-----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, G6QUFHDu95dfTJVrxY5qDxjm9bJQK+Fi88D9IzO1MwYxNRrEsmVhWzcSFJ9Muvna C/0nrrLTij+shvUTTWry6A== 0000897069-02-000244.txt : 20020415 0000897069-02-000244.hdr.sgml : 20020415 ACCESSION NUMBER: 0000897069-02-000244 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGAL BELOIT CORP CENTRAL INDEX KEY: 0000082811 STANDARD INDUSTRIAL CLASSIFICATION: MOTORS & GENERATORS [3621] IRS NUMBER: 390875718 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07283 FILM NUMBER: 02589351 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-K405 1 slp254.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------------------------------------------- FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to __________________ Commission file number 1-7283 -------------------------------------------------------------------- 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 20, 2002 was approximately $609,000,000. On March 20, 2002 the registrant had outstanding 25,000,135 shares of common stock, $.01 par value, which is registrant's only class of common stock. ================================================================================ DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for 2002 Annual Meeting of Shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of the registrant's fiscal year and, upon such filing, to be incorporated by reference into Part III) REGAL-BELOIT CORPORATION Index to Annual Report on Form 10-K For the Year Ended December 31, 2001 Page PART I Item 1. Business...................................................... 2 Item 2. Properties.................................................... 10 Item 3. Legal Proceedings............................................. 10 Item 4. Submission of Matters To A Vote of Security Holders........... 10 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters.......................................... 11 Item 6. Selected Financial Data....................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 12 Item 8. Financial Statements and Supplementary Data................... 16 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 30 PART III Item 10. Directors and Executive Officers of the Registrant............ 30 Item 11. Executive Compensation........................................ 30 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................... 31 Item 13. Certain Relationships and Related Transactions................ 31 PART IV Item 14. Financial Statements, Financial Statement Schedule, Exhibits and Reports on Form 8-K............................. 31 Signatures 32 CAUTIONARY STATEMENT The following is a cautionary statement made under the Private Securities Litigation Reform Act of 1995: With the exception of historical facts, the statements contained in this Annual Report on Form 10-K or incorporated by reference may be forward looking statements. Actual results may differ materially from those contemplated. Forward looking statements involve risks and uncertainties, including but not limited to the following risks: 1) cyclical downturns affecting the markets for capital goods, 2) our ability to achieve anticipated synergies in our acquired businesses, 3) substantial increases in interest rates that impact the cost of the Company's outstanding debt, 4) our ability to satisfy various covenant requirements under our existing credit facility, 5) the success of Management in increasing sales and maintaining or improving the operating margins of its businesses, 6) the availability of or material increases in the costs of select raw materials or parts, and 7) actions taken by competitors. Investors are directed to the Company's documents filed with the Securities and Exchange Commission. PART I Unless the context requires otherwise, references in this Annual Report to "we," "us" or "our" refer collectively to REGAL-BELOIT CORPORATION and its subsidiaries. ITEM 1. Business Our Company We are a leading manufacturer and marketer of industrial electric motors, electric power generation components and controls, mechanical motion control products, and cutting tools, serving markets predominantly in the United States as well as throughout the world. Our products are used in a variety of essential industrial applications, and we believe we have one of the most comprehensive product lines in the markets we serve. We sell our products using more than 20 recognized brand names through a multi-channel distribution model, which we believe provides us with a competitive selling advantage and allows us to more fully penetrate our target markets. Our business is organized in two segments: our electrical group, which represented 69% of our 2001 net sales, and our mechanical group, which represented 31% of our 2001 net sales. Our electrical group manufactures and markets a full line of alternating current (AC) and direct current (DC) industrial electric motors, electric power generation components and controls, and electrical connecting devices. Our mechanical group manufactures and markets a broad array of mechanical products, including gears and gearboxes, marine transmissions, high-performance automotive transmissions and ring and pinions, manual valve actuators, and cutting tools. Original equipment manufacturers and end users in a variety of motion control and other industrial applications increasingly combine the types of electrical and mechanical products we offer. We seek to take advantage of this trend and to enhance our market penetration by leveraging cross-marketing and product line bundling opportunities between products in our electrical and mechanical groups. We sell our products directly to original equipment manufacturers and distributors across many markets. Our two business segments are divided into multiple business units, with each unit typically having its own branded product offering and sales organization. These sales organizations consist of varying combinations of our own internal direct sales people as well as exclusive and non-exclusive manufacturers' representative organizations. We manufacture the vast majority of the products that we sell and have manufacturing, sales and distribution facilities throughout the United States and Canada as well as in Europe and the Far East. We believe our competitive strengths include our: o leadership in our major market segments o comprehensive product offering and leading brands o multi-channel and multi-brand distribution model o rapid response capabilities o product development focus o broad and diverse customer base o experienced management team Our business strategy includes growing revenues organically in excess of market rates, continuously lowering our manufacturing costs and pursuing strategic acquisitions. Our specific revenue growth initiatives include: o leveraging cross-marketing and product line bundling opportunities o introducing new products 2 o capturing custom product sales o growing our power generation business Major initiatives in process to lower our manufacturing costs include completing the integration of Leeson Electric Corporation and capitalizing on operating synergies from the acquisition; further improving our operational efficiencies; and focusing on sourcing and logistics opportunities. We will also seek to broaden our market coverage by acquiring businesses and product lines that provide a strategic fit with our existing businesses. Electrical Group Our electrical group manufactures and markets a full line of AC and DC industrial electric motors, electric power generation components and controls, and electrical connecting devices. We entered the industrial electric motor and electric power generation markets in March 1997 with our acquisition of Marathon Electric Manufacturing Corporation. Subsequent acquisitions of the Lincoln Motors business of Lincoln Electric Holdings, Inc. in 1999, Thomson Technology, Inc. in 2000 and Leeson Electric Corporation in 2000 have been integrated to form our current electrical group. Our expansion into the electric motor and electric power generation markets in 1997 was part of our strategy to leverage our core competencies in industrial manufacturing and to complement our existing mechanical businesses. We estimate that a substantial portion of the mechanical motion control products that we manufacture are powered by an electric motor. Our electrical group manufactures and markets AC and DC industrial electric motors ranging in size from sub-fractional to large integral horsepowers through 800 horsepower in AC and from sub-fractional through small integral horsepowers in DC. We offer approximately 5,500 stock models of electric motors in addition to the motors we produce to specific customer specifications. We also produce and market precision servo motors, electric generators ranging in size from five kilowatts through four megawatts, automatic transfer switches and paralleling switchgear to interconnect and control electric power generation equipment and electrical connecting devices such as terminal blocks, fuse holders and power blocks. Additionally, our electrical group markets a line of AC and DC adjustable speed drives. We sell our electrical group products to distributors, original equipment manufacturers and end users across many markets. In 2001, we created, within the electrical group, our motor technologies group to fully leverage potential efficiencies across our electric motor operations. This motor technologies group will centralize and manage the manufacturing, purchasing, engineering, accounting, information technology and quality control activities of our Marathon, Lincoln and Leeson electric motor businesses. Furthermore, the motor technologies group is specifically fostering the sharing of best practices across each of the three motor businesses and creating focused centers of excellence in each of our motor manufacturing functions. Our power generation business, which includes electric generators and power generation components and controls, represents a significant and growing portion of our electrical group net sales. The market for electric power generation components and controls is growing as a result of a desire on the part of end users to reduce losses due to power disturbances. We intend to continue to seek ways to take advantage of the growing market for prime and standby power generation in the United States and overseas by expanding our line of generators to meet higher and more sophisticated power generation requirements. With our June 2000 acquisition of Thomson Technology, we specifically targeted the emerging power generation controls market and now offer automatic transfer switches, paralleling switchgear and controls, and systems controls. When these control products are bundled with our Marathon generators, we are able to provide critical components of a system solution to power generation markets throughout the world. 3 The following is a description of our major electrical group businesses and the primary products that they manufacture and market: Leeson Electric. Manufactures AC motors up to 800 horsepower and DC motors up to five horsepower, gear reducers, gearmotors and drives primarily for the power transmission, pump, food processing, fitness equipment and industrial machinery markets. Lincoln Motors. Manufactures AC motors from 1/4 horsepower to 800 horsepower primarily for industrial and commercial pumps, compressors, elevator and machine tools, and specialty products. Marathon Electric. Manufactures AC motors up to 800 horsepower primarily for HVAC, pumps, power transmissions, fans and blowers, compressors, agriculture products, processing and industrial manufacturing equipment. Marathon Generators. Manufactures AC generators from five kilowatts to four megawatts that primarily serve the standby power, prime power, refrigeration, irrigation and wind power markets. Marathon Special Products. Manufactures fuse holders, terminal blocks, and power blocks primarily for the HVAC, telecommunications, electric control panel, utilities and transportation markets. Thomson Technology. Manufactures automatic transfer switches, paralleling switchgear and controls, and systems controls primarily for the electric power generation market. Mechanical Group Our mechanical group manufactures and markets a broad array of mechanical motion control products and cutting tools. Our products include: standard and custom worm gear, bevel gear, helical gear and concentric shaft gearboxes; marine transmissions; high-performance after-market automotive transmissions and ring and pinions; custom gearing; gearmotors; manual valve actuators and cutting tools. Our gear and transmission related products primarily control motion by transmitting power from a source, such as a motor or engine, to an end use, such as a conveyor belt, usually reducing speed and increasing torque in the process. Our valve actuators are used primarily in oil and gas, water distribution and treatment and chemical processing applications. Our high-speed steel and carbide rotary perishable cutting tools are used in metalworking applications. Mechanical group products are sold to original equipment manufacturers, distributors and end users across many industry segments. The following is a description of our major mechanical group businesses and the primary products they manufacture and market: CML (Costruzioni Meccaniche Legnanesi S.r.L.). Manufactures bevel gear valve actuators primarily for the oil, gas, wastewater and water distribution markets. Durst. Manufactures standard and specialized industrial transmissions and hydraulic pump drives primarily for the construction, agriculture, energy, material handling, forestry, lawn and garden and railroad maintenance markets. Electra-Gear. Manufactures specialized aluminum gear reducers and gearmotors primarily for the food processing, medical equipment, material handling and packaging markets. Foote-Jones/Illinois Gear. Manufactures large-scale parallel shaft and right-angle gear drives and custom gears up to 100 inches in diameter primarily for the mining, oil, pulp and paper, forestry, aggregate, construction and steel markets. Grove Gear. Manufactures standard and custom industrial gear reducers primarily for the material handling, food processing, robotics, healthcare and power transmission markets. 4 Hub City. Manufactures gear drives, sub-fractional horsepower gearmotors, mounted bearings and accessories primarily for the packaging, construction, material handling, healthcare and food processing markets. Mastergear. Manufactures manual valve actuators for liquid and gas flow control primarily for the petrochemical processing, fire protection and wastewater markets. New York Twist Drill. Manufactures a full line of industrial quality cutting tools in high speed steel and carbide primarily for the aerospace, automotive, railroad and general manufacturing markets. Ohio Gear. Manufactures gear reducers and gearmotors primarily for the material handling, lawn and garden vehicle and food processing markets. Opperman Mastergear, Ltd. Manufactures valve actuators and industrial gear drives primarily for the material handling, agriculture, mining and liquid and gas flow control markets. Regal Cutting Tools. Manufactures high-speed steel and carbide rotary cutting tools primarily for the aerospace, agriculture, automotive and general industrial markets. Richmond Gear. Manufactures ring and pinions and transmissions primarily for the high-performance automotive aftermarket. Velvet Drive Transmissions. Manufactures marine and industrial transmissions primarily for the pleasure boat, off-road vehicle and forestry markets. The Building of Our Business Our growth from our founding as a producer of high-speed cutting tools in 1955 to our current size and status has largely been the result of the acquisition and integration of 37 businesses to build a strong multi-product offering. Our senior management has substantial experience in the acquisition and integration of businesses, aggressive cost management, and efficient manufacturing techniques, all of which represent activities that are critical to our long-term growth strategy. Since 1979, our current management team has completed and successfully integrated 22 acquisitions. We have a proven track record of acquiring complementary businesses and product lines, integrating their activities into our organization and aggressively managing their cost structures to reduce waste and unnecessary expenditures. The history of our major electrical and mechanical group acquisitions since 1990 is outlined below. 5
Annual Revenues Year at Acquisition Business/Product Line Acquired (in millions) Product Listing at Acquisition --------------------- -------- ------------- ------------------------------ Electrical Group Leeson Electric Corporation 2000 $175 AC motors (to 350 horsepower) and DC motors (to 3 horsepower) gear reducers, gearmotors and drives Thomson Technology, Inc. 2000 $14 Automatic transfer switches, paralleling switchgear and controls, and systems controls Lincoln Motors 1999 $50 AC motors (1/4 to 800 horsepower) Marathon Electric Manufacturing 1997 $245 AC motors (to 500 horsepower), AC generators Corporation (5 kilowatt to 2.5 megawatt), fuse holders, terminal blocks and power blocks Mechanical Group Spiral bevel gear product 2001 $4 Spiral bevel gears line of Philadelphia Gear Velvet Drive Transmissions 1995 $27 Marine and industrial transmissions Hub City, Inc. 1992 $44 Gear drives, sub-fractional horsepower gearmotors, mounted bearings and accessories Opperman Mastergear, Ltd. 1991 $20 Manual valve actuators for liquid and gas (U.K., U.S. and Germany) flow control and industrial gear drives
Sales, Marketing and Distribution We sell our products directly to original equipment manufacturers and distributors across many markets. Our two business segments are divided into multiple business units, with each unit typically having its own branded product offering and sales organization. These sales organizations consist of varying combinations of our own internal direct sales people as well as exclusive and non-exclusive manufacturers' representative organizations. On a combined basis, our individual business units' sales organizations consist of more than 120 direct sales employees and 430 exclusive and non-exclusive manufacturers' representatives from 170 organizations as of January 2002. In 2001, across all of our business units, we sold products to more than 6,500 original equipment manufacturers and 11,000 distributors. We believe that our effective use of information technology significantly enhances our ability to provide customer focused quality and further differentiates us from many of our competitors. Our website allows customers easy access to business and product information, and contains the latest product introductions, distributor information, installation manuals, technical bulletins and customer service. For example, through our electrical group websites, we have an e-commerce portal that provides our independent manufacturers' representatives, distributors and employees with constant access to real-time information such as account status, order status, engineering and competitive information, stock product availability, pricing and order entry. In addition, customers are able to search our stock catalogs for motor, gearmotor, drive, part or catalog number. Markets and Competitors The overall market for our electrical products is estimated at $8 billion annually, although we believe that we compete primarily in the industrial sector of the domestic electric motor market, a $2.5 billion segment of the overall market. We believe approximately 60% of all electricity generated in the U.S. runs through electric motors. With the acquisitions of Marathon Electric in 1997, Lincoln Motors in 1999 and Leeson Electric in 2000, we believe we have become one of the largest producers of industrial electric motors in the United States and hold a market position in this segment close to Baldor Electric Company, the current market leader. In addition, we believe that we are the largest electric generator manufacturer in the United States that is not affiliated with a diesel engine manufacturer. Major domestic competitors for the electrical group other than Baldor Electric include U.S. Electrical Motors (a division of Emerson 6 Electric Co.), Reliance Electric Company (a division of Rockwell International), General Electric Company and Newage (a division of Cummins, Inc). Major foreign competitors include Siemens AG, Toshiba Corporation, Weg S.A., Leroy-Somer, Inc. and ABB Ltd. Our mechanical group serves various markets and competes with a number of different companies depending on the particular product offering. We believe that we are the leading manufacturer of several products offered by our mechanical group and that we are the leading manufacturer in the United States of worm gear drives and bevel gear drives. Our competitors in these markets include Boston Gear (a division of Colfax Corporation), Reliance Electric Company (a division of Rockwell International), Emerson Electric Co. and Winsmith (a division of Peerless-Winsmith, Inc.). Major foreign competitors include SEW Eurodrive GmbH & Co., Flender GmbH, Sumitomo Corporation and Zahnrad Fabrik GmbH & Co. During the past several years, niche product market opportunities have become more prevalent due to changing market conditions. Our markets have also been impacted by decisions by larger manufacturers not to compete in lower volume or specialized markets. Other manufacturers, which historically may have made component products for inclusion in their finished goods, have chosen to outsource their requirements to specialized manufacturers like us because we can make these products more cost effectively. In addition, we have capitalized on this competitive climate by making acquisitions and increasing our manufacturing efficiencies. Some of these acquisitions have created new opportunities by allowing us to enter new markets in which we had not been involved. In practice, our operating units have sought out specific niche markets concentrating on a wide diversity of customers and applications. We believe that we compete primarily on the basis of quality, price, service and our promptness of delivery. Product Development and Engineering Each of our business units has its own product development and design teams that continuously enhance our existing products and develop new products for our growing base of customers that require custom solutions. We have one of the electric motor industry's most sophisticated product development and testing laboratories. We believe these capabilities provide a significant competitive advantage in the development of high quality motors and electric generators incorporating leading design characteristics such as low vibration, low noise, improved safety, reliability and enhanced energy efficiency. An example of the success of our research and development efforts is our recently introduced line of microMAXTM AC inverter duty motors, which won the 2001 "Product of the Year" award in its category from Plant Engineering magazine. We are continuing to expand our business by developing new, differentiated products in each of our business segments. We work closely with our customers to develop new products or enhancements to existing products that improve performance and meet their needs. For example, we have redesigned more than 50% of our electric motor line to meet the new NEMA Premium Compliant Electric Motor standards. These redesigned motors offer increased efficiency that results in significant cost savings for customers over previous models. In addition, we have recently introduced many new product lines, including a line of AC inverter duty motors, a line of high efficiency, low vibration severe duty electric motors and large frame 1 1/2 to 4 megawatt electric generators. Furthermore, in 2002, we plan to introduce various new products, including a line of high efficiency helical worm, helical bevel and parallel shaft drives. This new line of drives will complement our existing high efficiency helical in-line drives and will allow us to compete more effectively in this growing segment of the gear drive market. Manufacturing and Operations Our vertically integrated manufacturing operations, including our own cast iron foundry and aluminum die casting and steel stamping operations, are an important element of our rapid response capabilities. In addition, we have an extensive internal logistics operation that consists of 56 semi-tractors and 90 semi- 7 trailers and a network of distribution facilities with the capability to modify stock products to quickly meet specific custom requirements in many instances. We manufacture a majority of the products that we sell but also strategically outsource components and finished goods to an established global network of suppliers. Although we have aggressively pursued global sourcing to reduce our overall costs, we still maintain a dual sourcing capability in our existing domestic facilities to ensure a reliable supply source for our customers. Most of our operating units conduct their manufacturing operations independently in one or more facilities. Our electrical group businesses, other than Marathon Special Products and Thomson Technology, are operated as part of our motor technologies group, which also has responsibility for all power generation operations, including sales and marketing. We regularly invest in machinery and equipment and other improvements to, and maintenance of, our facilities. Additionally, we have typically obtained significant amounts of quality capital equipment as part of our acquisitions, often increasing overall capacity and capability. The manufacturing operations of both our electrical group and mechanical group are highly integrated. Although raw materials and selected parts such as bearings and seals are purchased, this vertical integration permits us to produce most of our required component parts when needed. We believe this results in lower production costs, greater manufacturing flexibility and higher product quality, as well as reducing our reliance on outside suppliers. Base materials for our products consist primarily of: steel in various types and sizes, including bearings and weldments; copper magnet wire; and ferrous and non-ferrous castings. We purchase our raw materials from many suppliers and, with few exceptions, do not rely on any single supplier for any of our base materials. We have also continued to upgrade our manufacturing equipment and processes, including increasing our use of computer aided manufacturing systems, developing our own testing systems, redesigning plant layout and redesigning products to take full advantage of our more productive equipment and to improve product flow. We believe that our continued product redesign and efficient plant layout often provide us with a competitive cost advantage in our manufacturing operation. Our goal is to be a low cost producer in our core product areas. Backlog Our business units have historically shipped the majority of their products in the month the order is received. Since total backlog is less than 15% of our annual sales, we believe that backlog is not a reliable indicator of our future sales. As of December 31, 2001, our backlog was $68,152,000 as compared to $96,000,000 on December 31, 2000. We believe that virtually all of our backlog is shippable in 2002. Patents, Trademarks and Licenses We own a number of United States patents and foreign patents relating to our businesses. While we believe that our patents provide certain competitive advantages, we do not consider any one patent or group of patents essential to our business. We also use various registered and unregistered trademarks, and we believe these trademarks are significant in the marketing of most of our products. However, we believe the successful manufacture and sale of our products generally depends more upon our technological, manufacturing and marketing skills. Employees As of December 31, 2001, the Company employed approximately 5,300 persons, of which approximately 20% were covered by collective bargaining agreements. We consider our employee relations to be very good. 8 Environmental Matters We are subject to Federal, State and local environmental regulations. We are currently involved with environmental proceedings related to certain of our facilities. Based on available information, we believe that the outcome of these proceedings and future known environmental compliance costs will not have a material adverse effect on our financial position or results of operations. Executive Officers The names, ages, and positions of the executive officers of the Company as of December 31, 2001, 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.
Name Age Position Business Experience and Principal Occupation - ---- --- -------- -------------------------------------------- James L. Packard........ 59 Chairman, President Elected Chairman in 1986; Chief Executive Officer and Chief Executive since 1984; President since 1980. Officer Henry W. Knueppel....... 53 Executive Vice Elected Executive Vice President in 1987; from President September, 1997 until December, 1999, he also served as President of Marathon Electric. Kenneth F. Kaplan....... 56 Vice President, Joined Company in September 1996; elected Vice Chief Financial President, Chief Financial Officer in October, 1996 Officer and Secretary and Secretary in April, 1997; previously employed by Gehl Company, West Bend, Wisconsin, as Vice President - Finance and Treasurer. David L. Eisenreich..... 58 Vice President and Elected Vice President and named President of Motor President, Motor Technologies Group in 2001; Senior Vice President of Technologies Group Operations at Marathon Electric from 1997 until 2001; former Senior Vice President of Administration, Vice President of Administration and Vice President of Corporate Industrial Relations at Marathon Electric. Gary M. Schuster........ 46 Vice President and Elected Vice President and named President of President, Mechanical Components Group in 2001; Vice President Mechanical of Manufacturing at Marathon Electric from 1999 until Components Group 2001; Vice President and General Manager and Manager at Lincoln Electric from 1978 until 1999. Fritz Hollenbach........ 47 Vice President, Named Vice President, Administration and Human Administration and Resources in 2001; Vice President Human Resources in Human Resources Mechanical Group from 1994 until 2001; Human Resource Manager at Foote-Jones/Illinois Gear from 1991 until 1994; Human Resource Manager at Cutting Tools from 1987 until 1991.
9 ITEM 2. Properties We have manufacturing, sales and service facilities throughout the United States and Canada and in Europe and the Far East. Our electrical group currently operates 38 manufacturing and service and distribution facilities. The electrical group's present operating facilities contain a total of approximately 2,091,000 square feet of space of which approximately 622,000 square feet are leased. Our mechanical group currently operates 19 manufacturing and service and distribution facilities. The mechanical group's present operating facilities contain a total of approximately 1,530,000 square feet of space of which approximately 57,000 square feet are leased. Our principal executive offices are located in Beloit, Wisconsin in an owned approximately 24,000 square foot office building. We believe our equipment and facilities are well maintained and adequate for our present needs. ITEM 3. Legal Proceedings On or about February 1, 2002, an action was filed in the United States District Court for the Central District of Illinois against the Company and its Ohio Gear division ("Ohio Gear"). The plaintiffs in the litigation allege that in 1998 and 1999 Ohio Gear supplied defective differential assemblies that were used in transaxles manufactured by the plaintiffs. The alleged defect relates to a component part that Ohio Gear had sourced from a third party supplier. The plaintiffs allege that they have incurred damages in excess of $3.2 million, including repair and replacement costs, lost profits, and loss of goodwill. The plaintiffs seek recovery of $3.2 million plus fees and expenses. The Company believes it has both the right to recover costs that it incurs in the litigation from the third party supplier of the defective component part and defenses to the bulk of the plaintiffs' claims. The Company intends to defend its position vigorously in the litigation and to pursue recovery from the third party supplier to the extent that the Company incurs costs in connection with this matter. Given the preliminary stage of the process, the Company cannot currently predict the ultimate outcome of the litigation. From time to time, the Company, in the normal course of business, is also involved in various other claims and legal actions arising out of its operations. The Company does not believe that the ultimate disposition of any currently pending claims or actions would have a material adverse effect on the Company or its financial condition. 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, 2001. 10 PART II ITEM 5. Market for the Registrant's Common Equity and Related Shareholder Matters The Company's Common Stock, $.01 par value ("Common Stock"), is traded on the American Stock Exchange under the symbol "RBC." The following table sets forth the range of high and low closing sales prices for the Common Stock for the period from January 1, 2000 through December 31, 2001:
2001 2000 ------------------------------------------- ----------------------------------------- Price Range Price Range ------------------------- Dividends ------------------------- Dividends High Low Paid High Low Paid ----------- ---------- -------------- ----------- ---------- ------------ 1st Quarter......... $22.30 $16.40 $.12 $21.63 $16.50 $.12 2nd Quarter......... 21.35 16.10 .12 19.00 15.63 .12 3rd Quarter......... 22.50 16.90 .12 17.78 15.25 .12 4th Quarter......... 22.90 17.05 .12 19.35 14.60 .12
The Company has paid 166 consecutive quarterly dividends through January 2002. The number of registered holders of Common Stock as of December 31, 2001 was 923. ITEM 6. Selected Financial Data The selected statement of income data for the years ended December 31, 2001, 2000 and 1999 and the balance sheet data at December 31, 2001 and 2000 are derived from, and are qualified by reference to, the audited financial statements of the Company included elsewhere in this Annual Report on Form 10-K. The selected statement of income data for the years ended December 31, 1998 and 1997 and the balance sheet data at December 31, 1999, 1998 and 1997 are derived from audited financial statements not included herein.
(In Thousands, Except Per Share Data) --------------------------------------------------------------------------------- Year Ended December 31 --------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------- ------------ ------------- ------------ ------------- Net Sales....................... $663,571 $598,203 $550,661 $550,277 $493,174 Income from Operations.......... 56,060 71,608 72,440 81,113 74,381 Net Income...................... 19,590 33,771 38,067 42,961 38,897 Total Assets.................... 746,599 792,407 508,165 485,070 488,699 Long-term Debt.................. 345,667 393,510 148,166 166,218 192,261 Shareholders' Investment........ 280,150 273,889 252,626 224,497 189,427 Per Share of Common Stock: Earnings Per Share........... .94 1.61 1.82 2.06 1.87 Earnings Per Share - Assuming Dilution.......... .93 1.61 1.80 2.02 1.83 Cash Dividends Declared...... .48 .48 .48 .48 .48 Shareholders' Investment..... 13.42 13.10 12.04 10.74 9.09 Average Number of Shares Outstanding..................... 20,869 20,984 20,959 20,893 20,806 Average Number of Shares - Assuming Dilution............... 21,124 20,996 21,170 21,278 21,275
11 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read together with "Selected Financial Data" and our consolidated financial statements, including the related notes, included elsewhere in this report. Overview We are a leading manufacturer and marketer of industrial electric motors, electric power generation components and controls, mechanical motion control products, and cutting tools, serving markets predominantly in the United States as well as throughout the world. Our business is organized in two segments. Our electrical group manufactures and markets a full line of alternating current (AC) and direct current (DC) industrial electric motors, electric power generation components and controls, and electrical connecting devices. Our mechanical group manufactures and markets a broad array of mechanical products, including gears and gearboxes, marine transmissions, high-performance automotive transmissions and ring and pinions, manual valve actuators and cutting tools. We have grown our business during the past several years, in part, through a series of acquisitions, including the acquisitions of the spiral bevel gear product line of Philadelphia Gear Company in January 2001, Leeson Electric Corporation in September 2000, Thomson Technology, Inc. in June 2000 and the Lincoln Motors business of Lincoln Electric Holdings, Inc. in May 1999. See Note 4 of Notes to Consolidated Financial Statements. Our business is cyclical and dependent on industrial and consumer spending and is therefore impacted by the strength of the economy generally, interest rates and other factors. The economic slowdown that began in mid-2000 and became an economic recession in 2001 was the most significant factor in our reduced performance in 2001. Our net sales, while reaching a record $663,571,000 in 2001, 10.9% greater than in 2000, were down 11.4% when the impact of the two acquisitions we made in 2000 is excluded. Net income in 2001 was $19,590,000, a 42.0% reduction from the previous year. We improved our operating cash flow by more than $29,600,000 in 2001, primarily as a result of reductions in receivables and inventories. Combined with cash flow from net income, depreciation, and amortization, we generated nearly $82,000,000 of operating cash flow in 2001. This enabled us, after funding capital expenditures and paying shareholder dividends, to reduce our outstanding total debt by nearly $48,000,000 during 2001. Results of Operations 2001 versus 2000 Net sales in 2001 were $663,571,000, a 10.9% increase from 2000 net sales of $598,203,000. Excluding those net sales from the 2000 acquisitions of Leeson Electric and Thomson Technology necessary for comparability purposes, our 2001 net sales were 11.4% below 2000 net sales. This decrease was primarily due to reduced sales volumes as a result of the economic recession that impacted both of our operating groups. Electrical group net sales increased 29.1% to $456,956,000 in 2001 from $353,954,000 in 2000. Excluding the two acquisitions we made in 2000, electrical group net sales in 2001 were 8.6% below comparable 2000. Mechanical group net sales decreased 15.4% to $206,615,000 in 2001 from $244,249,000 in 2000. Our gross profit increased 5.4% to $165,877,000 in 2001 from $157,429,000 in 2000. Gross profit as a percentage of net sales (gross profit margin) declined to 25.0% in 2001 from 26.3% in 2000 due primarily to lower production volumes resulting from decreasing sales and planned inventory reductions and to increased price competition. Income from operations declined 21.7% to $56,060,000 in 2001, or 8.4% of net sales, from $71,608,000, or 12.0% of net sales, in 2000. The decrease in income from operations as a percentage of net sales (operating income margin) was due to a combination of the decrease in gross profit margin and an increase in operating expenses as a percentage of net sales to 16.5% in 2001 from 12 14.3% in 2000. The increase in operating expenses as a percentage of net sales was due primarily to the fact that Leeson Electric selling expenses, as a percentage of net sales, were greater than those we have historically incurred. In addition, a large part of our operating expenses are relatively fixed and our goodwill amortization increased by $3.4 million in 2001. Electrical group operating income margin decreased to 8.8% in 2001 from 11.5% in 2000 and mechanical group operating income margin declined to 7.7% in 2001 from 12.6% in 2000. The decrease in electrical group operating income margin was due primarily to the increase in operating expenses as a percentage of net sales described above. The decrease in mechanical group operating income margin resulted from a combination of higher operating expenses as a percentage of net sales and to a lower 2001 gross profit margin. See Note 10 of Notes to Consolidated Financial Statements. Interest expense increased to $22,239,000 in 2001 from $15,332,000 in 2000, primarily as a result of debt incurred to finance our acquisition of Leeson Electric at the end of September 2000. Interest expense decreased steadily by quarter in 2001, due to declining interest rates and as a result of our reducing total debt by nearly $48,000,000 during 2001. The average rate of interest we paid on outstanding debt in 2001 was 5.9% as compared to 7.4% in 2000. Because our income before income taxes decreased in 2001 from 2000, the impact of non-deductible goodwill amortization resulted in an increase in our effective tax rate in 2001 to 42.5% of income before income taxes from 40.3% in 2000. Net income decreased 42.0% to $19,590,000 in 2001 from $33,771,000 in 2000. As a percentage of net sales, net income decreased to 3.0% in 2001 from 5.6% in 2000. Basic earnings per share were $.94 and diluted earnings per share were $.93 in 2001, as compared to $1.61 (both basic and diluted) in 2000, representing a 41.6% and 42.2% decrease, respectively. 2000 versus 1999 Our net sales increased 8.6% to $598,203,000 in 2000 from $550,661,000 in 1999. Electrical group net sales increased 19.7% to $353,954,000 in 2000 from $295,694,000 in 1999. This increase reflects a full year of sales from Lincoln Motors, which we acquired in 1999. Excluding the Leeson Electric and Thomson Technology acquisitions, the increase in 2000 from 1999 was 3.8%. Mechanical group net sales decreased 4.2% to $244,249,000 in 2000 from $254,967,000 in 1999. This decrease was due primarily to broad-based weakness in the agriculture, transportation, marine, construction equipment and industrial machinery markets, particularly in the second half of 2000. We consider the diversity of markets served by our two operating groups as a key asset; however, new product introductions and increased market penetration achieved in 2000 did not offset the broad-based market slowdown. All net sales, cost of sales and operating expenses have been restated to reflect the required accounting change, adopted October 1, 2000, for shipping and handling billings and costs. As a result of this accounting change, 2000 net sales increased $7,919,000, cost of sales increased $17,930,000, and operating expenses decreased $10,011,000. Similarly, 1999 net sales increased $6,029,000, cost of sales increased $13,321,000 and operating expenses decreased $7,292,000. This change had no impact on net income or income from operations in any period. All prior periods have been restated to reflect this accounting change. Gross profit increased 9.2% to $157,429,000 in 2000 from $144,168,000 in 1999. As a percentage of net sales, gross profit margin of 26.3% in 2000 was slightly higher than 26.2% in 1999. Income from operations decreased 1.1% to $71,608,000 in 2000, or 12.0% of net sales, from $72,440,000, or 13.2% of net sales, in 1999. The decrease in operating income margin was due to an increase in operating expenses as a percentage of net sales to 14.3% in 2000 from 13.0% in 1999. The increased percentage resulted primarily from higher selling expenses during 2000 and to Leeson Electric's selling expenses as a percentage of net sales being greater than those we have historically incurred. Electrical group operating income margin decreased to 11.5% in 2000 from 12.4% in 1999, while the mechanical group operating income margin declined to 12.6% in 2000 from 14.0% in 1999. The operating income margin decrease in the electrical group resulted primarily from increased selling expenses as a percentage of net sales, which were partly offset by improvement in gross profit margin from 1999. Favorable product mix of sales and 13 improved manufacturing productivity enabled the electrical group to more than offset the impact of higher manufacturing costs in 2000. The mechanical group decrease was primarily due to a combination of lower sales volume, higher raw material, fuel and labor costs, reduced production levels and higher selling expenses as a percentage of net sales. Interest expense increased 63.0% to $15,332,000 in 2000 from $9,406,000 in 1999, virtually all as a result of the Leeson Electric acquisition. The higher interest expense was due to a combination of borrowing approximately $260,000,000 to finance the Leeson Electric acquisition, an increase in the interest rate paid on virtually all our debt from 6.9% to 7.9% effective September 29, 2000 and increases during the first half of 2000 in the London Interbank Offered Rate, or LIBOR, the rate upon which the interest rate we pay is based. The average rate of interest we paid on outstanding debt in 2000 was 7.4% as compared to 5.6% in 1999. Our effective tax rate in 2000 increased to 40.3% of income before taxes from 39.8% in 1999. The increase was due primarily to miscellaneous foreign tax-related items in 2000. Net income decreased 11.3% to $33,771,000 in 2000 from $38,067,000 in 1999. Net income as a percentage of net sales decreased to 5.6% in 2000 from 6.9% in 1999. The reduced percentage was due in part to the impact on the fourth quarter of the Leeson Electric acquisition, which added net sales but was approximately neutral to net income as we had expected, and in part to lower earnings in 2000 from our other operations. Basic and diluted earnings per share in 2000 were $1.61, 11.5% and 10.6% below, respectively, 1999's basic earnings per share of $1.82 and diluted earnings per share of $1.80. Liquidity and Capital Resources Our working capital decreased 13.3% to $161,044,000 at December 31, 2001 from $185,781,000 at December 31, 2000. The decrease resulted primarily from an aggregate reduction of more than $33,000,000 in our receivables and inventories in 2001. The reduction in our receivables was due primarily to the impact of the U.S. economic recession on our sales volume and operations and occurred primarily in the fourth quarter of 2001. The decrease in inventories was due in part to planned reductions in production levels and was made primarily in the first nine months of 2001. Despite the reduction in our working capital, our current ratio at December 31, 2001 remained substantially the same as it was at December 31, 2000. Cash flow from operations increased 57.0% to $81,769,000 in 2001 from $52,089,000 in 2000. The major factors contributing to the increased operating cash flow were $16,673,000 from reduced receivables and $17,014,000 from reduced inventories. Cash flow used in investing activities was $18,246,000 in 2001 and $285,020,000 in 2000. The 2000 investing activities included the acquisition of Leeson Electric. In 2001, capital expenditures were $15,426,000 compared to $16,994,000 in 2000. The capital expenditure figures in any year do not include the amounts of property, plant and equipment obtained in connection with our acquisitions. Such capital additions are included as part of acquisition costs under the heading "Business acquisitions" in the Consolidated Statements of Cash Flows. We currently expect capital expenditures for 2002 to be approximately $20,000,000, although our commitments for property, plant and equipment as of December 31, 2001 were $431,000. We believe that our present facilities, augmented by planned capital expenditures, are sufficient to provide adequate capacity for our operations in 2002. Cash flow used in financing activities in 2001 totaled $59,474,000, of which $48,598,000 on a net basis was used to repay debt, $10,022,000 was used to pay shareholder dividends and $1,042,000 was used in January 2001 to repurchase 60,700 shares of our common stock at a weighted average purchase price of $17.17 per share. We have not repurchased any shares of our common stock since January 2001. Our primary financing source is our $350,000,000 long-term revolving credit facility that expires on December 31, 2005, which we reduced from $375,000,000 when we completed the stock offering described in this paragraph. Our credit facility requires us to maintain specified financial ratios and to satisfy certain financial condition tests. We were in compliance with all of the financial ratios and financial condition tests specified by our amended credit agreement as of December 31, 2001. In March 2002, we completed a public offering of 4,109,985 shares of our common stock, including the sale of 14 536,085 shares pursuant to the exercise of the underwriters' over-allotment option. The net proceeds of the 4,109,985 shares issued were approximately $90,200,000, which was used to repay our outstanding debt. With the application of the net proceeds from this offering, we believe we will be able to satisfy the financial ratios and tests specified in our credit facility for the foreseeable future, absent unexpected changes in general business and economic conditions. At December 31, 2001, we had, after deducting approximately $2,800,000 of standby letters of credit, $30,200,000 of available borrowing capacity. On a pro forma basis giving effect to the public offering of our common stock, we would have had $95,400,000 of available borrowing capacity at December 31, 2001. We believe that the combination of borrowing availability under our credit facility and operating cash flow will provide sufficient cash availability to finance our existing operations for the foreseeable future. Our outstanding total debt of $345,787,000 at December 31, 2001 reflected a reduction of $47,829,000 from $393,616,000 at December 31, 2000. The debt reduction was due primarily to the application of cash generated from operations by the above-mentioned receivables and inventory reductions. See Note 5 of Notes to Consolidated Financial Statements. As a result of our capital structure, we are exposed to interest rate risk. Virtually all of our debt is under a credit facility with a variable interest rate based on a margin above LIBOR. As a result, interest rate changes impact our future earnings and cash flows assuming other factors are constant. A hypothetical 10% change in our weighted average borrowing rate on the outstanding debt at December 31, 2001, would result in a change in after-tax annual earnings of approximately $900,000. We have no material foreign currency rate risk. In addition, we do not have any material derivative instruments. Recent Accounting Pronouncements On June 30, 2001, the Financial Accounting Standards Board finalized Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 requires all business combinations initiated after June 30, 2001 to use the purchase method of accounting. Under the requirements of Statement No. 142, intangible assets meeting specific criteria will be separately identified from goodwill acquired in future acquisitions and amortized over their individual useful lives. Also, our existing goodwill at June 30, 2001 will no longer be amortized, effective January 1, 2002. This will eliminate approximately $8,400,000 of annual goodwill amortization and have a favorable annual impact on net income of approximately $6,700,000. As of December 31, 2001, we had goodwill on our balance sheet of $312,735,000, relating to our acquisitions of Leeson Electric, Marathon Electric and, to a lesser extent, Thomson Technology. The amount of goodwill constituted approximately 42.0% of our total assets. An assessment of fair value will be used to test for impairment of goodwill on an annual basis or when circumstances indicate a possible impairment. We have completed our 2002 annual impairment test and there has been no impairment of goodwill. Additionally, Statement No. 143, "Asset Retirement Obligations", and Statement No. 144, "Impairment or Disposal of Long-Lived Assets", have been issued by the FASB. Adoption of these Statements on January 1, 2002 will not have a material adverse effect on our consolidated financial statements. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk Information required by Item 305 of Regulation S-K is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 14-15 of this report. 15 ITEM 8. Financial Statements and Supplementary Data Quarterly Financial Data (Unaudited) Selected unaudited quarterly financial information for the fiscal years ended December 31, 2001 and 2000 is as follows (in thousands, except per share data):
(In Thousands, Except Per Share Data) ---------------------------------------------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------------------- ----------------------- ---------------------- ----------------------- 2001 2000 2001 2000 2001 2000 2001 2000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Sales.............. $177,122 $144,185 $171,946 $145,027 $166,719 $138,180 $147,784 $170,811 Gross Profit........... 45,151 38,322 42,829 38,062 40,706 35,922 37,191 45,123 Income from Operations. 17,160 18,087 14,734 18,213 13,344 16,670 10,822 18,638 Net Income............. 5,842 9,414 5,284 9,465 4,703 8,444 3,761 6,448 Earnings Per share..... .28 .45 .25 .45 .23 .40 .18 .31 Earnings Per Share - Assuming Dilution .28 .45 .25 .45 .22 .40 .18 .31 Average Number of Shares Outstanding. 20,863 20,986 20,866 20,988 20,871 20,994 20,875 20,970 Average Number of Shares - Assuming Dilution........... 21,110 21,033 21,128 20,988 21,129 20,994 21,130 20,970
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, 2001 and 2000, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin January 29, 2002 16 REGAL-BELOIT CONSOLIDATED STATEMENTS OF INCOME (In Thousands of Dollars, Except Shares Outstanding and Per Share Data)
For the Year Ended December 31, ------------------------------- 2001 2000 1999 ---- ---- ---- Net Sales ............................................ $ 663,571 $ 598,203 $ 550,661 Cost of Sales.......................................... 497,694 440,774 406,493 ----------- ----------- ----------- Gross Profit..................................... 165,877 157,429 144,168 Operating Expenses..................................... 109,817 85,821 71,728 ----------- ----------- ----------- Income From Operations........................... 56,060 71,608 72,440 Interest Expense....................................... 22,239 15,332 9,406 Interest Income........................................ 221 274 220 ------------- ------------ ------------- Income Before Income Taxes....................... 34,042 56,550 63,254 Provision for Income Taxes............................. 14,452 22,779 25,187 ----------- ----------- ----------- Net Income....................................... $ 19,590 $ 33,771 $ 38,067 =========== =========== =========== Earnings Per Share .................................... $ .94 $ 1.61 $ 1.82 ============ ============ ============ Earnings Per Share - Assuming Dilution................. $ .93 $ 1.61 $ 1.80 ============ ============ ============ Average Number of Shares Outstanding................... 20,868,896 20,984,423 20,959,182 ========== ========== ========== Average Number of Shares - Assuming Dilution........... 21,124,204 20,996,189 21,169,580 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 17 REGAL-BELOIT CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars, Except Share Information) ASSETS
December 31, Current Assets: 2001 2000 ---- ---- Cash and cash equivalents..................................... $6,629 $2,612 Receivables, less allowance for doubtful accounts of $2,233 in 2001 and $2,031 in 2000..................... 80,595 97,032 Income tax receivable......................................... 182 4,069 Future income tax benefits.................................... 8,420 9,475 Inventories................................................... 132,272 148,741 Prepaid expenses.............................................. 3,401 3,709 ---------------- ---------------- Total Current Assets..................................... 231,499 265,638 Property, Plant and Equipment: Land and improvements......................................... 11,867 11,898 Buildings and improvements.................................... 85,170 84,171 Machinery and equipment....................................... 240,444 225,617 ---------------- ---------------- Property, Plant and Equipment, at cost................... 337,481 321,686 Less: Accumulated Depreciation............................... (152,608) (132,608) ----------------- ----------------- Net Property, Plant and Equipment........................ 184,873 189,078 Goodwill ........................................................... 312,735 316,295 Other noncurrent assets............................................. 17,492 21,396 ---------------- ---------------- Total Assets............................................. $746,599 $792,407 ================ ================ LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Accounts payable.............................................. $28,429 $32,298 Dividends payable............................................. 2,505 2,509 Accrued compensation and employee benefits.................... 20,250 21,941 Other accrued expenses........................................ 17,303 22,849 Federal and state income taxes................................ 1,848 154 Current maturities of long-term debt.......................... 120 106 ---------------- ---------------- Total Current Liabilities................................ 70,455 79,857 Long-term debt...................................................... 345,667 393,510 Deferred income taxes............................................... 43,022 41,063 Other noncurrent liabilities........................................ 5,304 4,088 Minority interest in consolidated subsidiary........................ 2,001 - Shareholders' Investment: Common stock, $.01 par value, 50,000,000 shares authorized, 20,877,249 issued and outstanding in 2001 and 20,912,192 issued and outstanding in 2000............ 210 210 Additional paid-in capital.................................... 41,967 41,779 Less: Treasury Stock, at cost, 159,900 shares in 2001 and 99,200 shares in 2000........................... (2,727) (1,685) Retained earnings............................................. 244,564 234,992 Accumulated other comprehensive loss.......................... (3,864) (1,407) ----------------- ----------------- Total Shareholders' Investment........................... 280,150 273,889 ---------------- ---------------- Total Liabilities and Shareholders' Investment........... $746,599 $792,407 ================ ================
See accompanying Notes to Consolidated Financial Statements. 18 REGAL-BELOIT CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars)
For the Year Ended December 31, ------------------------------- 2001 2000 1999 ---- ---- ---- Cash Flows From Operating Activities: Net Income $ 19,590 $ 33,771 $ 38,067 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization.................... 31,798 25,549 23,052 Provision for deferred income taxes.............. 3,014 7,678 1,652 Change in assets and liabilities, net of acquisitions: Receivables................................. 16,673 8,321 1,093 Inventories................................. 17,014 (5,686) 7,066 Income tax receivable....................... 3,887 (4,069) -- Current liabilities and other, net.......... (10,207) (13,475) (673) -------- -------- -------- Net cash provided from operating activities...... 81,769 52,089 70,257 Cash Flows From Investing Activities: Additions to property, plant and equipment....... (15,426) (16,994) (11,422) Business acquisitions............................ (3,629) (269,232) (32,083) Sale of property, plant and equipment............ 650 2,725 49 Other, net....................................... 159 (1,519) (1,216) ---------- ----------- ----------- Net cash (used in) investing activities.......... (18,246) (285,020) (44,672) Cash Flows From Financing Activities: Additions to long-term debt...................... 2,000 270,000 1,000 Repayment of long-term debt...................... (50,598) (24,598) (19,047) Repurchase of common stock....................... (1,042) (1,685) -- Stock issued under option plans.................. 188 194 726 Dividends paid to shareholders................... (10,022) (10,075) (10,057) ------------ ---------- ------------ Net cash (used in) provided from financing activities.................................... (59,474) 233,836 (27,378) EFFECT OF EXCHANGE RATE ON CASH........................ (32) (22) (26) ------------ ---------- ------------ Net increase (decrease) in cash and cash equivalents................................... 4,017 883 (1,819) Cash and cash equivalents at beginning of year... 2,612 1,729 3,548 ----------- ----------- ----------- Cash and cash equivalents at end of year......... $ 6,629 $ 2,612 $ 1,729 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest.................................... $ 22,607 $ 14,924 $ 9,520 Income Taxes................................ $ 7,265 $ 18,348 $ 24,886
See accompanying Notes to Consolidated Financial Statements. 19 REGAL-BELOIT CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (In Thousands of Dollars, Except Per Share Data)
Common Accumulated Stock Additional Other Comprehensive $.01 Par Paid-In Treasury Retained Comprehensive Income Value Capital Stock Earnings Income (Loss) Total Balance, December 31, 1998........ $209 $40,860 -- $183,285 $143 $224,497 Net Income........................ $38,067 -- -- -- 38,067 -- 38,067 Dividends Declared ($.48 per share) -- -- -- (10,065) -- (10,065) Translation Adjustments........... (599) -- -- -- -- (599) (599) ----- Comprehensive Income.............. $37,468 ======= Stock Options Exercised........... 1 725 -- -- -- 726 - --- -- -- -- --- Balance, December 31, 1999........ 210 41,585 -- 211,287 (456) 252,626 - Net Income........................ $33,771 -- -- -- 33,771 -- 33,771 Dividends Declared ($.48 per share) -- -- -- (10,066) -- (10,066) Translation Adjustments........... (951) -- -- -- -- (951) (951) ----- Comprehensive Income.............. $32,820 ======= Common Stock Repurchased ......... -- -- (1,685) -- -- (1,685) Stock Options Exercised........... -- 194 -- -- -- 194 -- --- -- -- -- --- Balance, December 31, 2000........ 210 41,779 (1,685) 234,992 (1,407) 273,889 Net Income........................ $19,590 -- -- -- 19,590 -- 19,590 Dividends Declared ($.48 per share) -- -- -- (10,018) -- (10,018) Translation Adjustments........... (928) -- -- -- -- (928) (928) Additional Pension Liability...... (1,529) -- -- -- -- (1,529) (1,529) ------- Comprehensive Income.............. $17,133 ======= Common Stock Repurchased ......... -- -- (1,042) -- -- (1,042) Stock Options Exercised........... -- 188 -- -- -- 188 -- --- -- -- -- --- Balance, December 31, 2001........ $210 $41,967 $(2,727) $244,564 $(3,864) $280,150 ==== ======= ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 20 REGAL-BELOIT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Three Years Ended December 31, 2001 (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 power generation products. The principal markets for the Company's products and technologies are within the United States. - -------------------------------------------------------------------------------- (2) Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. The minority interest in the earnings of the majority-owned consolidated subsidiary is not material. Revenue Recognition Sales and related cost of sales for all products are recognized upon shipment of the products, as shipments are FOB shipping point. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP") 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, 2001. 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. Life Insurance Policies The Company maintains life insurance policies on certain officers and management which name the Company as beneficiary. The total face value of these policies was $7,963,000 at both December 31, 2001 and 2000. The cash surrender value, net of policy loans, is $251,000 and $3,209,000 at December 31, 2001 and 2000, respectively, and is included as a component of Other Noncurrent Assets. Intangible Assets The cost of goodwill and other intangible assets is amortized on a straight-line basis over the estimated periods benefited ranging from 5 to 40 years. Goodwill amortization was $8,401,000, 21 $4,994,000 and $3,845,000 in 2001, 2000 and 1999, respectively. Accumulated goodwill amortization was $23,965,000 at December 31, 2001 and $15,564,000 at December 31, 2000. Effective January 1, 2002, goodwill will no longer be amortized, in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Intangible assets with definitive lives will continue to be amortized. Goodwill and intangible assets will be evaluated in 2002 for impairment of their carrying values and at least annually thereafter. Earnings will be charged if the carrying value of goodwill or an intangible asset exceeds its fair market value. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company assesses these assets for impairment based on estimated future cash flows from these assets. Inventories The approximate percentage distribution between major classes of inventory is as follows: December 31, ---------------------- 2001 2000 --------- --------- Raw Material.................... 11% 11% Work In Process................. 19% 21% Finished Goods and Purchased Parts.............. 70% 68% Inventories are stated at cost, which is not in excess of market. Cost for approximately 87% of the Company's inventory at December 31, 2001 and 89% in 2000, 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 $4,417,000 and $3,233,000 as of December 31, 2001 and 2000, 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, plant and equipment retired or otherwise disposed of is removed from the 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 Shipping and Handling Revenues and Costs Shipping and handling costs are recorded as costs of sales and the related billings are recorded as sales. Reclassifications Certain reclassifications were made to the 2000 and 1999 financial statements to conform to the 2001 presentation. 22 Earnings per Share The difference between basic and diluted earnings per share is attributable to the incremental shares to be issued under the Company's stock option plans, which totaled 255,308, 11,766 and 210,398 at December 31, 2001, 2000 and 1999, respectively. (3) Leases and Rental Commitments Rental expenses charged to operations amounted to $7,314,000 in 2001, $4,934,000 in 2000 and $4,189,000 in 1999. The Company has future minimum rental commitments under operating leases as shown in the following table: Year (In Thousands of Dollars) ------------------ ----------------------------------- 2002 $4,164 2003 3,081 2004 2,926 2005 2,227 2006 1,847 Thereafter 2,037 - -------------------------------------------------------------------------------- (4) Acquisitions On January 16, 2001, the Company acquired, for cash, selected assets of Philadelphia Gear Company, which now comprise the Company's spiral bevel gear product line. The purchased assets included inventory and selected machinery, equipment and tooling. The operating results and assets purchased are not material to the performance or financial position of the Company. On September 29, 2000, the Company acquired 100% of the stock of Leeson Electric Corporation, a private company, for approximately $260,000,000 in cash. During 2001, the purchase price allocation was finalized and resulted in an increase to goodwill of approximately $4,000,000. This resulted in approximately $86,000,000 of the purchase price being allocated to the net assets acquired, and the remaining $174,000,000 being recorded as goodwill. Leeson is a leading North American manufacturer and marketer of electric motors and related products. On June 29, 2000, the Company acquired the assets and liabilities of Thomson Technology, Inc. ("TTI") for approximately $10,000,000. TTI is a Vancouver, BC, Canada based manufacturer of power systems controls for the worldwide power generation market. On May 28, 1999, the Company purchased the Lincoln Motors business of Lincoln Electric Holdings, Inc., for a cash purchase price of approximately $32,100,000. Lincoln Motors manufactures and markets a line of AC electric motors from 1 horsepower to 800 horsepower. - -------------------------------------------------------------------------------- 23 (5) Long-Term Debt and Bank Credit Facilities
(In Thousands of Dollars) December 31, ------------------------------------------ Long-term debt consists of the following: 2001 2000 -------------------- ------------------ Revolving Credit Facility.......................... $342,000 $392,500 Other.............................................. 3,787 1,116 -------------------- ------------------ 345,787 393,616 Less-Current maturities............................ 120 106 -------------------- ------------------ Noncurrent portion................................. $345,667 $393,510 ==================== ==================
The Company maintained at December 31, 2001, a $375,000,000 revolving credit facility which expires December 31, 2005 (the "Facility"). The Facility permits the Company to borrow at interest rates based upon a margin above LIBOR, which margin varies with the ratio of debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). These interest rates also vary with LIBOR. The Facility, as amended during 2001, restricts the payment of dividends to the current $.12 per quarter and also limits acquisitions for cash to $15 million for an individual acquisition and to $30 million in the aggregate. The Company has pledged in the amended Facility the stock of its major subsidiaries as security for this agreement. The stock pledge and the dividend and acquisition restrictions are subject to release if the Company's ratio of funded debt to EBITDA meets certain requirements. The Facility also includes various financial covenants regarding minimum net worth, permitted debt levels and minimum interest coverage. The most restrictive financial covenant included in the Facility is the ratio of funded debt to EBITDA. This covenant ratio was 4.15 at December 31, 2001, but declines in future quarters throughout 2002 to 3.25 at December 31, 2002. The Company was in compliance with all financial covenants as of December 31, 2001. The average balance outstanding under the Facility in 2001 was $372,512,000. The average interest rate paid under the Facility in 2001 was 5.9% and was 4.2% at December 31, 2001. The Company had $30,200,000 of available borrowing capacity, after deducting approximately $2,800,000 for standby letters of credit, under the Facility at December 31, 2001. (See Management's Discussion and Analysis of Financial Statements, "Liquidity and Capital Resources"). The Company also has other loans with a total balance outstanding of $3,787,000 at December 31, 2001. The largest is a $2,000,000 industrial development bond issue completed on September 6, 2001. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair market value of long-term debt is not materially different from the carrying value. Maturities of long-term debt are as follows: Year (In Thousands of Dollars) ------------------- --------------------------------- 2002 $120 2003 107 2004 232 2005 342,222 2006 678 Thereafter 2,428 ---------- Total $345,787 ======== - -------------------------------------------------------------------------------- 24 (6) Contingencies The Company is, from time to time, party to lawsuits arising from its normal business operations. It is believed that the outcome of these lawsuits 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 plans include defined contribution plans and defined benefit plans. The defined contribution plans provide for Company contributions based, depending on the plan, upon one or more of participant contributions, service and profits. Company contributions to defined contribution plans totaled $3,329,000, $4,628,000 and $4,820,000 in 2001, 2000 and 1999, respectively. Benefits provided under defined benefit plans are based, depending on the plan, on employees' average earnings and years of credited service, or a benefit multiplier times years of service. Funding of these qualified defined benefit plans is in accordance with federal laws and regulations. Net periodic pension benefit costs for the defined benefit plans were as follows: (In Thousands of Dollars) ---------------------------------------- 2001 2000 1999 ----------- --------- ------------ Service cost...................... $1,330 $1,253 $1,375 Interest cost..................... 3,078 2,993 2,809 Expected return on plan assets.... (5,410) (4,858) (4,158) Net amortization and deferral..... (355) (125) 58 ----------- --------- ------------ Net periodic (income) expense..... $(1,357) $(737) $84 =========== ========= ============ 25 The following table presents a reconciliation of the funded status of the defined benefit plans using an assumed discount rate of 7.5% in 2001 and 2000, annual compensation increases of 3.75% in 2001 and 4.5% in 2000, and an assumed long-term rate of return on plan assets of 9.0% in 2001 and 2000. (In Thousands of Dollars) ----------------------------- 2001 2000 ------------- ------------ Change in projected benefit obligation: Obligation at beginning of period......... $41,042 $39,909 Service cost.............................. 1,330 1,253 Interest cost............................. 3,078 2,993 Change in assumptions..................... (882) (1,293) Plan amendments........................... 403 131 Benefits paid............................. (1,863) (1,951) ------------- ------------ Obligation at end of period............... 43,108 41,042 ------------- ------------ Change in fair value of plan assets: Fair value of plan assets at beginning of period.............................. 60,844 60,601 Actual (loss) return on plan assets....... (11,582) 1,827 Employer contributions.................... 282 367 Benefits paid............................. (1,863) (1,951) ------------- ------------ Fair value of plan assets at end of period................................. 47,681 60,844 ------------- ------------ Funded status............................. 4,573 19,802 Unrecognized net actuarial loss (gain).................................. 3,251 (13,289) Unrecognized prior service costs........... 1,252 924 ------------- ------------ Net amount recognized...................... $9,076 $7,437 ============= ============ Amounts recognized in balance sheets: Prepaid benefit cost.................. $11,077 $10,728 Accrued benefit liability............. (3,906) (3,291) Intangible asset...................... 376 -- Accumulated other comprehensive loss................. 1,529 -- ------------- ------------ Net amount recognized................. $9,076 $7,437 ============= ============ The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the defined benefit plans with accumulated benefit obligations in excess of plan assets were $7,740,000, $7,699,000 and $4,094,000, respectively, as of December 31, 2001, and $3,105,000, $3,054,000 and $0, respectively, as of December 31, 2000. - -------------------------------------------------------------------------------- (8) Shareholders' Investment The Company has one stock option plan available for new grants to officers, directors and key employees, the 1998 Stock Option Plan, as amended. Additionally, the Company's 1991 Flexible Stock Incentive Plan and 1987 Stock Option Plan, which have expired as to new grants, have shares previously 26 granted remaining outstanding. Options under all the plans were granted at prices that equaled the market value on the date of the grant and with a maximum term of 10 years from the date of grant. Options vest over various periods up to 10 years. A summary of the Company's three stock option plans follows:
At December 31, 2001 -------------------------------------------------------- 1987 Plan 1991 Plan 1998 Plan --------------- ----------------- ---------------- Total Plan shares..................... 450,000 1,000,000 1,000,000 Options granted....................... 449,850 762,882 705,400 Options outstanding................... 38,700 731,324 690,100 Options available for grant........... -- -- 294,600
A summary of the status of the Company's three stock option plans as of December 31, 2001, 2000 and 1999, and changes during the years then ended is presented below:
2001 2000 1999 --------------------------- -------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- ----------- ----------- ----------- ----------- ----------- Outstanding at beginning of year................. 1,477,718 $18.01 1,430,682 $18.47 839,018 $14.18 Granted.................... 41,850 18.71 134,750 18.14 705,700 22.65 Exercised.................. (26,194) 7.52 (26,018) 6.97 (78,336) 9.33 Forfeited.................. (33,250) 21.28 (61,696) 22.61 (35,700) 23.43 ----------- ----------- ----------- ----------- ----------- ----------- Outstanding at end of year. 1,460,124 $18.49 1,477,718 $18.01 1,430,682 $18.47 Options exercisable at year-end................ 889,824 865,968 656,265
The following table provides information on the three Plans at various exercise price ranges:
Range of Exercise Prices ------------------------------------------------------------------------------- $7.18-$10.78 $10.79-$16.18 $16.19-$24.27 $24.28-$32.44 Total ------------- ------------- ------------- ----------- ------------ Options outstanding at 12/31/01 355,510 34,464 963,300 106,850 1,460,124 Options exercisable at 12/31/01 355,510 29,464 401,000 103,850 889,824
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 ("EPS") would have been reduced to the following pro-forma amounts:
(In Thousands, Except Per Share Data) ----------------------------------------------------------------- 2001 2000 1999 --------------------- ------------------ ------------------ Net income: As Reported................................ $19,590 $33,771 $38,067 Pro Forma.................................. $18,886 $33,018 $36,532 Earnings Per Share As Reported................................ $.94 $1.61 $1.82 Pro Forma.................................. $.91 $1.57 $1.74 Earnings Per Share - Assuming Dilution As Reported................................ $.93 $1.61 $1.80 Pro Forma.................................. $.89 $1.57 $1.73
27 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 2001, 2000 and 1999, respectively: risk-free interest rates of 5.1%, 6.3% and 5.4%; expected dividend yield of 2.5% for all years; expected option lives of 7.0 for all years; expected volatility of 33% in both 2001 and 2000, and 32% in 1999. On January 28, 2000, the Board of Directors approved a Shareholder Rights Plan (the "Plan"). Pursuant to this Plan, one common share purchase right is included with each outstanding share of common stock. In the event the rights become exercisable, each right will initially entitle its holder to buy one-half of one share of the Company's common stock at a price of $60 per share (equivalent to $30 per one-half share), subject to adjustment. The rights will become exercisable if a person or group acquires, or announces an offer for, 15% or more of the Company's common stock. In this event, each right will thereafter entitle the holder to purchase, at the right's then-current exercise price, common stock of the Company or, depending on the circumstances, common stock of the acquiring corporation having a market value of twice the full share exercise price. The rights may be redeemed by the Company at a price of one-tenth of one cent per right at any time prior to the time a person or group acquires 15% or more of the Company's common stock. The rights expire on January 28, 2010, unless otherwise extended. The Board of Directors approved in 2000 a repurchase program of up to 2,000,000 common shares of Company stock. Management was authorized to effect purchases from time to time in the open market or through privately negotiated transactions. Through December 31, 2001, the Company repurchased 159,900 shares at an average purchase price of $17.06 per share. Management ceased repurchases in January 2001. - -------------------------------------------------------------------------------- (9) Income Taxes Earnings before income taxes consisted of the following: (In Thousands of Dollars) --------------------------------------------- 2001 2000 1999 ------------- ----------- ------------- United States................ $30,213 $55,879 $62,143 Foreign...................... 3,829 671 1,111 ------------- ----------- ------------- Total........................ $34,042 $56,550 $63,254 ============= =========== ============= The provision for income taxes is summarized as follows: (In Thousands of Dollars) -------------------------------------------- 2001 2000 1999 -------------- ----------- ----------- Current Federal................. $9,155 $12,858 $20,594 State................... 1,186 1,995 2,321 Foreign................. 1,097 248 620 -------------- ----------- ----------- 11,438 15,101 23,535 Deferred..................... 3,014 7,678 1,652 -------------- ----------- ----------- $14,452 $22,779 $25,187 ============== =========== =========== 28 A reconciliation of the statutory Federal income tax rate and the effective tax rate reflected in the statements of income follows: 2001 2000 1999 -------------- ----------- ----------- Federal statutory tax rate........ 35.0% 35.0% 35.0% State income taxes, net of federal benefit................ 2.3 2.5 3.0 Nondeductible goodwill amortization................... 4.0 2.4 2.3 Other, net........................ 1.2 .4 (.5) -------------- ----------- ----------- Effective tax rate................ 42.5% 40.3% 39.8% ============== =========== =========== 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, 2001 of $34,602,000 is classified on the consolidated balance sheet as a current income tax benefit of $8,420,000 and a long-term deferred income tax liability of $43,022,000. The December 31, 2000 net deferred tax liability was $31,588,000, consisting of a current income tax benefit of $9,475,000 and a long-term deferred income tax liability of $41,063,000. The components of this net deferred tax liability are as follows: (In Thousands of Dollars) December 31 ----------------------------- 2001 2000 ------------ ------------ Federal operating loss carry forward... $ 277 $ 401 Accrued employee benefits.............. 1,349 1,495 Bad debt reserve....................... 768 443 Warranty reserve....................... 682 1,067 Other.................................. 215 2,542 ------------ ------------ Deferred tax assets............... 3,291 5,948 Property related....................... (29,121) (29,643) Inventory.............................. (4,935) (3,608) Other.................................. (3,837) (4,285) ------------ ------------ Deferred tax liabilities.......... (37,893) (37,536) ------------ ------------ Net deferred tax liability............. $(34,602) $(31,588) ============ ============ - -------------------------------------------------------------------------------- (10) Industry Segment Information The Company'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 electric motors, power generation equipment and related products for sale to original equipment manufacturers and distributors. The Company evaluates performance based on the segments' income from operations. Corporate costs have been allocated to each Group based primarily 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. 29 The Company's products manufactured and sold outside the United States were approximately 8%, 4% and 3% of net sales in 2001, 2000 and 1999, respectively. Export sales from U.S. operations were approximately 6% of net sales in 2001, 6% in 2000 and 7% in 1999. Pertinent data for each industry segment in which the Company operated for the three years ended December 31, 2001 is as follows:
(In Thousands of Dollars) ---------------------------------------------------------------------------------------- Depreciation Income From Identifiable Capital and Net Sales Operations Assets Expenditures Amortization ------------- --------------- -------------- -------------- -------------- 2001 Mechanical Group........... $206,615 $15,872 $125,201 $5,110 $8,824 Electrical Group........... 456,956 40,188 621,398(A) 10,316 22,974 ------------- --------------- -------------- -------------- -------------- Total REGAL-BELOIT......... $663,571 $56,060 $746,599 $15,426 $31,798 ============= =============== ============== ============== ============== 2000 Mechanical Group........... $244,249 $30,794 $142,145 $6,515 $9,663 Electrical Group........... 353,954 40,814 650,262(A) 10,479 15,886 ------------- --------------- -------------- -------------- -------------- Total REGAL-BELOIT......... $598,203 $71,608 $792,407 $16,994 $25,549 ============= =============== ============== ============== ============== 1999 Mechanical Group........... $254,967 $35,732 $145,391 $4,257 $10,910 Electrical Group........... 295,694 36,708 362,774(A) 7,165 12,142 ------------- --------------- -------------- -------------- -------------- Total REGAL-BELOIT......... $550,661 $72,440 $508,165 $11,422 $23,052 ============= =============== ============== ============== ============== (A) Includes $312,735 in 2001, $316,295 in 2000 and $143,314 in 1999 of goodwill relating to Electrical Group acquisitions.
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 included under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance", of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 19, 2002, 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. Information with respect to the executive officers of the Company appears in Part I, page 9 of this Annual Report on Form 10-K. ITEM 11. Executive Compensation Information required by Item 402 of Regulation S-K is included under the captions "Other Information about the Board" and "Compensation" of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 19, 2002, 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; provided, however, that the subsection entitled "Report of Compensation Committee on Annual Compensation" shall not be deemed to be incorporated herein by reference. 30 ITEM 12. Security Ownership of Certain Beneficial Owners and Management Information required pursuant to Item 403 of Regulation S-K is included under the caption "Security Ownership of Certain Beneficial Owners and Management" of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 19, 2002, 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 included under the caption "Certain Relationships and Related Transactions" of the Company's definitive proxy statement for the Annual Meeting of Shareholders to be held on April 19, 2002, 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. PART IV ITEM 14. Financial Statements, Financial Statement Schedule, Exhibits and Reports on Form 8-K (a) 1. Financial statements - The financial statements listed in the accompanying index to financial statements and financial statement schedule are filed as part of this Annual Report on Form 10-K. 2. Financial statement schedules - The financial statement schedules listed in the accompanying index to financial statements and financial statement schedule are filed as part of this Annual Report on Form 10-K. 3. Exhibits - The exhibits listed in the accompanying index to exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K On February 11, 2002, the Company filed a current report on Form 8-K pertaining to the action filed against the Company and its Ohio Gear division in the United States District Court for the Central District of Illinois. The plaintiffs in the litigation allege that in 1998 and 1999 Ohio Gear supplied defective differential assemblies that were used in transaxles manufactured by the plaintiffs. On February 1, 2002, the Company filed a current report on Form 8-K, attaching as exhibits Management's Discussion and Analysis of Financial Statements, Selected Financial Information and the audited Consolidated Financial Statements of the Company relating to the year ended December 31, 2001. Also filed was the form of Second Amendment and Waiver, dated as of January 31, 2001, among the Company, the financial institutions listed on the signature pages thereof, Bank of America, N.A., as Documentation and Syndication Agent, and M&I Marshall & Ilsley Bank, as Administrative Agent. On January 29, 2002, the Company filed a current report on 8-K, attaching as an exhibit a Company press release disclosing, among other things, the Company's fourth quarter and year-end financial results for the reporting periods ended December 31, 2001. 31 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 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 27, 2002 - --------------------------- Executive Officer and James L. Packard Director /s/ Kenneth F. Kaplan Vice President, Chief March 27, 2002 - --------------------------- Financial Officer and Kenneth F. Kaplan Secretary (Principal Accounting & Financial Officer) /s/ Henry W. Knueppel Executive Vice President March 27, 2002 - --------------------------- and Director Henry W. Knueppel /s/ John A. McKay Director March 27, 2002 - --------------------------- John A. McKay /s/ John M. Eldred Director March 27, 2002 - --------------------------- John M. Eldred /s/ J. Reed Coleman Director March 27, 2002 - --------------------------- J. Reed Coleman /s/ Frank Bauchiero Director March 27, 2002 - --------------------------- Frank Bauchiero 32 REGAL-BELOIT CORPORATION Index to Financial Statements and Financial Statement Schedule The following documents are incorporated by reference as part of this report: Page(s) In Form 10-K (1) Financial Statements: Report of Independent Public Accountants....................... 16 Consolidated Statements of Income for the three years ended December 31, 2001, 2000 and 1999....................... 17 Consolidated Balance Sheets at December 31, 2001 and 2000...... 18 Consolidated Statements of Cash Flows for the three years ended December 31, 2001, 2000 and 1999....................... 19 Consolidated Statements of Shareholders' Investment for the three years ended December 31, 2001, 2000 and 1999....... 20 Notes to Consolidated Financial Statements..................... 21-30 Page(s) In Form 10-K (2) Financial Statement Schedule: Report of Independent Public Accountants on Financial Statement Schedule........................................... 34 For the three years ended December 31, 2001, Schedule II - Valuation and Qualifying Accounts............................ 35 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 33 Report of Independent Public Accountants We have audited, in accordance with auditing standards generally accepted in the United States, the financial statements of Regal-Beloit Corporation in this Form 10-K, and have issued our report thereon dated January 29, 2002. 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 29, 2002 34 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, 2001 $ 2,031 $ 912 $ (710) $ -0- $ 2,233 Year Ended December 31, 2000 $ 1,758 $ 554 $ (809) $ 528 $ 2,031 Year Ended December 31, 1999 $ 1,851 $ (9) $ (84) $ -0- $ 1,758
35 Exhibits Index Exhibit Number Exhibit Description 2.1 Agreement and Plan of Merger among the Registrant, Regal-Beloit Acquisition Corp., and Marathon Electric Manufacturing Corporation dated as of February 26, 1997, as amended and restated March 17, 1997 and March 26, 1997. [Incorporated by reference to Exhibit 2.1 to Regal-Beloit Corporation's Current Report on Form 8-K dated April 10, 1997] 2.2 Stock Purchase Agreement, dated as of August 7, 2000, as amended by First Amendment to Stock Purchase Agreement, dated as of September 29, 2000, among Regal-Beloit Corporation, LEC Acquisition Corp., Leeson Electric Corporation ("Leeson") and Leeson's Shareholders. [Incorporated by reference to Exhibit 2 to Regal-Beloit Corporation's Current Report on Form 8-K dated October 13, 2000] 3.1 Articles of Incorporation of the Registrant [Incorporated by reference to Exhibit B to Regal-Beloit Corporation's Definitive Proxy Statement on Schedule 14A for the 1994 Annual Meeting of Shareholders] 3.2 Bylaws of the Registrant [Incorporated by reference to Exhibit C to Regal-Beloit Corporation's Definitive Proxy Statement on Schedule 14A for the 1994 Annual Meeting of Shareholders] 4.1 Articles of Incorporation and Bylaws of the Registrant [Incorporated by reference to Exhibits 3.1 and 3.2 hereto] 4.2 Rights Agreement, dated as of January 28, 2000, between Regal-Beloit Corporation and BankBoston, N.A. [Incorporated by reference to Exhibit 4.1 to Regal-Beloit Corporation's Registration Statement on Form 8-A (Registration No. 1-7283) filed January 31, 2000] 4.3 Credit Agreement, dated as of September 29, 2000, among Regal-Beloit Corporation, M&I Marshall & Ilsley Bank, as Administrative Agent, and Swing Line Bank, Bank of America, N.A., as Documentation and Syndication Agent, Banc of America Securities LLC, Lead Arranger and Book Manager and each of the Banks Party to the Credit Agreement [Incorporated by reference to Exhibit 4 to Regal-Beloit Corporation's Current Report on Form 8-K dated October 13, 2000] 4.4 First Amendment, dated as of June 29, 2001, among the Company, the financial institutions listed on the signature pages thereof, Bank of America, N.A., as Documentation and Syndication Agent, and M&I Marshall & Ilsley Bank, as Administrative Agent [Incorporated by reference to Exhibit 1 to Regal-Beloit Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001] 36 Exhibit Number Exhibit Description 4.5 Second Amendment and Waiver, dated as of January 31, 2002, among the Company, the financial institutions listed on the signature pages thereof, Bank of America, N.A., as Documentation and Syndication Agent, and M&I Marshall & Ilsley Bank, as Administrative Agent [Incorporated by reference to Exhibit 99.4 to Regal-Beloit Corporation's Current Report on Form 8-K dated February 1, 2002] 10.1* Short-Term Incentive Compensation Plan, as amended [Incorporated by reference to Exhibit 10.1 to Regal-Beloit Corporation's Annual Report on Form 10-K for the year ended December 31, 1992] 10.3* 1987 Stock Option Plan [Incorporated by reference to Exhibit 10.3 to Regal-Beloit Corporation's Registration Statement on Form S-1 (Registration No. 33-25363) dated November 4, 1988] 10.4* 1991 Flexible Stock Incentive Plan [Incorporated by reference to Exhibit 10.4 to Regal-Beloit Corporation's Annual Report on Form 10-K for the year ended December 31, 1992] 10.5* Form of Change of Control Agreement between Regal-Beloit Corporation and each of Henry W. Knueppel and Kenneth F. Kaplan [Incorporated by reference to Exhibit 10.5 to Regal-Beloit Corporation's Annual Report on Form 10-K for the year ended December 31, 1997] 10.6* Addendum to Change of Control Agreement effective as of April 21, 1998 [Incorporated by reference to Exhibit 10.5(a) to Regal-Beloit Corporation's Annual Report on Form 10-K for the year ended December 31, 1998] 10.7* Disability Insurance Agreement between Regal-Beloit Corporation and Continental Casualty Company [Incorporated by reference to Exhibit 10.6 to Regal-Beloit Corporation's Annual Report on Form 10-K for the year ended December 31, 1992] 10.8* 1998 Stock Option Plan, as amended [Incorporated by reference to Regal-Beloit Corporation's Registration Statement on Form S-8 (File No. 333-84779)] 10.9* Key Executive Employment and Severance Agreement, dated as of June 18, 2001, between James L. Packard and Regal-Beloit Corporation 21 Subsidiaries of Regal-Beloit Corporation 23 Consent of Independent Public Accountants 99.1 Regal-Beloit Corporation Letter to the Securities and Exchange Commission regarding representations from Arthur Andersen LLP 37 99.2 Proxy Statement of Regal-Beloit Corporation for the 2002 Annual Meeting of Shareholders [The Proxy Statement for the 2002 Annual Meeting of Shareholders will be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the Company's fiscal year. Except to the extent specifically incorporated by reference, the Proxy Statement for the 2002 Annual Meeting of Shareholders shall not be deemed to be filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K.] ------------------------ * A management contract or compensatory plan or arrangement. 38 EX-10.9 3 slp254c.txt KEY EXECUTIVE EMPLOYMENT AND SEVERANCE AGREEMENT KEY EXECUTIVE EMPLOYMENT AND SEVERANCE AGREEMENT THIS AGREEMENT, made and entered into as of the 18th day of June, 2001, by and between Regal-Beloit Corporation, a Wisconsin corporation (hereinafter referred to as the "Company"), and James L. Packard (hereinafter referred to as the "Executive"). W I T N E S S E T H WHEREAS, the Executive is employed by the Company and/or a subsidiary of the Company (hereinafter referred to collectively as the "Employer") in a key executive capacity and the Executive's services are valuable to the conduct of the business of the Company; WHEREAS, the Company desires to continue to attract and retain dedicated and skilled management employees in a period of industry consolidation, consistent with achieving the best possible value for its shareholders in any change in control of the Company; WHEREAS, the Company recognizes that circumstances may arise in which a change in control of the Company occurs, through acquisition or otherwise, thereby causing a potential conflict of interest between the Company's needs for the Executive to remain focused on the Company's business and for the necessary continuity in management prior to and following a change in control, and the Executive's reasonable personal concerns regarding future employment with the Employer and economic protection in the event of loss of employment as a consequence of a change in control; WHEREAS, the Company and the Executive are desirous that any proposal for a change in control or acquisition of the Company will be considered by the Executive objectively and with reference only to the best interests of the Company and its shareholders; WHEREAS, the Executive will be in a better position to consider the Company's best interests if the Executive is afforded reasonable economic security, as provided in this Agreement, against altered conditions of employment which could result from any such change in control or acquisition; WHEREAS, the Executive possesses intimate knowledge of the business and affairs of the Company and has acquired certain confidential information and data with respect to the Company; and WHEREAS, the Company desires to insure, insofar as possible, that it will continue to have the benefit of the Executive's services and to protect its confidential information and goodwill. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto mutually covenant and agree as follows: 1. Definitions. (a) Accrued Benefits. The term "Accrued Benefits" shall include the following amounts, payable as described herein: (i) all base salary for the time period ending with the Termination Date; (ii) reimbursement for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Employer for the time period ending with the Termination Date; (iii) any and all other cash earned through the Termination Date and deferred at the election of the Executive or pursuant to any deferred compensation plan then in effect; (iv) notwithstanding any provision of any bonus or incentive compensation plan applicable to the Executive, a lump sum amount, in cash, equal to the sum of (A) any bonus or incentive compensation that has been allocated or awarded to the Executive for a fiscal year or other measuring period under the plan that ends prior to the Termination Date but has not yet been paid (pursuant to Section 5(f) or otherwise) and (B) a pro rata portion to the Termination Date of the aggregate value of all contingent bonus or incentive compensation awards to the Executive for all uncompleted periods under the plan calculated as to each such award as if the Goals with respect to such bonus or incentive compensation award had been attained; and (v) all other payments and benefits to which the Executive (or in the event of the Executive's death, the Executive's surviving spouse or other beneficiary) may be entitled on the Termination Date as compensatory fringe benefits or under the terms of any benefit plan of the Employer, excluding severance payments under any Employer severance policy, practice or agreement in effect on the Termination Date. Payment of Accrued Benefits shall be made promptly in accordance with the Company's prevailing practice with respect to clauses (i) and (ii) or, with respect to clauses (iii), (iv) and (v), pursuant to the terms of the benefit plan or practice establishing such benefits. (b) Act. The term "Act" means the Securities Exchange Act of 1934, as amended. (c) Affiliate and Associate. The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule l2b-2 of the General Rules and Regulations under the Act. (d) Annual Cash Compensation. The term "Annual Cash Compensation" shall mean the sum of (i) the Executive's Annual Base Salary (determined as of the time of the Change in Control of the Company or, if higher, immediately prior to the date the Notice of Termination is given) plus (ii) an amount equal to the greater of the Executive's annual incentive target bonus for the fiscal year in which the Termination Date occurs or the annual incentive bonus the Executive received for the fiscal year prior to the Change in Control of the Company plus (iii) an amount equal to the greater of the Executive's Fringe Benefits for the fiscal year in which the Termination Date occurs or the annual amount of Fringe Benefits the Executive received for the fiscal year prior to the Change in Control of the Company (the aggregate amount set forth in clause (i), clause (ii) and clause iii shall hereafter be referred to as the "Annual Cash Compensation"). (e) Beneficial Owner. A Person shall be deemed to be the "Beneficial Owner" of any securities: -2- (i) which such Person or any of such Person's Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, (A) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase, or (B) securities issuable upon exercise of Rights issued pursuant to the terms of the Company's Rights Agreement, dated as of January 28, 2000, between the Company and Firstar Bank, N.A., as amended from time to time (or any successor to such Rights Agreement), at any time before the issuance of such securities; (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule l3d-3 of the General Rules and Regulations under the Act), including pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security under this clause (ii) as a result of an agreement, arrangement or understanding to vote such security if the agreement, arrangement or understanding: (A) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Act and (B) is not also then reportable on a Schedule l3D under the Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in clause (ii) above) or disposing of any voting securities of the Company. (f) Cause. "Cause" for termination by the Employer of the Executive's employment in connection with a Change in Control of the Company shall be limited to (i) the engaging by the Executive in intentional conduct not taken in good faith that the Company establishes, by clear and convincing evidence, has caused demonstrable and serious financial injury to the Employer, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an action, suit or proceeding, whether civil, criminal, administrative or investigative; (ii) conviction of a felony (as evidenced by binding and final judgment, order or decree of a court of competent jurisdiction, in effect after exhaustion of all rights of appeal), which substantially impairs the Executive's ability to perform his duties or responsibilities; or (iii) continuing willful and unreasonable refusal by the Executive to perform the Executive's duties or responsibilities (unless significantly changed without the Executive's consent). -3- (g) Change in Control of the Company. A "Change in Control of the Company" shall be deemed to have occurred if an event set forth in any one of the following paragraphs shall have occurred: (i) any Person (other than (A) the Company or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under any employee benefit plan of the Company or any of its subsidiaries, (C) an underwriter temporarily holding securities pursuant to an offering of such securities or (D) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock in the Company ("Excluded Persons")) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates after June 13, 2001, pursuant to express authorization by the Board that refers to this exception) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding voting securities; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors of the Company then serving: (A) individuals who, on June 13, 2001 constituted the Board and (B) any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on June 13, 2001, or whose appointment, election or nomination for election was previously so approved (collectively the "Continuing Directors"); provided, however, that individuals who are appointed to the Board pursuant to or in accordance with the terms of an agreement relating to a merger, consolidation, or share exchange involving the Company (or any direct or indirect subsidiary of the Company) shall not be Continuing Directors for purposes of this Agreement until after such individuals are first nominated for election by a vote of at least two-thirds (2/3) of the then Continuing Directors and are thereafter elected as directors by the shareholders of the Company at a meeting of shareholders held following consummation of such merger, consolidation, or share exchange; and, provided further, that in the event the failure of any such persons appointed to the Board to be Continuing Directors results in a Change in Control of the Company, the subsequent qualification of such persons as Continuing Directors shall not alter the fact that a Change in Control of the Company occurred; or (iii) the shareholders of the Company approve a merger, consolidation or share exchange of the Company with any other corporation or approve the issuance of voting securities of the Company in connection with a merger, consolidation or share exchange of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, -4- other than (A) a merger, consolidation or share exchange which would result in the voting securities of the Company outstanding immediately prior to such merger, consolidation or share exchange continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger, consolidation or share exchange, or (B) a merger, consolidation or share exchange effected to implement a recapitalization of the Company (or similar transaction) in which no Person (other than an Excluded Person) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates after June 13, 2001, pursuant to express authorization by the Board that refers to this exception) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding voting securities; or (iv) the shareholders of the Company approve of a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (in one transaction or a series of related transactions within any period of 24 consecutive months), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity at least 75% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, no "Change in Control of the Company" shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to own, directly or indirectly, in the same proportions as their ownership in the Company, an entity that owns all or substantially all of the assets or voting securities of the Company immediately following such transaction or series of transactions. (h) Code. The term "Code" means the Internal Revenue Code of 1986, including any amendments thereto or successor tax codes thereof. (i) Covered Termination. Subject to Section 2(b), the term "Covered Termination" means any termination of the Executive's employment during the Employment Period where the Termination Date, or the date Notice of Termination is delivered, is any date prior to the end of the Employment Period. (j) Employment Period. Subject to Section 2(b), the term "Employment Period" means a period commencing on the date of a Change in Control of the Company, and ending at 11:59 p.m. Central Time on the earlier of the third anniversary of such date or the Executive's Normal Retirement Date. -5- (k) Fringe Benefits. The term "Fringe Benefits" means the fair market value of the fringe benefits payable to Executive by the Company (determined as of the time of the Change in Control of the Company or, if higher, immediately prior to the date the Notice of Termination is given). For these purposes, Fringe Benefits include, but are not limited to club dues or automobile reimbursement and do not include welfare benefits, such as medical coverage (including prescription drug coverage), dental coverage, life insurance, disability insurance and accidental death and dismemberment benefits. (l) Good Reason. The Executive shall have "Good Reason" for termination of employment in connection with a Change in Control of the Company in the event of: (i) any breach of this Agreement by the Employer, including specifically any breach by the Employer of the agreements contained in Section 3(b), Section 4, Section 5, or Section 6, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith that the Employer remedies promptly after receipt of notice thereof given by the Executive; (ii) any reduction in the Executive's base salary, percentage of base salary available as incentive compensation or bonus opportunity or benefits, in each case relative to those most favorable to the Executive in effect at any time during the 180-day period prior to the Change in Control of the Company or, to the extent more favorable to the Executive, those in effect at any time during the Employment Period; (iii) the removal of the Executive from, or any failure to reelect or reappoint the Executive to, any of the positions held with the Employer on the date of the Change in Control of the Company or any other positions with the Employer to which the Executive shall thereafter be elected, appointed or assigned, except in the event that such removal or failure to reelect or reappoint relates to the termination by the Employer of the Executive's employment for Cause or by reason of disability pursuant to Section 12; (iv) a good faith determination by the Executive that there has been a material adverse change, without the Executive's written consent, in the Executive's working conditions or status with the Employer relative to the most favorable working conditions or status in effect during the 180-day period prior to the Change in Control of the Company, or, to the extent more favorable to the Executive, those in effect at any time during the Employment Period, including but not limited to (A) a significant change in the nature or scope of the Executive's authority, powers, functions, duties or responsibilities, or (B) a significant reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements, but in each case excluding for this purpose an isolated, insubstantial and inadvertent event not occurring in bad faith that the Employer remedies within ten (10) days after receipt of notice thereof given by the Executive; -6- (v) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment on the date 180 days prior to the Change in Control of the Company; (vi) the Employer requires the Executive to travel on Employer business 20% in excess of the average number of days per month the Executive was required to travel during the 180-day period prior to the Change in Control of the Company; (vii) failure by the Company to obtain the Agreement referred to in Section 17(a) as provided therein; or (viii) any voluntary termination of employment by the Executive where the Notice of Termination is delivered during the 30 days following the first anniversary of the Change in Control of the Company. (m) Normal Retirement Date. The term "Normal Retirement Date" means "Normal Retirement Date" as defined in the primary qualified defined benefit pension plan applicable to the Executive, or any successor plan, as in effect on the date of the Change in Control of the Company. (n) Person. The term "Person" shall mean any individual, firm, partnership, corporation or other entity, including any successor (by merger or otherwise) of such entity, or a group of any of the foregoing acting in concert. (o) Termination Date. Except as otherwise provided in Section 2(b), Section 10(b), and Section 17(a), the term "Termination Date" means (i) if the Executive's employment is terminated by the Executive's death, the date of death; (ii) if the Executive's employment is terminated by reason of voluntary early retirement, as agreed in writing by the Employer and the Executive, the date of such early retirement which is set forth in such written agreement; (iii) if the Executive's employment is terminated for purposes of this Agreement by reason of disability pursuant to Section 12, the earlier of thirty days after the Notice of Termination is given or one day prior to the end of the Employment Period; (iv) if the Executive's employment is terminated by the Executive voluntarily (other than for Good Reason), the date the Notice of Termination is given; and (v) if the Executive's employment is terminated by the Employer (other than by reason of disability pursuant to Section 12) or by the Executive for Good Reason, the earlier of thirty days after the Notice of Termination is given or one day prior to the end of the Employment Period. Notwithstanding the foregoing, (A) If termination is for Cause pursuant to Section 1(f)(iii) and if the Executive has cured the conduct constituting such Cause as described by the Employer in its Notice of Termination within such thirty-day or shorter period, then the Executive's employment hereunder shall continue as if the Employer had not delivered its Notice of Termination. -7- (B) If the Executive shall in good faith give a Notice of Termination for Good Reason and the Employer notifies the Executive that a dispute exists concerning the termination within the fifteen-day period following receipt thereof, then the Executive may elect to continue his or her employment during such dispute and the Termination Date shall be determined under this paragraph. If the Executive so elects and it is thereafter determined that Good Reason did exist, the Termination Date shall be the earliest of (1) the date on which the dispute is finally determined, either (x) by mutual written agreement of the parties or (y) in accordance with Section 22, (2) the date of the Executive's death or (3) one day prior to the end of the Employment Period. If the Executive so elects and it is thereafter determined that Good Reason did not exist, then the employment of the Executive hereunder shall continue after such determination as if the Executive had not delivered the Notice of Termination asserting Good Reason and there shall be no Termination Date arising out of such Notice. In either case, this Agreement continues, until the Termination Date, if any, as if the Executive had not delivered the Notice of Termination except that, if it is finally determined that Good Reason did exist, the Executive shall in no case be denied the benefits described in Section 9 (including a Termination Payment) based on events occurring after the Executive delivered his Notice of Termination. (C) Except as provided in Section 1(n)(B), if the party receiving the Notice of Termination notifies the other party that a dispute exists concerning the termination within the appropriate period following receipt thereof and it is finally determined that the reason asserted in such Notice of Termination did not exist, then (1) if such Notice was delivered by the Executive, the Executive will be deemed to have voluntarily terminated his employment and the Termination Date shall be the earlier of the date fifteen days after the Notice of Termination is given or one day prior to the end of the Employment Period and (2) if delivered by the Company, the Company will be deemed to have terminated the Executive other than by reason of death, disability or Cause. 2. Termination or Cancellation Prior to Change in Control. (a) Subject to Section 2(b), the Employer and the Executive shall each retain the right to terminate the employment of the Executive at any time prior to a Change in Control of the Company. Subject to Section 2(b), in the event the Executive's employment is terminated prior to a Change in Control of the Company, this Agreement shall be terminated and cancelled and of no further force and effect, and any and all rights and obligations of the parties hereunder shall cease. (b) Anything in this Agreement to the contrary notwithstanding, if a Change in Control of the Company occurs and if the Executive's employment with the Employer is terminated (other than a termination due to the Executive's death or as a result of the Executive's disability) during the period of 180 days prior to the date on which the Change in Control of the Company occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control of the Company or (ii) otherwise arose in connection with or in -8- anticipation of a Change in Control of the Company, then for all purposes of this Agreement such termination of employment shall be deemed a "Covered Termination," "Notice of Termination" shall be deemed to have been given, and the "Employment Period" shall be deemed to have begun on the date of such termination which shall be deemed to be the "Termination Date" and the date of the Change of Control of the Company for purposes of this Agreement. 3. Employment Period; Vesting of Certain Benefits. (a) If a Change in Control of the Company occurs when the Executive is employed by the Employer, the Employer will continue thereafter to employ the Executive during the Employment Period, and the Executive will remain in the employ of the Employer in accordance with and subject to the terms and provisions of this Agreement. Any termination of the Executive's employment during the Employment Period, whether by the Company or the Employer, shall be deemed a termination by the Company for purposes of this Agreement. (b) If a Change in Control of the Company occurs when the Executive is employed by the Employer, (i) the Company shall cause all restrictions on restricted stock awards made to the Executive prior to the Change in Control of the Company to lapse such that the Executive is fully and immediately vested in the Executive's restricted stock upon such a Change in Control of the Company; and (ii) the Company shall cause all stock options granted to the Executive prior to the Change in Control of the Company pursuant to the Company's stock option plan(s) to be fully and immediately vested upon such a Change in Control of the Company. 4. Duties. During the Employment Period, the Executive shall, in the same capacities and positions held by the Executive at the time of the Change in Control of the Company or in such other capacities and positions as may be agreed to by the Employer and the Executive in writing, devote the Executive's best efforts and all of the Executive's business time, attention and skill to the business and affairs of the Employer, as such business and affairs now exist and as they may hereafter be conducted. 5. Compensation. During the Employment Period, the Executive shall be compensated as follows: (a) The Executive shall receive, at reasonable intervals (but not less often than monthly) and in accordance with such standard policies as may be in effect immediately prior to the Change in Control of the Company, an annual base salary in cash equivalent of not less than twelve times the Executive's highest monthly base salary for the twelve-month period immediately preceding the month in which the Change in Control of the Company occurs or, if higher, an annual base salary at the rate in effect immediately prior to the Change in Control of the Company (which base salary shall, unless otherwise agreed in writing by the Executive, include the current receipt by the Executive of any amounts which, prior to the Change in Control of the Company, the Executive had elected to defer, whether such compensation is deferred under Section 401(k) of the Code or otherwise), subject to adjustment as hereinafter provided in Section 6 (such salary amount as adjusted upward from time to time is hereafter referred to as the "Annual Base Salary"). (b) The Executive shall receive Fringe Benefits at least equal in value to the highest value of such benefits provided for the Executive at any time during the 180-day period -9- immediately prior to the Change in Control of the Company or, if more favorable to the Executive, those provided generally at any time during the Employment Period to any executives of the Employer of comparable status and position to the Executive; and shall be reimbursed, at such intervals and in accordance with such standard policies that are most favorable to the Executive that were in effect at any time during the 180-day period immediately prior to the Change in Control of the Company, for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Employer, including travel expenses. (c) The Executive and/or the Executive's family, as the case may be, shall be included, to the extent eligible thereunder (which eligibility shall not be conditioned on the Executive's salary grade or on any other requirement which excludes persons of comparable status to the Executive unless such exclusion was in effect for such plan or an equivalent plan at any time during the 180-day period immediately prior to the Change in Control of the Company), in any and all plans providing benefits for the Employer's salaried employees in general, including but not limited to group life insurance, hospitalization, medical (including prescription drug coverage), dental, profit sharing and stock bonus plans; provided, that, (i) in no event shall the aggregate level of benefits under such plans in which the Executive is included be less than the aggregate level of benefits under plans of the Employer of the type referred to in this Section 5(c) in which the Executive was participating at any time during the 180-day period immediately prior to the Change in Control of the Company and (ii) in no event shall the aggregate level of benefits under such plans be less than the aggregate level of benefits under plans of the type referred to in this Section 5(c) provided at any time after the Change in Control of the Company to any executive of the Employer of comparable status and position to the Executive. (d) The Executive shall annually be entitled to not less than the amount of paid vacation and not fewer than the highest number of paid holidays to which the Executive was entitled annually at any time during the 180-day period immediately prior to the Change in Control of the Company or such greater amount of paid vacation and number of paid holidays as may be made available annually to other executives of the Employer of comparable status and position to the Executive at any time during the Employment Period. (e) The Executive shall be included in all plans providing additional benefits to executives of the Employer of comparable status and position to the Executive, including but not limited to deferred compensation, split-dollar life insurance, supplemental retirement, stock option, stock appreciation, stock bonus and similar or comparable plans; provided, that, (i) in no event shall the aggregate level of benefits under such plans be less than the highest aggregate level of benefits under plans of the Employer of the type referred to in this Section 5(e) in which the Executive was participating at any time during the 180-day period immediately prior to the Change in Control of the Company; (ii) in no event shall the aggregate level of benefits under such plans be less than the aggregate levels of benefits under plans of the type referred to in this Section 5(e) provided at any time after the Change in Control of the Company to any executive of the Employer comparable in status and position to the Executive; and (iii) the Employer's obligation to include the Executive in bonus or incentive compensation plans shall be determined by Section 5(f). (f) To assure that the Executive will have an opportunity to earn incentive compensation after a Change in Control of the Company, the Executive shall be included in a -10- bonus plan of the Employer which shall satisfy the standards described below (such plan, the "Bonus Plan"). Bonuses under the Bonus Plan shall be payable with respect to achieving such financial or other goals reasonably related to the business of the Employer as the Employer shall establish (the "Goals"), all of which Goals shall be attainable, prior to the end of the Employment Period, with approximately the same degree of probability as the most attainable goals under the Employer's bonus plan or plans as in effect at any time during the 180-day period immediately prior to the Change in Control of the Company (whether one or more, the "Company Bonus Plan") and in view of the Employer's existing and projected financial and business circumstances applicable at the time. The amount of the bonus (the "Bonus Amount") that the Executive is eligible to earn under the Bonus Plan shall be no less than the amount of the Executive's maximum award provided in such Company Bonus Plan (such bonus amount herein referred to as the "Targeted Bonus"), and in the event the Goals are not achieved such that the entire Targeted Bonus is not payable, the Bonus Plan shall provide for a payment of a Bonus Amount equal to a portion of the Targeted Bonus reasonably related to that portion of the Goals which were achieved. Payment of the Bonus Amount shall not be affected by any circumstance occurring subsequent to the end of the Employment Period, including termination of the Executive's employment. 6. Annual Compensation Adjustments. During the Employment Period, the Board of Directors of the Company (or an appropriate committee thereof) will consider and appraise, at least annually, the contributions of the Executive to the Company, and in accordance with the Company's practice prior to the Change in Control of the Company, due consideration shall be given to the upward adjustment of the Executive's Annual Base Salary, at least annually, (a) commensurate with increases generally given to other executives of the Company of comparable status and position to the Executive, and (b) as the scope of the Company's operations or the Executive's duties expand. 7. Termination For Cause or Without Good Reason. If there is a Covered Termination for Cause or due to the Executive's voluntarily terminating his or her employment other than for Good Reason (any such terminations to be subject to the procedures set forth in Section 13), then the Executive shall be entitled to receive only Accrued Benefits. 8. Termination Giving Rise to a Termination Payment. If there is a Covered Termination by the Executive for Good Reason, or by the Company other than by reason of (i) death, (ii) disability pursuant to Section 12, or (iii) Cause (any such terminations to be subject to the procedures set forth in Section 13), then the Executive shall be entitled to receive, and the Company shall promptly pay, Accrued Benefits and, in lieu of further base salary for periods following the Termination Date, as liquidated damages and additional severance pay and in consideration of the covenant of the Executive set forth in Section 14(a), the Termination Payment pursuant to Section 9(a). 9. Payments Upon Termination. (a) Termination Payment. The "Termination Payment" shall be an amount equal to the Annual Cash Compensation times three (3). The Termination Payment shall be paid to the Executive in cash equivalent ten (10) business days after the Termination Date. Such lump sum payment shall not be reduced by any present value or similar factor, and the Executive shall not be required to mitigate the amount of the Termination Payment by securing other employment or -11- otherwise, nor will such Termination Payment be reduced by reason of the Executive securing other employment or for any other reason. The Termination Payment shall be in lieu of, and acceptance by the Executive of the Termination Payment shall constitute the Executive's release of any rights of the Executive to, any other cash severance payments under any Company severance policy, practice or agreement. (b) Certain Additional Payments by the Company. (i) Notwithstanding any other provision of this Agreement, if any portion of the Termination Payment or any other payment under this Agreement, or under any other agreement with or plan of the Employer (in the aggregate, "Total Payments"), would constitute an "excess parachute payment," then the Company shall pay the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive after deduction of any excise tax imposed under Section 4999 of the Code (or any successor provision) and any interest charges or penalties in respect of the imposition of such excise tax (but not any federal, state or local income tax, or employment tax) on the Total Payments, and any federal, state and local income tax, employment tax, and excise tax upon the payment provided for by this Section 9(b)(i), shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's domicile for income tax purposes on the date the Gross-Up Payment is made, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. (ii) For purposes of this Agreement, the terms "excess parachute payment" and "parachute payments" shall have the meanings assigned to them in Section 280G of the Code (or any successor provision) and such "parachute payments" shall be valued as provided therein. Present value for purposes of this Agreement shall be calculated in accordance with Section 1274(b)(2) of the Code (or any successor provision). Promptly following a Covered Termination or notice by the Company to the Executive of its belief that there is a payment or benefit due the Executive which will result in an "excess parachute payment" as defined in Section 280G of the Code (or any successor provision), the Executive and the Company, at the Company's expense, shall obtain the opinion (which need not be unqualified) of nationally recognized tax counsel ("National Tax Counsel") selected by the Company's independent auditors and reasonably acceptable to the Executive (which may be regular outside counsel to the Company), which opinion sets forth (A) the amount of the Base Period Income, (B) the amount and present value of Total Payments, (C) the amount and present value of any excess parachute payments, and (D) the amount of any Gross-Up Payment. As used in this Agreement, the term "Base Period Income" means an amount equal to the Executive's "annualized includable compensation for the base period" as defined in -12- Section 280G(d)(1) of the Code. For purposes of such opinion, the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code (or any successor provisions), which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Executive. The opinion of National Tax Counsel shall be addressed to the Company and the Executive and shall be binding upon the Company and the Executive. If such National Tax Counsel so requests in connection with the opinion required by this Section 9(b), the Executive and the Company shall obtain, at the Company's expense, and the National Tax Counsel may rely on, the advice of a firm of recognized executive compensation consultants as to the reasonableness of any item of compensation to be received by the Executive solely with respect to its status under Section 280G of the Code and the regulations thereunder. Within five (5) days after the National Tax Counsel's opinion is received by the Company and the Executive, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of the Executive such amounts as are then due to the Executive under this Agreement. (iii) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Total Payments or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by the Executive, appropriate adjustments shall be made under this Agreement such that the net amount which is payable to the Executive after taking into account the provisions of Section 4999 of the Code (or any successor provision) shall reflect the intent of the parties as expressed in this Section 9, in the manner determined by the National Tax Counsel. (iv) The Company agrees to bear all costs associated with, and to indemnify and hold harmless, the National Tax Counsel of and from any and all claims, damages, and expenses resulting from or relating to its determinations pursuant to this Section 9(b), except for claims, damages or expenses resulting from the gross negligence or willful misconduct of such firm. (c) Additional Benefits. If there is a Covered Termination and the Executive is entitled to Accrued Benefits and the Termination Payment, then the Company shall provide to the Executive the following additional benefits: (i) The Executive shall receive, at the expense of the Company, outplacement services, on an individualized basis at a level of service commensurate with the Executive's status with the Company immediately prior to the date of the Change in Control of the Company (or, if higher, immediately prior to the termination of the Executive's employment), provided by a nationally recognized executive placement firm selected by the Company; provided that the cost to the Company of such services shall not exceed 10% of the Executive's Annual Base Salary. -13- (ii) Until the earlier of the end of the Employment Period or such time as the Executive has obtained new employment and is covered by benefits which in the aggregate are at least equal in value to the following benefits, the Executive shall continue to be covered, at the expense of the Company, by the same or equivalent life insurance, hospitalization, medical and dental coverage as was required hereunder with respect to the Executive immediately prior to the date the Notice of Termination is given. (iii) The Company shall bear up to $15,000 in the aggregate of fees and expenses of consultants and/or legal or accounting advisors engaged by the Executive to advise the Executive as to matters relating to the computation of benefits due and payable under this Section 9. (iv) The Company shall cause the Executive to be fully and immediately vested in his accrued benefit under any supplemental executive retirement plan of the Employer providing benefits for the Executive (the "SERP") and in any defined contribution retirement plan of the Employer. In addition, the Company shall cause the Executive to be deemed to have satisfied any minimum years of service requirement under the SERP for subsidized early retirement benefits regardless of the Executive's age and service at the Termination Date; provided, however, that SERP benefits will be based on service to date with no additional credit for service or age beyond such Termination Date. (v) On the Termination Date, for purposes of determining Executive's eligibility for post-retirement benefits under any welfare benefit plan (as defined in Section 3(1) of the Employee Retirement Security Act of 1974, as amended) maintained by the Company immediately prior to the Change in Control of the Company and in which Executive participated, immediately prior to the Change in Control of the Company, Executive shall be credited with the excess of three (3) years of participation in the applicable medical plan and three (3) years of age over the actual years and fractional years of participation and age credited to Executive as of the Change in Control of the Company. If the Executive is less than 60 years of age, he shall be credited with a minimum age of 60 years. If after taking into account such participation and age, Executive would have been eligible to receive such post-retirement benefits had Executive retired immediately prior to the Change in Control of the Company, Executive shall receive, commencing on the Termination Date, post-retirement benefits based on the terms and conditions of the applicable plans in effect immediately prior to the Change in Control of the Company. (vi) For purposes of determining the Executive's retirement benefits under the various retirement benefits plans of the Company, Executive shall be deemed to be an active employee receiving his Annual Base Salary and shall accordingly continue to earn service and accrue benefits under such plans to a minimum age of sixty (60) years, but not less than for an additional period of three (3) years following the Termination Date. -14- (vii) The Company shall cause all performance plan awards granted to the Executive pursuant to any long-term incentive plan maintained by the Company to be paid out at target, as if all performance requirements had been satisfied, on a pro rata basis based on the completed portion of each award cycle. (viii) The Executive shall, after the Termination Date, retain all rights to indemnification under applicable law or under the Company's Certificate of Incorporation or By-Laws, as they may be amended or restated from time to time, to the extent any such amendment or restatement expands the Executive's rights to indemnification. In addition, the Company shall maintain Director's and Officer's liability insurance on behalf of the Executive, provided the Executive is eligible to be covered and has in fact been covered by such insurance, at the highest level in effect immediately prior to the date of the Change in Control of the Company (or, if higher, immediately prior to the termination of the Executive's employment) including any such insurance that was reduced prior to a Change in Control of the Company at the request of the person or entity acquiring control of the Company or reasonably shown to be related to the Change in Control of the Company, for the seven (7) year period following the Termination Date. 10. Death. (a) Except as provided in Section 10(b), in the event of a Covered Termination due to the Executive's death, the Executive's estate, heirs and beneficiaries shall receive all the Executive's Accrued Benefits through the Termination Date. (b) In the event the Executive dies after a Notice of Termination is given (i) by the Company or (ii) by the Executive for Good Reason, the Executive's estate, heirs and beneficiaries shall be entitled to the benefits described in Section 10(a) and, subject to the provisions of this Agreement, to such Termination Payment as the Executive would have been entitled to had the Executive lived. For purposes of this Section 10(b), the Termination Date shall be the earlier of thirty days following the giving of the Notice of Termination, subject to extension pursuant to Section 1(n), or one day prior to the end of the Employment Period. 11. Retirement. If, during the Employment Period, the Executive and the Employer shall execute an agreement providing for the early retirement of the Executive from the Employer, or the Executive shall otherwise give notice that he is voluntarily choosing to retire early from the Employer, the Executive shall receive Accrued Benefits through the Termination Date; provided, that if the Executive's employment is terminated by the Executive for Good Reason or by the Company other than by reason of death, disability or Cause and the Executive also, in connection with such termination, elects voluntary early retirement, the Executive shall also be entitled to receive a Termination Payment pursuant to Section 8. 12. Termination for Disability. If, during the Employment Period, as a result of the Executive's disability due to physical or mental illness or injury (regardless of whether such illness or injury is job-related), the Executive shall have been absent from the Executive's -15- duties hereunder on a full-time basis for a period of six consecutive months and, within thirty days after the Company notifies the Executive in writing that it intends to terminate the Executive's employment (which notice shall not constitute the Notice of Termination contemplated below), the Executive shall not have returned to the performance of the Executive's duties hereunder on a full-time basis, the Company may terminate the Executive's employment for purposes of this Agreement pursuant to a Notice of Termination given in accordance with Section 13. If the Executive's employment is terminated on account of the Executive's disability in accordance with this Section, the Executive shall receive Accrued Benefits through the Termination Date and shall remain eligible for all benefits provided by any long term disability programs of the Company in effect at the time of such termination. 13. Termination Notice and Procedure. Any Covered Termination by the Company or the Executive (other than a termination of the Executive's employment that is a Covered Termination by virtue of Section 2(b)) shall be communicated by a written notice of termination ("Notice of Termination") to the Executive, if such Notice is given by the Company, and to the Company, if such Notice is given by the Executive, all in accordance with the following procedures and those set forth in Section 23: (a) If such termination is for disability, Cause or Good Reason, the Notice of Termination shall indicate in reasonable detail the facts and circumstances alleged to provide a basis for such termination. (b) Any Notice of Termination by the Company shall have been approved, prior to the giving thereof to the Executive, by a resolution duly adopted by a majority of the directors of the Company (or any successor corporation) then in office. (c) If the Notice is given by the Executive for Good Reason, the Executive may cease performing his duties hereunder on or after the date fifteen days after the delivery of Notice of Termination and shall in any event cease employment on the Termination Date. If the Notice is given by the Company, then the Executive may cease performing his duties hereunder on the date of receipt of the Notice of Termination, subject to the Executive's rights hereunder. (d) The Executive shall have thirty days, or such longer period as the Company may determine to be appropriate, to cure any conduct or act, if curable, alleged to provide grounds for termination of the Executive's employment for Cause under this Agreement pursuant to Section 1(f)(iii). (e) The recipient of any Notice of Termination shall personally deliver or mail in accordance with Section 23 written notice of any dispute relating to such Notice of Termination to the party giving such Notice within fifteen days after receipt thereof; provided, however, that if the Executive's conduct or act alleged to provide grounds for termination by the Company for Cause is curable, then such period shall be thirty days. After the expiration of such period, the contents of the Notice of Termination shall become final and not subject to dispute. 14. Further Obligations of the Executive. (a) Competition. The Executive agrees that, in the event of any Covered Termination where the Executive is entitled to Accrued Benefits and the Termination Payment, the Executive shall not, for a period expiring one year after the Termination Date, without the prior -16- written approval of the Company's Board of Directors, participate in the management of, be employed by or own any business enterprise at a location within the United States that engages in substantial competition with the Company or its subsidiaries, where such enterprise's revenues from any competitive activities amount to 10% or more of such enterprise's net revenues and sales for its most recently completed fiscal year; provided, however, that nothing in this Section 14(a) shall prohibit the Executive from owning stock or other securities of a competitor amounting to less than five percent of the outstanding capital stock of such competitor. (b) Confidentiality. During and following the Executive's employment by the Company, the Executive shall hold in confidence and not directly or indirectly disclose or use or copy or make lists of any confidential information or proprietary data of the Company (including that of the Employer), except to the extent authorized in writing by the Board of Directors of the Company or required by any court or administrative agency, other than to an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of duties as an executive of the Company. Confidential information shall not include any information known generally to the public or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that of the Company. All records, files, documents and materials, or copies thereof, relating to the business of the Company which the Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company and shall be promptly returned to the Company upon termination of employment with the Company. 15. Expenses and Interest. If, after a Change in Control of the Company, (a) a dispute arises with respect to the enforcement of the Executive's rights under this Agreement or (b) any legal or arbitration proceeding shall be brought to enforce or interpret any provision contained herein or to recover damages for breach hereof, in either case so long as the Executive is not acting in bad faith, then the Company shall reimburse the Executive for any reasonable attorneys' fees and necessary costs and disbursements incurred as a result of the dispute, legal or arbitration proceeding ("Expenses"), and prejudgment interest on any money judgment or arbitration award obtained by the Executive calculated at the rate of interest announced by M&I Marshall & Isley Bank, from time to time at its prime or base lending rate from the date that payments to him or her should have been made under this Agreement. Within ten days after the Executive's written request therefor, the Company shall pay to the Executive, or such other person or entity as the Executive may designate in writing to the Company, the Executive's reasonable Expenses in advance of the final disposition or conclusion of any such dispute, legal or arbitration proceeding. 16. Payment Obligations Absolute. The Company's obligation during and after the Employment Period to pay the Executive the amounts and to make the benefit and other arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against him or anyone else, except as provided in Section 20. Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, and compensation earned from such employment or otherwise shall not reduce the amounts otherwise payable under this Agreement. Except as provided in Section 15, all amounts payable by the Company hereunder -17- shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company will not seek to recover all or any part of such payment from the Executive, or from whomsoever may be entitled thereto, for any reason whatsoever. 17. Successors. (a) If the Company sells, assigns or transfers all or substantially all of its business and assets to any Person or if the Company merges into or consolidates or otherwise combines (where the Company does not survive such combination) with any Person (any such event, a "Sale of Business"), then the Company shall assign all of its right, title and interest in this Agreement as of the date of such event to such Person, and the Company shall cause such Person, by written agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform from and after the date of such assignment all of the terms, conditions and provisions imposed by this Agreement upon the Company. Failure of the Company to obtain such agreement prior to the effective date of such Sale of Business shall be a breach of this Agreement constituting "Good Reason" hereunder, except that for purposes of implementing the foregoing the date upon which such Sale of Business becomes effective shall be deemed the Termination Date. In case of such assignment by the Company and of assumption and agreement by such Person, as used in this Agreement, "Company" shall thereafter mean such Person which executes and delivers the agreement provided for in this Section 17 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law, and this Agreement shall inure to the benefit of, and be enforceable by, such Person. The Executive shall, in his or her discretion, be entitled to proceed against any or all of such Persons, any Person which theretofore was such a successor to the Company and the Company (as so defined) in any action to enforce any rights of the Executive hereunder. Except as provided in this Section 17(a), this Agreement shall not be assignable by the Company. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. (b) This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive under Sections 7, 8, 9, 10, 11, 12 and 15 if the Executive had lived shall be paid, in the event of the Executive's death, to the Executive's estate, heirs and representatives; provided, however, that the foregoing shall not be construed to modify any terms of any benefit plan of the Employer, as such terms are in effect on the date of the Change in Control of the Company, that expressly govern benefits under such plan in the event of the Executive's death. 18. Severability. The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. 19. Contents of Agreement; Waiver of Rights; Amendment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and supercedes, and the Executive hereby waives all rights under, any prior or other agreement or understanding between the parties with respect to such subject matter, including without limitation, the Change of Control Agreement dated January 1997, as amended, between the -18- Company and the Executive. This Agreement may not be amended or modified at any time except by written instrument executed by the Company and the Executive. 20. Withholding. The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes or charges which it is from time to time required to withhold; provided, that the amount so withheld shall not exceed the minimum amount required to be withheld by law. The Company shall be entitled to rely on an opinion of the National Tax Counsel if any question as to the amount or requirement of any such withholding shall arise. 21. Certain Rules of Construction. No party shall be considered as being responsible for the drafting of this Agreement for the purpose of applying any rule construing ambiguities against the drafter or otherwise. No draft of this Agreement shall be taken into account in construing this Agreement. Any provision of this Agreement which requires an agreement in writing shall be deemed to require that the writing in question be signed by the Executive and an authorized representative of the Company. 22. Governing Law; Resolution of Disputes. This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Wisconsin. Any dispute arising out of this Agreement shall, at the Executive's election, be determined by arbitration under the rules of the American Arbitration Association then in effect (in which case both parties shall be bound by the arbitration award) or by litigation. Whether the dispute is to be settled by arbitration or litigation, the venue for the arbitration or litigation shall be Milwaukee, Wisconsin or, at the Executive's election, if the Executive is not then residing or working in the Milwaukee, Wisconsin metropolitan area, in the judicial district encompassing the city in which the Executive resides; provided, that, if the Executive is not then residing in the United States, the election of the Executive with respect to such venue shall be either Milwaukee, Wisconsin or in the judicial district encompassing that city in the United States among the thirty cities having the largest population (as determined by the most recent United States Census data available at the Termination Date) which is closest to the Executive's residence. The parties consent to personal jurisdiction in each trial court in the selected venue having subject matter jurisdiction notwithstanding their residence or situs, and each party irrevocably consents to service of process in the manner provided hereunder for the giving of notices. 23. Notice. Notices given pursuant to this Agreement shall be in writing and, except as otherwise provided by Section 13(d), shall be deemed given when actually received by the Executive or actually received by the Company's Secretary or any officer of the Company other than the Executive. If mailed, such notices shall be mailed by United States registered or certified mail, return receipt requested, addressee only, postage prepaid, if to the Company, to Regal-Beloit Corporation, Attention: Secretary (or President, if the Executive is then Secretary), 200 State Street, Beloit, Wisconsin 53511-6254, or if to the Executive, at the address set forth below the Executive's signature to this Agreement, or to such other address as the party to be notified shall have theretofore given to the other party in writing. 24. No Waiver. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed -19- by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. 25. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. -20- IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. REGAL-BELOIT CORPORATION By: /s/ Henry W. Knueppel ------------------------------------- Name: Henry W. Knueppel Title: Executive Vice President Attest: /s/ Kenneth F. Kaplan ---------------------------------- Name: Kenneth F. Kaplan Title: Vice President, Chief Financial Officer, Secretary EXECUTIVE: /s/ James L. Packard (SEAL) ----------------------------------------- James L. Packard Address: 7613 McCurry Road Roscoe, Illinois 61073 -21- EX-21 4 slp254d.txt LIST OF SUBSIDIARIES SUBSIDIARIES OF REGAL-BELOIT CORPORATION Jurisdiction of Subsidiary Organization Equity Owners (Including %) - ---------- ------------ --------------------------- Marathon Electric Manufacturing Corporation Wisconsin Regal-Beloit Corporation (100%) Leeson Electric Corporation Wisconsin Regal-Beloit Corporation (100%) Hub City, Inc. Delaware Regal-Beloit Corporation (100%) Marathon Special Products Corporation Ohio Marathon Electric Manufacturing Corporation (100%) Thomson Technology, Inc. British Columbia Regal-Beloit Holdings, Inc. (Canada) (100%) Leeson Canada, Inc. Ontario (Canada) Leeson Electric Corporation (100%) Mastergear GmbH Germany Regal-Beloit Corporation (100%) Opperman Mastergear Limited United Kingdom Regal-Beloit Corporation (100%) Costruzioni Meccaniche Legnanesi Italy Regal-Beloit Corporation (100%) New York Twist Drill, Inc. Delaware Regal-Beloit Corporation (100%) Regal-Beloit Foreign Sales Corporation Barbados Regal-Beloit Corporation (100%) Regal-Beloit Flight Services, Inc. Wisconsin Marathon Electric Manufacturing Corporation (60%) Regal-Beloit Corporation (40%) Regal-Beloit Holdings Ltd. Yukon Territory Regal-Beloit Corporation (100%) (Canada) Marathon Redevelopment Corporation Missouri Marathon Electric Manufacturing Corporation (100%) Marathon Electric Far East Pte Ltd. Singapore Marathon Electric Manufacturing Corporation (100%) Thomson Finance, Ltd. British Columbia Regal-Beloit Holdings, Inc, (Canada) (100%) Patent Holdings Ltd. British Columbia Regal-Beloit Holdings, Ltd. (Canada) (100%) Leeson Electric International, Inc. Wisconsin Leeson Electric Corporation (100%) Shanghai Marathon GeXin Electric Company Ltd. China Marathon Electric Manufacturing Corporation (55%) EX-23 5 slp254a.txt CONSENT Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our reports, included in this Form 10-K, into Regal-Beloit Corporation's previously filed Registration Statements, File Nos. 33-25480, 33-25233, 33-82076, 33-8934, 333-00237, 333-48789, 333-48795, 333-48815 and 333-84779. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, March 27, 2002 EX-99.1 6 slp254b.txt LETTER REGARDING ARTHUR ANDERSEN [REGAL-BELOIT CORPORATION LETTERHEAD] U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Judiciary Plaza Washington, D.C. 20549 Ladies and Gentlemen: In a letter dated March 27, 2002, our independent public accountants, Arthur Andersen LLP ("Andersen"), represented to us that their audit of the consolidated financial statements of Regal-Beloit Corporation and subsidiaries as of December 31, 2001 and for the year then ended was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that their engagement was conducted in compliance with professional standards and that there was appropriate continuity of Andersen personnel working on the audit and availability of national office consultation. Availability of personnel at foreign affiliates of Andersen was not relevant to this audit. REGAL-BELOIT CORPORATION /s/ Kenneth F. Kaplan - -------------------------------------------- Kenneth F. Kaplan Vice President, Chief Financial Officer and Secretary March 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----