylvania, in accordance with the rules then obtaining of the American Arbitration Association. The prevailing party in any such arbitration proceeding shall be entitled to recover from the losing party its reasonable expenses for attorneys' fees and disbursements paid or incurred by or on behalf of the prevailing party. Both Executive and Employer hereby waive any right to a trial by jury for settling any dispute that arises from this agreement. 10. Expenses. Upon submission of proper vouchers, the Employer will pay or reimburse the Executive for all transportation, hotel, and living expenses incurred by the Executive on business trips outside the Chambersburg, PA area or any area to which such Executive may have been relocated by the Employer and for all other business and entertainment expenses reasonably incurred by the Executive in connection with the business of the Employer during the term of the Executive's active service hereunder, all in accordance with the reasonable Employer policies in effect on the date hereof and/or from time to time during the term of this Employment Agreement. 11. Indemnification. Employer shall have an obligation to indemnify Executive in the event of any claims or litigation made against Executive as a result of his activities within the scope of his employment only to the extent permitted or required by Employer's bylaws and applicable insurance policies, if any, to the extent permitted by Delaware law. 12. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Pennsylvania, but not including the choice of law provisions thereof. TB WOOD'S, INC. By:/s/ Thomas C. Foley /s/ Michael L. Hurt EXECUTIVE EX-10.17 3 EXHIBIT 10.17 EXHIBIT 10.17 TB WOOD'S CORPORATION SUPPLEMENTAL RETIREMENT PLAN Final May 7, 1998 - -------------------------------------------------------------------------------- THIS DOCUMENT IS AN IMPORTANT LEGAL INSTRUMENT WITH LEGAL AND TAX IMPLICATIONS AND SHOULD BE REVIEWED BY YOUR ATTORNEY - -------------------------------------------------------------------------------- 47 ARTICLE I PURPOSE AND EFFECTIVE DATE -------------------------- 1.01 Title. This Plan shall be known as the TB Wood's Corporation Supplemental Retirement Plan (hereinafter referred to as the "Plan"). 1.02 Purpose. The purpose of the Plan is to permit a select group of management and highly compensated employees to restore the income lost under the Qualified Plan because of limits imposed on that plan by the Internal Revenue Code. 1.03 Effective Date. The effective date of this Plan shall be January 1, 1998. ARTICLE II DEFINITIONS AND CONSTRUCTION OF THE PLAN DOCUMENT ------------------------------------------------- 2.01 Administrator. "Administrator," for purposes of the claims procedure of this Plan, shall mean the VP of Quality/Human Resources. 2.02 Beneficiary. "Beneficiary" shall mean the person or persons or the estate of a Participant entitled to receive any benefits under this Plan following the death of a Participant. 2.03 Board. "Board" shall mean the Board of Directors of TB Wood's Corporation. 2.04 Bookkeeping Account. "Bookkeeping Account" shall mean the bookkeeping record established for each Participant. 2.05 Cause. "Cause" shall mean: (a) conviction of the Executive for a felony, (b) the occurrence of material loss or damage to the Employer as a result of the Executive's commission of any act or acts of theft, larceny, embezzlement, fraud, dishonesty, illegality, sexual harassment, or moral turpitude as determined in good faith by the Board of Directors of the Employer, whose determination shall be final and binding. (c) gross insubordination or gross and willful violation of Employer's policies. 2.06 Change of Control. "Change of Control" shall mean (1) the direct or indirect ownership by any person of twenty (20%) or more of the voting stock of the Company unless the Company's Board of Directors has approved such ownership, or (2) the commencement of a tender offer by any person without the approval of the Board of Directors if upon consummation thereof such person would directly or indirectly own twenty (20%) or more of the voting stock of the Company, or (3) the individuals who constitute the Board of Directors of the Company on the date hereof for any reason cease to be a majority of the Board of Directors, provided that any person becoming a member of the Board of Directors subsequent to the date hereof shall be considered to be a member of the Board of Directors on the date hereof if such person was nominated or elected by at least seventy-five percent (75%) of the members of the Board of Directors (or persons treated as a member of the Board of Directors) on the date hereof. (a) If there is a Change of Control, notwithstanding any other provision of this Plan, any Participant who has a balance in her/her Bookkeeping Account may, at any time during a twenty-four (24) month period 48 immediately following a Change of Control elect to receive an immediate lump sum payment of the vested and previously unvested balance of his/her Bookkeeping Account reduced by a penalty equal to ten percent (10%) of the Participant's remaining Bookkeeping Account balance. The ten percent (10%) penalty shall be permanently forfeited and shall not be paid to, or in respect of, the Participant. The Participant shall thereafter be ineligible to participate in the Plan. (b) If there is a Change of Control, notwithstanding any other provision of this Plan, any retired Participant or Beneficiary may, at any time during a twenty-four(24) month period immediately following a Change of Control, elect to receive an immediate lump sum payment of the vested and previously unvested balance of her/her Bookkeeping Account reduced by a penalty equal to six percent (6%) of the retired Participant's or Beneficiary's remaining Bookkeeping Account balance. The six percent (6%) penalty shall be permanently forfeited and shall not be paid to, or in respect of, the retired Participant or Beneficiary. The retired Participant or Beneficiary shall thereafter be ineligible to participate in the Plan. In the event no such request is made by a Participant, a retired Participant or Beneficiary, the Plan and Agreement shall remain in full force and effect. 2.07 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.08 Committee. "Committee" shall mean the fiduciary committee consisting of the President, VP of Finance, and VP of Quality/Human Resources. 2.09 Company. "Company" shall mean TB Wood's Corporation and any subsidiary or affiliated company that adopts the Plan for its employees with the approval of the Board. 2.10 Disability. "Disability" shall mean a physical or mental condition resulting from bodily injury, disease, or mental disorder which renders the Executive incapable of continuing her/her usual and customary employment with the Employer. The disability will be determined by a licensed physician chosen by the Administrator. For purposes of this document, disability shall not include conditions caused by or aggravated by alcohol or substance abuse. 2.11 Earnings. "Earnings" shall mean the Participant's base pay, including elective deferrals to the Qualified Plan and salary reduction contributions to a Code Section 125 plan, plus compensation from the Annual Management Incentive Compensation Plan, commonly known as the "EBBIT Bonus Plan." Notwithstanding the preceding sentence, for those Participants listed in Appendix I, "Earnings" shall not include compensation from the Annual Management Incentive Compensation Plan. 2.12 Employee. "Employee" shall mean a member of a select group of management or highly compensated employees of the Company. 2.13 Final Average Earnings. "Final Average Earnings" shall mean the annual average of a Participant's three (3) highest consecutive years of Earnings out of his last ten (10) years of employment. 2.14 Participant. "Participant" shall mean an Employee who has been selected for participation in the Plan pursuant to Section 3.01, and whose Bookkeeping Account balance has not yet been fully distributed. 2.15 Plan. "Plan" shall mean the TB Wood's Corporation Supplemental Retirement Plan as described in this document and as amended from time to time. 2.16 Plan Year. The "Plan Year" shall mean the twelve-month period commencing January 1 and ending on December 31. 2.17 Qualified Plan. "Qualified Plan" shall mean the TB Wood's Corporation Retirement Savings and Investment Plan (401(k)), as amended from time to time. 49 2.18 Target Benefit. "Target Benefit" shall mean the annual income payable as a single life annuity assumed to be available to the Participant at age 65, equal to 50% of his Final Average Earnings, reduced by the sum of (a), (b) and (c) below: (a) is one hundred percent (100%) of the annual income payable as a single life annuity at age 65 which is the actuarial equivalent of the projected value, as of the Participant's 65th birthday, of that portion of the Participant's account balance under the Qualified Plan attributable to employer contributions, assuming that the Company would make the maximum employer contributions (whether or not the Participant makes elective deferrals) and assuming such employer contributions would earn interest at a rate of 8% per year. (b) is one hundred percent (100%) of the estimated annual primary social security benefit payable to the Participant as of his social security normal retirement age (as defined in section 216(l) of the Social Security Act), assuming the Participant continues to receive earnings for social security purposes at the same rate. (c) is sixty-six and two-thirds percent (66 2/3%) of the annual income payable as a single life annuity at age 65 which is the actuarial equivalent of the projected cash value, as of the Participant's 65th birthday, of the split-dollar life insurance policy or policies purchased on behalf of the Participant by the Company which are in effect on the initial date of his participation in this Plan. Such projected cash value shall be determined based on the policy assumptions in effect on such initial date of participation in this Plan. 2.19 Termination of Service. "Termination of Service" shall mean the termination of the Participant's employment as a regular Employee of the Company and any division, subsidiary or affiliate thereof. 2.20 Triggering Event. "Triggering Event" shall mean the event which results in a distribution of the Participant's Bookkeeping Account balance pursuant to Section 6.01. 2.21 Valuation Date. The regular Valuation Date for this Plan shall be each December 31 (commencing December 31, 1998). The Committee may provide for Valuation Dates at such other times as it deems necessary or expedient. As soon as administratively practicable following each Valuation Date, the Company will provide a written account report to each Participant. 2.22 Year of Service. For purposes of determining eligibility to participate in this Plan, an Employee shall be credited with a Year of Service for every twelve (12) consecutive months of employment with the Company. For purposes of determining the value of a Participant's Bookkeeping Account balance, a Participant shall be credited with no more than five (5) Years of Service for his period of employment with the Company prior to the date he commences participation in this Plan and shall be credited with one (1) additional Year of Service for every twelve (12) consecutive months of employment beginning with the date he commences participation in this Plan. Titles of the Articles of this Plan are included for ease of reference only and are not to be used for the purpose of construing any portion or provision of this Plan document. Wherever the context so requires, masculine pronouns include the feminine, and singular words shall include the plural. 50 ARTICLE III ELIGIBILITY AND PARTICIPATION ----------------------------- 3.01 Eligibility. Eligibility for participation in this Plan shall be determined by the President of the Company, with approval by the Board. Each Participant must have had at least five (5) Years of Service with the Company prior to initial participation, and each Participant must be a member of a select group of management or a highly compensated employee of the Company. ARTICLE IV CONTRIBUTIONS ------------- 4.01 Participant Contribution. No Participant shall be required or permitted to contribute under this Plan. Any contributions the Participant is permitted to make under the Qualified Plan shall not be affected by this Plan. 4.02 Company Contribution. This Plan shall be and remain at all times unfunded. As of the last day of each Plan Year (beginning December 31, 1998) on which any Participant remains employed by the Company, the Company shall credit an amount to the Participant's Bookkeeping Account. The amount of such credit shall be an annual amount which, when credited each year and accumulated with Interest, will accumulate to the lump sum value necessary to provide the Target Benefit, assuming all assumptions hold true. The amount shall be determined by an independent actuary designated by the Employer for that purpose and shall be redetermined periodically at the discretion of the Plan Administrator, but no less frequently than annually. The amount of the credit shall be computed at a level percentage of pay and using the following actuarial assumptions: Pre-Retirement Interest Rate: 7.5% Mortality Table: GAM 83 Male Pay Increases: 4% Post-Retirement Interest Rate: 7.5% Mortality Table: GAM 83 Male To the extent not inconsistent with any other plan sponsored by the Company, the amount of the credit shall not be considered as compensation under such other plan. ARTICLE V BOOKKEEPING ACCOUNT AND INTEREST RATE ------------------------------------- 5.01 Bookkeeping Account. The credit pursuant to Section 4.02 shall be reflected in a Bookkeeping Account maintained for each Participant. 5.02 Interest. As of each Valuation Date, the amount in the Participant's Bookkeeping Account shall be credited with interest at a rate equal to the annualized yield for 20-year United States Treasury Bonds in effect on the previous January 1. Such rate shall be applied to the existing balance reflected in the Participant's Bookkeeping Account, including any amounts credited as of the immediately preceding Valuation Date. 51 ARTICLE VI DISTRIBUTION ------------ 6.01 Distribution of Bookkeeping Account Balance. Distribution of the value of a Participant's Bookkeeping Account balance shall begin as soon as administratively practicable following the first occurrence of any of the following events (hereinafter referred to as the "Triggering Event"): (a) Termination of Service, other than for Cause, (b) death of a Participant, (c) disability of a Participant per 2.10, (d) a Change of Control rights per 2.06(a) and (b), (e) termination of this Plan for any reason. 6.02 Value of Bookkeeping Account Balance. As of a Triggering Event, the value of a Participant's Bookkeeping Account shall be calculated by first determining the Bookkeeping Account balance as of the most recent Valuation Date and adding interest since the most recent Valuation Date equal to the applicable interest rate in effect pursuant to Section 5.02 multiplied by a fraction the numerator of which is the number of days from January 1 to the Triggering Event and the denominator of which is 365. Such balance shall then be multiplied by the following vesting percentage based on the Participant's Years of Vesting Service as of such Triggering Event: Years of Service Vesting Percentage ---------------- ------------------ At least 5 but less than 6 25% At least 6 but less than 7 30% At least 7 but less than 8 35% At least 8 but less than 9 40% At least 9 but less than 10 45% At least 10 but less than 11 50% At least 11 but less than 12 60% At least 12 but less than 13 70% At least 13 but less than 14 80% At least 14 but less than 15 90% At least 15 100% Notwithstanding the preceding, a Participant's Bookkeeping Account shall be 100% vested (regardless of his Years of Service) in the event of a Change in Control. 6.03 Manner of Distribution. Distribution of the value of a Participant's Bookkeeping Account balance shall be paid as a lump sum distribution of cash. Notwithstanding the preceding sentence, in the event that the Participant has attained age sixty (60) as of the Triggering Event, the Participant or his Beneficiary may elect to have the value of the Participant's Bookkeeping Account balance paid in one of the following methods: (a) lump sum distribution of cash (b) partial lump sum distribution of cash (to be determined by the Participant) and the remaining account balance to be provided in installment payments over a period of time up to 240 months (c) installment payments over a period of time up to 240 months. Account balances remaining with the Company shall be credited with interest as provided in section 5.02. 52 ARTICLE VII BENEFICIARY ----------- 7.01 Beneficiary Designation. A Participant shall designate a Beneficiary to receive benefits under the Plan by completing a Beneficiary Designation Form. If more than one Beneficiary is named, the shares and/or precedence of each Beneficiary shall be indicated. A Participant shall have the right to change the Beneficiary by submitting to the Committee a Change of Beneficiary form. However, no Change of Beneficiary shall be effective until acknowledged in writing by the Committee. 7.02 Proper Beneficiary. If the Company has any doubt as to the proper Beneficiary to receive payments hereunder, the Company shall have the right to withhold such payments until the matter is finally adjudicated. However, any payment made by the Company, in good faith and in accordance with this Plan, shall fully discharge the Company from all further obligations with respect to that payment. 7.03 Minor or Incompetent Beneficiary. In making any payments to or for the benefit of any minor or an incompetent Beneficiary, the Committee, in its sole and absolute discretion, may make a distribution to a legal or natural guardian or other relative of a minor, to a court-appointed committee of such incompetent, or to any adult with whom the minor or incompetent temporarily or permanently resides. The receipt by a guardian, committee, relative or other person shall be a complete discharge to the Company. Neither the Committee nor the Company shall have any responsibility to see to the proper application of any payments so made. ARTICLE VIII ADMINISTRATION OF THE PLAN -------------------------- 8.01 Majority Vote. All resolutions or other actions taken by the Committee shall be by vote of a majority of those present at a meeting at which a majority of the members are present, or in writing by all the members at the time in office if they act without a meeting. 8.02 Finality of Determination. Subject to the Plan, the Committee shall, from time to time, establish rules, forms and procedures for the administration of the Plan. Except as herein otherwise expressly provided, the Committee shall have the exclusive right to interpret the Plan and to decide any and all matters arising thereunder or in connection with the administration of the Plan, and it shall endeavor to act, whether by general rules or by particular decisions, so as not to discriminate in favor of or against any person. The decisions, actions and records of the Committee shall be conclusive and binding upon the Company and all persons having or claiming to have any right or interest in or under the Plan. 8.03 Certificates and Reports. The members of the Committee and the officers and directors of the Company shall be entitled to rely on all certificates and reports made by any duly appointed accountants, and on all opinions given by any duly appointed legal counsel, which legal counsel may be counsel for the Company. 8.04 Indemnification and Exculpation. The Company shall indemnify and hold harmless each member of the Committee against any and all expenses and liabilities arising out of membership on the Committee. Expenses against which a member of the Committee shall be indemnified hereunder shall include, without limitation, the amount of any settlement or judgment, costs, counsel fees, and related charges reasonably incurred in connection with a claim asserted, or a proceeding brought or settlement thereof. The foregoing right of indemnification shall be in addition to any other rights to which any such member of the Committee may be entitled as a matter of law. 8.05 Expenses. The expenses of administering the Plan shall be borne by the Company. 53 ARTICLE IX CLAIMS PROCEDURE ---------------- 9.01 Written Claim. Benefits shall be paid in accordance with the provisions of this Plan. The Participant (or Beneficiary), or a designated recipient thereof, shall make a written request for benefits under this Plan. This written claim shall be mailed or delivered to the Administrator. Such claim shall be reviewed by the Administrator or a delegate. 9.02 Denied Claim. If the claim is denied, in full or in part, the Administrator shall provide a written notice within thirty (30) days setting forth the specific reasons for denial, and any additional material or information necessary to perfect the claim, and an explanation of why such material or information is necessary, and appropriate information and explanation of the steps to be taken if a review of the denial is desired. 9.03 Review Procedure. If the claim is denied and a review is desired, the Participant (or Beneficiary) shall notify the Administrator in writing within sixty (60) days after receipt of the written notice of denial. In requesting a review, the Participant or Beneficiary may request a review of the Plan document or other pertinent documents with regard to the Plan, may submit any written issues and comments, may request an extension of time for such written submission of issues and comments, and may request that a hearing be held, but the decision to hold a hearing shall be within the sole discretion of the Committee. 9.04 Committee Review. The decision on the review of the denied claim shall be rendered by the Committee within sixty (60) days after the receipt of the request for review (if no hearing is held) or within sixty (60) days after the hearing if one is held. The decision shall be written and shall state the specific reasons for the decision including reference to specific provisions of this Plan on which the decision is based. ARTICLE X NATURE OF COMPANY'S OBLIGATION ------------------------------- 10.01 Company's Obligation. The Company's obligations under this Plan shall be an unfunded and unsecured promise to pay. The Company shall not be obligated under any circumstances to informally or formally fund its financial obligations under this Plan. 10.02 Creditor Status. Any assets which the Company may acquire or set aside to help cover its financial liabilities hereunder are and must remain general assets of the Company subject to the claims of its creditors. Neither the Company nor this Plan gives the Participant any beneficial ownership interest in any asset of the Company. All rights of ownership in any such assets are and remain in the Company. Participants shall have the status of general unsecured creditors of the Company. ARTICLE XI MISCELLANEOUS ------------- 11.01 Written Notice. Any notice which shall be or may be given under the Plan shall be in writing and shall be mailed by United States mail, postage prepaid. If notice is to be given to the Company, such notice shall be addressed to the Company at 440 North Fifth Avenue, Chambersburg, Pennsylvania 17201, marked for the attention of the Plan Administrator or if notice to an Employee, addressed to the last-known address maintained on the Company's personnel records. 11.02 Change of Address. Any party may, from time to time, change the address to which notices shall be mailed by giving written notice of such new address. 11.03 Merger, Consolidation or Acquisition. The Plan shall be binding upon the Company, its assigns, and any successor Company which shall succeed to substantially all of its assets and business through merger, acquisition or consolidation, and upon an Employee, the Beneficiary, assigns, heirs, executors and administrators. 54 11.04 Amendment and Termination. The Company retains the sole and unilateral right to terminate, amend, modify, or supplement this Plan, in whole or part, at any time. This right includes the right to make retroactive amendments. However, no Company action under this right shall reduce the Bookkeeping Account of any Participant or Beneficiary or reduce benefits that are in payment status. 11.05 Employment. This Plan does not provide a contract of employment between the Company and the Participant, and the Company reserves the right to terminate the Participant's employment for any reason, at any time, notwithstanding the existence of this Plan. 11.06 Non-transferability. Except insofar as prohibited by applicable law, no sale, transfer, alienation, assignment, pledge, collateralization or attachment of any benefits under this Plan shall be valid or recognized by the Company. Neither the Participant, spouse, or designated Beneficiary shall have any power to hypothecate, mortgage, commute, modify, or otherwise encumber in advance of any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony maintenance, owed by the Participant or Beneficiary, or be transferable by operation of law in the event of bankruptcy, insolvency, or otherwise. 11.07 Enforcement Expenses. The Company shall pay and be solely responsible for all reasonable enforcement expenses, including legal fees and court costs, incurred by any Participant, former Participant or Beneficiary as a result of any failure by the Company to timely pay any amount due to such person under this Plan (including but not limited to amounts due under this section), provided that the Company has been notified in writing of such failure and has not cured it within 30 days of the giving of such notice. 11.08 Tax Withholding. The Company may withhold from a payment made under this Plan any federal, state, or local taxes required by law to be withheld with respect to such payment and such sum as the Company may reasonably estimate as necessary to cover any taxes for which the Company may be liable and which may be assessed with regard to such payment. 11.09 Applicable Law. This Plan shall be governed by the laws of the Commonwealth of Pennsylvania, except to the extent they are preempted by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). It is the intention of the Company that the Plan be unfunded for tax purposes and for purpose of Title I of ERISA. IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officer on this 7th day of May, 1998, effective as of the first day of January , 1998. TB WOOD'S CORPORATION BY /s/ Michael L. Hurt ------------------------- President ATTEST: By /s/ Emma K. Gross ------------------- [SEAL] 55 APPENDIX I For those Participants listed below, "Earnings" as defined in Section 2.11 shall mean the Participant's base pay, including elective deferrals to the Qualified Plan and salary reduction contributions to a Code Section 125 plan, but excluding compensation from the Annual Management Incentive Compensation Plan, commonly known as the "EBBIT Bonus Plan." M. Hurt T. Foley M. Iversen 56 EX-10.18 4 EXHIBIT 10.18 EXHIBIT 10.18 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 $18.00 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 57 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: Dated as of January 26, 1999 58 EX-10.19 5 EXHIBIT 10.19 EXHIBIT 10.19 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 $12.00 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. 59 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: Dated as of January 26, 1999 60 EX-11.1 6 EXHIBIT 11.1 EXHIBIT 11.1 Statement Regarding Computation Of Per Share Earnings TB Wood's Corporation And Subsidiaries January 1, 1999
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Net income $7,890 $8,689 $4,640 =============================================== Per share of common stock: Basic: Income before extraordinary item $ 1.34 $ 1.49 $ 1.08 Extraordinary item .00 .00 (.24) ----------------------------------------------- Net income per common share $ 1.34 $ 1.49 $ .84 =============================================== Weighted average shares of common stock and equivalents outstanding 5,874 5,833 5,520 =============================================== Diluted: Income before extraordinary item $ 1.33 $ 1.47 $ 1.06 Extraordinary item .00 .00 (.23) ----------------------------------------------- Net income per common share $ 1.33 $ 1.47 $ .83 =============================================== Weighted average shares of common stock and equivalents outstanding 5,932 5,921 5,600 ===============================================
61 EX-21.1 7 EXHIBIT 21.1 EXHIBIT 21.1 Subsidiaries of Registrant TB Wood's Corporation and Subsidiaries January 1, 1999 Registrant: TB Wood's Corporation Delaware Subsidiary: TB Wood's Incorporated Pennsylvania Subsidiaries: Plant Engineering Consultants, Incorporated Tennessee TB Wood's North Carolina, Inc. North Carolina 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 62 EX-23.1 8 EXHIBIT 23.1 EXHIBIT 23.1 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 March 25, 1999 63 -----END PRIVACY-ENHANCED MESSAGE-----