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