-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, D7EIKukIniHIm9SJOvk0VZHJ79Us/HD982nKN4ugr0vm/blxZV5PXIJZsDCp0Dz5 KSaAWWqCWlz09ofM7cpb6g== 0000950152-94-000201.txt : 19940304 0000950152-94-000201.hdr.sgml : 19940304 ACCESSION NUMBER: 0000950152-94-000201 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RELIANCE ELECTRIC CO/DE CENTRAL INDEX KEY: 0000814331 STANDARD INDUSTRIAL CLASSIFICATION: 3621 IRS NUMBER: 341538687 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-10404 FILM NUMBER: 94514432 BUSINESS ADDRESS: STREET 1: 6065 PARKLAND BLVD CITY: CLEVELAND STATE: OH ZIP: 44124 BUSINESS PHONE: 2162665800 MAIL ADDRESS: STREET 1: 6065 PARKLAND BLVD CITY: CLEVLAND STATE: OH ZIP: 44124 10-K 1 RELIANCE ELECTRIC 10-K 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1993 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 1-10404 RELIANCE ELECTRIC COMPANY (Exact name of registrant as specified in its charter) Delaware ------------------------------------------------- (State or other jurisdiction of incorporation or organization) 6065 Parkland Boulevard, Cleveland, Ohio ------------------------------------------------- (Address of principal executive offices) 34-1538687 ------------------------------------------------- (I.R.S. Employer Identification No.) 44124-6106 ------------------------------------------------- (Zip Code) Registrant's telephone number, including area code: (216) 266-5800 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ---------------------------------------------------------------------------------------------- Class A Common Stock, New York Stock Exchange par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of February 28, 1994, the registrant had 32,886,289 shares of Class A voting Common Stock, 3,161,032 shares of Class B non-voting Common Stock and 5,250,000 shares of Class C non-voting Common Stock outstanding. As of that date, the aggregate market value of the shares of Class A voting Common Stock held by non-affiliates was $518,340,610 (based upon the closing price of $17.25 per share of Class A Common Stock on the New York Stock Exchange on February 28, 1994). For purposes of this calculation, the registrant deems the 2,837,558 shares of Class A Common Stock held by all of its Directors and executive officers to be the shares of Class A Common Stock held by affiliates. There is no established public trading market for the non-voting Class B Common Stock and non-voting Class C Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement to be used in connection with its Annual Meeting of Stockholders to be held on April 21, 1994 are incorporated by reference into Part III of this Form 10-K Annual Report. Except as otherwise stated, the information contained in this Form 10-K Annual Report is as of December 31, 1993. - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS; ITEM 2. PROPERTIES; AND ITEM 3. LEGAL PROCEEDINGS. THE COMPANY Reliance Electric Company (the "Company" or "Reliance") was organized in December 1986 as a Delaware corporation by a group of investors including senior management of the Company for the purpose of acquiring the Company's predecessor from Exxon Corporation ("Exxon"). A predecessor of the Company, originally formed in 1904, had been acquired by Exxon in 1979. As used herein, the terms "Company" or "Reliance" mean Reliance Electric Company, its subsidiaries and investments, and the business activities of its predecessor, unless the context otherwise indicates. The Company's executive offices are located at 6065 Parkland Boulevard, Cleveland, Ohio 44124-6106, and its telephone number is (216) 266-5800. RECAPITALIZATION TRANSACTIONS The Company completed several recapitalization transactions during 1993. In April 1993, the Company issued $150 million in principal amount of ten year 6.8% notes, after registering $200 million of debt securities under the Securities Act of 1933. Net proceeds of approximately $149 million were applied to reduce indebtedness outstanding under the Company's former Term Loan and Revolving Credit Facility (the "Former Facility"). Also in April 1993, the Company entered into a New Competitive Advance and Revolving Credit Facility (the "New Credit Facility"), borrowed $209 million under the New Credit Facility and applied these proceeds to repay the remaining indebtedness outstanding under the Former Facility. The Former Facility was then terminated. For a description of the material terms of the New Credit Facility, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" included herein at Exhibit 99.3. BUSINESS Reliance is a U.S.-based manufacturer of industrial motors and related controls, generators, transformers, mechanical power transmission products and systems, and telecommunications equipment. Reliance is organized into two business segments: Industrial and Telecommunications. For additional information regarding the amounts of the Company's net sales, earnings and identifiable assets attributable to each such business segment during the three years ended December 31, 1993, see Note 16 to the Consolidated Financial Statements of the Company included herein at Exhibit 99.4. INDUSTRIAL Reliance's Industrial segment, with net sales of $1,172 million, or approximately 73% of the Company's total net sales in 1993, designs, manufactures, markets and services a broad range of products and provides related services to a variety of industries. Its four operating groups are Electrical, Mechanical, North American Transformer and Motion Control. Each group has its own manufacturing, marketing and administrative operations. Because the Electrical, Mechanical and Motion Control Groups sell to customers in similar industries, the Company is able to offer these customers a comprehensive line of products and systems designed to meet a wide range of their needs. 1 3 ELECTRICAL GROUP Overview. The Electrical Group designs, manufactures, sells and services industrial motors, generators, electrical variable speed drives, engineered drive systems, and industrial control products throughout the world. The Electrical Group is organized into three U.S. product divisions and two international divisions. The organization of each of its domestic business divisions is configured around a logical family of products targeted to the specific served markets. While the divisions are decentralized, interaction among them is fostered by a combined force of approximately 425 domestic sales engineers and support personnel and a service organization providing field technical services, aftermarket parts, customer training, and electronic and motor repair services. The two electrical international divisions are Europe and the rest of the world outside of North America. Coordination also is enhanced by the Company's research and development "Centers of Excellence" located in the United States, Switzerland and Japan. The Electrical Group is headquartered in Euclid, Ohio, with 20 manufacturing facilities located in: Euclid, Ohio; Ashtabula, Ohio; Bogart, Georgia; Cuyahoga Heights, Ohio; Athens, Georgia (two); Gainesville, Georgia; Madison, Indiana; Mankato, Minnesota; Kings Mountain, North Carolina; Sydney and Melbourne, Australia; Sao Paulo, Brazil; Stratford, Ontario, Canada; Kempen and Krefeld, Germany; Yokohama, Japan (a 45% Company-owned venture); Seoul, Korea; Dierikon, Switzerland; and Telford, United Kingdom. The Electrical Group also serves its customers through eight regional engineering locations, 19 service facilities and 20 parts depots. Markets and Products. Process industries are the primary markets for Reliance's electrical products. The Electrical Group serves customers in the metals, mining, pulp and paper, plastics, petrochemical, flat glass, food, utilities, water treatment, textile and the heating, ventilation and air conditioning industries, as well as specialized naval and shipping applications. Reliance's strategy is to compete on the basis of product differentiation, reliability and quality, and attentive customer service. The majority of the Electrical Group's sales is made to original equipment manufacturers ("OEMs") and end-users. Reliance complements these direct sales by the use of a network of independent distributors who typically carry products for more standard applications. A description is set forth below of the operating divisions and their competitors. INDUSTRIAL MOTORS. From its inception, Reliance has been a manufacturer of industrial motors. The Industrial Motors division provides a full range of AC motors with particular focus in the fractional to 500 horsepower ("hp") range. The Company's strategy with regard to its industrial motors is to integrate the manufacture of its motors with specific custom designs and to provide reliable and expedient delivery. For example, a motor manufacturing plant in Bogart, Georgia has significantly reduced manufacturing times for custom-designed motors. The Industrial Motors division recently introduced a new line of energy efficient motors called the E-Master product line. This product line was designed specifically to meet the Energy Policy Act. In addition, Reliance has recently been announced as a Charter Partner of the motor challenge program sponsored by the United States Department of Energy. Significant competitors of this division include Baldor, Emerson Electric, General Electric and Siemens. ENGINEERED MOTORS AND GENERATORS. The Engineered Motors and Generators division designs and manufactures customized large AC (500 to 15,000 hp) and large DC (500 to 3,500 hp) motors, including mining and hermetic motors, at facilities in Kings Mountain, North Carolina and Stratford, Ontario, Canada. These motors are manufactured to customer specifications and require substantial customer interaction throughout manufacturing and delivery. Successful recent developments include large AC motors in totally enclosed, water cooled and weather protected enclosures. Motors with higher efficiencies and lower noise levels also have been developed. Specialty medium motors, including variable speed AC (5 to 500 hp) and DC ( 1/8 to 500 hp) submersible, nuclear, navy, mining and hermetic motors are produced in facilities in Gainesville, Georgia, Ashtabula, Ohio and Euclid, Ohio. As in the other Electrical Group divisions, Reliance's strategy is to provide its customers with premium components and systems for standard and custom applications. Significant competitors in this division include General Electric, MagneTek, Siemens and Westinghouse. 2 4 The Engineered Motors and Generators division includes the Kato Engineering business which produces synchronous generators and motors in sizes up to 13 megawatts. New product developments have focused on larger sizes of generators and generators for special locomotive, mining and prime power applications. Kato Engineering's major competitors include Ideal Electric, Leroy Somer, MagneTek and Marathon. North American Service Centers in 19 locations provide after-market support for Electrical Group products. They have responsibility for on-site services, equipment repairs and parts. Significant competitors include Eastern Electric, General Electric, MagneTek and independent service shops. DRIVES AND SYSTEMS. The Drives and Systems division combines adjustable speed electric drive capabilities of its VS Drives business and controls capabilities of its industrial controls business. This division uses competencies in the design, manufacture and application of standard drives, motion control and industrial control products to supply customer solutions for increased productivity. Products include a broad line of AC (inverter), DC and Motion Control drives ranging from fractional to 2,000 hp. These products are sold for various customer applications throughout the world with an increasing emphasis on global designs. The division designs its products to be "configurable," allowing digital drives to be adapted and incorporated on a custom basis from standard products in a wide variety of applications and industries. Allen Bradley (Rockwell International), Emerson Electric, MagneTek and Siemens are significant competitors in both AC and DC drives. The Drives and Systems business combines Reliance's expertise in motors, drives and controls, and markets this combination to a variety of process industry users. Reliance's focus in this division is on product integration, project management and application engineering capabilities. This approach has resulted in business particularly within the pulp and paper, and metals industries. The Drives and Systems division's design capabilities have enabled users to integrate Reliance products with other manufacturers' products into Reliance systems. Project management focuses on consulting with customers with regard to plant layout, and installation and repair efficiency. Project management follows through with fully tested, rapid start-up and post commissioning service and training. Application engineers provide specific industry expertise to maximize custom production through the application of the proper digital controls and motors tailored to individual process lines. Reliance competes primarily with ABB, Allen Bradley, General Electric and Siemens in its Drives and Systems business. The Drives and Systems division also designs and manufactures logic controllers used to control a wide variety of manufacturing processes. The AutoMate controller and AutoMax controller provide customers with precise industrial control. These two lines of controllers are integral parts of the Electrical Group's overall Drive Systems business. The Company's strategy is to establish the integration potential of Reliance's controls with drive products to increase productivity in various manufacturing processes. Significant competitors include Allen Bradley, General Electric, Modicon (AEG) and Siemens. EUROPE. The Europe division develops, designs, manufactures, markets and services AC and DC drives, drive systems, motors and alternators. This division serves a broad range of industries including power generation, marine, metals, paper, textile, converting, plastic and food. Significant competitors with this division are ABB, AEG, Cegelec, Siemens and a large number of companies located in other countries. INTERNATIONAL. The International division concentrates on the Asian Pacific and South American markets with fully owned affiliate plants in Brazil and Australia and joint ventures in Japan and Korea. Approximately half the sales are exports from North American operations and the remainder are sold, engineered and produced in the affiliate operations. The affiliates produce drive systems combining Reliance expertise and components in motors, drives, controls and application know-how to serve a broad variety of process industry users. 3 5 The joint venture operation in Japan develops and manufactures AC (inverter), DC and Motion Control drives ranging from fractional to 220 kilowatts. A large portion of these products are sold to Japanese OEM's and industrial users. Selected products also are produced for Reliance's worldwide operations. Reliance competes primarily with ABB, Allen Bradley, General Electric, Siemens, Toshiba and Yaskawa in the full spectrum of Reliance's product mix in Asia. In South America the primary competitors are ABB and Siemens. MECHANICAL GROUP Overview. The Mechanical Group, portions of which have been in operation since 1878 (Reeves), designs, manufactures and sells mechanical power transmission products primarily under the Dodge, Reeves and Master brand names. The Mechanical Group is organized around three principal product areas: (i) mounted bearings, (ii) enclosed gearing and mechanical adjustable speed drives and (iii) drive components, couplings and electric clutch brakes. The Mechanical Group's three divisions use an integrated approach to sales and marketing, and share a common distribution channel. The Mechanical Group markets most of its products through a network of distributors and the balance through direct sales. Reliance has established a distributor network with over 200 distributors having approximately 1,400 branch outlets. The Mechanical Group works closely with its customers to enhance service. For example, it markets electronic software to both OEM customers and distributors. This software enables customers to enter specifications for applications and order parts directly from the Mechanical Group via electronic data interchange. In addition, the Mechanical Group has computerized application and selection programs for its customers which detail methods of writing specifications, installation and product use. The Mechanical Group was the recipient of the Power Transmission Distributors Association 1993 Trailblazer Award for customer service excellence. The Mechanical Group is headquartered in Greenville, South Carolina, and has nine manufacturing facilities located in: Greenville, South Carolina; Belton, South Carolina; Rogersville, Tennessee; Asheville, North Carolina; Mishawaka, Indiana; Columbus, Indiana (two); Seattle, Washington; and Guadalajara, Mexico. The Mechanical Group operates eight major distribution centers in the United States. Markets and Products. The Mechanical Group distinguishes itself in the mechanical power transmission market by providing products which are used in a wide variety of industrial applications, and by providing technical support to the distributor and end-user. The Mechanical Group has focused its efforts on developing and improving engineering and manufacturing capabilities. The primary end-users of the Mechanical Group's products are process industries, such as aggregates and mining, food, packaging, air and unit handling, and waste water. The Mechanical Group's sales are primarily in the United States and Canada. A description of the Mechanical Group's products and major competitors within its three principal product areas are as follows: BEARINGS. The Bearings division manufactures mounted bearings, including ball, roller, sleeve and Sleevoil bearings. Reliance does not participate in the market for "naked" bearings, i.e., bearings without mountings. In 1993, Dodge introduced its new mounted spherical roller bearing family, providing features most requested by customers, such as patented seals, cast closed-end housings, corrosion resistant coatings, the highest load ratings in the world and electronic monitoring capabilities. The Mechanical Group's largest customers for mounted bearings and conveyor components are companies in the unit handling, bulk material handling and air handling industries. Significant competitors in this market include EPT (division of Emerson Electric), Rexnord (a subsidiary of BTR) and Torrington/FAFNIR (a subsidiary of Ingersoll-Rand). 4 6 ENCLOSED GEARING AND MECHANICAL ADJUSTABLE SPEED DRIVES. The Gearing division produces four major gear products, including Dodge torque arm reducers, parallel gear boxes, right angle gear boxes and the Reeves mechanical adjustable speed devices. Each product line may be sold separately or in an integrated system. The flagship product of this division is the Dodge Torque-Arm shaft mounted reducer. The Company believes that direct mounting of this reducer to driven shafts through a hollow output bore can result in considerable cost savings and flexibility for the customer. In 1992, the Company introduced a compact and efficient concentric parallel reducer, the Dodge Maxum reducer. Right angle reducers include worm gears and worm helical combinations. The Reeves Motodrive is a motorized enclosed variable pitch belt drive coupled with a speed reducer. The Motodrive provides variable speed capability in more difficult constant torque applications where high starting torque is required or overload service factor is required. The Mechanical Group's mechanical adjustable speed drives are built to provide simple maintenance requirements for the user. Significant competitors include Boston Gear, Falk (a division of Sunstrand) and SEW Eurodrives. DRIVE COMPONENTS AND ELECTRIC CLUTCH BRAKES. The Drive Components division produces drive components including sheaves, shaft couplings and bushings. Typical applications utilizing drive components' products include fans, compressors, pumps, mixers, crushers, conveyors and machine tools. The division also produces clutches and motor brakes. The Mechanical Group's largest customers for clutches and motor brakes are companies in the baggage handling, unit handling, packing, wrapping and other motion control industries. Significant competitors include EPT, Rexnord and T. B. Woods. NORTH AMERICAN TRANSFORMER North American Transformer ("NAT") manufactures mid-range (12 to 650 megavoltamps) power transformers used by domestic electric utilities and independent power producers for the distribution of electricity. NAT conducts its manufacturing operations at a facility located in Milpitas, California. NAT sells its products through approximately 40 agents located throughout the United States and in selected foreign countries. NAT's sales result from electric load growth, utility system upgrades, increased tie-ins between utilities, and regional changes in electricity demand. NAT has historically targeted the medium to large transformer market to capitalize on its capability to design and build the larger, more complex transformers. As a result of recent decreased demand in the medium to large transformer market, NAT has also targeted the smaller transformer market (as small as 30 megavoltamps) and has increased its participation in international markets. Domestically NAT's main competitors are General Electric and MagneTek in medium transformers and ABB and the McGraw Edison division of Cooper Industries in large transformers. MOTION CONTROL Motion Control was created in 1991 as a result of a purchase of several businesses from Robbins & Myers, Inc., a Dayton, Ohio-based company. The businesses which make up Motion Control manufacture and distribute fractional horsepower motors and small clutch/brake components for a variety of commercial applications, and programmable servo drives for industrial factory automation applications. Motion Control attempts to differentiate itself by emphasizing easy-to-use servo products with the ability to customize motors. Reliance believes that these products complement Reliance's existing motor and control technologies and product lines and provide Reliance access to new markets. Motion Control has five manufacturing facilities located in: Eden Prairie, Minnesota; Gallipolis, Ohio; Collinsville, Connecticut; and Crewe and Welshpool, United Kingdom. Significant competitors in this market include Indramat, Siemens and Yaskawa. 5 7 BACKLOG At December 31, 1993, the Industrial segment's backlog of firm sales orders amounted to approximately $338 million compared with $343 million at December 31, 1992. The Company anticipates that substantially all of this 1993 backlog will be shipped during 1994. IDENTIFIABLE ASSETS The Industrial segment's identifiable assets amounted to $581 million at December 31, 1993 and $526 million at December 31, 1992. TELECOMMUNICATIONS The Telecommunications segment, with net sales of $439 million, or approximately 27>% of the net sales of the Company in 1993, is known in the industry as Reliance Comm/Tec ("Comm/Tec"). Comm/Tec produces power, connection, protection and distribution devices and transmission products and systems. Comm/Tec serves the telephone operating companies ("telcos") including AT&T, the regional Bell operating companies ("RBOCs"), other independent telephone companies as well as other suppliers of communications equipment and services including cable television system operators, competitive access providers and wireless communications suppliers. Comm/Tec provides access products and services for use in rapidly changing communications networks which extend from public network access points (for example, central offices in the telephone industry or head end connections in cable television) to an end user's premises. Comm/Tec is headquartered in Cleveland, Ohio, and is organized into four operating divisions: Lorain Products, Reliable Electric, Transmission Systems and Network Services/Engineered Systems. Comm/Tec's products are sold primarily through a centralized direct sales force which is responsible for the sale of all Comm/Tec products and receives specialized support from marketing professionals at each of the respective operating units. Comm/Tec also provides specific coverage for national and OEM accounts. Comm/Tec's products also are sold through distributors. Non-United States sales are handled primarily by representatives located throughout the world. LORAIN PRODUCTS Lorain Products ("Lorain") develops and manufactures power conversion equipment and components, including AC-DC battery chargers, ringing generators (DC-AC), inverters (DC-AC), interrupters, monitoring systems and DC-DC converters. Lorain combines variations of these products with fuses, circuit breakers and controls to form complete telecommunications power systems, ranging from small units used in remote switching units and carrier systems to very large units used to supply power to central offices and cellular radio sites. Lorain also markets uninterruptible power systems to telephone central offices, resells batteries and markets embedded power equipment to OEMs. Lorain is headquartered in Lorain, Ohio, and has three manufacturing facilities located in Lorain, Ohio, St. Thomas, Ontario, Canada and Mexico City, Mexico. Lorain sells power equipment to the regulated United States telecommunications market, comprised of telcos, AT&T and the RBOCs. Lorain has focused on utilizing both its knowledge of the RBOCs' power equipment requirements and its product engineering capabilities to position itself as an alternative supplier to AT&T for the RBOCs. Lorain also sells in the non-regulated market, composed of a variety of OEMs, cellular OEMs and users, other common carriers, private networks and export sales. Significant competitors include Argus, AT&T, Northern Telecom, Power Conversion Products and a number of smaller independent companies. RELIABLE ELECTRIC Reliable Electric ("Reliable") manufactures and markets products and hardware principally for the subscriber loop segment of the telecommunications market. Reliable offers more than 3,000 products, consisting of enclosures (buried, aerial, pedestals, cabinets and controlled environmental vaults) and connection and protection devices (cross-connects, terminal blocks, building entrance 6 8 terminals, arrestors and protection modules). Reliable is headquartered in Franklin Park, Illinois, and conducts its manufacturing operations in five facilities located in Franklin Park, Illinois; Milwaukee, Wisconsin; Toccoa, Georgia; St. Stephen, South Carolina; and Greenville, Mississippi. Significant competitors include ADC Telecommunications, Coil, Northern Telecom and Raynet (a division of Raychem). Reliable targets primarily the outside plant segment of the telephone market and is actively involved in a number of other telecommunications areas including cable television, wireless and competitive access. The Company believes that Reliable's introduction of sealed plant products, fiber optic products and an expanded electronic equipment cabinet capability enhances its competitive position in these dynamic market segments. TRANSMISSION SYSTEMS Transmission Systems develops, designs, produces and services electronic transmission systems for use in the local subscriber loop. Transmission Systems is composed of three business units: its primary engineering and manufacturing facility in Bedford, Texas, near Fort Worth; Test Systems in Carrollton, Texas, near Dallas; and Poynting Systems in Scottsdale, Arizona. Transmission Systems designs and manufactures analog and digital subscriber loop carrier systems including its DISCS next-generation digital loop carrier ("DLC"), which is compatible with both copper and fiber optic cable distribution systems. DISCS also features fully integrated SONET (Synchronous Optical NETwork) and Fiber-in-the-Loop products. In addition, Transmission Systems designs and manufactures products for the distribution, or remote, end of the Fiber-in-the- Loop and video broadband markets. Test Systems manufactures a family of microprocessor-based remote line testing units which enable the telcos to automatically test subscriber lines out of the central office exchange, as well as those served from digital remote and DLC systems. Poynting Systems performs research and development activities in connection with the development of SONET high-speed multiplexers. The telecommunications industry has been shifting from the use of copper wire toward the use of fiber optic cable. The non-regulated service providers and telcos are incorporating these newer technologies (digital products and optical fiber) into the subscriber loop to offer the user the most cost-efficient and flexible services. By moving the intelligence out of the switch in the central office and into the loop via DLCs, the non-regulated service providers and telcos will have greater flexibility in meeting specific customer needs for a wide variety of voice, video and data requirements. Significant competitors include ADC Telecommunications, AT&T, DSC Communications, Fujitsu, Northern Telecom, Pulsecom and Raynet. NETWORK SERVICES/ENGINEERED SYSTEMS Network Services provides installation and service support for all Comm/Tec products in all market segments. These services include installation engineering, product and system installation, training and field service and repair. The Network Services division operates 13 regional service centers in the United States with additional service centers in Mexico and Canada. Network Services complements Comm/Tec's product capability with the complete service required to compete as a supplier in both regulated and non-regulated markets. Engineered Systems provides turnkey systems for customers in all Comm/Tec market segments. These systems can include network application engineering, system design, product selection, system configuration and total project management. Engineered Systems delivers a custom engineered, manufactured and installed package designed to solve a unique telecommunication application problem requiring total project management from inception through final acceptance. Engineered Systems operates out of the Bedford, Texas facility and maintains field engineers and project managers in regional offices throughout the United States. 7 9 Competitors of Network Services/Engineered Systems include AT&T, Northern Telecom, smaller product-based companies, third-party engineering firms and a number of third-party installation and service companies. BACKLOG At December 31, 1993, the Telecommunications segment's backlog of firm sales orders amounted to approximately $70 million, compared with approximately $66 million at December 31, 1992. The Company anticipates that substantially all of this 1993 backlog will be shipped during 1994. IDENTIFIABLE ASSETS The Telecommunications segment's identifiable assets amounted to $591 million at December 31, 1993 and $596 million at December 31, 1992. SEASONALITY The Company's businesses are not materially affected by seasonal considerations. PATENTS AND TRADEMARKS Although the Company has a number of patents, trademarks and/or licenses related to each segment's activities, none of them is considered by the Company to be materially important. In general, each industry segment depends on technological capabilities, manufacturing quality control and application of know-how rather than patents in the conduct of its business. RAW MATERIALS AND COMPONENTS The Company manufactures the major portion of the products it sells. Raw materials and components such as laminating steel, aluminum, castings, copper, magnetic wire, finished steel forms, powdered metal, insulating materials, magnetic steel ball and roller bearings, brushes, belts, plastics and resins, electronic parts and control devices are purchased from multiple sources of supply, subjecting the Company to potential price fluctuations for these raw materials and components. While the Company at this time is experiencing some selective tightening in supply, it foresees no acute shortages of those items that would have a material adverse effect on its operations. ENGINEERING, INCLUDING RESEARCH AND DEVELOPMENT During the fiscal years 1993, 1992 and 1991, the Company spent approximately $112 million, $103 million and $94 million, respectively, on application engineering, including research and development activities. Of these amounts, approximately $43 million, $40 million and $34 million was spent in 1993, 1992 and 1991, respectively, on research and development, including the development of new products, improvement of existing products and systems design. The customer sponsored portion of such expenditures was not significant. ENVIRONMENTAL CONTROLS The Company believes its facilities are generally in compliance with environmental protection requirements. The nature of the Company's present operations is such that it does not expect expenditures for environmental compliance to be material. See "Business -- Legal Proceedings." 8 10 EMPLOYEES As of January 31, 1994, the Company employed approximately 14,000 employees, of whom approximately half were hourly rated. Of these hourly rated employees, less than half were represented by labor unions under contracts that expire at varying times in the future. The Company is subject to potential work-related actions by its employees. The Company, however, believes that its relations with its employees are good. The Company is a party to one collective bargaining agreement which expires in December 1994 covering approximately 365 employees. The Company expects to negotiate a contract which is suitable to the Company. FACILITIES The Company has 44 manufacturing locations worldwide, with 15 located in nine countries outside the United States. The Company occupies a total of approximately 8.1 million square feet, with the majority, approximately 7.2 million square feet, devoted to manufacturing, assembly and storage. This space is occupied by industry segments as follows: 84% Industrial and 16% Telecommunications. Of the approximately 8.1 million square feet occupied, 6.3 million square feet are owned, and 1.8 million square feet are occupied under operating leases. The Company considers its manufacturing facilities suitable and adequate for the purposes for which they are used. The majority of Reliance production facilities has earned the universally recognized ISO 9000 series quality assurance certification as established by the International Organization for Standardization ("ISO"). ISO is a specialized international agency for standardization that is comprised of the national standards bodies of 91 countries. The object of ISO is to promote the development of standardization and related world activities with a view to facilitating international exchange of goods and services and to developing cooperation in the sphere of intellectual, scientific, technological and economic activity. Reliance is committed to obtaining ISO certification in all of its production facilities. LEGAL PROCEEDINGS In March 1990, the United States Department of Justice filed suit in the United States District Court for the District of Massachusetts against a nonoperating subsidiary of the Company, Federal Pacific Electric Co. ("FPE") and a number of other defendants to recover costs for environmental response actions under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") at the Re-Solve Superfund site in North Dartmouth, Massachusetts. These costs include unrecovered costs in settlements reached with other parties alleged to have arranged for disposal of hazardous substances at the site, costs of overseeing clean-up at the site and attorney's fees and costs incurred in litigation. In July 1992, the United States Department of Justice filed suit in the United States District Court for the District of Massachusetts against FPE and Cornell-Dubilier Electronics Corporation, a former FPE subsidiary ("CDE"), to recover costs for environmental response actions under CERCLA in connection with the investigation and remediation of one operable unit at the Sullivan's Ledge Superfund site in New Bedford, Massachusetts. The Department of Justice seeks to recover certain unreimbursed response costs in connection with the site. In August 1992, the United States Department of Justice filed suit in the United States District Court for the District of Massachusetts against FPE, CDE and other defendants seeking to recover costs it incurred or will incur for environmental response actions under CERCLA in connection with the Norwood Superfund site in Norwood, Massachusetts. In October 1992, the Commonwealth of Massachusetts also filed suit against FPE, CDE and others for recovery of response costs in connection with the Norwood site, attorney's fees and an injunction requiring the defendants to remove all hazardous materials from the site. The complaint also requests that the court treble all costs expended in assessing, containing and removing hazardous materials from the site. 9 11 The Company also has been named as a potentially responsible party at several other CERCLA sites. Pursuant to the December 29, 1986 Stock Purchase Agreement (the "Agreement") with the Company, Exxon agreed to indemnify and hold harmless the Company against substantially all losses, liabilities, claims, obligations, damages (including any governmental penalty or punitive damages) or deficiencies arising out of or resulting from any environmental claim relating to the operations of FPE and certain of its subsidiaries, including CDE. No action or claim for damages pursuant to this indemnity may be brought or made by the Company after the expiration of a 20-year period from December 30, 1986, except that such time limitation does not apply to any claims which have been the subject of a written notice from the Company to Exxon prior to the expiration of such period. Pursuant to the Agreement, Exxon is liable for the first $10 million of any damages incurred by the Company, 95% of the next $100 million and 100% of any damages in excess of $110 million. As a result of the foregoing the Company expects to be indemnified by Exxon for substantially all settlement amounts attributable to FPE and CDE. While there can be no assurance as to the future compliance with the Agreement, Exxon has been and is indemnifying the Company for these environmental matters. The Company is also a party, in the ordinary course of business, to various legal actions related to performances under contracts and product liability suits, and proceedings relating to a wide range of matters, several of which claim substantial damages. The Company believes that these legal actions (including the environmental claims described above) will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. EXECUTIVE OFFICERS OF THE REGISTRANT* The name, age, principal occupation and the material occupations, positions, offices or employments for the past five years of each executive officer of the Company are as follows:
PRINCIPAL OCCUPATION NAME AGE AND DIRECTORSHIPS(1) - --------------------- --- -------------------------------------------------------------- John C. Morley 62 President and Chief Executive Officer since 1980 and a Director of the Company. Held numerous executive positions with Exxon from 1958 to 1980, including President of Exxon Chemical USA and Senior Vice President of Exxon, USA. Peter J. Tsivitse 64 Vice President, Technology and Corporate Development since 1989, Operating and Group Vice President from 1978 to 1989. Joined Reliance in 1952 as a design engineer. Dudley P. Sheffler 49 Vice President, Telecommunications since 1981 and a Director of the Company. President of Reliance Comm/Tec since 1989. Joined Reliance in 1970 as a plant controller. William R. Norton 50 Vice President, General Counsel and Secretary since 1991 and Associate General Counsel and Assistant Secretary from 1978 to 1991. Joined Reliance in 1976 as an attorney. E. Scott Dalton 53 Vice President, Human Resources and Community Affairs since 1986, Group Employee Relations Manager from 1985 to 1986 and Director of Personnel Administration and Compensation from 1977 to 1985. Joined Reliance in 1977 as Director of Compensation. John D. Hutson 61 Vice President since March 1993 and Treasurer since 1992. Assistant Treasurer from 1977 to 1992. Joined Reliance in 1956 as a management trainee.
10 12
PRINCIPAL OCCUPATION NAME AGE AND DIRECTORSHIPS(1) - --------------------- --- -------------------------------------------------------------- James A. Guseilo 47 Vice President and Controller since March 1993. Controller of Reliance Comm/Tec since 1989. Joined Reliance in 1976 as supervisor of corporate accounting. Robert L. Matejka 51 Assistant Controller since March 1993. Director of Accounting and Control since 1989. Joined Reliance in 1973 as a member of the corporate accounting staff. Albin A. Muren 55 Vice President since October 1993. General Manager of Reli- ance's Electrical Group since 1986. Joined Reliance in 1963 as a sales trainee. Joseph D. Swann 52 Vice President since October 1993. General Manager of Reli- ance's Mechanical Group since 1982. Joined Reliance in 1969 as a technical service manager.
- --------------- * Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K. (1) The descriptions of the principal occupation of the executive officers include their employment history with both the Company and its predecessor. 11 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this item is included herein at Exhibit 99.1 to this Form 10-K Annual Report. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is included herein at Exhibit 99.2 to this Form 10-K Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is included herein at Exhibit 99.3 to this Form 10-K Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item is included herein at Exhibits 99.1 and 99.4 to this Form 10-K Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information regarding Directors appearing under the caption "Election of Directors" in the registrant's definitive Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on April 21, 1994 (the "1994 Proxy Statement") is incorporated herein by reference. The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 appearing under the caption "Compliance With Section 16(a) of the Securities Exchange Act of 1934" in the 1994 Proxy Statement is incorporated herein by reference. Information regarding executive officers of the registrant is set forth in Part I of this Form 10-K Annual Report. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated herein by reference to "Executive Compensation" in the 1994 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated herein by reference to "Stock Ownership of Principal Holders and Management" in the 1994 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated herein by reference to "Certain Transactions" in the 1994 Proxy Statement. 12 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. The following financial statements and supplementary quarterly information are filed as part of this Form 10-K Annual Report herein at Exhibits 99.1 and 99.4 as indicated:
ITEM - ------------------------------------------------------------------------------------- Report of Independent Accountants Consolidated Statement of Earnings for the Years Ended December 31, 1993, 1992 and 1991 Consolidated Balance Sheet as of December 31, 1993 and 1992 Consolidated Statement of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements Quarterly Information (unaudited)
2. Financial Statement Schedules. See the Index to Financial Statement Schedules at page FS-1 of this Form 10-K Annual Report. 3. Exhibits. See the Index to Exhibits at page E-1 of this Form 10-K Annual Report. (b) Reports on Form 8-K. The registrant did not file any Current Reports on Form 8-K during the fourth quarter of 1993. 13 15 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. RELIANCE ELECTRIC COMPANY By: /s/ JOHN C. MORLEY John C. Morley, President and Chief Executive Officer Date: March 3, 1994 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. /s/ JOHN C. MORLEY /s/ H. VIRGIL SHERRILL John C. Morley, H. Virgil Sherrill, President, Chief Executive Officer Chairman of the Board of Directors and a Director (Principal Executive Officer) /s/ DUDLEY P. SHEFFLER /s/ ANTHONY C. HOWKINS Dudley P. Sheffler Anthony C. Howkins, Vice President Director and a Director /s/ JOHN D. HUTSON /s/ ALFRED M. RANKIN, JR. John D. Hutson, Alfred M. Rankin, Jr., Vice President Director and Treasurer (Principal Financial Officer) /s/ JAMES A. GUSEILO /s/ E. MANDELL DE WINDT James A. Guseilo, E. Mandell de Windt, Vice President Director and Controller (Principal Accounting Officer)
Date: March 3, 1994 14 16 RELIANCE ELECTRIC COMPANY INDEX TO FINANCIAL STATEMENT SCHEDULES
DESCRIPTION PAGE ------------------------------------------------------------------------------ Report of Independent Accountants on Financial Statement Schedules................. FS-2 Schedule VIII --Valuation and Qualifying Accounts............................... FS-3 Schedule IX --Short-Term Borrowings........................................... FS-4 Schedule X --Supplementary Income Statement Information...................... FS-5
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. FS-1 17 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Reliance Electric Company Our audits of the consolidated financial statements referred to in our report dated February 3, 1994, appearing on page 1 of Exhibit 99.4 of this Annual Report on Form 10-K also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. As discussed in Note 1 of the consolidated financial statements included herein at Exhibit 99.4 of this Annual Report on Form 10-K, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions. PRICE WATERHOUSE Cleveland, Ohio February 3, 1994 FS-2 18 RELIANCE ELECTRIC COMPANY SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
COLUMN COLUMN A COLUMN B COLUMN C D COLUMN E - ---------------------------------------------------------------------------------------------------------- ADDITIONS ------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER OTHER END CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS CHANGES OF PERIOD - ---------------------------------------------------------------------------------------------------------- DEDUCTED FROM ASSETS TO WHICH THEY APPLY: ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended December 31, 1993 $ 8 $ 1 $ - $ - $ 9 Year ended December 31, 1992 7 1 - - 8 Year ended December 31, 1991 8 - (1) - 7 ALLOWANCE FOR AMORTIZATION -- GOODWILL: Year ended December 31, 1993 $ 37 $ 6 $ - $ - $ 43 Year ended December 31, 1992 31 6 - - 37 Year ended December 31, 1991 25 6 - - 31 ALLOWANCE FOR AMORTIZATION -- PATENTS AND OTHER INTANGIBLES: Year ended December 31, 1993 $ 37 $ 2 $ - $ (19)(A) $ 20 Year ended December 31, 1992 35 2 - - 37 Year ended December 31, 1991 29 6 - - 35 VALUATION ALLOWANCE ON DEFERRED TAX ASSETS: Year ended December 31, 1993 $ 6 $ 1 $ - $ - $ 7 Year ended December 31, 1992 6 - - - 6 Year ended December 31, 1991 6 - - - 6
- --------------- (A) Approximately $19 million of fully amortized intangible assets were written off in 1993. Financial data for 1992 and 1991 has been restated to reflect retroactive adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." FS-3 19 RELIANCE ELECTRIC COMPANY SCHEDULE IX -- SHORT-TERM BORROWINGS (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ------------------------------------------------------------------------------------------------------------- WEIGHTED MAXIMUM AVERAGE AVERAGE WEIGHTED AMOUNT AMOUNT INTEREST BALANCE AT AVERAGE OUTSTANDING OUTSTANDING RATE CATEGORY OF AGGREGATE END INTEREST DURING DURING THE DURING THE SHORT-TERM BORROWINGS OF PERIOD RATE (A) THE PERIOD PERIOD (B) PERIOD (A) - ------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1993 Notes payable to banks (Non-U.S.).. $ - $ - $ 2 $ 1 $ - DECEMBER 31, 1992 Notes payable to banks (Non-U.S.).. - - 2 - - DECEMBER 31, 1991 Notes payable to banks (Non-U.S.).. - - 1 1 -
(A) A weighted average interest rate for the combined various non-United States short-term borrowings does not provide a relevant interest rate due to varying foreign exchange rates and currencies borrowed. (B) Average amount outstanding during the period is computed by dividing the total of month-end outstanding principal balances by 12. FS-4 20 RELIANCE ELECTRIC COMPANY SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
COLUMN A COLUMN B - ------------------------------------------------------------------------- CHARGED TO COSTS AND EXPENSES ---------------------- YEARS ENDED DECEMBER 31, ---------------------- ITEM 1993 1992 1991 - ------------------------------------------------------------------------- Maintenance and repairs........................ $23 $21 $19 Taxes other than payroll and income............ 18 15 12
There were no other items not presented elsewhere which exceeded one percent of consolidated net sales. FS-5 21 RELIANCE ELECTRIC COMPANY EXHIBIT INDEX
SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE - --------------- ---------------------------------------------------------------- ---------------- 3.1 Restated Certificate of Incorporation of the Company as filed (A) with the Secretary of State of Delaware on February 1, 1993. 3.2 By-Laws of the Company, as amended May 11, 1988. (B) 4.1 Competitive Advance and Revolving Credit Facility Agreement, (C) dated as of April 21, 1993, among the Company, the Lenders named therein and Chemical Bank, as Administrative Agent. 4.2 Indenture, dated as of April 1, 1993, between the Company and (C) Bankers Trust Company as Trustee (the "Indenture"). 4.2.1 First Supplemental Indenture, dated as of April 14, 1993, (C) between the Company and Bankers Trust Company, supplementing the Indenture. 4.3 Specimen Certificate for the Company's 6.80% Notes due April 15, (C) 2003. 4.4 Specimen certificate of the Company's Class A Common Stock. (A) 4.5 Specimen certificate of the Company's Class B Common Stock. (D) 4.6 Specimen certificate of the Company's Class C Common Stock. (D) 10.1 Letter of Credit Facility Agreement, dated as of April 21, 1993, (C) between the Company and Society National Bank. 10.2 Stock Purchase Agreement, dated April 8, 1987 among Court Square (D) Capital Ltd. ("Citicorp"), Prudential Securities Incorporated ("Prudential") and the Company. 10.3 Registration Rights Agreement, dated April 8, 1987 among (D) Citicorp, Prudential, the management participants in the Employee Stock Purchase Plan and the Employee Stock Redistribution Plans and the Company. 10.3.1 Amendment No. 1 to Registration Rights Agreement, dated (B) September 15, 1988. 10.4 Registration Rights Agreement, dated April 29, 1992 among (A) Citicorp, Prudential and the Company. 10.5* Form of 1990 Severance Agreement of the Company with Messrs. (E) Morley, Dalton, Sheffler, Tsivitse, Hutson, Norton, Swann, Muren and Matejka. 10.5.1* Form of Amendment to 1990 Severance Agreement of the Company (E) with Messrs. Morley, Dalton, Sheffler, Tsivitse, Hutson, Norton, Swann, Muren and Matejka. 10.6* Form of Indemnity Agreement of the Company. (B) 10.7* Deferred Compensation Plan of the Company, as amended February (F) 20, 1991. 10.8* Form of Savings and Investment Plan of the Company, as amended and restated. 10.9* Defined Benefit Pension Plan of the Company. (D)
E-1 22 EXHIBIT INDEX -- CONTINUED
SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE - --------------- ---------------------------------------------------------------- ---------------- 10.10* Employee Stock Purchase Plan of the Company and the related (D) Non-Qualified Stock Option Agreement (Exhibit B thereto as revised) between the Company and the management participants in the Employee Stock Purchase Plan and the Employee Stock Redistribution Plan. 10.10.1* Employee Stock Redistribution Plan of the Company. (B) 10.10.2* Employee Stock Redistribution Plan of March 1, 1990 of the (G) Company. 10.11 Outside Director Stock Option Plan of the Company. (D) 10.11.1 Form of Amendment No. 1 to Outside Director Stock Option Plan of (H) the Company. 10.11.2 Form of Amendment No. 2 to Outside Director Stock Option Plan of (D) the Company. 10.12* Key Employee Stock Option Plan of 1990. (I) 10.13* Retirement Plan of the Company. (J) 10.14* Agreement relating to Golden Parachute Excise Tax. (I) 10.15* Reliance Electric Company Supplemental Retirement Plan for Key (F) Employees, as amended September 5, 1990. 10.16* Reliance Electric Company Special Retirement Program for Elected (F) Officers, as amended January 1, 1991. 21.1 Subsidiaries of the Registrant. ** 23.1 Consent of Price Waterhouse. ** 99.1 Quarterly Financial and Stockholder Information. ** 99.2 Selected Financial Data. ** 99.3 Management's Discussion and Analysis of Results of Operations ** and Financial Condition. 99.4 Consolidated Financial Statements of the Company listed under ** Item 14(a)(1).
- --------------- * Management contract or compensatory plan or arrangement identified pursuant to Item 14(c) of this Form 10-K. **Filed herewith. (A) Incorporated herein by reference to the appropriate exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1992. (B) Incorporated herein by reference to the appropriate exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1988. (C) Incorporated herein by reference to the appropriate exhibit to the Company's Form 10-Q for the quarter ended March 31, 1993. (D) Incorporated herein by reference to the appropriate exhibit to the Company's Registration Statement on Form S-1 declared effective on August 6, 1987 (Reg. No. 33-14048), and as amended by Post-Effective Amendment No. 1 on May 5, 1988, Post-Effective Amendment No. 2 on April 13, 1989 and Post-Effective Amendment No. 3 on May 1, 1990. (E) Incorporated herein by reference to the appropriate exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1991. (F) Incorporated herein by reference to the appropriate exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1990. E-2 23 EXHIBIT INDEX -- CONTINUED (G) Incorporated herein by reference to the appropriate exhibit to the Company's Registration Statement on Form S-8 declared effective on June 6, 1990 (Reg. No. 33-34976). (H) Incorporated herein by reference to the appropriate exhibit to the Company's Registration Statement on Form S-8 declared effective on December 2, 1987 (Reg. No. 33-18410). (I) Incorporated herein by reference to the appropriate exhibit to the Company's Registration Statement on Form S-1 declared effective on December 13, 1989 (Reg. No. 33-31612). (J) Incorporated herein by reference to the appropriate exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1987. E-3 EX-10.8 2 EXHIBIT 10.8 1 EXHIBIT 10.8 RELIANCE ELECTRIC COMPANY SAVINGS AND INVESTMENT PLAN RESTATEMENT EFFECTIVE JANUARY 1, 1989 2 INDEX
PAGE ARTICLE I DEFINITIONS 1 ARTICLE II PARTICIPATION 14 ARTICLE III EMPLOYEE CONTRIBUTIONS 17 ARTICLE IV EMPLOYER CONTRIBUTIONS 21 ARTICLE V INVESTMENT PROVISIONS 30 ARTICLE VI VALUATION OF ACCOUNTS 40 ARTICLE VII VESTING 42 ARTICLE VIII DISTRIBUTION OF BENEFITS 47 ARTICLE IX WITHDRAWALS DURING EMPLOYMENT 54 ARTICLE X LOANS 60 ARTICLE XI PAYMENT OF BENEFITS 65 ARTICLE XII REEMPLOYMENT 67 ARTICLE XIII ADMINISTRATION OF THE PLAN 68 ARTICLE XIV CERTAIN RIGHTS AND OBLIGATIONS 72 ARTICLE XV AMENDMENTS 75 ARTICLE XVI NON-ALIENATION OF BENEFITS 77 ARTICLE XVII TOP-HEAVY PROVISIONS 78 ARTICLE XVIII MISCELLANEOUS 83
3 ARTICLE I DEFINITIONS 1.01 "Account" means the account maintained for each Participant which reflects separately his Basic Employee Contributions, Basic Salary Reduction Contributions, Supplemental Employee Contributions, his portion of Matching Employer Contributions, and his portion of Supplemental Employer Contributions, investments in Fund A, Fund B, Fund C, Fund D, the Exxon Fund and the Company Stock Fund, with any earnings, interest, dividends, and profits or losses, realized or unrealized, thereon, and which also reflects any distributions to, loans to or withdrawals by such Participant or his Beneficiary. 1.02 "Administrative Committee" means the committee appointed to administer the Plan in accordance with Section 13.03 of the Plan. 1.03 "Appraisal Date" means the date as of which the value of a share of Company Stock is determined by the Administrative Committee or its designee. 1.04 "Basic Employee Contributions" means the contributions made by a Participant as a condition of participation in the Prior Reliance Electric Plan, as provided in Section 3.02 of the Prior Reliance Electric Plan. 1.05 "Basic Salary Reduction Contributions" means the contributions of the Employer to the Reliance Electric Plan and the Plan as a result of a written Compensation reduction agreement with 1 4 a Participant, as provided in Section 3.01 of the Reliance Electric Plan and the Plan. 1.06 "Beneficiary" means, if a Participant is married, the Participant's Eligible Surviving Spouse unless such Eligible Surviving Spouse consents to waiving his or her right to receive a death benefit under the Plan upon his or her death and consents to the designation of another beneficiary. If there is no Eligible Surviving Spouse, or the Eligible Surviving Spouse consents to waiving his or her right to receive a death benefit, the Beneficiary means any person, estate, trust or organization (other than a business corporation) designated by a Participant to receive a death benefit under the Plan in the event of his death. The Administrative Committee shall prescribe the form for the written designation of beneficiary and, upon the Participant's filing the form with the Administrative Committee, it effectively shall revoke all designations filed prior to that date by the same Participant. If under any circumstance, there shall be a failure of the primary and contingent designees, such as the death of designees before the deceased or simultaneously with the deceased, the Eligible Surviving Spouse of the deceased shall be the designated beneficiary, but if there is no such Eligible Surviving Spouse, then the designated beneficiary shall be the deceased's surviving children and they shall share such death benefit equally, but if there shall be no surviving children, then the designated beneficiary shall be those who would take under the intestate laws of the jurisdiction in which the deceased was domiciled at the time of his death. 2 5 1.07 "Board of Directors" means the Board of Directors of the Company. 1.08 "Code" means the Internal Revenue Code of 1986, as amended. 1.09 "Company" means Reliance Electric Company, a Delaware corporation. 1.10 "Company Stock" means any Class of common stock of the Company which qualifies as a "qualifying employer security" within the meaning of Section 407(d)(5) of ERISA. 1.11 "Compensation" means (a) the nondeferred remuneration of an Employee for services rendered to the Employer, inclusive of Basic Salary Reduction Contributions, inclusive of regularly scheduled paid bonuses and sales commissions, exclusive of overtime, shift differential and incentive earnings, and exclusive of compensation for work rendered in excess of 40 hours per week and the Employer's cost for any employee benefit plan (which cost is not included in the gross income of the Employee), including the Plan, except as provided in this Section, and (b) in the case of an Eligible Employee, described in the second paragraph of Section 1.15, an amount determined by the Administrative Committee, using as a guideline to be uniformly and consistently applied, that nondeferred remuneration which would be considered as his basic rate of compensation if his services were performed in a similar position in the United States for the Company, but in no event shall "Compensation", as determined by the Administrative Committee, exceed the nondeferred remuneration actually received by such an Eligible Employee. For purposes of this Plan, the amount 3 6 of a Participant's Compensation for any Plan Year shall not exceed Two Hundred Thousand Dollars ($200,000), as indexed by the Internal Revenue Service. 1.12 "Disability Date" means the first day of the month coincident with or next following the termination of service of a Participant or Inactive Participant with the Employer due to a physical or mental disability which will permanently disable such Participant from performing the customary duties of his regular job with the Employer. Such permanent disability is to be determined by a licensed physician provided by or acceptable to the Administrative Committee. 1.13 "Early Retirement Date" means the date of a Participant's or Inactive Participant's termination of service, provided it occurs on or after his 55th birthday, but prior to his Normal Retirement Date, and after his completion of ten (10) Years of Credited Service. 1.14 "Effective Date of the Plan" means (a) March 1, 1978 for each Employer authorized to participate under the Prior Reliance Electric Plan on such date, and (b) such other date after March 1, 1978, which is the first date an Employer is authorized to participate under the Prior Reliance Electric Plan or the Plan. 1.15 "Eligible Employee" means an Employee who is employed on or after the Restatement Date by an Employer and who has completed a Year of Credited Service and is neither covered by a collective bargaining agreement (unless that collective bargaining agreement expressly provides for the employee's eligibility) nor eligible to 4 7 participate in any other defined contribution plan maintained by an Employer or to which an Employer contributes. Lastly, the Plan excludes an Employee of an Employer which is a "foreign subsidiary" (described in Section 406(a) of the Code and to which an agreement entered into under Section 3121(1) of the Code applies) or a "domestic subsidiary" (described in Section 407(a) of the Code) and who is not a citizen of the United States -- other than a person employed by a Subsidiary authorized to participate in the Plan by the Administrative Committee. 1.16 "Eligible Surviving Spouse" means the husband or wife to who the Participant was married on the date of the Participant's death. 1.17 "Employee" means any person who is employed by an Employer. 1.18 "Employer" means a division of the Company or any corporation (or division of such a corporation) within Reliance Electric Company, which, in each instance, is authorized by the Administrative Committee to participate in the Plan. 1.19 "Employment Commencement Date" means the first date on which an Employee performs an Hour of Service. 1.20 "ERISA" means Public Law No. 93-406, the Employee Retirement Income Security Act of 1974, any regulations thereunder and any amendments thereto and any successor statutes or regulations which may be enacted or promulgated from time to time. 1.21 "Excluded Entity" means a division of the Company or any corporation (or division of such a corporation) within the Company 5 8 which, in each instance, is not authorized by the Administrative Committee to participate in the Plan. 1.22 "Exxon Corporation" means Exxon Corporation, a New Jersey corporation. 1.23 "First Day of the Calendar Quarter" means either January 1, April 1, July 1 or October 1, whichever is appropriate. 1.24 "Former Participant" means any person who is entitled to benefits from the Trust and who ceases to be employed by Reliance Electric Company. 1.25 "Hour of Service" means an hour for which an Employee is directly or indirectly paid, or entitled to payment by the Employer for the performance of duties. 1.26 "Inactive Participant" means any Participant who ceases to be an Eligible Employee, but who nonetheless remains in the employment of Reliance Electric Company. 1.27 "Initial Public Offering" means the first public offering of Company Stock pursuant to a registration statement filed with the United States Securities and Exchange Commission pursuant to the provisions of the Federal Securities Act of 1933. 1.28 "Management Investor" means a Participant who on October 31, 1989 held in the aggregate in excess of 4,999 shares of Company Stock and/or options to purchase Company Stock under either the Reliance Electric Company Employee Stock Purchase Plan or the Reliance Electric Company Employee Stock Redistribution Plan. 1.29 "Matching Employer Contributions" mean the contributions made to the Plan by the Employer, as provided in Sections 4.01, 4.09, 4.10 and 4.11 hereof. 6 9 1.30 "Normal Retirement Age" means the attainment of age Participant or Inactive Participant. 1.31 "Normal Retirement Date" means the first day of the month coincident with or next following a Participant's or Inactive Participant's 65th birthday. 1.32 "One Year Period of Severance" means any of the successive twelve consecutive month periods commencing on an Employee's Severance from Service Date and ending on the anniversary of such date provided that during such period the Employee does not perform an Hour of Service. 1.33 "Participant" means any person participating in the Plan as provided in Article II. 1.34 "Pendency of an Initial Public Offering" shall mean the period commencing on the date (at which date Company Stock is not Publicly Traded) the Company publicly announces its intention to effect an Initial Public Offering and ending on either the date the Initial Public Offering is consummated or the date the Company publicly announces that the contemplated Initial Public Offering will not take place. 1.35 "Period of Service" means a period of service commencing on an Employee's Employment Commencement Date or Reemployment Commencement Date, whichever is applicable, and ending on his Severance from Service Date. Except as otherwise provided in the Plan, all non- successive Periods of Service shall be aggregated and less than whole year Periods of Service shall be aggregated on the basis that twelve months of service or 365 days of service equal a whole year. 7 10 1.36 "Period of Severance" means the period of time commencing on an Employee's Severance from Service Date and ending on his Reemployment Commencement Date. 1.37 "Plan" means the Reliance Electric Company Savings and Investment Plan as set forth herein and as from time to time amended. 1.38 "Plan Year" means, as provided in the Prior Document, the twelve month period commencing on January 1, 1981 and each January 1 thereafter. 1.39 "Prior Document" means the Reliance Electric Company Savings and Investment Plan, as amended and restated as of January 1, 1981, including amendments of January 1, 1979, April 1, 1979, April 25, 1980 and October 1, 1980. 1.40 "Publicly Traded" shall mean, with respect to any shares of Company Stock, either (a) the listing of such shares on a nationally-recognized stock exchange; or (b) the listing of such shares on the NASDAQ National Market System. 1.41 "Qualified Domestic Relations Order (QDRO)" means any judgment, decree or order (including approval of a property settlement agreement) which is made pursuant to a State Domestic Relations Law (including a community property law) and which: (i) relates to provision of child support, alimony payments, or marital property rights of a spouse, former spouse, child or other dependent of a Participant, and which 8 11 (ii) recognizes or creates an alternate payee's right to, or assigns an alternative payee the right to receive all or a portion of the benefits payable with respect to a Participant under this Plan, and which (iii) clearly specifies (a) name and last known address of the Participant and of each alternate payee (b) the amount, percentage or manner in which such could be determined, of the Participant's benefits to be paid to such alternate payee by the Plan (c) the number of payments or time period the QDRO covers, and (d) each Plan to which the QDRO applies. A QDRO cannot require the Plan to provide a type or form of benefit, or any option not otherwise provided by the Plan, nor can it require the Plan to provide increased benefits. A QDRO cannot require payment to an alternate payee of benefits required to be paid to another alternate payee by virtue of a previous QDRO. A written procedure will be established to determine the qualified status of QDRO's and to administer distributions thereunder. 1.42 "Reemployment Commencement Date" means the first date on which an Employee performs an Hour of Service following a Period of Severance. 1.43 "Reliance Electric Company" means all corporations which, with the Company, are members of a controlled group of 9 12 corporations within the meaning of Section 1563(a), determined without regard to Section 1563(a)(4) and (e)(3)(C), of the Code, provided, however, the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" wherever it appears in Section 1563(a)(1) of the Code. 1.44 "Reliance Electric Plan" means the Reliance Electric Company Savings and Investment Plan, as amended and restated effective as of October 1, 1983, and thereafter amended. 1.45 "Severance from Service Date" means the date on which an Employee quits, retires, is discharged or dies, or, if earlier, the first anniversary of the first date of a period in which an Employee remains absent from service with the Employer for any other reason. The "Severance from Service Date" for a Participant who is absent from work for Maternity or Paternity reasons, shall be the second anniversary of the first date of such absence. The period between the first and second anniversaries of the first date of absence for Maternity or Paternity reasons shall not constitute a "Period of Severance". For purposes of this paragraph, an absence from work for Maternity or Paternity reasons means an absence: (i) by reason of pregnancy of the Employee, (ii) by reason of the birth of a child of the Employee, (iii) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or (iv) for purposes of caring for such child for a period immediately following such birth or placement. 10 13 An absence will not be considered a "Maternity or Paternity Absence" unless the Employee provides the Administrative Committee with information within 10 working days demonstrating that the absence is for one of the four permitted reasons outlined above. At the end of such absence, the Employee must provide the Administrative Committee with a record of the number of days of such absence. Nothing in this Plan shall require the Employer to grant a paid leave of absence to any Employee. 1.46 "Supplemental Employee Contributions" means contributions to the Reliance Electric Plan and the Plan as provided in Section 3.02 of the Reliance Electric Plan and the Plan or contributions to the Prior Reliance Electric Plan in excess of the Maximum Basic Employee Contributions as provided in Section 3.03 of the Prior Reliance Electric Plan. 1.47 "Trust" means the Reliance Electric Company Savings and Investment Trust, as adopted and subsequently amended, and as the same forms part of the Plan. 1.48 "Trust Fund" means the fund established under Section 13.01. 1.49 "Trustee" means the trustee as provided in Section 13.01. 1.50 "Valuation Date" means the last business day of each month. 1.51 "Vested Interest" means that portion of an Account in which an individual has a fully vested and nonforfeitable right, as provided in Article VII. 11 14 1.52 "Year of Credited Service" means each whole year of an Employee's Period of Service, whether or not such Period of Service is completed consecutively. 1.53 "Year of Vested Service" means, for purposes of determining a Participant's nonforfeitable interest in Employer contributions, each whole year of his Period of Service, whether or not such Period of Service was completed consecutively, provided, however, that a "Year of Vested Service" shall not include: (a) any portion of a Participant's Period of Service or employment by an Excluded Entity prior to March 1, 1978, and (b) prior to July 1, 1980, any portion of a Participant's Period of Service with respect to which the Participant did not make Basic Employee Contributions under the Prior Reliance Electric Plan; and, further provided, however, that a "Year of Vested Service" shall include: (c) employment by an Excluded Entity on March 1, 1978 and thereafter of a person who, on or after that date, either ceases to be (i) an Employee of an Employer and becomes employed by an Excluded Entity, or (ii) employed by an Excluded Entity and becomes an Employee of an Employer, except that if on or after March 1, 1978 an Employer or Excluded Entity is for the first time included within the definition oF "Reliance Electric Company", the Administrative Committee shall determine, in a 12 15 uniform nondiscriminatory manner, what portion, if any, of service prior to inclusion within such definition shall be included under this paragraph (c). 13 16 ARTICLE II PARTICIPATION 2.01 Each Eligible Employee shall be so notified by his Employer and shall elect to participate or not to participate by signing such forms as the Administrative Committee may require and which forms shall be delivered to the Administrative Committee, or its designated representative, within 30 days after such notice of eligibility, or such shorter period as established by the Administrative Committee. 2.02 Each Eligible Employee who is employed by an Employer on the Effective Date (including an Eligible Employee whose participation under the Reliance Electric Plan had been suspended) and who elects to participate, in accordance with Section 2.01, in the Plan as of the Effective Date shall become a Participant as of the Effective Date. Each Eligible Employee who is employed by an Employer after the Effective Date and who elects to participate when first eligible, in accordance with Section 2.01, shall become a Participant as of the First Day of the Calendar Year Quarter coincident with or next following his eligibility date. Notwithstanding the preceding sentence, each Eligible Employee who is employed by an Employer after January 1, 1991 and who elects to participate when first eligible, in accordance with Section 2.01, shall become a Participant as of the first day of the month coincident with or next following his eligibility date. 2.03 Each Eligible Employee who elects not to become a Participant when first eligible (including an Eligible Employee whose participation under the Reliance Electric Plan had been 14 17 suspended) may at any time after his eligibility date elect to become a Participant as of the First Day of the Calendar Year Quarter next following the date of his election to participate by completing and delivering such forms as the Administrative Committee may require, in accordance with Section 2.01. Notwithstanding the preceding sentence, effective January 1, 1991, each such Eligible Employee may elect to become a Participant as of the first day of the month next following the date of his election to participate by completing and delivering such forms as the Administrative Committee may require, in accordance with Section 2.01. 2.04 Except as specifically provided for herein, if a Participant terminates his service with the Employer for any reason, his participation shall terminate. 2.05 Interruptions in service in case of up to one year of layoff or authorized leave of absence will not be considered termination of service for the purposes of the Plan, but no Basic Salary Reduction Contributions or Supplemental Employee Contributions may be made for periods of absence or layoff unless the Participant receives nondeferred remuneration for such periods. 2.06 If a Participant is transferred to service with an Excluded Entity, he shall be an Inactive Participant and no Basic Salary Reduction Contributions or Supplemental Employee Contributions may be made until he again becomes an Eligible Employee. 2.07 In the event that the Company shall acquire the control of any organization by purchases of assets or stock, merger, amalgamation, consolidation or any other similar event, the Board 15 18 of Directors or the Administrative Committee may authorize such organization to participate in the Plan upon agreement that contributions shall be made as required under the Plan, and shall determine to what extent, if any, credit for employment with such organization shall be granted to the employees of such organization for the purpose of determining eligibility hereunder. 16 19 ARTICLE III EMPLOYEE CONTRIBUTIONS 3.01 Each Eligible Employee wishing to participate in the Plan must elect to make Basic Salary Reduction Contributions (upon which Matching Employer contributions will be made in accordance with the Plan) of no less than 1% and no more than 12% of his Compensation; however, at no time during any Plan Year shall a Participant's Basic Salary Reduction Contributions exceed the maximum annual deferral limit for 401(k) plans as provided in Section 402(g) of the Code. Each Participant shall enter into a written Compensation reduction agreement with the Employer which shall provide that the Participant agrees to accept a reduction in Compensation equal to the amount elected by the Participant as his Basic Salary Reduction Contribution. In consideration of such agreement, the Employer will make contributions to the Trust Fund on behalf of the Participant for each Plan Year, in an amount equal to the amount by which the Participant's Compensation was reduced with respect to each pay period. In the event that the amount so contributed with respect to a Participant during any Plan Year is less or more than the amount elected by the Participant in his Compensation reduction agreement, an appropriate adjustment shall be made within a reasonable period of time. 3.02 As established by the Administrative Committee, a time period may be designated for a Participant to make a Supplemental Employee Contribution from his own funds, provided, however, in no event may the total Supplemental Employee Contributions, from whatever source, exceed 10% of such Participant's aggregate 17 20 nondeferred remuneration during the period of his participation in any qualified employee benefit plan maintained by Reliance Electric Company. 3.03 A Participant may elect to increase or decrease the rate of Basic Salary Reduction Contributions to be deducted from his Compensation, effective as of the First Day of any Calendar Quarter, provided that the Administrative Committee receives notice from him in writing, at least thirty (30) days in advance, unless said notice is waived by the Administrative Committee, and provided further that not more than two (2) increases or decreases in the rate may be made in any one Plan Year. Notwithstanding the preceding sentence, effective January 1, 1991, any such election by a Participant to increase or decrease the rate of Basic Salary Reduction Contributions to be deducted from his Compensation shall be effective the first day of any month, provided that the Administrative Committee receives notice from him in writing, at least thirty (30) days in advance, unless said notice is waived by the Administrative Committee, and provided further that not more than two (2) increases or decreases in the rate may be made in any one Plan Year. Notwithstanding either of the preceding sentences, the Administrative Committee may, pursuant to Section 13.13, permit an additional increase or decrease in the contribution rate during a Plan Year. 3.04 A Participant may suspend his Basic Salary Reduction Contributions as of the first day of any Calendar Quarter, by giving at least thirty (30) days prior written notice to the Administrative Committee (as determined by the date notice is 18 21 received by the Administrative Committee). Notwithstanding the preceding sentence, effective January 1, 1991, a Participant may suspend his Basic Salary Reduction Contributions as of the first day of any month by giving prior written notice to the Administrative Committee (as determined by the date notice is received by the Administrative Committee). He shall be deemed to be an Inactive Participant during the period of suspension of his Basic Salary Reduction Contributions. He may resume such Basic Salary Reduction Contributions, effective for notices received before January 1, 1991 on the First Day of the Calendar Quarter and for notices received on or after January 1, 1991 on the first day of any month, which is at least three full calendar months after the date the suspension commenced, by giving at least thirty (30) days prior written notice to the Administrative Committee (as determined by the date such notice is received by the Administrative Committee). 3.05 No Basic Salary Reduction Contributions may be made by a Participant who is: (a) not receiving Compensation, (b) no longer an Eligible Employee, (c) an Inactive Participant, or (d) a Former Participant. 3.06 Notwithstanding the foregoing provisions of this Article, the Administrative Committee shall have the right at any time to amend the Compensation reduction agreement between the Employer and a Participant -- by means of a retrospective or prospective reduction or rollback of the amount elected by such 19 22 Participant as his Basic Salary Reduction Contribution -- if the Administrative Committee determines that such amendment is necessary to assure that the Participant's Basic Salary Reduction Contribution for any Plan Year will not exceed the limits which may be imposed by the Administrative Committee, from time to time and in its sole discretion, so as to assure satisfaction of the discrimination tests of Section 401(k) of the Code and/or regulations issued thereunder. Any retrospective reduction or rollback of the amount elected by a Participant as his Basic Salary Reduction Contribution, in accordance with the preceding sentence, shall be deemed to have been caused by an administrative error and shall be refunded by the Trust to the Employer. Thereafter, the Employer shall pay the amount refunded to it, in accordance with the preceding sentence, as Compensation to such Participant. 20 23 ARTICLE IV EMPLOYER CONTRIBUTIONS 4.01 For each month after the Restatement Date during which the Plan is in effect, subject to the provisions of Section 9.02, the Employer shall make Matching Employer Contributions to the Trust Fund in an amount which, when added to forfeitures, if any, will be equal to 50% of each Participant's Basic Salary Reduction Contributions for the corresponding month, provided, however that for this purpose Basic Salary Reduction Contributions in excess of 6% of Compensation shall not be taken into account. No Matching Employer Contributions shall be made with respect to the Participant's Supplemental Employee Contributions. The Employer may make its Matching Employer Contributions for any month prior to the time the Basic Salary Reduction Contributions are made for such month. 4.02 The Employer also shall contribute during each Plan Year such amounts as are reinstated pursuant to Article XII. 4.03 Contributions to the Plan generally shall be made in the form of cash. Notwithstanding the foregoing, effective January 1, 1990, subject to Section 4.05, fifty percent (50%) of the Matching Employer Contributions to the Plan pursuant to Section 4.01 hereof on behalf of those Participants who are not Management Investors shall be made either in the form of Company Stock or in the form of cash, which cash amount shall be invested by the Trustee in Company Stock to the extent available. Effective April 1, 1992, subject to Section 4.05, fifty percent (50%) of all Matching Employer Contributions to the Plan pursuant to Section 4.01 hereof shall be 21 24 made either in the form of Company Stock or in the form of cash, which cash amount shall be invested by the Trustee in Company Stock to the extent available. Notwithstanding the foregoing, effective upon the first day of the month during which an Initial Public Offering is completed, subject to Section 4.05, one hundred percent (100%) of the Matching Employer Contributions to the Plan pursuant to Section 4.01 hereof shall be made either in the form of Company Stock or in the form of cash, which cash amount shall be invested by the Trustee in Company Stock to the extent available. 4.04 Effective July 1, 1990, subject to Section 4.05, Participants who are not Management Investors shall have the right to elect to have that portion of the Matching Employer Contribution to the Plan on their behalf pursuant to Section 4.01 hereof which is not automatically invested in Company Stock pursuant to Section 4.03 hereof invested in Company Stock to the extent available. Effective April 1, 1992, subject to Section 4.05, all Participants shall be entitled to elect to have that portion of the Matching Employer Contribution to the Plan on their behalf pursuant to Section 4.01 hereof, which is not automatically invested in Company Stock pursuant to Section 4.03 hereof, invested in Company Stock to the extent available. Notwithstanding the foregoing, effective upon the first day of the month during which an Initial Public offering is completed, subject to Section 4.05, one hundred percent (100%) of the Matching Employer Contributions to the Plan pursuant to Section 4.01 hereof shall be made either in the form of Company Stock or in the form of cash, which cash amount shall be invested by the Trustee in Company Stock to the extent available. 22 25 4.05 Notwithstanding the provisions of Sections 4.03 and 4.04, during the Pendency of an Initial Public Offering the Company shall neither make a Matching Employer Contribution in the form of Company Stock or make available Company Stock for purchase by the Trustee. The Trustee shall purchase Company Stock from any other available source during the Pendency of an Initial Public Offering, but only to the extent the price of any share of Company Stock does not exceed the value determined as of the most recent Appraisal Date. Any Matching Employer Contributions which are not, pursuant to this Section 4.05, immediately invested in Company Stock, shall be invested in a short term interest fund. At the end of the Pendency of the Initial Public Offering, all such amounts shall be invested in Company Stock, either in the Initial Public Offering, or as soon thereafter as practicable taking account of prevailing market conditions. 4.06 In addition to the contributions to be made pursuant to Sections 4.01, 4.02, 4.09, 4.10, and 4.11, the Employer shall pay all expenses reasonably incurred in administering the Plan. 4.07 Subject to the provisions of Section 14.06, all contributions made to the Plan by the Employer shall be irrevocable, except that contributions made on account of a mistake in fact shall be returned to the Employer, without interest, within one year of such contribution. Contributions shall be held in the Trust Fund to be used in accordance with the provisions of the Plan in providing the benefits, and, subject to the last sentence of Section 7.07, neither such contributions nor any income therefrom shall be used for or diverted to purposes other than for the 23 26 exclusive benefit of Participants, Inactive Participants, and Former Participants and their Beneficiaries under the Plan. 4.08 Notwithstanding the foregoing provisions of this Article, with respect to a Participant the following provisions shall apply: (a) If no Benefit Plan covering the Participant is maintained by Reliance Electric Company during said Plan Year, the Annual Addition for said Plan Year to all Contribution Plans maintained by Reliance Electric Company (including the Plan) shall not exceed the Annual Addition Limitation. (b) If a Benefit Plan covering the Participant is maintained by Reliance Electric Company during said Plan Year, the Annual Addition for said Plan Year to all Contribution Plans maintained by Reliance Electric Company (including the Plan) shall be limited so that the sum of the Contribution Plan Fraction and the Benefit Plan Fraction does not exceed 1. If, despite the foregoing limitations, the Annual Addition with respect to a Participant would exceed such limitations as a result of, for instance, the allocation of forfeitures, a reasonable error in determining a Participant's Compensation or other limited facts and circumstances which the Internal Revenue Service findsjustifiable, said Annual Addition shall be reduced to the extent necessary to bring 24 27 said Annual Addition within such limitations in the following manner: (a) First, contributions by the Participant which are included in the Annual Addition for the Plan Year shall be returned to the Participant; (b) Second, the amount of contributions by Reliance Electric Company in excess of said limitations shall not be allocated to such Participant's Account, but shall be reallocated to the Accounts of other Participants (in proportion to annual total nondeferred remuneration for all Participants) until the allocations to the Accounts of all Participants reach such limitations; and (c) Third, if after said reallocation, such contributions by Reliance Electric Company would cause such limitations to be exceeded for any Participant, the amount of the contributions of Reliance Electric Company in excess of such limitations shall be held in a suspense account by the Trustee and, before further contributions by Reliance Electric Company are allocated to such Participant, the amount in such suspense account shall be allocated to such Participant's Account in the first succeeding Plan Year or Plan Years in which such amount or a portion thereof may be allocated without exceeding such limitations. 25 28 For the application of the foregoing provisions, the following terms are defined as: (i) "Annual Addition" means with respect to a Participant the sum for said Plan Year of-- (a) contributions by Reliance Electric Company to all Contribution Plans, (b) the sum of the Participant's contributions under all Benefit Plans and Contribution Plans, and (c) forfeitures, if any allocated to such Participant under all Contribution Plans. (ii) "Annual Addition Limitation" means with respect to a Participant the lesser of-- (a) in 1978, $30,050 in 1979, $32,700; in 1980, $36,875; in 1981, $41,500; in 1982 and 1983, $45,475 and in 1984 and thereafter $30,000 (as the same may be adjusted by the Secretary of the Treasury), and (b) 25% of the Participant's nondeferred remuneration. (iii) "Benefit Plan" means a plan maintained by Reliance Electric Company which is described in Section 401(a) or 403(a) of the Code and which is not a Contribution Plan. (iv) "Benefit Plan Fraction" means a fraction, the numerator of which is the projected annual benefit 26 29 of the Participant under all Benefit Plans (determined as of the close of the Plan Year), and the denominator of which is the lesser of: (a) the product of 1.25multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of the Code for said Plan Year, or (b) the product of 1.4multiplied by the amount which may be taken into account under Section 415(b)(1)(B) of the Code with respect to such Participant for said Plan Year. (v) "Contribution Plan" means a plan maintained by Reliance Electric Company which is described in Section 401(a) of the Code and which provides for an individual account for each participant and for benefits based solely on the amount contributed to the Participant's Account and any income, expenses, gains and losses, and any forfeitures of accounts of other Participants which may be allocated to such Participant's Account. (vi) "Contribution Plan Fraction" means a fraction, the numerator of which is the sum of the Annual Additions to the Participant's Accounts under all Contribution Plans as of the close of the Plan Year and the denominator of which is the sum of the lesser of the following amounts determined for said Plan Year and each prior year of service: (a) the product of 1.25 multiplied by the dollar limitation in effect under Section 415(c)(1)(A) of the Code, 27 30 or (b) the product of 1.4 multiplied by the amount which may be taken into account under 415(c)(1)(B) of the Code with respect to such Participant. 4.09 Notwithstanding the foregoing provisions of this Article, the Employer may contribute to the Trust Fund additional amounts which are to be credited to the Accounts of Participants who are not "highly compensated employees", as defined in Section 414(g) of the Code and/or the regulations issued thereunder, as additional Matching Employer Contributions so as to assure satisfaction of the discrimination tests of Section 401(k) of the Code and/or the regulations issued thereunder. 4.10 Effective January 1, 1989 and ending December 31, 1989, a Participant's Account that is eligible to receive a supplemental Matching Employer Contribution as of the last day of the Calendar Quarter, shall be credited with a supplemental Matching Employer Contribution of One Hundred Dollars ($100.00). A Participant shall be eligible to receive a supplemental Matching Employer Contribution if said Participant (a) contributes in each month of the quarter, (b) could not contribute in each month of the quarter due to layoff, or (c) is unable to contribute because his contribution exceeds the maximum amount specified in Section 402(g) of the Code as adjusted for changes in the cost of living. 4.11 Effective July 1, 1990, and ending on the first day of the month during which an Initial Public Offering is completed, a Participant who shall make the election described in Section 4.04 hereof shall be entitled to have made on his behalf an additional Matching Employer Contribution equal to twenty percent (20%) of the 28 31 amount described in said Section 4.04. Subject to Section 4.05, additional Matching Employer Contributions to the Plan shall be made either in the form of Company Stock or in the form of cash, which cash amount shall be invested by the Trustee in Company Stock to the extent available. Notwithstanding the foregoing, a Participant shall be ineligible to receive all or a portion of the additional Matching Employer Contribution in the event the Participant is a "highly compensated employee" as defined in Section 414(q) of the Code and, in the reasonable opinion of the Administrative Committee, allocation of all or a portion of such Matching Employer Contribution would violate Section 401(a) or 401(m) of the Code. 29 32 ARTICLE V INVESTMENT PROVISIONS 5.01 The Administrative Committee shall direct the Trustee to establish the following Funds for investment of contributions under this Plan: (1) Fund A - Aetna Variable Fund Accumulation Account, a registered mutual fund which will be invested under a contract or contracts, approved by the Administrative Committee, between the Trustee and Aetna Life Insurance and Annuity Company for the investment of the Assets of Fund A into a diversified portfolio consisting of common stocks and securities convertible into common stocks. (2) Fund B - Interest Accumulation Fund, which will be invested under a contract or contracts, approved by the Administrative Committee, between the Trustee and an insurance or other financial company or companies selected by the Administrative Committee. Such contract or contracts shall contain, among other things, provisions relating to the return on investment which such insurance or other financial company or companies shall provide on invested monies, and the repayment of invested monies in the event of distributions, transfers and consolidating transfers made in accordance with the provisions of the Plan or in the event of termination or discontinuance of such contract or contracts or in 30 33 the event of dissolution or bankruptcy of any such company. (3) Fund C - Merrill Lynch Basic Value Fund, which will be invested by the Trustee in shares of the Merrill Lynch Basic Value Fund Inc., a diversified, open-ended investment company seeking capital appreciation and, secondarily, income by investing in securities, primarily equities, that the management of Merrill Lynch Basic Value Fund Inc. believes are undervalued and therefore represent basic investment value. Particular emphasis is placed on securities which provide an above-average dividend return and sell at a below-average price earnings ratio. (4) Fund D - Equity Index Fund of the General Employee Benefit Trust of Bankers Trust Company, which shall be invested by the Trustee in shares of the Equity Index Fund of the General Employee Benefit Trust of Bankers Trust Company, a fund composed of a portfolio of common stocks constructed and maintained with the objective of providing investment results which approximate the overall performance of the common stocks included in the Standard & Poor's Composite Index of 500 stocks. (5) Exxon Stock Fund, which shall consist of shares of the common stock of Exxon Corporation purchased by the Trustee for a Participant under the Fund A - 31 34 Common Stock Fund provision of the Prior Reliance Electric Plan. Participants will not be allowed to elect to have their Basic Salary Reduction Contribution, Supplemental Employee Contribution, Matching Employer Contribution, and Supplemental Employer Contribution invested in the Exxon Stock Fund and the Trustee shall make no investment in the Exxon Stock Fund except for the reinvestment of cash dividends on shares of the common stock of Exxon Corporation and the investment of the interest earned by the short term interest fund maintained by the Trustee to generate interest income on cash transactions related to the sale of Exxon shares liquidated for loans, distributions, and withdrawals. (6) Company Stock Fund, which, effective January 1, 1990, shall consist of shares of Company Stock which shall be acquired by the Plan pursuant to Sections 4.03, 4.04, 4.11, 5.02, 5.04, 5.05 and 5.06 hereof. Prior to completion of an Initial Public Offering, the Trustee shall make no other investment in the Company Stock Fund except for the reinvestment of cash dividends on shares of the Company Stock and the investment of cash (and interest thereon) in a short term interest fund maintained by the Trustee for the purpose of generating income on cash transactions related to 32 35 the purchase or sale of Company Stock pursuant to the Plan. 5.02 Basic Salary Reduction Contributions, Supplemental Employee Contributions and, except as otherwise provided in Sections 4.03, 4.04, and 4.11 hereof, Matching Employer Contributions credited to a Participant's Account shall be invested in whole in Fund A, Fund B, Fund C or Fund D, or in 25% increments to such Funds, pursuant to the election of the Participant. Notwithstanding the preceding sentence, effective as of January 1, 1991, Basic Salary Reduction Contributions, Supplemental Employee Contributions and, except as otherwise provided in Sections 4.03, 4.04 and 4.11 hereof, Matching Employer Contributions credited to a Participant's Account shall be invested in whole in Fund A, Fund B, Fund C or Fund D, or in 5% increments to such Funds, pursuant to the election of the Participant. Effective the first day of the month following the completion of an Initial Public Offering, Basic Salary Reduction Contributions and Supplemental Employee Contributions credited to a Participant's Account may also be invested, in whole or in 5% increments, in the Company Stock Fund, pursuant to the election of the Participant. Notwithstanding the second sentence of this Section 5.02 if during the Pendency of an Initial Public Offering, (a) a Participant receives a distribution of his Account pursuant to Article VIII, or makes a withdrawal from his Account pursuant to Article IX, to the extent the Participant receives an amount of 33 36 cash representing his interest in the Company Stock Fund, or (b) amounts credited to a Participant's Account are forfeited pursuant to Section 7.07, to the extent forfeited amounts represent the Participant's interest in the Company Stock Fund, such Participant's interest in the Company Stock Fund shall be reallocated among the remaining Participants who receive Matching Employer Contributions with respect to the month in which the distribution or withdrawal occurred and each remaining Participant shall have his investment in the Company Stock Fund increased as though his Matching Employer Contribution for such month was invested in the Company Stock Fund provided, however, that the shares of Company Stock available for reallocation shall be equitably prorated among the remaining Participants based on their relative Matching Employer Contributions for such month and, to the extent applicable, consistent with their elections under Section 4.04 as in effect immediately prior to the commencement of the Pendency of the Initial Public Offering. The Participants assume all risk inherent in investment, including the risk connected with any decrease in the market price or income yield of the securities in said Account. 5.03 Effective January 1, 1989, a Participant may two (2) times in any Plan Year change any election pursuant to Section 5.02 effective on the First Day of any Calendar Quarter, provided that written notice of such change is received by the Administrative Committee at least thirty (30) days prior to the First Day of such 34 37 Calendar Quarter. Effective January 1, 1991, a Participant may two (2) times in any Plan Year change any election pursuant to Section 5.02 effective on the first day of any month, provided that written notice of such change is received by the Administrative Committee at least thirty (30) days prior to the first day of such month. Effective the first day of the month following completion of an Initial Public Offering June 1, 1992, a Participant may four (4) times in any Plan Year (but not more frequently than once in any three (3) month period) change any election pursuant to Section 5.02, effective on the first day of any calendar month, provided that written notice of such change is received by the Administrative Committee at least thirty (30) days prior to the first day of such month (unless such notice requirement is waived by the Administrative Committee). 5.04 Effective January 1, 1989, a Participant or Inactive Participant (and effective January 1, 1991, any Former Participant) shall be permitted two (2) times during a Plan Year to direct a change with respect to the existing balance of his Account in Fund A, Fund B, Fund C, Fund D, the Exxon Stock Fund, or the Company Stock Fund (subject to the subsequent provisions of this Section 5.04) in accordance with the rules and procedures established by the Administrative Committee, uniformly and nondiscriminatorily applied. Effective the first day of the month following completion of an Initial Public Offering, a Participant, Inactive Participant or Former Participant shall be permitted four (4) times in any Plan Year (but not more frequently than once in any three (3) month period) to direct a change with respect to the existing 35 38 balance of his Account in Fund A, Fund B (subject to subsequent provisions of this Section 5.04), Fund C, Fund D, the Exxon Stock Fund or the Company Stock Fund (subject to the subsequent provisions of this Section 5.04), in accordance with the rules and procedures established by the Administrative Committee, uniformly and nondiscriminatorily applied. A Participant, Inactive Participant or Former Participant shall only be permitted to direct a change with respect to the existing balance of his Account which is invested in Fund B to the extent permitted under the contract or contracts entered into pursuant to Section 5.01(1). A Participant, Inactive Participant or Former Participant shall not be permitted to direct a change with respect to the existing balance of his Account which is invested in the Company Stock Fund except to the extent such balance was derived from some source other than Matching Employer Contributions. Notwithstanding any other provision of the Plan, the Administrative Committee shall have the authority, in its sole discretion, to place such restrictions upon the investment directions of any person who is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended (an "Insider"), as shall be necessary or desirable to facilitate compliance with said Section 16(b) and rules and regulations issued thereunder. Such restrictions shall include, but not be limited to: (a) a requirement that investment directions relating to the Company Stock Fund shall be given by Insiders only on a semi- annual date (see below) which is at least six (6) months after the date of 36 39 the most recent investment direction received from said Insider relating to the Company Stock Fund; and (b) in the event an Insider shall receive shares of Company Stock in connection with a withdrawal pursuant to Article IX hereof, a prohibition on such Insider directing the investment of amounts credited to his accounts into or out of the Company Stock Fund during the six (6) month period commencing on the date of such withdrawal. The words "semi-annual date" shall mean a date which is within the period that begins on the third business day following the date on which the Company's first fiscal quarter and third fiscal quarter summary statements of sales and earnings respectively shall be released, and which ends on the twelfth business day following each such release date. 5.05 Notwithstanding Section 5.04 above, during the Pendency of the Initial Public Offering under uniform rules and procedures prescribed by the Administrative Committee and subject to such terms and conditions as the Administrative Committee may prescribe, Participants may be permitted to direct that amounts which are credited to their Accounts and invested in Fund A, Fund B, Fund C, Fund D, or the Exxon Stock Fund instead be invested in the Company Stock Fund. In the event that Participants are permitted to reallocate their Account balances among the existing investment funds pursuant to the preceding sentence so that Company Stock may be purchased for their Accounts in the Initial Public Offering, the 37 40 Administrative Committee shall promulgate uniform rules and procedures so that the available shares of Company Stock which may be purchased in the Initial Public Offering will be allocated among the Accounts of all similarly situated Participants in a fair and equitable manner; provided, however, that no Former Participant may direct that any amounts credited to his Account which are not already invested in the Company Stock Fund be transferred to the Company Stock Fund for the purpose of purchasing shares of Company Stock in the Initial Public Offering. 5.06 Except as provided in Sections 4.03, 4.04, 4.05, and 4.11 hereof, Matching Employer Contributions with respect to a Participant's Account shall be credited to the same fund as the other contributions which are credited to the Participant's Account. Cash dividends and the cash proceeds of any other distributions received on funds held in Fund A, Fund C, Fund D, the Exxon Stock Fund or the Company Stock Fund shall be invested in accordance with the terms of Fund A, Fund C, Fund D, the Exxon Stock Fund or the Company Stock Fund. The return on investment of Fund B shall be invested in accordance with the terms of Fund B. 5.07 Before an annual or special meeting of its shareholders, Exxon Corporation shall furnish to each Participant, Inactive Participant and Former Participant who is participating in the Exxon Stock Fund at such time, a proxy form with related material and a request that the proxy be signed and returned. Upon receipt of the signed proxy, the shares credited to the Participant's Account in the Exxon Stock Fund shall be voted in the manner 38 41 directed. Any shares as to which no proxy is received may be voted by the Trustee in its discretion. 5.08 The shares of Company Stock allocated to Participants' Accounts shall be made subject to that certain Voting Trust Agreement dated as of April 8, 1987 between certain of the Company's shareholders and the Voting Trustees named therein. The Voting Trustees under the Voting Trust Agreement shall have the full power and discretion to vote or to give or withhold consent in respect of any and all shares of Company Stock held in the Company Stock Fund for all matters which shall be submitted to the stockholders of the Company for their approval or consent. If the shares of Company Stock held in the Company Stock Fund are Publicly Traded, then the Company shall furnish to each Participant, Inactive Participant and Former Participant who is participating in the Company Stock Fund at such time, before an annual or special meeting of its shareholders, a proxy form with related material and a request that the proxy be signed and returned. Upon receipt of the signed proxy, the shares credited to the Participant's Account in the Company Stock Fund shall be voted in the manner directed. Any shares as to which no proxy is received may be voted by the Trustee in its discretion. 39 42 ARTICLE VI VALUATION OF ACCOUNTS 6.01 The Administrative Committee shall determine the value of each Participant's account based on the fair market value of Funds A, B, C, D, the Exxon Stock Fund and, to the extent Company Stock is Publicly Traded, the Company Stock Fund not less frequently than as of the end of each month. To the extent Company Stock is not Publicly Traded, the Administrative Committee shall determine the fair market value of the Company Stock Fund not less frequently than annually as of a uniform Appraisal Date. 6.02 In making any determination under Section 6.01 as to the fair market value of any shares of Company Stock which are not Publicly Traded and are held as part of the Company Stock Fund hereunder, the Administrative Committee shall obtain one or more appraisals by independent appraisers meeting the requirements of regulations issued under Section 170(a)(1) of the Code, and to the extent any Participant's Account is invested in the Company Stock Fund, to that extent its value on any date shall be based on the fair market value of a share of Company Stock determined by the Administrative Committee as of the most recent Appraisal Date. 6.03 As soon as practicable following the end of each Plan Year, and at such other times as the Administrative Committee deems appropriate, the Administrative Committee shall deliver or mail to each Participant, Inactive Participant, Former Participant and Beneficiary who is entitled to receive a benefit under the Plan a statement setting forth the fair market value of his Account in 40 43 Funds A, B, C, D, the Exxon Stock Fund and the Company Stock Fund as of the end of such Plan Year. 41 44 ARTICLE VII VESTING 7.01 Each Participant, Inactive Participant, Former Participant and Beneficiary shall be fully and immediately vested in that portion of his Account which is attributable to any contributions made by him or on his behalf except that portion of his Account which is attributable to either Matching Employer Contributions made pursuant to Sections 4.01, 4.02, 4.10 and 4.11 hereof. 7.02 Except as set forth elsewhere in this Article VII, each Participant, Inactive Participant and Former Participant shall be 100% (fully) vested after completion of three (3) Years of Vested Service in the value of the Matching Employer Contributions credited or to be credited to his Account pursuant to Sections 4.01, 4.02, 4.10 and 4.11 hereof. 7.03 In determining a Participant's Period of Service, for the purpose of determining under Section 7.02 the total Years of Vested Service of a Participant, the Plan shall take into account Periods of Severance if the Participant completes an Hour of Service within twelve (12) months: (a) of his Severance from Service Date, in the case of a Participant who severs from service by reason of a quit, discharge or retirement; or (b) of the date on which he was first absent from service, in the case of a Participant who severs from service by reason of a quit, discharge or retirement during an absence from service of 12 42 45 months or less for any reason other than a quit, discharge or retirement. 7.04 For the purpose of determining under Section 7.02 the total Years of Vested Service a Participant has completed, all of the Participant's Period of Service (including Periods of Severance required to be taken into account under Section 7.03) with an Employer shall be taken into account, except that the following shall be disregarded: (a) In the case of a Participant who has a One Year Period of Severance, Periods of Service before such severance, unless and until such Participant has completed a one year Period of Service after he is rehired by an Employer; (b) in the case of a Participant who does not have a Vested Interest, under Section 7.02, when he terminates employment with an Employer, and who has a One Year Period of Severance, Periods of Service before such severance, unless the Participant's Period of Service prior to such severance exceeds his consecutive Periods of Severance; and (c) Periods of Service after a One Year Period of Severance solely for the purpose of determining the nonforfeitable percentage applicable to the Participant, under Section 7.02, prior to such One Year Period of Severance. 43 46 (d) If a Former Employee is reemployed, his Period of Service prior to such Severance from Service Date shall be restored only if the number of consecutive one year Periods of Severance, prior to such reemployment, was less than the greater of (i) five (5) or (ii) the aggregate number of years of Periods of Service before such Severance from Service Date. An Employee whose prior service is restored shall receive service from the date of reemployment. 7.05 If a Former Participant who was not fully vested at the time of his Severance from Service Date is deemed to have received a single lump sum distribution upon his becoming a Former Participant, in accordance with Section 7.07 hereof, upon rehire of such Former Participant his Period of Service with respect to which such a distribution was made shall be disregarded for the purpose of Section 7.02, unless he is rehired prior to his incurring five (5) consecutive One Year Periods of Severance. 7.06 Notwithstanding the provisions of Section 7.02, Participants and Inactive Participants shall become fully vested in Matching Employer Contributions credited to their Accounts at: (a) Normal Retirement Age, (b) Early Retirement Date, (c) Disability Date, (d) death, (e) termination of the Plan, 44 47 (f) complete discontinuance of Matching Employer Contributions to the Plan, or (g) termination of employment due to the closing or divestment (including the closing of a plant or facility) of any Employer (but only with respect to Eligible Employees of such Employer). 7.07 If a Participant's Vested Interest is less than 100% of the amount credited to his Account, an amount equal to the excess of: (a) the amount credited to his Account; over (b) his Vested Interest; shall be forfeited as of the first to occur of (i) the date on or after the Participant's Severance from Service Date on which the Participant receives a distribution of his Account pursuant to Article VIII hereof, or (ii) the date on which the Participant incurs five (5) consecutive One Year Periods of Severance, or (iii) the date the Participant dies. Notwithstanding the preceding provisions of this Section 7.07, if a Participant's Vested Interest under the Plan is zero (0), then such Participant shall be deemed to have received a lump sum distribution from the Plan in such amount in full discharge of the Plan's liability in respect to payment of his Account and the amount credited to his Account shall 45 48 be forfeited. Such distribution and such forfeiture shall be deemed to have occurred on the date of the Participant's Severance from Service Date. Any forfeiture shall be used to reduce the Matching Employer Contributions which are otherwise required to be made on and after the date of forfeiture. 46 49 ARTICLE VIII DISTRIBUTION OF BENEFITS 8.01 A Participant who retires can elect to receive a distribution of his Account in a single lump sum distribution (a) as soon as practicable following his date of retirement, (b) during the month of January which immediately follows the calendar year in which he retires, (c) if Company Stock is not then Publicly Traded, as soon as practicable following the first to occur of either completion of the next appraisal of Company Stock which occurs after his retirement or the date Company Stock becomes Publicly Traded, or (d) except as provided in Section 8.07, on any date on or after his attainment of age 65. A Participant who separates from service prior to his Normal Retirement Date or Early Retirement Date can elect to receive a distribution of his Vested Interest in a single lump sum (a) as soon as practicable following his Severance from Service Date, (b) if Company Stock is not then Publicly Traded as soon as practicable following the first to occur of either completion of the next appraisal of Company Stock which occurs after his Severance from Service Date or the date Company Stock becomes Publicly Traded, (c) except as provided in Section 8.07 on any date on or after his attainment of age 65, or (d) if the Participant has completed ten (10) Years of Credited Service, on his 55th birthday. Notwithstanding the foregoing, if a Participant retires or separates from service and, prior to the time he elects to receive a distribution of his Account pursuant to this Section 8.01 above, the Pendency of an Initial Public Offering commences, then, 47 50 in addition to the choices of the Participant is given under this Section 8.01 above, the Participant may elect to receive his Vested Interest either: (a) in two distributions, with the value of his Account which is not invested in the Company Stock Fund distributed to him as soon as practicable following his retirement or Severance from Service Date, and the value of his Account which is invested in the Company Stock Fund distributed to him as soon as practicable following the end of the Pendency of the Initial Public Offering; or (b) in a single lump sum distribution as soon as practicable following the end of the Pendency of the Initial Public Offering. Notwithstanding the foregoing, if the value of a Participant's Account does not exceed $3,500, distribution shall be made to such Participant in the form of a single lump sum distribution as soon as practicable following his retirement or Severance from Service Date; provided, however, that if such a Participant retires or separates from service during the Pendency of an Initial Public Offering, such a Participant may elect to receive his Vested Interest: (a) in a single lump sum distribution as soon as practicable following his retirement or Severance from Service Date, or (b) in two distributions, with the value of his account which is not invested in the Company Stock Fund 48 51 distributed to him as soon as practicable following his retirement or Severance from Service Date, and the value of his Account which is invested in the Company Stock Fund distributed to him as soon as practicable following the end of the Pendency of the Initial Public Offering; or (c) in a single lump sum distribution as soon as practicable following the end of the Pendency of the Initial Public Offering. 8.02 If a Participant has elected a time of distribution pursuant to Section 8.01 and, after such election is made and prior to the time the distribution is made, the Pendency of an Initial Public Offering commences, if such distribution is scheduled to be made while the Pendency of the Initial Public Offering exists, such Participant may elect to either: (a) receive his distribution at the scheduled date; or (b) receive the value of his Vested Interest, to the extent it is not invested in the Company Stock Fund, on the scheduled date, and the value of his Vested Interest, to the extent it is invested in the Company Stock Fund, as soon as practicable following the end of the Pendency of the Initial Public Offering. (c) receive his entire distribution at the end of the Pendency of the Initial Public Offering. 8.03 A Participant generally shall receive payment of his entire Vested Interest in the form of cash; provided, however, that 49 52 if sufficient cash is not available to make cash distributions to all similarly situated Participants who have a Vested Interest in the Exxon Fund and/or the Company Stock Fund, the Administrative Committee shall have the discretion to direct the Trustee to make distributions to such Participants in the form of whole shares of Exxon Stock and/or Company Stock, as appropriate, plus cash for the value of any fractional shares. In addition, any Participant may elect in writing to receive that portion of his Vested Interest in the Exxon Fund in whole shares of Exxon Stock, plus cash for the value of any fractional shares. If Company Stock is Publicly Traded, any Participant may elect in writing to receive that portion of his Vested Interest which is invested in the Company Stock Fund in whole shares of Company Stock, plus cash for the value of any fractional shares. 8.04 Participants who Sever from Service or retire shall be required to complete such forms as the Administrative Committee shall prescribe. 8.05 If a Participant, Inactive Participant or Former Participant shall die before complete distribution of his Vested Interest, the undistributed balance of such Vested Interest shall be distributed to his Beneficiary. 8.06 Each Participant shall have the right from time to time to file with the Administrative Committee: (a) a designation of Beneficiary to receive death benefits, and (b) a direction to the Administrative Committee that 50 53 the death benefits are to be distributed to his Beneficiary: (i) in the form of a lump sum distribution; or (ii) in approximately equal annual installments over more than one (1) year but not more than five (5) years; subject to any generally applicable restrictions in the Plan. 8.07 Notwithstanding any other provisions of this Plan, distributions hereunder shall be subject to the following restrictions: (a) in the case of a living Participant or Former Participant distribution must commence on or before the April 1 following the end of the calendar year in which: (i) he attains age seventy and one-half (70-1/2) or retires, whichever is later, if the Participant shall have attained age seventy and one-half (70-1/2) prior to January 1, 1988 and was not a five percent (5%) owner at any time after the beginning of the Plan Year that ends in the calendar year during which he attained age sixty-six and one-half (66-1/2); or (ii) he attains age seventy and one-half (70-1/2) in all other cases; and 51 54 (b) in the case of a deceased Participant or Former Participant, distributions after his death shall be payable either: (i) within five (5) years of the date of his death; or (ii) if distributions commence to his Beneficiary, then: (A) within one (1) year of the date of his death or on a later date permitted under any lawful regulations by the Secretary of the Treasury; or (B) if his spouse is his Beneficiary, by the date such Participant would have attained age seventy and one-half (70-1/2); over a period not extending beyond the life expectancy of such Beneficiary; and (c) in the case of the death of a Beneficiary who is the surviving spouse of a deceased Participant, a distribution commencing after the death of the spouse shall be payable either: (i) within five (5) years of the date of the spouse's death; or (ii) if distribution commences to the spouse's Beneficiary within one (1) year of the spouse's death or on a later date permitted under any lawful regulations issued by the Secretary of the Treasury, 52 55 over a period not extending beyond the life expectancy of such Beneficiary; or (d) in the event payments are made to a Participant's child, for purpose of this Section 8.06 such payments shall be deemed to be paid to the Participant's spouse if such payments will become payable to such spouse upon such child's reaching majority or any other event permitted under any lawful regulations issued by the Secretary of the Treasury. The life expectancy of a Participant, Former Participant or spouse thereof may be redetermined from time to time but not more frequently than annually. 8.08 Upon termination of the Plan, complete discontinuance of Employer contributions, or closing or divestment of any Employer (but only with respect to Eligible Employees of such Employer), Vested Interests of Participants shall be distributed at the time and in the manner as may be decided on by the Administrative Committee upon rules that will be uniformly and nondiscriminatorily applied. 53 56 ARTICLE IX WITHDRAWALS DURING EMPLOYMENT 9.01 (a) A Participant or Inactive Participant who attains age 59-1/2 may withdraw up to his entire Vested Interest. (b) A Participant or Inactive Participant, not described in (a) above, may withdraw that portion of his Account attributable to Basic Employee Contributions or Supplemental Employee Contributions. (c) Effective January 1, 1989, a participant or Inactive Participant not described in (a) above may withdraw his Vested Interest attributable to Matching Employer Contributions (other than Matching Employer Contributions invested in the Company Stock Fund) provided that the amounts to be withdrawn were contributed to the Plan at least 24 months prior to the date of withdrawal. Notwithstanding the foregoing, in the event a Participant or Inactive Participant not described in (a) above has been a Participant in the Plan for a five year period, such Participant or Inactive Participant may withdraw 100% of his Vested Interest attributable to Matching Employer Contributions (other than Matching Employer Contributions invested in the Company Stock Fund 54 57 and Matching Employer Contributions made pursuant to Section 4.09). (d) Effective January 1, 1989, in the case of financial hardship, a Participant or Inactive Participant, even though described in (a) above, may withdraw his Vested Interest attributable to Matching Employer Contributions as described in Section 9.01(c) above (including Matching Employer Contributions made pursuant to Section 4.08 but excluding Matching Employer Contributions invested in the Company Stock Fund) and that part of the balance of his pre-tax Account (including earnings on the Basic Salary Reduction Contributions through December 31, 1988) which is not attributable to Matching Employer Contributions. For the purpose of this paragraph, a withdrawal will be on account of financial hardship if the withdrawal is necessary in light of an immediate and heavy financial need of the Participant or Inactive Participant and is necessary to satisfy such financial need. Such withdrawal based upon financial hardship cannot exceed the amount required to meet the financial need created by the hardship. The determination of the existence of financial hardship and the amount required to meet the financial need shall take into account all non-hardship distributions and nontaxable loans available under the Plan and shall be made in accordance with the hardship provisions of Section 401(k) of the Internal Revenue Code and with uniform and nondiscriminatory standards 55 58 established by the Administrative Committee. In accordance with the foregoing, the Administrative Committee has established that a Participant or Inactive Participant will be deemed to have an immediate and heavy financial need and, therefore, will qualify for a financial hardship withdrawal if the purpose of the withdrawal is on account of the following: (i) Medical expenses of the Participant, Inactive Participant, spouse or dependent of the type that are eligible for tax deductions, (ii) Down payment for principal residence of the Participant or Inactive Participant, (iii) Tuition payments for the next semester or quarter of post-secondary education for the Participant, Inactive Participant, spouse, children or dependents, or, (iv) The need for the Participant or Inactive Participant to avoid eviction from or foreclosure on the Participant's or Inactive Participant's principal residence. (e) Withdrawals of a Vested Interest, to the extent permitted, shall be made only in the following order of priority, and only after the funds of a higher priority have been completely withdrawn shall funds of the next following priority be withdrawn: 56 59 (i) Supplemental Employee Contributions, (ii) Basic Employee Contributions, (iii) Earnings credited to Supplemental Employee Contributions and Basic Employee Contributions, (iv) Matching Employer Contributions (other than Matching Employer Contributions made pursuant to Section 4.09), together with earnings thereon, if any, (v) Basic Salary Reduction Contributions and Matching Employer Contributions made pursuant to Section 4.09, (vi) Earnings credited to Basic Salary Reduction Contributions and Matching Employer Contributions made pursuant to Section 4.09, (vii) Subsequent to a determination of the order of priority for purposes of withdrawals of a Vested Interest as determined in subsection (i) through subsection (vi) above, withdrawals of a Vested Interest shall be made only in the following order of priority from Funds A, B, C, D the Exxon Stock Fund and the Company Stock Fund (to the extent permitted) as follows: 1. Fund B - Interest Accumulation Fund 2. Exxon Stock Fund 57 60 3. Fund A - Aetna Variable Fund Accumulation Account 4. Fund C - Merrill Lynch Basic Value Fund 5. Fund D - Equity Index Fund of the General Employee Benefit Trust of Bankers Trust Company 6. Company Stock Fund (f) Upon thirty (30) days written notice to the Administrative Committee withdrawals shall be made as of the next forthcoming First Day of the Calendar Year Quarter in such form as the Administrative Committee may direct. Notwithstanding the preceding sentence, effective January 1, 1991, upon thirty (30) days written notice to the Administrative Committee withdrawals shall be made as of the next forthcoming first day of the month in such form as the Administrative Committee may direct. Notwithstanding the above, the Administrative Committee may pursuant to Section 13.13 suspend the above requirements to provide for a "special withdrawal period". 9.02 If a Participant withdraws an amount from his Account for any reason other than a financial hardship, there shall be a six (6) month suspension of Matching Employer Contributions with respect to such Participant's Basic Salary Reduction Contributions. If a Participant withdraws an amount from his Account in the case 58 61 of a financial hardship, there shall be a twelve (12) month suspension of all contributions to his Account. 59 62 ARTICLE X LOANS 10.01 A Participant, an Inactive Participant or Former Participant who is a party-in-interest within the meaning of Section 3(14) of ERISA, or the Beneficiary of such an individual, may apply to the Administrative Committee for a loan from the Plan. Loans shall be permitted under the Plan for any purpose. If the Administrative Committee determines that a borrower and the proposed loan to such borrower satisfy the requirements set forth below for loan approval, the Administrative Committee shall direct the Trustee to make a loan to such borrower. The amount of any such loan shall be determined by the Administrative Committee; provided, however, that any such loan shall be for an amount not less than $1,000.00 nor more than 50% of the value of the borrower's Account which is attributable to his Basic Salary Reduction Contributions. In addition, any such loan shall not, when combined with outstanding loans made under other qualified retirement plans, if any, maintained by the Employer, exceed $50,000.00 reduced by the highest outstanding loan balance to the borrower during the immediately preceding 12-month period (ending the day before the new loan is granted). All loans from the Plan must comply with the following terms and conditions: (a) An application for a loan shall be made in writing to the Administrative Committee or its agent, whose action thereon shall be final; 60 63 (b) the interest rate shall be determined by the Administrative Committee and shall be not less than the rate which would be charged to the borrower by a lending institution, were such institution to make a personal loan to the borrower on which the borrower were to pledge identical or substantially similar collateral; (c) the Administrative Committee receives assurances that the borrower intends to repay the loan in accordance with its terms; (d) the borrower provides adequate security consisting of not more than 50% of the value of the borrower's Account which is attributable to his Basic Salary Reduction Contributions and/or such other security as the Administrative Committee may require; (e) the borrower shall execute appropriate loan documents; (f) the term of any loan shall be arrived at by mutual agreement between the borrower and the Administrative Committee and shall not exceed five (5) years. All loans shall provide for the substantially level amortization of the loan, with payments made not less frequently than quarterly, over the term of the loan; (g) repayment of any loan made to an Employee shall be by payroll deduction, unless the Administrative Committee and the Employee mutually agree to 61 64 another procedure. Repayment of any loan made to a person who is not an Employee shall be made by certified check or money order; (h) a borrower shall be in default if he fails to make two payments of principal or interest when due or if his collateral becomes inadequate to secure the loan and he does not provide substitute collateral satisfactory to the Administrative Committee within ten (10) days after a request therefor by the Administrative Committee. In the event of default by a borrower, his loan shall be accelerated and: 1. If his collateral security in the Plan is adequate to cover all or part of the outstanding principal and interest, and if distribution of such amount would not, in the opinion of the Administrative Committee, put at risk the tax qualified status of the Plan or the Basic Salary Reduction Contribution portion thereof, the Trustee shall execute upon such Plan collateral; and 2. If his collateral security described in paragraph (h)(1) is not adequate to cover all of the outstanding principal and interest, or if execution upon such collateral would, in the opinion of the Administrative Committee, put at risk the tax qualified status of the Plan or the Basic Salary Reduction Contribution portion thereof, the Trustee shall commence appropriate collection action against the borrower to recover the amounts owed. Expenses of collection, including legal fees, if any, of any loan in default shall be borne by the borrower or his Account; (i) except as provided below, each loan shall be treated as a separate investment of the funds credited to such borrower's Account and the Administrative Committee shall reduce such borrower's Account in the following order of priority: 1. Fund B - Interest Accumulation Fund 2. Exxon Stock Fund 3. Fund A - Aetna Variable Fund Accumulation Account 4. Fund C - Merrill Lynch Basic Fund 5. Fund D - Equity Index Fund of the General Employee Benefit Trust of Bankers Trust Company 6. Company Stock Fund Payments by a borrower on any such loan shall be credited to such borrower's Account in the Funds listed above in the same proportions as the borrower's current investment option election with respect to such Funds at the time loan payments are made; 62 65 (j) no distribution shall be made to any Participant, Inactive Participant, eligible Former Participant, or to a Beneficiary of any such individual, unless and until all unpaid loans to such Participant, Inactive Participant, eligible Former Participant, or Beneficiary, including accrued interest thereon, have been paid; (k) a Participant, Inactive Participant, eligible Former Participant or Beneficiary cannot have more than one loan outstanding at any time; and (l) the Administrative Committee shall notify a borrower that, to the extent his loan is secured by his Basic Salary Reduction Contributions, no interest deduction is allowable. 63 66 ARTICLE XI PAYMENT OF BENEFITS 11.01 If the Administrative Committee receives evidence satisfactory to it that a person entitled to receive any benefit under the Plan is physically or mentally incompetent to receive such benefit and to give a valid release therefor, or is a minor, and that another person or an institution is then maintaining or has custody of such person, unless claim shall have been made therefor by a duly appointed guardian, committee or other legal representative, the Administrative Committee may authorize payment of such benefit to such other person or institution and the release of such other person or institution shall be a valid and complete discharge for the payment of such benefit. 11.02 Every person before becoming entitled to any benefits under the Plan shall furnish the Administrative Committee with such information as it may require, including, but not limited to, proof of age relating to himself and any person nominated as a Beneficiary. 11.03 The benefits under the Plan shall be payable solely from the Trust Fund and each Participant, Inactive Participant, Former Participant, Beneficiary or other person who shall claim the right to any payment under the Plan shall be entitled to look only to that fund for such payment. No liability for the payment of benefits or any other payments under the Plan shall be imposed upon the Administrative Committee, Reliance Electric Company, the Company, Employer, or the officers, directors or stockholders of the Company. 64 67 11.04 Except as expressly provided in the Plan, no Participant, Inactive Participant, Beneficiary or other person entitled to benefits may withdraw or receive any monies from the Trust Fund. 65 68 ARTICLE XII REEMPLOYMENT 12.01 A Participant or Inactive Participant, whose service is terminated prior to retirement and who is subsequently reemployed by an Employer, shall be eligible for participation on his date of reemployment. An Eligible Employee who had been a Former Participant whose service terminated prior to attaining a fully vested interest in his Account, as provided in Section 7.02, shall have the dollar value of that portion of his Account which was forfeited pursuant to Section 7.07 reinstated if he is rehired prior to incurring five (5) consecutive One Year Periods of Severance after such termination of service. 66 69 ARTICLE XIII ADMINISTRATION OF THE PLAN 13.01 A Trust Fund shall be established by a Trustee or Trustees appointed and/or removed from time to time by the Board of Directors into which shall be deposited all assets of the Plan. The Company may, without reference to any Participant or other party, enter into a trust agreement and make such amendment to such trust agreement or such further amendments as it in its sole discretion may deem necessary or desirable to carry out the Plan. The corpus and income of the Trust Fund shall be used to provide benefits under the Plan and no part thereof shall be used for or diverted to purposes other than for the exclusive benefit of Participants, Inactive Participants, Former Participants and their Beneficiaries. 13.02 The Trustee or Trustees appointed by the Board of Directors shall have sole authority to sell Exxon Stock held in the Exxon Stock Fund and Company Stock held in the Company Stock Fund for the Participants for the purposes of making a distribution of the value of the Exxon Stock and/or Company Stock to a Participant as required under the terms of the Plan. The Trustee or Trustees also shall conform to procedures established by the Administrative Committee for disbursal of funds of the Plan. The Trustee or Trustees shall not be liable for any act performed while subject to directions of the Administrative Committee made in accordance with the terms of the Plan. 13.03 The Company shall be the named fiduciary and Administrator of the Plan as such terms are defined by ERISA. The 67 70 general administration of the Plan and the responsibility for carrying out its provisions shall be placed in an Administrative Committee consisting of not less than three persons who shall be appointed from time to time by the Board of Directors to serve at its pleasure. The members of the Administrative Committee may authorize one or more of their number or any agent to make any payment on their behalf or to execute or deliver any instrument or do any act on behalf of the Committee. 13.04 The Administrative Committee shall, at a meeting duly called for the purpose, establish a funding policy and method consistent with the objectives of the Plan and the requirements of Title I of ERISA and shall meet annually to review such funding policy and method. All actions taken with respect to such funding policy and method and the reasons therefor shall be recorded in the minutes of the Administrative Committee's meetings. 13.05 The Administrative Committee shall hold meetings upon such notice, at such place and at such time as it may determine. A majority of the members of the Administrative Committee shall constitute a quorum for the transaction of business, and the action of a majority of such majority expressed from time to time by voting at a meeting shall constitute the action of the Committee. In lieu thereof, the action of a majority of the members of the Administrative Committee expressed in writing without a meeting shall constitute the action of the Committee. 13.06 Subject to the limitations of the Plan, the Administrative Committee from time to time shall adopt administrative rules and regulations and prescribe such forms and applications as 68 71 are appropriate to the administration of the Plan. The determination of the Administrative Committee as to any disputed questions shall, subject to the provisions of ERISA, be conclusive. 13.07 The Administrative Committee shall determine the procedures to be followed in connection with the disbursal of the funds of the Plan and shall establish a reasonable claims procedure. 13.08 Each member of the Administrative Committee, the Company, or any director, officer or Employee thereof, shall be entitled to rely conclusively on all tables, valuations, certificates, opinions and reports which shall be furnished by any expert who shall be employed or engaged by the Company or the Administrative Committee. 13.09 All rules and decisions of the Administrative Committee in administering the Plan shall, to the extent practicable and reasonable, be uniformly and consistently applied to all Participants in similar circumstances. In particular, in exercising its powers hereunder, the Administrative Committee shall pursue uniform policies and shall not discriminate in favor of or against any Participant or group of Participants, except to the extent the Committee may consider necessary in order to meet any requirements of the Code or of regulations issued thereunder or of ERISA or other applicable law. 13.10 No member of the Administrative Committee shall receive any compensation from the funds held under the Plan for his services as such, and no bond or other security need be required of him in such capacity in any jurisdiction. 69 72 13.11 Reliance Electric Company shall indemnify and hold harmless all present and future fiduciaries of the Plan, including the Administrative Committee and Trustee, from any and all liability imposed, whether individually or jointly, under ERISA and under any similar legislation, with respect to any action or omission as a fiduciary of the Plan, unless such persons have knowingly participated in or have knowingly undertaken to conceal an act or omission knowing that such act or omission was a breach of their fiduciary duty. 13.12 Shares of Exxon Stock shall not be purchased by the Plan from or sold to Reliance Electric Company. 13.13 The Administrative Committee may, once a year, suspend the requirements of Section 9.01(f) of the Plan to provide for a "special withdrawal period" which shall be subject to the limitations of the Plan and/or permit an additional increase or decrease in the contribution rate as stated in Section 3.03 of the Plan. 70 73 ARTICLE XIV CERTAIN RIGHTS AND OBLIGATIONS 14.01 It is the intention that the Plan continue and that contributions be made regularly each year, but all contributions of the Plan shall be voluntary, and not a legal obligation. 14.02 The Plan may be terminated at any time by the Board of Directors. Upon complete or partial termination, the rights of all affected Participants and Inactive Participants to the amounts credited to their Accounts are fully vested and nonforfeitable. Following such termination the Administrative Committee may require persons entitled thereto to withdraw amounts allocated to them in cash or otherwise as it, in its discretion, may determine. 14.03 The Company may, with the consent of the Board of Directors withdraw from the Plan at any time, and the Board of Directors may in its discretion at any time withdraw the authorization of any subsidiary or any Employer to participate in the Plan. In either of such events, the affected Employees shall cease to be Participants under the Plan, and the Administrative Committee shall arrange for the withdrawal or segregation of such Employees' share of the assets of the Plan, as determined by a valuation as of the date of the event. The Administrative Committee shall have the full discretion as to the nature of the funds to be withdrawn or segregated, and its valuation thereof for that purpose shall be conclusive. Unless a savings and investment plan substantially similar in form to the Plan or such other form as may be approved by the Internal Revenue Service under Section 401(a) of the Code is continued by a successor corporation for its employees, the Plan 71 74 shall be deemed to have terminated with respect to such Employees and such segregated assets shall be fully vested to them in accordance with the provisions of Section 14.02. The Administrative Committee shall arrange for the disposition of such assets through transfers to a successor trust, an assignment of all or a portion of the rights under any insurance contract or by any other means it shall determine. 14.04 The establishment of the Plan shall not be construed as conferring any legal rights upon any Employee or any person for a continuation of employment, nor shall it interfere with the rights of the Employer to discharge any Employee and to treat him without regard to the effect which such treatment might have upon him under the provisions of the Plan. 14.05 In the event, and effective as of the date, of any merger or consolidation with, or transfer of assets or liabilities to, any other plan or to this Plan if applicable, each Participant of the Plan will (if the other plan is then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit the Participant would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan/plan had then terminated). 14.06 If the Internal Revenue Service determines that the Plan and Trust do not qualify initially under Sections 401(a) and/or 401(k) of the Code, within one year after the date of such denial of qualification and upon written request by the Company filed with the Trustee, Supplemental Employee Contributions, if any, shall be returned to the Employees by the Trustee and Matching 72 75 Employer Contributions, Supplemental Employer Contributions, and Basic Salary Reduction Contributions shall be returned to the Employer by the Trustee. Thereafter, the Employer shall pay the amount of Basic Salary Reduction Contributions refunded to it, in accordance with the preceding sentence, as Compensation to the Employees. Notwithstanding any provision in this Plan to the contrary, no Participant or Beneficiary shall have any right or claim to any asset of the Trust or to any benefit under the Plan before the Internal Revenue Service determines that the Plan and Trust qualify under the provisions of Section 401(a) and 401(k) of the Code. Upon the return of all contributions to the Employer and Employees as provided herein, the Trust shall terminate and the Trustee shall be discharged from all obligations under the Trust. 73 76 ARTICLE XV AMENDMENTS 15.01 The Company reserves the right at any time and from time to time by action of its President or any Vice President to modify or amend in whole or in part any or all of the provisions of the Plan; provided, that no modification or amendment may be made which will deprive any Participant, Inactive Participant, Former Participant, Beneficiary or other person receiving a benefit under the Plan to which he would otherwise be entitled by reason of his participation in the Plan of any vested benefit; provided, however, that any amendment to the Plan which is deemed necessary or appropriate to bring the Plan into conformity with Governmental regulations may be made (retroactively if necessary) in order to qualify the Plan under the Code. The Company shall furnish a copy of any amendment to the Plan to the Trustee as soon as practicable following the adoption thereof. 15.02 Any such amendment, modification or alteration shall be expressed in an instrument executed by the President or by a Vice President of Reliance Electric Company, and shall become effective as of the date designated in such instrument. Furthermore, unless proper exemption is granted, any amendment to be effective for a Plan Year must be adopted no later than 2-1/2 months after the close of the Plan Year, or such longer period as is permitted by the Internal Revenue Service and/or the Department of Labor of the U.S. Government, and, if such amendment reduces the accrued benefit of any Employee, such amendment shall not be effective unless approved by the Secretary of Labor or unless he fails to take 74 77 action disapproving such amendment within ninety (90) days after receiving notice of it. Finally, no Plan amendment shall affect the vesting of any Participant's benefits adversely. 75 78 ARTICLE XVI NON-ALIENATION OF BENEFITS 16.01 No benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void; nor shall any such benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled to such benefit, except as specifically provided in the Plan, or except as provided by a Qualified Domestic Relations Order. 16.02 If any Participant, Inactive Participant, Former Participant, Beneficiary, or any other person entitled to benefits under the Plan becomes bankrupt or makes an assignment for the benefit of creditors, or in any way suffers a lien or judgment against his personal assets or attempts to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any benefit under the Plan, except as specifically provided in the Plan, then such benefit shall, in the discretion of the Administrative Committee, cease and terminate, and in that event the Administrative Committee may hold or apply the same or any part thereof to or for the benefit of such Participant, his spouse, descendants (including any person adopted by such person or his descendants, and descendants of such adopted persons), other dependents, other persons or any of them, in such manner and in such proportion as the Administrative Committee may think proper. 76 79 ARTICLE XVII TOP-HEAVY PROVISIONS 17.01 If the Plan is determined to be a Top-Heavy Plan with respect to any Plan Year, the provisions of this Article XVII shall govern notwithstanding any contrary provisions in the Plan. 17.02 As of any Determination Date, as defined herein, the Plan will be determined to be a Top-Heavy Plan if the sum of contributions due as of the Determination Date on behalf of Key Employees, as defined herein, and the aggregate of the balances of Accounts (as of the most recent Valuation Date within the twelve-month period ending on the Determination Date) of Key Employees exceeds 60% of a like sum of all Participants under the Plan or, if the Plan is required to be included in an Aggregation Group, as set forth herein, and such Aggregation Group is a Top-Heavy Group, as defined herein. 17.03 With respect to Section 17.02, the following definitions shall apply: (a) "Key Employee" means any Employee who, at any time during the Plan Year or any of the four preceding Plan Years, is -- (i) an officer of the Employer, (ii) one of the ten Employees owning (or considered as owning within the meaning of Section 318 of the Code) the largest interests in the Employer, (iii) a 5% owner of the Employer, or 77 80 (iv) a 1% owner of the Employer having annual Compensation from the Employer of more than $150,000. For purposes of clause (i), no more than 50 Employees (or, if lesser, the greater of 3 or 10% of the Employees) shall be treated as officers. For purposes of clause (iii), the term "5% owner" means any person who owns (or is considered as owning within the meaning of Section 318 of the Code) more than 5% of the outstanding stock of the Employer or stock possessing more than 5% of the total combined voting power of all stock of the Employer. For purposes of clause (iv), the term "1% owner" means any person who would be described above if "1%" were substituted for "5%" each place it appears. For purposes of this paragraph, a Beneficiary of a Key Employee shall be deemed to be a Key Employee and subparagraph (C) of Section 318(a)(2) of the Code shall be applied by substituting "5%" for "50%". (b) A plan, including the Plan, shall be required to be included in an Aggregation Group if it is described in (i) or (ii). An "Aggregation Group" means-- (i) a qualified employee benefit plan of the Employer in which a Key Employee is a participant, and (ii) each other qualified employee benefit plan of the Employer which enables any plan described 78 81 in clause (i) to meet the requirements of Section 401(a)(4) or 410 of the Code. (c) "Top-Heavy Group" means any Aggregation Group if-- (i) the sum (as of any Determination Date) of: (a) the present value of the cumulative accrued benefits for Key Employees under all defined benefit plans included in such Aggregation Group, and (b) the aggregate of the Accounts of Key Employees under all defined contribution plans included in such Aggregation Group, (ii) exceeds 60% of a similar sum determined for all Employees. For purposes of this paragraph, the present value of the cumulative accrued benefit for any Employee, or the amount of the Account of any Employee shall be increased by the aggregate distributions made with respect to such Employee under a plan during the five-year period ending on the Determination Date. For purpose of this paragraph, except to the extent provided in regulations, any rollover contribution (or similar transfer) initiated by an Employee and made after December 31, 1983 to a plan shall not be taken into account with respect to the transferee plan for purposes of determining whether such plan is a Top-Heavy Plan (or whether any Aggregation Group which includes such plan is a Top-Heavy Group). For purpose of this paragraph, if an 79 82 individual is a Non-Key Employee with respect to any plan for any plan year, but such individual was a Key Employee with respect to such plan for any prior plan year, any accrued benefit for such Employee (and the Account of such Employee) shall not be taken into account. (d) "Determination Date" means, with respect to any Plan Year-- (i) the last day of the preceding Plan Year, or (ii) in the case of the first Plan Year, the last day of such Plan Year. (e) "Non-Key Employee" means any Employee who is not a Key Employee. (f) For purposes of this Section 17.03, "Employer" means all corporations which, with the Company, are members of a controlled group of corporations within the meaning of Section 1563(a), determined without regard to Sections 1563(a)(4) and (e)(3)(C) of the Code and "Employee" means an employee of the Employer. 17.04 If the Plan is determined to be a Top-Heavy Plan with respect to any Plan Year, the Employer contributions for such Plan Year for each Participant who is a Non-Key Employee shall not be less than 3% of such Participant's Compensation (and for this purpose, Basic Salary Reduction Contributions shall not be taken into account). 17.05 If the Plan is determined to be a Top-Heavy Plan, the definition of "Benefit Plan Fraction" and "Contribution Plan 80 83 Fraction" in Section 4.09(iv) and 4.09(vi) shall be applied by substituting "1.0" for "1.25". 17.06 Notwithstanding the provisions of Section 17.05, if the Plan is determined to be a Top-Heavy Plan, "1.0" shall not be substituted for "1.25", as otherwise required by Section 17.05 if "4%" is substituted for "3%" in Section 17.04 and if the Plan would not be a Top-Heavy Plan if "90%" were substituted for "60% in Section 17.02. 81 84 ARTICLE XVIII MISCELLANEOUS 18.01 This Plan, and any trust agreement entered into pursuant to Section 13.01 hereof, shall be construed, whenever possible, to be in conformity with the requirements of the Code and ERISA. To the extent not in conflict with the preceding sentence, the Plan and, unless otherwise provided therein, any trust agreement, shall be construed according to the laws of the State of Ohio (where the Company's principal office is located) and all provisions thereof shall be administered according to the laws of such State, and all persons accepting or claiming benefits under the Plan or any trust agreement shall be deemed to consent to these provisions. 18.02 Whenever appropriate, the use of the masculine shall include the feminine or neuter, the singular shall include the plural, and the plural shall be restricted to mean the singular. IN WITNESS WHEREOF, the Company has caused this document to be executed at Cleveland, Ohio this 1st day of May, 1992. RELIANCE ELECTRIC COMPANY By: __________________________ 091/10226AQB.390 82 EX-21.1 3 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
% COUNTRY OWNERSHIP ------------ ---------- Reliance Electric Industrial Company.......................... U.S. 100% Reliance Electric (Hong Kong) Limited....................... Hong Kong 100% Reliance Electric A.G. ..................................... Switzerland 100% Reliance Electric GmbH................................... Austria 100% Reliance Electric (U.K.) Ltd. ........................... England 100% Electro-Craft Limited.................................. England 100% Reliance Electric S.p.A. ................................ Italy 100% Reliance Electric GmbH................................... Germany 100% Reliance Electric SARL................................... France 100% Reliance Electric Scandinavia A.p.S. .................... Denmark 100% Reliance Electric S.A. ..................................... Spain 100% Reliance Eletrica Ltda. .................................... Brazil 100% Grupo Industrias Reliance S.A. de C.V. ..................... Mexico 100% Industrias Reliance S.A. de C.V. ........................ Mexico 99.9% Administrativa Industrias Reliance S.A. de C.V. ....... Mexico 100% Productos Lorain de Mexico S.A. de C.V. ............... Mexico 100% Reliance Electric & Engineering Co. de Mexico S.A. de C.V. ............................................... Mexico 100% Dodge de Mexico S.A. de C.V. .......................... Mexico 100% Reliance Exportel, S.A. de C.V. ....................... Mexico 100% Reliance Automation Pty. Ltd. .............................. Australia 100% Reliance Electric Limited................................... Japan 45% Reliance Electric Service Ltd. ........................ Japan 100% Renix Co. Ltd. ........................................ Japan 82% Reliance Electric Limited................................... Canada 100%* Reliance Electric Canada Ltd. (Inactive).................... Canada 100% Wrenford Insurance Company Ltd. ............................ Bermuda 20% Reliance Electric International Corporation................. Guam 100% North American Transformer, Inc. ........................... U.S. 100% Inertia Dynamics Incorporated............................... U.S. 100% Reliance Electric Limited (Inactive)........................ New Zealand 100% Federal Pacific Electric Company............................ U.S. 100% Reliance Motion Control, Inc. .............................. U.S. 100% Reliance Electric (Singapore) Pte. Ltd. .................... Singapore 100% Yonjun-Reliance Electric Co., Ltd. ......................... Korea 71.9% Reliance Comm/Tec Corporation................................. U.S. 100% Suntech Company, Ltd. ...................................... Japan 49.2% Vermont Reserve Insurance Company............................. U.S. 100% REC Holding, Inc. ............................................ U.S. 100% - --------------- * Owned Jointly: Reliance Electric Industrial Company 76.8% Reliance Comm/Tec Corporation 23.2%
EX-23.1 4 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-60066) and the Registration Statements on Form S-8 (Nos. 33-18410, 33-34976, 33-45830, 33-45831 and 33-45832) of Reliance Electric Company of our report dated February 3, 1994, appearing on page 1 of Exhibit 99.4 of this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page FS-2 of this Form 10-K. PRICE WATERHOUSE Cleveland, Ohio March 3, 1994 EX-99.1 5 EXHIBIT 99.1 1 EXHIBIT 99.1 QUARTERLY FINANCIAL AND STOCKHOLDER INFORMATION (UNAUDITED)
(Dollars in Millions, First Quarter Second Quarter Third Quarter Fourth Quarter except per share amounts) 1993 1992 1993 1992 1993 1992 1993 1992 Net Sales $ 388 $ 373 $ 413 $ 383 $ 402 $ 398 $ 405 $ 399 Gross Profit 96 97 99 100 92 100 98 100 Earnings before extraordinary items 12 6 9 12 10 15 1 14 Per equivalent share of common stock .23 .04 .19 .18 .19 .22 .03 .23 Net Earnings (Loss) 12 6 2 (10) 10 15 1 14 Per equivalent share of common stock .23 .03 .05 (.33) .19 .21 .03 .23 Dividends per share of common stock - - - - - - - - Price range per share of Class A common High 23 7/8 - 21 7/8 20 5/8 20 3/4 19 1/2 18 1/2 20 7/8 Low 19 3/4 - 18 3/4 16 3/8 16 3/4 16 3/8 16 3/8 15 1/4
The Company's Class A Common Stock began trading on the New York Stock Exchange on May 6, 1992. Prior to that time, there was no public trading market for the Class A Common Stock. At December 31, 1993, the Company estimates that there were more than 10,000 beneficial owners of the Company's Class A Common Stock. There is no public trading market for the Company's Class B and Class C Common Stock. At December 31, 1993, there were eleven stockholders and one stockholder of record of the Company's Class B and Class C Common Stock, respectively. It is the Company's current plan to retain earnings and not to pay cash dividends on common stock in the foreseeable future. The Company incurred restructure charges totalling $16 million in 1993, of which $4 million was recorded in the second quarter and $12 million was recorded in the fourth quarter. The effective income tax rate for the fourth quarter of 1993 was 79.1% as a result of fixed tax charges on lower earnings. All 1992 financial information has been restated to reflect the retroactive adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." -1- EX-99.2 6 EXHIBIT 99.2 1 EXHIBIT 99.2 SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts) 1993 1992 1991 1990 1989 1988 1987 Net sales $1,608 $1,553 $1,516 $1,547 $1,411 $1,303 $1,170 Earnings before interest and taxes 92 131 148 176 165 150 121 Earnings from continuing operations before extraordinary items 32 47 34 47 32 30 1 Earnings (loss) from discontinued operation - - - - - (3) (5) Gain on sale of discontinued operation - - - - 21 - - Extraordinary items (7) (22) - (1) (5) - 8 Net earnings 25 25 34 46 48 27 4 Preferred stock dividends and accretion - 16 19 20 11 18 13 Per equivalent share of common stock: Earnings (loss) from continuing operations before extraordinary items $.64 $.73 $.44 $.83 $.56 $.30 $ (.58) Discontinued operation - - - - - (.08) (.15) Gain on sale of discontinued operation - - - - .52 - - Extraordinary items (.14) (.51) - (.03) (.12) - .34 ----------------------------------------------------------------------------- Net earnings (loss) $ .50 $ .22 $ .44 $ .80 $ .96 $ .22 $ (.39) Dividends per share of common stock - - - - - - - Total assets $1,195 $1,151 $1,176 $1,188 $1,176 $1,392 $1,542 Long-term obligations: Long-term debt $ 351 $ 369 $ 586 $ 603 $ 648 $ 798 $ 887 Other 199 187 177 160 155 152 175 $1.40 Senior Exchangeable Preferred Stock - - - - - 86 84 $1.50 Junior Exchangeable Preferred Stock - - 89 93 85 - - ----------------------------------------------------------------------------- Total $ 550 $ 556 $ 852 $ 856 $ 888 $1,036 $1,146
All financial information for 1992 and earlier periods has been restated to reflect the retroactive adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." -1- EX-99.3 7 EXHIBIT 99.3 1 EXHIBIT 99.3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OPERATING RESULTS Consolidated net sales were $1,608 million in 1993, a $55 million or 4% increase over 1992, and a $92 million or 6% increase over 1991. Within the Industrial segment, sales increased by $19 million or 2% over both 1992 and 1991 sales of $1,153 million. Significant sales increases of mechanical power transmission and motion control products, coupled with a modest increase in electrical equipment sales, more than offset a relatively sharp decline in transformer sales. The sales increases for mechanical power transmission products followed the general economic recovery. The increased sales of motion control products were driven by new products and the penetration of new markets. Within the electrical equipment business, all product lines showed year-over-year improvement with the exception of engineered drive systems, where demand was soft, both domestically and in Europe. Transformer sales were down from historically high levels in 1992 and 1991. In 1992, Industrial segment net sales of $1,153 million duplicated the 1991 results. Increased sales of mechanical power transmission products and transformers, along with the inclusion of a full year's sales for a motion control business acquired in 1991, combined to offset the reduction in electrical equipment sales. The decline in electrical equipment sales included most areas of the business and was attributable to general economic uncertainty. Telecommunications segment net sales increased to $439 million in 1993, a $37 million or 9% improvement over 1992, and a $74 million increase over 1991. Sales increases in 1993 were driven by greater demand for newer product offerings and to a lesser degree by modest gains in the more traditional products. The sales increase from 1991 to 1992 was attributable to new product development and commercialization efforts to position products with targeted customers. Reliance's consolidated gross profit margin declined to 23.9% in 1993 from 25.6% in 1992 and 26.8% in 1991. In the Industrial segment, the gross profit margin in 1993 was 23.6%, versus 25.4% in 1992 and 27.4% in 1991. The margin erosion primarily was concentrated within the engineered drive systems unit, where cost/price/mix pressures have been particularly acute. To a lesser degree, lower volume and a changing product mix in transformers contributed to the lower margin, along with increased plant spending across the entire electrical equipment business. Comparing 1992 with 1991 shows lower volume across most of the electrical equipment business, and lower margins on engineered drive systems and in the industrial motor portion of the electrical equipment business. This, combined with the full year's inclusion of the business acquired in 1991, which has historically lower margins, more than offset margin increases in mechanical power transmission products and transformers. In the Telecommunications segment, the 1993 gross profit margin of 25.3% declined compared to 1992's 26.2%, but increased slightly relative to 1991's 25.2%. Margins have been reduced to increase market share for new products and to establish longer-term relationships with existing customers. Some manufacturing inefficiencies also contributed to the lower margins. The margin increase from 1991 to 1992 was primarily due to manufacturing cost improvements. -1- 2 Consolidated selling, general, and administrative ("SG&A") expenses increased $9 million in 1993 over 1992 but remained at a constant 16.9% of sales. In the Industrial segment, 1993 SG&A expenses were essentially flat compared to 1992, which, in turn, were up primarily due to the business acquired in 1991. In the Telecommunications segment, SG&A spending increased by approximately $11 million over 1992. These increases were largely for research and development spending to identify and bring to market new technologies, and for additional sales and marketing expenses to increase penetration into selected markets, including the emerging broadband multi-media markets. Telecommunications segment SG&A spending increased about $4 million in 1992 over 1991, as a result of additional marketing efforts to support both new customers and new products and, secondarily, for additional engineering expenses. The Company incurred $16 million of restructure charges in 1993. Approximately $11 million of these restructure charges were recorded by the Electrical Group of the Industrial segment for workforce reductions, consolidation of manufacturing capacity and international structure changes. In the Telecommunications segment, restructure charges were approximately $5 million, largely for the consolidation of redundant manufacturing capacity. These actions are aligning the Company's manpower, manufacturing capacity, and structure with current and expected market conditions, and will improve productivity, capacity, and administrative efficiency. Restructure charges of $1 million in 1992 and $1 million in 1991 related to the movement of certain product lines and administrative functions to different facilities. Interest expense decreased substantially in both 1993 and 1992, primarily due to the Company's recapitalization in the second quarter of 1992. This recapitalization eliminated the Company's high cost subordinated debt using proceeds from an initial public offering of Class A Common Stock and Term Loan and Revolving Credit Facilities. The 1993 refinancing provided greater financial flexibility. Worldwide effective income tax rates were 50.8%, 45.3% and 46.9% in 1993, 1992, and 1991, respectively, versus the 35% statutory rate in 1993 and the 34% statutory rate in 1992 and 1991. The effective tax rates were higher than the statutory rate primarily due to permanent differences between book and taxable income and the effects of state, local, and non-U.S. income taxes. The permanent differences result from charges which are not deductible for income tax purposes, primarily goodwill. Due to the fixed amount of permanent differences between book and taxable income, lower earnings before taxes result in a relatively higher effective tax rate. The Company recognized extraordinary charges, net of tax benefits, of $7 million in 1993 and $22 million in 1992. The 1993 extraordinary charge resulted from the Company's refinancing, and includes accelerated amortization of issuance fees and interest rate swap costs related to the -2- 3 termination of the Term Loan Facility. The 1992 extraordinary charges were generated by the recapitalization of the Company and prepayments on the Term Loan Facility, and include premiums paid on the redeemed subordinated debentures, accelerated amortization of debt issuance costs, interest, and administrative fees. LIQUIDITY AND CAPITAL RESOURCES Cash Provided From Operations - Cash provided from operations was $90 million in 1993 versus $108 million in 1992 and $172 million in 1991. In 1993, accounts receivable balances and inventories increased due to higher sales and slower asset turnover. In 1992, the decrease was primarily due to the completion of the accretion on the 14% Discount Subordinated Debentures and changes in accounts receivable and inventory balances. Accounts receivable balances increased due to higher sales and a slight increase in collection periods. Although inventory turnover improved in 1992, the Company generated relatively less cash from inventory compared to 1991. Financing Activities - After registering $200 million of debt securities under a shelf registration statement, the Company issued $150 million principal amount ten-year 6.8% notes in 1993. Net proceeds of approximately $149 million were applied to reduce the Term Loan Facility. In April 1993, the Company and a bank syndicate entered into a five-year Competitive Advance and Revolving Credit Facility (the "New Credit Facility") whereby the Company may borrow an aggregate of up to $350 million. The Company initially borrowed $209 million under the New Credit Facility, applying these proceeds to the remaining Term Loan and Revolving Credit Facilities' balances. The Term Loan and Revolving Credit Facilities were established in 1992 and have been terminated. The maximum borrowing under the New Credit Facility at any time during 1993 was $217 million. The Company had $122 million outstanding at 3.45%, and $228 million available under the New Credit Facility at December 31, 1993. In 1993, the Company also established money market lines of credit, an unsecured, uncommitted form of financing. The money market lines of credit and the New Credit Facility are used interchangeably based on the Company's cash requirements and available terms. These lines of credit totalled $205 million at December 31, 1993, and the maximum borrowing during the year under these lines was $118 million. At year-end 1993, $70 million was outstanding at a rate of 3.44%. In addition, during 1993 the Company entered into letter of credit facilities totalling $38 million. At December 31, 1993, the Company had $28 million of outstanding letters of credit supported by these facilities and $1 million under a previously existing letter of credit facility. During 1992, the Company completed an initial public offering of Class A Common Stock and replaced its Senior Debt with a $600 million credit facility, comprised of $440 million available under a Term Loan Facility and $160 million available under a Revolving Credit Facility. Proceeds from the sale of Class A Common Stock together with borrowings under the Term Loan Facility were used during the remainder of 1992 to redeem the 14.25% Junior Subordinated Debentures, the 11.75% Senior Subordinated Debentures, the 14% Discount Subordinated Debentures, the $1.40 Junior Preferred Stock and the $1.50 Junior Exchangeable Preferred Stock and to pay outstanding borrowings under previous bank financing facilities and fees related to these transactions. -3- 4 During the year ended December 31, 1993 the Company realized $11 million of tax benefits related to stock option exercises. Of the $11 million tax benefit, $9 million was attributable to 1992 stock option exercises and the remaining $2 million was attributable to 1993 stock option exercises. The Company reduced to 7.5% the discount rate used to determine its obligations for pensions and postretirement benefits other than pensions, to reflect prevailing long-term market interest rates at December 31, 1993. This discount rate change increased these obligations by approximately $51 million in total, which will be amortized beginning in 1994. Capital Expenditures - Capital expenditures in 1993 were $68 million versus $49 million in 1992 and $35 million in 1991. The additional capital expenditures have increased capacity at selected mechanical power transmission plants, expanded manufacturing capabilities through improved flexibility and speed, and updated process technology. The funds for these expenditures were provided by operating cash generation. The Company expects to modestly increase the level of capital expenditures over the next few years to broaden manufacturing improvement programs and implement new technologies. Management believes that cash provided from operations and funds available from the New Credit Facility and the money market lines of credit will be sufficient to fund capital expenditures and operating requirements for the foreseeable future. Other Investing Activities - During 1991, the Company expended $22 million for business acquisitions. Funds for these acquisitions were provided by bank financing and existing cash balances. ENVIRONMENTAL MATTERS The Company has been designated as a potentially responsible party relating to a non-operating subsidiary. The Company has also been named as a potentially responsible party at several CERCLA sites. As explained in Note 14, management believes that these contingent liabilities will not have a material adverse effect on the Company's financial position, results of operations or cash flows, as the Company has an indemnity agreement covering substantially all claims arising from the non-operating subsidiary. EFFECTS OF CHANGES IN ACCOUNTING STANDARDS Postretirement Benefits - The Company adopted Statement of Financial Accounting Standards No. 106 - "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106") for its U.S. postretirement benefit plans effective as of January 1, 1993. SFAS 106 requires the accrual method of accounting for postretirement benefits. Postretirement benefits, which are unfunded, consist principally of health care and life insurance benefits for certain eligible employees. The impact of adopting SFAS 106 is approximately $3 million of transition obligation which is being amortized over 20 years. At December 31, 1993 the Company had $127 million accrued for postretirement benefits. -4- 5 The Company is reviewing the impact of non-U.S. postretirement benefit plans; SFAS 106 requires that such costs be accrued no later than 1995. Income Taxes - Effective January 1, 1993, the Company also adopted Statement of Financial Accounting Standards No. 109 - "Accounting for Income Taxes" ("SFAS 109"). The adoption of SFAS 109 changes the Company's method of accounting for income taxes from the deferred method to an asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. The effects on financial position of adopting SFAS 109 retroactively were the recording of additional goodwill, deferred tax liabilities (principally relating to inventories), and the gross-up of certain assets and liabilities which heretofore had been reflected net of tax; the impact on stockholders' equity was not material. Financial information for years prior to 1993 has been restated to reflect retroactive adoption of SFAS 109 back to the Company's formation on December 30, 1986. Postemployment Benefits - Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112") was issued in November 1992. SFAS 112 requires accrual accounting for benefits such as severance, disability, health insurance and training, offered to inactive employees after employment but before retirement. The Company will adopt SFAS 112 in 1994. Preliminary analysis indicates that adoption of SFAS 112 will not have a material effect on the Company's financial position, results of operations or cash flows. EFFECTS OF INFLATION Inflation has not had a significant effect on the results of operations or the value of the Company's assets and liabilities because the general rate of inflation has been relatively low since the December 1986 formation of the Company and related purchase price allocation. Also, the Company uses the LIFO inventory valuation method which normally matches current costs against current revenues. OUTLOOK FOR 1994 As we enter 1994, business activity, as measured by many economists, appears to be improving and conditions seem favorable for a continuation of the moderately-paced economic upturn. There is, however, some uncertainty in the degree and timing of a pick-up in our later cycle businesses and in the rate of change in capital spending by the Company's electric utility customers. The Company has aggressively addressed the cost and profit issues related to underperforming business units. Our restructure actions in 1993, coupled with ongoing cost reduction efforts in all areas of the Company, will improve our operating efficiency and profits as we move forward in 1994. While it will not be a quick fix, with the level and mix of backlog in our electric transformer and large engineered drive systems businesses impacting the first half of 1994, the Company continues to improve productivity and leverage our increasing sales for improved profits. -5- 6 In the Telecommunications segment, the Company has accelerated research and development programs to continue to strengthen our offerings in the rapidly evolving broadband multi-media markets. This spending, coupled with our strong local loop presence and announced alliances, better positions the Company within these markets. -6- EX-99.4 8 EXHIBIT 99.4 1 REPORT OF INDEPENDENT ACCOUNTANTS EXHIBIT 99.4 Price Waterhouse TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF RELIANCE ELECTRIC COMPANY In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of earnings, of cash flows and of changes in stockholders' equity present fairly, in all material respects, the financial position of Reliance Electric Company and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1, in 1993 the Company changed its method of accounting for income taxes and postretirement benefits other than pensions. /s/ Price Waterhouse Cleveland, Ohio February 3, 1994 - 1 - 2 CONSOLIDATED STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 31 (Dollars in millions, except per share amounts) 1993 1992 1991 NET SALES $ 1,608 $ 1,553 $ 1,516 Costs and expenses: Cost of sales 1,223 1,156 1,110 Selling, general and administrative 272 263 251 Restructure 16 1 1 Other expense, net 5 2 6 ----------------------------------------- EARNINGS BEFORE INTEREST AND TAXES 92 131 148 Interest expense 27 45 84 ----------------------------------------- EARNINGS BEFORE TAXES 65 86 64 Provision for income taxes 33 39 30 ----------------------------------------- EARNINGS BEFORE EXTRAORDINARY ITEMS 32 47 34 Extraordinary items (7) (22) - ----------------------------------------- NET EARNINGS $ 25 $ 25 $ 34 Net earnings $ 25 $ 25 $ 34 Less preferred stock dividends and accretion - 16 19 Net earnings available for common stock $ 25 $ 9 $ 15 Net earnings per equivalent share of common stock (after preferred stock dividends and accretion): Earnings before extraordinary items $ .64 $ .73 $ .44 Extraordinary items (.14) (.51) - Net Earnings $ .50 $ .22 $ .44 Weighted average equivalent shares of common stock outstanding 50,664,080 43,433,306 33,252,251 The accompanying notes are an integral part of these financial statements.
- 2 - 3 CONSOLIDATED BALANCE SHEET
DECEMBER 31 (Dollars in millions, except per share amounts) 1993 1992 ASSETS Cash (including cash equivalents of $14 and $15) $ 41 $ 32 Accounts receivable, net 217 210 Inventories 328 320 Other 29 17 ------------------------ TOTAL CURRENT ASSETS 615 579 Goodwill, net 209 216 Other intangible assets, net 10 11 Property, plant and equipment, net 298 287 Deferred income taxes 28 21 Other 35 37 ------------------------ TOTAL ASSETS $ 1,195 $ 1,151 liabilities and stockholders' equity Notes payable and current maturities of long-term debt $ - $ 5 Accounts payable 78 72 Income taxes payable 42 28 Other 144 132 ------------------------ TOTAL CURRENT LIABILITIES 264 237 Long-term debt 351 369 Pension and other postretirement benefits 169 154 Other 30 33 Stockholders' equity Common stock (convertible, $.01 par value): Class A, 32,865,159 (1993) and 32,363,083 (1992) shares issued 339 337 Class B, 3,179,712 (1993) and 3,419,528 (1992) shares issued 1 1 Class C, 5,250,000 shares issued 4 4 Retained earnings 37 12 Minimum pension liability (3) - Currency translation adjustments 3 4 ------------------------ TOTAL STOCKHOLDERS' EQUITY 381 358 ------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,195 $ 1,151
Commitments and contingencies (Note 14) The accompanying notes are an integral part of these financial statements. -3- 4 CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31 1993 1992 1991 (Dollars in millions, except per share amounts) CASH PROVIDED FROM OPERATIONS Net Earnings $ 25 $ 25 $ 34 Adjustments to reconcile to net cash provided from operations: Extraordinary items 7 22 - Restructure 16 1 1 Depreciation and amortization 61 58 61 Debenture accretion and fee amortization 1 16 51 Provision for deferred income taxes (16) (14) (13) Changes in operating assets and liabilities: Accounts receivable (7) (10) 8 Inventories (7) 4 26 Accounts payable 6 7 (5) Income taxes payable 8 10 7 Advances from customers (1) (4) (14) Other (3) (7) 16 ------------------------ NET CASH PROVIDED FROM OPERATIONS 90 108 172 ------------------------ CASH PROVIDED FROM INVESTING ACTIVITIES Capital expenditures (68) (49) (35) Business acquisitions - - (22) Other (1) (2) - ------------------------ NET CASH PROVIDED FROM INVESTING ACTIVITIES (69) (51) (57) ------------------------ CASH PROVIDED FROM FINANCING ACTIVITIES Proceeds from issuance of 6.8% Notes Due April 15, 2003 149 - - Net proceeds/payments from New Credit Facility 122 - - Proceeds from initial public offering - 309 - Net proceeds/payments from money market lines of credit 70 - - Net proceeds/payments on Term Loan Facility (364) 364 (55) Proceeds from Revolving Credit Facility 71 71 - Payments on Revolving Credit Facility (71) (71) - Proceeds from accounts receivable facility - 50 160 Payments on accounts receivable facility - (50) (180) Redemption of Senior Subordinated Debentures - (131) - Redemption of Junior Subordinated Debentures - (89) - Redemption of Discount Subordinated Debentures - (386) - Redemption of $1.40 Junior Preferred Stock - (31) (2) Redemption of $1.50 Junior Exchangeable Preferred Stock - (101) (6) Payment of refinancing fees - (15) - Tax benefit from option exercises 11 13 - Payment of preferred dividends - (17) (19) Sale of treasury stock - - 7 Other - 1 (2) ------------------------
- 4 - 5 NET CASH PROVIDED FROM FINANCING ACTIVITIES (12) (83) (97) --------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9 (26) 18 CASH AND CASH EQUIVALENTS AT JANUARY 1 32 58 40 --------------------------- CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 41 $ 32 $ 58
The accompanying notes are an integral part of these financial statements. - 5 - 6 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock ---------------------------------------- $1.40 Junior Nonqualified Preferred Stock Class A Class B Class C Stock Options --------------- ------- ------- ------- ------------- Shares Amount Shares Amount Shares Amount Shares Amount Amount BALANCE AT JANUARY 1, 1991 3,147 $ 31 10,640 $ 3 9,631 $ 3 5,250 $ 4 $ 1 Net earnings - - - - - - - - - Preferred stock dividends and accretion - - - - - - - - - Shares sold - - - - - - - - - Shares repurchased - - - - - - - - - Shares converted - - (15) - 15 - - - - Other direct charges - - - - - - - - - Currency translation adjustments - - - - - - - - - BALANCE AT DECEMBER 31, 1991 3,147 $ 31 10,625 $ 3 9,646 $ 3 5,250 $ 4 $ 1 Net earnings - - - - - - - - - Preferred stock dividends and accretion - - - - - - - - - Shares issued 3 - 20,656 333 - - - - (1) Shares converted - - 3,283 2 (3,283) (2) - - - Shares retired (3,150) (31) (2,201) (1) (2,943) - - - - Preferred stock redemptions - - - - - - - - - Currency translation adjustments - - - - - - - - - BALANCE AT DECEMBER 31, 1992 - $ - 32,363 $ 337 3,420 $ 1 5,250 $ 4 $ - Net earnings - - - - - - - - - Shares issued - - 262 2 - - - - - Shares converted - - 240 - (240) - - - - Currency translation adjustments - - - - - - - - - Minimum pension liability - - - - - - - - -
CONSOLIDATION STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY, continued
Minimum Currency Retained Pension Translation Treasury Stock Earnings Liability Adjustments at Cost ---------- --------- ----------- ------------- BALANCE AT Amount Amount Amount Amount JANUARY 1, 1991 $ 64 $ - $ 15 $(69) Net earnings 34 - - - Preferred stock dividends and accretion (19) - - - Shares sold - - - 7 Shares repurchased - - - (3) Shares converted - - - - Other direct charges (1) - - - Currency translation adjustments - - (2) - BALANCE AT DECEMBER 31, 1991 $78 $ - $ 13 $(65) Net earnings 25 - - - Preferred stock dividends and accretion (16) - - - Shares issued - - - - Shares converted - - - - Shares retired (61) - - 65 Preferred stock redemptions (14) - - - Currency translation adjustments - - (9) - BALANCE AT DECEMBER 31, 1992 $ 12 $ - $ 4 $ - Net earnings 25 - - - Shares issued - - - - Shares converted - - - - Currency translation adjustments - - (1) - Minimum pension liability - (3) - -
- 6 - 7 BALANCE AT DECEMBER 31, 1993 - $ - 32,865 $ 339 3,180 $ 1 5,250 $ 4 $ - $ 37 $ (3) $ 3 $ -
The accompanying notes are an integral part of these financial statements. - 7 - 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidated financial statements include affiliates in which the Company owns in excess of 50% of the common stock. Ownership positions of 20% to 50% are accounted for using the equity method while positions of less than 20% are carried at cost. All financial information for 1992 and earlier periods has been restated to reflect retroactive adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The Company acquired certain U.S. assets and a non-U.S. subsidiary of Robbins & Myers, Inc.'s Motion Control Group for $19 million in September 1991. Cash equivalents, representing investments purchased with a maturity of three months or less, are stated at cost which approximates market value. Inventories are stated at the lower of cost or market. Cost is determined primarily by the last in, first out method (LIFO). Deferred income taxes are provided for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. U.S. income and foreign withholding taxes are accrued for undistributed earnings of non-U.S. affiliates where repatriation of such earnings is expected. Effective January 1, 1993, the Company adopted SFAS 109. The adoption of SFAS 109 changes the Company's method of accounting for income taxes from the deferred method to an asset and liability method. The effects on financial position of adopting SFAS 109 retroactively were the recording of additional goodwill, deferred tax liabilities (principally relating to inventories), and the gross-up of certain assets and liabilities which heretofore had been reflected net of tax; the impact on stockholders' equity was not material. Goodwill is amortized over 40 years using the straight-line method. Other intangible assets, such as certain technology and computer software, are amortized using the straight-line method over estimated useful lives ranging from 2 to 17 years. Property, plant and equipment are recorded at cost. Plant and equipment are depreciated using the straight-line method over useful lives ranging from 3 to 12 years for machinery and equipment, and up to 45 years for buildings. Net gains or losses related to asset dispositions are recognized in earnings in the period in which the dispositions occur. Postretirement benefits other than pensions, principally health care and life insurance benefits, are provided to eligible retired employees. The Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106") for U.S. plans on January 1, 1993. Prior to the adoption of SFAS 106, postretirement benefits had been accounted for on an accrual method, which included amortization of unrecognized actuarial gains and losses. Slight refinements in methodology were required in order to conform to the provisions of SFAS 106. The impact of adopting SFAS 106 is approximately $3 million of transition obligation which is being amortized over 20 years. The Company is reviewing the impact of non-U.S. postretirement benefit plans; SFAS 106 requires that such costs be accrued no later than 1995. -8- 9 In a related area, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112") in November 1992. SFAS 112 requires accrual accounting for benefits, such as severance, disability, health insurance and training, offered to inactive employees after employment but before retirement. SFAS 112 is effective for years beginning after December 15, 1993. The Company will adopt SFAS 112 in 1994. Preliminary analysis indicates that adoption of SFAS 112 will not have a material effect on the Company's financial position, results of operations or cash flows. Deferred debt issuance costs are amortized using the effective interest rate method. Foreign currency translation of substantially all assets and liabilities of non-U.S. affiliates is computed using year-end currency exchange rates. Income and expenses are translated using average exchange rates for the year. Cumulative translation adjustments are presented as a separate component of stockholders' equity. Foreign currency translation adjustments relating to hyperinflationary currencies are included in other income and expense. Forward contracts for future purchases or sales of foreign currencies are entered into as a hedge against exchange rate changes on firm commitments. Resulting gains and losses are deferred and recognized when the transaction for which the hedge was entered into is finalized. As of December 31, 1993, the Company had commitments to purchase $13 million and to sell $27 million in various non-U.S. currencies. These contracts are entered into with financial institutions and mature throughout 1994. The Company is exposed to credit risk in the event of nonperformance by these financial institutions. Financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, debt instruments, interest rate swaps and foreign currency contracts. The Company determines the fair values of financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the book value of those financial instruments. When the fair value is equal to the book value, no additional disclosure is made. The Company received quoted market prices or quotes for instruments with similar terms to calculate these fair values. Revenues generally are recognized when goods are shipped or services are provided. Other income and expense includes interest income, amortization of goodwill, equity income and losses, the effects of foreign currency translation and transactions, and other items. Net earnings per equivalent share of common stock are calculated by dividing net earnings, less preferred stock dividends and accretion, by the weighted average number of shares of common stock outstanding. For the calculation, each share of Class C Common Stock is converted to 2.708 shares of Class A Common Stock in accordance with its conversion feature. Nonqualified stock options are included as common stock equivalents when the effect is dilutive. 2. CAPITAL AND REFINANCING TRANSACTIONS During 1992, the Company completed several recapitalization transactions, including the sale of 17,250,000 shares of Class A Common Stock in an initial public offering. -9- 10 The $309 million net proceeds from the sale, together with borrowings under a Term Loan Facility were used during the remainder of 1992 to redeem the 14.25% Junior Subordinated Debentures, the 11.75% Senior Subordinated Debentures, the 14% Discount Subordinated Debentures, the $1.40 Junior Preferred Stock and the $1.50 Junior Exchangeable Preferred Stock and to pay outstanding borrowings under previous bank financing facilities and fees related to the transactions. As a result of the subordinated debt redemptions and optional prepayments under the Term Loan Facility, the Company incurred a $22 million extraordinary charge, net of tax benefits of $15 million, in 1992. This charge was generated by redemption premiums paid, accelerated amortization of debt issuance fees, interest, and administrative fees related to the redemption transactions. The Company also incurred charges totalling $14 million to retained earnings, primarily for premiums and accelerated fee amortization related to the redemption of the preferred stock issues. In April 1993, the Company issued $150 million principal amount ten-year 6.8% notes ("Notes"), after registering $200 million of debt securities under the Securities Act of 1933. Net proceeds of approximately $149 million were applied to reduce the Term Loan Facility balance. Also in April 1993, the Company entered into the New Credit Facility, borrowed $209 million thereunder and applied these proceeds to the remaining Term Loan and Revolving Credit Facilities' balances. The Term Loan and Revolving Credit Facilities were then terminated. The Company recorded a $7 million extraordinary charge, net of a related tax benefit of $4 million, in the second quarter of 1993 due primarily to the accelerated amortization of issuance fees and interest rate swap costs related to the Term Loan Facility. The Company also established money market lines of credit totalling $205 million and letter of credit facilities totalling $38 million in 1993. 3. MISCELLANEOUS FINANCIAL INFORMATION
December 31 1993 1992 (Dollars in millions) Allowance for doubtful accounts receivable $ 9 $ 8 Accumulated amortization of goodwill 43 37 Accumulated amortization of intangible assets 20 37
The Company's accounts receivable are spread across a wide variety of industries, minimizing the potential credit risk due to nonpayment. Approximately $19 million of fully amortized intangible assets were written off in 1993.
Years ended December 31 1993 1992 1991 (Dollars in millions) Depreciation $ 53 $ 50 $49 Amortization of goodwill 6 6 6 Amortization of intangibles 2 2 6 Amortization of debt issue costs 1 3 4 Engineering: Research and development expenses $ 43 $ 40 $34 Application engineering 69 63 60 Total Engineering $112 $103 $94
-10- 11 4. INVENTORY Inventory consists of: December 31 1993 1992 (Dollars in millions) Raw materials $104 $ 85 Work in process 68 78 Finished goods 68 66 Total (approximates replacement cost) 240 229 Difference to LIFO 88 91 Total LIFO value income taxes $328 $320
5. INCOME TAXES The current and noncurrent components of deferred taxes are:
December 31 1993 1992 (Dollars in millions) Deferred Tax Assets Postretirement benefits $ 49 $ 45 Inventory capitalization 23 21 Pensions 12 10 Self insurance reserves 8 8 Vacation reserves 5 5 Group insurance reserves 5 5 Restructure reserves 5 - State tax NOL carryforwards 5* 4* Warranty reserves 4 3 Inventory reserves 4 3 Federal capital loss carryforwards 2* 2* Accounts receivable reserve 3 3 State income tax 2 1 Legal reserves 1 2 Other 7 6 Gross deferred tax assets 135 118 Valuation allowance on deferred tax asset (7)* (6)* Total deferred tax assets 128 112 Deferred Tax Liabilities Acquisition inventory valuation adjustments 45 45 Property, plant and equipment 33 35 Unrepatriated non-U.S. earnings 4 5 Pension assets 4 3 Favorable financing intangibles 2 2 Total deferred tax liabilities 88 90 Net deferred tax assets $ 40 $ 22 * A valuation allowance has been recognized on these deferred tax assets because it has been determined that it is more likely than not that such assets will not be realized. Federal capital loss carryforwards expire in 1994 and the state tax net operating loss carryforwards expire through 2007. Earnings before taxes consist of:
-11- 12 Earnings before taxes consist of:
Years ended December 31 1993 1992 1991 (Dollars in millions) Earnings before taxes: U.S. $ 63 $ 76 $ 34 Non-U.S. 2 10 30 Total $ 65 $ 86 $ 64 Provisions for income taxes include: Years ended December 31 1993 1992 1991 (Dollars in millions) Current taxes: U.S. federal $ 39 $ 42 $ 27 State and local 8 6 5 Non-U.S. 2 5 11 Total 49 53 43 Deferred taxes: U.S. (16) (13) (14) Non-U.S. - (1) 1 Total (16) (14) (13) Total tax provision $ 33 $ 39 $ 30
The 1993 provision for deferred taxes of $16 million differs from the $18 million increase in net deferred tax assets due to the $2 million of additional deferred tax assets associated with the recognition of the minimum liability for pensions, recorded as a component of Stockholders' Equity. Income taxes differ from amounts computed at the U.S. statutory rate due to:
Years ended December 31 1993 1992* 1991* (Dollars in millions) Expected tax at statutory rate $ 23 $ 29 $ 22 State and local taxes, net of federal income tax benefit 5 4 2 Nondeductible amortization 2 2 2 Effect of rate change on deferred tax assets (1) - - Other, net 4 4 4 Total tax provision $ 33 $ 39 $ 30
The U.S. statutory tax rate increased from 34% in 1991 and 1992 to 35% in 1993. Income taxes paid in 1993, 1992, and 1991 totalled $32 million, $27 million and $34 million, respectively. Retained earnings of non-U.S. affiliates on which U.S. income and foreign withholding taxes have not been provided totalled $32 million at December 31, 1993. -12- 13 These taxes have not been provided for, as such earnings are not expected to be repatriated. The associated income and withholding taxes are $13 million. The Company's tax returns are audited in the normal course of business. During 1993, the Internal Revenue Service completed their audit of the Company's tax returns from its formation through 1988 and proposed certain adjustments. Management and independent tax counsel believe most of the proposed adjustments will not be sustained. Management believes that the outcome of all audits of its tax returns will not have a material adverse effect on the Company's financial position or results of operations. 6. PROPERTY, PLANT AND EQUIPMENT
December 31 1993 1992 (Dollars in millions) Land $ 25 $ 25 Buildings 156 151 Machinery and equipment 444 394 625 570 Accumulated depreciation (327) (283) Total $ 298 $ 287
7. OTHER CURRENT LIABILITIES
December 31 1993 1992 (Dollars in millions) Compensation and employee benefits $ 52 $ 52 Advances from customers 19 20 Warranties 13 12 Other 60 48 Total $144 $132
8. LEASE COMMITMENTS
Commitments due under long-term operating lease agreements are: (Dollars in millions) 1994 $ 16 1995 11 1996 7 1997 4 1998 3 After 1998 5 Total $ 46
Net rent expense totalled $25 million in 1993 and $27 million in both 1992 and 1991. 9. LONG-TERM DEBT
December 31 1993 1992 (Dollars in millions) 6.8% Notes Due April 15, 2003 $149 $ -- New Credit Facility 222 -- Money market lines of credit 70 -- Term Loan Facility -- 364 Other 10 10 Total long-term debt 351 374 Less current maturities -- 5 Total $351 $369
- 13 - 14 The Notes are due April 15, 2003 and interest on the Notes is payable on each October 15 and April 15, beginning October 15, 1993. The Notes are not callable and have no sinking fund requirement. In April 1993, the Company and a bank syndicate entered into a five-year New Credit Facility, whereby the Company may borrow an aggregate of up to $350 million. Upon request of the Company, the New Credit Facility may be extended for additional one-year periods with the consent of all members of the bank syndicate. Annual facility fees are 0.25% of the total available New Credit Facility. The New Credit Facility is subject to variable interest rates based on LIBOR, certificate of deposit or adjusted base rates. The adjusted base rate is defined in the New Credit Facility and is essentially equal to the prime rate. Covenants contained in the New Credit Facility relate to consolidated net worth, interest coverage and leverage. The Company also established money market lines of credit in 1993. The money market lines of credit are an uncommitted, unsecured form of financing where amounts are borrowed for periods typically ranging from overnight to 60 days, with a maximum possible term of 180 days. Although the money market lines of credit are short-term in nature, the Company has the ability and intent to maintain all, or substantially all, of the $70 million principal amount through renewals or through the New Credit Facility on a long-term basis. The money market lines of credit and the New Credit Facility are used interchangeably based on the Company's cash requirements and available terms. Accordingly, such amounts have been classified as long-term debt. - 14 - 15 The aggregate fair value of long-term debt at December 31, 1993 was $349 million, $2 million less than the carrying value. The Company maintains interest rate swap agreements to reduce the impact of potential interest rate increases. Present swap agreements have remaining lives of one to four years and cover a notional principal amount of $200 million. Amounts payable or receivable by the Company are recognized over the life of the swap agreements. During 1993, the Company recognized $5 million of interest expense attributable to the swap agreements. At December 31, 1993, the aggregate fair value of the interest rate swaps, all of which are payable, is $4 million. The Company had $29 million of outstanding letters of credit at December 31, 1993, supported by $39 million of letter of credit facilities. Including fee amortization and interest expense recognized under the swap agreements, the 1993 effective interest rate on all long-term debt instruments was 6.64%. Cash interest paid totalled $21 million, $39 million and $31 million in 1993, 1992 and 1991, respectively. Scheduled maturities of long-term debt are:
(Dollars in millions) 1994 $ - 1995 - 1996 - 1997 - 1998 192 After 1998 159 Total $351
10. STOCKHOLDERS' EQUITY Stockholders' equity includes Classes A, B and C Common Stock and options to purchase Class A Common Stock ("Options"). On February 24, 1992, the Board of Directors approved the retirement of all treasury shares of Class A and B Common Stock and $1.40 Junior Preferred Stock (2,201,000, 2,943,000 and 248,000 shares, respectively), reducing contributed capital and retained earnings. While the retirement had no effect on total stockholders' equity, retained earnings were reduced by $61 million. On April 15, 1992, the stockholders approved a three-for-two split of the Company's Class A, B and C Common Stock and an increase in the number of authorized shares of Class A and B Common Stock to 100,000,000 shares each. Retroactive effect has been given to the common stock split in all share and per share data in these financial statements. At December 31, 1993, share data (in thousands) were:
Authorized Issued Outstanding Par Value Class A Common 100,000 32,865 32,865 $.01 Class B Common 100,000 3,180 3,180 .01 Class C Common 12,000 5,250 5,250 .01 Preferred 15,000 0 0 .10
- 15 - 16 Each share of Class A Common Stock has one vote. Class B and Class C Common Stock have no voting rights. Class A Common Stock may be converted into Class B Common Stock on a one share to one share basis. Each share of Class B Common Stock may be converted into one share of Class A Common Stock. Each share of Class C Common Stock may be converted to 2.708 shares of Class A Common Stock upon the satisfaction of certain conditions. The weighted average number of common shares outstanding is calculated as follows:
Years ended December 31 1993 1992 1991 (Shares in thousands) Weighted average number of common shares 41,194 31,907 20,132 Net shares issuable pursuant to conversion of Class C Common Stock into Class A Common Stock on a one share to 2.708 shares basis 8,967 8,967 8,967 Weighted average of nonqualified stock options 503 2,559 4,153 Weighted average equivalent shares of common stock outstanding 50,664 43,433 33,252
Pursuant to employee stock purchase plans, members of management have purchased Options for shares of Class A Common Stock in exchange for $.27 of cash or deferred compensation for each Option. The remaining exercise prices range from $.07 to $1.07 for these Options, which expire ten years from the grant date. As of December 31, 1993, the Company has reserved 342,415 shares of Class A Common Stock for these Options. No further Options will be granted under these plans. A Key Employee Stock Option Plan was adopted effective January 1, 1990. Under this plan, employees may be granted Options through December 31, 1994 to purchase Class A Common Stock. The maximum number of shares for which Options may be granted under this plan is 900,000. As of December 31, 1993, the Company has issued 873,450 Options, net of cancellations, and reserved 894,600 shares of Class A Common Stock for this plan. Options terminate ten years after the date of grant. The exercise price per share equals the share's fair value on the date the Option is granted. In May 1990 the Company granted 66,750 Options under this plan at an exercise price of $12.56 per Option. During 1993, 3,700 of these Options were exercised and 750 were cancelled, leaving a vested balance of 61,050 at December 31, 1993. In March 1992 the Company granted 646,050 Options under this plan at a grant price of $17.27 per Option. During 1993, 69,300 of these Options were cancelled and 450 were exercised. As of December 31, 1993, 286,875 of these Options were exercisable, with the remaining 287,325 Options becoming exercisable in September 1994. In December 1993 the Company granted 232,800 Options under this plan at an exercise price of $17.25. These Options will be exercisable starting in December 1995. -16 - 17 Two outside directors of the Company each received Options in April 1987, under the Company's Common Stock Option Plan for Outside Directors, to purchase 75,000 shares of Class A Common Stock at an exercise price of $0.33 per share, exercisable until April 1997. In 1993, none of these options were exercised. The Company has reserved 75,000 shares of Class A Common Stock for this plan at December 31, 1993. The Company recorded a $2 million increase in equity in 1993 as a result of the tax benefits relating to employee stock option exercises. Option activity for the three years ended December 31, 1993 was as follows:
Employee Key Outside Stock Employee Director (Options in thousands) Plans Plan Plan Balance at January 1, 1991 3,960 67 150 Cancelled (32) - - Balance at December 31, 1991 3,928 67 150 Cancelled - (2) - Exercised (3,327) (1) (75) Granted - 646 - Balance at December 31, 1992 601 710 75 Cancelled - (71) - Exercised (259) (4) - Granted - 233 - Balance at December 31, 1993 342 868 75 Exercisable at December 31, 1993 342 348 75
11. RETIREMENT AND SAVINGS PLANS The Company sponsors defined benefit pension plans which provide benefits generally based on years of service and compensation to substantially all U.S. employees of the Company. Annual contributions to U.S. plans equal or exceed the minimum funding requirements of the Employee Retirement Income Security Act. Funds are contributed as necessary to provide for current service and any unfunded projected benefit obligation over a reasonable period. Assets of the plans consist primarily of marketable securities. A Supplemental Retirement Plan for Key Employees covers elected officers of the Company and individuals named key employees by the Board of Directors. The plan provides pension benefits that are excluded from qualified plans due to compensation deferral, annual compensation limits, and the benefit limit under Section 415 of the Internal Revenue Code. Upon retirement, benefits from the plan are paid over the life of the participant. Lump sum payments may be made to selected current retirees upon the occurrence of certain events. Net periodic pension cost was determined using an 8.5% discount rate and includes:
Years ended December 31 1993 1992 1991 (Dollars in millions) Benefits earned during the year $ 18 $ 15 $ 15 Interest accrued on projected benefit obligation 18 17 14 Actual return on plan assets (19) (17) (34) Net amortization and deferral - - 21 Net pension cost for the year $ 17 $ 15 $ 16
- 17 - 18 The Company uses the projected unit credit actuarial method for determining pension costs. The actuarial present values of projected benefit obligations are determined using weighted average discount rates of 7.5% at December 31, 1993 and 8.5% at December 31, 1992. The effect of the discount rate change was to increase the pension obligations by approximately $34 million at December 31, 1993. Future compensation levels are assumed to increase 5% annually. The expected long-term rate of return on plan assets is assumed to be 9.5%. The funded status of defined benefit pension plans and the amounts recognized in the consolidated balance sheet were:
December 31 1993 1992 Over Under Over Under Funded Funded Funded Funded (Dollars in millions) Plans Plans Plans Plans Plan assets at fair value $ 156 $ 104 $ 173 $ 57 Actuarial present value: Vested benefits 119 133 129 57 Nonvested benefits 5 18 7 18 Accumulated benefit obligation 124 151 136 75 Additional amounts related to projected salary increases 11 22 9 29 Projected benefit obligation 135 173 145 104 Plan assets in excess of (less than) projected benefit obligation 21 (69) 28 (47) Transition obligation (5) 3 (6) 3 Amounts necessary to reconcile excess pension assets and liabilities included in the balance sheet: Unrecognized prior service cost 6 17 8 15 Adjustment required to recognize minimum liability - (12) - (3) Unrecognized net (gains) losses (8) 14 (16) (6) Net pension assets (liabilities) included in the balance sheet $14 $(47) $ 14 $(38)
The Company sponsors a Savings and Investment Plan covering substantially all U.S. nonbargaining unit - 18 - 19 employees. Company contributions and expenses related to the plan totalled $8 million in 1993, and $7 million in both 1992 and 1991. 12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides postretirement benefits other than pensions, primarily health care and life insurance, for certain eligible U.S. retirees. The estimated present values of these benefits recorded as liabilities were $127 million and $119 million at December 31, 1993 and 1992, respectively. Of these, $9 million and $8 million were classified as current liabilities at December 31, 1993 and 1992, respectively. Postretirement benefits are unfunded. Net postretirement benefit costs were calculated using an 8.5% discount rate and include:
Years ended December 31 1993 1992 1991 (Dollars in millions) Service Cost $ 2 $ 3 $ 4 Interest Cost 12 11 9 Net amortization and deferral 2 1 (1) Net periodic postretirement benefit cost $16 $15 $12
The reconciliation of the postretirement benefit obligation with the amount recorded on the balance sheet is:
December 31 1993 1992 (Dollars in millions) Accumulated postretirement benefit obligation: Retired participants $112 $ 96 Fully eligible active plan participants 17 15 Other active plan participants 43 29 Accumulated postretirement benefit obligation 172 140 Unrecognized actuarial gains and (losses) (42) (21) Unrecognized transition obligation (3) -- Net postretirement benefit liability recognized in the balance sheet $127 $119
The actuarial present value of the accumulated postretirement benefit obligation was determined using a weighted average discount rate of 7.5% at December 31, 1993 and 8.5% at December 31, 1992. The effect of the discount rate change was to increase the postretirement benefit obligations by approximately $17 million at December 31, 1993. Health care cost inflation is assumed to be 13.75% in 1993, declining gradually to 6.5% in 2007 and thereafter. A 1% increase in the assumed health care cost rates would increase the service and interest cost components by approximately $2 million and increase the accumulated postretirement benefit obligation by approximately $19 million. 13. MANAGEMENT INCENTIVE PROGRAMS The Company provides an incentive compensation plan based on attaining certain objectives to officers and their key management personnel. Expense under this plan totalled $4 million, $5 million, and $4 million in 1993, 1992 and 1991, respectively. - 19 - 20 14. CONTINGENT LIABILITIES The Company's primary contingent environmental liabi-lity relates to governmental and private actions which name Federal Pacific Electric Company ("FPE"), a nonoperating subsidiary of the Company, as a defendant or potentially responsible party. These liabilities include several CERCLA sites, the investigation of possible remediation actions at former FPE facilities and a number of other less significant environmental matters. The gross estimated unpaid liability for these environmental matters at December 31, 1993 is approximately $20 million. As described below, the Company is indemnified for a substantial portion of these environmental claims. Pursuant to the December 29, 1986 Stock Purchase Agreement ("Agreement") with the Company, Exxon Corporation ("Exxon") agreed to indemnify and hold harmless the Company against substantially all losses, liabilities, claims, obligations, damages (including any governmental penalty or punitive damages) or deficiencies (collectively "Losses") arising out of or resulting from any environmental claim relating to the operations of FPE and certain of its subsidiaries including Cornell-Dubilier Electronics Corporation. No action or claim for damages pursuant to this indemnity may be brought or made by the Company after the expiration of a twenty year period from December 30, 1986, except that such time limitation does not apply to any claims which have been the subject of a written notice from the Company to Exxon prior to the expiration of such period. Pursuant to the Agreement, Exxon is liable for the first $10 million of any such damages incurred by the Company, 95% of the next $100 million and 100% of any such damages in excess of $110 million. While there can be no assurance as to the future compliance with the Agreement, Exxon has been and is indemnifying the Company for these environmental matters. After effect to this indemnification, the gross estimated liability referred to above is reduced to approximately $4 million, the amount which is reflected in the Company's December 31, 1993 balance sheet. The Company is subject to various legal actions, performances under contracts, pending litigation and proceedings relating to a wide range of matters, several of which claim substantial damages. In the opinion of management, after reviewing the information which is currently available with respect to such matters and consulting with the Company's counsel, any liability which may ultimately be incurred will not materially affect the consolidated financial position, results of operations or cash flows of the Company. 15. RELATED PARTY TRANSACTIONS Court Square Capital Limited (an affiliate of Citicorp, together with other affiliates "Citicorp") and Prudential Securities Inc. (an affiliate of The Prudential Insurance Company of America, together with other affiliates "Prudential") are related parties to the Company. At December 31, 1993, Citicorp owned all outstanding shares of Class C Common Stock. During 1991 the Company paid $2.5 million for Citicorp's 32% interest in the Company's Mexican affiliates. Prudential owned 2,466,968 shares of Class B Common Stock at December 31, 1993. Prudential acted as a broker for the Company's March 1992 purchase of - 20 - 21 approximately $18 million principal amount of its 14% Discount Subordinated Debentures. The Company also engaged Prudential as one of three managing underwriters involved in the May 1992 initial public offering and engaged Prudential as one of the two managing underwriters involved in the April 1993 offering of the 6.8% Notes due April 15, 2003. Prudential received commissions and fees in connection with these transactions on a basis consistent with standard industry practice. In 1991, the Company hired Prudential to assist in the investigation of the potential sale or merger of the Company; this investigation was terminated in December 1991. Also during 1991, the Company repurchased 200,000 shares of $1.40 Junior Preferred Stock from Citicorp in a transaction brokered by Prudential. In 1991, Reliance Electric Limited, a Canadian corporation and a wholly owned subsidiary of the Company, entered into two separate agreements with Citicorp. Pursuant to agency agreements, the Company engaged Citicorp to act as its agent in purchases and sales of approximately $3 million of U.S. Treasury Bonds. The Company took steps to determine that all of the above transactions were handled on a basis no less favorable than could have been obtained from unrelated parties. 16. BUSINESS SEGMENT INFORMATION The Company is comprised of Industrial and Telecommunications business segments. Industrial segment business units develop, manufacture, market and service motors, electrical drives, mechanical power transmission products, and utility transformers. Telecommunications segment business units develop, manufacture, market and service specialty telecommunications products. Consolidated net sales and earnings by business segment include sales to unaffiliated customers and inter-segment sales, which are accounted for at prices approximating market. Operating income represents sales less operating expenses, including restructure charges. Operating income excludes general corporate expense, interest and miscellaneous income, interest expense, income taxes and equity earnings of unconsolidated affiliates. Goodwill has been allocated to the segments.
By Geographic Location 1993 1992 1991 (Dollars in millions) Net Sales U.S. $1,478 $1,394 $1,336 Non-U.S. 170 190 209 Eliminations (40) (31) (29) Total $1,608 $1,553 $1,516 Earnings U.S. $ 109 $ 138 $ 137 Non-U.S. (2) 6 26 Operating income 107 144 163 Corporate expense 16 15 16 Interest expense 27 45 84 Other (income) expense (1) (2) (1) Earnings Before Taxes $ 65 $ 86 $ 64 Identifiable Assets U.S. $ 1,056 $1,007 $1,005 Non-U.S. 116 115 138 Corporate 23 29 33 Total $ 1,195 $1,151 $1,176
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By Segment 1993 1992 1991 (Dollars in millions) Net Sales Industrial $1,172 $1,153 $1,153 Telecommunications 439 402 365 Eliminations (3) (2) (2) Total $1,608 $1,553 $1,516 Earnings Industrial $ 92 $ 118 $ 150 Telecommunications 15 26 13 Operating income 107 144 163 Corporate expense 16 15 16 Interest expense 27 45 84 Other (income) expense (1) (2) (1) Earnings Before Taxes $ 65 $ 86 $ 64 Identifiable Assets Industrial $ 581 $ 526 $ 553 Telecommunications 591 596 590 Corporate 23 29 33 Total $1,195 $1,151 $1,176 Depreciation and Amortization Industrial $ 38 $ 35 $ 38 Telecommunications 23 23 23 Corporate -- -- -- Total $ 61 $ 58 $ 61 Capital Expenditures Industrial $ 52 $ 39 $ 27 Telecommunications 15 10 8 Corporate 1 -- -- Total $ 68 $ 49 $ 35 Research and Development Expense Industrial $ 22 $ 23 $ 18 Telecommunications 21 17 16 Corporate -- -- -- Total $ 43 $ 40 $ 34
17. RESTRUCTURE CHARGES The Company incurred $16 million of restructure charges in 1993. The Electrical Group of the Industrial segment recorded approximately $11 million of these charges for workforce reductions, consolidation of manufacturing capacity and international structure changes. The Telecommunications segment charges were approximately $5 million, largely for consolidation of redundant manufacturing capacity. The majority of the $16 million provision represents projected cash expenditures. These actions align the Company's manpower, manufacturing capacity and structure with current and expected market conditions, and improve productivity, capacity and administrative efficiency. - 22 - -----END PRIVACY-ENHANCED MESSAGE-----