-----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, ELeTdufqUSKyBdHV/dkvZkA75wNEw4U747x5dS/ssE04JQMQBYYksV5hAGSaCnUz pA/TQmy0mZ2bJ2/8lwCfCQ== 0000082811-99-000007.txt : 19990316 0000082811-99-000007.hdr.sgml : 19990316 ACCESSION NUMBER: 0000082811-99-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGAL BELOIT CORP CENTRAL INDEX KEY: 0000082811 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT [3560] IRS NUMBER: 390875718 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07283 FILM NUMBER: 99565237 BUSINESS ADDRESS: STREET 1: 200 STATE ST CITY: BELOIT STATE: WI ZIP: 53511 BUSINESS PHONE: 6083648800 MAIL ADDRESS: STREET 1: 200 STATE STREET CITY: BELOIT STATE: WI ZIP: 53511-6254 FORMER COMPANY: FORMER CONFORMED NAME: BELOIT TOOL CORP DATE OF NAME CHANGE: 19730522 FORMER COMPANY: FORMER CONFORMED NAME: RECORD A PUNCH CORP DATE OF NAME CHANGE: 19690320 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 1-7283 ------------------------------------------------------ REGAL-BELOIT CORPORATION (Exact Name of Registrant as Specified in Its Charter) Wisconsin 39-0875718 (State of Incorporation) (I.R.S. Employer Identification No.) 200 State Street Beloit, Wisconsin 53511-6254 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (608) 364-8800 ============================================================================= 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) American Stock Exchange Securities registered pursuant to Section 12 (g) of the Act . . . . None (Title of Class) ============================================================================= 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. X ----- The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 5, 1999 was approximately $407,154,000. On March 5, 1999 the registrant had outstanding 20,946,805 shares of common stock, $.01 par value, which is registrant's only class of common stock. ============================================================================ Documents Incorporated by Reference ----------------------------------- Documents Form 10-K Reference - --------- ------------------- Annual Report to Shareholders for Year Ended December 31, 1998 . . . . . . . . . . . . . I, II, IV Proxy Statement for Annual Shareholders Meeting to be Held on April 21, 1999 . . . . . III 1 REGAL-BELOIT CORPORATION Index to Annual Report on Form 10-K For the Year Ended December 31, 1998 Page PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 6 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 6 Item 4. Submission of Matters To A Vote of Security Holders . . . . 6 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters . . . . . . . . . . . . . 6 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . 7 Item 8. Financial Statements and Supplementary Data. . . . . . . . . 7 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . 7 PART III Item 10. Directors and Executive Officers of the Registrant . . . . . 7 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . 8 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . 8 Item 13. Certain Relationships and Related Transactions . . . . . . . 8 PART IV Item 14. Financial Statements, Financial Statement Schedule, Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 9 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 PART I ITEM 1. Business General Development of Business - ------------------------------- Regal-Beloit Corporation is a Wisconsin corporation founded in 1955. The Company's initial business was the production of special metalworking taps. Through 34 acquisitions and internal growth, the Company has become a prominent manufacturer of a diversified line of mechanical products to control motion and torque and electrical products such as motors and generators. The Company's mechanical products are manufactured by its Mechanical Group and include standard and custom worm gear, bevel gear, helical gear and concentric shaft gearboxes; marine and high-performance after-market automotive transmissions; custom gearing; gear motors; manual valve actuators; and perishable, high speed steel, rotary cutting tools. Mechanical Group products are sold to distributors, original equipment manufacturers and end users across many industry segments. Typical applications for the Company's mechanical products include material handling systems such as conveyors, palletizers and packaging equipment; off-highway vehicular equipment such as street pavers, graders, airport/fire/crash/rescue equipment; farm implements; gas and liquid pipeline transmission systems; civic water and waste treatment facilities; open-pit mining; paper making machinery; high-performance, after-market automotive transmissions and ring/pinion sets; and marine transmissions for luxury inboard powered craft. Effective March 26, 1997, the Company acquired 100% of the stock of Marathon Electric Manufacturing Corporation. Marathon Electric now comprises the Company's Electrical Group. The Electrical Group produces and markets AC electric motors ranging in size from 1/12 horsepower to over 500 horsepower and electric generators ranging in size from 5 kilowatts through 2300 kilowatts. The Group is currently developing larger motors to 800 horsepower and larger generators to 4,000 kilowatts, and plans to commence shipments in the second and third quarters of 1999, respectively. The Group's products are also sold to distributors, original equipment manufacturers and end users across many industry segments. Typical applications for the Company s electrical products include: 1) for electric motors: air movement such as heating, ventilating, air conditioning and compressors; fluid movement such as pumping; woodworking; commercial laundry; process industries; variable frequency drives; and floor care; and 2) for electric generators: prime and standby power applications including buildings such as telecommunication, commercial, industrial, hospital and school; marine; agriculture; windpower; military; and transport refrigeration. Regal-Beloit believes its consistent ability to provide products on a shorter delivery schedule than other manufacturers gives it a competitive selling advantage and that its extensive use of modern, up-to-date equipment which is best suited for the job, along with its continued product redesign and effective plant layout, often gives it a competitive cost advantage in its product offering. Marketing and Sales - ------------------- The Company's products are sold to distributors, original equipment manufacturers and end users. Both the Mechanical Group and the Electrical Group have their own organization of field sales employees and manufacturers representatives. Export sales accounted for approximately 6% of the Company's sales in 1998, 7% in 1997 and 3% in 1996. Additionally, 3%, 4%, and 7% of Company sales were manufactured and sold outside the United States in 1998, 1997, and 1996, respectively. No material part of the Company's business is dependent upon a single customer. In fiscal 1998, 1997, and 1996, no single customer accounted for as much as 3% of Company sales. Although the Company's sales are predominantly not seasonal, they tend to vary with general economic conditions and with the rate of industrial production, and are affected by business climates in the many markets in which the Company sells. However, because the Company's products are sold to many different markets, the effects of weaker markets are frequently offset by strengths in other markets. Working capital requirements to properly serve the Company's customers are generally typical of capital goods manufacturers. Accounts receivable and inventory are generally not seasonal or at unusual levels by industry standards. Competition - ----------- Major domestic competitors in the mechanical motion control equipment industry include Emerson Electric, Reliance Electric, Winsmith, Falk, and Boston Gear. Major foreign competitors would include SEW Eurodrive, Flender, Sumitomo and Zahnrad Fabrik. Major domestic competitors for the Electrical Group include Baldor Electric, Emerson, Reliance, Leeson, General Electric, Cummins, and Magnetek. Major foreign competitors include Siemens, Toshiba, Weg, Leroy Somer, and ABB. Over the past several years, niche product market opportunities have become more prevalent due to changing market conditions. The Mechanical Group's markets have also been impacted by decisions by larger manufacturers not to compete in lower volume or specialized markets. Many captive producers have chosen, for economic reasons, to outsource their requirements to specialized manufacturers like Regal-Beloit's Mechanical Group, who can produce more cost effectively. The Company has capitalized on this competitive climate by making acquisitions and increasing its manufacturing efficiencies. Some of these acquisitions have created new opportunities for the Company because the Company is now in new markets in which it was not previously involved. The Company has also continued to upgrade its manufacturing equipment and processes, including increasing its use of computer aided manufacturing systems and redesigning products to take full advantage of the more productive equipment along with redoing plant layout to improve product flow. In practice, the Company's operating units have sought out specific niche markets concentrating on a wide diversity of customers and applications. Because of this approach, the Company is often not the largest supplier in any specific market. The Company believes it competes primarily on the basis of the promptness of delivery, price and quality. For further segment information required by Item 101 of Regulation S-K, reference is made to Note 11 of Notes to Consolidated Financial Statements on page 14 of the Annual Report to Shareholders for the year ended December 31, 1998, and such information is incorporated herein by reference. Manufacturing - ------------- Each of the Company's operating units conducts its manufacturing operations independently in one or more facilities. The Company regularly invests in high quality machinery and equipment and other improvements to and maintenance of its facilities. These capital expenditures typically meet 4 or exceed the Company's depreciation levels, as the Company believes that such investments are essential to its long-term success, although in 1998 expenditures were held below depreciation as the capital goods economy slowed. The manufacturing operations of both the Mechanical Group and Electrical Group are highly integrated. Although raw materials and selected parts such as bearings and seals are purchased, this vertical integration permits the Company to produce most of its products component parts when needed. The Company believes this results in lower production costs, greater manufacturing flexibility and higher product quality, as well as reducing the Company's reliance on outside suppliers. Base materials for the Company's products consist primarily of: 1) steel in various types and sizes, bearings and weldments, 2) copper magnet wire and 3) castings made of grey iron or aluminum. The Company purchases its raw materials from many suppliers and is not dependent on any single supplier for any of its base materials. Backlog - ------- As of December 31, 1998, the amount of the Company's Mechanical Group backlog was approximately $40,300,000 compared to approximately $51,310,000 on December 31, 1997. The Electrical Group backlog as of December 31, 1998 was $25,300,000 versus $31,700,000 on December 31, 1997. Average delivery time for orders of the Company's mechanical products (except for large, specially designed products) varies from three days to two months. The Company believes that virtually all of its backlog is shippable in 1999. The Company's business units have historically shipped the majority of its products in the month the order is received. Accordingly, since total backlog is less than 15% of the Company's annual sales, the Company believes that backlog is not a reliable indicator of the Company's future sales. Patents, Trademarks and Licenses - -------------------------------- The Company owns a number of United States patents and foreign patents relating to its businesses. While the Company believes that its patents provide certain competitive advantages, the Company does not consider any one patent or group thereof essential to the business of either of its Groups or the Company as a whole. Regal-Beloit utilizes various registered and unregistered trademarks and the Company believes these trademarks are significant in the marketing of most of its products. However, the Company believes the successful manufacture and sale of its products generally depends more upon its technological, manufacturing and marketing skills. In addition, the Company believes its engineering, test and development capabilities are significant factors in the success of its business. Employees - --------- As of December 31, 1998, the Company employed approximately 4,780 persons, of which approximately 27% are covered by collective bargaining agreements. The Company considers its employee relations to be very good. Environmental Matters - --------------------- The Company is subject to Federal, State and local environmental regulations. The Company is currently involved with environmental proceedings related to certain of its facilities. Based on available information, it is believed that the outcome of these proceedings and future known environmental compliance costs will not have a material adverse effect on the Company's financial position or results of operations. 5 ITEM 2. Properties - ------------------- The Company's Mechanical Group currently operates 21 manufacturing and service/distribution facilities. Four are located in Illinois; two each are located in Indiana, South Carolina, South Dakota and Wisconsin; and one each are located in California, Massachusetts, New York, North Carolina, Pennsylvania, Texas, Newbury (England), Neu Anspach (Germany) and Legnano (Italy). The Mechanical Group s present operating facilities contain a total of approximately 1,590,000 square feet of space of which approximately 46,700 square feet are leased. The Electrical Group currently operates 12 manufacturing and warehousing facilities. Three are located in Missouri, two each in Ohio and Texas and one each in Indiana, Pennsylvania, Wisconsin, Singapore, and Market Overton (England). The Electrical Group's present operating facilities contain a total of approximately 1,010,000 square feet of space of which approximately 130,000 square feet are leased. The Company has its principal offices in Beloit, Wisconsin in an owned 24,000 square foot office building. The Company believes its equipment and facilities are well maintained and adequate for its present needs. ITEM 3. Legal Proceedings - -------------------------- The Company is not involved in any material legal proceedings. ITEM 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ There were no matters submitted to a vote of security holders during the quarter ended December 31, 1998. PART II ITEM 5. Market for the Registrant's Common Equity and - ------------------------------------------------------ Related Shareholder Matters - --------------------------- Certain information required by Item 201 of Regulation S-K is set forth on page 4 and the inside back cover of the Annual Report to Shareholders for the year ended December 31, 1998, and such information is incorporated herein by reference. ITEM 6. Selected Financial Data - -------------------------------- Information required by Item 301 of Regulation S-K is set forth on page 4 of the Annual Report to Shareholders for the year ended December 31, 1998, and such information is incorporated herein by reference. 6 ITEM 7. Management's Discussion and Analysis of Financial Condition - -------------------------------------------------------------------- and Results of Operations - ------------------------- Information required by Item 303 of Regulation S-K is set forth on pages 5 and 6 of the Annual Report to Shareholders for the year ended December 31, 1998, and such information is incorporated herein by reference. ITEM 8. Financial Statements and Supplementary Data - ---------------------------------------------------- In the Annual Report to Shareholders for the year ended December 31, 1998, there are set forth on pages 7 through 15, financial statements meeting the requirements of Regulation S-X and information specified by Item 302 of Regulation S-K and such financial statements are incorporated herein by reference. ITEM 9. Changes in and Disagreements with Accountants on Accounting - -------------------------------------------------------------------- and Financial Disclosure - ------------------------ The Company has had no disagreements with its accountants subject to disclosure by Item 304 of Regulation S-K nor has it had a change of accountants within the last two fiscal years. PART III ITEM 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ Information required by Item 401 of Regulation S-K is set forth on pages 3 through 5 and 7 of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 21, 1999, a copy of which has been filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference. The names, ages, and positions of the executive officers of the Company as of March 5, 1999, are listed below along with their business experience during the past five years. Officers are elected annually by the Board of Directors at the Meeting of Directors immediately following the Annual Meeting of Shareholders in April. There are no family relationships among these officers, nor any arrangements of understanding between any officer and any other persons pursuant to which the officer was selected. 7 Name, Age and Position Business Experience During the Past 5 Years - ---------------------- ------------------------------------------- James L. Packard, 56 - Elected Chairman in 1986; Chief Executive Chairman, President and Officer since 1984; President since 1980. Chief Executive Officer Henry W. Knueppel, 50 - Elected Executive Vice President in 1987, Executive Vice President prior to which he was Vice President- Operations since 1985. Appointed to the additional position of President, Marathon Electric Manufacturing Corporation in September, 1997. Kenneth F. Kaplan, 53 - Joined Company in September, 1996. Elected Vice President, Chief Vice President, Chief Financial Officer in Financial Officer and October, 1996 and Secretary in April, 1997. Secretary Previously, he was employed by Gehl Company, West Bend, Wisconsin, as Vice President -Finance and Treasurer from 1987. ITEM 11. Executive Compensation - -------------------------------- Information required by Item 402 of Regulation S-K is set forth on pages 8 through 14 of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 21, 1999, a copy of which has been filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ Information required pursuant to Item 403 of Regulation S-K is set forth on pages 3 through 5 and 7 of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 21, 1999, a copy of which has been filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions - -------------------------------------------------------- Information required pursuant to Item 404 of Regulation S-K is set forth on pages 6 and 9 of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 21, 1999, a copy of which has been filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference. 8 PART IV ITEM 14. Financial Statements, Financial Statement Schedule, Exhibits - ---------------------------------------------------------------------- and Reports on Form 8-K - ----------------------- (a) 1. and 2. Financial Statements and Financial Statement Schedule ---------------------------------------------------------------- Reference is made to the separate index to the Company s Consolidated Financial Statements and Schedule contained on Page 11 hereof. 3. Exhibits ------------ Reference is made to the separate exhibit index contained on Pages 14-15 hereof. (b) Reports on Form 8-K ------------------- There were no reports filed on Form 8-K by the Company during the quarter ended December 31, 1998. 9 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. REGAL-BELOIT CORPORATION By: /s/ Kenneth F. Kaplan --------------------- Kenneth F. Kaplan Vice President, Chief Financial Officer and Secretary March 5, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
/s/ James L. Packard Chairman, President, Chief March 5, 1999 - -------------------- Executive Officer and Director James L. Packard /s/ Kenneth F. Kaplan Vice President, Chief Financial March 5, 1999 - --------------------- Officer and Secretary Kenneth F. Kaplan (Principal Accounting & Financial Officer) /s/ Henry W. Knueppel Executive Vice President March 5, 1999 - --------------------- and Director Henry W. Knueppel /s/ John A. McKay Director March 5, 1999 - --------------------- John A. McKay /s/ John M. Eldred Director March 5, 1999 - --------------------- John M. Eldred /s/ J. Reed Coleman Director March 5, 1999 - --------------------- J. Reed Coleman /s/ Frank Bauchiero Director March 5, 1999 - --------------------- Frank Bauchiero
10 REGAL-BELOIT CORPORATION Index to Financial Statements and Financial Statement Schedule Page(s) In Annual Report * --------------- The following documents are incorporated by reference as part of this report: (1) Financial Statements: Consolidated Balance Sheets at December 31, 1998 and 1997 7 Consolidated Statements of Income for the three years ended December 31, 1998 8 Consolidated Statements of Shareholders Investment for the three years ended December 31, 1998 8 Consolidated Statements of Cash Flows for the three years ended December 31, 1998 9 Notes to Consolidated Financial Statements 10 - 14 Report of Independent Public Accountants 15 * Incorporated by reference from the indicated pages of the Regal-Beloit Corporation 1998 Annual Report to Shareholders Page In Form 10-K --------- (2) Financial Statement Schedule: Report of Independent Public Accountants on Financial Statement Schedule 12 Consent of Independent Public Accountants 12 For the three years ended December 31, 1998, Schedule II - Valuation and Qualifying Accounts 13 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 11 Report of Independent Public Accountants To Regal-Beloit Corporation: We have audited, in accordance with generally accepted auditing standards, the financial statements included in Regal-Beloit Corporation's Annual Report to Shareholders, incorporated by reference in this Form 10-K, and have issued our report thereon dated January 27, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index to financial statements is the responsibility of the Company's management and 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. /s/ ARTHUR ANDERSEN LLP ----------------------- ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, January 27, 1999 Exhibit 23 Consent of Independent Public Accountants To Regal-Beloit Corporation: As independent public accountants, we hereby consent to the incorporation of our reports, included and incorporated by reference in this Form 10-K, into Regal-Beloit Corporation's previously filed Registration Statements, File Nos. 33-25480, 33-25233, 33-82076 and 33-8934. /s/ ARTHUR ANDERSEN LLP ------------------------ ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, March 5, 1999 13 SCHEDULE II REGAL-BELOIT CORPORATION VALUATION AND QUALIFYING ACCOUNTS Allowance for Doubtful Accounts:
(In Thousands Of Dollars) -------------------------------------------------------------- Balance Provision Write-offs, Additions, Balance Beginning (Credits) Net of Related to End of Year for Losses Recoveries Acquisition of Year --------- ---------- ---------- ----------- --------- Year Ended December 31, 1998 $ 2,620 $ (213) $ (556) $ -0- $ 1,851 Year Ended December 31, 1997 $ 1,190 $ 592 $ (622) $ 1,460 $ 2,620 Year Ended December 31, 1996 $ 1,140 $ 125 $ (75) $ -0- $ 1,190
13 Exhibits Index The following exhibits are required to be filed by Item 601 of Regulation S-K.
Exhibit Number Description Incorporated by Reference Herein - ------- ----------- -------------------------------- 2 Agreement and Plan of Merger by Filed as Exhibit A to Annual Meeting and between the Registrant and Proxy Statement of Regal-Beloit Corporation, dated as Regal-Beloit Corporation of April 18, 1994 dated March 11, 1994 2.1 Agreement and Plan of Merger Filed as Exhibit 2.1 on Regal-Beloit among the Registrant, Regal- Corporation's Form 8-K dated Beloit Acquisition Corp., and April 10, 1997 Marathon Electric Manufacturing Corporation dated as of February 26, 1997, as amended and restated March 17, 1997 and March 26, 1997 2.2 Credit Agreement among Regis- Filed as Exhibit 2.2 on Regal-Beloit trant, Bank of America Illinois, M&I Corporation's Form 8-K dated Marshall & Illsley Bank and the April 10, 1997 Other Financial Institutions Party hereto dated as of March 26, 1997; Schedule 2.01; Guaranty Agree- ments dated March 26, 1997; and Promissory Notes dated March 26, 1997. 2.3 Amended and Restated Credit Filed as Exhibit 2.3 to Regal-Beloit Agreement Dated as of May 30, Corporation's Quarterly Report 1997 among Registrant, Bank of on Form 10-Q dated August 8, America Illinois, as Documentation 1997 Agent, M&I Marshall & Illsley Bank, as Administrative Agent and Letter of Credit Issuing Bank, Firstar Bank Milwaukee, N.A., Harris Trust and Savings Bank and The Northern Trust Company, as Co-Agents, and The Other Financial Institutions Party Hereto Arranged by Bancamerica Securities, Inc. as Syndication Agent; Disclosure Schedules and Attached Exhibits; and Promissory Note 3.1 Articles of Incorporation of the Filed as Exhibit B to the 1994 Proxy Registrant Statement 3.2 Bylaws of the Registrant Filed as Exhibit C to the 1994 Proxy
Statement 14
Exhibit Number Description Incorporated by Reference Herein - ------- ----------- -------------------------------- 4 Articles of Incorporation and Bylaws Filed as Exhibits 3.1 and 3.2 hereto of the Registrant 10.1 Short-Term Incentive Compensation Filed as Exhibit 10.1 to Regal-Beloit Plan, as amended Corporation's Annual Report on Form 10-K dated March 29, 1993 10.2 1982 Incentive Stock Option Plan Filed as Exhibit 10.4 to 1986 S-1 10.3 1987 Stock Option Plan Filed as Exhibit 10.3 to 1988 S-1 10.4 1991 Flexible Stock Incentive Plan Filed as Exhibit 10.4 to Regal-Beloit Corporation's Annual Report on Form 10-K dated March 29, 1993 (1994 S-8 Registration No. 33-82076) 10.5 Change of Control Agreement Filed as Exhibit 10.5 to Regal-Beloit Corporation's Annual Report on Form 10-K dated March 6, 1998 10.5 (a) Addendum to Change of Control Regal-Beloit Corporation's Annual Report Agreement effective as of on Form 10-K dated March 5, 1999. April 21, 1998 (Filed herewith) 10.6 Disability Insurance Agreement Filed as Exhibit 10.6 to Regal-Beloit between Regal-Beloit Corporation Corporation's Annual Report and Continental Casualty Company on Form 10-K dated March 29, 1993 10.7 1998 Stock Option Plan Regal-Beloit Corporation's Annual Report on Form 10-K dated March 5, 1999. (Filed herewith) 13 Annual Report to Shareholders Regal-Beloit Corporation's Annual Report for the year ended December 31, on Form 10-K dated March 5, 1999. 1998 (Filed herewith) 21 Subsidiaries of Regal-Beloit Regal-Beloit Corporation's Annual Report Corporation on Form 10-K dated March 5, 1999. (Filed herewith) 23 Consent of Independent Public Regal-Beloit Corporation's Annual Report Accountants on Form 10-K dated March 5, 1999. (Filed herewith) 99 Annual Meeting Proxy Statement of Regal-Beloit Corporation's Proxy Regal-Beloit Corporation dated Statement on Schedule 14A dated March 12, 1999 March 12, 1999, (Filed herewith)
15 Exhibit 10.5(a) ADDENDUM TO CHANGE OF CONTROL AGREEMENT The following revisions shall be deemed to be a part of the change of Control Agreement effective as of April 21, 1998: 1. Section 2(a) Severance Benefits. This will be replaced by the following: ------------------------------- Within fifteen (15) business days after the Termination Date, Regal-Beloit shall pay Executive a lump sum amount, in cash, equal to three (3) times the sum of: (i) Executive's Base Salary, as defined in Section 1(a); (ii) Executive's Annual Bonus, as defined in Section 1(b); and (iii) Executive's Fringe Benefits, as defined in Section 1(i). IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed and delivered as of April 21, 1998. REGAL-BELOIT CORPORATION By: /s/ John McKay ---------------------------- John McKay, Director and Chairman of Compensation Committee By:____________________________________ Named Executive Officer Exhibit 10.7 REGAL-BELOIT CORPORATION 1998 STOCK OPTION PLAN 1. PURPOSES. The purpose of the 1998 Stock Option Plan (the "1998 Plan") is to provide, on a basis competitive with industry practices, long-term incentives through stock grants (the "Grants") to Directors, Officers, key executives and other management employees of Regal-Beloit Corporation and its subsidiaries (the "Company"), in order to assist the Company in attracting and retaining experienced and capable Directors, Officers, key executives and other management employees and to associate the interest of such persons with those of the Company's Shareholders. 2. EFFECTIVE DATE. The 1998 Plan is effective as of April 21, 1998, subject to the approval by the holders of at least a majority of the outstanding shares of the Company's Common Stock, present, or represented, and entitled to vote at the 1998 Annual Meeting of Shareholders. Grants may be made under the 1998 Plan on and after its effective date. 3. SHARES OF STOCK SUBJECT TO THE 1998 PLAN. The shares that may be delivered or purchased or used for reference purposes under the 1998 Plan shall not exceed an aggregate of 1,000,000 shares of the Company's Common Stock, $0.01 par value, subject to adjustment as provided in Section 19. The Committee may make any other type of Grant which it shall determine is consistent with the objectives and limitations of the 1998 Plan. 4. ADMINISTRATION OF THE 1998 PLAN. The 1998 Plan shall be administered by the Board of Directors of the Company or a Committee comprised of two or more Non-Employee Directors, (hereinafter collectively called the "Committee"). The Committee shall have all the powers vested in it by the terms of the 1998 Plan, such powers to include exclusive authority (within the limits described herein) to select the eligible Participants (as hereinafter defined) to receive Grants under the 1998 Plan, to determine the type, size and terms of Grants to be made to each Participant selected, to determine the time when Grants will be granted and to establish objectives and conditions, if any, relating to such Grants. The Committee shall have full power and authority to administer and interpret the 1998 Plan and to adopt such rules, regulations, agreements, guidelines and instruments for the administration of the 1998 Plan and to make all other determinations which the Committee deems necessary or advisable. The Committee's interpretation of the 1998 Plan and all actions taken and determinations made by the Committee pursuant to the powers vested in it hereunder, shall be conclusive and binding on all parties concerned, including the Company, its Shareholders and Participants in the 1998 Plan. In administering the 1998 Plan, the term "Committee" shall mean exclusively the Board of Directors where appropriate when interpreting the 1998 Plan as it pertains to Non-Employee Directors. "Non Employee Directors" means those Outside Directors who are not officers or employees of the Company. 5. ELIGIBLE PARTICIPANTS. The persons eligible to participate in the 1998 Plan shall be all Directors, Officers, key executives and other management employees of the Company who are responsible for or contribute to the management, growth and/or profitability of the business of the Company (the "Participants"). 6. NON-EMPLOYEE DIRECTOR GRANTS. a. (i) The 1998 Plan shall supersede the 1991 Flexible Stock Incentive Plan, as amended, as to Non-Employee Director grants only, effective April 21 1998. 1 (ii) Under the 1998 Plan, each individual Non-Employee Director will be annually granted stock options, Stock Appreciation Rights or any combination thereof of shares of Common Stock at 100 percent (100%) of the fair market value as of the date corresponding to the Annual Shareholders' Meeting. For the years 1998 and 1999, each individual Non-Employee Director shall be granted 800 shares of Common Stock. For the years 2000 and 2001, each individual Grant will be increased to 900 shares. For the years 2002 through 2008, each individual Grant will be increased to 1,000 shares. However, the first Grant to each Non-Employee Director who is initially elected as a Non-Employee Director or is initially appointed subsequent to the date of the Annual Shareholders' Meeting of the Company and prior to the date of the next succeeding Annual Shareholders' Meeting, shall be three (3) times the number of shares granted to each individual Non-Employee Director during such applicable year at 100 percent (100%) of the fair market value at the closing sale price on the date that he or she becomes a director of the Company. b. The right to exercise any Grant given to Non-Employee Directors shall vest immediately upon Grant. Unexercised Grants to Non-Employee Directors shall terminate the earlier of ten (10) years after the date of Grant or ninety (90) days after the Non-Employee Director ceases to be a member of the Company's Board of Directors, unless terminated for Cause as provided in Section 18. c. In all other respects, Grants to a Non-Employee Director under the Plan shall be controlled by the terms and conditions of the 1998 Plan and the rules, regulations, agreements, guidelines, instruments and interpretations issued by the Committee, except where inconsistent with the limitations set forth in this Section 6 of the 1998 Plan. 7. GRANTS. a. Types. Grants under the 1998 Plan shall be made with reference to ----- shares of the Company's Common Stock and may include, but need not be limited to Incentive Stock Options ("ISO"), Nonqualified Stock Options ("NSO"), Restricted Stock, Deferred Stock, Stock Appreciation Rights or any combination thereof. b. Vesting ------- (i) The Committee, in its sole discretion, shall determine any vesting (i.e., exercisability) requirements applicable to each Grant. (ii) The Committee may also determine that all or a portion of a payment of Grants other than ISOs and NSOs to a Participant under the 1998 Plan, whether it is to be made in cash, shares of the Company's Common Stock or a combination thereof, shall be vested at such times and upon such terms as may be selected by it in its sole discretion. c. Price. The option price per share of each option granted shall be ----- established by the Committee except that the option price shall not be less than 100 percent (100%) of the fair market value of the stock at the closing sale price on the date the option is granted. If there is no sale on the date of Grant, the fair market value of the stock shall be the closing sale price of the stock on the preceding business day on which the Company's Common Stock was traded. d. Performance Goals. The Committee may, but need not, establish ----------------- performance goals to be achieved within such performance periods as may be selected by it in its sole discretion, using such measures of the performance of the Company as it may select. e. Guidelines. The Committee may adopt from time to time written policies ---------- implementing the 1998 Plan. Such policies may include, but need not be limited to the type, size and term of Grants to be made to Participants and the conditions for payment of such Grants. 2 f. Maximum Grants. Participants may be granted multiple Grants under the -------------- 1998 Plan. However, no one Participant shall be granted a Grant if immediately after such Grant he or she is the owner or would be deemed to be the owner of more than 10 percent (10%) of the total combined voting power of all classes of stock of the Company, unless the option price per share is at least 110 percent (110%) of the fair market value and such Grant by its terms is not exercisable after the expiration of five (5) years from the date such Grant is granted. 8. PAYMENT OF GRANTS. The Committee shall determine the extent to which Grants other than ISOs and NSOs shall be payable in cash, shares of the Company's Common Stock or any combination thereof to a Participant. The Committee may determine that all or a portion of a payment to a Participant under the 1998 Plan, whether it is to be made in cash, shares of the Company's Common Stock or a combination thereof shall be deferred. Deferrals shall be for such periods and upon such terms as the Committee may determine in its sole discretion. 9. EXERCISE OF ISOs AND NSOS. The price for shares may be paid in any combination of cash, cashier's or certified check, personal check acceptable to the Company, or shares of the Company's Common Stock, including previously owned Common Stock. 10. RIGHTS OF SHAREHOLDERS. A Participant under the 1998 Plan shall have no rights as a holder of the Company's Common Stock with respect to Grants hereunder, unless and until certificates for shares of such stock are issued to the Participant. 11. ASSIGNMENT OR TRANSFER. Except as otherwise provided by the Committee, Grants under the 1998 Plan or any rights or interests therein shall not be assignable or transferable except by will or the laws of descent and distribution, or exercisable by anyone other than the Participant during his or her lifetime. 12. AGREEMENTS. All Grants granted under the 1998 Plan shall be evidenced by agreements in such form and containing such terms and conditions (not inconsistent with the 1998 Plan) as the Committee shall adopt. 13. COMPLIANCE WITH LEGAL REGULATIONS. a. The Committee may require each person purchasing shares pursuant to a stock option or other Grant under the 1998 Plan to represent to and agree with the Company in writing that the optionee or Participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. b. All certificates for shares of stock or other securities delivered under the 1998 Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the stock is then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificate to make appropriate reference to such restrictions. 14. WITHHOLDING TAXES. a. The Company shall have the right to deduct from all Grants hereunder paid in cash any federal, state, local or foreign taxes required by law to be withheld with respect to such Grants. b. With respect to Grants paid by shares of the Company's Common Stock, the Company shall also have the right to require the payment (through withholding from the Participant's salary or otherwise) of any of the taxes referenced above in Section 14a. An appropriate number of shares of Common Stock may be withheld for such payment. If shares are used to satisfy tax withholding requirements, the value of such shares shall be based on the fair market value of the Common Stock on the date when the tax withholding is required to be made. c. The obligation of the Company to make delivery of Grants in cash or the Company's Common Stock shall be subject to currency or other restrictions imposed by any government. 3 15. NO RIGHTS TO GRANTS. No Participant or other person shall have any right to receive a Grant under the 1998 Plan. Neither the 1998 Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the employ of the Company or any of its subsidiaries or shall interfere with or restrict in any way the rights of the Company, which are hereby reserved, to discharge the Participant at any time for any reason whatsoever, with or without good cause. 16. COST AND EXPENSES. The cost and expense of administering the 1998 Plan shall be bome by the Company and not charged to any Grant nor to any Participant receiving a Grant. 17. TERMINATION OR EXPIRATION OF GRANTS. If any Grant under the 1998 Plan terminates or expires, the shares allocable to the unexercised portion of the Grant will be available for purposes of the 1998 Plan. In certain circumstances where a Participant uses stock to exercise a Grant, only the net shares issued to the Participant are counted against the number of shares issued under the 1998 Plan. Certain stock issuances which are later forfeited by the Participant do not count as grants under the 1998 Plan. 18. TERMINATION OF EMPLOYMENT. a. (i) In the event a Participant's employment with the Company is terminated, whether voluntarily or otherwise, but not by reason of death, disability or retirement, each prior unexpired or uncancelled Grant, to the extent exercisable as of the date of such termination of employment or service, shall terminate thirty (30) days after the Participant's date of termination or as determined by the Committee. (ii) Notwithstanding the foregoing, if a Participant's employment or service as a Non-Employee Director of the Company is terminated for Cause (as defined below), each unexpired or uncancelled Grant, to the extent not previously exercised by him or her, shall terminate immediately. b. The term "Cause" is defined as: (i) the commission by a Participant of any act or omission that would constitute a felony under federal, state or equivalent foreign law, (ii) fraud, dishonesty, theft, embezzlement, disclosure of trade secrets or confidential information or other acts or omissions that result in a breach of any fiduciary duty to the Company. c. In the event a Participant terminates his or her employment with the Company as a result of death, disability, or retirement, the Committee shall have the discretion to extend the period of exercisability of each previously granted and unexpired or uncancelled Grant in accordance with applicable statutes, rules and regulations and to preserve ISO treatment, where necessary, unless the termination date specified in the Grant occurs earlier. The Committee shall also have discretion to determine whether such Grant(s) shall become immediately exercisable in full. 19. DILUTION AND OTHER ADJUSTMENTS. In the event of any change in the outstanding shares of the Company's Common Stock by reason of any split, stock dividend, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, such equitable adjustments shall be made in the 1998 Plan and the Grants thereunder as the Committee determines are necessary or appropriate. If necessary, the Committee may make any adjustments in the maximum number of shares referred to in Section 3, in the number and option price of shares subject to outstanding options, in the number and purchase price of shares subject to outstanding stock purchase rights, and in the number of shares subject to other Grants granted under the 1998 Plan. Such adjustment shall be conclusive and binding for all purposes of the 1998 Plan. 20. AMENDMENTS AND TERMINATIONS. a. Amendments. The Committee may terminate or amend the 1998 Plan in whole or in part at any time, but no such action shall adversely affect any rights or obligations with respect to any Grants theretofore made under the 1998 Plan nor change the limitations as to Non-Employee Directors as set forth in Section 6 hereof. 4 Unless the holders of at least a majority of the outstanding shares of the Common Stock, present or represented, and entitled to vote at a meeting of Shareholders shall have first approved thereof, no amendment of the 1998 Plan shall be effective which would (i) increase the maximum number of shares referred to in Section 3 of the 1998 Plan; (ii) extend the maximum period during which ISO Grants may be granted under the 1998 Plan, or (iii) reduce the price per share at which ISO Options may be offered under the 1998 Plan below 100 percent (100%) of the fair market value on the date of Grant. For purposes of this Section 20a, subject to adjustment as provided in Section 19, any (1) cancellation and reissuance or (2) repricing of any Grants made under the 1998 Plan at a new option price as provided in the 1998 Plan's rules relating to stock options and Stock Appreciation Rights shall not constitute an amendment of this 1998 Plan. With the consent of the Participant affected, the Committee or the Board of Directors, where applicable, may amend outstanding agreements evidencing Grants under the 1998 Plan in a manner not inconsistent with the terms of the 1998 Plan. b. Termination. Unless the 1998 Plan shall heretofore have been terminated as above provided, the 1998 Plan shall terminate on and no Grants shall be granted after April 20, 2008. Any Grants outstanding under the 1998 Plan at the time of the termination of the 1998 Plan shall remain in effect until such Grant shall have been exercised or shall have expired according to its terms. 21. GOVERNING LAWS. The validity and construction of the 1998 Plan and any agreements entered into thereunder shall be governed by the laws of the State of Wisconsin. 22. COMPLIANCE WITH APPLICABLE LAWS. The Committee will comply with all applicable laws, rules and regulations including the Internal Revenue Code of 1986, as amended (the "Code") and the Securities Exchange Act of 1934, as amended (the "Exchange Act") or any successor provisions or other regulatory requirements. To the extent required, the 1998 Plan is designed to comply with Section 162(m) of the Code to qualify future performance based compensation and to qualify under Section 16 of the Exchange Act. To the extent any provision of the 1998 Plan or action by the Committee fails to so comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Committee. 5 EX-1 2 ANNUAL REPORT SELECTED FINANCIAL INFORMATION REGAL-BELOIT CORPORATION - ------------------------------ ------------------------
FIVE YEAR HISTORICAL DATA (In Thousands, Except Per Share Data) -------------------------------------------- Year Ended December 31, -------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Net Sales $543,513 $487,019 $281,508 $295,891 $242,650 Income from Operations 81,113 74,381 51,120 53,607 38,982 Net Income 42,961 38,897 32,276 32,818 23,129 Total Assets 482,022 485,625 196,996 175,480 167,665 Long-term Debt 166,218 192,261 2,168 2,884 16,022 Shareholders' Investment 224,497 189,427 160,023 135,873 110,545 Per Share of Common Stock: Earnings Per Share 2.06 1.87 1.57 1.60 1.13 Earnings Per Share - Assuming Dilution 2.02 1.83 1.53 1.57 1.11 Cash Dividends Declared .48 .48 .48 .39 .31 Shareholders' Investment 10.74 9.09 7.75 6.61 5.40 Average Number of Shares Outstanding 20,893 20,806 20,617 20,509 20,438 Average Number of Shares - Assuming Dilution 21,278 21,275 21,075 20,966 20,840
COMMON STOCK 1998 1997 --------------------------------- ------------------------------ Price Range Price Range ---------------------- Dividends ------------------- Dividends High Low Paid High Low Paid ---------- ---------- --------- --------- -------- --------- 1st Quarter $ 33 1/4 $ 26 7/8 $ .12 $ 24 1/2 $ 18 $ .12 2nd Quarter 33 1/4 27 13/16 .12 28 1/2 22 1/2 .12 3rd Quarter 28 9/16 19 3/8 .12 32 1/4 26 1/16 .12 4th Quarter 26 7/8 17 1/2 .12 32 3/4 25 1/16 .12 Regal-Beloit has paid 154 consecutive quarterly dividends through January, 1999. The approximate number of holders of common stock as of December 31, 1998 is 1,170.
QUARTERLY FINANCIAL INFORMATION (In Thousands, Except Per Share Data) ------------------------------------------------------------------------------ 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. ----------------- ------------------ ------------------ ------------------- 1998 1997 1998 1997 1998 1997 1998 1997 -------- ------- -------- -------- -------- -------- -------- -------- Net Sales $137,818 $70,570 $138,981 $143,610 $137,973 $138,403 $128,741 $134,436 Gross Profit 39,738 20,371 41,290 41,408 38,907 39,068 37,879 40,161 Income from Operations 19,868 12,062 21,970 21,863 19,848 19,934 19,427 20,522 Net Income 10,414 7,706 11,679 10,807 10,390 9,914 10,478 10,470 Earnings Per Share .50 .37 .56 .52 .50 .48 .50 .50 Earnings Per Share - Assuming Dilution .49 .36 .55 .51 .49 .47 .49 .49 Average Number of Shares Outstanding 20,861 20,774 20,898 20,807 20,905 20,816 20,908 20,826 Average Number of Shares - Assuming Dilution 21,332 21,248 21,349 21,253 21,223 21,315 21,209 21,300
1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS - ------------------------------------------------------------ REGAL-BELOIT CORPORATION - ------------------------ OVERVIEW The Company in 1998 achieved record highs in net sales, net income, and earnings per share for the second consecutive year. Net sales in 1998 increased 11.6% to $543,513,000. Net income rose 10.4% to $42,961,000 in 1998, or $2.02 per share (assuming dilution). Return on average shareholders' investment (ROE) was 20.8%, the fifth year in a row above 20%. As 1998 progressed there was a slowing in demand in many of the Company's markets. This led to weakening orders and sales in the second half of the year, particularly during the fourth quarter. Cash flow from operations of $50,393,000 in 1998 was again strong, enabling long-term debt to be reduced by $26,038,000 during 1998 to $166,218,000 at year-end 1998. Virtually all of the debt reduction occurred in the second half of 1998. The Company's capitalization ratio at December 31, 1998 was 42.5%, down from 50.4% a year earlier. RESULTS OF OPERATIONS 1998 versus 1997 - ---------------- Total Company net sales in 1998 were $543,513,000, an 11.6% increase from $487,019,000 in 1997. Mechanical Group net sales were $280,153,000, 1.8% below 1997 net sales of $285,174,000. The decrease from 1997 occurred almost entirely in the fourth quarter of 1998, with many of the Mechanical Group's customers adjusting their inventories to lower levels as the industrial economy continued to slow. Electrical Group net sales in 1998 of $263,360,000 were 30.5% higher than the $201,845,000 of net sales for the nine months of 1997 following the acquisition of Marathon Electric. (See "Note 4 to Consolidated Financial Statements") On a pro-forma basis assuming the acquisition had occurred January 1, 1997, Electrical Group sales in 1998 were .5% below net sales of $264,681,000 in 1997. Gross profit as a percent of net sales for the Company was 29.0% in 1998, unchanged from 1997. Income from operations for the Company increased 9.1% to $81,113,000 in 1998 from $74,381,000 in 1997. As a percent of net sales, income from operations decreased to 14.9% in 1998 from 15.3% the prior year. The reduction was due in part to having one additional quarter of Electrical Group operations, with its lower operating margins, in 1998 than in 1997. Mechanical Group operating income margin decreased to 16.3% in 1998 from 17.0% in 1997, primarily due to lower sales volume and the related impact on cost of sales. However, Electrical Group operating income margin increased to 13.4% in 1998 from 12.9% a year previously, due mainly to reductions in operating expenses. 2 Interest expense increased to $11,479,000 in 1998 from $10,804,000 in 1997, due to a full year of the acquisition related debt in 1998 versus only nine months in 1997. For the last nine months of 1998, interest expense of $8,491,000 was $2,260,000, or 21%, lower than the comparable nine months of 1997. The average rate of interest the Company paid in 1998 was 6.1% as compared to 6.2% in 1997. Interest income decreased to $306,000 in 1998 from $810,000 in 1997. The decrease was due primarily to the Company utilizing $37,000,000 of cash for the March 1997 acquisition of Marathon Electric. The Company's effective tax rate decreased to 38.6% of income before taxes in 1998 from 39.6% in 1997. The decrease was due primarily to reductions in effective Company state income tax rates in 1998. Net income of the Company in 1998 was $42,961,000, a 10.4% increase from $38,897,000 in 1997. As a percent of net sales, net income was 7.9% in 1998 versus 8.0% in 1997. On a per share basis, 1998 net income was $2.06 per share (basic) and $2.02 per share (assuming dilution), 10% higher in each case than 1997 net income of $1.87 per share (basic) and $1.83 per share (assuming dilution). 1997 versus 1996 - ---------------- Net sales of the Company were $487,019,000 in 1997, a 73.0% increase from $281,508,000 in 1996. Mechanical Group net sales grew to $285,174,000 in 1997, a 1.3% increase from $281,508,000 in 1996. Sales growth in the Mechanical Group's operating divisions in 1997 varied, with about half achieving sales growth, more than offsetting those that had sales decreases. Electrical Group 1997 net sales for the nine months as part of the Company were $201,845,000, 9% higher than for the same nine months of 1996 under Marathon Electric's former ownership. The Electrical Group achieved broad-based sales increases in motors, generators, and other electrical products. Gross profit as a percentage of sales for the Company was 29.0% in 1997 as compared to 29.5% in 1996. The decrease from 1996 was due primarily to a decline in the overall gross margin in the Mechanical Group resulting from a more competitive pricing environment in 1997 than experienced in 1996. Company operating expenses increased to $66,627,000 in 1997 from $31,806,000 in 1996 due predominantly to the acquisition of Marathon Electric. Income from operations of the Company increased to $74,381,000 in 1997 from $51,120,000 in 1996. The increase was due to the $25,836,000 of income from operations contributed by the new Electrical Group from April through December 1997. 3 Interest expense in 1997 was $10,804,000 as compared to $357,000 in 1996. On March 26, 1997, the Company borrowed $242,000,000 under its Revolving Credit Facility to finance the purchase of Marathon Electric (See "Note 4 to Consolidated Financial Statements"). The average rate of interest paid by the Company in 1997 was 6.2%. The Company's effective tax rate increased to 39.6% of income before taxes in 1997 from 37.7% in 1996. The rate increase was due primarily to the nondeductibility of the amortized goodwill associated with the Marathon Electric acquisition. YEAR 2000 READINESS DISCLOSURE The Company has for several years been addressing the Year 2000 issue. Management has been aware of the critical requirement that the Company's computer hardware and systems handle all transactions properly relating to 2000 and beyond. Management further understands the importance of computer-operated machinery and facilities equipment such as tele- communications, security, and HVAC also being Year 2000 ready. The Company's products have been evaluated and determined to be Year 2000 ready. Accordingly, the Company has assessed its computer hardware and systems and any necessary changes have, for the most part, been made and implemented. Testing of the Company's systems to assure Year 2000 readiness is in progress. Also in progress is the evaluation and testing of computer-operated machinery and facilities equipment. The Company plans to complete its testing during the second quarter of 1999. Additionally, recognizing the Company's dependence on its suppliers, surveys have been sent to key suppliers to evaluate their Year 2000 readiness efforts and status. Where key suppliers are not able to verify their readiness to the Company's satisfaction, the Company plans to consider alternative or contingent suppliers. Management believes that the Company is devoting the necessary resources to identify and resolve significant Year 2000 issues and to minimize the risk of not being Year 2000 ready. Management further believes the costs it has expended, and plans to expend, to become Year 2000 ready are not material, and have not had, and will not have, an adverse effect on the Company's financial position, cash flow or results of operations. However, to the extent that the Company or third parties on which it relies do not achieve Year 2000 readiness in a timely manner, the Company's financial position, cash flow or results of operations may be adversely affected. 4 LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased to $117,305,000 at December 31, 1998, from $100,627,000 a year ago. The increase was due primarily to reductions in current liabilities. The Company's current ratio also increased, to 3.0:1 at year-end 1998, from 2.4:1 a year earlier. The Company maintains a $190,000,000 unsecured revolving credit facility which expires March 26, 2002 (the "Facility"). The Facility permits the Company to borrow up to the credit limit at interest rates based upon a margin above LIBOR. At December 31, 1998, $166,000,000 was outstanding under the Facility, a $26,000,000 reduction from the end of 1997, and the Company had $24,000,000 of available borrowing capacity. During 1998 the Company paid an average interest rate of 6.1% for its outstanding debt. The Company was in compliance with the covenants of the Facility throughout 1998. The Company's capitalization ratio at December 31, 1998 was 42.5%, down from 50.4% a year earlier and its funded debt to EBITDA ratio at year-end 1998 was 1.61:1 as compared to 1.86:1 at year-end 1997. Additionally, the Company maintains a short-term credit line of $10,000,000. At December 31, 1998, there were no borrowings against the short-term line. Management believes the credit facilities it has in place provide sufficient borrowing capacity for the Company to finance its operations for the foreseeable future. Management further believes that future external growth from acquisitions can be adequately funded from a combination of the current credit facilities and the Company's ability to further leverage its equity with additional long-term indebtedness. Cash flow from operations was $50,393,000 in 1998, below the $78,789,000 in 1997, primarily due to payment of liabilities associated with the Marathon Electric acquisition. Expenditures for property, plant and equipment in 1998 were $14,836,000. Commitments for capital items outstanding at December 31, 1998 were $1,500,000. Management believes its present facilities are sufficient to provide adequate capacity for its operations in 1999. In the ordinary course of business, the Company is exposed to market risk, primarily interest rate risk. The Company maintains a credit facility with floating-rate debt at a rate based on a margin above LIBOR. As a result, interest rate changes generally do not affect fair market value but do impact future earnings and cash flows assuming other factors are constant. A hypo- thetical 10% change in the Company's weighted average borrowing rate on the outstanding debt at December 31, 1998, would result in a change in after-tax annual earnings of approximately $630,000. The Company has no material foreign currency rate risk. 5
CONSOLIDATED BALANCE SHEETS REGAL-BELOIT CORPORATION - --------------------------- ------------------------ In Thousands of Dollars ASSETS December 31, ------------------------ 1998 1997 ---------- ---------- Current Assets: Cash and cash equivalents $ 3,548 $ 3,351 Receivables, less allowance for doubtful accounts of $1,851 in 1998 and $2,620 in 1997 69,400 69,660 Future income tax benefits 10,249 13,141 Inventories 91,461 85,527 Prepaid expenses 1,253 880 ---------- ---------- Total Current Assets 175,911 172,559 Property, Plant and Equipment: Land and land improvements 11,066 10,979 Buildings and improvements 66,123 64,167 Machinery and equipment 169,774 158,468 ---------- ---------- Property, Plant and Equipment, at cost 246,963 233,614 Less-Accumulated depreciation (99,034) (82,355) ---------- ---------- Net Property, Plant and Equipment 147,929 151,259 Goodwill 147,161 151,358 Other Noncurrent Assets 11,021 10,449 ---------- ---------- Total Assets $ 482,022 $ 485,625 ========== ==========
LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Accounts payable $ 23,791 $ 23,590 Dividends payable 2,509 2,500 Accrued compensation and employee benefits 19,395 28,674 Other accrued expenses 12,359 11,434 Federal and state income taxes 509 5,696 Current maturities of long-term debt 43 38 ---------- ---------- Total Current Liabilities 58,606 71,932 Long-term Debt 166,218 192,261 Deferred Income Taxes 32,507 31,726 Other Noncurrent Liabilities 194 279 Shareholders' Investment: Common stock, $.01 par value, 50,000,000 shares authorized, 20,911,540 issued and outstanding in 1998 and 20,830,226 issued and outstanding in 1997 209 208 Additional paid-in capital 40,860 38,904 Retained earnings 183,285 150,357 Accumulated other comprehensive income 143 (42) ---------- ---------- Total Shareholders' Investment 224,497 189,427 ---------- ---------- Total Liabilities and Shareholders' Investment $ 482,022 $ 485,625 ========== ========== See accompanying Notes to Consolidated Financial Statements.
6
CONSOLIDATED STATEMENTS OF INCOME REGAL-BELOIT CORPORATION - --------------------------------- ------------------------ In Thousands of Dollars, Except Shares Outstanding For The Year Ended December 31, ------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Net Sales $ 543,513 $ 487,019 $ 281,508 Cost of Sales 385,699 346,011 198,582 ---------- ---------- ---------- Gross Profit 157,814 141,008 82,926 Operating Expenses 76,701 66,627 31,806 ---------- ---------- ---------- Income From Operations 81,113 74,381 51,120 Interest Expense 11,479 10,804 357 Interest Income 306 810 1,052 ---------- ---------- ---------- Income Before Income Taxes 69,940 64,387 51,815 Provision For Income Taxes 26,979 25,490 19,539 ---------- ---------- ---------- Net Income $ 42,961 $ 38,897 $ 32,276 ========== ========== ========== Earnings Per Share $ 2.06 $ 1.87 $ 1.57 ========== ========== ========== Earnings Per Share - Assuming Dilution $ 2.02 $ 1.83 $ 1.53 ========== ========== ========== Average Number of Shares Outstanding 20,893,182 20,805,844 20,616,825 ========== ========== ========== Average Number of Shares-Assuming Dilution 21,278,497 21,275,061 21,074,615 ========== ========== ========== See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT - --------------------------------------------------- In Thousands of Dollars, Except Per Share Data Common Accumulated Compre- Stock Additional Other hensive $.01 Paid-In Retained Comprehensive Income Par Value Capital Earnings Income Total -------- --------- ---------- -------- ------------- --------- Balance, December 31, 1995 $ 206 $ 37,133 $ 99,079 $ (545) $ 135,873 Net Income $ 32,276 -- -- 32,276 -- 32,276 Dividends Declared ($.48 per share) -- -- (9,902) -- (9,902) Translation Adjustment 1,214 -- -- -- 1,214 1,214 -------- Comprehensive Income $ 33,490 ======== Stock Options Exercised 562 -- -- 562 -------- -------- --------- ------------- --------- Balance, December 31, 1996 206 37,695 121,453 669 160,023 Net Income $ 38,897 -- -- 38,897 -- 38,897 Dividends Declared ($.48 per share) -- -- (9,993) -- (9,993) Translation Adjustment (711) -- -- -- (711) (711) --------- Comprehensive Income $ 38,186 ========= Stock Options Exercised 2 1,209 -- -- 1,211 -------- -------- --------- ------------- --------- Balance, December 31, 1997 208 38,904 150,357 (42) 189,427 Net Income $ 42,961 -- -- 42,961 -- 42,961 Dividends Declared ($.48 per share) -- -- (10,033) -- (10,033) Translation Adjustment 185 -- -- 185 185 -------- Comprehensive Income $ 43,146 ======== Stock Options Exercised 1 1,956 -- -- 1,957 -------- -------- --------- ------------- --------- Balance, December 31, 1998 $ 209 $ 40,860 $ 183,285 $ 143 $ 224,497 ======== ======== ========= ============= ========= See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS REGAL-BELOIT CORPORATION - ------------------------------------- ------------------------ In Thousands of Dollars For The Year Ended December 31, --------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996 --------- --------- --------- Net income $ 42,961 $ 38,897 $ 32,276 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 22,039 18,874 10,578 Provision for deferred income taxes 3,673 13,770 (54) Change in assets and liabilities, net of acquisitions: Receivables 338 (200) 8,799 Inventories (5,816) 473 3,708 Current liabilities and other, net (12,802) 6,975 (1,640) ---------- -------- ---------- Net cash provided from operating activities 50,393 78,789 53,667 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (14,836) (16,076) (11,112) Business acquisition --- (279,260) --- Sale of property, plant and equipment 118 515 391 Other, net (1,400) 356 (525) ---------- --------- ---------- Net cash used in investing activities (16,118) (294,465) (11,246) CASH FLOWS FROM FINANCING ACTIVITIES: Additions to long-term debt --- 242,000 --- Repayment of long-term debt (26,038) (52,532) (2,721) Stock issued under option and compensation plans 1,957 1,211 562 Dividends to shareholders (10,023) (9,970) (9,480) ---------- --------- ---------- Net cash (used in) provided from financing activities (34,104) 180,709 (11,639) EFFECT OF EXCHANGE RATE ON CASH: 26 (84) 162 ---------- --------- ---------- Net increase (decrease) in cash and cash equivalents 197 (35,051) 30,944 Cash and cash equivalents at beginning of year 3,351 38,402 7,458 ---------- --------- ---------- Cash and cash equivalents at end of year $ 3,548 $ 3,351 $ 38,402 ========== ========= ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 12,081 $ 10,053 $ 413 Income Taxes $ 28,011 $ 9,509 $ 19,728 See accompanying Notes to Consolidated Financial Statements.
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REGAL-BELOIT CORPORATION - ----------------------------------------- ------------------------ For The Three Years Ended December 31, 1998 (1) NATURE OF OPERATIONS Regal-Beloit Corporation (the Company) is a United States-based multinational corporation. The Company is organized into two operating groups, the Mechanical Group with its principal line of business in mechanical products which control motion and torque, and the Electrical Group with its principal line of business in electric motors and generators. The principal markets for the Company's products and technologies are within the United States. Sales in foreign countries represent a relatively minor proportion of total Company sales. (2) ACCOUNTING POLICIES Principles of Consolidation - --------------------------- The financial statements include the accounts of the Company and its wholly owned subsidiaries. Revenue Recognition - ------------------- Sales and related cost of sales for all products are recognized upon shipment of the products. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions, in certain circumstances, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Foreign Currency Translation - ---------------------------- Net assets of non-U.S. subsidiaries, whose functional currencies are other than the U.S. Dollar, are translated at the rates of exchange in effect as of year end. Income and expense items are translated at the average exchange rates in effect during the year. The translation adjustments relating to net assets are recorded directly into a separate component of shareholders' investment. Certain other translation adjustments continue to be reported in net income and were not significant in any of the three years ended December 31, 1998. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist primarily of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at date of acquisition. The carrying value of cash equivalents closely approximates their fair market value. 8 Inventories - ----------- The approximate percentage distribution between major classes of inventory is as follows: December 31 ------------- 1998 1997 ---- ---- Raw Material . . . . . . . . . . . . . 14% 13% Work In Process. . . . . . . . . . . . 23% 23% Finished Goods and Purchased Parts . . 63% 64% Inventories are stated at cost, which is not in excess of market. Cost for approximately 82% of the Company's inventory at December 31, 1998 and 1997, was determined using the last-in, first-out (LIFO) method. If all inventories were valued on the first-in, first-out (FIFO) method, they would have increased by $7,030,000 and $8,364,000 as of December 31, 1998 and 1997, respectively. Material, labor and factory overhead costs are included in the inventories. Property, Plant and Equipment - ----------------------------- Property, plant and equipment is stated at cost. Maintenance and repairs are charged to expense as incurred and major renewals and improvements are capitalized. The cost of property retired or otherwise disposed of is removed from the property accounts, the accumulated depreciation is removed from related reserves, and the net gain or loss is reflected in income. The provisions for depreciation are based on the estimated useful lives of plant and equipment from the dates of acquisition and are calculated primarily using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful lives are: Description Life - -------------------------- -------------- Buildings and Improvements 10 to 45 years Machinery and Equipment 3 to 15 years (3) LEASES AND RENTAL COMMITMENTS Rental expenses charged to operations amounted to $3,616,000 in 1998, $3,535,000 in 1997 and $1,158,000 in 1996. Future minimum rental commitments for noncancelable operating leases having a remaining term in excess of one year as of December 31, 1998 are not material. 9 (4) ACQUISITION On March 26, 1997, the Company acquired 100% of the stock of Marathon Electric Manufacturing Corporation of Wausau, Wisconsin for approximately $279,000,000. The acquisition was financed with a combination of approximately $37,000,000 of existing cash and $242,000,000 of debt. (See also Note 5 "Long-Term Debt and Bank Credit Facilities".) Marathon Electric is a leading manufacturer of electric motors and generators. Marathon Electric sells its products worldwide to a broad range of industries and customers. Results of operations for Marathon Electric have been consolidated in the Company's statements effective March 27, 1997. Unaudited pro-forma results of operations for Regal-Beloit Corporation for the year ended December 31, 1997 as though Marathon Electric had been acquired as of January 1, 1997 are net sales of $549,855,000, net income of $39,602,000 and basic earnings per share of $1.90. This acquisition was accounted for as a purchase, and the audited results shown in these statements relating to the acquisition have been prepared in accordance with generally accepted accounting principles. (5) LONG-TERM DEBT AND BANK CREDIT FACILITIES (In Thousands of Dollars) Long-term debt consists of the following: December 31, ------------------------- 1998 1997 ------------ ----------- Revolving Credit Facility $ 166,000 $ 192,000 Other 261 299 166,261 192,299 ----------- ----------- Less-Current maturities 43 38 ----------- ----------- Noncurrent portion $ 166,218 $ 192,261 =========== =========== The Company maintains a $190,000,000 unsecured revolving credit facility which expires March 26, 2002 (the "Facility"). The Facility permits the Company to borrow at rates based upon a margin above LIBOR. The Facility also includes financial covenants regarding minimum net worth, maximum permitted debt and minimum interest coverage. The average balance outstanding under the Facility in 1998 was $185,427,000. The average interest rate paid under the Facility in 1998 was 6.1%. The Company had $24,000,000 of available borrowing capacity under the Facility at December 31, 1998. The Company also maintains a short-term credit line of $10,000,000 at December 31, 1998. There was no outstanding balance on the short-term credit line at December 31, 1998. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of long-term debt is not materially different than the carrying value. Maturities of long-term debt are as follows: Year (In Thousands of Dollars) ------ ------------------------- 1999 $43 2000 48 2001 54 2002 166,061 2003 and thereafter 55 -------- Total $166,261 ======== (6) CONTINGENCIES The Company is, from time to time, party to lawsuits arising from its normal business operations. In addition, the Company is party to certain environmental cleanup proceedings. It is believed that the outcome of these lawsuits and cleanup proceedings will have no material effect on the Company's financial position or its results of operations. (7) RETIREMENT PLANS The Company has a number of retirement plans that cover most of its employees. The primary plan of the Mechanical Group is a qualified discretionary profit- sharing plan covering substantially all domestic employees except those covered by collective bargaining agreements. Total expense for all profit- sharing and retirement plans of the Mechanical Group was $4,044,000, $4,247,000 and $4,041,000 in 1998, 1997 and 1996, respectively. The Electrical Group has defined benefit pension plans which cover substantially all employees. Benefits provided under qualified defined benefit plans are based on employees' average earnings in years immediately preceding retirement and years of credited service. Funding of the plans is in accordance with federal laws and regulations. Net periodic pension benefit costs for the Company sponsored plans were as follows: (In Thousands of Dollars) Twelve Months Ended Nine Months Ended December 31,1998 December 31,1997 ------------------- ----------------- Service cost................ $1,201 $ 822 Interest cost............... 2,635 1,880 Expected return on plan assets................ (3,752) (2,570) Amortization of prior service cost............... 9 -- ------- ------- Net periodic benefit cost... $ 93 $ 132 ======= ======= The Company's pension plans have assets in excess of the accumulated benefit obligation. The accumulated benefit obligation of the plans was $34,636,000 and $29,891,000 in 1998 and 1997, respectively. The following table presents a reconciliation of the funded status of the plans using an assumed discount rate of 7.0% in 1998 and 7.5% in 1997, annual compensation increases of 4.5% in 1998 and 1997, and an assumed long-term rate of return on plan assets of 9.0% in 1998 and 1997.
(In Thousands of Dollars) Twelve Months Ended Nine Months Ended December 31, 1998 December 31,1997 ------------------- ----------------- Change in projected benefit obligation: Obligation at beginning of period . . . . . . . . . . . $ 35,316 $ 32,258 Service cost . . . . . . . . . . 1,202 822 Interest cost. . . . . . . . . . 2,635 1,880 Change in assumptions. . . . . . 1,910 1,237 Plan amendments . . . . . . . . 589 104 Benefits paid. . . . . . . . . . (1,520) (985) --------- --------- Obligation at end of period. . . 40,132 35,316 --------- --------- Change in fair value of plan assets: Fair value of plan assets at beginning of period . . . . . . 44,937 38,182 Actual return on plan assets . . 4,713 7,740 Employer contributions . . . . . 327 - Benefits paid . . . . . . . . . (1,520) (985) --------- --------- Fair value of plan assets at end of period. . . . . . . . 48,457 44,937 --------- --------- Funded status. . . . . . . . . . 8,325 9,621 Unrecognized net actuarial (gain) loss . . . . . . . . . . (2,934) (3,884) Unrecognized prior service costs . . . . . . . . . 684 104 --------- --------- Intangible asset recognized in balance sheet. . . . . . . . $ 6,075 $ 5,841 ======== ========= The Electrical Group also has defined contribution plans for all salaried and hourly employees. The plans provide for company contributions based, depending on the plan, upon one or more of participant contributions, service, and Electrical Group profits. Electrical Group contributions to the plans totaled $1,289,000 and $1,073,000 in 1998 and 1997, respectively. (8) NEW ACCOUNTING PRONOUNCEMENTS In June, 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which established standards for reporting and displaying comprehensive income and its components. The statement is effective for fiscal years beginning after December 15, 1997 and has been adopted by the Company in these statements. The components of comprehensive income have been displayed in the Consolidated Statements of Shareholders' Investment. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires that an entity recognize derivatives as either assets or liabilities on its balance sheet and measure those interments at fair value. The Company was not party to any material derivative financial instrument contracts in 1998, 1997 or 1996. (9) STOCK OPTION PLANS The Company has four stock option plans available for officers, directors, and key employees. Under the Company's 1982 and 1987 Stock Option Plans, which have expired as to new grants, 1,200 shares and 150,586 shares previously granted, respectively, remain outstanding. Options under these plans were granted at a price that equaled the market value on the date of grant and an option's maximum term is 10 years from date of grant. In 1991, the shareholders approved a Flexible Stock Incentive Plan, which permits the awarding of up to 1,000,000 option shares. Options for 774,156 shares have been granted under this plan; 681,632 shares remain outstanding. These options were granted at prices that equaled the market value on the date of grant and an option's maximum term is 10 years from date of grant. In 1998, the shareholders approved the 1998 Stock Option Plan, which permits the awarding of up to 1,000,000 additional option shares. Options for 5,600 shares have been granted under this plan and remain outstanding. These options were granted at prices that equaled the market value on the date of grant and an option's maximum term is 10 years from date of grant. A summary of the status of the Company's four stock option plans as of December 31, 1998, 1997 and 1996, and changes during the years then ended is presented below:
1998 1997 1996 ----------------------- ------------------------ ------------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ----------------------- ------------------------ ------------------------- Outstanding at beginning of year 907,682 $ 13.42 866,418 $ 8.88 873,086 $ 7.84 Granted 88,400 28.31 243,850 24.10 107,700 18.85 Exercised (81,564) 11.31 (200,336) 7.54 (96,368) 5.84 Forfeited (75,500) 23.65 (2,250) 18.81 (18,000) 19.00 -------- ------- --------- ------- -------- ------- Outstanding at end of year 839,018 $ 14.18 907,682 $ 13.42 866,418 $ 8.88 Options exercisable at year-end 522,981 467,582 616,068
The following table summarizes information about the Company's four stock option plans outstanding at December 31, 1998:
Range of Options Options Exercise Outstanding at Exercisable at Prices 12/31/98 12/31/98 -------------------------------------------------- $ 5.56 - 8.36 410,594 314,594 8.37 - 12.56 64,098 64,098 12.57 - 18.86 75,626 45,626 18.87 - 28.31 217,050 48,063 ------- ------- 28.32 - 32.44 71,650 50,600 ------- ------- 839,018 522,981
The Company accounts for its stock option plans under APB Opinion No. 25. Accordingly, no compensation cost has been recognized in the statements of income. Had compensation cost for these plans been determined consistent with FASB Statement No. 123 "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the following pro forma amounts: 12
(In Thousands, Except Per Share Data) 1998 1997 1996 -------- -------- -------- Net Income: As Reported $ 42,961 $ 38,897 $ 32,276 Pro Forma $ 41,796 $ 38,100 $ 32,066 Earnings Per Share As Reported $ 2.06 $ 1.87 $ 1.57 Pro Forma $ 2.00 $ 1.83 $ 1.56 Earnings Per Share - Assuming Dilution As Reported $ 2.02 $ 1.83 $ 1.53 Pro Forma $ 1.96 $ 1.79 $ 1.52 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996, 1997 and 1998, respectively: risk-free interest rates of 5.9%, 6.7% and 5.6%; expected dividend yield of 2.5% for all years; expected option lives of 7.0 for all years; expected volatility of 32% in all three years.
(10) INCOME TAXES The provision for income taxes is summarized as follows:
(In Thousands of Dollars) ---------------------------------- 1998 1997 1996 --------- ---------- -------- Current Federal $ 19,960 $ 9,748 $ 16,232 State 2,493 861 2,712 Foreign 853 1,111 649 -------- -------- --------- 23,306 11,720 19,593 Deferred 3,673 13,770 (54) -------- -------- --------- $ 26,979 $ 25,490 $ 19,539 ======== ======== =========
A reconciliation of the statutory Federal income tax rate and the effective rate reflected in the statements of income follows: 1998 1997 1996 ----- ----- ----- Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.6 3.0 3.4 Nondeductible goodwill amortization 2.1 1.6 - Other, net (1.1) - (.7) ----- ----- ----- Effective tax rate 38.6% 39.6% 37.7% ===== ===== ===== Deferred taxes arise primarily from differences in amounts reported for tax and financial statement purposes. The Company's net deferred tax liability as of December 31, 1998 of $22,258,000 is classified on the consolidated balance sheet as a current income tax benefit of $10,249,000 and a long-term deferred income tax liability of $32,507,000. The December 31, 1997 net deferred tax liability was $18,585,000, consisting of a current income tax benefit of $13,141,000 and a long-term deferred income tax liability of $31,726,000. The components of this net deferred tax liability are as follows: 13
(In Thousands of Dollars) December 31 1998 1997 ---------- ---------- Operating loss carry forward $ 649 $ 774 Inventory 1,378 1,999 Accrued employee benefits 3,519 4,428 Bad debt reserve 423 959 Other 2,191 2,552 ---------- ---------- Deferred tax assets 8,160 10,712 Property related (25,534) (24,277) Inventory valuation reserve (4,734) (4,734) Other (150) (286) ---------- ---------- Deferred tax liabilities (30,418) (29,297) ---------- ---------- Net deferred tax liability $ (22,258) $ (18,585) ========== ==========
(11) INDUSTRY SEGMENT INFORMATION Regal-Beloit's reportable segments are strategic businesses that offer different products and services. The Company has two such reportable segments: Mechanical Group and Electrical Group. The Mechanical Group produces mechanical speed reducers and related products for sale to original equipment manufacturers and distributors. The Electrical Group produces AC electric motors, electric generators and related products for sale to original equipment manufacturers and distributors. The Company evaluates performance based on the segments' income from operations. All corporate costs have been allocated to each group based on the net sales of each group. The reported net sales of each segment are solely from external customers. No single customer accounts for 10% or more of the Company's net sales. The Company's products manufactured and sold outside the United States were 3%, 4% and 7% of net sales in 1998, 1997 and 1996, respectively. Export sales from U.S. operations were approximately 6% of net sales in 1998, 7% in 1997 and 3% in 1996. Pertinent data for each industry segment in which the Company operated for the three years ended December 31, 1998 is as follows:
(In Thousands of Dollars) ----------------------------------------------------------------------- Net Income From Identifiable Capital Depreciation and Sales Operations Assets Expenditures Amortization (B) --------- ---------- ------------ ------------ ---------------- 1998 Mechanical Group $ 280,153 $ 45,758 $ 163,740 $ 7,643 $ 10,767 Electrical Group 263,360 35,355 318,282(A) 7,193 11,272 --------- -------- ------------ -------- -------- Total Regal-Beloit Corporation $ 543,513 $ 81,113 $ 482,022 $ 14,836 $ 22,039 ========= ======== ============ ======== ======== 1997 Mechanical Group $ 285,174 $ 48,545 $ 158,639 $ 9,482 $ 10,767 Electrical Group (9 months results) 201,845 25,836 326,986(A) 6,594 8,107 --------- -------- ------------ -------- -------- Total Regal-Beloit Corporation $ 487,019 $ 74,381 $ 485,625 $ 16,076 $ 18,874 ========= ======== ============ ======== ======== 1996 (C) Total Regal-Beloit Corporation $ 281,508 $ 51,120 $ 196,996 $ 11,112 $ 10,578 ========= ======== ============ ======== ======== (A) Includes $147,161,000 in 1998 and $151,358,000 in 1997 of goodwill relating to the Marathon Electric acquisition. (B) Amortization included for Electrical Group only: $4,152,000 in 1998, and $3,124,000 in 1997. (C) Prior to 1997, the Company's operations were all part of the Mechanical Group.
14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Regal-Beloit Corporation: We have audited the accompanying consolidated balance sheets of REGAL-BELOIT CORPORATION (a Wisconsin Corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended December 31, 1998. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Regal- Beloit Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Milwaukee, Wisconsin, /s/ Arthur Andersen LLP ------------------------- January 27, 1999 Arthur Andersen LLP RESPONSIBILITY FOR FINANCIAL STATEMENTS The preceding financial statements of Regal-Beloit Corporation and related footnotes were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles, which have been applied on a consistent basis. The system of internal controls of Regal-Beloit Corporation is designed to assure that the books and records reflect the transactions of the Company and that its established policies and procedures are carefully followed. The internal control system is augmented by careful selection and training of qualified employees, proper division of responsibilities, and the development and dissemination of written policies and procedures. Arthur Andersen LLP, whose audit report is shown on this page, is engaged by the Board of Directors to audit the financial statements of Regal-Beloit Corporation and issue reports thereon. Their audit is conducted in accordance with generally accepted auditing standards which require obtaining an understanding of the Company's systems and procedures and performing tests and other procedures sufficient to provide reasonable assurance that the financial statements are neither materially misleading nor contain material errors. The Audit Committee of the Board of Directors, which committee consists entirely of outside directors, meets regularly with the independent public accountants and management to review the scope and results of audits. In addition, the Audit Committee meets with Arthur Andersen LLP, without management representatives present, to discuss the results of their audit including a discussion of internal accounting controls, financial reporting and other audit matters. /s/ James L. Packard /s/ Kenneth F. Kaplan -------------------- --------------------- James L. Packard Kenneth F. Kaplan Chairman, President, Vice President, Chief Executive Officer Chief Financial Officer and Secretary 15 DIVISIONS & SUBSIDIARIES REGAL-BELOIT CORPORATION - ------------------------ ------------------------
ELECTRICAL GROUP MECHANICAL GROUP---------------------------------------------------------- Domestic Domestic International - -Marathon Electric -Durst -Mastergear U.S.A. -Costruzioni Manufacturing Shopiere, WI South Beloit, IL Meccaniche Wausau, WI Legnanesi S.r.L. Legnano. Italy - -Marathon Special -Electra-Gear -Ohio Gear/ Products Anaheim, CA Richmond Gear Bowling Green, OH Liberty, SC -Mastergear (GmbH) Neu-Anspach, -Foote-Jones/ -Regal Cutting Tools Germany International Illinois Gear National Twist Drill - -Marathon Electric Ltd. Chicago, IL New York Twist Drill -Opperman Mastergear, Singapore, Republic of South Beloit, IL Ltd. Singapore -Grove Gear Newbury, England Union Grove, WI -Velvet Drive - -Marathon Electric - Transmissions U.K. -Hub City New Bedford, MA Leicestershire, England Aberdeen, SD SHAREHOLDER INFORMATION - ------------------------------------------------------------------------------- Corporate Headquarters - ---------------------- Regal-Beloit Corporation 200 State Street, Beloit, WI 53511-6254 Phone: (608) 364-8800 Fax: (608) 364-8818 Transfer Agent, Registrar and Dividend Disbursing Agent - ------------------------------------------------------- First Class, Registered ----------------------- & Certified Mail ---------------- Overnight Courier BankBoston, NA EquiServe EquiServe Blue Hills Office Park P.O. Box 8040 150 Royall Street Boston, MA 02266-8040 Canton, MA 02021 Phone: (781) 575-3400 Fax: (781) 575-2665 Have you received your cash dividends? - -------------------------------------- During 1998, four quarterly cash dividends were declared on Regal-Beloit Corporation common stock. If you have not received all dividends to which you are entitled, please write or call BankBoston at the address above. Stock Listing - ------------- Regal-Beloit stock was first traded publicly in 1969. The Corporation began trading on the American Stock Exchange in 1976 under the symbol RBC. Cash Dividends and Stock Splits - ------------------------------- Regal-Beloit Corporation paid its first cash dividend in January, 1961. Since that date, Regal-Beloit has paid 154 consecutive quarterly dividends through January, 1999. The Company has raised cash dividends 33 times in the 38 years these dividends have been paid. The dividend has never been reduced. The company has also declared and issued 15 stock splits/dividends since inception. 16 Stock Purchases - --------------- A shareholder should make sure that newly purchased shares are registered the same way each time they add to their holdings in order to prevent the creation of duplicate accounts. Such accounts are not only an inconvenience to the shareholder, but also increase your Company's administrative costs. Notice of Annual Meeting - ------------------------ The Annual Meeting of shareholders will be held at 10:30 a.m., C.D.T., on Wednesday, April 21, 1999, at the Corporate Offices, 200 State Street, Beloit, Wisconsin. Form 10-K - --------- A copy of the report filed by the Company with the Securities and Exchange Commission is available to shareholders upon request. Please direct requests to: Regal-Beloit Corporation Attn: Investor Relations 200 State Street, Beloit, WI 53511-6254 Auditors - -------- Arthur Andersen LLP, Milwaukee, Wisconsin. Regal-Beloit Corporation is a Wisconsin Corporation listed on the - ----------------------------------------------------------------- American Stock Exchange under the symbol RBC. - -------------------------------------------- 17
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