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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1997.
REGISTRATION NO. 333-27801
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT
NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
------------------------
OHIO
(State or other jurisdiction of
incorporation or organization)
5085
(Primary Standard Industrial
Classification Code No.)
34-0117420
(IRS Employer Identification No.)
------------------------
ONE APPLIED PLAZA, CLEVELAND, OHIO 44115
(216) 426-4000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------
ROBERT C. STINSON, ESQ.
VICE PRESIDENT -- ADMINISTRATION, HUMAN RESOURCES
GENERAL COUNSEL AND SECRETARY
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
ONE APPLIED PLAZA
CLEVELAND, OHIO 44115
(216) 426-4000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------
COPIES TO:
DAVID A. ZAGORE, ESQ.
SQUIRE, SANDERS & DEMPSEY L.L.P.
4900 KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 479-8500
------------------------
Approximate Date of Commencement of Proposed Sale to the Public:
As promptly as practicable after this Registration Statement becomes
effective and the effective time of the proposed merger of INVETECH Company with
and into a subsidiary of the Registrant, as described in the enclosed
Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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APPLIED INDUSTRIAL TECHNOLOGIES, INC.
CROSS-REFERENCE SHEET BETWEEN ITEMS IN FORM S-4 AND PROSPECTUS
PURSUANT TO ITEM 501(b) OF REGULATION S-K
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ITEM NO. FORM S-4 CAPTION HEADING IN PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
Item 1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus....... Cover Page of Registration Statement;
Cross-Reference Sheet; Outside Front
Cover Page of Prospectus
Item 2. Inside Front and Outside Back Cover Pages of
Prospectus................................... Inside Front Cover Page of
Prospectus; Table of Contents;
Available Information
Item 3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information................ Summary; Selected Historical
Consolidated and Unaudited Pro Forma
Combined Financial Information;
Comparative Per Share Data and
Dividend History; Risk Factors; The
Merger; Invetech Special Meeting
Item 4. Terms of the Transaction..................... Summary; The Merger; Description of
Applied Common Stock; Comparison of
Rights of Holders of Applied Common
Stock and Invetech Common Stock
Item 5. Pro Forma Financial Information.............. Summary; Unaudited Pro Forma Combined
Condensed Financial Statements
Item 6. Material Contracts with the Company Being
Acquired..................................... Interests of Certain Persons in the
Merger
Item 7. Additional Information Required for
Reoffering by Persons and Parties Deemed to
be Underwriters.............................. *
Item 8. Interests of Named Experts and Counsel....... Experts; Legal Matters
Item 9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................. *
B. INFORMATION ABOUT THE REGISTRANT
Item 10. Information with Respect to S-3
Registrants.................................. *
Item 11. Incorporation of Certain Information by
Reference.................................... *
Item 12. Information with Respect to S-2 or S-3
Registrants.................................. *
Item 13. Incorporation of Certain Information by
Reference.................................... *
Item 14. Information with Respect to Registrants Other
Than S-3 or S-2 Registrants.................. Summary; Applied Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Information Concerning Applied;
Financial Statement Schedules
C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
Item 15. Information with Respect to S-3 Companies.... *
Item 16. Information with Respect to S-2 or S-3
Companies.................................... *
Item 17. Information with Respect to Companies Other
Than S-3 or S-2 Companies.................... Summary; Invetech Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Information Concerning Invetech;
Financial Statement Schedules
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ITEM NO. FORM S-4 CAPTION HEADING IN PROSPECTUS
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D. VOTING AND MANAGEMENT INFORMATION
Item 18. Information if Proxies, Consents or
Authorizations are to be Solicited........... *
Item 19. Information if Proxies, Consents or
Authorizations are not to be Solicited or in
an Exchange Offer............................ Summary; The Merger; Invetech Special
Meeting; Information Regarding
Beneficial Ownership of Principal
Applied Shareholders and Management;
Management of Applied; Compensation
of Directors and Executive Officers;
Information Regarding Beneficial
Ownership of Principal Invetech
Shareholders and Management
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* Omitted because inapplicable or answer is in the negative.
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PROSPECTUS
2,300,000 SHARES
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
COMMON STOCK
This Prospectus relates to up to 2,300,000 shares of common stock (the
"Applied Common Stock"), without par value, of Applied Industrial Technologies,
Inc. ("Applied") that may be issued in connection with the merger (the "Merger")
of INVETECH Company ("Invetech") with and into I.C. Acquisition Corp. ("Merger
Sub") in accordance with the terms of the Plan and Agreement of Merger dated as
of April 29, 1997 by and among Applied, Invetech and Merger Sub attached as
Annex A hereto (the "Merger Agreement"). Applied Common Stock is listed on the
New York Stock Exchange ("NYSE") under the symbol "APZ." On June 30, 1997, the
closing sale price for Applied Common Stock as reported on the NYSE Composite
Tape was $36.00 per share.
In the Merger, all of the outstanding shares of Class A common stock, $0.10
par value, of Invetech (the "Invetech Class A Common Stock") and Class B common
stock, $0.10 par value, of Invetech (the "Invetech Class B Common Stock"; the
Invetech Class A Common Stock and the Invetech Class B Common Stock shall be
referred to herein collectively as the "Invetech Common Stock") will be
converted into the right to receive shares of Applied Common Stock and cash, in
the proportion designated by Invetech based upon preference specification forms
solicited by Invetech from the holders of Invetech Common Stock (the "Invetech
Shareholders"). The aggregate value of Applied Common Stock and cash to be paid
to Invetech Shareholders will be Eighty-Three Million Dollars ($83,000,000) (the
"Merger Consideration"); provided, however, in no event shall more than Two
Million Three Hundred Thousand (2,300,000) shares of Applied Common Stock be
issuable in connection with the Merger. Each holder of Invetech Common Stock
will be entitled to elect to receive 50%, 60%, 70% or 78% of the Merger
Consideration payable to such holder in Applied Common Stock, with the balance
of the Merger Consideration payable to such holder in cash. For purposes of
computing the Merger Consideration, each share of Applied Common Stock will be
assigned a value of Twenty-Eight Dollars and Sixty-Two Cents ($28.62) per share.
Ten Million Dollars ($10,000,000) (the "Escrow Amount") of the cash portion of
the Merger Consideration will be deposited and held in escrow pursuant to the
terms of an escrow agreement substantially in the form of Annex B hereto (the
"Escrow Agreement") to be entered into as of the Closing Date (as hereinafter
defined) of the Merger for the purpose of funding the indemnification
obligations of Invetech under the Merger Agreement. The Merger Consideration and
the Escrow Amount are allocable (i) 15% to the holders of Invetech Class A
Common Stock and (ii) 85% to the holders of Invetech Class B Common Stock, on a
pro rata basis to each holder's percentage interest in each class of Invetech
Common Stock. Assuming no claims for indemnification are asserted by Applied,
the Escrow Amount shall be distributed to the Invetech Shareholders over a
five-year period following the Effective Time (as hereinafter defined) in
accordance with the terms of the Escrow Agreement. The Merger Consideration is
subject to adjustment on a dollar for dollar basis to the extent that the
shareholders' equity of Invetech as reflected on the Closing Balance Sheet (as
hereinafter defined), reduced as provided in the Merger Agreement for all
transaction costs and certain other expenses incurred by Invetech in connection
with the Merger, is greater than or less than Forty-Six Million Dollars
($46,000,000). There is no limit on the amount of such upward or downward
adjustment and no further approval of the holders of Invetech Common Stock is
required to approve any adjustment. In addition, Applied shall pay interest on
the Merger Consideration, as adjusted, in an amount equal to the product of (x)
the Merger Consideration, as adjusted, (y) the number of days elapsed between
the date of the Closing Balance Sheet and the Closing (as hereinafter defined),
and (z) 0.0002191.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE MERGER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this prospectus is July , 1997.
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AVAILABLE INFORMATION
Applied is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference room of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the public reference facilities in the New York Regional Office, 7 World Trade
Center, New York, New York 10048, and the Chicago Regional Office, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained
at prescribed rates by writing to the Securities and Exchange Commission, Public
Reference Section, Washington, D.C. 20549. In addition, material filed by
Applied can be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York, 10005. The Commission also maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other reports and information filed electronically by Applied.
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No person has been authorized to give any information or to make any
representations not contained or incorporated in this Prospectus in connection
with the matters referred to herein and, if given or made, such information or
representations must not be relied upon as having been so authorized by Applied.
This Prospectus does not constitute an offer of any securities other than the
registered securities to which it relates or an offer to any person in any
jurisdiction where such offer would be unlawful. The delivery of this Prospectus
shall not, under any circumstances, create any implication that the information
herein is correct as of any time subsequent to the date hereof.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains statements that are forward-looking, as that term
is defined by the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases. Those
statements appear in a number of places in this Prospectus and include
statements regarding intent, belief or current expectations of Applied. Applied
intends that such forward-looking statements be subject to the safe harbors
created thereby. All forward-looking statements are based on current
expectations regarding important risk factors. Accordingly, actual results may
differ materially from those expressed in the forward-looking statements, and
the making of such statements should not be regarded as a representation by
Applied or any other person that the results expressed therein will be achieved.
See "Risk Factors."
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.............................. 1
The Companies................................. 1
Applied Industrial Technologies, Inc........ 1
INVETECH Company............................ 1
Merger Sub.................................. 2
The Merger.................................... 2
General..................................... 2
Merger Consideration........................ 3
Election Procedures Regarding Merger
Consideration............................. 4
Escrow Amount............................... 5
Closing Date................................ 6
Effective Time.............................. 6
Conditions to Merger........................ 6
Termination................................. 6
No Solicitation; Termination Fee............ 7
Approval and Recommendation of the Boards of
Directors; Reasons for the Merger......... 7
Certain Federal Income Tax Consequences..... 7
Resale of Applied Common Stock.............. 8
Accounting Treatment of Merger.............. 8
Selected Historical Consolidated and Unaudited
Pro Forma Combined Financial Information.... 9
Comparative Per Share Data and Dividend
History..................................... 11
Comparative Stock Price Data and Dividend
History..................................... 12
RISK FACTORS.................................... 14
Integration of Operations; Adverse Effect on
Financial Results........................... 14
Potential Dilutive Effect to Shareholders..... 14
Depletion of Escrow Amount.................... 14
Potential Unavailability of "Reorganization"
Tax Treatment of Merger..................... 15
Conflict of Interest of Certain Directors and
Shareholders of Invetech.................... 15
Risks Attendant to Future Acquisitions........ 15
Highly Competitive Markets.................... 15
Change in Relationship with Manufacturers..... 16
General Market Conditions..................... 16
THE MERGER...................................... 16
General....................................... 16
Background of the Merger...................... 18
Approval of Applied Board of Directors;
Reasons for Merger.......................... 20
Recommendation and Approval of Invetech Board
of Directors; Reasons for Merger............ 20
Opinion of Invetech's Financial Advisor....... 21
Appraisal Rights.............................. 23
Certain Federal Income Tax Consequences of the
Merger...................................... 23
Accounting Treatment.......................... 24
Regulatory Matters............................ 24
INVETECH SPECIAL MEETING........................ 25
INTERESTS OF CERTAIN PERSONS IN THE MERGER...... 25
RESALE OF APPLIED COMMON STOCK.................. 27
THE MERGER AGREEMENT............................ 28
General....................................... 28
Merger Consideration.......................... 28
Election Procedures Regarding Merger
Consideration............................... 29
Escrow Amount................................. 29
Closing Date.................................. 29
Conversion and Exchange of Shares............. 30
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Business of Invetech Pending the Merger....... 30
Solicitation of Alternative Transactions...... 30
Corporate Structure and Related Matters After
the Merger.................................. 31
Certain Covenants............................. 31
Indemnification............................... 31
Conditions to the Merger...................... 33
Termination or Amendment of the Merger
Agreement; Termination Fee.................. 34
Fees and Expenses............................. 34
Confidentiality Agreements.................... 34
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS.................................... 35
APPLIED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 40
INFORMATION CONCERNING APPLIED.................. 45
Description of Business....................... 45
General Development of the Business........... 45
Financial Information about Industry
Segments.................................... 45
Narrative Description of the Business......... 45
Properties.................................... 48
Pending Legal Proceedings..................... 49
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF
PRINCIPAL APPLIED SHAREHOLDERS AND
MANAGEMENT.................................... 50
MANAGEMENT OF APPLIED........................... 51
Executive Officers............................ 51
Directors..................................... 52
COMPENSATION OF DIRECTORS AND EXECUTIVE
OFFICERS...................................... 55
Summary Compensation Table.................... 55
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values........... 57
Report of the Compensation Committee.......... 59
Director Compensation......................... 61
INVETECH MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 63
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF
PRINCIPAL INVETECH STOCKHOLDERS AND
MANAGEMENT.................................... 65
INFORMATION CONCERNING INVETECH................. 67
DESCRIPTION OF APPLIED CAPITAL STOCK............ 69
Common Stock.................................. 69
Preferred Stock............................... 69
Transfer Agent and Registrar.................. 69
COMPARISON OF RIGHTS OF HOLDERS OF APPLIED
COMMON STOCK AND INVETECH COMMON STOCK........ 70
EXPERTS......................................... 72
LEGAL MATTERS................................... 72
INDEX TO FINANCIAL STATEMENTS................... F-1
ANNEX A Plan and Agreement of Merger............ A-1
ANNEX B Escrow Agreement........................ B-1
ANNEX C Oppenheimer & Co., Inc. Opinion......... C-1
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus and is hereby qualified in its entirety by reference to the full
text of this Prospectus and the annexes hereto. Holders of Invetech Common Stock
are urged to read this Prospectus and the accompanying annexes in their
entirety. See "Risk Factors" for certain information that should be considered
in connection with the Merger. Information set forth herein concerning Applied,
Merger Sub and their respective affiliates has been furnished by Applied and
information set forth herein concerning Invetech and its affiliates has been
furnished by Invetech. This Prospectus contains certain information set forth
more fully in the Merger Agreement and Escrow Agreement attached as Annexes A
and B hereto, respectively, and is qualified by reference to the Merger
Agreement and Escrow Agreement, which are hereby incorporated by reference. The
Merger Agreement and Escrow Agreement should be read carefully by each recipient
of this Prospectus.
THE COMPANIES
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
Applied Industrial Technologies, Inc. is an Ohio corporation that, directly
and through its subsidiaries (Applied and its subsidiaries shall be referred to
herein collectively as "Applied"), engages in the distribution and sale of ball,
roller, thrust, plane and linear type bearings, mechanical and electrical drive
system products, industrial rubber products, fluid power products and specialty
items used in connection with the foregoing such as seals, lubricants, locking
devices, sealing compounds, adhesives and maintenance tools. Although Applied
does not generally manufacture the products that it sells, it does assemble
filter carts, fluid power components, hydraulic power units, hydraulic and
pneumatic cylinders, speed reducers and electrical panels, modify conveyor belts
and rebuild precision machine tool spindles.
Applied's sales personnel advise and assist customers with respect to
product selection and application. Applied considers this advice and assistance
to be an integral part of its overall sales efforts. Beyond acting as a mere
distributor, Applied markets itself to selected customers as a "single-source"
applied technology supplier, offering product and process solutions involving
multiple product technologies, which solutions reduce production downtime and
overall procurement and maintenance costs for customers. By providing a high
level of service, product knowledge and technical support, while at the same
time offering competitive pricing, Applied seeks to develop closer,
longer-lasting and more profitable relationships with its customers.
Applied purchases from over 100 major suppliers of bearings, drive system
products, industrial rubber products, fluid power products and specialty items
and resells to customers in a wide variety of industries, including industrial
machinery, forest products, primary metals, agriculture and food processing,
chemical processing, transportation, mining, textiles and utilities. Its
customers range from the largest industrial concerns in the country to the
smallest. No single customer of Applied accounts for more than 3% of Applied's
net sales taken as a whole.
Applied and its predecessor companies have been engaged in this business
since 1923. Applied was incorporated pursuant to the laws of Delaware in 1928
and reincorporated from Delaware to Ohio in 1988. Applied, formerly known as
Bearings, Inc., adopted its current name as of January 1, 1997. Applied's
executive offices are located at One Applied Plaza, Cleveland, Ohio 44115 and
its telephone number is (216) 426-4000.
INVETECH COMPANY
INVETECH Company, a Michigan corporation, and its wholly owned
subsidiaries, American Bearing and Power Transmission, Inc., a Michigan
corporation, and Moore Bearing Co., a Michigan corporation (Invetech and its
subsidiaries shall be referred to herein collectively as "Invetech") engage in
the distribution and sale of bearings, mechanical and electrical drive system
products, industrial rubber products and specialty maintenance and repair
products manufactured by others. Although Invetech does not manufacture the
products that it sells, it assembles hydraulic and general purpose hose
assemblies and power transmission
1
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products. Invetech has a machine shop at its Fort Street facility in Detroit,
Michigan which specializes in bearing reconditioning, reducer rebuilds and
repair, and machining and alterations.
Invetech is a non-exclusive distributor for numerous manufacturers of the
products it sells. Invetech purchases from over 100 major suppliers and resells
to a wide range of customers, including automotive companies, industrial plants,
machine shops, mines, paper mills, textile mills, food processing plants,
agricultural concerns and other enterprises.
Invetech's sales personnel advise and assist customers with respect to
product selection and application. Invetech offers product and process solutions
involving multiple technologies in an effort to reduce production downtime and
overall procurement and maintenance costs for customers. Invetech believes it
offers high levels of service, product knowledge and technical support as well
as competitive pricing.
Invetech's sales personnel include inside customer service representatives
assigned to each branch who receive, process and expedite customer orders and
assist in servicing customers. In addition, each branch has field account
representatives who make on-site calls to customers and potential customers to
provide product and pricing information, engineering assistance and other cost
savings services to its customers. Invetech employs a number of product
specialists to assist customers with applications in their particular area of
expertise.
Invetech, formerly Detroit Ball Bearing Company of Michigan, was
incorporated in 1917. Invetech's principal executive offices are located at 1400
Howard Street, Detroit, Michigan 48216 and its telephone number is (313)
963-6011.
MERGER SUB
I.C. Acquisition Corp., herein referred to as Merger Sub, is a wholly owned
subsidiary of Applied recently organized under the Ohio General Corporation Law
for the purpose of effecting the acquisition of Invetech. Merger Sub has no
material assets and has not engaged in any activities except in connection with
the proposed acquisition. Merger Sub's executive offices are located at One
Applied Plaza, Cleveland, Ohio 44115 and its telephone number is (216) 426-4000.
THE MERGER
GENERAL
This Prospectus relates to up to 2,300,000 shares of Applied Common Stock
that may be issued in connection with the merger of Invetech with and into
Merger Sub. The Merger is conditioned upon, among other things, approval of the
Merger Agreement by the Invetech Shareholders at a special meeting called for
that purpose. Each share of Invetech Class A Common Stock and Invetech Class B
Common Stock is entitled to one vote regarding approval of the Merger Agreement.
The affirmative vote of the holders of at least a majority of the shares of the
outstanding Invetech Class A Common Stock and the Invetech Class B Common Stock,
voting separately as classes, is required for approval of the Merger Agreement.
Pursuant to the Merger Agreement, J. Michael Moore and James T. Moore II,
directors and executive officers of Invetech, who together beneficially own 100%
of the outstanding shares of Invetech Class A Common Stock and approximately
26.7% of Invetech Class B Common Stock, have agreed to vote their respective
shares in favor of the Merger. Invetech Shareholders will not be entitled to
appraisal or dissenters' rights in connection with the Merger pursuant to
Section 762(2)(b) of the Michigan Business Corporation Act. See "Invetech
Special Meeting."
The Merger is intended to qualify as a reorganization for federal income
tax purposes upon which no gain or loss will be recognized by Invetech
Shareholders with respect to shares of Applied Common Stock received in the
Merger. However, gain, but not loss, will be recognized to the extent Invetech
Shareholders receive cash in the Merger. Upon consummation of the Merger, the
separate corporate existence of Invetech shall cease and Merger Sub will succeed
to all of the rights, franchises, assets, liabilities and business of Invetech.
Merger Sub will thereafter continue to conduct business as a wholly owned
subsidiary of Applied. By approving the Merger and the Merger Agreement, the
Invetech Shareholders shall also thereby agree to be bound by the
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terms of the Escrow Agreement and the lock-up letter attached as Exhibit B to
the Merger Agreement. In addition, by virtue of the Merger, at the Effective
Time, all existing stock redemption agreements and shareholder agreements
between Invetech and any Invetech Shareholder(s) shall be deemed to have been
terminated and shall have no further force or effect. Following the Effective
Time, to the extent the Invetech Shareholders receive shares of Applied Common
Stock in the Merger, the rights of such Invetech Shareholders will be governed
by Applied's Articles of Incorporation, Code of Regulations and the agreement of
merger and plan of reorganization between Bearings, Inc. (Ohio) and Bearings,
Inc. (Delaware) dated as of September 6, 1988.
MERGER CONSIDERATION
In the Merger, all outstanding shares of the Invetech Common Stock will be
converted into the right to receive shares of Applied Common Stock and cash, in
the proportion designated by Invetech based upon preference specification forms
solicited by Invetech from the Invetech Shareholders in connection with the
Special Meeting of Invetech Shareholders (see "The Merger -- Election Procedures
Regarding Merger Consideration"). The aggregate value of Applied Common Stock
and cash to be paid to Invetech Shareholders will be Eighty-Three Million
Dollars ($83,000,000) (the "Merger Consideration"); provided, however, in no
event shall more than Two Million Three Hundred Thousand (2,300,000) shares of
Applied Common Stock be issuable in connection with the Merger. The Merger
Consideration is allocable (i) 15% to the holders of Invetech Class A Common
Stock and (ii) 85% to the holders of Invetech Class B Common Stock, on a pro
rata basis to each holder's percentage interest in each class of Invetech Common
Stock. For purposes of computing the Merger Consideration, each share of Applied
Common Stock will be assigned a value of Twenty-Eight Dollars and Sixty-Two
Cents ($28.62), which was the average closing sale price of Applied Common Stock
on NYSE for the twenty business days preceding February 5, 1997 (the day Applied
executed the letter of intent relating to the Merger). The Merger Consideration
is subject to adjustment on a dollar for dollar basis to the extent that the
shareholders' equity of Invetech, as reflected on the Closing Balance Sheet,
reduced as provided in the Merger Agreement for all transaction costs and
certain other expenses incurred by Invetech in connection with the Merger, is
greater than or less than Forty-Six Million Dollars ($46,000,000). In addition,
Applied shall pay interest on the Merger Consideration, as adjusted, in an
amount equal to the product of (x) the Merger Consideration, as adjusted, (y)
the number of days elapsed between the date of the Closing Balance Sheet and the
date of the Closing, and (z) 0.0002191.
No fractional shares of Applied Common Stock will be issued in connection
with the Merger. Each Invetech Shareholder otherwise entitled to a fractional
share of Applied Common Stock will receive an amount of cash in lieu thereof,
rounded up to the nearest cent, determined by multiplying (i) Twenty-Eight
Dollars and Sixty-Two Cents ($28.62) by (ii) the fractional interest to which
such Invetech Shareholder would otherwise be entitled.
As of June 30, 1997, there were 20,000 shares of Invetech Class A Common
Stock and 2,075,391 shares of Invetech Class B Common Stock outstanding and
approximately 50 shareholders of record of Invetech Class B Common Stock. If the
Merger is approved, each share of Invetech Class B Common Stock may be exchanged
for $33.9936 of Merger Consideration and each share of Invetech Class A Common
Stock may be exchanged for $622.50 of Merger Consideration (without giving
effect to the adjustment relating to the shareholders' equity of Invetech as
reflected on the Closing Balance Sheet or interest to be paid on the Merger
Consideration, as described above). For purposes of computing per share Merger
Consideration, each share of Applied Common Stock will be assigned a value of
Twenty-Eight Dollars and Sixty-Two Cents ($28.62).
The allocation of the Merger Consideration between the holders of Invetech
Class A Common Stock and Invetech Class B Common Stock was determined pursuant
to negotiations between the holders of the Invetech Class A Common Stock and the
holders of the Invetech Class B Common Stock. As a result of such negotiations,
the Invetech Company Shareholder Agreement dated July 16, 1996 was executed,
which agreement provides for the 15%-85% allocation of consideration upon a sale
of Invetech which includes the Merger. Invetech believes that the primary factor
considered by the Invetech Shareholders in determining the allocation was the
control premium attributable to the Invetech Class A Common Stock. The holders
of the Invetech Class A Common Stock have the sole right to elect the Board of
Directors of Invetech and must
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approve any sale of Invetech or similar transaction such as the Merger.
Consequently, the Invetech Class B Common Stock shareholders, acting alone, have
no right to effect a sale of Invetech or otherwise obtain liquidity for their
shares. See "The Merger -- Background of the Merger."
See "'Election Procedures Regarding Merger Consideration" below for
examples of the per share consideration to be received for the Invetech Class A
Common Stock and the Invetech Class B Common Stock.
On June 30, 1997, the closing sale price for Applied Common Stock as
reported on the NYSE Composite Tape was $36.00 per share. Consummation of the
Merger is subject to the condition that the closing price of Applied Common
Stock not exceed $38.00 per share, nor be less than $24.875 per share, on any
day subsequent to April 29, 1997. As of the date of this Prospectus, this
condition has not been triggered and, if subsequently triggered, may be waived
by Applied in the event such closing price exceeds $38.00 or by Invetech in the
event such closing price is less than $24.875. Neither Applied nor Invetech have
formed any intention with respect to such condition in the event it is
triggered.
ELECTION PROCEDURES REGARDING MERGER CONSIDERATION
In connection with seeking approval by the Invetech Shareholders of the
Merger Agreement and the Merger, Invetech will deliver to each Invetech
Shareholder a merger consideration election form (the "Preference
Specification"). The Preference Specification will allow each Invetech
Shareholder to indicate his or her preference with respect to the portions of
the Merger Consideration that such Invetech Shareholder would like to receive in
Applied Common Stock and cash. Each Invetech Shareholder will be given the
choice to elect to receive 78%, 70%, 60% or 50% of the aggregate Merger
Consideration payable to such Invetech Shareholder in Applied Common Stock (at a
value of $28.62 per share), with the balance of such Merger Consideration to be
payable in cash. From such amounts, cash equal to approximately 12.05% of the
Merger Consideration payable to each Invetech Shareholder will be deposited in
the Escrow Account by Applied. See "The Merger -- Escrow Amount" and "--
Indemnification." The Preference Specification completed by each Invetech
Shareholder will apply to all shares of Invetech Common Stock held by such
Invetech Shareholder. A Preference Specification will only be effective if
Invetech shall have received the Preference Specification properly completed and
signed not less than five (5) business days prior to the Effective Time. In the
event that a properly completed and signed Preference Specification for any
Invetech Shareholder is not received by Invetech by such date, such Invetech
Shareholder shall be entitled to receive Merger Consideration allocated fifty
percent (50%) to Applied Common Stock (at a value of $28.62 per share) and fifty
percent (50%) to cash.
The right to elect to receive 78%, 70%, 60% or 50% of the aggregate Merger
Consideration payable to each Invetech Shareholder in Applied Common Stock (at a
value of $28.62 per share), with the balance of such Merger Consideration
payable in cash, was determined by the management of Invetech based upon the
following considerations: (i) the 50% minimum was chosen to assure that the
Merger will qualify as a reorganization for federal income tax purposes (see
"The Merger -- Certain Federal Income Tax Consequences of the Merger"); (ii) the
78% maximum was selected to assure that the maximum amount of Applied Common
Stock elected by Invetech Shareholders would not exceed the 2,300,000 shares of
Applied Common Stock issuable in connection with the Merger; and (iii) the 70%
and 60% choices were selected arbitrarily to provide more flexibility for the
Invetech Shareholders. The management of Invetech determined that utilizing four
choices would allow for efficient administration of the selection process while
providing a reasonable amount of flexibility for each Invetech Shareholder. The
following table sets forth examples of the consideration (rounded to the nearest
whole cent and one-hundredth of a share) to be received by the
4
<PAGE> 11
Invetech Shareholders for each share of the Invetech Class A Common Stock and
the Invetech Class B Common Stock, pursuant to each of the four percentage
choices:
<TABLE>
<CAPTION>
CONSIDERATION TO BE CONSIDERATION TO BE
RECEIVED FOR EACH SHARE RECEIVED FOR EACH SHARE
PERCENTAGE OF OF INVETECH CLASS B COMMON STOCK OF INVETECH CLASS A COMMON STOCK
APPLIED COMMON -------------------------------- ---------------------------------
STOCK CASH APPLIED STOCK CASH APPLIED STOCK
- -------------- ------ --------------------- ------- ---------------------
<S> <C> <C> <C> <C>
50% $17.00 .59 shares $311.25 10.88 shares
60% $13.60 .71 shares $249.00 13.05 shares
70% $10.20 .83 shares $186.75 15.23 shares
78% $ 7.48 .93 shares $136.95 16.97 shares
</TABLE>
The portion of the Merger Consideration to be received by an Invetech
Shareholder in Applied Common Stock will be valued at $28.62 per share for
purposes of determining the number of shares of Applied Common Stock to be
delivered to such Invetech Shareholder. On June 30, 1997, the closing sale price
for Applied Common Stock, as reported on the NYSE Composite Tape, was $36.00 per
share. To the extent an Invetech Shareholder elects to receive Merger
Consideration allocated to Applied Common Stock, such Invetech Shareholder will
receive a premium or discount equal to the difference between the market price
of each share of Applied Common Stock received and $28.62. As of June 30, 1997,
the premium would have been $7.38 per share of Applied Common Stock. However, by
approving the Merger and Merger Agreement, the Invetech Shareholders shall also
thereby agree to be bound by the terms of the lock-up letter attached as Exhibit
B to the Merger Agreement whereby each Invetech Shareholder will agree not to
sell any Applied Common Stock received in connection with the Merger prior to
January 1, 1998 unless the Invetech Shareholder first furnishes to Applied an
opinion of a national recognized tax counsel to the effect that the proposed
disposition will not affect the status of the Merger as a tax-free
reorganization under Section 368(a) of the Code. There can be no assurances that
the market price of Applied Common Stock will not decline prior to January 1,
1998.
ESCROW AMOUNT
At the effective time, Ten Million Dollars ($10,000,000) of the cash
portion of the Merger Consideration or 12.05% of the aggregate Merger
Consideration will be deposited into an escrow account (the "Escrow Account") to
secure the indemnification obligations of Invetech under the Merger Agreement.
See "The Merger Agreement -- Escrow Amount" and "-- Indemnification." The
aggregate amount of cash received by Invetech Shareholders as part of the Merger
Consideration will be reduced by: (i) $1.5 million contributed by the holders of
Invetech Class A Common Stock; and (ii) $8.5 million contributed by the holders
of Invetech Class B Common Stock, on a pro rata basis as to each holder's
percentage interest in each class of Invetech Common Stock. The amount of cash
deposited into the Escrow Account will be Seventy-Five Dollars ($75.00) per
share of Invetech Class A Common Stock and approximately Forty Dollars and
Ninety-Six Cents ($40.96) per share of Invetech Class B Common Stock and such
amount will not be affected by the Invetech Shareholders' Preference
Specifications.
Subject to the prior lien of any claims for indemnification asserted by
Applied which have not yet been paid from the Escrow Account, the Escrow Amount
will be reduced to Five Million Dollars ($5,000,000) on January 1, 2000 and Two
Million Five Hundred Thousand Dollars ($2,500,000) on April 1, 2001 and all
amounts held in excess of the then applicable Escrow Amount shall be distributed
to Invetech Shareholders in proportion to their respective interests. Unless the
entire Escrow Amount shall have been paid to Applied in satisfaction of the
indemnification obligations of Invetech (upon which the escrow will terminate),
the escrow will terminate on the later of (i) five years following the Effective
Time, and (ii) the date upon which all claims for indemnification made by
Applied pursuant to the Merger Agreement and Escrow Agreement have been resolved
and all amounts then held in the Escrow Account will be distributed to the
Invetech Shareholders. See "The Merger Agreement -- Escrow Amount" and "--
Indemnification."
5
<PAGE> 12
CLOSING DATE
The closing of the transactions contemplated by the Merger Agreement (the
"Closing") shall take place as soon as practicable after the satisfaction or
waiver of each of the conditions to Merger (the "Closing Date"), unless Applied
and Invetech agree that the Closing should occur at some other time, as
specified in the Merger Agreement. See "The Merger Agreement -- Conditions to
the Merger."
EFFECTIVE TIME
The Merger will become effective (the "Effective Time") following the
Closing upon the later to occur of (i) the filing of a certificate of merger
with the Secretary of State of the State of Ohio and (ii) the filing of a
certificate of merger with the Corporation, Securities and Land Development
Bureau of the State of Michigan. Except for certain pre-merger notification
requirements under federal antitrust laws and for compliance with federal and
state securities laws requirements, each of which requirements have been
satisfied, the Merger is not subject to any other federal or state regulatory
requirements. See "The Merger -- Regulatory Matters."
CONDITIONS TO MERGER
Consummation of the Merger is subject to the satisfaction of various
conditions, including, without limitation, (i) the approval of the Merger
Agreement and the transactions contemplated therein by the Invetech
Shareholders, (ii) receipt by Invetech and Applied of certain opinions of
counsel, including receipt by Invetech of an opinion of counsel regarding tax
matters, (iii) the effectiveness of the Registration Statement (of which this
Prospectus is a part) with respect to the Applied Common Stock to be issued in
connection with the Merger and approval for listing of such shares on NYSE, (iv)
the continuing accuracy as of the Effective Time of the representations and
warranties made by and the performance of all covenants and agreements of
Applied, Invetech and the Merger Sub in the Merger Agreement, (v) Applied being
satisfied with the environmental condition of the real property of Invetech,
(vi) Applied being satisfied that the shareholders' equity of Invetech as of
December 31, 1996 and as of the Closing is not less than Forty-One Million
Dollars ($41,000,000) nor greater than Fifty-One Million Dollars ($51,000,000),
(vii) Applied being satisfied that certain benefit plans and agreements to which
Invetech and certain of its current or former directors, officers or employees
were parties have been terminated and all obligations thereunder have been
discharged, (viii) the execution of certain employment, consulting,
noncompetition and confidentiality agreements between Applied and certain
shareholders, directors, officers and employees of Invetech, (ix) the closing
price of Applied Common Stock not exceeding $38.00 nor being less than $24.875
on any day subsequent to April 29, 1997 (the date of the Merger Agreement), (x)
no material adverse change having occurred with respect to the business of
Invetech, (xi) Applied being reasonably satisfied that all material customers,
product vendors, suppliers, sales representatives and employees of Invetech will
continue their respective relationships with Applied following the Effective
Time, (xii) the absence of any restraining order, injunction or other legal
restraint prohibiting consummation of the Merger, and (xiii) consent having been
obtained by Invetech to the assignment by Invetech of certain intellectual
property rights in the Variable Curvilinear Recirculating Element Bearing and a
Traveling Windlass Drive Mechanism, also referred to as the Motion
Roller/Bearing Assembly, to MRBA Company.
Any of the aforementioned conditions to the obligation of the respective
parties to consummate the Merger may be waived by such party prior to or
following approval by the Invetech Shareholders of the Merger Agreement and the
transactions contemplated thereby. For a complete list of conditions to each
party's obligation to consummate the Merger, see "The Merger
Agreement -- Conditions to the Merger."
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
prior to the Effective Time under certain circumstances specified in the Merger
Agreement, including, without limitation, (i) by mutual written agreement of
Applied and Invetech, (ii) by either party, if the Merger shall not have been
consummated by July 31, 1997 or if there is issued any permanent restraining
order, injunction or other legal restraint prohibiting consummation of the
Merger, (iii) by Invetech, in the event the Board of Directors of
6
<PAGE> 13
Invetech, acting in good faith, determines that it is required, in order to
discharge properly its fiduciary duties to the Invetech Shareholders, to
withdraw, modify or change its approval of this Merger Agreement or the
transactions set forth therein or, by Applied, if the Board of Directors of
Invetech takes any such action, (iv) by either party, if the Invetech
Shareholders fail to approve the Merger, or (v) by either party, upon a breach
by the other party which results or would reasonably be expected to result in an
adverse effect on the non-breaching party of Three Million Dollars ($3,000,000)
or more before taxes. See "The Merger Agreement -- Termination or Amendment of
the Merger Agreement."
NO SOLICITATION; TERMINATION FEE
Invetech has agreed that it will not, prior to the Effective Time,
initiate, solicit, or participate in discussions with any other party relating
to, or enter into any acquisition proposal or other transaction, the
consummation of which could prevent or materially delay the Merger, except to
the extent the Board of Directors of Invetech reasonably determines that failure
to take such action would constitute a breach of its fiduciary duties to the
Invetech Shareholders; provided, however, if (x) prior to termination of this
Agreement, any person other than Applied and its affiliates shall have
commenced, proposed or communicated to Invetech an Acquisition Proposal (as
defined in Section 4.2(c) of the Merger Agreement) and (y) within one year of
termination of the Merger Agreement, such person, or any affiliate of such
person, enters into any definitive agreement to effect a transaction
contemplated by such Acquisition Proposal (or which is related thereto), then
Invetech shall pay to Applied within five business days following consummation
of the transaction that was contemplated by the Acquisition Proposal a
termination fee of Three Million Dollars ($3,000,000). See "The Merger
Agreement -- Solicitation of Alternative Transactions" and "-- Termination or
Amendment of the Merger Agreement; Termination Fee."
APPROVAL AND RECOMMENDATION OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER
The Boards of Directors of Applied and Invetech have unanimously approved
the Merger and the Merger Agreement and the Board of Directors of Invetech has
recommended the Merger to the Invetech Shareholders. During their respective
evaluations of the Merger, each Board considered a number of potential benefits
resulting to its shareholders from the Merger, including those benefits which
may be realized as a result of the complementary nature of the businesses of
Applied and Invetech, the opportunity for the combined company to achieve
increased economies of scale and operational efficiency and the enhanced ability
of the combined company to attract top quality employees, suppliers and
customers. Each Board considered the risks that the potential benefits of the
Merger may not be realized and that the Merger may result in a possible loss of
customers or suppliers or dilution in their respective shareholders' investments
in shares of Applied Common Stock. See "Risk Factors."
For a discussion of the factors considered by the respective Boards of
Directors in reaching their decisions to approve the Merger, see "The
Merger -- Approval of Applied Board of Directors; Reasons for Merger" and "The
Merger -- Recommendation and Approval of Invetech Board of Directors; Reasons
for Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a reorganization (a "Reorganization")
for federal income tax purposes under Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), upon which no gain or loss will be
recognized for federal income tax purposes by Invetech Shareholders with respect
to shares of Applied Common Stock received in exchange for their shares of
Invetech Common Stock. However, gain, but not loss, if any, will be recognized
to the extent that Invetech Shareholders receive cash in exchange for their
shares of Invetech Common Stock. Consummation of the Merger is conditioned upon
receipt by Invetech of an opinion from its legal counsel to that effect. Receipt
of the aforementioned legal opinion may be waived by Invetech as a condition to
consummation of the Merger. Neither party intends to seek a ruling from the
Internal Revenue Service regarding the federal income tax consequences of the
Merger. The Merger will have no tax consequences to shareholders of Applied. ALL
INVETECH SHAREHOLDERS SHOULD READ CAREFULLY THE DISCUSSION UNDER "The
Merger -- Certain Federal Income Tax Consequences of the Merger" and "The Merger
Agreement -- Conditions to the Merger."
7
<PAGE> 14
RESALE OF APPLIED COMMON STOCK
For the purpose of ensuring qualification of the Merger as a tax-free
reorganization for federal income tax purposes, in connection with the Merger,
each Invetech Shareholder will be required to execute a "lock up" letter in the
form attached as Exhibit B to the Merger Agreement. The lock up letter prohibits
each Invetech Shareholder from disposing of any shares of Applied Common Stock
obtained in the Merger prior to January 1, 1998, without first delivering an
opinion of counsel satisfactory in form and substance to Applied to the effect
that such disposition will not violate the continuity of shareholder interest
requirement set forth in Section 1.368-1 of the official Treasury Department
interpretation of the Code.
Certain persons who are deemed to be "affiliates" of Invetech immediately
prior to the Merger will be subject to additional restrictions relating to
future resales of Applied Common Stock received in the Merger pursuant to Rule
145 under the Securities Act of 1933, as amended (the "Securities Act"). See
"Resale of Applied Common Stock".
ACCOUNTING TREATMENT OF MERGER
The Merger will be accounted for by Applied as a purchase of Invetech for
financial accounting purposes in accordance with generally accepted accounting
principles.
8
<PAGE> 15
SELECTED HISTORICAL CONSOLIDATED AND UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION
The following selected historical consolidated financial information of
Applied and Invetech has been derived from their respective historical
consolidated financial statements, and should be read in conjunction with such
consolidated financial statements and the footnotes thereto, which are included
in this Prospectus. The selected Applied historical consolidated financial
information as of and for the nine months ended March 31, 1997 and the selected
Invetech historical consolidated financial information as of and for the three
months ended March 31, 1997 presented below have been prepared on the same basis
as the historical information derived from the audited financial statements and
in the opinion of management of Applied and Invetech, respectively, include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the financial position and results of operations of Applied as
of and for the nine months ended March 31, 1997 and Invetech as of and for the
three months ended March 31, 1997.
The selected unaudited pro forma combined financial information has been
derived from the pro forma combined condensed financial statements and should be
read in conjunction with such pro forma statements and the notes thereto, which
are included in this Prospectus. These pro forma statements have been prepared
as if the acquisition (to be accounted for as a purchase of Invetech) was
consummated at the beginning of the fiscal year ended June 30, 1996.
The selected unaudited pro forma combined financial information is
presented for illustrative purposes and is not necessarily indicative of the
combined financial position or combined results of operations that would have
been reported had the acquisition occurred on the dates indicated, nor do the
pro forma financial statements represent a forecast of the combined financial
position or results of operations for any future period. The selected unaudited
pro forma combined financial information does not include the effect on the
results of operations of a $3.7 million pre-tax nonrecurring charge for the
accrual of estimated costs associated with the acquisition of Invetech,
including the consolidation of operations of certain facilities, along with
costs relating to certain duplicative assets. This charge principally includes
accruals for severance costs, lease termination costs, and disposal of
duplicative capital assets. The charge will be recorded in the period in which
the acquisition is consummated. This pro forma financial information does not
include any favorable effect on selling, distribution and administrative
expenses resulting from the planned reduction in expenses, primarily salaries
and employee benefits, upon consolidation of certain facilities and
administrative functions of the two companies. The impact of the reductions is
estimated to be approximately $15 million per year before the effect of income
taxes.
9
<PAGE> 16
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, NINE MONTHS ENDED
-------------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
-------- -------- -------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales................ $817,813 $831,432 $936,254 $1,054,809 $1,143,749 $ 854,431
Net income (loss)........ (1,666) 8,927 12,687 16,909 23,334 18,163
Net income (loss) per
share.................. (0.16) 0.82 1.12 1.46 1.90 1.47
Cash dividends per
share.................. 0.43 0.43 0.43 0.47 0.54 0.46
Total assets............. 330,619 315,935 343,519 359,231 404,072 397,779
Total long-term
obligations............ -- 80,000 80,000 74,286 62,857 57,143
Shareholders' equity..... 128,830 134,940 150,491 165,401 189,292 199,341
</TABLE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF
INVETECH COMPANY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
---------------------------------------------------- ENDED MARCH 31,
1992* 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $221,658 $246,859 $280,313 $313,913 $314,318 $ 83,360
Income before cumulative
effect of change in
accounting principle........ 2,602 3,554 4,655 4,215 5,089 1,702
Income per share before
cumulative effect of change
in accounting principle..... 0.88 1.24 1.62 2.01 2.43 0.81
Cash dividends per share...... 0.16 0.24 0.32 0.37 0.47 0.04
Total assets.................. 89,810 90,486 98,458 107,697 101,477 104,069
Total long-term obligations... 8,149 8,662 11,341 28,162 8,517 8,517
Stockholders' equity.......... 43,282 45,144 49,034 42,816 46,920 48,538
</TABLE>
- ---------------
* In 1992, the amounts indicated above exclude the cumulative effect of
accounting change to adopt SFAS No. 106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions."
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION OF APPLIED INDUSTRIAL TECHNOLOGIES, INC.
AND INVETECH COMPANY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
JUNE 30, MARCH 31,
1996 1997
----------------- -----------------
<S> <C> <C>
Net sales.................................................. $ 1,454,596 $ 1,092,405
Net income................................................. 24,443 19,904
Net income per share....................................... 1.67 1.35
Cash dividends per share................................... 0.54 0.46
Total assets............................................... 565,334 560,444
Total long-term obligations................................ 89,057 65,660
</TABLE>
10
<PAGE> 17
COMPARATIVE PER SHARE DATA AND DIVIDEND HISTORY
The following tables set forth certain historical per share data of Applied
and Invetech and combined per share data on an unaudited pro forma basis after
giving effect to the acquisition using the purchase method of accounting. The
information set forth below should be read in conjunction with the selected
historical consolidated financial information, the unaudited pro forma combined
condensed financial statements and the separate historical consolidated
financial statements of Applied and Invetech and notes thereto. The unaudited
pro forma combined condensed information is provided for illustrative purposes
and is not necessarily indicative of the combined financial position or combined
results of operations that would have been reported had the acquisition occurred
on the dates indicated, nor does the unaudited pro forma combined condensed
financial information represent a forecast of the combined financial position or
results of operations for any future period.
SELECTED HISTORICAL PER SHARE DATA OF
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, NINE MONTHS ENDED
------------------------------------------ MARCH 31,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Book value per share(1)............... $12.09 $11.97 $13.30 $13.59 $15.29 $ 16.11
Cash dividends per share.............. 0.43 0.43 0.43 0.47 0.54 0.46
Net income per share.................. (0.16) 0.82 1.12 1.46 1.90 1.47
</TABLE>
SELECTED HISTORICAL PER SHARE DATA OF INVETECH COMPANY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------ MARCH 31,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Book value per share(1)................. $14.70 $15.70 $17.05 $20.43 $22.39 $23.16
Cash dividends per share................ 0.16 0.24 0.32 0.37 0.47 0.04
Income per share before cumulative
effect of change in accounting
principle............................. 0.88 1.24 1.62 2.01 2.43 0.81
</TABLE>
SELECTED UNAUDITED PRO FORMA COMBINED PER SHARE INFORMATION OF APPLIED
INDUSTRIAL TECHNOLOGIES, INC. AND INVETECH COMPANY AND EQUIVALENT
PRO FORMA PER SHARE INFORMATION OF INVETECH COMPANY
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
JUNE 30, MARCH 31,
1996 1997
----------------- -----------------
<S> <C> <C>
Book value per share (1)................................... $ 17.61 $ 18.31
Cash dividends per share................................... 0.54 0.46
Net income per share....................................... 1.67 1.35
Equivalent pro forma book value per Invetech share(2)...... 19.33 20.10
Equivalent pro forma cash dividends per Invetech
share(2)................................................. 0.59 0.50
Equivalent pro forma net income per Invetech share(2)...... 1.83 1.48
</TABLE>
NOTES TO THE COMPARATIVE PER SHARE DATA
(1) -- Historical book value per share is computed by dividing total
shareholders' equity by the number of common shares outstanding at the end of
each period. Pro forma combined book value per share is computed by dividing pro
forma shareholders' equity by the pro forma number of shares of Applied Common
Stock outstanding after consideration of the projected issuance of 2.3 million
shares to effect the acquisition.
(2) -- The pro forma equivalent book value, cash dividends and net income
per Invetech share information are computed by multiplying the respective pro
forma combined information by the exchange ratio of 1.0978. The exchange ratio
is computed by dividing the projected number of shares of Applied Common Stock
(2.3 million) to be issued by the number of outstanding shares of Invetech
Common Stock (2.095 million).
11
<PAGE> 18
COMPARATIVE STOCK PRICE DATA AND DIVIDEND HISTORY
There is no public trading market for the Invetech Class A Common Stock or
the Invetech Class B Common Stock and there is no published information with
respect to its market price. Invetech is not aware of any trading in Invetech's
Class A Common Stock or Class B Common Stock during the past three years, except
that Invetech purchased 780,755 shares of its Class B Common Stock in January,
1995, at a price of $12.37 per share.
Applied Common Stock is listed on NYSE under the trading symbol "APZ." The
following table sets forth, for the periods indicated, the quarterly high and
low sale prices and dividend history per share of Applied Common Stock (as
adjusted to give effect to a three-for-two stock split effected in December
1995).
APPLIED COMMON STOCK
FOR FISCAL YEARS 1995 TO DATE
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------ ------ --------
<S> <C> <C> <C>
First quarter ended September 30, 1994................. $22.17 $20.17 $ 0.11
Second quarter ended December 31, 1994................. 23.09 20.42 0.12
Third quarter ended March 31, 1995..................... 22.67 18.83 0.12
Fourth quarter ended June 30, 1995..................... 21.50 18.33 0.12
First quarter ended September 30, 1995................. 22.67 20.08 0.12
Second quarter ended December 31, 1995................. 29.63 22.50 0.14
Third quarter ended March 31, 1996..................... 29.38 24.00 0.14
Fourth quarter ended June 30, 1996..................... 33.75 26.75 0.14
First quarter ended September 30, 1996................. 31.13 25.63 0.14
Second quarter ended December 31, 1996................. 29.25 25.75 0.16
Third quarter ended March 31, 1997..................... 35.88 27.38 0.16
Fourth quarter ended June 30, 1997..................... 36.75 29.75 0.16
</TABLE>
On February 14, 1997, the last trading day prior to the announcement by
Applied and Invetech that they had entered into a letter of intent relating to
the Merger, the closing price of Applied Common Stock as reported on NYSE was
$29.625 per share. As of February 14, 1997 and April 30, 1997, there were
approximately 1,353 and 1,337 shareholders of record of Applied Common Stock,
respectively.
Because the market price of Applied Common Stock is subject to fluctuation,
the market value of the shares of Applied Common Stock that the Invetech
Shareholders will receive in the Merger may increase or decrease prior to the
Effective Time. Invetech Shareholders are urged to obtain a current market
quotation for Applied Common Stock.
The holders of Invetech Common Stock are entitled to dividends when, as and
if declared by the Board of Directors of Invetech out of funds legally available
for that purpose. Shares of Invetech Class A Common Stock and Invetech Class B
Common Stock are entitled to share equally in all cash dividends.
The following table sets forth the dividends paid to the holders of
Invetech Class A Common Stock and Invetech Class B Common Stock during calendar
years 1995 and 1996 and for the period from January 1 to March 31, 1997.
12
<PAGE> 19
INVETECH COMMON STOCK
FOR FISCAL YEARS 1995 TO DATE
<TABLE>
<CAPTION>
DIVIDEND
--------
<S> <C>
First Quarter ended March 31, 1995 $ 0.24
Second Quarter ended June 30, 1995 0.04
Third Quarter ended September 30, 1995 0.04
Fourth Quarter ended December 31, 1995 0.04
First Quarter ended March 31, 1996 0.25
Second Quarter ended June 30, 1996 0.04
Third Quarter ended September 30, 1996 0.04
Fourth Quarter ended December 31, 1996 0.04
First Quarter ended March 31, 1997 0.35
Second Quarter ended June 30, 1997 0.04
</TABLE>
Invetech's ability to pay dividends is dependent upon its earnings and the
declaration of any dividends by Invetech's Board of Directors. If the merger is
approved, Invetech Shareholders receiving shares of Applied Common Stock will
participate in Applied dividends declared with a record date later than the
Effective Time.
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<PAGE> 20
RISK FACTORS
The following risk factors should be carefully considered by Invetech
Shareholders. The risks associated with the combination of the businesses of
Applied and Invetech in the Merger will be additional risks faced by both
Applied Shareholders and Invetech Shareholders following the Merger. These
factors should be considered in conjunction with the other information included
in this Prospectus.
INTEGRATION OF OPERATIONS; ADVERSE EFFECT ON FINANCIAL RESULTS
The realization of the benefits sought from the Merger depends in part on
the ability of the combined company to utilize sales and marketing channels,
administrative functions and facilities better than either company could do
separately. These benefits may not be achieved if the activities of Applied and
Invetech are not integrated in a coordinated, timely and efficient manner, and
there can be no assurance that this will occur. In addition, there can be no
assurance that the combined company will be able to retain its existing
suppliers or customers following the Merger. The combination of the two
organizations will also require the dedication of management resources, which
will temporarily detract attention from the day-to-day business of the combined
company. There can be no assurance that the integration will be completed
without disrupting Applied's or Invetech's businesses. Should the combined
company not be able to achieve integration in a timely and coordinated fashion,
a material adverse effect on the operating results of the combined company may
result. In addition, there is no assurance that the combined company will be
able to achieve the benefits projected to occur as a result of the integration
or retain the key management, sales and marketing personnel who are critical to
the integration and the combined company's future operations.
POTENTIAL DILUTIVE EFFECT TO SHAREHOLDERS
There can be no assurance that the combining of the two companies'
businesses, even if achieved in an efficient, effective and timely manner, will
result in combined results of operations and financial condition superior to
what would have been achieved by each company independently. The issuance of
Applied Common Stock in connection with the Merger may have the effect of
reducing Applied's net income per share from levels otherwise expected and could
reduce the market price of the Applied Common Stock unless revenue growth or
cost savings and other business synergies sufficient to offset the effect of
such issuance can be achieved. As a consequence of the Merger, Invetech
Shareholders will lose the chance to invest in Invetech on a stand-alone basis.
Additionally, the combined company will have different management than
Invetech's current management, and consequently the management of the combined
company may make strategic and operational decisions that differ from those of
Invetech's current management. It is possible that Invetech, if it remained
independent, could achieve economic performance superior to that of the combined
company. Consequently, there can be no assurance that Invetech Shareholders will
achieve greater returns on investment through the combined company than if
Invetech were to remain an independent company.
From time to time, Applied issues shares and options to purchase Applied
Common Stock, Performance-Accelerated Restricted Stock and other stock-based
awards under its 1990 Long-Term Performance Plan and otherwise. As of April 30,
1997, options to purchase 758,106 shares of Applied Common Stock were
outstanding, of which 349,541 were then currently exercisable. The exercise of
such options or the future issuance of such stock, stock-based awards, options
or Performance-Accelerated Restricted Stock will dilute the beneficial ownership
of Invetech Shareholders following the Merger.
DEPLETION OF ESCROW AMOUNT
Under the Merger Agreement, Invetech has agreed to indemnify Applied and
Merger Sub against losses and expenses incurred by Applied and Merger Sub by
reason of any breach of any representation, warranty, covenant or agreement of
Invetech. The Escrow Amount is the sole source for funding this obligation. In
the event that Applied or Merger Sub incurs indemnifiable losses or expenses,
all or a portion of the Escrow Amount may be paid to Applied to satisfy
Invetech's obligations under the Merger Agreement and such amounts will not be
available for distribution to the Invetech Shareholders. See "The Merger
Agreement -- Escrow Amount" and "-- Indemnification."
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<PAGE> 21
POTENTIAL UNAVAILABILITY OF "REORGANIZATION" TAX TREATMENT OF MERGER
The Merger is intended to qualify as a tax-free reorganization under
Section 368(a) of the Code. In connection with such a reorganization, no gain or
loss will be recognized for federal income tax purposes by Invetech Shareholders
upon their receipt of shares of Applied Common Stock in exchange for their
shares of Invetech Common Stock. However, gain, but not loss, will be recognized
to the extent that Invetech Shareholders receive cash in exchange for their
shares of Invetech Common Stock. The receipt of a satisfactory tax opinion (a
"Tax Opinion") regarding the availability of such tax treatment is a condition
to Invetech's obligations to consummate the Merger, although such condition may
be waived by Invetech. See "The Merger Agreement -- Conditions to the Merger."
Invetech Shareholders should be aware that the Tax Opinion does not bind
the Internal Revenue Service (the "IRS"), and the IRS is therefore not precluded
from successfully asserting a contrary opinion. A successful IRS challenge to
the Reorganization status of the Merger would result in all Invetech
Shareholders recognizing taxable gain or loss with respect to each share of
Invetech Common Stock surrendered equal to the difference between the Invetech
Shareholder's basis in such share and the fair market value, as of the Effective
Time, of the Applied Common Stock and cash received in exchange therefor.
CONFLICT OF INTEREST OF CERTAIN DIRECTORS AND SHAREHOLDERS OF INVETECH
Certain directors and principal shareholders of Invetech have interests in
the Merger in addition to their interests as Invetech Shareholders generally.
These interests include, but are not limited to, payments to be made by Applied
to certain individuals pursuant to employment agreements and consulting,
noncompetition and confidentiality agreements, and by Invetech pursuant to
Invetech's Phantom Stock Plan and Salary Continuation Agreements. See "Interests
of Certain Persons in the Merger." These interests create a potential conflict
of interest for the directors of Invetech approving the Merger who receive such
interests. The Invetech Board of Directors was aware of these interests and
considered them in unanimously approving the Merger Agreement and the
transactions contemplated thereby.
RISKS ATTENDANT TO FUTURE ACQUISITIONS
Applied regularly considers the acquisition of other companies engaged in
the same and related businesses as Applied. At any given time, Applied may be in
various stages of considering such opportunities. Such acquisitions are subject
to the negotiation of definitive agreements and to conditions typical in
acquisition transactions, certain of which conditions may be beyond Applied's
control. There is no assurance that Applied will be able to identify desirable
acquisition candidates or will be successful in entering into any definitive
agreements with respect to desirable acquisitions. Moreover, even if definitive
agreements are entered into, there is no assurance that any future acquisition
will thereafter be completed or, if completed, that the anticipated benefits of
the acquisition will be realized. The process of integrating acquired operations
into Applied's operations may result in unforeseen operating difficulties, may
absorb significant management attention and may require significant financial
resources that would otherwise be available for the ongoing development or
expansion of Applied's existing operations. Future acquisitions by Applied could
result in the incurrence of additional debt and contingent liabilities, which
could have a material adverse effect on Applied's financial condition and
results of operations.
HIGHLY COMPETITIVE MARKETS
Applied considers the markets in which it operates to be highly
competitive. In addition, such markets present few economic or technological
barriers to entry. Applied's principal competitors are, and following the
Merger, the combined company's principal competitors will be, other specialized
bearing, drive system product, industrial rubber product, fluid power and
specialty item distributors, and, to a lesser extent, mill supply houses. These
competitors include single and multiple branch operations, some of which are
divisions or subsidiaries of larger organizations that may have greater
financial resources than the combined company. The combined company will also
compete with the manufacturers of original equipment and their distributors in
the sale of maintenance and replacement bearings, power transmission components
and related items. Some
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<PAGE> 22
of these manufacturers may have greater financial resources than the combined
company. The identity and number of competitors vary throughout the geographic
areas in which the combined company will do business.
CHANGE IN RELATIONSHIP WITH MANUFACTURERS
Applied is a non-exclusive distributor for numerous manufacturers of the
products which it sells. The principal bearing lines distributed by Applied are:
American, Barden, Cooper, FAG, Heim/RBC, INA, Kaydon, MB Manufacturing, McGill,
MRC, Sealmaster, SKF, Symmco, Thomson, Timken and Torrington/Fafnir. The
principal drive system product lines distributed by Applied are: Baldor,
Browning, Electron, Falk, FMC, Foote Jones, Jeffrey, Kop-Flex, Lincoln Electric,
Lovejoy, Martin, Morse, Reliance/Dodge, Rexnord/Link-Belt, Saftronics, Stephens
Adamson, U.S. Electrical Motors and Winsmith. The principal industrial rubber
product lines distributed by Applied are: Aeroquip, Boston, Dixon, Flexco,
Gates, Globe, Goodyear, Habasit and Weatherhead. The principal fluid power
product lines distributed by Applied are: Dana, Denison, Donaldson, Eaton
Char-Lynn, Ingersoll Rand-ARO and Schrader Bellows. Specialty items, including
seals, sealants, fluid sealing, "O" rings, retaining rings, adhesives,
lubricants, maintenance equipment, skin care products and tools, are purchased
from various suppliers. The principal specialty item lines distributed by
Applied are: CR Industries, Dow Corning, Garlock, Gojo, Keystone, Loctite,
Lubriplate, National/Federal Mogul, OTC/Power Team, Parker Hannifin, Rotor Clip
and Skil/Bosch. The loss of certain of these suppliers could have an adverse
effect on Applied's, and following the Merger, the combined company's, business.
The operations of the combined company will contrast sharply with those of
the manufacturers whose products it sells, in that the manufacturers generally
confine their direct sales activities to large-volume transactions with original
equipment manufacturers who incorporate the components purchased into the
products they make. At present, the manufacturers generally do not sell
replacement components directly to customers but rather refer such customers to
Applied, Invetech or another distributor. There can be no assurance that this
practice will continue, however, and any discontinuance of this practice could
have an adverse effect on the combined company's business.
There is also a trend among large industrial customers towards reducing the
number of suppliers of maintenance and repair products with whom they deal. The
combined company intends to respond to this trend by, among other things,
continuing to broaden its product offerings and developing new methods for
marketing its products. There can be no guarantee, however, that the trend
referenced above will not have an adverse effect on the combined company's
business.
GENERAL MARKET CONDITIONS
Applied's operations are, and, following the Merger, the combined company's
operations will be, dependent upon general industrial activities and economic
conditions and would be adversely affected by the unavailability of raw
materials to its suppliers or by any prolonged recession or depression that has
an adverse effect on American industrial activity generally.
THE MERGER
The terms of, and conditions to, the Merger and certain related
transactions are contained in the Merger Agreement and the Escrow Agreement
which are attached as Annexes A and B, respectively, to this Prospectus.
Information contained herein with respect to the terms of the Merger and such
related transactions are qualified by reference to the more complete information
set forth in the Merger Agreement and Escrow Agreement.
GENERAL
This Prospectus relates to up to 2,300,000 shares of Applied Common Stock
that may be issued in connection with the Merger in accordance with the terms of
the Merger Agreement. The Merger is conditioned upon, among other things,
approval of the Merger Agreement by the Invetech Shareholders at a
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<PAGE> 23
special meeting called for that purpose. See "Invetech Special Meeting." The
Merger will be consummated promptly after the satisfaction or waiver of the
conditions to the Merger set forth in the Merger Agreement. Upon consummation of
the Merger, Invetech will be merged with and into Merger Sub, the separate
corporate existence of Invetech shall cease and Merger Sub will succeed to all
of the rights, franchises, assets, liabilities and business of Invetech. By
approving the Merger and the Merger Agreement, the Invetech Shareholders shall
also thereby agree to be bound by the terms of the Escrow Agreement and the
lock-up letter attached as Exhibit B to the Merger Agreement. In addition, by
virtue of the Merger, at the Effective Time, all existing stock redemption
agreements and shareholder agreements between Invetech and any Invetech
Shareholder(s) shall be deemed to have been terminated and shall have no further
force or effect. Following the Effective Time, to the extent the Invetech
Shareholders receive shares of Applied Common Stock, the rights of such Invetech
Shareholders will be governed by Applied's Articles of Incorporation, Code of
Regulations and the agreement of merger and plan of reorganization between
Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) dated as of September 6,
1988.
In the Merger, all of the outstanding shares of the Invetech Common Stock
will be converted into the right to receive shares of Applied Common Stock and
cash, in the proportion designated by Invetech based upon preference
specification forms solicited by Invetech from the Invetech Shareholders in
connection with the Special Meeting. The aggregate value of Applied Common Stock
and cash to be paid to Invetech Shareholders will be Eighty-Three Million
Dollars ($83,000,000); provided, however, in no event shall more than Two
Million Three Hundred Thousand (2,300,000) shares of Applied Common Stock be
issuable in connection with the Merger. The Merger Consideration is allocable
(i) 15% to the holders of Invetech Class A Common Stock and (ii) 85% to the
holders of Invetech Class B Common Stock, on a pro rata basis to each holder's
percentage interest in each class of Invetech Common Stock. Ten Million Dollars
($10,000,000) of the cash portion of the Merger Consideration will be deposited
and held in escrow pursuant to the terms of the Escrow Agreement for the purpose
of funding the indemnification obligations of Invetech under the Merger
Agreement. Assuming no claims for indemnification are asserted by Applied, the
Escrow Amount shall be distributed to the Invetech Shareholders over a five-year
period following the Effective Time in accordance with the terms of the Escrow
Agreement. For purposes of computing the Merger Consideration, each share of
Applied Common Stock will be assigned a value of Twenty-Eight Dollars and
Sixty-Two Cents ($28.62), which was the average closing sale price of Applied
Common Stock on NYSE for the twenty business days preceding February 5, 1997
(the day Applied executed the letter of intent relating to the Merger). The
Merger Consideration is subject to adjustment on a dollar for dollar basis to
the extent that shareholders' equity of Invetech as reflected on the Closing
Balance Sheet, reduced as provided in the Merger Agreement for all transaction
costs and certain other expenses incurred by Invetech in connection with the
Merger, is greater than or less than Forty-Six Million Dollars ($46,000,000). In
addition, Applied shall pay interest on the Merger Consideration, as adjusted,
in an amount equal to the product of (x) the Merger Consideration, as adjusted,
(y) the number of days elapsed between the date of the Closing Balance Sheet and
the date of the Closing, and (z) 0.0002191.
No fractional shares of Applied Common Stock will be issued in connection
with the Merger. Each Invetech Shareholder otherwise entitled to a fractional
share of Applied Common Stock will receive an amount of cash in lieu thereof,
rounded up to the nearest cent, determined by multiplying (i) Twenty-Eight
Dollars and Sixty-Two Cents ($28.62) by (ii) the fractional interest to which
such Invetech Shareholder would otherwise be entitled.
At the Effective Time, Ten Million Dollars ($10,000,000) of the cash
portion of the Merger Consideration will be deposited into the Escrow Account to
secure the indemnification obligations of Invetech under the Merger Agreement.
Subject to the prior lien of any claims for indemnification asserted by Applied
which have not been paid, the Escrow Amount will be reduced to Five Million
Dollars ($5,000,000) on January 1, 2000 and Two Million Five Hundred Thousand
Dollars ($2,500,000) on April 1, 2001 and all amounts held in excess of the then
applicable Escrow Amount shall be distributed to Invetech Shareholders in
proportion to their respective interests. Unless the entire Escrow Amount shall
have been paid to Applied in satisfaction of the indemnification obligations of
Invetech (upon which the escrow will terminate), the escrow will terminate on
the later of (i) five years following the Effective Time, and (ii) the date upon
which all claims for
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<PAGE> 24
indemnification made by Applied pursuant to the Merger Agreement and Escrow
Agreement have been resolved and all amounts then held in the Escrow Account
will be distributed to the Invetech Shareholders. See "The Merger
Agreement--Escrow Amount" and "--Indemnification."
BACKGROUND OF THE MERGER
The holders of the Invetech Class A Common Stock (the "Class A
Shareholders") have the sole right to elect the Board of Directors of Invetech
and must approve any sale of Invetech or similar transaction (a "Sale").
Consequently, the Invetech Class B Common Stock shareholders (the "Class B
Shareholders"), acting alone, have no right to effect a Sale or otherwise obtain
liquidity for their shares. During 1993, certain of the Class B Shareholders
advised Invetech that they had an interest in obtaining liquidity for their
shares. In response, Invetech offered to purchase 808,407 shares of the Invetech
Class B Common Stock at a price of $12.37 per share. Pursuant to such offer, in
January, 1995, Invetech purchased 780,755 shares of Invetech Class B Common
Stock at such price.
In addition to addressing issues regarding liquidity for the Invetech Class
B Common Stock, the Invetech Board considered the need either to rapidly expand
the business of Invetech through acquisitions or to enter into a Sale to a
larger organization in order to effectively compete in a rapidly changing
marketplace. In this context, the Invetech Board considered the limited capital
resources available to Invetech for the purposes of making large acquisitions.
In 1996, the Class B Shareholders entered into negotiations with the Class
A Shareholders (consisting of J. Michael Moore and James T. Moore II). As a
result of such negotiations, the Class A Shareholders and the Class B
Shareholders (except for one shareholder) entered into the Invetech Company
Shareholder Agreement dated July 16, 1996 (the "Shareholders Agreement") for,
among other matters, the purpose of determining the fair market value of the
Invetech Class A Common Stock relative to the Invetech Class B Common Stock. The
Shareholders Agreement provided, in part, that upon a Sale, (i) the aggregate
consideration for shares of Invetech received or to be received by the Class B
Shareholders and the Class A Shareholders would be allocated 85% to the Class B
Shareholders and 15% to the Class A Shareholders; and (ii) the present or future
value of any consideration paid or payable to any Class A Shareholder in the
form of any employment agreement, consulting contract, covenant not to compete,
technical services agreement, director fees or other amounts paid in connection
with certain existing agreements with the Class A Shareholders would not be
included in such 85%-15% allocation of value upon a Sale and the Class A
Shareholders would not be required to share any such consideration with any
Class B Shareholder.
After execution of the Shareholders Agreement, Invetech's management
initiated actions to determine the feasibility of a Sale. Invetech's management
interviewed several investment banking firms and hired the firm of Oppenheimer &
Co., Inc. ("Oppenheimer") in July, 1996. Thereafter, Oppenheimer and Invetech's
management developed a list of seven potential purchasers from approximately
thirty candidates initially identified by Oppenheimer. Invetech's management
determined that Applied would be the most logical purchaser of Invetech, because
of the potential synergies between the businesses of Invetech and Applied and
the compatibility of their cultures.
In July, 1996, Oppenheimer initiated discussions with Applied regarding a
potential Sale of Invetech. On August 2, 1996, Applied entered into a
confidentiality agreement with Oppenheimer, as investment advisor representing
Invetech. On August 7, 1996, representatives of Applied and Invetech met in
Sandusky, Ohio to discuss Applied's interest in a possible Sale transaction.
Following a meeting of the Board of Directors of Applied on August 29,
1996, Applied sent an indication of interest to Invetech to purchase all of the
equity of Invetech for $40 to $50 million. Soon thereafter, discussions were
discontinued by Invetech's management for lack of a suitable offer from Applied.
Thereafter, Invetech's management authorized Oppenheimer to contact the other
potential purchaser candidates and Oppenheimer proceeded to contact all six of
such candidates. Pursuant to such contacts, Invetech's management entered into
discussions with Motion Industries Inc., a wholly owned subsidiary of Genuine
Parts Company, regarding a Sale, which discussions were ultimately terminated as
a result of renewed discussions with Applied as described below.
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On November 5, 1996, after receipt of additional information from Invetech,
Applied delivered a revised indication of interest to Invetech increasing the
purchase price for Invetech's outstanding equity to $80 million. Following
discussions between representatives of Invetech and Applied regarding the
indication of interest, on November 25 and 26, 1996, representatives of Applied
commenced preliminary due diligence.
On December 17, 1996, after receiving reports from members of Applied's
management and Applied's financial advisor, the TransAction Group, Applied's
Board of Directors authorized its management to deliver to Invetech a
non-binding letter of intent providing for the acquisition of Invetech by
Applied at a purchase price of $85,000,000 payable in Applied Common Stock and
cash.
Invetech's management determined that the proposal identified in the
above-referenced letter of intent was inadequate because: (i) resale of the
Applied Common Stock to be received was restricted for two years; (ii)
indemnification of Applied by the Invetech Shareholders for certain liabilities
and breaches of representations and warranties was unlimited; (iii) there was no
minimum value for the Applied Common Stock to be received; and (iv) no
compensation was allocated to certain noncompetition agreements requested by
Applied.
On January 13, 1997, the Chairman and Vice Chairman of Applied and the
Chairman and President of Invetech met in Cincinnati, Ohio to further discuss
terms of a possible transaction. On January 29, 1997, Applied delivered to
Invetech a revised letter of intent providing for an acquisition of all
outstanding Invetech Common Stock at a purchase price of $80 million, payable in
a combination of Applied Common Stock and cash, and for J. Michael Moore and
James T. Moore II to enter into noncompetition agreements with Applied in
exchange for payments totaling $2,900,000 each over five years.
On February 5, 1997, representatives of Applied and Invetech met in the
Detroit offices of Miller, Canfield, Paddock and Stone, P.L.C. to discuss the
terms of Applied's offer. During these meetings, Applied submitted a revised
letter of intent providing for an acquisition of all outstanding Invetech Common
Stock for $83 million payable in Applied Common Stock and cash, and for J.
Michael Moore and James T. Moore II to enter into non-competition agreements
with Applied on terms mutually acceptable to such parties. The revised Letter of
Intent dated February 5, 1997 also provided for: (i) registration of the Applied
Common Stock by Applied; (ii) limitations on Invetech's indemnification of
Applied for certain liabilities and breaches of representations and warranties;
and (iii) a minimum value for the Applied Common Stock to be received.
On February 8, 1997, after receiving advice from Oppenheimer that the
transaction set forth in the February 5, 1997 letter of intent appeared to be
fair to the Invetech Shareholders from a financial point of view, the Board of
Directors of Invetech approved the letter of intent and caused the letter of
intent to be executed by a duly authorized representative of Invetech. On
February 18, 1997, Applied and Invetech issued a joint press release announcing
execution of the letter of intent.
Thereafter, Applied and Invetech entered into negotiations with respect to
the Merger Agreement through the end of April 1997. In addition, beginning in
early February, 1997 and continuing until execution of the Merger Agreement,
Applied, its representatives and its legal counsel conducted legal, business and
other due diligence with respect to Invetech.
On March 27, 1997, the Board of Directors of Applied held a meeting at
which the directors, after receiving advice from members of Applied's management
and the TransAction Group and reviewing the terms of the Merger Agreement,
authorized and approved the Merger Agreement, the Merger and the other
transactions contemplated thereby. On March 31, 1997, the Invetech Board held a
special meeting at which, after receiving advice from Oppenheimer and reviewing
the terms of the Merger Agreement the Invetech Board voted unanimously to
approve the Merger Agreement, subject to satisfactory resolution of the then
outstanding terms and conditions and receipt of a satisfactory fairness opinion
from Oppenheimer, and to recommend to the Invetech Shareholders that they
approve and adopt the Merger Agreement. On April 23, 1997, the Invetech Board
held another special meeting at which, after review of the then-current draft of
the Merger Agreement, the Invetech Board again voted unanimously to approve the
Merger Agreement, subject to satisfactory resolution of any outstanding terms
and conditions, and receipt of a satisfactory fairness opinion,
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and to recommend the Merger to the Invetech Shareholders. On April 29, 1997,
Applied, Merger Sub and Invetech executed the Merger Agreement.
APPROVAL OF APPLIED BOARD OF DIRECTORS; REASONS FOR MERGER
The Board of Directors of Applied views the Merger as a means to increase
the value of the combined company to Applied's shareholders. In evaluating the
proposed Merger, the Board of Directors of Applied considered and discussed a
wide variety of factors, including the terms of the Merger Agreement and
Applied's and Invetech's respective operations and the opportunity for synergies
between those operations. The Board of Directors of Applied also discussed the
terms of the Merger Agreement in light of its fairness to Applied's
shareholders, projected dilution to existing Applied shareholders resulting from
the Merger and the effects of and requirements for a tax-free transaction which
qualifies as a reorganization under Section 368(a) of the Code. In addition, the
Board of Directors of Applied considered the advantages and disadvantages that
the Merger would present to Applied's achievement of its strategic objectives.
As part of the evaluation process, the Board of Directors of Applied reviewed
information about the business, operations and future prospects of both Invetech
and Applied, and the relative assets, revenues and results of operations of
Applied and Invetech. In connection with its consideration of the Merger, the
Board of Directors of Applied received financial advice with respect to the
Merger from its financial advisor, the TransAction Group.
Significant factors leading to the Board's approval of the Merger were the
Board's beliefs that Invetech's branch locations in Michigan and the Rocky
Mountain states would enable Applied to serve certain existing and potential
national account customers better, that the acquisition of Invetech would
present significant new customer opportunities to Applied, especially in the
automobile industry, and would result in Applied being able to market a broader
product offering to customers of the combined company. The Applied Board also
determined that a combination of Applied and Invetech would present the combined
company with opportunities to service their respective customers better and more
cost-efficiently, to consolidate field operations in areas with overlapping
branch locations and to eliminate certain management and other overhead expenses
through the closing of Invetech's headquarters.
The Board of Directors of Applied also considered the following potentially
negative factors: (i) the possibility that the Merger might not be consummated,
and the effects of the public announcement of the Merger on Applied's revenues
and operating results, (ii) the possible effects of the public announcement of
the Merger on the market price of Applied Common Stock, (iii) the risk that the
anticipated benefits of the Merger will not be realized, and (iv) the other
risks described above under "Risk Factors."
After considering the foregoing factors, the Board of Directors of Applied
unanimously approved the Merger Agreement and the transactions contemplated
thereby.
RECOMMENDATION AND APPROVAL OF INVETECH BOARD OF DIRECTORS; REASONS FOR MERGER
The Invetech Board believes that the Merger is in the best interests of
Invetech Shareholders and that the Merger would allow Invetech and its
shareholders to realize the objectives described below.
In approving the Merger, the Invetech Board considered that the Merger
would provide the Invetech Shareholders with cash and a public market for their
remaining equity ownership in Invetech. The Invetech Board considered the
alternative of an initial public offering of Invetech Common Stock but
determined that, in light of the costs of such a transaction and the absence of
any assurances that an offering would be successfully completed, the Merger
provided a preferable means to: (i) provide the Invetech Shareholders liquidity
for their current investment in Invetech for which there is no public market,
notwithstanding that the Applied Common Stock to be received by the Invetech
Shareholders may only be sold by the Invetech Shareholders after January 1, 1998
when certain transfer restrictions expire or upon presentation of an opinion of
counsel as described in the "lock up" letter attached as Exhibit B to the Merger
Agreement; and (ii) address the need for Invetech to rapidly expand its
business. The Invetech Board also concluded that, at the same time as providing
enhanced liquidity to the Invetech Shareholders, the Merger will allow Invetech
Shareholders to retain an investment in Invetech's business by becoming
shareholders of Applied. In addition,
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the cash component of the Merger Consideration would provide Invetech
Shareholders with an immediate return on their investment in Invetech.
In reaching its conclusion, the Invetech Board evaluated a number of
factors, including the terms and conditions of the Merger Agreement, the amount
of cash and Applied Common Stock offered by Applied, the business operations and
prospects of Applied on a historical basis and of Invetech and Applied on a pro
forma combined basis, and the fact that Applied submitted the highest
acquisition offer. The Invetech Board did not consider one factor more than the
others, or assign relative weights to the factors it considered in arriving at
its determination.
After considering the foregoing factors, the Invetech Board unanimously
adopted and approved the Merger Agreement and the transactions contemplated
thereby and determined that the Merger and the issuance of the Merger
Consideration pursuant thereto were in the best interests of Invetech and the
Invetech Shareholders. The Invetech Board has therefore recommended that the
Invetech Shareholders approve the Merger.
OPINION OF INVETECH'S FINANCIAL ADVISOR
Invetech retained Oppenheimer to act as its financial advisor in connection
with a potential sale of Invetech, to investigate the proposed consideration
offered by Applied, and to provide an opinion as to the fairness, from a
financial point of view, to the Invetech shareholders of the consideration to be
paid in connection with the Merger.
The consideration to be paid by Applied in connection with the Merger was
determined following extensive negotiations between the management of Applied
and Invetech, and was approved by the Invetech Board of Directors. Oppenheimer
advised Invetech with respect to the potential form and amount of consideration
that was proposed to be paid in connection with the Merger and also advised
Invetech with respect to the relative merits, from a financial point of view, of
the various proposals made by the potential acquirors of Invetech. Oppenheimer
played a significant role in the negotiation of the terms of the letter of
intent between Applied and Invetech.
At the request of Invetech, Oppenheimer rendered an opinion dated April 29,
1997 to the Invetech Board of Directors that, based upon and subject to the
considerations set forth therein and on other factors Oppenheimer deemed
relevant, as of such date, Oppenheimer was of the opinion that the consideration
to be received by the Invetech Shareholders pursuant to the Merger Agreement was
fair, from a financial point of view, to such shareholders. Oppenheimer's
opinion is not a recommendation to any current or prospective Invetech
Shareholders as to any investment decision such person may make. Oppenheimer
expressed no opinion as to what the value of the Applied Common Stock actually
will be when issued to the Invetech Shareholders pursuant to the Merger
Agreement or the price at which the Applied Common Stock will trade subsequent
to the Merger. The full text of the opinion of Oppenheimer, which sets forth
certain assumptions made, matters considered and limitations on the review
undertaken, is attached as Annex C hereto and is incorporated herein by
reference and should be read in its entirety in connection with this Prospectus.
The summary of Oppenheimer's opinion set forth herein is qualified in its
entirety by reference to the full text of such opinion. No limitations were
imposed by the Invetech Board of Directors upon Oppenheimer with respect to the
investigations made or procedures followed by Oppenheimer in rendering its
opinion. Oppenheimer has consented to the inclusion of its opinion in this
Prospectus and has reviewed the following summary of its opinion.
In rendering its opinion, Oppenheimer relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of all
of the financial and other information provided to Oppenheimer by Invetech and
its employees, representatives and affiliates. With respect to forecasts of
future financial condition and operating results of Invetech provided to
Oppenheimer, Oppenheimer assumed, without independent verification or
investigation, that such forecasts were reasonably prepared on bases reflecting
the best available information, estimates and judgment of Invetech's management.
In rendering its opinion, Oppenheimer neither made nor obtained any independent
evaluation of appraisals of the assets or liabilities of Invetech, Applied, or
such other affiliated entities. Oppenheimer assumed, without independent
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verification, the accuracy of the advice and conclusions of Invetech's legal
counsel and accountants with respect to tax matters as provided to Oppenheimer
by Invetech's management including, without limitation, the treatment of the
Merger as a tax-free reorganization for federal income tax purposes.
In rendering the Oppenheimer Opinion, Oppenheimer: (a) reviewed the draft
Plan and Agreement of Merger, dated April 29, 1997; (b) reviewed Invetech's
audited financial statements for the fiscal years ended December 31, 1992, 1993,
1994, 1995 and 1996; (c) reviewed Applied's audited financial statements for the
fiscal years ended June 30, 1992, 1993, 1994, 1995 and 1996, and the unaudited
financial statements for the six months ended December 31, 1995 and 1996; (d)
reviewed financial information of Invetech prepared by Invetech's management;
(e) reviewed financial information for Applied, including both stand-alone and
pro forma combined financial information with Invetech, provided to Oppenheimer
by Applied's management; (f) reviewed the historical market prices and trading
volume for Applied Common Stock; (g) held discussions with senior management of
Applied and Invetech with respect to the business and prospects for future
growth and the integration of the two companies; (h) reviewed and analyzed the
pro forma impact of the combination of Invetech and Applied; (i) performed
discounted cash flow analyses of Invetech and Applied, both on a stand-alone,
and a combined entity basis using certain assumptions of future performance
provided to Oppenheimer by the managements of Invetech and Applied; (j) reviewed
and analyzed certain publicly available financial data for certain companies
deemed by Oppenheimer to be comparable to Invetech and Applied; (k) reviewed
certain publicly available financial data for transactions that Oppenheimer
deemed comparable to the Merger; (l) reviewed public information concerning
Invetech and Applied; and (m) performed such other analyses and reviewed such
other information as Oppenheimer deemed appropriate.
Valuation of Invetech
Oppenheimer performed three primary valuation analyses of Invetech; (i)
comparable public company analysis; (ii) comparable merger and acquisition
transactions analysis; and (iii) discounted cash flow analysis. In establishing
the range of values resulting from the application of each of the analyses,
Oppenheimer made qualitative judgments as to the meaningfulness of the valuation
measurements. The judgments were based upon a comparative analysis of the
financial performance and growth prospects between Invetech and the comparable
public companies, the number and similarity of comparable transactions, as well
as the predictability and volatility of future earnings when assessing the
relative significance of the discounted cash flow analysis. The comparable
public company analysis formed the basis for the selection of appropriate
multiples for the Company, and certain other valuation measurements, such as
operating cash flow or price/earnings multiples, as used generally for
comparative purposes, were also taken into account in making such judgments.
Oppenheimer compared Invetech to certain publicly traded companies engaged
in businesses similar to Invetech's, resulting in an implied aggregate value
range (equity value plus total debt minus cash) for Invetech of $70.0 million to
$75.0 million and an implied equity value range (equity value without debt) of
$60.4 million to $65.4 million. Using publicly available information,
Oppenheimer analyzed the consideration paid in selected merger and acquisition
transactions involving certain publicly traded companies engaged in businesses
similar to Invetech's. Oppenheimer calculated the earnings and cash flow
multiples for the target companies based upon the respective purchase prices,
and then applied these multiples to Invetech's most recent twelve months
operating results, resulting in an implied aggregate value range for Invetech of
$55.0 million to $65.0 million and an implied equity value range of $45.4
million to $55.4 million. Oppenheimer performed a discounted cash flow analysis
of the projected after-tax cash flow of Invetech for the years ending December
31, 1997 through 2001, based on forecasts and other data provided by the
management of Invetech. A provision for the value of the Company at the end of
the forecast period (a "terminal value") was made, and the present value of the
interim cash flows and the terminal value was determined using a risk-adjusted
rate of return (a "discount rate"). This analysis resulted in an implied
aggregate value range of $60.0 million to $70.0 million and an implied equity
value range of $50.4 million to $60.4 million.
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Valuation of Applied
In consideration of the fact that the Merger involves the receipt by
Invetech Shareholders of Applied Common Stock, Oppenheimer performed a valuation
of Applied utilizing the following methods of analysis: (i) comparable public
company analysis; (ii) merger and acquisition transactions analysis; (iii)
discounted cash flow analysis; and (iv) common stock trading history analysis.
Oppenheimer conducted the comparable public company analysis and merger and
acquisition transactions analysis using the same comparable public companies and
comparable transactions used in the Invetech analyses. The discounted cash flow
analysis performed for Applied used slightly lower discount rates and terminal
value multiples than those applied to the Invetech discounted cash flow
analysis. Oppenheimer's analyses resulted in an implied aggregate value range
for Applied of $470.0 million to $635.0 million as of March 20, 1997 and an
implied equity value range per share of $30.66 to $43.86.
Oppenheimer also analyzed the Merger on a pro forma combined company basis
using the same methods of analysis and assuming the issuance of an additional
2.3 million shares of Applied Common Stock. To obtain the implied equity value
ranges Oppenheimer also assumed the assumption of Invetech debt and of
additional debt to fund the cash portion of the consideration. Oppenheimer
determined that the comparable company analysis results were the most
informative, resulting in an implied aggregate value range of $620 million to
$645 million and an implied equity value range per share of $34.08 to $35.77, as
of March 20, 1997.
The summary set forth above does not purport to be a complete description
of the analysis performed by Oppenheimer in this regard. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relative methods of financial analysis and the application of these methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description.
Oppenheimer was selected to act as Invetech's financial advisor based upon
its qualifications, expertise and reputation. Oppenheimer, as a customary part
of its investment banking business, is engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, private
placements and valuations for estate, corporate and other purposes. Oppenheimer
Capital, an affiliate of Oppenheimer, has advised Invetech regarding its 401(k)
profit sharing plan since 1979. Julius Nicolai, an employee of Oppenheimer
Capital, serves on the Invetech Board of Directors.
APPRAISAL RIGHTS
Invetech Shareholders are not entitled to appraisal or dissenters' rights
in connection with the Merger pursuant to Section 762(2)(b) of the Michigan
Business Corporation Act.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger is intended to qualify as a reorganization (a "Reorganization")
for federal income tax purposes under Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). Consummation of the Merger is conditioned
upon receipt by Invetech of an opinion from its legal counsel to that effect.
Receipt of the aforementioned legal opinion may be waived by Invetech as a
condition to consummation of the Merger. Invetech currently intends to obtain
the aforementioned opinion from Deloitte & Touche LLP. The Merger will have no
tax consequences to shareholders of Applied.
Under current law, assuming that the Merger takes place as described in the
Merger Agreement, Applied believes that:
(i) Gain will be recognized by Invetech Shareholders that exchange
Invetech Common Stock for Applied Common Stock and cash, but not in excess
of the amount of cash actually received (excluding any amounts deposited
into the Escrow Account). Such gain will be treated either as the receipt
of a dividend or as gain on the sale of Invetech Common Stock, as provided
in section 356 of the Code, the regulations thereunder, and judicial
authorities interpreting such section. Such gain will be capital gain to
the extent that the Invetech Common Stock was a capital asset at the
Effective Time. No loss will be recognized upon the exchange. Invetech
Shareholders will not recognize any gain with respect to cash deposited
into the Escrow Account until such time as cash is distributed to the
Invetech Shareholders. At
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the time that cash is distributed from the Escrow Account, a portion of
such cash may be treated as the receipt of imputed interest income as
provided in sections 1274 and 1275 of the Code, the regulations thereunder,
and judicial authorities interpreting such sections. The remainder of such
cash received will be treated, to the extent of gain realized from the
disposition of the shareholder's Invetech Common Stock, as the receipt of a
dividend or as gain from the sale of such Invetech Common Stock, as
provided above. An amount treated as gain from the sale of Invetech Common
Stock will be capital gain to the extent that the Invetech Common Stock was
a capital asset at the Effective Time.
(ii) The tax basis of the shares of Applied Common Stock received by
the Invetech Shareholders will be the same as the basis of the Invetech
Common Stock surrendered in the exchange, decreased by the amount of cash
received (excluding any cash treated as imputed interest), and increased by
the amount of cash treated as a dividend (if any) and by the amount of gain
recognized on the exchange (excluding any portion of the gain treated as a
dividend).
(iii) The holding period of the shares of Applied Common Stock in the
hands of Invetech Shareholders will include the holding period of their
shares of Invetech Common Stock exchanged therefor, provided such shares of
Invetech Common Stock are held as capital assets at the Effective Time.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. IT
DOES NOT ADDRESS THE STATE, LOCAL, OR FOREIGN TAX ASPECTS OF THE MERGER. THE
DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND
PROPOSED TREASURY REGULATIONS THEREUNDER, AND CURRENT ADMINISTRATIVE RULINGS AND
COURT DECISIONS. THE OPINIONS OF COUNSEL OR ACCOUNTANTS DESCRIBED ABOVE ARE NOT
BINDING UPON THE INTERNAL REVENUE SERVICE AND NO RULINGS OF THE INTERNAL REVENUE
SERVICE WILL BE SOUGHT OR OBTAINED. THERE IS NO ASSURANCE THAT THE INTERNAL
REVENUE SERVICE WILL AGREE WITH THE OPINIONS DESCRIBED ABOVE. EACH SHAREHOLDER
SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX
CONSEQUENCES TO HIM OR HER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL,
STATE, LOCAL, AND FOREIGN TAX LAWS.
ALL INVETECH SHAREHOLDERS SHOULD READ CAREFULLY THE DISCUSSION UNDER "The
Merger -- Certain Federal Income Tax Consequences of the Merger" and "The Merger
Agreement -- Conditions to the Merger." See "Risk Factors -- Potential
Unavailability of "Reorganization" Tax Treatment.
ACCOUNTING TREATMENT
The Merger will be accounted for by Applied using the purchase method of
accounting in accordance with generally accepted accounting principles.
Accordingly, the assets and liabilities of Invetech will be adjusted to fair
value and the results of operations of Invetech will be included in the results
of operations of Applied for periods subsequent to the Effective Time.
REGULATORY MATTERS
On March 28, 1997, Applied and Invetech filed pre-merger notification under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations thereunder. Early termination of the waiting period was
granted on April 7, 1997. Other than (i) the Commission's declaring effective
the Registration Statement containing this Prospectus, (ii) approvals in
connection with compliance with applicable Blue Sky or state securities laws and
(iii) the filing of certificates of merger with the Secretary of State of the
State of Ohio and with the Corporation, Securities and Land Development Bureau
of the State of Michigan, neither the management of Applied nor the management
of Invetech believes that any filing with or approval of any government
authority is necessary in connection with the consummation of the Merger.
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INVETECH SPECIAL MEETING
The Merger is conditioned upon, among other things, approval of the Merger
Agreement by the Invetech Shareholders at a special meeting called for that
purpose. A special meeting of the Invetech Shareholders has been called and will
be held at Invetech's headquarters, 1400 Howard Street, Detroit, Michigan, on
July 29, 1997, at 10:00 a.m., local time (the "Special Meeting"). At the Special
Meeting, the Invetech Shareholders will be asked to approve the Merger Agreement
among Invetech, Applied and Merger Sub pursuant to which Invetech would be
merged with and into Merger Sub, a wholly-owned subsidiary of Applied.
Invetech's Board of Directors unanimously voted to adopt the Merger
Agreement and determined that the consummation of the Merger would be in the
best interests of Invetech and the Invetech Shareholders. The Board of Directors
of Invetech has recommended that the Invetech Shareholders vote to approve the
Merger Agreement.
Invetech Class A Shareholders and Invetech Class B Shareholders of record
at the close of business on July 18, 1997, will be entitled to vote on the
approval of the Merger and any other matter that may be brought before the
Special Meeting on July 29, 1997, and any adjournment thereof. As of June 30,
1997, there were 20,000 shares of Invetech Class A Common Stock and 2,075,391
shares of Invetech Class B Common Stock outstanding.
Each share of Invetech Class A Common Stock and Invetech Class B Common
Stock is entitled to one vote regarding approval of the Merger Agreement. The
affirmative vote of the holders of at least a majority of the shares of the
outstanding Invetech Class A Common Stock and the Invetech Class B Common Stock,
voting separately as classes, is required for approval of the Merger Agreement.
Pursuant to the Merger Agreement, J. Michael Moore and James T. Moore II,
directors and executive officers of Invetech, who together beneficially own 100%
of the outstanding shares of Invetech Class A Common Stock and approximately
26.7% of Invetech Class B Common Stock, have agreed to vote their respective
shares in favor of the Merger. Invetech Shareholders will not be entitled to
appraisal or dissenters' rights in connection with the Merger.
The Board of Directors of Invetech intends to solicit proxies for approval
of the Merger Agreement in connection with the Special Meeting, and expenses
incurred in connection with the solicitation of proxies will be borne by
Invetech. Applied does not intend to solicit proxies in connection with the
Special Meeting.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and executive officers of Invetech have interests in the
Merger in addition to their interests as Invetech Shareholders generally. The
Invetech Board of Directors was aware of these interests and considered them in
approving the Merger Agreement and the transactions contemplated thereby.
As described below, J. Michael Moore, James T. Moore, II, Steven P. Mellos,
Steven L. Laten and Thomas P. Moore, II are participants in Invetech's phantom
stock plan (the "Phantom Stock Plan"). The Phantom Stock Plan was adopted to
provide a means to attract, reward and retain management and to align the
interests of managers participating in the Phantom Stock Plan with the interests
of shareholders. Awards have been made to participants in the Phantom Stock Plan
since 1988 based upon recommendations of the salary and bonus committee of the
Invetech Board of Directors and the attainment of certain goals established by
such committee. Each award vests over a five year period and increases in value
based upon Invetech's annual consolidated return on its equity. Participants in
the Phantom Stock Plan were encouraged to increase shareholder value by meeting
the goals necessary to receive awards under the Phantom Stock Plan and
thereafter by increasing Invetech's return on equity. In addition, the Phantom
Stock Plan provides that upon a change in control of Invetech (such as the
Merger) each active employee's account will become fully vested and is to be
promptly paid with the value of the account adjusted to reflect the
consideration to be received by the holders of Invetech Class B Common Stock.
Pursuant to the Merger Agreement, at the Closing, J. Michael Moore
(Chairman of the Board and Chief Executive Officer of Invetech) and a consulting
corporation to be formed and wholly owned by Mr. Moore will enter into a
Consulting, Noncompetition and Confidentiality Agreement with Applied, pursuant
to which:
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(i) Mr. Moore's corporation will perform certain consulting services for Applied
for a period of five (5) years in exchange for an annual fee of $70,000; (ii)
Mr. Moore has agreed not to compete with Applied during the longer of (x) the
five year period following the date of the agreement and (y) the one year period
following the date of termination of all of Mr. Moore's relationships with
Applied (other than as a shareholder) in exchange for $2,550,000 payable in five
equal annual installments of $510,000; (iii) Mr. Moore and his corporation have
agreed to maintain the confidentiality of all non-public information pertaining
to Applied during the five year period following the date of termination of any
of Mr. Moore's and his corporation's relationships with Applied (other than as a
shareholder); (iv) Mr. Moore and Applied agree to amend the Salary Continuation
Agreement between Mr. Moore and Invetech to (x) provide that the benefits
payable thereunder shall be payable to Mr. Moore beginning at an age not earlier
than age 55 designated by Mr. Moore and (y) increase the aggregate benefits
payable thereunder by $500,000; and (v) during the term of Mr. Moore's and his
spouse's lives, Applied shall pay to Mr. Moore's corporation $700 per month for
the cost of health insurance to be obtained and maintained by Mr. Moore's
corporation for himself, his spouse and his eligible children. In addition, as a
result of the termination and payment of the Phantom Stock Plan, Mr. Moore will
receive an aggregate amount of approximately $689,000 (assuming that the value
of Applied Common Stock is $32.00 on the date the Merger is consummated). Mr.
Moore will also receive a special bonus from Invetech of property with a value
of $32,500. Also, pursuant to the terms of the Merger Agreement, Applied has
agreed to recommend to the Nominating Committee of its Board of Directors that
Mr. Moore be nominated for election as a director at Applied's next annual
meeting.
Pursuant to the Merger Agreement, at the Closing, James T. Moore, II
(President and Chief Executive Officer of Invetech) and a consulting corporation
to be formed and wholly-owned by Mr. Moore, II will enter into a Consulting,
Noncompetition and Confidentiality Agreement with Applied, pursuant to which:
(i) Mr. Moore, II's corporation will perform certain consulting services for
Applied for a period of five (5) years in exchange for an annual fee of $70,000
during the first two years and $40,000 during the remaining three years; (ii)
Mr. Moore, II has agreed not to compete with Applied during the longer of (x)
the five year period following the date of the Agreement and (y) the one year
period following the date of termination of any and all of Mr. Moore, II's
relationships with Applied (other than as a shareholder) in exchange for
$2,700,000 payable in five equal annual installments of $540,000; (iii) Mr.
Moore, II and his corporation have agreed to maintain the confidentiality of all
non-public information pertaining to Applied during the five year period
following the date of termination of any of Mr. Moore, II's and his
corporation's relationships with Applied (other than as a shareholder); (iv) Mr.
Moore, II and Applied agree to amend the Salary Continuation Agreement between
Mr. Moore, II and Invetech to (x) provide that the benefits payable thereunder
shall be payable to Mr. Moore, II beginning at an age not earlier than age 55
designated by Mr. Moore, II and (y) increase the aggregate benefits payable
thereunder by $500,000; (v) during the term of Mr. Moore, II's and his spouse's
lives, Applied shall pay to Mr. Moore, II's corporation $700 per month for the
cost of health insurance to be obtained and maintained by Mr. Moore, II's
corporation for himself, his spouse and his eligible children; and (vi) Applied
has agreed to reimburse Mr. Moore, II's corporation for the reasonable travel
expenses of Mr. Moore, II and Mr. Moore, II's corporation has agreed to cause
Mr. Moore, II to attend (x) the annual meetings of the Bearings Specialists
Association as a representative of Applied and (y) during the first year of the
Agreement (and, thereafter, at the discretion of Applied) the annual meeting of
the Power Transmission Distributors Association. In addition, as a result of the
termination and payment of the Phantom Stock Plan, Mr. Moore, II will receive an
aggregate amount of approximately $689,000 (assuming that the value of Applied
Common Stock is $32.00 on the date the Merger is consummated). Mr. Moore will
also receive a special bonus from Invetech of property with a value of $32,600.
Steven P. Mellos (Senior Vice President and Chief Financial Officer of
Invetech) intends to enter into an agreements with Applied, pursuant to which:
(i) Mr. Mellos will agree not to compete with Applied for a period of one year
in exchange for payment of $145,000; (ii) Mr. Mellos will provide consulting
services to Applied for a period of four months in exchange for payments of
$27,917 per month; (iii) Applied will provide Mr. Mellos medical insurance and
life insurance benefits for a period of sixteen months following the Closing;
and (iv) Applied will reimburse Mr. Mellos for outplacement service costs up to
$20,000. In addition, pursuant to the terms of the Merger Agreement, Invetech is
required to terminate and pay all benefits due under certain of the Salary
Continuation Agreements between Invetech and its employees. As a result of the
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termination and payment of such agreements and the Phantom Stock Plan, Mr.
Mellos will receive an aggregate amount of approximately $439,500 (assuming that
the value of the Applied Common Stock is $32.00 on the date the Merger is
consummated). Mr. Mellos will also receive a special bonus from Invetech of cash
and property with an aggregate value of $284,700.
Steven L. Laten (Vice President of Operations of Invetech) intends to enter
into an agreement with Applied pursuant to which he will receive severance
benefits which have yet to be determined. In addition, Mr. Laten is party to a
salary continuation agreement with Invetech. Pursuant to the terms of the Merger
Agreement, Invetech is required to terminate and pay all benefits due under
certain of the Salary Continuation Agreements between Invetech and its
employees. As a result of the termination and payment of such agreements and the
Phantom Stock Plan, Mr. Laten will receive an aggregate amount of approximately
$112,900 (assuming that the value of Applied' Common Stock is $32.00 on the date
the Merger is consummated).
Thomas P. Moore, II (a director of Invetech) is a participant in the
Phantom Stock Plan. As a result of the termination and payment of the Phantom
Stock Plan, Mr. Moore, II will receive an aggregate amount of approximately
$224,000 (assuming that the value of Applied Common Stock is $32.00 on the date
the Merger is consummated).
Invetech will pay to each of its directors (including J. Michael Moore,
James T. Moore, II and Thomas P. Moore, II) an amount equal to Invetech's
standard monthly director's fee of $1,700 multiplied by the number of full
months between the Effective Time and December 31, 1997.
In considering the recommendation of the Invetech Board, Invetech
Shareholders should be aware that certain directors, officers and advisors of
Invetech have interests in the Merger that are different from, or in addition
to, the interests of Invetech Shareholders generally.
Oppenheimer acted as financial advisor to Invetech in connection with the
Merger and, in connection therewith, rendered an opinion as to the fairness,
from a financial point of view, to the Invetech Shareholders of the
consideration to be paid by Applied in the Merger. Oppenheimer Capital, an
affiliate of Oppenheimer has also advised Invetech regarding its 401(k) profit
sharing plan since 1979. In addition, Julius Nicolai, an employee of Oppenheimer
Capital, serves as a director of Invetech. Oppenheimer will receive fees in
connection with the transaction of approximately $870,000.
Miller, Canfield, Paddock and Stone, P.L.C. acted as legal counsel to
Invetech in connection with the Merger and will receive fees in connection with
the transaction of approximately $300,000. Bruce D. Birgbauer, Esq. is a senior
principal in the law firm of Miller, Canfield, Paddock and Stone, P.L.C. and
serves as Secretary and as a director of Invetech.
RESALE OF APPLIED COMMON STOCK
The shares of Applied Common Stock to be issued in the Merger will have
been registered under the Securities Act pursuant to the Registration Statement
on Form S-4 of which this Prospectus is a part, thereby allowing such shares to
be traded without restriction under federal securities laws by all former
holders of Invetech Common Stock who (i) are not deemed "affiliates" of Invetech
prior to the Merger and (ii) do not become "affiliates" of Applied after the
Merger.
Rule 145 promulgated under the Securities Act regulates the disposition of
securities of "affiliates" of Invetech in connection with the Merger. Pursuant
to the Merger Agreement, Invetech has agreed to request each of its affiliates
enter into a written agreement to the effect that such affiliate will not sell,
transfer or otherwise dispose of Applied Common Stock issued to the affiliate in
the Merger unless such sale, transfer or other disposition (i) has been
registered under the Securities Act, (ii) is made in compliance with the
requirements of Rule 145 under the Securities Act or (iii) in the opinion of
counsel reasonably acceptable to Applied, is otherwise exempt from registration
under the Securities Act.
In addition to the limitations imposed by Rule 145 under the Securities
Act, for the purpose of ensuring qualification of the Merger as a tax-free
reorganization for federal income tax purposes, in connection with the
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Merger, each Invetech Shareholder will be required to execute a "lock up" letter
in the form attached as Exhibit B to the Merger Agreement. The lock up letter
prohibits each Invetech Shareholder from disposing of any shares of Applied
Common Stock obtained in the Merger prior to January 1, 1998, without first
delivering an opinion of counsel satisfactory in form and substance to Applied
to the effect that such disposition will not violate the continuity of
shareholder interest requirement set forth in Section 1.368-1 of the official
Treasury Department interpretation of the Code.
THE MERGER AGREEMENT
The following paragraphs summarize, among other things, the material terms
of the Merger Agreement, which is attached hereto as Annex A and incorporated by
reference herein. Invetech Shareholders are urged to read the Merger Agreement
in its entirety for a more complete description of the Merger.
GENERAL
This Merger Agreement generally provides for the merger of Invetech with
and into Merger Sub. The Merger will become effective upon the later to occur of
the filing of a certificate of merger with the Secretary of State of the State
of Ohio and the filing of a certificate of merger with the Corporations,
Securities and Land Development Bureau of the State of Michigan. It is
anticipated that such filing will be made immediately after the Closing. By
approving the Merger and the Merger Agreement, the Invetech Shareholders shall
also thereby agree to be bound by the terms of the Escrow Agreement and the
lock-up letter attached as Exhibit B to the Merger Agreement. In addition, by
virtue of the Merger, at the Effective Time, all existing stock redemption
agreements and shareholder agreements between Invetech and any Invetech
Shareholder(s) shall be deemed to have been terminated and shall have no further
force or effect.
MERGER CONSIDERATION
In the Merger, all of the outstanding shares of the Invetech Common Stock
will be converted into the right to receive shares of Applied Common Stock and
cash, in the proportion designated by Invetech based upon preference
specification forms solicited by Invetech from the Invetech Shareholders in
connection with the Special Meeting. The aggregate value of Applied Common Stock
and cash to be paid to Invetech Shareholders will be Eighty-Three Million
Dollars ($83,000,000) (the "Merger Consideration"); provided, however, in no
event shall more than Two Million Three Hundred Thousand (2,300,000) shares of
Applied Common Stock be issuable in connection with the Merger. The Merger
Consideration is allocable (i) 15% to the holders of Invetech Class A Common
Stock and (ii) 85% to the holders of Invetech Class B Common Stock, on a pro
rata basis to each holder's percentage interest in each class of Invetech Common
Stock. For purposes of computing the Merger Consideration, each share of Applied
Common Stock will be assigned a value of Twenty-Eight Dollars and Sixty-Two
Cents ($28.62), which was the average closing sale price of Applied Common Stock
on NYSE for the twenty business days preceding February 5, 1997 (the day Applied
executed the letter of intent relating to the Merger). The Merger Consideration
is subject to adjustment on a dollar for dollar basis to the extent that the
shareholders' equity of Invetech, as reflected on the Closing Balance Sheet,
reduced as provided in the Merger Agreement for all transaction costs and
certain other expenses incurred by Invetech in connection with the Merger, is
greater than or less than Forty-Six Million Dollars ($46,000,000). In addition,
Applied shall pay interest on the Merger Consideration, as adjusted, in an
amount equal to the product of (x) the Merger Consideration, as adjusted, (y)
the number of days elapsed between the date of the Closing Balance Sheet and the
date of the Closing, and (z) 0.0002191.
No fractional shares of Applied Common Stock will be issued in connection
with the Merger. Each Invetech Shareholder otherwise entitled to a fractional
share of Applied Common Stock will receive an amount of cash in lieu thereof,
rounded up to the nearest cent, determined by multiplying (i) Twenty-Eight
Dollars and Sixty-Two Cents ($28.62) by (ii) the fractional interest to which
such Invetech Shareholder would otherwise be entitled.
As of June 30, 1997, there were 20,000 shares of Invetech Class A Common
Stock and 2,075,391 shares of Invetech Class B Common Stock outstanding and
approximately 50 shareholders of record of Invetech
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<PAGE> 35
Class B Common Stock. If the Merger is approved, each share of Invetech Class B
Common Stock may be exchanged for $33.9936 of Merger Consideration and each
share of Invetech Class A Common Stock may be exchanged for $622.50 of Merger
Consideration (without giving effect to the adjustment relating to the
shareholders' equity of Invetech as reflected on the Closing Balance Sheet or
interest to be paid on the Merger Consideration, as described above). For
purposes of computing per share Merger Consideration, each share of Applied
Common Stock will be assigned a value of Twenty-Eight Dollars and Sixty-Two
Cents ($28.62).
ELECTION PROCEDURES REGARDING MERGER CONSIDERATION
In connection with seeking approval by the Invetech Shareholders of the
Merger Agreement and the Merger, Invetech will deliver to each Invetech
Shareholder a merger consideration election form (the "Preference
Specification"). The Preference Specification allows each Invetech Shareholder
to indicate his or her preference with respect to the portions of the Merger
Consideration that such Invetech Shareholder would like to receive in Applied
Common Stock and cash. Each Invetech Shareholder will be given the choice to
elect to receive 78%, 70%, 60% or 50% of the aggregate Merger Consideration
payable to such Invetech Shareholder in Applied Common Stock (at a value of
$28.62 per share), with the balance of such Merger Consideration to be payable
in cash. From such amounts, cash equal to approximately 12.05% of the Merger
Consideration payable to each Invetech Shareholder will be deposited in escrow
by Applied. See "The Merger -- Escrow Amount" and "-- Indemnification." The
Preference Specification completed by each Invetech Shareholder will apply to
all shares of Invetech Common Stock held by such Invetech Shareholder. A
Preference Specification will only be effective if Invetech shall have received
the Preference Specification properly completed and signed not less than five
(5) business days prior to the Effective Time. In the event that a properly
completed and signed Preference Specification for any Invetech Shareholder is
not received by Invetech by such date, such Invetech Shareholder shall be
entitled to receive Merger Consideration allocated fifty percent (50%) to
Applied Common Stock (at a value of $28.62 per share) and fifty percent (50%) to
cash.
ESCROW AMOUNT
At the effective time, Ten Million Dollars ($10,000,000) of the cash
portion of the Merger Consideration or 12.05% of the aggregate Merger
Consideration will be deposited into an Escrow Account to secure the
indemnification obligations of Invetech under the Merger Agreement. See "The
Merger Agreement -- Indemnification." The aggregate amount of cash received by
Invetech Shareholders as part of the Merger Consideration will be reduced by:
(i) $1.5 million contributed by the holders of Invetech Class A Common Stock;
and (ii) $8.5 million contributed by the holders of Invetech Class B Common
Stock, on a pro rata basis as to each holders percentage interest in each class
of Invetech Common Stock. The amount of cash deposited into the Escrow Account
will be Seventy-Five Dollars ($75.00) per share of Invetech Class A Common Stock
and approximately Forty Dollars and Ninety-Six Cents ($40.96) per share of
Invetech Class B Common Stock and such amount will not be affected by the
Invetech Shareholders' Preference Specifications.
Subject to the prior lien of any claims for indemnification asserted by
Applied which have not yet been paid, the Escrow Amount will be reduced to Five
Million Dollars ($5,000,000) on January 1, 2000 and Two Million Five Hundred
Thousand Dollars ($2,500,000) on April 1, 2001 and all amounts held in excess of
the then applicable Escrow Amount shall be distributed to Invetech Shareholders
in proportion to their respective interests. Unless the entire Escrow Amount
shall have been paid to Applied in satisfaction of the indemnification
obligations of Invetech (upon which the escrow will terminate), the escrow will
terminate on the later of (i) five years following the Effective Time, and (ii)
the date upon which all claims for indemnification made by Applied pursuant to
the Merger Agreement and Escrow Agreement have been resolved and all amounts
then held in the Escrow Account will be distributed to the Invetech
Shareholders. See "The Merger Agreement -- Indemnification."
CLOSING DATE
The Closing of the transactions contemplated by the Merger Agreement shall
take place as soon as practicable after the satisfaction or waiver of each of
the conditions to Merger, unless Applied and Invetech
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<PAGE> 36
agree that the Closing should occur at some other time, as specified in the
Merger Agreement. See "The Merger Agreement -- Conditions to the Merger."
CONVERSION AND EXCHANGE OF SHARES
At the Effective Time, each outstanding share of Invetech Common Stock will
be converted into and exchanged for the right to receive the Merger
Consideration consisting of Applied Common Stock and cash. See "The
Merger -- General."
As promptly as practicable after the Effective Time, Applied will cause
Harris Trust and Savings Bank (the "Exchange Agent") to mail to each Invetech
Shareholder of record as of the Effective Time transmittal materials for use in
exchanging certificates of Invetech Common Stock for certificates of Applied
Common Stock and cash. The transmittal materials will contain information and
instructions with respect to the surrender of Invetech Common Stock certificates
in exchange for new certificates representing Applied Common Stock and cash.
Certificates should not be surrendered until the transmittal materials are
received. Pending delivery to the Exchange Agent of certificates representing
Invetech Common Stock, any dividends on the Applied Common Stock to be issued as
a result of the Merger that are payable prior to the delivery of such
certificates will be held by the Exchange Agent. Such dividends will be paid,
without interest, to the persons entitled thereto upon delivery of such Invetech
stock certificates to the Exchange Agent.
Fractional shares of Applied Common Stock will not be issued in the Merger.
Instead, each Invetech Shareholder who would otherwise be entitled to a fraction
of a share will receive, in lieu thereof, an amount of cash (rounded to the
nearest cent) equal to the product of such fractional interest multiplied by
Twenty-Eight Dollars and Sixty-Two Cents ($28.62). All certificates representing
shares of Invetech Common Stock shall be aggregated prior to determining the
number of fractional shares.
BUSINESS OF INVETECH PENDING THE MERGER
Pending the consummation of the Merger, and except as otherwise consented
to or approved in advance by Applied in writing, Invetech has agreed that it
will, among other things, (i) carry on its and its subsidiaries' business in the
usual, regular and ordinary course in substantially the same manner as it has
been conducted, (ii) maintain adequate insurance coverage and maintain its
properties and assets in good repair, in all cases consistent with past
practice, and (iii) use its reasonable efforts to preserve substantially intact
its business organization, its relationships with employees, consultants,
customers and suppliers.
In addition, Invetech has agreed not to take certain actions without the
prior written consent of Applied, including (without limitation) the following:
(i) amend its Articles of Incorporation or By-laws, (ii) issue, sell, pledge or
otherwise dispose of any securities of Invetech or its subsidiaries, (iii)
increase the compensation payable to any director, officer, consultant or
employee of Invetech except in a manner consistent with past practice or as may
be required by law or collective bargaining agreement, (iv) make any tax
election inconsistent with past practice, (v) elect to be covered by the
provisions of Section 780 of the Michigan Business Corporation Act, or take any
action which could cause the Invetech to be covered by Section 790 of the
Michigan Business Corporation Act, (vi) adopt any resolution which would grant
Invetech Shareholders dissenters' rights under the Michigan Business Corporation
Act, (vii) maintain its books, records, machinery, equipment and other assets in
a manner other than as consistent with past practice, or (viii) enter into any
agreement in excess of $100,000 connected with the purchase or lease of real
property, computer software, or non-resale items, or any commitments to make any
capital expenditures.
SOLICITATION OF ALTERNATIVE TRANSACTIONS
Until the Effective Time, Invetech has agreed that it will not, directly or
indirectly, solicit any proposals or offers from any third party relating to any
possible acquisition of Invetech, or participate (except to the extent
reasonably required by fiduciary obligations) in any negotiations regarding or
furnish to any person (except to the extent reasonably required by fiduciary
obligations) any information with respect to, or otherwise cooperate with, any
effort by any person to do any such transaction. However, Invetech has agreed
30
<PAGE> 37
that if an unsolicited acquisition proposal shall be received by the Board of
Directors of Invetech, then Invetech shall immediately notify Applied upon
receipt of any such proposal.
CORPORATE STRUCTURE AND RELATED MATTERS AFTER THE MERGER
At the Effective Time, Invetech will merge with and into Merger Sub, which
will survive as a wholly owned subsidiary of Applied. Following the Merger, the
Articles of Incorporation and Code of Regulations of Merger Sub, as in effect
immediately prior to the Effective Time, will be the Articles of Incorporation
and Regulations of the surviving corporation until thereafter amended as
provided by Ohio General Corporation Law and such Articles of Incorporation and
Regulations.
The directors and the officers of Merger Sub immediately prior to the
Effective Time will be the initial directors and officers of the surviving
corporation, in each case until their respective successors are duly elected or
appointed and qualified.
CERTAIN COVENANTS
Applied, Invetech and Merger Sub have made certain additional covenants
under the Merger Agreement. A complete list of such covenants is set forth in
the Merger Agreement attached hereto as Annex A. These covenants include the
following:
(a) Invetech has agreed to afford Applied and its representatives
reasonable access to its properties, books and other information concerning
its business, properties and personnel as Applied and its representatives
may reasonably request.
(b) Applied and Invetech will use all reasonable efforts to obtain all
necessary federal and state securities law or "Blue Sky" permits and
approvals required to carry out the transactions contemplated by the Merger
Agreement.
(c) Applied has agreed to use its best efforts to cause the Applied
Common Stock to be issued in connection with the Merger to be listed on
NYSE prior to the Effective Time.
(d) Invetech has agreed to call a meeting of its shareholders to be
held as soon as practicable for the purpose of obtaining the shareholder
approvals required in connection with the Merger Agreement. Subject to the
directors' applicable fiduciary duties, the Board of Directors of Invetech
will recommend to its shareholders that they vote to approve the Merger
Agreement and the Merger.
(e) Applied or the Merger Sub shall offer consulting and employment
agreements to certain key employees of Invetech on terms and conditions
reasonably agreeable to Applied or the Merger Sub, respectively.
(f) Invetech will use its reasonable efforts to obtain, and Applied
will cooperate with Invetech in obtaining, all consents, waivers,
approvals, authorizations or orders required in connection with the
consummation of the transactions contemplated in the Merger Agreement.
(g) Applied and Merger Sub will prepare, execute and file all tax
returns and other documents necessary to constitute the Merger as a
Reorganization under Section 368(a) of the Code.
(h) Invetech shall terminate all salary continuation agreements and
other postemployment benefit arrangements (other than those pertaining to
J. Michael Moore, James T. Moore II, Robert Maxon, Raymond Ranch, Lester
Schroeder, and Thomas P. Moore II) and shall satisfy and discharge any and
all obligations arising thereunder.
INDEMNIFICATION
By Invetech. At the Effective Date, Applied will cause to be deposited,
from the Merger Consideration, immediately available funds in the amount of Ten
Million Dollars ($10,000,000) (the "Escrow Amount") into the Escrow Account with
NBD Bank, as Escrow Agent pursuant to the Escrow Agreement. The Escrow Amount
will be available to indemnify Applied and Merger Sub from and against any
losses or expenses
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<PAGE> 38
incurred by Applied and Merger Sub arising out of any breach of the
representations, warranties, covenants or agreements given or made by Invetech
under the Merger Agreement. In general, Invetech's indemnification obligation is
subject to an aggregate deductible of One Hundred Sixty Thousand Dollars
($160,000).
If the Merger is consummated, the Escrow Amount shall be the exclusive
remedy of Applied and Merger Sub for any breach of any representation, warranty,
covenant or agreement of Invetech under the Merger Agreement.
Subject to the prior lien of any claims for indemnification asserted by
Applied, the Escrow Amount will be reduced to Five Million Dollars ($5,000,000)
on January 1, 2000 and Two Million Five Hundred Thousand Dollars ($2,500,000) on
April 1, 2001 and all amounts held in excess of the then applicable Escrow
Amount shall be distributed to Invetech Shareholders in proportion to their
respective interests. Unless the entire Escrow Amount shall have been paid to
Applied in satisfaction of the indemnification obligations of Invetech (upon
which the escrow will terminate), the escrow will terminate on the later of (i)
five years following the Effective Time, and (ii) the date upon which all claims
for indemnification made by Applied pursuant to the Merger Agreement and Escrow
Agreement have been resolved and all amounts then held in the Escrow Account
will be distributed to the Invetech Shareholders.
Pursuant to the terms of the Escrow Agreement, Thomas P. Moore II and
Dennis P. Moore will be appointed the Shareholder Representatives and shall each
have the discretion to make decisions and take actions on behalf of, and without
the consent of, the Invetech Shareholders. Such decisions and actions of each of
the Shareholder Representatives will be final, binding and conclusive upon all
Invetech Shareholders. Such agency may be changed pursuant to the terms of the
Escrow Agreement. BY APPROVING THE MERGER AGREEMENT, INVETECH SHAREHOLDERS WILL
BE DEEMED TO HAVE CONSENTED TO THE APPOINTMENT OF THOMAS P. MOORE II AND DENNIS
P. MOORE EACH TO ACT AS SHAREHOLDER REPRESENTATIVES ON BEHALF OF INVETECH
SHAREHOLDERS, TO GIVE AND RECEIVE COMMUNICATIONS, TO AUTHORIZE DELIVERY TO
APPLIED OF THE ESCROW AMOUNT FROM THE ESCROW ACCOUNT, TO OBJECT TO SUCH
DELIVERIES, TO AGREE TO, NEGOTIATE, AND ENTER INTO SETTLEMENTS AND COMPROMISES
OF SUCH CLAIMS, AND TO TAKE CERTAIN OTHER ACTIONS ON BEHALF OF INVETECH
SHAREHOLDERS, ALL AS MORE FULLY DESCRIBED IN THE ESCROW AGREEMENT.
If Applied claims that it is entitled to indemnification under the Merger
Agreement, Applied must provide written notice (a "Notice of Claim") of such
claim specifying with particularity the factual basis of the claim, to the
extent then known, to the Shareholder Representatives and the Escrow Agent.
Applied and the Shareholder Representatives shall discuss each Notice of Claim
in good faith to determine the validity and (if the claim is then liquidated)
the value of such claim for indemnification. If Applied and the Shareholder
Representatives cannot agree on the validity of the claim for indemnification
and/or (if the claim is then liquidated) the value of the claim specified in the
Notice of Claim, then the claim may be submitted by either party to an
arbitrator, and the decision of such arbitrator shall be final and binding upon
the parties.
In the event Applied or Merger Sub becomes aware of the commencement of any
claim, action or proceeding ("Proceeding") against either of them (including,
but not limited to a Proceeding regarding any federal, state or local tax) which
either of them believes may result in a claim for indemnification under the
Merger Agreement, Applied will give notice to the Shareholder Representatives of
the commencement of such Proceeding, and the Shareholder Representatives will be
entitled to participate in such Proceeding. No compromise or settlement of such
claims may be effected by Applied if a Shareholder Representative participates
and reasonably objects to the compromise.
Indemnification by Applied. Pursuant to the terms of the Merger Agreement,
Applied agrees to indemnify the Invetech Shareholders from any losses and
expenses incurred by them by reason of any breach of any representation,
warranty, covenant or agreement made in the Merger Agreement by Applied or the
Merger Sub. Notwithstanding the above, the liability of Applied under such
indemnification shall not exceed Ten Million Dollars ($10,000,000) with respect
to claims for indemnification first asserted within the thirty
32
<PAGE> 39
month period following the Effective Time; shall not exceed the lesser of (i)
Five Million Dollars ($5,000,000) or (ii) together with the aggregate of all
claims for indemnification first asserted within the thirty month period
following the Effective Time, Ten Million Dollars ($10,000,000) with respect to
claims for indemnification first asserted within the fifteen month period
following the first aforementioned thirty month period; and shall not exceed the
lesser of (i) Two Million Five Hundred Thousand Dollars ($2,500,000) or (ii)
together with the aggregate of all claims for indemnification first asserted
within the forty-five month period following the Effective Time, Ten Million
Dollars ($10,000,000) with respect to claims for indemnification first asserted
within the fifteen month period following the aforementioned forty-five month
period. In general, Applied's indemnification obligation is subject to an
aggregate deductible of One Hundred Sixty Thousand Dollars ($160,000).
CONDITIONS TO THE MERGER
Applied's and Invetech's respective obligations to consummate the Merger
are subject to the satisfaction of various conditions, including, without
limitation, (i) the approval of the Merger Agreement and the transactions
contemplated therein by the Invetech Shareholders, (ii) the listing of the
Applied Common Stock to be issued as part of the Merger Consideration on NYSE,
(iii) obtaining the requisite regulatory approvals, and (iv) the absence of any
restraining order, injunction or other order issued by a court of competent
jurisdiction prohibiting the Merger, or of any law, statute, rule or regulation
making the Merger or any of the transactions contemplated in the Merger
Agreement illegal.
The obligations of Applied and Merger Sub to consummate the Merger are
subject to, among other things, (i) the continuing accuracy as of the Effective
Time of the representations and warranties made by Invetech, (ii) the
performance by Invetech of all of its obligations required of it prior to the
Closing Date under the Merger Agreement, (iii) Applied being satisfied with the
environmental condition of the real property of Invetech, (iv) the receipt by
Applied and Merger Sub of duly executed consulting and non-competition
agreements between Applied or an affiliate of Applied and certain key employees,
(v) Applied being reasonably satisfied that all material customers, vendors,
suppliers, sales representatives and employees of Invetech will continue their
respective relationships with Invetech's business following the Effective Time,
(vi) Applied being satisfied that the shareholders equity of Invetech as of
December 31, 1996 and as of the Closing Date is not less than Forty-One Million
Dollars ($41,000,000) nor greater than Fifty-One Million Dollars ($51,000,000),
(vii) Applied being reasonably satisfied that it may assume all material
contracts, approvals, permits and leases of Invetech and its subsidiaries, and
that no such contracts or leases will conflict with or result in a material
breach or default under any material contract, approval, permit or agreement
with Applied, (viii) Applied being satisfied that certain benefit plans and
agreements to which Invetech and any of its current or former directors,
officers or employees were parties have been terminated and all obligations
thereunder have been discharged, (ix) Deloitte & Touche LLP having completed its
annual audit of Invetech's financial statements for the fiscal year ended
December 31, 1996 and issued an unqualified audit opinion with respect thereto,
and the absence of an occurrence or nonoccurrence of any event which might
result in a material adverse change in the financial condition, assets, business
or future prospects of Invetech, (x) the execution of certain employment,
consulting, noncompetition and confidentiality agreements between Applied and
certain shareholders, directors, officers and employees of Invetech, (xi) the
receipt by Applied and the Merger Sub of legal opinions reasonably satisfactory
to it pertaining to the Merger and the transactions contemplated in the Merger
Agreement, (xii) the closing price of Applied Common stock not having exceeded
$38.00 on any day subsequent to April 29, 1997 and prior to the Effective Time,
and (xiii) the receipt by Invetech of the consent of the inventor to Invetech's
assignment of a patent application relating to a certain Motion Roller/Bearing
Assembly to MRBA Company, which assignment shall have been filed with the United
States Patent and Trademark Office.
The obligation of Invetech to consummate the Merger is subject to, among
other things, (i) the continuing accuracy as of the Effective Time of the
representations and warranties made by Applied and the Merger Sub, (ii) the
performance by Applied and the Merger Sub of all of its obligations required of
it prior to the Effective Time under the Merger Agreement, (iii) the receipt by
Invetech of certain legal opinions reasonably satisfactory to it regarding tax
and other matters pertaining to the Merger and the transactions
33
<PAGE> 40
contemplated in the Merger Agreement, (iv) the closing price of Applied Common
Stock not having been less than $24.875 on any day subsequent to April 29, 1997
and prior to the Effective Time, and (v) control of Applied not having been
transferred to persons other than those persons in control of Applied on the
date of this Agreement. Any of the aforementioned conditions may be waived by
the party whose obligations are so conditioned prior to or following approval of
the Merger Agreement and the transactions contemplated thereby by the Invetech
Shareholders.
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT; TERMINATION FEE
The Merger Agreement may be terminated and the Merger may be abandoned
prior to the Effective Time under certain circumstances specified in the Merger
Agreement, including, without limitation, (i) by mutual written agreement of
Applied and Invetech, (ii) by either Applied or Invetech if the Merger shall not
have been consummated by July 31, 1997, (iii) by either party if a court of
competent jurisdiction or administrative agency shall have issued an order, rule
or injunction restraining or prohibiting the Merger, (iv) by Applied, if the
Board of Directors of Invetech shall have changed its approval or recommendation
of the Merger Agreement or the Merger or shall have recommended to shareholders
an alternate acquisition proposal, (v) by Invetech, if the Board of Directors of
Invetech, acting in good faith, determines that it is required, in order to
discharge properly its fiduciary duties to the Invetech Shareholders, to
withdraw, modify or change its approval of the Merger Agreement or the
transactions set forth therein, (vi) by either Applied or Invetech if the
Invetech Shareholders, at a meeting of such Invetech Shareholders, fail to
approve such Merger, or (vii) by either Applied or Invetech if the other party
shall have breached the Merger Agreement, which breach results or reasonably
would be expected to result in an adverse effect to the terminating party of
$3,000,000 or more (before taxes).
In the event, prior to termination of the Merger Agreement, any person
other than Applied or its affiliates shall have commenced, proposed or
communicated to Invetech a proposal to acquire all or substantially all of the
stock or assets of Invetech, and, within one year of the termination of the
Merger Agreement, a definitive agreement is entered into between Invetech and
such person, Invetech shall pay to Applied the sum of $3,000,000.
FEES AND EXPENSES
Except as set forth above (see "-- Termination or Amendment of the Merger
Agreement"), all fees and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby will be paid by the party
incurring such expenses, whether or not the Merger is consummated.
Notwithstanding the above, Applied shall be responsible for the payment of all
printing and registration fees associated with this Registration Statement on
Form S-4 Registration Statement and Prospectus.
CONFIDENTIALITY AGREEMENTS
Each party to the Merger Agreement has agreed to keep confidential
information provided by the other party pursuant to the Merger Agreement,
including information with respect to the business and intellectual properties
of the party furnishing such information. Such information is only to be used by
the parties for the purpose of effecting the Merger.
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<PAGE> 41
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
("pro forma financial statements") give effect to the merger of Applied and
Invetech. The Merger is subject to the approval of the Invetech Shareholders.
The unaudited pro forma combined condensed balance sheet has been prepared as if
the acquisition was consummated as of March 31, 1997 and is to be accounted for
as a purchase. The purchase price consideration is projected to be paid through
the issuance of 2,300,000 shares of Applied Common Stock (valued at $30.16 per
share for purchase accounting purposes) along with an estimated $18.8 million of
cash. The purchase price has been allocated to the acquired assets of Invetech
based on a preliminary analysis of the fair value of assets acquired and
liabilities assumed.
The following unaudited pro forma combined condensed income statements for
the year ended June 30, 1996 and for the nine months ended March 31, 1997 give
effect to the acquisition as if the transaction was completed at the beginning
of the year ended June 30, 1996. These pro forma income statements do not
include the impact of an estimated $3.7 million pre-tax nonrecurring charge for
the accrual of estimated costs associated with the acquisition of Invetech,
including the consolidation of operations of certain facilities, along with
costs relating to certain duplicative assets. This charge principally includes
accruals for certain severance costs, lease termination costs, and disposal of
duplicative capital assets. The charge will be recorded in the period in which
the acquisition is consummated. These pro forma statements do not include any
potential favorable effect on selling, distribution and administrative expenses
resulting from the projected reduction in expenses, primarily salaries and
employee benefits, upon consolidation of certain facilities and administrative
functions of the two companies. The impact of these reductions is estimated to
be approximately $15 million per year prior to any income tax impact.
The pro forma financial statements are provided for illustrative purposes
and are not necessarily indicative of the combined financial position or
combined results of operations that would have been reported had the acquisition
occurred on the dates indicated, nor do the pro forma financial statements
represent a forecast of the combined financial position or results of operations
for any future period. The pro forma financial statements should be read in
conjunction with the historical financial statements and accompanying notes for
Applied and Invetech.
Invetech has a fiscal year end as of December 31. The unaudited income
statements have been prepared as of Applied's fiscal reporting period ending
June 30 and were based upon Invetech's internal interim financial statements.
The accompanying Invetech unaudited financial statements contain all adjustments
necessary to present fairly the results of operations for the year ended June
30, 1996 and for the nine months ended March 31, 1997 utilizing accounting
methods consistent with the audited financial statements.
The total purchase price for Invetech is computed as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
2.3 million shares of Applied Common Stock to be issued (valued at $30.16 per
share for purchase accounting purposes)....................................... $ 69,368
Cash............................................................................ 18,820
Non-interest bearing obligations (discounted at 6.5%) issued for certain
covenants not to compete...................................................... 5,000
Present value of additional benefits payable under salary continuation
agreements for certain employees.............................................. 1,000
Direct transaction costs........................................................ 850
------------
TOTAL........................................................................... $ 95,038
==========
</TABLE>
The purchase price is expected to be allocated as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
Current assets.................................................................. $ 97,538
Property........................................................................ 12,322
Other assets.................................................................... 13,610
Goodwill........................................................................ 34,195
Intangible assets associated with certain covenants not to compete.............. 5,000
Liabilities assumed............................................................. (67,627)
------------
TOTAL........................................................................... $ 95,038
==========
</TABLE>
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<PAGE> 42
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
APPLIED INVETECH ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and temporary investments............. $ 15,521 $ 1,072 $ 16,593
Accounts receivable, net................... 152,335 42,663 194,998
Inventories................................ 118,172 30,047 $ 20,700 (1) 168,919
Other current assets....................... 7,226 3,056 10,000 (2) 20,282
------- ------- ------- -------
Total current assets.......................... 293,254 76,838 30,700 400,792
Property, net................................. 84,242 12,272 50 (3) 96,564
Other assets.................................. 20,283 14,959 27,846 (4) 63,088
------- ------- ------- -------
TOTAL ASSETS.......................... $397,779 $104,069 $ 58,596 $560,444
======= ======= ======= =======
LIABILITIES
Current liabilities
Notes payable.............................. $ 20,897 $ 18,820 (5) $ 39,717
Current portion of long-term debt.......... 11,429 $ 13,636 25,065
Accounts payable........................... 62,860 17,239 80,099
Other accrued liabilities.................. 34,532 9,688 14,190 (6) 58,410
------- ------- ------- -------
Total current liabilities..................... 129,718 40,563 33,010 203,291
Long-term debt................................ 57,143 8,517 65,660
Other liabilities............................. 11,577 6,451 4,810 (7) 22,838
------- ------- ------- -------
TOTAL LIABILITIES..................... 198,438 55,531 37,820 291,789
SHAREHOLDERS' EQUITY
Common stock.................................. 10,000 210 (210)(8) 10,000
Additional paid-in capital.................... 9,365 314 69,000 (8) 78,679
Income retained for use in the business....... 209,694 48,014 (48,014)(8) 209,694
Treasury shares -- at cost.................... (23,467) (23,467)
Other......................................... (6,251) (6,251)
------- ------- ------- -------
TOTAL SHAREHOLDERS' EQUITY............ 199,341 48,538 20,776 268,655
------- ------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.............................. $397,779 $104,069 $ 58,596 $560,444
======= ======= ======= =======
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Statements.
36
<PAGE> 43
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
---------------------------
APPLIED INVETECH ADJUSTMENTS COMBINED
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net Sales.................................. $1,143,749 $310,847 $1,454,596
Cost and Expenses
Cost of sales............................ 848,682 233,855 1,082,537
Selling, distribution and
administrative........................ 245,786 70,475 $ 2,150 (1) 318,411
---------- -------- ------- ----------
1,094,468 304,330 2,150 1,400,948
---------- -------- ------- ----------
Operating Income........................... 49,281 6,517 (2,150) 53,648
Interest
Interest Expense......................... 8,975 2,290 1,223 (2) 12,488
Interest Income.......................... (528) (237) (765)
---------- -------- ------- ----------
8,447 2,053 1,223 11,723
Income Before Income Taxes................. 40,834 4,464 (3,373) 41,925
Income Taxes............................... 17,500 875 (893)(3) 17,482
---------- -------- ------- ----------
Net Income................................. $ 23,334 $ 3,589 $(2,480) $ 24,443
========== ======== ======= ==========
Net Income per share....................... $ 1.90 $ 1.71 N/A $ 1.67
========== ======== ======= ==========
Average common shares outstanding.......... 12,303 2,095 205 (4) 14,603
========== ======== ======= ==========
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Statements.
37
<PAGE> 44
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
---------------------------
APPLIED INVETECH ADJUSTMENTS COMBINED
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net Sales................................... $854,431 $237,974 $1,092,405
Cost and Expenses
Cost of sales............................. 630,791 180,149 810,940
Selling, distribution and
administrative......................... 188,766 51,934 $ 1,612 (1) 242,312
-------- -------- ------- --------
819,557 232,083 1,612 1,053,252
-------- -------- ------- --------
Operating Income............................ 34,874 5,891 (1,612) 39,153
Interest
Interest Expense.......................... 4,829 1,275 917 (2) 7,021
Interest Income........................... (695) (141) (836)
-------- -------- ------- --------
4,134 1,134 917 6,185
Income Before Income Taxes.................. 30,740 4,757 (2,529) 32,968
Income Taxes................................ 12,577 1,279 (792)(3) 13,064
-------- -------- ------- --------
Net Income.................................. $ 18,163 $ 3,478 $(1,737) $ 19,904
======== ======== ======= ========
Net Income per share........................ $ 1.47 $ 1.66 N/A $ 1.35
======== ======== ======= ========
Average common shares outstanding........... 12,390 2,095 205 (4) 14,690
======== ======== ======= ========
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Statements.
38
<PAGE> 45
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following pro forma adjustments have been made for the balance sheet
dated March 31, 1997:
(1) Reflects the adjustment of inventory to fair value.
(2) Reflects a reclassification of a $10 million non-current asset to
current as the intent is to liquidate this asset within a twelve
month period.
(3) Reflects the net adjustment of property to fair value. This
adjustment consists of an increase in Invetech's net book value of
$2.1 million primarily related to land and buildings offset by a
reduction of $2.05 million primarily relating to certain
duplicative data processing and other equipment.
(4) Primarily reflects the allocation of the purchase price to
goodwill ($34.2 million) and certain covenants not to compete
($5.0 million). In addition, $10 million of assets have been
reclassified to current as they are intended to be realized within
a twelve month period.
(5) Reflects unsecured borrowing under existing short-term lines of
credit to finance the estimated cash portion of the purchase
price.
(6) Reflects accrual of direct acquisition costs ($9.4 million), the
current portion of the liability for certain covenants not to
compete ($1.2 million), and the deferred tax liability ($3.6
million) associated with the pro forma adjustments.
(7) Reflects the long-term portion of the liability for certain
covenants not to compete and the salary continuation agreements.
(8) Reflects the elimination of Invetech Common Stock, additional
paid-in capital and retained earnings and the projected issuance
of 2.3 million shares of Applied Common Stock.
The following pro forma adjustments have been made for the income statement
for the year ended June 30, 1996 and the nine months ended March 31, 1997:
(1) Reflects amortization of goodwill and certain covenants not to
compete on a straight line basis over 30 and 5 years,
respectively, as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1996 MARCH 31, 1997
--------------- ------------------
<S> <C> <C>
Goodwill $1.2 million $.9 million
Covenants not to compete 1.0 million .7 million
</TABLE>
(2) Reflects the interest cost of funds borrowed to finance the
estimated cash portion of the purchase price. Interest has been
computed using a rate of 6 1/2%. A 1/8% rate fluctuation would
result in a change in the interest costs of approximately two
thousand dollars per month.
(3) Reflects the impact of the above adjustments on income tax
expense. No tax benefit has been included for nondeductible
goodwill amortization.
(4) Reflects the net impact on the average common shares outstanding
of the elimination of the Invetech Common Stock outstanding and
the projected issuance of 2.3 million shares of Applied Common
Stock in the Merger.
39
<PAGE> 46
APPLIED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW
YEAR ENDED JUNE 30, 1996 VS. 1995
Applied sales in 1996 increased 8% to $1,143.7 million from 1995 sales of
$1,054.8 million. The sales increased approximately 4% due to price increases
and 4% due to volume increases. Net income for the fiscal year ended June 30,
1996 improved 38% over the prior year. In 1996, Applied continued to implement
its strategy, which began in 1992, of selling additional products to its
existing customers, as well as better penetration of the market with products
beyond the traditional bearing product lines. Applied expects to continue
expanding its business through acquisitions of other distributors.
Gross margin (net sales less cost of sales) as a percent of sales was 25.8%
in 1996 and 1995. Margins remained constant, even though the benefits from
favorable LIFO cost adjustments were significantly lower in 1996 than 1995 (see
Note 3 to the Consolidated Financial Statements). The lower LIFO benefits were
offset by a change in product mix.
Selling, distribution and administrative expenses as a percent of sales
were 21.5% in 1996 and 22.3% in 1995. The decrease in expenses as a percent of
sales was the result of a continued effort to control expenses and improved
productivity. While these expenses decreased as a percent of sales, they did
increase 5% in absolute dollars primarily due to higher compensation costs from
an increase in the number of associates, costs associated with acquisitions and
the accelerated vesting of performance accelerated restricted stock (PARS) based
upon the price performance of Applied Common Stock during the year.
Operating income increased to $49.3 million in 1996 from $36.9 million in
1995. As a percent of sales, operating income increased to 4.3% in 1996 from
3.5% in 1995. This improved operating margin resulted from higher sales volume
and improved productivity.
The number of associates was 4,133 at June 30, 1996 and 4,080 at June 30,
1995.
Interest expense for 1996 increased $1.3 million as a result of increased
borrowings and higher interest rates on short-term debt.
Income tax expense as a percentage of income before income taxes was 42.9%
in 1996. The effective tax rate was greater than the federal statutory rate
primarily due to state and local income taxes and non-deductible expenses.
YEAR ENDED JUNE 30, 1995 VS. 1994
Sales increased to $1,054.8 million from 1994 sales of $936.3 million, an
increase of 13%. The increase in sales was mainly due to additional volume.
Price increases averaged 4% for most product lines over the course of the fiscal
year. Results for the fiscal year ended June 30, 1995, continued to improve with
net income improving 33% over the prior year.
Gross margin as a percent of sales was 25.8% in 1995 and 26.9% in 1994. The
gross margin percentage decreased in fiscal 1995 due to a reduction in favorable
LIFO cost adjustments and delays in passing along certain price increases due to
contract timing and the competitive environment.
Selling, distribution and administrative expenses as a percent of sales
were 22.3% in 1995 and 23.9% in 1994. The decrease in expenses as a percent of
sales was the result of an active effort to control expenses and the rise in
sales volume. In fiscal 1995, Applied incurred higher expenses for
hospitalization, and sales commissions paid to account representatives. Expenses
decreased due to accelerated vesting in the prior year of performance
accelerated restricted stock (PARS).
The number of associates was 4,080 at June 30, 1995 and 4,066 at June 30,
1994.
Interest expense for 1995 increased $1.3 million over the prior year. This
increase was due, in part, to higher average interest rates on short-term
borrowings. Further, Applied in fiscal 1994 partially offset interest expense by
net interest income earned under interest rate swap agreements. In 1995, Applied
incurred
40
<PAGE> 47
additional interest expense from the termination of an interest rate swap
agreement. (See Note 5 to the Consolidated Financial Statements).
Income tax expense as a percent of income before income taxes was 43.0% in
1995. The effective tax rate was greater than the federal statutory rate
primarily due to state and local income taxes and non-deductible expenses.
LIQUIDITY AND WORKING CAPITAL
Applied generated cash from operating activities in the amount of $36.4
million and $13.4 million in 1996 and 1995, respectively.
Cash flow from operations depends primarily upon generating operating
income, controlling the investment in inventory and receivables, and managing
the timing of payments to suppliers. Applied's growth in accounts receivable and
inventory in 1996 was necessary to service the increased sales volume, including
greater sales of non-bearing products.
Investments in property totaled $23.5 million and $15.1 million in 1996 and
1995, respectively. These capital expenditures were primarily made for building
and upgrading branch facilities, construction of a new distribution center in
Atlanta which opened in the fall of 1996, acquisition of data processing
equipment, and vehicles.
Working capital at June 30, 1996, was $152.0 million compared to $153.6
million at June 30, 1995. The current ratio was 2.1 at June 30, 1996 and 2.4 at
June 30, 1995.
CAPITAL RESOURCES
Capital resources are obtained from income retained in the business,
indebtedness under Applied's lines of credit and long-term debt and from
operating lease arrangements. Average combined short-term and long-term
borrowing was $111.8 million in 1996 and $97.9 million in 1995. Effective
interest rates on short-term borrowings were 6.2% in 1996 and 5.9% in 1995.
Applied has short-term lines of credit totaling $110 million. Applied had $30.1
million of borrowings under these short-term lines of credit at June 30, 1996.
Applied sold its Dixie Bearings Aircraft Division business early in fiscal
1997. The initial proceeds from the sale of $9.1 million were used to reduce
short-term borrowings. This transaction is not anticipated to have a material
effect on the Consolidated Financial Statements.
Applied is obligated for rental payments for operating leases on 176 of its
354 branch, distribution center and other operating locations. See Note 9 to the
Consolidated Financial Statements for annual rental commitments.
Management expects that capital resources provided from operations,
available lines of credit, long-term debt and operating leases will be
sufficient for the foreseeable future to finance normal working capital needs,
business acquisitions and enhancement of facilities and equipment. Management
also believes that additional long-term debt and line of credit financing could
be obtained if desired.
OTHER MATTERS
The name of the company was changed from Bearings, Inc. to Applied
Industrial Technologies, Inc., effective January 1, 1997. The Bearings, Inc.
name no longer reflected the full scope of Applied's diverse business.
Anticipated expenses to promote, communicate and market the new corporate
identity are not expected to have a material impact on the fiscal 1997 results
of operations.
The 1990 agreement for the acquisition of King Bearing included specific
indemnification of Applied and King for any financial damages or losses related
to a lawsuit pending against King in the Superior Court of Orange County,
California. The indemnification was also guaranteed by the ultimate parent of
King's former owner, a Fortune 500 company with stockholders' equity exceeding
five billion dollars at June 30, 1996. A $32.4 million judgment relating to this
lawsuit was rendered against King in June 1992. As further explained
41
<PAGE> 48
in Note 10 to the Consolidated Financial Statements, management believes that
the outcome of this matter will not have a material adverse affect on the
consolidated financial position or results of operations of Applied due to the
indemnification and guarantee.
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997
The following is Management's discussion and analysis of certain
significant factors which have affected the Company's: (1) financial condition
at March 31, 1997 and June 30, 1996, and (2) results of operations and cash
flows during the three month and nine month periods ended March 31, 1997.
FINANCIAL CONDITION
LIQUIDITY AND WORKING CAPITAL
Cash provided by operating activities was $27.5 million in the nine months
ended March 31, 1997. This compares to $4.3 million provided by operating
activities in the same period a year ago.
Cash flow from operations depends primarily upon generating operating
income and controlling the investment in inventory and receivables, and managing
the timing of payments to suppliers. The company has continuing programs to
monitor and control these investments. During the nine month period ended March
31, 1997, inventories (excluding inventories sold with the Dixie Bearings
Aircraft Division) decreased approximately $3.8 million. Accounts receivable
increased by $0.4 million.
Investments in property totaled $10.9 million and $13.2 million in the nine
months ended March 31, 1997 and 1996 respectively. These capital expenditures
were primarily made for building and upgrading branch and distribution center
facilities, and acquiring data processing equipment and vehicles. A new
company-owned distribution center in Atlanta was opened during the quarter ended
September 30, 1996. Construction was started on a new distribution center in
Fort Worth, Texas. This build-to-suit facility will be financed under an
operating lease and is expected to open in May of 1997.
Working capital at March 31, 1997 was $163.5 million compared to $152.0
million at June 30, 1996. This increase is primarily due to an increase in cash
provided from operations, the receipt of proceeds from the sale of the Aircraft
Division, and the refund of insurance deposits.
CAPITAL RESOURCES
Capital resources are obtained from income retained in the business,
indebtedness under the Company's lines of credit and long-term debt agreements,
and operating lease arrangements.
Average combined short-term and long-term borrowing was $90.7 million for
the nine months ended March 31, 1997 and $111.8 million during the year ended
June 30, 1996. The average effective interest rate on the short-term borrowings
for the nine months ended March 31, 1997 increased to 6.5% from an average rate
of 6.1% for the nine months ended March 31, 1996 due to higher interest rates on
short-term debt. The Company has $105 million of short-term lines of credit with
commercial banks which provide for payment of interest at various interest rate
options, none of which are in excess of the banks' prime rate. The Company has
an agreement with the Prudential Insurance Company of America for an uncommitted
shelf facility to borrow up to $50 million in additional long term financing, at
its sole discretion, with terms ranging from seven to twenty years. The Company
had $18.9 million of borrowings outstanding under short-term bank lines of
credit and none under the shelf facility agreement at March 31, 1997. Unused
lines of credit of totaling $136.1 million are available for future short-term
financing needs. In addition, the Company also has $2.0 million of other
short-term notes payable outstanding outside of these bank line of credit
arrangements.
The Board of Directors has authorized the purchase of up to 420,000 shares
of the Company's common stock to fund employee benefit programs and stock option
and award programs. These purchases are made in open market and negotiated
transactions, from time to time, depending upon market conditions. The Company
acquired 150,500 shares of its common stock for $4.1 million during the nine
months ended March 31, 1997.
42
<PAGE> 49
The acquisition of Invetech will be financed by a combination of cash and
stock valued at $83 million. At least 50% but not more than 78% of the price for
all outstanding shares of Invetech Common Stock will be paid with Applied Common
Stock. The remainder will be financed through available lines of credit. It is
anticipated that a charge of $3.7 million to record restructuring of operations,
and consolidation expenses will be recorded at the consummation of the
acquisition.
Management expects that capital resources provided from operations,
available lines of credit and long-term debt and operating leases will be
sufficient for the foreseeable future to finance normal working capital needs,
business acquisitions, enhancement of facilities and equipment and the purchase
of additional Company common stock. Management also believes that additional
long-term debt and line of credit financing could be obtained if desired.
RESULTS OF OPERATIONS
A summary of the period-to-period changes in principal items included in
the statements of consolidated income follows:
INCREASE (DECREASE)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1997 AND 1996 1997 AND 1996
------------------ -------------------
AMOUNT CHANGE AMOUNT CHANGE
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net sales......................................... $1,126 .4 % $ 6,168 .7 %
Cost of sales..................................... 1,537 .7 247 0
Selling, distribution and administrative
expenses........................................ 89 .1 5,272 2.9
Operating income.................................. (500) (3.9) 649 1.9
Interest expense -- net........................... (678) (30.4) (2,370) (36.4)
Income before income taxes........................ 178 1.7 3,019 10.9
Income taxes...................................... (455) (9.9) 682 5.7
Net income........................................ 633 10.3 2,337 14.8
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 VS. 1996
The sales increase of 0.4% for the quarter was lower than in previous
quarter to quarter comparisons due to an overall slowing in certain industries
that exhibited strength in the prior year, particularly in the paper and machine
tools industries. These decreases were offset in part by increases in sales to
the aluminum, wood products, construction and food products industries. Our
comparative sales amounts were also negatively impacted by the sale of the Dixie
Bearings Aircraft Division earlier this year and by having fewer business days
than in the same quarter last year.
Selling, distribution and administrative expenses remained constant with a
modest increase of 0.1%.
Interest expense-net for the quarter decreased by 30.4% primarily as a
result of a decrease in average borrowings.
Income taxes as a percentage of income before taxes was 38.0% in the three
months ended March 31, 1997 and 42.9% in the three months ended March 31, 1996.
The decrease is primarily attributed to tax savings from lower effective state
and local income tax rates and from Federal income tax credits.
As a result of the above factors, net income increased by 10.3% compared to
the same quarter of last year.
NINE MONTHS ENDED MARCH 31, 1997 VS. 1996
The sales increase of 0.7% for the period was lower than in the prior nine
month comparison due to an overall slowing in certain industries that exhibited
strength in the prior year, particularly in the paper and machine tools
industries. These decreases were offset in part by increases in sales to the
aluminum, wood
43
<PAGE> 50
products, construction and food products industries. The decline in sales growth
was also affected by the sale of Dixie Bearings Aircraft Division during the
quarter ended September 30, 1996. Gross profit, as a percentage of sales,
increased from 25.7% to 26.2% primarily due to changes in the product mix as
sales of lower margin bearing products declined and sales in non-bearing
products continue to grow. In addition, lower freight costs also favorably
impacted the gross profit percentage.
Selling, distribution and administrative expenses increased by 2.9%,
primarily from higher compensation expense and health care costs.
Interest expense-net for the period decreased by 36.4% primarily from a
decrease in average borrowings.
Income taxes as a percentage of income before taxes was 40.9% in the nine
months ended March 31, 1997 and 42.9% in the nine months ended March 31, 1996.
The decrease is primarily attributed to tax savings from lower effective state
and local income tax rates and from Federal income tax credits.
As a result of the above factors, net income increased by 14.8% compared to
the same period last year. Income per share increased by 14.0% due to an
increase in income and an increase in the average number of shares outstanding.
44
<PAGE> 51
INFORMATION CONCERNING
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
DESCRIPTION OF BUSINESS
Applied, directly and through its wholly owned operating subsidiaries, is
engaged in the business of selling and distributing bearings, mechanical and
electrical drive system products, industrial rubber products, fluid power
products and specialty maintenance and repair products manufactured by others.
Applied and its predecessor companies have been engaged in this business since
1923. Applied was incorporated pursuant to the laws of Delaware in 1928 and
reincorporated from Delaware to Ohio in 1988. Applied (formerly known as
Bearings, Inc.) adopted its current name as of January 1, 1997.
GENERAL DEVELOPMENT OF THE BUSINESS
In fiscal 1996, Applied continued to enter into strategic business
combinations to improve its market position in non-bearing products and
services. Applied exchanged 486,000 shares of Applied Common Stock for all of
the outstanding shares of Engineered Sales, Inc., an applied-technology
distributor of hydraulic, pneumatic and electro-hydraulic systems and components
based in St. Louis, in February 1996. Earlier in the year, Applied purchased the
assets of Flood Industries, Inc. a two-branch distributor in the Upper Peninsula
of Michigan, and the Power Transmission Equipment Division of Hines Motor
Supply, Inc., located in Billings, Montana. In addition, in August 1996 Applied
sold its aircraft bearing distribution business, located in Atlanta, in order to
concentrate further on the core business of distribution to industrial markets.
Applied opened a new 155,000 square foot distribution center in Douglas
County, Georgia, replacing the former facility in that area. The center is
Applied's largest distribution center. In addition, a new 127,000 square foot
distribution center opened in May 1997 in Fort Worth, Texas replacing the
current Fort Worth facility. Applied has completed construction of and moved
into its new 145,000 square foot headquarters facility in Cleveland's Midtown
Corridor. The complex replaced Applied's former headquarters complex of five
buildings spread over three blocks in the Midtown Corridor.
Effective January 1, 1997, Applied changed its name from Bearings, Inc. to
Applied Industrial Technologies, Inc. The new name reflects the widening range
of products and services offered by Applied.
Further information regarding developments in Applied's business are set
forth under "Applied Management's Discussion and Analysis of Financial Condition
and Results of Operations" herein.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Applied considers its business to involve only one industry segment.
NARRATIVE DESCRIPTION OF THE BUSINESS
Products. Applied engages in the distribution and sale of ball, roller,
thrust, plane and linear type bearings, mechanical and electrical drive system
products, industrial rubber products, fluid power products and specialty items
used in connection with the foregoing such as seals, lubricants, locking
devices, sealing compounds, adhesives and maintenance tools. Although Applied
does not generally manufacture the products that it sells, it does assemble
filter carts, fluid power components, hydraulic power units, hydraulic and
pneumatic cylinders, speed reducers and electrical panels, modify conveyor belts
and rebuild precision machine tool spindles.
Applied is a non-exclusive distributor for numerous manufacturers of the
products which it sells. The principal bearing lines distributed by Applied are:
American, Barden, Cooper, FAG, Heim/RBC, INA, Kaydon, MB Manufacturing, McGill,
MRC, Sealmaster, SKF, Symmco, Thomson, Timken and Torrington/Fafnir. The
principal drive system product lines distributed by Applied are: Baldor,
Browning, Electron, Falk, FMC, Foote Jones, Jeffrey, Kop-Flex, Lincoln Electric,
Lovejoy, Martin, Morse, Reliance/Dodge, Rexnord/Link-Belt, Saftronics, Stephens
Adamson, U.S. Electrical Motors and Winsmith. The principal industrial rubber
product lines distributed by Applied are: Aeroquip, Boston, Dixon, Flexco,
Gates, Globe, Goodyear, Habasit and Weatherhead. The principal fluid power
product lines distributed by Applied
45
<PAGE> 52
are: Dana, Denison, Donaldson, Eaton Char-Lynn, Ingersoll Rand-ARO and Schrader
Bellows. Specialty items, including seals, sealants, fluid sealing, "O" rings,
retaining rings, adhesives, lubricants, maintenance equipment, skin care
products and tools, are purchased from various manufacturers. The principal
specialty items lines distributed by Applied are: CR Industries, Dow Corning,
Garlock, Gojo, Keystone, Loctite, Lubriplate, National/Federal Mogul, OTC/Power
Team, Parker Hannifin, Rotor Clip and Skil/Bosch. Applied believes that its
relationships with its suppliers are generally good and that Applied can
continue to represent these suppliers. The loss of certain of these suppliers
could have an adverse effect on Applied's business.
Based upon Applied's analysis of product dollar sales volume for the period
from June 30, 1996 through April 30, 1997, bearings represented 41%, drive
system products represented 31%, specialty items represented 12%, and other
items, including industrial rubber and fluid power products, represented 16% of
sales. For the fiscal year ended June 30, 1996, bearings represented 43%, drive
system products represented 30%, specialty items represented 11%, and other
items, including industrial rubber and fluid power products, represented 15% of
sales. For the year ended June 30, 1995, bearings represented 45%, drive system
products represented 30%, specialty items represented 12%, and other items,
including industrial rubber and fluid power products, represented 13% of sales.
For the year ended June 30, 1994, bearings represented 50%, drive system
products represented 27%, specialty items represented 12%, and other items,
including industrial rubber and fluid power products, represented 12% of sales.
Applied rebuilds precision machine tool spindles at its Spindle Lab in
Cleveland, Ohio. Mechanical shops located in Corona, California; Tracy,
California; Atlanta, Georgia; Florence, Kentucky; Worcester, Massachusetts; Iron
Mountain, Michigan; Butte, Montana; Charlotte, North Carolina; Cleveland, Ohio;
Carlisle, Pennsylvania; Fort Worth, Texas; and Longview, Washington rebuild and
assemble speed reducers, pumps, valves, cylinders and hydraulic motors, provide
custom machining and assemble electrical panels and fluid power systems to
customer specifications. Fluid power centers located in Corona, California;
Tracy, California; Baltimore, Maryland; Worcester, Massachusetts; Maryland
Heights, Missouri; Limerick, Pennsylvania; Richmond, Virginia; and Kent,
Washington assemble fluid power systems and components and provide customers
with technical expertise. Applied also operates rubber shops in Tucson, Arizona;
Corona, California; Tracy, California; Atlanta, Georgia; Crestwood, Illinois;
Billings, Montana; Dayton, New Jersey; Fort Worth, Texas; Longview, Washington;
and Appleton, Wisconsin to modify conveyor belts and provide hose assemblies in
accordance with customer requirements.
Services. Applied's sales personnel advise and assist customers with
respect to product selection and application. Applied considers this advice and
assistance to be an integral part of its overall sales efforts. Beyond acting as
a mere distributor, Applied markets itself to selected customers as a
"single-source" applied technology supplier, offering product and process
solutions involving multiple product technologies, which solutions reduce
production downtime and overall procurement and maintenance costs for customers.
By providing a high level of service, product knowledge and technical support,
while at the same time offering competitive pricing, Applied believes it will
develop closer, longer-lasting and more profitable relationships with its
customers.
Applied sales personnel consist of inside customer service and field
account representatives assigned to each branch, in addition to representatives
assigned as industry and product specialists. Inside customer service
representatives receive, process and expedite customer orders, provide pricing
and product information, and provide assistance to field account representatives
in servicing customers. Field account representatives make on-site calls to
customers and potential customers to provide product and pricing information,
make surveys of customer requirements and recommendations, and assist in the
implementation of maintenance programs. The representatives will measure and
document for a customer the value to the customer of the services and advice
Applied provides, through cost savings or increased productivity. Specialists
assist with applications particular to their areas of technical expertise.
Applied maintains inventory levels in each branch that are tailored to meet
the immediate needs of its customers and maintains back-up inventory in its
distribution centers, thereby enabling customers to minimize their own
inventories. Such inventories consist of certain standard items stocked at most
branches as well as
46
<PAGE> 53
other items related to the specific needs of customers in the particular locale.
As a result, the business of each branch is concentrated largely in the
geographic area in which it is located.
Timely delivery of products to customers is an integral part of the service
that Applied provides. Branches and distribution centers utilize the most
effective method of transportation available to meet customer needs including
both surface and air common carrier and courier services. Applied also maintains
a fleet of delivery vehicles to provide for delivery to customers. These
transportation services and delivery vehicles are also utilized for movement of
products between suppliers, distribution centers and branches to assure
availability of merchandise for customer needs.
Applied's ability to service its customers is enhanced by its computerized
inventory and sales information systems. Applied's point-of-sale OMNEX(R) 2.0
computer system gives all Applied locations on-line access to inventory, sales
analysis and data. Inventory and sales information is updated as transactions
are entered. The OMNEX(R) 2.0 system permits direct access for order entry,
pricing and price-auditing, order expediting and back order review. Applied's
computer system also permits Electronic Data Interchange (EDI) with
participating customers and suppliers.
Applied's operations contrast sharply with those of manufacturers whose
products it sells in that the manufacturers generally confine their direct sales
activities to large-volume transactions with original equipment manufacturers
who incorporate the components purchased into the products they make. The
manufacturers generally do not sell replacement components directly to the
customer but refer the customer to Applied or another distributor, although
there is no assurance that this practice will continue.
There is a trend among large industrial customers towards reducing the
number of suppliers of maintenance and repair products with whom they deal.
Applied is responding to this trend by, among other things, continuing to
broaden its product offering and developing new methods for marketing its
products, such as through various integrated supply channels. Applied continues
to develop marketing strategies to anticipate and address evolving customer
needs and concerns.
Patents, trademarks and licenses do not have a significant effect on
Applied's business.
Markets and Methods of Distribution. Applied purchases from over 100 major
suppliers of bearings, drive system products, industrial rubber products, fluid
power products and specialty items and resells to customers in a wide variety of
industries, including industrial machinery, forest products, primary metals,
agriculture and food processing, chemical processing, transportation, mining,
textiles and utilities. Its customers range from the largest industrial concerns
in the country to the smallest. Applied's business is not significantly
dependent upon a single customer or group of customers, the loss of which would
have a material adverse effect upon Applied's business as a whole, and no single
customer of Applied accounts for more than 3% of Applied's net sales.
On April 30, 1997, Applied had 331 branches in 42 states. Applied has no
operations outside the continental United States.
Applied's export business during the fiscal year ended June 30, 1996 and
prior fiscal years was less than 2% of net sales, and is not concentrated in any
one geographic area.
Competition. Applied considers its overall business to be highly
competitive. In addition, such markets present few economic or technological
barriers to entry. Applied's principal competitors are other specialized
bearing, drive system product, industrial rubber product, fluid power and
specialty item distributors, and, to a lesser extent, mill supply houses. These
competitors include single and multiple branch operations, some of which are
divisions or subsidiaries of larger organizations that may have greater
financial resources than Applied. There is a trend in the industry toward larger
multiple branch operations. Applied also competes with the manufacturers of
original equipment and their distributors in the sale of maintenance and
replacement bearings, power transmission components and related items. Some of
these manufacturers may have greater financial resources than Applied. The
competitors and the number of competitors vary throughout the geographic areas
in which Applied does business. Applied continues to develop and implement
marketing strategies to maintain a competitive position.
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<PAGE> 54
Applied is one of the leading distributors of replacement bearings, drive
system products, industrial rubber products, fluid power products and specialty
items in the United States, but Applied's share of the market for those products
is relatively small compared to the portion of that market serviced by original
equipment manufacturers and other distributors. Applied may not be the largest
distributor in each of the geographic areas in which a branch is located.
Backlog and Seasonality. Applied does not have a substantial backlog of
orders and backlog is not significant in the business of Applied since prompt
delivery of the majority of Applied's products is essential to Applied's
business. Applied does not consider its business to be seasonal.
Raw Materials and General Business Conditions. Applied's operations are
dependent upon general industrial activities and economic conditions and would
be adversely affected by the unavailability of raw materials to its suppliers or
by any prolonged recession or depression that has an adverse effect on American
industrial activity generally.
Number of Employees. On April 30, 1997, Applied had 4,074 employees. None
of Applied's employees are covered by collective bargaining. Applied considers
its relationship with its employees to be generally favorable.
Working Capital. Applied's working capital position is disclosed in this
Prospectus under the heading "Applied Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Applied requires substantial working capital related to accounts receivable
and inventories. Significant amounts of inventory are required to be carried to
meet rapid delivery requirements of customers. Applied generally requires all
payments for sales on account within 30 days and generally customers have no
right to return merchandise. Returns are not considered to have a material
effect on Applied's working capital requirements. Applied believes that such
practices are consistent with prevailing industry practices in these areas.
Environmental Laws. Applied believes that compliance with federal, state
and local provisions regulating the discharge of materials into the environment
or otherwise relating to the protection of the environment will not have a
material adverse effect upon capital expenditures, earnings or competitive
position of Applied.
Financial Information About Foreign and Domestic Operations and Export
Sales. Applied has no operations outside the continental United States.
Applied's export business during the fiscal year ended June 30, 1996, and prior
fiscal years, was less than 2% of net sales, and is not concentrated in any one
geographic area.
PROPERTIES
Applied owns or leases the properties in which its offices, branches,
distribution centers, shops and corporate facilities are located. As of April
30, 1997, the real properties at 175 locations were owned by Applied, while 171
locations were leased by Applied. Certain property locations may contain
multiple operations, such as a branch and a distribution center.
The principal real properties owned by Applied (each of which has more than
20,000 square feet of floor space) are: the corporate headquarters office
building in Cleveland, Ohio; the Cleveland East branch in Cleveland, Ohio; the
Atlanta Distribution Center, mechanical shop and rubber shop in Atlanta,
Georgia; the Prospect mechanical shop in Cleveland, Ohio; the Midwest
Distribution Center in Florence, Kentucky; the John R. Cunin Distribution Center
in Carlisle, Pennsylvania; and the Portland branch and Portland Distribution
Center in Portland, Oregon. The principal real properties leased by Applied
(each of which has more than 20,000 square feet of floor space) are: the new
corporate headquarters facility in Cleveland, Ohio; the Corona offices and
Corona Distribution Center in Corona, California; the Long Beach branch in Long
Beach, California; the San Jose branch in San Jose, California; the Tracy fluid
power shop, rubber shop and mechanical shop in Tracy, California; the Worcester
branch and fluid power center in Worcester, Massachusetts; the Fort Worth
Distribution Center, mechanical shop and rubber shop in Fort Worth, Texas; the
Longview branch and Longview Distribution Center in Longview, Washington; the
Appleton offices, branch
48
<PAGE> 55
and rubber shop in Appleton, Wisconsin; and the Milwaukee branch and
distribution center in Milwaukee, Wisconsin.
Applied considers the properties owned or leased to be generally sufficient
to meet its requirements for office space and inventory stocking. The size of
the buildings in which Applied's branches are located is primarily influenced by
the amount of inventory required to be carried to meet the needs of the
customers of the branch. All of the real properties owned or leased by Applied
are being utilized by Applied in its business except for certain properties,
which in the aggregate are not material and are either for sale or lease to
third parties due to relocation or closing of a facility. Unused portions of
buildings may be leased or subleased to others.
Generally, when opening a new branch, Applied will initially lease space.
Then, as the business develops, suitable property may be purchased or leased for
relocation of the branch. A new general purpose office-storeroom building may be
constructed. However, Applied has no fixed policy in this regard, and in each
instance the final decision is made on the basis of availability and cost of
suitable property in the local real estate market, whether purchased or leased.
Applied does not consider any one of its properties to be material, because it
believes that if it becomes necessary or desirable to relocate any of its
branches and distribution centers, other suitable properties could be found.
PENDING LEGAL PROCEEDINGS
In 1994, Dixie Bearings, Incorporated (now known as Applied Industrial
Technologies -- Dixie, Inc.), a wholly-owned subsidiary of Applied, was served
with a First Amending and Supplemental Petition in a case captioned In Re:
Robert Lee Bickham, et al. v. Metropolitan Life Insurance Company, et al., 22nd
Judicial District Court for the Parish of Washington, Louisiana, Case No.
70,760-E, naming it as an additional defendant, along with over 50 other
defendants. The action was initially filed in 1993. The petition claims to have
been filed on behalf of 1,117 persons or heirs of persons who were allegedly
exposed to asbestos-containing products while employed at the Bogalusa,
Louisiana, Paper Mill and/or Box Factory, currently operated by Gaylord
Container, Inc. Exposure is claimed to have occurred until approximately 1989.
Compensatory and punitive damages are sought, but no amount is specified. The
Company was subsequently served with Petitions in two related cases pending in
the same court as the Bickham case: Ida Mae Williams, et al. v. Metropolitan
Life Insurance Company, et al., Case No. 72,986-F; and Bennie L. Adams, et al.
v. Metropolitan Life Insurance Company, et al., Case No. 72,154-B. These cases,
involving a total of 123 persons or heirs of persons who worked at the same
Bogalusa facility, are essentially identical to the Bickham case.
Preliminary information made available to Applied indicates that Applied
has been named a defendant in the foregoing cases only as a supplier of certain
products manufactured by others, which products allegedly contained a small
percentage of encapsulated asbestos fiber. Applied intends to defend these cases
vigorously. Even if liability were assessed, Applied would seek indemnification
from its suppliers and its insurance carriers.
In 1992, a jury in a case captioned King Bearing, Inc., et al. v. Caryl
Edmund Oranges, et al., Superior Court of the State of California, County of
Orange, Case No. 53-42-31, awarded a $32.4 million judgment against King
Bearing, Inc., a wholly-owned subsidiary of Applied (but which has since been
merged into Applied). The verdict was based on contractual and other claims
asserted by various cross-complainants against King Bearing in a breach of
contract and unfair competition case initially filed by King Bearing in 1987.
The suit, which involved a former owner of King Bearing, was pending at the time
Applied acquired King Bearing in June 1990. All events relative to the judgment
occurred prior to Applied's purchase of King Bearing. On September 30, 1996, the
California Court of Appeal, Fourth Appellate District, affirmed the trial
court's grant of King Bearing's motion for a new trial. The cross-complainants'
petition for rehearing by the Court of Appeal and petition for review by the
California Supreme Court were both denied. As a result, the matter was remanded
to the trial court for a new trial. Under the 1990 Stock Purchase Agreement
relative to the acquisition of King Bearing by Applied, Applied is specifically
indemnified by the ultimate parent of the former owner of King Bearing (whose
stockholders' equity exceeded $5 billion at June 30, 1996) for any damages or
losses relating to this action.
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<PAGE> 56
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF
PRINCIPAL APPLIED SHAREHOLDERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of Applied Common Stock as of February 1, 1997, (i) by each
person known by Applied to own beneficially more than five percent of the
outstanding shares of Applied's common stock, (ii) by each director of Applied
who beneficially owns shares of Applied's common stock, (iii) by the executive
officers named in the Summary Compensation Table, and (iv) by all directors and
executive officers as a group based upon 12,379,761 shares of Applied Common
Stock outstanding as of April 30, 1997.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF PERCENT
BENEFICIAL COMMON STOCK AFTER
NAME OF BENEFICIAL OWNER OWNERSHIP(1) OUTSTANDING MERGER(9)
- ------------------------------------------------------ ------------ ------------- ----------
<S> <C> <C> <C>
The Capital Group Companies, Inc...................... 890,000(2) 7.2% 6.1%
333 South Hope Street
Los Angeles, CA 90071
The Prudential Insurance Company
of America.......................................... 725,925(3) 5.9% 4.9%
Three Gateway Center
Newark, New Jersey 07102-4077
William G. Bares...................................... 13,775(4) * *
Dr. Roger D. Blackwell................................ 5,902 * *
William E. Butler..................................... 1,350 * *
John C. Dannemiller................................... 211,894(5) 1.7% 1.4%
Russel B. Every....................................... 14,068 * *
Russell R. Gifford.................................... 3,458 * *
L. Thomas Hiltz....................................... 571,081(6) 4.6% 3.9%
John J. Kahl.......................................... 14,573 * *
Francis A. Martins.................................... 25,921(7) * *
John C. Robinson...................................... 108,593(5) * *
Robert C. Stinson..................................... 52,932(5) * *
Dr. Jerry Sue Thornton................................ 1,046 * *
John R. Whitten....................................... 52,604(5) * *
All directors and executive officers as group (16
persons)............................................ 1,114,560(8) 8.9% 7.5%
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934. Beneficial ownership may be disclaimed for
other purposes.
(2) The Capital Group Companies, Inc. filed a Schedule 13G dated February 12,
1997 indicating it had, as of December 31, 1996, sole voting power for
275,950 shares and sole dispositive power for 890,000 shares. The Capital
Group Companies, Inc. is the parent company of six investment management
companies: Capital Research and Management Company, a registered investment
adviser that manages The American Funds Group of mutual funds; Capital
Guardian Trust Company, a California state-chartered trust company that acts
as investment manager to large institutional accounts (primarily pension
funds); Capital International, Inc., a registered investment adviser that
serves as investment manager to a number of institutional investors; Capital
International S.A., Capital International K.K., and Capital International
Limited, based in Switzerland, Japan, and the United Kingdom, respectively,
which serve as investment managers to various institutional clients. Each of
these investment management companies acts separately from the others and
from The Capital Group Companies, Inc., in exercising investment discretion
over its managed accounts. Neither The Capital Group Companies, Inc., nor
any of its affiliates owns any shares of Applied Common Stock for its own
account. Rather, the shares reported in
50
<PAGE> 57
the Schedule 13G are owned by accounts under the discretionary investment
management of one or more of the investment management companies described
above.
(3) The Prudential Insurance Company of America filed a Schedule 13G dated
January 28, 1997 indicating it had, as of December 31, 1996, sole voting and
dispositive power for 302,400 shares, and shared voting and dispositive
power for 423,525 shares.
(4) Includes 1,500 shares owned by Mr. Bares' spouse, who has sole voting and
dispositive power.
(5) Includes shares that could be acquired within 60 days after February 1,
1997, pursuant to the exercise of stock options as follows: Mr.
Dannemiller -- 82,050; Mr. Robinson -- 41,589; Mr. Stinson -- 23,576; and
Mr. Whitten -- 23,276.
(6) Includes 553,500 shares held by the H.C.S. Foundation, a charitable trust of
which L. Thomas Hiltz is one of five trustees, with sole voting and
dispositive power. Pursuant to a Schedule 13D filed by the H.C.S. Foundation
dated December 20, 1989, the trustees, including Mr. Hiltz, disclaimed
beneficial ownership of those shares.
(7) Includes 375 shares owned by Mr. Martins' son, who has sole voting and
dispositive power.
(8) Includes 171,241 shares that could be acquired within 60 days after February
1, 1997, pursuant to the exercise of stock options. In determining the
percentage of share ownership, the 171,241 stock option shares are added to
both the denominator and the numerator, pursuant to Instruction 1 to Item
403 of Regulation S-K and Rule 13-3(d)(1) under the Securities Exchange Act
of 1934.
(9) Assuming the issuance of 2,300,000 shares of Applied Common Stock in
connection with the Merger.
MANAGEMENT OF APPLIED: EXECUTIVE OFFICERS AND DIRECTORS
Executive Officers
The Executive Officers of Applied are elected for a term of one year, or
until their successors are chosen and qualified, at the organizational meeting
of the Board of Directors held immediately following the annual meeting of
shareholders. The following is a listing of the Executive Officers of Applied
and a description of their business experience during the past five years.
Except as otherwise stated, the positions and offices indicated are with Applied
and the persons were elected to their present positions on October 22, 1996:
John C. Dannemiller. Mr. Dannemiller is Chairman (since January 1992),
Chief Executive Officer (since January 1992), President (since October 1996) and
a Director (since 1985). He is 59 years of age.
John C. Robinson. Mr. Robinson is Vice Chairman (since October 1996) and a
Director (since 1991). He was President (from January 1992 to October 1996),
Chief Operating Officer (from January 1992 to October 1996). He is 54 years of
age.
Mark O. Eisele. Mr. Eisele is Controller (since October 1992). He was
Manager of Internal Audit (from 1991 to October 1992). He is 40 years of age.
Francis A. Martins. Mr. Martins is Vice President-Sales & Field Operations
(since July 1996). Prior to that he was Vice President-Sales & Marketing
(October 1994 to July 1996); and Vice President-Marketing (from May 1992 to
October 1994). He is 54 years of age.
Bill L. Purser. Mr. Purser is Vice President-Marketing & National Accounts
(since July 1996). Prior to that he was Vice President-National Accounts (from
January 1995 to July 1996); and Director of National Accounts (from December
1994 to January 1995). Before joining Applied, he was Vice President of Business
Development for Invetech (from December 1992 to December 1994); and Vice
President of Sales for Invetech (from 1990 to December 1992). He is 53 years of
age.
Richard C. Shaw. Mr. Shaw is Vice President-Communications, Organizational
Learning & Quality Standards (since July 1996). Prior to that he was Vice
President-Communications & Public Relations (from July 1993 to July 1996); and
Director of Corporate Communications (from 1989 to July 1993). He is 48 years of
age.
51
<PAGE> 58
Robert C. Stinson. Mr. Stinson is Vice President-Administration, Human
Resources, General Counsel & Secretary (since October 1994) and has served as
Secretary since 1990. He was Vice President-General Counsel (from 1989 to
October 1994). He is 51 years of age.
John R. Whitten. Mr. Whitten is Vice President-Finance & Treasurer (since
October 1992). He was Vice President (since 1985) and Controller (from 1981 to
October 1992). He is 50 years of age.
Directors
The Board of Directors is divided into three classes. The terms of
directors serving in Class I expire in 1997, the terms of directors serving in
Class II expire in 1998, and the terms of directors serving in Class III expire
in 1999. The following is a listing of the directors of Applied and a
description of their business experience during the past five years.
CLASS I DIRECTORS
JOHN C. DANNEMILLER (a)(b)
(Director since 1985)
Mr. Dannemiller is Chairman (since January 1992), Chief Executive Officer
(since January 1992), and President (since October 1996) of Applied. He is 59
years of age.
JOHN C. ROBINSON (a)
(Director since 1991)
Mr. Robinson is Vice Chairman (since October 1996) of Applied. He has also
served as President (from January 1992 to October 1996) and Chief Operating
Officer (from January 1992 to October 1996). He is 54 years of age.
DR. JERRY SUE THORNTON (d)(e)
(Director since 1994)
Dr. Thornton is President (since January 1992) of Cuyahoga Community
College, the largest community college in Ohio. She is 50 years of age.
CLASS II DIRECTORS
WILLIAM G. BARES (b)(c)(e)
(Director since 1986)
Mr. Bares is Chairman (since April 1996), President (since 1982) and Chief
Executive Officer (since January 1996) of The Lubrizol Corporation, a specialty
chemical company. Lubrizol specializes in products created through the
application of advanced chemical, mechanical and biological technologies for use
in specialty additive systems for gasoline and diesel engine oils, automatic
transmission fluids, gear oils, marine and tractor lubricants, and specialty
products for industrial fluids, fuel additives and process chemicals. He was
Chief Operating Officer (from 1987 to December 1995) and has served as a
director of that company since 1981. He is 55 years of age and also serves as a
director of Oglebay Norton Company and KeyCorp.
DR. ROGER D. BLACKWELL
(Director since 1996)
Dr. Blackwell is a Professor of Marketing at the Ohio State University
College of Business and President of Blackwell Associates, Inc., a consulting
firm in Columbus, Ohio. He is 56 years of age and also serves as a director of
Checkpoint Systems, Inc., Cheryl & Co., Inc., Intimate Brands, Inc., Max &
Erma's Restaurants, Inc., and Worthington Foods, Inc., and as a trustee of The
Flex-funds.
52
<PAGE> 59
RUSSEL B. EVERY (c)(d)
(Director since 1986)
Mr. Every has been a business consultant since his retirement as Chairman
of The Lamson & Sessions Co. in 1989. In furtherance of his consulting business,
he was hired as President and Chief Executive Officer in October 1991 by the
Board of Directors of Sudbury, Inc., a diversified manufacturer of industrial
products, for the purpose of restructuring that company. When Sudbury, Inc.
filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in January
1992, Mr. Every was elected Chairman and director to continue the restructuring
of that company and to find a new Chief Executive Officer. A plan of
reorganization was confirmed and a new Chief Executive Officer selected;
therefore, Mr. Every's assignment with Sudbury, Inc. concluded in August 1992.
He served as a director of The Lamson & Sessions Co. from 1979 to April 1995.
The Lamson & Sessions Co. is a supplier of a variety of fabricated and machined
metal components and parts for use by original equipment manufacturers
principally in the transportation equipment industry. Its Carlon Division is a
leading domestic producer of thermoplastic conduit, ducts, fittings, enclosures
and accessories used principally in electrical applications. He is 72 years of
age.
JOHN J. KAHL (b)(d)
(Director since 1992)
Mr. Kahl is Chairman and Chief Executive Officer of Manco, Inc., a
manufacturer of pressure sensitive tapes for household and automotive repair,
including Duck(R) Brand Tapes, mailing and shipping supplies for both home and
office under the CareMail(R) brand, weatherstripping and related home energy
products for the "do-it-yourselfer" and labels for both home and office. He is
56 years of age and also serves as a director of Royal Appliance Mfg. Co.
CLASS III DIRECTORS
WILLIAM E. BUTLER (b)(c)
(Director since 1987)
Mr. Butler was Chairman, from January 1992 until his retirement in December
1995, of Eaton Corporation, a global manufacturer of highly engineered products
which serve vehicle, industrial, construction, commercial, aerospace and marine
markets. Principal products include truck transmissions and axles, engine
components, hydraulic products, electrical power distribution and control
equipment, ion implanters and a wide variety of controls. He was Chief Executive
Officer (from September 1991 to September 1995), and served as a director of
that company from 1989 until his retirement. He is 66 years of age and also
serves as a director of Ferro Corporation, The Goodyear Tire & Rubber Co.,
Pitney Bowes, Inc. and Zurn Industries, Inc.
RUSSELL R. GIFFORD (d)(e)
(Director since 1992)
Mr. Gifford was President of CNG Energy Services Corp., a subsidiary of
Consolidated Natural Gas Company, from September 1994 until his retirement in
September 1996. CNG Energy Services Corp. is an unregulated energy services
marketing company. He was also President and Chief Executive Officer (from 1989
to September 1994) of The East Ohio Gas Company, the largest distribution
subsidiary of Consolidated Natural Gas Company. Mr. Gifford is 57 years of age
and serves as a trustee of First Union Real Estate Equity and Mortgage
Investments.
L. THOMAS HILTZ (a)(b)(c)(e)
(Director since 1981)
Mr. Hiltz is an attorney in Covington, Kentucky and is one of five trustees
of the H.C.S. Foundation, a charitable trust which has sole voting and
dispositive power with respect to 553,500 shares of Applied Common Stock. He is
51 years of age.
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<PAGE> 60
- ---------------
(a) Member of the Executive Committee.
(b) Member of the Director Nominating Committee.
(c) Member of the Executive Organization & Compensation Committee.
(d) Member of the Audit Committee.
(e) Member of the Corporate Governance Committee.
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<PAGE> 61
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table summarizes compensation earned during the fiscal years
ended June 30, 1996, 1995 and 1994, by those persons who were, during the fiscal
year ended June 30, 1996, the Chief Executive Officer and the four other most
highly compensated executive officers of Applied.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND
PRINCIPAL POSITION YEAR SALARY BONUS(1)
------------------------------------------------------- ---- -------- --------
<S> <C> <C> <C>
John C. Dannemiller.................................... 1996 $439,167 $435,960
Chairman, Chief 1995 411,117 451,153
Executive Officer & President 1994 374,567 379,771
John C. Robinson....................................... 1996 303,533 241,444
Vice Chairman 1995 283,333 241,027
1994 258,333 224,602
John R. Whitten........................................ 1996 186,830 131,680
Vice President -- 1995 175,667 117,429
Finance & Treasurer 1994 165,000 124,932
Robert C. Stinson...................................... 1996 179,067 131,572
Vice President -- Administration, Human 1995 165,000 132,874
Resources, General Counsel & Secretary 1994 151,333 82,802
Francis A. Martins..................................... 1996 170,640 126,903
Vice President -- 1995 158,000 114,704
Sales & Field Operations 1994 146,667 96,439
</TABLE>
LONG-TERM
COMPENSATION AWARDS
<TABLE>
<CAPTION>
NAME AND RESTRICTED NUMBER
PRINCIPAL POSITION YEAR STOCK AWARD(S)(2) OF OPTIONS
------------------------------------------------- ---- ----------------- ----------
<S> <C> <C> <C>
John C. Dannemiller.............................. 1996 $ 0 0
Chairman, Chief 1995 952,500 0
Executive Officer & President 1994 0 0
John C. Robinson................................. 1996 0 0
Vice Chairman 1995 476,250 0
1994 0 0
John R. Whitten.................................. 1996 0 0
Vice President -- 1995 238,125 0
Finance & Treasurer 1994 0 0
Robert C. Stinson................................ 1996 0 0
Vice President -- Administration, Human 1995 238,125 0
Resources, General Counsel & Secretary 1994 0 0
Francis A. Martins............................... 1996 0 0
Vice President -- 1995 238,125 0
Sales & Field Operations 1994 0 0
</TABLE>
55
<PAGE> 62
<TABLE>
<CAPTION>
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR COMPENSATION(3)
-------------------------------------------------------------- ---- ---------------
<S> <C> <C>
John C. Dannemiller........................................... 1996 $41,994
Chairman, Chief 1995 42,168
Executive Officer & President 1994 36,394
John C. Robinson.............................................. 1996 27,245
Vice Chairman 1995 21,651
1994 26,163
John R. Whitten............................................... 1996 16,457
Vice President -- 1995 11,379
Finance & Treasurer 1994 7,486
Robert C. Stinson............................................. 1996 16,726
Vice President -- Administration, Human 1995 12,189
Resources, General Counsel & Secretary 1994 11,691
Francis A. Martins............................................ 1996 9,874
Vice President -- 1995 14,111
Sales & Field Operations 1994 12,185
</TABLE>
- ---------------
(1) Amounts reported in this column are earnings pursuant to the annual
Management Incentive Plan, described in the Executive Organization &
Compensation Committee Report. Pursuant to the Deferred Compensation Plan,
described herein, the following named executive officers deferred, and had
invested in Applied Common Stock in August 1996, the corresponding
percentages of their earnings under the 1996 Management Incentive Plan: Mr.
Dannemiller, 80%; Mr. Robinson, 64%; Mr. Whitten, 50%; Mr. Stinson, 50%; and
Mr. Martins, 20%.
(2) Amounts reported in this column represent Performance-Accelerated Restricted
Stock awards ("PARS") under the 1990 Long-Term Performance Plan described in
the Executive Organization & Compensation Committee Report, valued at the
closing market price of Applied Common Stock on the dates of grant.
Dividends are paid on PARS at the same rate paid to all shareholders.
One-half of the PARS granted in fiscal 1995 vested during fiscal 1996,
except certain of those held by Mr. Dannemiller, for the reason described in
the Executive Organization & Compensation Committee Report below. At June
30, 1996, the persons listed above held the following number of unvested
PARS, valued at the closing market price of Applied Common Stock on that
date: Mr. Dannemiller, 27,961 shares, $754,947; Mr. Robinson, 11,250 shares,
$303,750; Mr. Whitten, 5,625 shares, $151,875; Mr. Stinson, 5,625 shares,
$151,875; and Mr. Martins, 5,625 shares, $151,875.
(3) Amounts reported in this column for fiscal 1996 include the following:
(a) The contributions made by Applied and credited to the individual
accounts of the named executive officers under Applied's Retirement Savings
Plan, as follows: Mr. Dannemiller, $7,117; Mr. Robinson, $11,853; Mr.
Whitten, $9,873; Mr. Stinson, $10,147; and Mr. Martins, $9,874. These totals
are estimated and subject to year-end adjustment.
(b) Pursuant to the Deferred Compensation Plan, the accounts of certain
participants were credited with additional Applied Common Stock equal to 10%
of the amount of earnings deferred into Applied Common Stock. The values of
the additional shares credited to the accounts of the named executive
officers are as follows: Mr. Dannemiller, $34,877; Mr. Robinson, $15,392;
Mr. Whitten, $6,584; Mr. Stinson, $6,579; and Mr. Martins, $0.
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<PAGE> 63
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth information concerning stock option
exercises by the Chief Executive Officer and the four other most highly
compensated executive officers of Applied in the fiscal year ended June 30,
1996, and the values of in-the-money options held by those individuals on June
30, 1996.
NUMBER OF SECURITIES UNDERLYING OPTIONS
<TABLE>
<CAPTION>
NAME EXERCISED VALUE REALIZED
------------------------------------------------------------- --------- --------------
<S> <C> <C>
John C. Dannemiller.......................................... 0 $0
John C. Robinson............................................. 0 0
John R. Whitten.............................................. 0 0
Robert C. Stinson............................................ 0 0
Francis A. Martins........................................... 0 0
</TABLE>
NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS
AT FISCAL YEAR END
<TABLE>
<CAPTION>
NAME EXERCISABLE UNEXERCISABLE
------------------------------------------------------------ ----------- -------------
<S> <C> <C>
John C. Dannemiller......................................... 82,050 0
John C. Robinson............................................ 41,589 0
John R. Whitten............................................. 23,276 0
Robert C. Stinson........................................... 23,576 0
Francis A. Martins.......................................... 0 0
</TABLE>
VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS
AT FISCAL YEAR END
<TABLE>
<CAPTION>
NAME EXERCISABLE UNEXERCISABLE
----------------------------------------------------------- ----------- -------------
<S> <C> <C>
John C. Dannemiller........................................ $1,240,894 $ 0
John C. Robinson........................................... 601,971 0
John R. Whitten............................................ 359,174 0
Robert C. Stinson.......................................... 363,161 0
Francis A. Martins......................................... 0 0
</TABLE>
57
<PAGE> 64
ESTIMATED RETIREMENT BENEFITS UNDER
SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS PLAN(1)
The following table shows estimated annual benefits payable at retirement
to certain selected executive officers under Applied's Supplemental Executive
Retirement Benefits Plan.
YEARS OF SERVICE(2)
<TABLE>
<CAPTION>
REMUNERATION(3) 5 10 15 20
- --------------- ------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 125,000 $14,063 $ 28,125 $ 42,188 $ 56,250
150,000 16,875 33,750 50,625 67,500
175,000 19,688 39,375 59,063 78,750
200,000 22,500 45,000 67,500 90,000
225,000 25,313 50,625 75,938 101,250
250,000 28,125 56,250 84,375 112,500
275,000 30,938 61,875 92,813 123,750
300,000 33,750 67,500 101,250 135,000
350,000 39,375 78,750 118,125 157,500
400,000 45,000 90,000 135,000 180,000
450,000 50,625 101,250 151,875 202,500
500,000 56,250 112,500 168,750 225,000
550,000 61,876 123,750 185,626 247,500
</TABLE>
- ---------------
(1) Amounts shown in the table are computed on the basis of a straight life
annuity and are not subject to deduction of Social Security or other offset
amounts.
(2) Mr. Robinson has in excess of 20 years of service with Applied and is,
therefore, entitled to a full retirement benefit under the plan. Messrs.
Dannemiller, Stinson and Martins have in excess of five years of service
with Applied and Mr. Whitten has in excess of fifteen years of service.
(3) Amounts in this column represent, and benefits are based on, highest average
salary for three consecutive years. The salaries for the Chief Executive
Officer and the four other most highly compensated executive officers for
the past three fiscal years are found in the Summary Compensation Table on
pages 52 and 53.
58
<PAGE> 65
REPORT OF THE EXECUTIVE ORGANIZATION & COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
OVERVIEW
The Executive Organization & Compensation Committee (the "Committee") is
comprised entirely of independent outside directors. The Committee is
responsible for setting Applied's executive officer compensation policies. The
purpose of the executive officer compensation program is to attract and retain
qualified executives and to provide appropriate incentives, both monetary and
stock-based, to achieve Applied's business strategies and ultimately enhance
shareholder value over the long term.
The major components of Applied's executive officer compensation program
applicable to the Chief Executive Officer and the other executive officers,
including those named in the Summary Compensation Table appearing on pages 52
and 53 hereof, are:
(a) Annual base salary; and,
(b) The 1990 Long-Term Performance Plan.
ELEMENTS OF COMPENSATION PROGRAM
(a) ANNUAL BASE SALARY
The Committee utilizes an annual competitive pay analysis compiled by an
independent nationally recognized compensation and benefits consulting firm (the
"Independent Consultant") which provides data on similar positions. The analysis
provides the Committee with the market base salary at the 25th, 50th and 75th
percentiles for each executive officer position, together with the market total
cash compensation (discussed later in this report). The competitive pay analysis
is based on survey data primarily from the distribution industry and is more
industry-specific to Applied than the published industry index shown in the
stock performance graph appearing below. In addition to the competitive pay
analysis, the Committee generally considers time and level of experience in the
position in setting the annual base salary. As a general rule, annual base
salaries have been set by the Committee below the 50th percentile; however, the
Committee would consider setting annual base salaries at higher levels
coincident with sustained corporate earnings improvement. The Committee's
overall executive compensation philosophy is to place greater weight on the
performance-driven portions of the compensation package -- namely the awards
under Applied's 1990 Long-Term Performance Plan.
(b) LONG-TERM PERFORMANCE PLAN
(1) MANAGEMENT INCENTIVE PLAN
The annual Management Incentive Plan, adopted under the Long-Term
Performance Plan, is Applied's program for compensating executive officers for
the achievement of goals set for a particular fiscal year. Under the Management
Incentive Plan, each executive officer, including the Chief Executive Officer
and the other executive officers named in the Summary Compensation Table,
presents the Committee with individual goals for the fiscal year. Corporate
goals for the fiscal year are also presented to the Committee. The Committee
reviews and discusses the goals with the executive officers and then sets the
goals for the year. Both the individual and the corporate goals are expressed in
terms of threshold, target (midpoint) and maximum levels of required
performance.
In fiscal 1996, Messrs. Dannemiller and Robinson had the corporate goals as
their individual goals. The corporate goals for fiscal 1996 included objectives
based on Applied's pre-tax return on assets, pre-tax income, and sales,
distribution and administrative expenses as a percentage of net sales. These
goals were weighted 40%, 40% and 20%, respectively. The other executive
officers, including Messrs. Whitten, Stinson and Martins, had individual goals
(in addition to the corporate goals) relating specifically to their job
responsibilities. These goals may vary in relative weight. The size of the
Management Incentive Plan payment for any of the executive officers depends on
the amount of performance achieved on both the individual and the corporate
goals. Although all or some of the individual goals under the Plan were met in
fiscal 1990, 1991 and
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<PAGE> 66
1992, corporate goals were not met and, for that reason, no payments were made
under the Plan in those years. Because the corporate goals were met in fiscal
1993, 1994, 1995 and 1996, payments were made pursuant to the Management
Incentive Plans in those years.
Assuming that corporate and individual goals are met, the amount of the
individual award is based on a formula, the components of which are the 50th
percentile market base salary and a responsibility percentage assigned to the
executive officer. The responsibility percentages are set by the Committee.
Thus, the Chief Executive Officer target incentive payment set by the Committee
in fiscal 1996 was $301,000, being 70% (the responsibility percentage)
multiplied by the market base salary. The annual base salary set by the
Committee, plus the target incentive payment, has generally been less than the
50th percentile market total cash compensation. For Mr. Dannemiller, the market
total cash compensation at the 50th percentile was $810,000 effective for the
twelve-month period commencing November 1, 1995, the date on which executive
compensation changes are made each year. Mr. Dannemiller's actual annual base
salary for fiscal 1996 was $439,167, his target incentive was $301,000, and
total cash compensation assuming target performance under the Management
Incentive Plan was $740,167. If, however, performance for corporate and
individual goals exceeds the target level set by the Committee, the executive
officers, including the Chief Executive Officer and the named executive
officers, can earn above the 50th percentile for total cash compensation. Thus,
because 94% of maximum performance was achieved on his goals in fiscal 1996, Mr.
Dannemiller received total cash compensation of $875,127 ($439,167 base salary,
plus $435,960 under the Management Incentive Plan), as compared with the 50th
percentile market total cash compensation of $810,000. A similar philosophy
applies to the other executive officers. Responsibility percentages for the
other executive officers during fiscal 1996, including those named in the
Summary Compensation Table, ranged from 36% to 50%.
The Deferred Compensation Plan, approved by the shareholders in October
1993, was adopted in part to encourage increased investment in Applied Common
Stock by Applied's executive officers. All but one of the participants in the
1996 Management Incentive Plan elected under the Deferred Compensation Plan to
defer a portion of their Management Incentive Plan awards, with deferral
percentages ranging from 20% to 85%. All but one of those persons elected to
have their deferred awards invested solely in Applied Common Stock, with the
remaining participant electing to invest more than one-half of his total award
in Common Stock.
(2) STOCK-BASED AWARDS
Until fiscal 1993, the only types of awards under Applied's 1990 Long-Term
Performance Plan were stock options. In order to align more closely the
executive officers with the interests of Applied's shareholders and to
compensate the executive officers based on performance measures that directly
enhance shareholder value, the Committee chose in October 1992 to make awards of
Performance-Accelerated Restricted Stock ("PARS") under the Plan. The awards
were intended to replace ongoing stock option grants to executive officers, but
would not affect past stock option grants. The PARS were awards of restricted
shares of Applied Common Stock, which shares would vest six years from the date
of grant; however, the PARS could vest automatically at an earlier date if
certain performance hurdles based on stock price and pre-tax return on assets
were met. No new stock option or PARS awards could be made to the executive
officers until 100% of the PARS had vested, either by meeting the performance
hurdles or by passage of the six-year term, and in no event could a new award be
made during the two-year period immediately following the date of grant of the
previous awards. The initial PARS awards vested in fiscal 1994 as a result of
the achievement of stock price performance hurdles.
In October 1994 new PARS awards were made to the executive officers. At the
time the awards were made, the stock price was $21.17 (adjusted for the December
1995 3-for-2 stock split). Once again, the shares would automatically vest six
years from the date of grant, although they could vest at an earlier date if
certain performance hurdles were met; provided further, with respect to the
awards made to Messrs. Dannemiller and Robinson, such awards would not vest
early to the extent vesting would result in the non-deductibility of the
resulting compensation under Section 162(m) of the Internal Revenue Code. In
April 1996, 50% of the PARS awards vested on reaching a stock price of $30.67
per share for ten consecutive trading days. The remaining 50% can vest early on
reaching either a pre-tax return on assets of 12%, or a stock price of $36.00
per share for ten consecutive days. According to an independent survey of other
companies utilizing
60
<PAGE> 67
stock-based long-term performance awards, which survey was prepared at the time
the grants were made, if all of the PARS had vested within the first two years,
the awards would have represented the 85th percentile of competitive
compensation. If, however, the performance hurdles were not met and the PARS
vested only after the full six years, the compensation on a competitive basis
would have been in the 20th percentile.
No new stock option or PARS awards can be made to the executive officers
until 100% of the PARS vest, either by meeting the performance hurdles or by
passage of the six-year term, and in no event can a new award be made during the
two-year period immediately following the date of grant of the previous awards.
An exception with respect to the two-year limitation was made in October 1994
for two executive officers. These individuals were granted PARS awards within
the previous two years upon assuming their current positions of responsibility.
The two-year limitation on the grant of additional awards was waived to permit
the grant of new PARS awards to these individuals in October 1994 and to put all
of the executive officers on the same award cycle.
The total amount of all stock-based awards is limited by the annual
limitation set forth in the Long-Term Performance Plan of 2% of shares
outstanding on the first day of the fiscal year in which the awards are made.
(c) BENEFITS
Benefits provided to the executive officers are those generally provided to
Applied's other associates with variations consistent with executive benefits in
the competitive marketplace.
FEDERAL INCOME TAX DEDUCTIBILITY
Section 162(m) of the Internal Revenue Code limits the amount of
compensation a publicly-held corporation may deduct as a business expense for
federal income tax purposes. That limit, which applies to the Chief Executive
Officer and the four other most highly compensated executive officers, is $1
million per individual per year, subject to certain exceptions. One of the
exceptions is for compensation that is performance-based.
The Committee has taken steps to ensure that the awards made to the
executive officers under the Management Incentive Plan qualify as
performance-based under Internal Revenue Service regulations. In the future, the
Committee will continue to seek ways to preserve the full deductibility of
compensation paid to Applied's executive officers without compromising the
Committee's flexibility in designing an effective compensation program.
EXECUTIVE ORGANIZATION & COMPENSATION COMMITTEE
September 16, 1996
William E. Butler
William G. Bares
Russel B. Every
L. Thomas Hiltz
DIRECTOR COMPENSATION
Applied officers do not receive any additional compensation for service as
a director. Non-employee directors receive a quarterly retainer of $4,500, a fee
of $1,500 for the first directors' meeting or committee meeting attended on a
given day, and $500 for each additional meeting attended on the same day, up to
a maximum of $2,500 per day. The directors may be similarly compensated if they
attend other meetings or conferences at the request of the Chairman. In
addition, the directors receive $500 for any action taken by unanimous written
consent or via telephone conference of less than 30 minutes in duration, and
directors who serve as chairmen of committees receive an additional quarterly
retainer of $400. All non-employee directors are eligible to participate in the
Deferred Compensation Plan for Non-employee Directors described below.
Participants in the plan may elect to receive their director compensation in the
form of Applied Common Stock, in which case they receive an additional amount
equal to 25% of the compensation so deferred. The
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<PAGE> 68
amount of compensation received by non-employee directors is reviewed from time
to time by Applied's management. If management believes that a change in the
amount of non-employee director compensation is required to make the level of
such compensation relative to the size and nature of Applied's business,
management recommends the change to the Board of Directors and approval of any
such change requires the affirmative vote of a majority of the directors then
serving in office. The directors participate in Applied's travel accident plan
and may also elect to participate in Applied's contributory health insurance
plan.
The purposes of the Applied Deferred Compensation Plan for Non-employee
Directors (the "Plan") are to allow non-employee directors to defer receipt of
compensation payable for services as a director to promote loyalty to Applied
through increased investment in Applied's Common Stock.
Pursuant to the Plan, a non-employee director may elect, prior to any
calendar quarter, to defer payment of his or her compensation for future
services as a director. Once an election is made, it is irrevocable with respect
to compensation earned. Directors may change their election to receive or defer
receipt of compensation for future services commencing with the calendar quarter
following the election. Amendments that serve only to change a director's
beneficiary are permitted at any time and as often as necessary.
As directors' compensation would otherwise become due and payable, Applied
transfers an amount equal to the compensation deferred pursuant to the Plan to a
trust maintained by Key Trust Company of Ohio, N.A., as Trustee. Deferred fees
are invested by the Trustee, at a director's option, in a money market fund
and/or Applied Common Stock. If a director elects to have his compensation
invested in Applied Common Stock, then Applied contributes to the trust an
additional amount equal to 25% of the amount so deferred.
The Plan is administered by a committee consisting of not less than three
members, not necessarily members of the Board of Directors, which is authorized
to interpret and administer the Plan, but has no discretion with respect to Plan
contributions, investment direction or distributions.
Distribution of a director's account commences as designated by the
director in his or her election on a date that is not more than thirty days
after (i) the director's termination as a director due to resignation,
retirement, death or otherwise, or (ii) the director's attainment of the age
(not younger than age 55) specified in his or her deferral election form; or
upon a change of control (as defined in the Plan) of Applied.
There are currently eight non-employee directors of Applied. Of those
non-employee directors, Messrs. Bares, Every, Gifford, Hiltz and Kahl and Drs.
Blackwell and Thornton currently defer all of their retainer and meeting fees
and invest those fees in Applied Common Stock.
62
<PAGE> 69
INVETECH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 VS. 1995
Net sales for the year ended December 31, 1996 were $314.3 million compared
to $313.9 million for the year ended December 31, 1995. The increase in net
sales was due primarily to volume increases. The increase was partially offset
by lost revenue from a discontinued line of hose and fittings.
Invetech gross margins (net sales less related cost of products sold)
increased 0.9% to $77.3 million in 1996 from $76.6 million in 1995. The gross
margin as a percentage of sales increased from 24.4% to 24.6%.
Operating, selling, administrative and general expenses decreased 3.0% to
$69.0 million in 1996 from $71.2 million in 1995. During 1996 several cost
reduction actions were implemented including advertising reductions, staff
reductions, elimination of certain outside consultants, re-negotiation of long
distance rates, closing of the electrical division, branch consolidations and
revision of the cash management system. These actions resulted in cost
reductions of $2.1 million during 1996.
Interest expense decreased $65,000 as a result of decreased borrowings. The
overall decrease was partially offset by a higher average borrowing rate during
1996 as compared to 1995.
Income tax expense decreased 23.4% in 1996. The decrease was due to an
adjustment to the liability and income recorded for book purposes which was not
taxable. The decrease was partially offset by taxes on increased net earnings
before taxes.
Net earnings in 1996 increased 20.7% over 1995 earnings.
YEAR ENDED DECEMBER 31, 1995 VS. 1994
Invetech net sales for the year ended December 31, 1995 of $313.9 million
increased 12% over sales of $280.3 million for the year ended December 31, 1994.
The acquisition of Kentucky Bearings Service, Inc. ("Kentucky Bearings")
contributed approximately 4.1% while gain in market share accounted for the
remaining increase.
Invetech gross margins increased to $76.6 million in 1995 from $69.2
million in 1994. Despite increased sales volume, the gross margin as a
percentage of sales declined slightly from 24.7% to 24.4% in 1995, due to
increased competitive pressure and delays in passing on certain price increases.
Operating, selling, administrative and general expenses increased 13.7% to
$71.2 million in 1995 from $62.6 million in 1994. The increase was attributable
to costs associated with the acquisition of Kentucky Bearings and increases in
compensation and certain general expenses.
Interest expense increased $1.4 million from $0.7 million in 1994 to $2.1
million in 1995, an increase of 202.3%. This increase was due to the addition of
acquisition financing related to Kentucky Bearings and the addition of debt to
finance the redemption of $9.7 million of common stock.
In 1995, other income of $1.9 million was due to gains on the sale of
business properties and from death benefits paid on life insurance policies.
Income tax expense decreased 36.3% in 1995. Taxes for 1995 decreased as a
result of larger portion of non-taxable income from the proceeds of life
insurance, capital gains treatment on the sale of land and buildings, and
non-taxable increase in the surrender value of life insurance policies.
Net earnings decreased 9.5% to $4.2 million in fiscal 1995 from $4.7
million in fiscal 1994.
LIQUIDITY AND SOURCES OF CAPITAL
Working capital was $34.2 million at December 31, 1996 compared to $49.2
million at December 31, 1995. The ratio of current assets to current liabilities
was 1.9 and 2.6 at December 31, 1996 and 1995. The
63
<PAGE> 70
decrease in working capital in 1996 is primarily due to a reclassification of
$13.5 million in debt from long-term to current.
Net cash flows from operations of $10.5 million in 1996 and $3.9 million in
1995 have continued to improve the Company's financial position and serve as a
primary source of funding capital requirements. The 1996 increase in net cash
flows from operations over 1995 was the result of increased earnings, inventory
reductions and accounts receivable management. The increase was partially offset
by reductions in trade payables during 1996. In addition to internally generated
funds, the Company has financing of $18 million available under bank lines of
credit and a working capital authorization. Total debt as a percent of
shareholders' equity was 47.3% and 70.2%, at December 31, 1996 and 1995,
respectively.
During 1995, the Company repurchased 780,755 shares of common stock for a
total cost of $9.7 million. Long term debt was issued to fund the repurchase.
During 1995, the Company acquired the assets and certain liabilities of
Kentucky Bearings for a purchase price of approximately $3.1 million. Long-term
debt was issued to fund the purchase.
THREE MONTHS ENDED MARCH 31, 1997 VS. 1996
Net sales for the three months ended March 31, 1997 were $83.3 million
compared to $80.8 million for the three months ended March 31, 1996. The
increase in net sales was due primarily to volume increases.
Invetech's gross margins (net sales less related cost of products sold)
decreased slightly to $20.1 million in 1997 from $20.2 million in 1996. The
gross margin as a percentage of sales decreased from 25.1% in 1996 to 24.1% in
1997.
Operating, selling, administrative and general expenses decreased $0.4
million to $17.2 million in 1997 from $17.6 million in 1996. Expenses continue
to decrease due to continued cost reduction efforts.
Interest expense decreased $174,000 as a result of decreased borrowings.
Income tax expense increased $475,000 in 1997. The increase was primarily
due to an adjustment of the tax liability in 1996. The increase was also
partially due to an increase in earnings before taxes in 1997.
Net earnings in 1997 decreased 0.3% from 1996 earnings.
LIQUIDITY AND SOURCES OF CAPITAL
Working capital was $37.2 million at March 31, 1997 compared to $34.2
million at December 31, 1996. The ratio of current assets to current liabilities
was 1.9 at both March 31, 1997 and December 31, 1996.
Net cash flows provided by operations was $1.6 million during the three
month period ended March 31, 1997. In addition to internally generated funds,
Invetech has financing of $18 million available under bank lines of credit and a
working capital authorization. Total debt as a percent of shareholder's equity
was 45.6% and 47.3%, at March 31, 1997 and December 31, 1996, respectively.
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<PAGE> 71
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL
INVETECH SHAREHOLDERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of Invetech Class A Common Stock as of May 1, 1997, (i) by
each person known by Invetech to own beneficially more than five (5%) percent of
the outstanding shares of Invetech Class A Common Stock; (ii) by each director
of Invetech who beneficially owns shares of Invetech Class A Common Stock; (iii)
by each executive officer of Invetech who beneficially owns shares of Invetech
Class A Common Stock; and (iv) by all directors and executive officers as a
group. The number of shares of Invetech Class A Common Stock outstanding as of
May 1, 1997 was 20,000 shares.
<TABLE>
<CAPTION>
PERCENT OF CLASS A
NAME & ADDRESS OF AMOUNT AND NATURE OF COMMON STOCK
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING
- -------------------------------------------------------------- ------------------------
<S> <C> <C>
J. Michael Moore 10,000 Shares 50%
4376 Oak Grove Drive
Bloomfield Hills, MI 48302
James T. Moore II 10,000 Shares 50%
1988 Crosswick
Bloomfield Hills, MI 48301
All Directors and Executive 20,000 Shares 100%
Officers as a Group (2 Persons)
</TABLE>
The following table sets forth certain information with respect to
beneficial ownership of Invetech Class B Common Stock as of May 1, 1997, (i) by
each person known by Invetech to own beneficially more than five (5%) percent of
the outstanding shares of Invetech Class B Common Stock; (ii) by each director
of Invetech who beneficially owns shares of Invetech Class B Common Stock; (iii)
by each executive officer of Invetech who beneficially owns shares of Invetech
Class B Common Stock; and (iv) by all directors and executive officers as a
group. The number of shares of Invetech Class B Common Stock outstanding as of
May 1, 1997 was 2,075,391 shares.
<TABLE>
<CAPTION>
PERCENT OF CLASS B
NAME & ADDRESS OF AMOUNT AND NATURE OF COMMON STOCK
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OUTSTANDING
- -------------------------------------------------------------- ------------------------
<S> <C> <C>
J. Michael Moore 243,425 Shares 11.73%
4376 Oak Grove Drive
Bloomfield Hills, MI 48302
James T. Moore, II 310,658 shares(2) 14.97%
1988 Crosswick
Bloomfield Hills, MI 48301
Dennis P. Moore and 203,585 shares 9.81%
Susan L. Moore
131 Hall Place
Gross Point Farms, MI 48236
</TABLE>
- ---------------
(1)This information is based upon Invetech's records as of May 1, 1997 and
information supplied by its directors. The number of shares stated in the column
includes shares owned directly as well as by spouses, dependent children, minor
children in trust, trusts of which the named individual has sole or shared
voting and investment power, and other indirect ownership, over which shares the
named individuals effectively exercise sole or shared voting and investment
power, unless otherwise noted.
(2)Includes 106,900 shares as to which Mr. Moore II shares voting and
investment power with Marion G. Moore, his mother and Sterling Bank, as
co-trustees.
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<PAGE> 72
<TABLE>
<CAPTION>
PERCENT OF CLASS B
NAME & ADDRESS OF AMOUNT AND NATURE OF COMMON STOCK
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OUTSTANDING
- -------------------------------------------------------------- ------------------------
<S> <C> <C>
Margaret Anne Luyat 179,844 shares(3) 8.67%
c/o James Williams
Miller, Canfield, Paddock
and Stone, P.L.C.
1400 North Woodward Avenue
Bloomfield Hills, MI 48303-2014
Mary E. Squires 227,096 shares 10.94%
3762 S. Quebec Street
Denver, CO 80237
Maureen G. Wolohan 121,221 shares 5.84%
45889 Turtlehead
Plymouth, MI 48170
Elizabeth A. Parravano 118,406 shares 5.71%
22210 Olmstead Avenue
Dearborn, MI 48124
Thomas P. Moore, II 92,618 shares 4.46%
1158 E. Wickford
Bloomfield Hills, MI 48302
All Directors and 646,701 shares 31.16%
Executive Officers as a
Group (3 persons)
</TABLE>
- ---------------
(1)This information is based upon Invetech's records as of May 1, 1997 and
information supplied by its directors. The number of shares stated in the column
includes shares owned directly as well as by spouses, dependent children, minor
children in trust, trusts of which the named individual has sole or shared
voting and investment power, and other indirect ownership, over which shares the
named individuals effectively exercise sole or shared voting and investment
power, unless otherwise noted.
(3)Includes 118,948 shares as to which Ms. Luyat shares voting and
investment power with James C. Williams, a senior principal of Miller, Canfield,
Paddock and Stone, P.L.C., who serves as a trustee.
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<PAGE> 73
INFORMATION CONCERNING INVETECH
INVETECH COMPANY
INVETECH Company, a Michigan corporation, and its wholly owned
subsidiaries, American Bearing and Power Transmission, Inc., a Michigan
corporation, and Moore Bearing Co., a Michigan corporation (Invetech and its
subsidiaries shall be referred to herein collectively as "Invetech") engage in
the distribution and sale of bearings, mechanical and electrical drive system
products, industrial rubber products and specialty maintenance and repair
products manufactured by others. Although Invetech does not manufacture the
products that it sells, it assembles hydraulic and general purpose hose
assemblies and power transmission products. Invetech has a machine shop at its
Fort Street facility in Detroit, Michigan which specializes in bearing
reconditioning, reducer rebuilds and repair, and machining and alterations.
Invetech is a non-exclusive distributor for numerous manufacturers of the
products it sells. Invetech purchases from over 100 major suppliers and resells
to a wide range of customers, including automotive companies, industrial plants,
machine shops, mines, paper mills, textile mills, food processing plants,
agricultural concerns and other enterprises.
Invetech's sales personnel advise and assist customers with respect to
product selection and application. Invetech offers product and process solutions
involving multiple technologies in an effort to reduce production downtime and
overall procurement and maintenance costs for customers. Invetech believes it
offers high levels of service, product knowledge and technical support as well
as competitive pricing.
Invetech's sales personnel include inside customer service representatives
assigned to each branch who receive, process and expedite customer orders and
assist in servicing customers. In addition, each branch has field account
representatives who make on-site calls to customers and potential customers to
provide product and pricing information, engineering assistance and other cost
savings services to its customers. Invetech employs a number of product
specialists to assist customers with applications in their particular area of
expertise.
Invetech, formerly Detroit Ball Bearing Company of Michigan, was
incorporated in 1917. Invetech's principal executive offices are located at 1400
Howard Street, Detroit, Michigan 48216 and its telephone number is (313)
963-6011.
PROPERTIES
Invetech owns or leases the properties in which its offices, branches,
warehouses and corporate facilities are located. As of April 28, 1997, the real
properties at 27 locations were owned by Invetech while 67 locations were leased
by Invetech.
The principal real properties owned by Invetech are the corporate
headquarters office building in Detroit, Michigan and adjoining warehouse
facility and the office building and shop operation located on Fort Street in
Detroit, Michigan. The principal real properties leased by Invetech are the
warehouse facilities located in Charlotte, North Carolina and Denver, Colorado.
Invetech considers the properties owned or leased to be generally
sufficient to meet its requirements for office space and inventory stocking. The
size of the buildings in which Invetech branches are located is primarily
influenced by the amount of inventory required to be carried to meet the needs
of the customers of the branch. All of the real properties owned or leased by
Invetech are being utilized by Invetech in its business, except for one
undeveloped parcel.
NUMBER OF EMPLOYEES
On May 15, 1997, Invetech had 980 employees of which 124 are represented by
Local Union No. 299 affiliated with International Brotherhood of Teamsters,
AFL/CIO. Invetech considers its relationship with its employees to be generally
favorable.
67
<PAGE> 74
COMPETITION
Invetech considers its overall business to be highly competitive.
Invetech's principal competitors are other specialized bearing, drive system
product, industrial rubber products and specialty item distributors. These
competitors include single and multiple branch operations, some of which are
divisions or subsidiaries of larger organizations that may have greater
financial resources than Invetech. There is a trend in the industry toward
larger multiple branch operations. Invetech also competes with the manufacturers
of original equipment and their distributors in the sale of maintenance and
replacement bearings, power transmission components and related items. Some of
these manufacturers may have greater financial resources than Invetech. The
competitors and the number of competitors vary throughout the geographic areas
in which Invetech does business. Invetech continues to develop and implement
marketing strategies to maintain a competitive position.
Invetech is one of the leading mid-size distributors of replacement
bearings, drive system products, industrial rubber products and specialty items
in the United States, but Invetech's share of the market for those products is
relatively small compared to the portion of that market serviced by original
equipment manufacturers and other distributors. Invetech may not be the largest
distributor in each of the geographic areas in which a branch is located.
LEGAL PROCEEDINGS
Invetech is subject to claims and lawsuits arising in the ordinary course
of business. In the opinion of Invetech's management, all such pending claims
are either adequately covered by insurance or, if not insured, will not have a
material adverse effect on Invetech.
68
<PAGE> 75
DESCRIPTION OF APPLIED CAPITAL STOCK
The authorized capital stock of Applied consists of 30,000,000 shares of
Common Stock, without par value, and 2,500,000 shares of Preferred Stock,
without par value.
COMMON STOCK
The holders of Applied Common Stock are entitled to one vote per share on
all matters to be voted upon by the shareholders. Subject to preferences that
may be applicable to any outstanding shares of Applied Preferred Stock, the
holders of Applied Common Stock are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. In the event of a liquidation, dissolution or
winding up of Applied, the holders of Applied Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
rights of holders of Applied Preferred Stock then outstanding, if any. The
Applied Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
available to the Applied Common Stock. All outstanding shares of Applied Common
Stock are fully paid and non-assessable.
At April 30, 1997, 12,379,761 shares of Applied Common Stock were
outstanding and held of record by 1,337 shareholders. In addition, options to
purchase an aggregate of 758,106 shares of Applied Common Stock were outstanding
at April 30, 1997.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 2,500,000 shares of
Preferred Stock and to determine the powers, preferences and rights and the
qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued shares of undesignated Preferred Stock and to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by the shareholders. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of
Applied without further action by the shareholders and may adversely affect the
voting and other rights of the holders of Applied Common Stock. At present, no
shares of Applied Preferred Stock are issued or outstanding, and Applied has no
plans to issue any shares of Applied Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Applied Common Stock is Harris
Trust and Savings Bank.
69
<PAGE> 76
COMPARISON OF RIGHTS OF HOLDERS OF APPLIED COMMON STOCK
AND INVETECH COMMON STOCK
Upon consummation of the Merger, holders of common stock of Invetech, a
Michigan corporation, whose rights are currently governed by Michigan law and
Invetech's Articles of Incorporation and By-Laws, will become shareholders of
Applied to the extent such holders receive Applied Common Stock. Upon becoming
shareholders of Applied, the rights of such shareholders shall be governed by
Ohio law, and Applied's Articles of Incorporation, Code of Regulations and the
agreement of merger and plan of reorganization between Bearings, Inc. (Ohio) and
Bearings, Inc. (Delaware) dated as of September 6, 1988.
Certain differences exist between the applicable laws of Michigan and Ohio
and the respective organizational documents of Applied and Invetech. The
following discussion is not intended to be a complete statement of all
differences affecting the rights of shareholders and is qualified in its
entirety by reference to the Articles of Incorporation of Applied and Invetech,
the Code of Regulations of Applied, the By-laws of Invetech, the agreement of
merger and plan of reorganization between Bearings, Inc. (Ohio) and Bearings,
Inc. (Delaware) dated as of September 6, 1988 and the laws of the States of Ohio
and Michigan.
Preemptive Rights
Holders of Applied Common Stock have no right to purchase or subscribe for
any additional unissued shares or treasury shares of the capital stock of
Applied.
The Invetech Articles of Incorporation do not grant holders of Invetech
Common Stock the right to purchase or subscribe for any additional unissued
shares or treasury shares of the capital stock of Invetech.
Number and Term of Directors
Pursuant to the Applied Code of Regulations, the Applied Board of Directors
(the "Applied Board") is to be comprised of no fewer than nine (9) and no more
than twelve (12) directors divided into three classes, which classes are to be
as nearly equal in size as possible. Currently, the Applied Board consists of 10
members, divided into two classes of three members each and one class of four
members. Each director serves a three-year term. Terms of office expire on a
staggered basis and, as a result, it would generally take two annual meetings to
effect a change in membership of a majority of the Applied Board.
Pursuant to the Invetech By-laws, the Invetech Board of Directors (the
"Invetech Board") is to be comprised of no fewer than one (1) and no more than
twelve (12) directors, all of which serve for one-year terms. Currently, the
Invetech Board consists of 8 members. The holders of Invetech Class A Common
Stock have the sole voting power exercisable in the election of directors.
Cumulative Voting
Neither the holders of Applied Common Stock nor the holders of Invetech
Class A Common Stock have cumulative voting rights. As a result, in the case of
each of Applied and Invetech, the holders of more than 50% of the voting power
of all securities outstanding voting for the election of directors can elect
100% of the directors if they choose to do so. In such event, the holders of the
remaining voting power will not be able to elect any person or persons to the
respective company's Board.
Antitakeover Provisions
Certain of the provisions of the Applied Articles of Incorporation
summarized in the succeeding paragraphs may be deemed to have an antitakeover
effect and may delay a tender offer or takeover attempt which an Applied
shareholder might consider in such shareholder's best interest, including
attempts which might result in the payment to shareholders of a premium over the
market price for Applied's common stock.
The rights of Applied shareholders are governed by Applied's Articles of
Incorporation and Code of Regulations, the agreement of merger and plan of
reorganization between Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) dated
as of September 6, 1988 and Ohio law (including Chapters 1701, 1704 and 1707 of
the
70
<PAGE> 77
Ohio Revised Code). Chapter 1704 of the Ohio Revised Code, among other things,
prohibits certain mergers, sales of assets, issuances or purchases of
securities, liquidation or dissolution, or reclassification of the then
outstanding shares of an Ohio corporation involving, or for the benefit of,
certain holders of stock representing 10% or more of the voting power (other
than current 10% shareholders who do not increase their present proportional
interest), unless (a) such transactions are approved by the directors of such
corporation prior to the 10% shareholder becoming such, or (b) the acquisition
of 10% of the voting power is approved by the directors of such corporation
prior to the 10% shareholder becoming such, or (c) the transaction involves a
10% shareholder which has been such for at least three years and is approved by
holders of two-thirds of the voting power of the company and the holders of a
majority of the voting power not owned by the 10% shareholder or certain minimum
price and form of consideration requirements are met; and Section 1707.043 of
the Ohio Revised Code provides Ohio corporations, or in certain circumstances
the shareholders of an Ohio corporation, a cause of action to recover profits
realized under certain circumstances by persons who dispose of securities of a
corporation within 18 months of proposing to acquire such corporation. Chapter
1704 and Section 1707.043 of the Ohio Revised Code may have the effect of
deterring certain potential acquisitions of Applied which might be beneficial to
Applied's shareholders.
The Applied Articles of Incorporation include a fair price provision (the
"Fair Price Provision") which is similar in many ways to the provisions of
Chapter 1704 described above. The Fair Price Provision, in certain
circumstances, requires a Business Combination between Applied and a Related
Person (as such terms are defined in the Applied Articles of Incorporation) to
meet specified criteria as to price and procedural requirements. Specifically,
the Fair Price Provision requires that any Business Combination with a Related
Person receive the prior approval of the holders of not less than eighty percent
(80%) of the voting power of Applied, unless such Business Combination is a
merger or consolidation and the per share consideration to be received by
Applied shareholders meets certain fair price requirements set forth in the
Applied Articles of Incorporation. For purposes of the Fair Price Provision, the
term "Business Combination" includes mergers or consolidations of Applied or its
subsidiaries with other entities, a sale, lease exchange or transfer of a
substantial part of the Assets of Applied or any of its subsidiaries, the
issuance of Applied securities to any Related Person, or any reclassification or
recapitalization which would have the effect of increasing the voting power of
any Related Person. The term "Related Person", for purposes of the Fair Price
Provision, includes any entity which, together with its affiliates, beneficially
owns twenty percent (20%) or more of the outstanding voting power of Applied.
The eighty percent shareholder vote generally required to approve a Business
Combination with a Related Person may have the effect of foreclosing mergers and
other business combinations which a majority of Applied shareholders deem
desirable, and places the power to prevent such a merger or combination in the
hands of a minority of shareholders.
The Applied Articles of Incorporation include a control share acquisition
provision (the "Control Share Acquisition Provision"), pursuant to which the
purchase of shares with certain levels of voting power of Applied (one-fifth or
more, one-third or more, or a majority) can be made only with the prior
authorization of (i) the holders of at least a majority of the total voting
power of Applied and (ii) the holders of at least a majority of the total voting
power held by shareholders other than the proposed acquiror, officers of Applied
elected or appointed by the Applied Board, and directors of Applied who are also
employees of Applied. Chapter 1701 of the Ohio Revised Code contains a similar
control share acquisition provision; Applied, however, has elected not to be
subject to such provision for such times as the Control Share Acquisition
Provision described above remains substantially in full force and effect. The
Control Share Acquisition Provision may have the effect or deterring certain
potential acquisitions of Applied which might be beneficial to Applied's
shareholders.
Removal of Directors
The Applied Code of Regulations provides that one or more directors may be
removed, with or without cause, upon the affirmative vote of the holders of
eighty percent (80%) of the Applied Common Stock entitled to vote on the matter
present in person or represented by proxy at any annual or special meeting of
shareholders. The Invetech By-laws provide that one or more directors may be
removed at any time, with or
71
<PAGE> 78
without cause, upon the affirmative vote of the holders of a majority of the
Invetech Common Stock entitled to vote on such removal.
Amendment of Articles of Incorporation, Code of Regulations and By-Laws
Under Ohio law and the Applied Articles of Incorporation, the Applied
Articles of Incorporation may be amended by the affirmative vote of the holders
of one-half of the Applied shares entitled to vote on the matter, except that
amendments to the articles relating to the Control Share Acquisition Provision
and the Fair Price Provision require the approval of the holders of at least
eighty percent (80%) of such shares.
Under Ohio law and the Applied Code of Regulations, the Applied Code of
Regulations may be amended by the affirmative vote of the holders of one-half of
the Applied shares entitled to vote on the matter. Notwithstanding the previous
sentence, amendments relating to the number, classification, term, and removal
of directors must be approved by the affirmative vote of the holders of at least
eighty percent (80%) of the Applied shares entitled to vote on the matter,
present in person or by proxy, at any annual meeting or special meeting duly
called for the purpose of acting on such amendment, unless such amendment has
been recommended by at least two-thirds of the members of the Applied Board, in
which case such amendment shall require the approval of the holders of one-half
of the Applied shares entitled to vote on the matter.
Under Michigan law and the Invetech Articles of Incorporation, the Invetech
Articles of Incorporation may be amended by the affirmative vote of the holders
of a majority of each class of the Invetech Common Stock entitled to vote on the
matter.
Under Michigan law and the Invetech By-laws, the Invetech By-laws may be
amended by the affirmative vote of the holders of a majority of the Invetech
Class A Common Stock.
Liability of Directors
Under the laws of both Ohio and Michigan, a director of a corporation is
required to perform his duties as a director in good faith, and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
corporation. To impose liability on a director, however, the law of Ohio
requires a showing of clear and convincing evidence that such director violated
the duties set forth above. This evidentiary burden imposed under Ohio law is
greater than that imposed under Michigan law.
EXPERTS
The consolidated financial statements of Applied as of June 30, 1996 and
1995, and for each of the three years in the period ended June 30, 1996 included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein, and are included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Invetech as of December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the Applied Common Stock issuable pursuant to the Merger
and certain other legal matters relating thereto will be passed upon for Applied
by Squire, Sanders & Dempsey L.L.P. Miller, Canfield, Paddock and Stone, P.L.C.
is acting as counsel for Invetech in connection with certain legal matters
relating to the Merger and the transactions contemplated thereby.
72
<PAGE> 79
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Consolidated Financial Statements of Applied Industrial Technologies, Inc. and
its subsidiaries:
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1995................... F-3
Statements of Consolidated Income for each of the years in the three-year period
ended June 30, 1996.............................................................. F-4
Statements of Consolidated Shareholders' Equity for each of the years in the
three-year period ended June 30, 1996............................................ F-5
Statements of Consolidated Cash Flows for each of the years in the three-year period
ended June 30, 1996.............................................................. F-6
Notes to Consolidated Financial Statements.......................................... F-7
Unaudited Consolidated Financial Statements of Applied Industrial Technologies, Inc.
and its subsidiaries:
Consolidated Balance Sheets as of March 31, 1997 and June 30, 1996.................. F-15
Statements of Consolidated Income for the three months and nine months ended March
31, 1997 and 1996................................................................ F-16
Statements of Consolidated Shareholders' Equity for the nine months ended March 31,
1997 and the year ended June 30, 1996............................................ F-17
Statements of Consolidated Cash Flows for the nine months ended March 31, 1997 and
1996............................................................................. F-18
Notes to Consolidated Financial Statements.......................................... F-19
Audited Consolidated Financial Statements of INVETECH Company and its subsidiaries:
Independent Auditors' Report........................................................ F-21
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995........... F-22
Consolidated Statements of Earnings for each of the years in the three-year period
ended December 31, 1996.......................................................... F-23
Consolidated Statements of Stockholders' Equity for each of the years
in the three-year period ended December 31, 1996................................. F-24
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31, 1996................................................... F-25
Notes to Consolidated Financial Statements.......................................... F-26
Unaudited Consolidated Financial Statements of INVETECH Company and its subsidiaries:
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996.............. F-32
Consolidated Statements of Earnings for three month periods ended March 31, 1997 and
March 31, 1996................................................................... F-33
Consolidated Statements of Cash Flows for three month periods ended March 31, 1997
and March 31, 1996............................................................... F-34
Consolidated Statements of Stockholders' Equity for three month periods ended March
31, 1997 and the year ended December 31, 1996.................................... F-35
Notes to Unaudited Consolidated Financial Statements................................ F-36
</TABLE>
F-1
<PAGE> 80
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Applied Industrial Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Applied
Industrial Technologies, Inc. (formerly Bearings, Inc.) and its subsidiaries
(the "Company") as of June 30, 1996 and 1995 and the related statements of
consolidated income, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company at June 30, 1996
and 1995 and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
August 6, 1996
F-2
<PAGE> 81
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30
---------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary investments....................................... $ 9,243 $ 4,789
Accounts receivable, less allowance of $2,400 and $2,300............. 155,524 145,680
Inventories.......................................................... 127,937 112,596
Other current assets................................................. 2,434 2,307
-------- --------
Total current assets................................................... 295,138 265,372
-------- --------
Property -- at cost
Land................................................................. 13,529 11,783
Buildings............................................................ 64,441 57,365
Equipment............................................................ 71,938 68,926
-------- --------
149,908 138,074
Less accumulated depreciation........................................ 63,574 58,802
-------- --------
Property -- net........................................................ 86,334 79,272
-------- --------
Other assets........................................................... 22,600 14,587
-------- --------
TOTAL ASSETS................................................. $404,072 $359,231
======== ========
LIABILITIES
Current liabilities
Notes payable........................................................ $ 30,056 $ 18,575
Current portion of long-term debt.................................... 11,429 5,714
Accounts payable..................................................... 67,652 53,722
Compensation and related benefits.................................... 19,081 18,248
Other current liabilities............................................ 14,964 15,558
-------- --------
Total current liabilities.............................................. 143,182 111,817
Long-term debt......................................................... 62,857 74,286
Deferred income taxes.................................................. 918
Other liabilities...................................................... 8,741 6,809
-------- --------
TOTAL LIABILITIES............................................ 214,780 193,830
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock -- no par value; 2,500 shares authorized; none issued
or outstanding
Common stock -- no par value; 30,000 shares authorized; 13,954 shares
issued............................................................... 10,000 10,000
Additional paid-in capital............................................. 7,528 11,311
Income retained for use in the business................................ 197,232 177,402
Treasury shares -- at cost (1,577 and 2,266 shares).................... (21,260) (29,253)
Shares held in trust for deferred compensation plans................... (3,008) (1,426)
Unearned restricted common stock compensation.......................... (1,200) (2,633)
-------- --------
TOTAL SHAREHOLDERS' EQUITY................................... 189,292 165,401
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $404,072 $359,231
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 82
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------------------------
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
NET SALES............................................... $1,143,749 $1,054,809 $936,254
---------- ---------- --------
COST AND EXPENSES
Cost of sales......................................... 848,682 783,105 684,213
Selling, distribution and administrative.............. 245,786 234,781 224,224
---------- ---------- --------
1,094,468 1,017,886 908,437
---------- ---------- --------
OPERATING INCOME........................................ 49,281 36,923 27,817
---------- ---------- --------
INTEREST EXPENSE........................................ 8,975 7,650 6,385
INTEREST INCOME......................................... (528) (386) (225)
---------- ---------- --------
8,447 7,264 6,160
---------- ---------- --------
INCOME BEFORE INCOME TAXES.............................. 40,834 29,659 21,657
---------- ---------- --------
INCOME TAX EXPENSE
Federal............................................... 14,250 10,630 7,172
State and local....................................... 3,250 2,120 1,798
---------- ---------- --------
17,500 12,750 8,970
---------- ---------- --------
NET INCOME.............................................. $ 23,334 $ 16,909 $ 12,687
========== ========== ========
NET INCOME PER SHARE.................................... $ 1.90 $ 1.46 $ 1.12
========== ========== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 83
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES HELD
SHARES OF INCOME IN TRUST FOR UNEARNED
COMMON ADDITIONAL RETAINED TREASURY DEFERRED RESTRICTED TOTAL
STOCK COMMON PAID-IN FOR USE IN SHARES- COMPENSATION COMMON STOCK SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL THE BUSINESS AT COST PLANS COMPENSATION EQUITY
----------- ------- ---------- ------------ -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1993........ 11,273 $10,000 $ 5,357 $157,784 $(31,947) $ (2,189) $139,005
Net income................... 12,687 12,687
Cash dividends -- $.43 per
share...................... (4,739) (4,739)
Purchases of common stock for
treasury................... (88) (1,945) (1,945)
Treasury shares issued for:
401(k) Savings Plan
contributions.......... 84 503 1,007 1,510
Exercise of stock
options................ 19 74 237 311
Restricted common stock
awards................. 19 53 233 (286)
Other.................... 12 64 137 201
Amortization of restricted
common stock
compensation............... 911 2,475 3,386
Other........................ 75 75
------ ------- ------- -------- -------- ------- --------
BALANCE AT JUNE 30, 1994....... 11,319 10,000 6,962 165,807 (32,278) 150,491
Net income................... 16,909 16,909
Cash dividends -- $.47 per
share...................... (5,397) (5,397)
Purchases of common stock for
treasury................... (180) (3,874) (3,874)
Treasury shares issued for:
401(k) Savings Plan
contributions.......... 140 1,124 1,788 2,912
Exercise of stock
options................ 225 1,565 2,789 4,354
Restricted common stock
awards................. 138 1,232 1,727 (2,959)
Deferred compensation
plans.................. 46 428 595 $ (1,023)
Amortization of restricted
common stock
compensation............... 326 326
Other........................ 83 (403) (320)
------ ------- ------- -------- -------- ------- ------- --------
BALANCE AT JUNE 30, 1995
As previously reported....... 11,688 10,000 11,311 177,402 (29,253) (1,426) (2,633) 165,401
Pooling of interests with
Engineered Sales, Inc...... 486 (6,499) 3,024 6,408 2,933
------ ------- ------- -------- -------- ------- ------- --------
BALANCE AS RESTATED............ 12,174 10,000 4,812 180,426 (22,845) (1,426) (2,633) 168,334
Net income................... 23,334 23,334
Cash dividends -- $.54 per
share...................... (6,528) (6,528)
Purchases of common stock for
treasury................... (86) (2,212) (2,212)
Treasury shares issued for:
Retirement Savings Plan
contributions.......... 138 1,692 1,805 3,497
Exercise of stock
options................ 107 391 1,390 1,781
Restricted common stock
awards................. 1 13 19 (32)
Deferred compensation
plans.................. 43 416 583 (999)
Amortization of restricted
common stock
compensation............... 204 1,465 1,669
Other........................ (583) (583)
------ ------- ------- -------- -------- ------- ------- --------
BALANCE AT JUNE 30, 1996....... 12,377 $10,000 $ 7,528 $197,232 $(21,260) $ (3,008) $ (1,200) $189,292
====== ======= ======= ======== ======== ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 84
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $23,334 $16,909 $12,687
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Depreciation..................................... 13,478 13,275 13,586
Deferred income taxes............................ (1,444) (3,345) 2,448
Provision for losses on accounts receivable...... 2,123 1,710 1,418
(Gain) loss on sale of property.................. (1,119) (1,412) (775)
Amortization of restricted common stock
compensation and goodwill...................... 1,959 680 2,779
Treasury shares contributed to employee benefit
and deferred compensation plans................ 4,496 3,935 1,510
Changes in current assets and liabilities:
Accounts receivable............................ (9,132) (16,313) (14,344)
Inventories.................................... (12,889) (5,075) (2,042)
Other currents assets.......................... 1,722 (4) 885
Accounts payable and accrued expenses.......... 13,908 2,548 9,810
Other -- net..................................... 513 2,547
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 36,436 13,421 30,509
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Property purchases.................................. (23,536) (15,055) (16,585)
Proceeds from property sales........................ 4,803 4,081 4,901
Acquisition of businesses, less cash acquired....... (4,328) (1,852)
Deposits and other.................................. (7,729) (164) (519)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES................. (30,790) (12,990) (12,203)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayments) under:
Line-of-credit agreements -- net............... 11,481 (1,230) (5,321)
Long-term debt................................. (5,714)
Exercise of stock options........................... 1,781 3,924
Dividends paid...................................... (6,528) (5,397) (4,739)
Purchases of treasury shares........................ (2,212) (3,874) (1,945)
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES................. (1,192) (6,577) (12,005)
------- ------- -------
Increase (decrease) in cash and temporary
investments......................................... 4,454 (6,146) 6,301
Cash and temporary investments at beginning of year... 4,789 10,935 4,634
------- ------- -------
CASH AND TEMPORARY INVESTMENTS AT END OF YEAR......... $ 9,243 $ 4,789 $10,935
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes..................................... $17,842 $14,827 $ 3,697
Interest......................................... $ 8,291 $ 8,411 $ 5,928
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 85
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BUSINESS AND ACCOUNTING POLICIES
NAME CHANGE
On October 22, 1996 shareholders approved a change in the company's name
from Bearings, Inc. to Applied Industrial Technologies, Inc. effective January
1, 1997.
BUSINESS
The Company distributes bearings, electrical and mechanical drive systems
products, fluid power products and systems, industrial rubber products, general
maintenance products and related specialty items. The Company offers technical
application support for these products and provides creative solutions to help
customers minimize downtime and reduce overall procurement costs. Although the
Company does not generally manufacture the products it sells, it does assemble
and repair certain products and systems. Most of the Company's sales are in the
maintenance and replacement markets, to customers in a wide range of industries
principally in the United States.
CONSOLIDATION
The consolidated financial statements include the accounts of Bearings,
Inc. (Applied Industrial Technologies, Inc., effective January 1, 1997) and its
wholly-owned subsidiaries Bruening Bearings, Inc., Dixie Bearings, Incorporated,
King Bearing, Inc., Mainline Industrial Distributors, Inc., and for the year
ended June 30, 1996, Engineered Sales, Inc. (see Note 2). All significant
intercompany transactions and balances have been eliminated in consolidation.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the period. Actual results may differ from the estimates and
assumptions used in preparing the consolidated financial statements.
CASH EQUIVALENTS
The Company considers all temporary investments with maturities of three
months or less from date purchased to be cash equivalents for purposes of the
statements of consolidated cash flows.
GOODWILL
Goodwill is recorded for the purchase price of acquired operations in
excess of the fair value of identifiable net assets. Goodwill is amortized on a
straight-line basis over 15 to 20 years.
INVENTORIES
Inventories are valued at the lower of cost or market, using the last-in,
first-out (LIFO) method. See Note 3 for further information regarding
inventories.
F-7
<PAGE> 86
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DEPRECIATION
Depreciation of buildings and equipment is computed using the straight-line
method over the estimated useful lives of the assets. Buildings are depreciated
over 30 years and equipment over 3.75 to 8 years.
INCOME TAXES
Income taxes are determined based upon income and expenses recorded for
financial reporting purposes. Deferred income taxes are recorded for estimated
future tax effects of differences between the bases of assets and liabilities
for financial reporting and income tax purposes giving consideration to enacted
tax laws.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common shares outstanding for the period. Net income per share has not been
adjusted for the effect of stock options as the dilutive effect would be less
than 3% for each year. All shares and per-share data have been restated to
reflect a three-for-two stock split effective December 4, 1995.
2. BUSINESS COMBINATIONS
On February 9, 1996 the Company exchanged 486,000 shares of the Company's
common stock for all of the outstanding shares of Engineered Sales, Inc., a
distributor of hydraulic, pneumatic and electro-hydraulic components, systems
and related fluid power engineering services. This business combination was
accounted for as a pooling of interests. The fiscal 1996 consolidated financial
statements include results of operations of Engineered Sales for the entire
fiscal year. The prior years' consolidated financial statements have not been
restated as the effects are not material. Separate 1996 results of operations
for Engineered Sales prior to the acquisition are not presented as the amounts
are not material.
In addition, during fiscal 1996 the Company acquired the assets of a
distributor of drive products and a distributor of rubber products, for a total
of $4,328. During fiscal 1995, the Company acquired the assets of a distributor
of fluid power products, and of a distributor of bearings and drive systems
products, for a total of $3,255. The acquisitions of these businesses were
accounted for as purchases and their results of operations are included in the
accompanying consolidated financial statements from their respective acquisition
dates. Results of operations for these acquisitions are not material for all
periods presented. Goodwill recognized in connection with these combinations is
being amortized over 15 years.
In fiscal 1994, the Company exchanged 294,000 shares of its common stock
for Mainline Industrial Distributors, Inc., an applied technology distributor of
drive systems, rubber products and bearings. The business combination was
accounted for as a pooling of interests and the consolidated financial
statements include Mainline's results of operations for each of the three years
ended June 30, 1996.
3. INVENTORIES
CURRENT COST
The current cost of inventories exceeded the LIFO cost as follows:
<TABLE>
<CAPTION>
JUNE 30
---------------------
1996 1995
-------- --------
<S> <C> <C>
LIFO cost....................................................... $127,937 $112,596
Excess of current cost over LIFO cost........................... 100,835 94,670
-------- --------
Current cost.................................................... $228,772 $207,266
======== ========
</TABLE>
F-8
<PAGE> 87
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
LIFO LIQUIDATIONS
During the years ended June 30, 1996, 1995 and 1994, the Company liquidated
LIFO inventory quantities carried at lower costs prevailing in prior years. The
effect of these liquidations reduced cost of sales and increased net income and
net income per share, respectively, by $946, $515, and $.04 per share during
1996, $3,127, $1,692, and $.15 per share during 1995 and $6,784, $3,841 and $.34
per share during 1994.
4. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1996 1995
------- -------
<S> <C> <C>
Deposits and investments........................................ $12,024 $ 5,495
Goodwill -- net of amortization................................. 5,281 4,554
Other........................................................... 5,295 4,538
------- -------
Total........................................................... $22,600 $14,587
======= =======
</TABLE>
Substantially all investments are restricted and consist of money-market or
similar liquid investments which have fair values approximately equal to their
carrying values.
5. NOTES PAYABLE AND LONG-TERM DEBT
NOTES PAYABLE
The Company has $110,000 of short-term lines of credit which require
payment of interest at various interest rate options, none of which is in excess
of the banks' prime rate at interest determination dates. Borrowings under these
lines of credit totaled $30,056 at June 30, 1996. The remaining unused lines
available for short-term borrowings at June 30, 1996 totaled $79,944.
LONG-TERM DEBT
The Company has $74,286 of long-term Senior Unsecured Term Notes, including
$11,429 due during fiscal 1997. Interest is payable quarterly at a fixed
interest rate of 7.82%. The principal amount is to be paid in semi-annual
installments of $5,714 through 2003. These notes contain certain restrictive
covenants regarding liquidity, tangible net worth, financial ratios and other
covenants. At June 30, 1996, the most restrictive of these covenants required
that the Company maintain a minimum tangible net worth of $122,000. Based upon
current market rates for debt of similar maturities, the Company estimates that
the fair value of its long-term debt is more than its carrying value at June 30,
1996 by $1,000.
INTEREST RATE SWAPS
Effective March 1, 1996 the Company entered into a two year interest rate
swap agreement with a major bank that effectively converts $15,000 of variable
rate borrowings to a fixed rate. Under this agreement, the Company receives
payments at variable rates based on LIBOR as determined at monthly intervals and
makes payments at a fixed interest rate of 5.29%. Net interest earned under this
agreement reduces interest expense. The interest rate swap agreement has a
nominal fair value at June 30, 1996.
During fiscal 1995, the Company terminated a two year interest rate swap
agreement initiated in fiscal 1994. Costs to terminate were amortized to
interest expense over the original term of the swap agreement.
F-9
<PAGE> 88
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. INCOME TAXES
PROVISION
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current............................................... $18,944 $16,095 $ 6,522
Deferred.............................................. (1,444) (3,345) 2,448
------ ------ ------
Total................................................. $17,500 $12,750 $ 8,970
====== ====== ======
</TABLE>
The exercise of non-qualified stock options during fiscal 1996 and 1995
resulted in $501 and $431, respectively, of income tax benefits to the Company
derived from the difference between the market price at the date of exercise and
the option price. Also, the accelerated vesting of Performance Accelerated
Restricted Stock (PARS) in fiscal 1996 and 1994 resulted in $204 and $911,
respectively, of income tax benefits. These tax benefits were credited to
additional paid-in capital.
EFFECTIVE TAX RATES
The following is a reconciliation between the federal statutory income tax
rate and the Company's effective tax rate:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate....................................... 35.0% 35.0% 35.0%
Effects of:
State and local income taxes........................... 5.2 4.7 5.4
Non-deductible expenses................................ 2.0 2.3 1.8
Other, net............................................. .7 1.0 (0.8)
---- ---- ----
Effective tax rate....................................... 42.9% 43.0% 41.4%
==== ==== ====
</TABLE>
BALANCE SHEET
The significant components of the Company's deferred tax assets
(liabilities) as of June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1996 1995
------- -------
<S> <C> <C>
Depreciation and differences in property bases.................. $(4,526) $(4,771)
Inventory....................................................... (8,301) (8,180)
Compensation liabilities not currently deductible............... 5,121 4,298
Reserves not currently deductible............................... 4,226 3,474
Goodwill........................................................ 1,393 1,502
Tax loss carried forward........................................ 94 526
Other........................................................... 1,427 1,086
Valuation allowance............................................. (266) (404)
------- -------
Net deferred tax liability...................................... $ (832) $(2,469)
======= =======
</TABLE>
F-10
<PAGE> 89
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. STOCK INCENTIVE PLANS
The 1990 Long-Term Performance Plan (the "1990 Plan") provides for granting
of stock options, stock awards, cash awards, and such other awards or
combination thereof as the Executive Organization and Compensation Committee of
the Board of Directors may determine. The number of shares of Common Stock which
may be awarded in each fiscal year under the 1990 Plan is two percent (2%) of
the total number of shares of Common Stock outstanding on the first day of each
year for which the plan is in effect. Common Stock available for distribution
under the 1990 Plan, but not distributed, may be carried over to the following
year.
Under the 1990 Plan, the Company had awarded PARS and stock options to
officers and other key associates. PARS recipients are entitled to receive
dividends and have voting rights on their respective shares but are restricted
from selling or transferring the shares prior to vesting. The restricted stock
vests after a period of six years, with accelerated vesting based upon
achievement of certain return on asset objectives or minimum stock price levels.
The aggregate fair market value of the restricted stock is considered unearned
compensation at the time of grant and is amortized over the six year vesting
period or until such time as acceleration of vesting takes place. In fiscal 1996
and 1994 the Company recognized accelerated vesting of 64,000 and 230,000
shares, respectively, of previously awarded PARS.
The following is a summary of transactions with respect to the stock
incentive plans:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------------------
AVAILABLE
OPTION PRICE FOR FUTURE
PER SHARE OUTSTANDING EXERCISABLE GRANTS
-------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at July 1, 1993................. 722,931 435,630 3,261
Additional available.................... 219,573
Became exercisable...................... 172,575
Canceled upon exercise.................. $9.46-$20.00 (148,192) (148,192)
Expired/canceled........................ $9.46-$20.00 (30,488) (24,713)
Options granted......................... $14.62-$21.54 179,175 (179,175)
PARS common stock awards................ (19,500)
-------- -------- --------
Balance at June 30, 1994................ 723,426 435,300 24,159
Additional available.................... 226,383
Became exercisable...................... 124,429
Canceled upon exercise.................. $9.46-$20.00 (224,581) (224,581)
Expired/canceled........................ $9.46-$20.00 (9,673) (3,039)
Options granted......................... $22.29 2,400 (2,400)
PARS common stock awards................ (138,000)
-------- -------- --------
Balance at June 30, 1995................ 491,572 332,109 110,142
Additional available.................... 233,762
Became exercisable...................... 72,005
Canceled upon exercise.................. $9.46-$21.54 (107,597) (107,597)
Expired/canceled........................ $9.46-$21.54 (16,500) (375)
Options granted......................... $21.71-$22.88 217,275 (217,275)
PARS common stock awards................ (1,500)
-------- -------- --------
Balance at June 30, 1996................ 584,750 296,142 125,129
======== ======== ========
</TABLE>
F-11
<PAGE> 90
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At June 30, 1996 option prices related to outstanding options ranged from
$9.46 to $22.88 per share.
The Financial Accounting Standards Board has issued Statement of Financial
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which the
Company will be required to adopt for the fiscal year ending June 30, 1997. As
permitted by SFAS 123, the Company does not intend to change its method of
accounting for stock-based compensation. The Company has not yet determined the
pro forma disclosures for employee awards granted in the fiscal year ending June
30, 1996, which will be presented in the notes to financial statements for the
year ending June 30, 1997.
8. BENEFIT PLANS
QUALIFIED RETIREMENT PLANS
Substantially all associates of the Company are covered by the Applied
Industrial Technologies Inc. (formerly Bearings, Inc.) Retirement Savings Plan.
This plan is the result of a combination, effective July 1, 1995, of the
Employees' Profit-Sharing Trust and the Bearings, Inc. 401(k) Savings Plan. The
Company makes a discretionary profit-sharing contribution to the Retirement
Savings Plan generally based upon a percentage of the Company's income before
income taxes and before the amount of the contribution. The Company also
partially matches contributions by participants, who may elect to contribute up
to 15 percent of their compensation. The matching contribution is made with the
Company's Common Stock and is determined quarterly using rates based on
achieving certain quarterly earnings per share levels.
The Company's expense for contributions to the above plans was $4,953,
$3,958, and $2,602 for the years ended June 30, 1996, 1995, and 1994,
respectively.
RETIREE MEDICAL BENEFITS
The Company provides health care benefits to eligible retired associates
who elect to pay the Company a specified monthly premium. Premium payments are
based upon current insurance rates for the type of coverage provided and are
adjusted annually. Certain monthly health care premium payments are partially
subsidized by the Company. At June 30, 1996 and 1995 the accumulated
post-retirement benefit obligation was $830 and $685, respectively. The costs
recognized for post-retirement benefits for fiscal 1996, 1995, and 1994 were not
material.
SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFIT PLAN (SERP)
The Company has a non-qualified pension plan to provide supplemental
retirement benefits to certain officers. Benefits are payable at retirement
based upon a percentage of the participant's compensation. The plan specifies
minimum annual retirement benefits for certain participants.
F-12
<PAGE> 91
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The funded status of the SERP plan is:
<TABLE>
<CAPTION>
JUNE 30
-----------------
1996 1995
------ ------
<S> <C> <C>
Projected benefit obligation............................................... $4,852 $4,629
Unrecognized net transition obligation..................................... (262)
Unrecognized net loss...................................................... (802) (796)
Unrecognized prior service cost............................................ (145) (207)
Adjustment required to recognize minimum liability......................... 418
------ ------
Accrued pension liability, included in other liabilities on the
Consolidated Balance Sheets.............................................. $3,905 $3,782
====== ======
Accumulated benefit obligation, fully vested............................... $3,905 $3,782
====== ======
</TABLE>
Periodic pension cost for the SERP consists of:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost -- benefits earned....................................... $132 $115 $ 91
Interest cost on projected benefit obligation......................... 368 350 347
Net amortization and deferral......................................... 349 361 483
---- ---- ----
Total................................................................. $849 $826 $921
==== ==== ====
</TABLE>
Pension cost and benefit obligations shown above were determined using a
discount rate of 8.0% and a rate of increase in compensation levels of 5.5%. At
June 30, 1996 there were no assets under the plan. The Company funds the
benefits when payments are made to participants.
DEFERRED COMPENSATION PLANS
The Company has deferred compensation plans that enable certain associates
of the Company to defer receipt of a portion of their compensation and
non-employee directors to defer receipt of director fees. The Company funds
these deferred compensation liabilities by contributing to rabbi trusts common
stock of the Company and investments in money market and mutual funds. While
held in trust, the common stock is reported as a contra-equity account and the
money market and mutual fund investments are included in other assets in the
accompanying consolidated balance sheets. The deferred compensation liabilities
of $3,286 and $1,461 at June 30, 1996 and 1995, respectively, are recorded in
other liabilities in the consolidated balance sheets.
9. COMMITMENTS, LEASE OBLIGATIONS AND RENT EXPENSES
The Company leases certain branch and distribution center facilities and
computer equipment under non-cancelable lease agreements. The minimum annual
rental commitments under operating leases, including the lease commitment
described below, are $8,779 in 1997; $9,035 in 1998; $6,129 in 1999; $4,430 in
2000; $3,157 in 2001 and $41,549 after 2001.
During fiscal 1996 the Company entered into a twenty year lease agreement
with the Cleveland-Cuyahoga County Port Authority (the Port) in connection with
the construction of a new corporate headquarters facility. Lease payments began
in July 1997 and the facility portion of the lease will be accounted for as an
operating lease. The Company will also have a capital lease for $2,000 of
furniture, fixtures and
F-13
<PAGE> 92
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
equipment as part of the agreement. In connection with the lease agreement the
Company has also agreed to guarantee repayment of $5,678 of bonds issued by the
Port and Cuyahoga County to fund construction of the new headquarters facility.
Rental cost, principally from leases for real property, vehicles and
computer equipment was $12,077 in 1996, $10,756 in 1995, and $10,013 in 1994.
10. LITIGATION
The 1990 agreement for the acquisition of King Bearing, Inc. (King)
included specific indemnification of Applied Industrial Technologies, Inc.
(effective January 1, 1997) and King for any financial damages or losses related
to a lawsuit pending against King in the Superior Court of Orange County,
California. The indemnification was also guaranteed by the ultimate parent of
King's former owner, a Fortune 500 company with stockholders' equity exceeding
five billion dollars at June 30, 1996. A $32,400 judgment relating to this
lawsuit was rendered against King in June 1992. The judgment is being strongly
contested by counsel retained by the indemnitor on behalf of King, and in
September 1992 the trial court granted the motion of King for a new trial as to
all but $219 in damages returned by the jury. A notice of appeal was filed by
the cross-complainants, and the case is now pending in the California Court of
Appeal, Fourth Appellate District. All alleged events relevant to the judgment
occurred prior to the Company's purchase of King, and the jury found no
liability on the part of the Company. Due to the indemnification and guarantee,
management believes that the outcome of this matter will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
The Company is a defendant in several lawsuits for product and employment
related matters. The Company is vigorously defending these lawsuits, which
management believes are without merit. Although management cannot predict the
outcomes of these lawsuits, they are not expected to have a material adverse
affect on the Company's consolidated financial position, results of operations
or cash flows.
F-14
<PAGE> 93
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
----------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary investments............................................... $ 15,521 $ 9,243
Accounts receivable, less allowance of $2,002 and $2,400..................... 152,335 155,524
Inventories (at LIFO)........................................................ 118,172 127,937
Other current assets......................................................... 7,226 2,434
-------- --------
Total current assets........................................................... 293,254 295,138
-------- --------
Property -- at cost
Land......................................................................... 12,972 13,529
Buildings.................................................................... 64,798 64,441
Equipment.................................................................... 75,493 71,938
-------- --------
153,263 149,908
Less accumulated depreciation................................................ 69,021 63,574
-------- --------
Property -- net................................................................ 84,242 86,334
-------- --------
Other assets................................................................... 20,283 22,600
-------- --------
TOTAL ASSETS................................................................. $ 397,779 $404,072
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable................................................................ $ 20,897 $ 30,056
Current portion of long-term debt............................................ 11,429 11,429
Accounts payable............................................................. 62,860 67,652
Compensation and related benefits............................................ 20,424 19,081
Other accrued liabilities.................................................... 14,108 14,964
-------- --------
Total current liabilities................................................ 129,718 143,182
Long-term debt................................................................. 57,143 62,857
Other liabilities.............................................................. 11,577 8,741
-------- --------
TOTAL LIABILITIES.............................................................. 198,438 214,780
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock -- no par value; 2,500 shares authorized; none issued or
outstanding
Common stock -- no par value; 30,000 shares authorized; 13,954 shares
issued..................................................................... 10,000 10,000
Additional paid-in capital................................................... 9,365 7,528
Income retained for use in the business...................................... 209,694 197,232
Less 1,579 and 1,577 treasury shares -- at cost.............................. (23,467) (21,260)
Less shares held in trust for deferred compensation plans.................... (5,202) (3,008)
Less unearned restricted common stock compensation........................... (1,049) (1,200)
-------- --------
TOTAL SHAREHOLDERS' EQUITY..................................................... 199,341 189,292
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................................... $ 397,779 $404,072
======== ========
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE> 94
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales....................................... $297,190 $296,064 $854,431 $848,263
-------- -------- -------- --------
Cost and Expenses
Cost of sales................................. 221,991 220,454 630,791 630,544
Selling, distribution and administrative...... 62,752 62,663 188,766 183,494
-------- -------- -------- --------
284,743 283,117 819,557 814,038
-------- -------- -------- --------
Operating Income................................ 12,447 12,947 34,874 34,225
-------- -------- -------- --------
Interest
Interest expense.............................. 1,673 2,426 4,829 6,879
Interest income............................... (124) (199) (695) (375)
-------- -------- -------- --------
1,549 2,227 4,134 6,504
-------- -------- -------- --------
Income Before Income Taxes...................... 10,898 10,720 30,740 27,721
-------- -------- -------- --------
Income Taxes
Federal....................................... 3,379 3,665 10,338 9,563
State and local............................... 764 933 2,239 2,332
-------- -------- -------- --------
4,143 4,598 12,577 11,895
-------- -------- -------- --------
Net Income...................................... $ 6,755 $ 6,122 $ 18,163 $ 15,826
======== ======== ======== ========
Net Income per share............................ $ 0.55 $ 0.50 $ 1.47 $ 1.29
======== ======== ======== ========
Cash dividends per common share................. $ 0.16 $ 0.14 $ 0.46 $ 0.40
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE> 95
APPLIED INDUSTIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
AND YEAR ENDED JUNE 30, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES HELD
SHARES OF INCOME IN TRUST UNEARNED
COMMON ADDITIONAL RETAINED TREASURY FOR DEFERRED RESTRICTED TOTAL
STOCK COMMON PAID-IN FOR USE IN SHARES -- COMPENSATION COMMON STOCK SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL THE BUSINESS AT COST PLANS COMPENSATION EQUITY
----------- ------- ---------- ------------ -------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1,
1995................... 12,174 $10,000 $4,812 $180,426 $(22,845) $ (1,426) $ (2,633) $168,334
Net income............. 23,334 23,334
Cash dividends -- $.54
per share............ (6,528) (6,528)
Purchase of common
stock for treasury... (86) (2,212) (2,212)
Treasury shares issued
for:
Retirement Savings
Plan
contributions...... 138 1,692 1,805 3,497
Exercise of stock
options............ 107 391 1,390 1,781
Deferred compensation
plans.............. 43 416 583 (999)
Restricted common
stock awards....... 1 13 19 (32)
Amortization of
restricted common
stock compensation... 204 1,465 1,669
Other.................. (583) (583)
------ ------- ------ -------- --------- -------- -------- ---------
Balance at June 30,
1996................... 12,377 10,000 7,528 197,232 (21,260) (3,008) (1,200) 189,292
Net income............. 18,163 18,163
Cash dividends -- $.46
per share............ (5,701) (5,701)
Purchase of common
stock for treasury... (162) (4,434) (4,434)
Treasury shares issued
for:
Retirement Savings
Plan
contributions...... 84 1,307 1,195 2,502
Exercise of stock
options............ 39 (28) 538 510
Deferred compensation
plans.............. 33 500 438 (938)
Restricted common
stock awards....... 4 58 56 (114)
Amortization of
restricted common
stock compensation... 265 265
Other.................. (1,256) (1,256)
------ ------- ------ -------- --------- -------- -------- ---------
Balance at March 31,
1997................... 12,375 $10,000 $9,365 $209,694 $(23,467) $ (5,202) $ (1,049) $199,341
====== ======= ====== ======== ========= ======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE> 96
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
-------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................................... $18,163 $15,826
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation................................................................... 10,178 10,193
Provision for losses on accounts receivable.................................... 599 1,966
Gain on sale of property....................................................... (399) (889)
Amortization of restricted common stock compensation and goodwill.............. 606 723
Treasury shares contributed to employee benefit plans.......................... 2,502 2,402
Changes in current assets and liabilities, net of effects from acquisition and
disposal of businesses:
Accounts receivable....................................................... (426) (9,539)
Inventories............................................................... 3,765 (17,329)
Other current assets...................................................... (4,792) 1,537
Accounts payable and accrued expenses..................................... (3,637) (1,583)
Other -- net.............................................................. 938 956
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................................... 27,497 4,263
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property purchases............................................................... (10,855) (13,210)
Proceeds from property sales..................................................... 3,068 3,667
Proceeds from sale of Aircraft Division.......................................... 9,090
Acquisition of businesses, less cash acquired.................................... (4,328)
Deposits and other............................................................... 1,976 (8,451)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................ 3,279 (22,322)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under Line-of-credit agreements...................... (9,159) 31,450
Long-term debt repayments........................................................ (5,714)
Exercise of stock options........................................................ 510 1,219
Dividends paid................................................................... (5,701) (4,799)
Purchase of treasury shares...................................................... (4,434) (1,362)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................ (24,498) 26,508
-------- --------
Increase in cash and temporary investments......................................... 6,278 8,449
Cash and temporary investments at beginning of period.............................. 9,243 4,789
-------- --------
CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD.................................... $15,521 $13,238
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes................................................................... $16,740 $12,933
Interest....................................................................... $ 5,161 $ 6,297
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE> 97
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
1. NAME CHANGE
Effective January 1, 1997, the Company changed its name from Bearings, Inc.
to Applied Industrial Technologies, Inc.
2. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position as of
March 31, 1997 and June 30, 1996, and the results of operations for the three
months and nine months ended March 31, 1997 and 1996, and cash flows for the
nine months ended March 31, 1997 and 1996.
The results of operations for the three and nine month periods ended March
31, 1997 are not necessarily indicative of the results to be expected for the
fiscal year.
Cost of sales for interim financial statements are computed using estimated
gross profit percentages which are adjusted throughout the year based upon
available information. Adjustments to actual cost are made based on the annual
physical inventory and the effect of year-end inventory quantities on LIFO
costs.
3. NET INCOME PER SHARE
Net income per share was computed using the weighted average number of
common shares outstanding for the period.
Average shares outstanding for the computation of net income per share were
as follow:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
- ------------------- -------------------
1997 1996 1997 1996
- ------ ------ ------ ------
<S> <C> <C> <C>
12,354 12,341 12,390 12,285
</TABLE>
4. SALE OF DIVISION
On August 9, 1996 the Company sold the Dixie Bearings Aircraft Division
located in Atlanta, Georgia to Aviation Sales Company for $9,090. The assets
were sold at their approximate net book value. The sale did not have a material
effect on the consolidated financial statements.
5. RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", which the Company will be required to adopt for the fiscal year
ending June 30, 1997. As permitted by SFAS No. 123, the Company does not intend
to change its method of accounting for stock-based compensation. The Company has
not yet determined the pro forma disclosure for employee awards granted in the
nine months ended March 31, 1997 and the fiscal year ending June 30, 1996 which
will be presented in the notes to financial statements for the year ending June
30, 1997.
In February 1997 the FASB issued SFAS No. 128, "Earnings Per Share." This
statement simplifies the current standard for computing earnings per share
(EPS). At March 31, 1997 the Company has stock options outstanding, which would
currently have a less than 3% dilution effect for reporting Diluted EPS under
SFAS No. 128. SFAS No. 128 becomes effective for interim and annual financial
statements issued after December 15, 1997 and earlier application is not
permitted.
F-19
<PAGE> 98
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. LONG-TERM DEBT
The Company has entered into an agreement with Prudential Insurance Company
of America for an uncommitted shelf facility enabling the Company to borrow up
to $50,000 in additional long-term financing. The Company may make long-term
borrowings at its sole discretion, with terms ranging anywhere from seven to
twenty years under this agreement. At March 31, 1997 there were no borrowings
under this agreement.
7. LITIGATION
As reported in the Notes to the Consolidated Financial Statements contained
in the 1996 Annual Report to shareholders, a $32,400 judgment was rendered
against King Bearing, Inc. (King) in June 1992 in a lawsuit pending in the
Superior Court of Orange County, California. The 1990 agreement for the
Company's acquisition of King included specific indemnification of the Company
for any financial damages or losses related to the lawsuit. The indemnification
was also guaranteed by the ultimate parent of King's former owner, a Fortune 500
company with stockholders' equity exceeding five billion dollars at June 30,
1996. The judgment was strongly contested by counsel retained by the indemnitor
on behalf of King, and in September 1992 the trial court granted King's motion
for a new trial as to all but $219 in damages returned by the jury. In September
1996 the California Court of Appeals, Fourth Appellate District, affirmed the
trial court's grant of King's motion for a new trial and reversed its exclusion
of the $219 in damages from the new trial order. As a result, a new trial will
be scheduled. Due to the indemnification and guarantee, management believes that
the outcome of this matter will not have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company.
8. SUBSEQUENT EVENT
In April, 1997 the Company signed a definitive agreement to acquire
Invetech Company, a distributor of industrial components, for a combination of
cash and stock valued at $83 million. The acquisition is expected to close near
the end of the fourth quarter. This business combination is anticipated to be
accounted for as a purchase.
F-20
<PAGE> 99
INVETECH COMPANY AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
INVETECH Company
Detroit, Michigan
We have audited the accompanying consolidated balance sheets of INVETECH Company
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of INVETECH Company and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 10, 1997
(April 29, 1997 as to Note 12)
F-21
<PAGE> 100
INVETECH COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 583,110 $ 285,731
Trade accounts receivable, less allowance for doubtful accounts
of $450,000 in 1996 and 1995................................ 36,536,006 37,040,040
Inventories (Note 2)........................................... 33,273,283 39,377,687
Income tax receivable.......................................... 1,272,959 604,332
Deferred income taxes (Note 10)................................ 1,358,000 1,736,000
Other current assets........................................... 844,825 723,354
------------ ------------
Total current assets................................. 73,868,183 79,767,144
PROPERTY, PLANT AND EQUIPMENT (Notes 3 and 4):
Land........................................................... 1,160,726 1,195,778
Buildings and improvements..................................... 11,782,247 11,952,113
Furniture and equipment........................................ 18,647,245 18,710,031
------------ ------------
Total................................................ 31,590,218 31,857,922
Less accumulated depreciation.................................. 18,867,598 17,454,683
------------ ------------
Total property, plant and equipment.................. 12,722,620 14,403,239
OTHER ASSETS:
Deferred income taxes (Note 10)................................ 1,756,000 806,000
Goodwill -- net of accumulated amortization.................... 445,970 472,660
Cash surrender value of life insurance......................... 12,054,338 11,323,067
Covenants not to compete -- net of accumulated amortization.... 456,288 762,406
Miscellaneous.................................................. 173,444 162,810
------------ ------------
Total other assets................................... 14,886,040 13,526,943
------------ ------------
TOTAL ASSETS..................................................... $101,476,843 $107,697,326
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable......................................... $ 17,246,277 $ 19,781,179
Compensation and related payroll taxes......................... 6,337,549 6,037,309
Taxes, other than income taxes................................. 503,407 806,000
Current portion of long-term debt (Note 3)..................... 13,684,273 1,904,466
Dividends payable.............................................. 649,571 440,032
Other current liabilities...................................... 1,255,919 1,643,029
------------ ------------
Total current liabilities............................ 39,676,996 30,612,015
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION (Note 3)............. 8,516,876 28,161,830
DEFERRED COMPENSATION (Note 1)................................... 1,887,558 1,655,416
ACCRUED POST-RETIREMENT BENEFITS (Note 8)........................ 4,475,000 4,452,000
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value:
Class A (voting), authorized 30,000 shares, issued and
outstanding 20,000 shares.............................. 2,000 2,000
Class B (non-voting), authorized 5,000,000 shares, issued
and outstanding 2,075,391 shares (Note 9).............. 207,539 207,539
Additional paid-in capital..................................... 314,309 314,309
Retained earnings.............................................. 46,396,565 42,292,217
------------ ------------
Total stockholders' equity........................... 46,920,413 42,816,065
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $101,476,843 $107,697,326
============ ============
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE> 101
INVETECH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Net sales.......................................... $314,317,708 $313,912,918 $280,313,261
Other income....................................... 225,911 340,740 373,083
------------ ------------ ------------
Total........................................... 314,543,619 314,253,658 280,686,344
COSTS AND EXPENSES:
Cost of products sold.............................. 237,028,272 237,338,271 211,133,216
Operating, selling, administrative, and general.... 69,021,165 71,172,822 62,614,019
------------ ------------ ------------
Total........................................... 306,049,437 308,511,093 273,747,235
INCOME FROM OPERATIONS............................... 8,494,182 5,742,565 6,939,109
OTHER INCOME (EXPENSE):
Interest income.................................... 231,528 192,661 175,741
Interest expense................................... (2,064,179) (2,128,803) (704,158)
Other.............................................. (393,349) 1,948,511 663,186
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES......................... 6,268,182 5,754,934 7,073,878
INCOME TAXES:
Current............................................ 1,790,000 2,154,000 2,199,000
Deferred........................................... (611,000) (614,000) 220,000
------------ ------------ ------------
Total........................................... 1,179,000 1,540,000 2,419,000
------------ ------------ ------------
NET EARNINGS......................................... $ 5,089,182 $ 4,214,934 $ 4,654,878
============ ============ ============
NET EARNINGS PER SHARE............................... $ 2.43 $ 2.01 $ 1.62
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE> 102
INVETECH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL
STOCK STOCK PAID-IN RETAINED
CLASS A CLASS B CAPITAL EARNINGS
------- -------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994............................. $ 2,000 $285,615 $ 431,422 $44,424,666
Net earnings....................................... 4,654,878
Cash dividends, $.32 per share..................... (764,216)
------ -------- -------- -----------
BALANCE, DECEMBER 31, 1994........................... 2,000 285,615 431,422 48,315,328
Net earnings....................................... 4,214,934
Cash dividends, $.37 per share..................... (775,295)
Stock repurchase (Note 9).......................... (78,076) (117,113) (9,462,750)
------ -------- -------- -----------
BALANCE, DECEMBER 31, 1995........................... 2,000 207,539 314,309 42,292,217
Net earnings....................................... 5,089,182
Cash dividends, $.47 per share..................... (984,834)
------ -------- -------- -----------
BALANCE, DECEMBER 31, 1996........................... $ 2,000 $207,539 $ 314,309 $46,396,565
====== ======== ======== ===========
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE> 103
INVETECH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net earnings............................................ $ 5,089,182 $ 4,214,934 $ 4,654,878
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 3,558,500 3,509,492 3,098,838
(Increase) decrease in cash surrender value of life
insurance.......................................... (731,271) 472,545 (1,313,116)
(Decrease) increase in allowance for doubtful
accounts........................................... -- (280,000) 30,000
Loss (gain) on sales of equipment..................... 62,386 (1,703,642) (1,046,186)
Increase in deferred compensation..................... 232,142 129,753 65,057
Decrease (increase) in deferred income tax............ (572,000) (614,000) 220,000
Changes in working capital items affecting operations:
Decrease (increase) in accounts receivable............ 504,034 947,824 (5,663,581)
Decrease (increase) in inventories.................... 6,104,404 (4,525,501) (1,493,449)
(Increase) decrease in income tax receivable.......... (668,627) 15,568 (619,900)
(Increase) decrease in other current assets........... (121,471) 109,740 (129,104)
(Decrease) increase in accounts payable............... (2,534,902) 1,202,538 (729,328)
(Decrease) increase in other current liabilities...... (387,110) 298,122 (849,138)
Increase in other accrued expenses.................... 10,013 118,579 663,756
----------- ----------- -----------
Total adjustments.................................. 5,456,098 (318,982) (7,766,151)
----------- ----------- -----------
Net cash provided by (used in) operations.......... 10,545,280 3,895,952 (3,111,273)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property, plant and
equipment.......................................... 636,827 4,018,265 1,454,211
Proceeds from land held for sale...................... 700,000
Capital expenditures.................................. (2,244,286) (6,526,857) (3,631,469)
Acquisition of Kentucky Bearings Service, Inc......... (3,096,596) --
Other................................................. -- -- (150,064)
----------- ----------- -----------
Net cash used in investing activities.............. (1,607,459) (5,605,188) (1,627,322)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings.................... -- 21,000,000 10,500,000
Repayment of note..................................... (15,899) (13,161) --
Repayment of short-term debt.......................... (1,700,000) (2,000,000) (5,500,000)
Repayment of long-term debt........................... (6,202,876) (6,191,563) (556,406)
Payments on life insurance policy loans............... -- (696,285) --
Borrowings against life insurance policies............ 53,628 53,628 874,888
Cash paid for repurchase of common stock.............. -- (9,657,939) --
Dividends paid........................................ (775,295) (754,341) (575,229)
----------- ----------- -----------
Net cash (used in) provided by financing
activities....................................... (8,640,442) 1,740,339 4,743,253
NET INCREASE IN CASH AND CASH EQUIVALENTS............... 297,379 31,103 4,658
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......... 285,731 254,628 249,970
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................ $ 583,110 $ 285,731 $ 254,628
=========== =========== ===========
OTHER CASH FLOW INFORMATION:
Interest paid......................................... $ 2,208,000 $ 1,650,000 $ 1,011,000
=========== =========== ===========
Income taxes paid..................................... $ 2,430,000 $ 2,030,000 $ 2,540,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE> 104
INVETECH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL -- INVETECH Company ("Invetech") is an industrial distributor of
bearings, pneumatic products, power transmission components, and other
industrial related products. Invetech has service centers in 20 states
throughout the continental United States.
CONSOLIDATED FINANCIAL STATEMENTS -- The consolidated financial statements
include the accounts of Invetech and its wholly owned subsidiaries. All material
intercompany transactions, profits, and balances have been eliminated.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS -- Invetech considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
INVENTORIES represent finished goods and are stated at the lower of cost,
last-in, first-out method, or market.
PROPERTY, PLANT AND EQUIPMENT are stated at cost. Invetech provides for
depreciation by the straight-line method based on estimated useful lives.
Expenditures for repairs and maintenance are charged to operations as incurred.
GOODWILL -- The excess of acquisition cost over fair value of net assets
acquired is amortized on a straight-line basis over ten or forty years. Invetech
evaluates the recoverability of goodwill based upon cash flows and other
financial factors. Accumulated amortization of goodwill was $399,000 and
$372,000 at December 31, 1996 and 1995 respectively.
REVENUE RECOGNITION -- Invetech recognizes revenue when title to the goods
sold passes to the buyer, which is at the time of shipment. Approximately 10% of
Invetech's sales are derived from companies in the automotive industry.
DEFERRED COMPENSATION relates to amounts earned by branch managers,
divisional management and executives under incentive compensation plans whereby
those participants have elected to defer payments into future years. Interest
accumulates on the unpaid balance under the incentive compensation agreements at
the rate of the longest term certificate of deposit established by a regional
bank as of the beginning of each year.
NET EARNINGS PER SHARE is based on the weighted average number of shares of
Invetech Common Stock outstanding during each year.
INCOME TAXES -- Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is generally the tax payable or refundable,
if any, for the period plus or minus the change during the period in deferred
tax assets and liabilities.
F-26
<PAGE> 105
INVETECH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. INVENTORIES
Inventories are valued using the last-in, first-out (LIFO) method of
inventory accounting, which essentially charges to cost of goods sold the most
recent costs of goods purchased, resulting in the matching of current costs to
revenues. On a supplemental basis, if inventories had been valued by the
first-in, first-out method, inventories would have been approximately
$24,000,000 higher at December 31, 1996, and $23,200,000 higher at December 31,
1995.
During 1996, the quantities of inventory were reduced resulting in a
partial liquidation of LIFO inventory layers. These liquidations increased net
earnings and net earnings per share by $256,000 and $0.12, respectively.
3. LONG-TERM DEBT, CAPITAL LEASE OBLIGATION AND LINES OF CREDIT
Long-term debt, capital lease obligation and lines of credit consist of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Term loans........................................................ $21,500,000 $27,500,000
Capital lease obligation -- warehouse and office additions........ -- 1,700,000
Note assumed in Kentucky Bearings Service, Inc. purchase, payable
in monthly principal installments of $2,172..................... 122,128 138,025
Noninterest bearing obligation with an imputed interest rate of
6%, payable in monthly installments of $15,000.................. 96,855 266,011
Noninterest bearing obligation with an imputed interest rate of
9%, payable in annual installments.............................. 321,283 355,005
Policy loans...................................................... 160,883 107,255
----------- -----------
Total................................................... 22,201,149 30,066,296
Less current portion.............................................. 13,684,273 1,904,466
----------- -----------
Total long-term debt.............................................. $ 8,516,876 $28,161,830
=========== ===========
</TABLE>
At December 31, 1996, Invetech has $13,500,000 in borrowings outstanding
under term loan agreements maturing on December 1, 1997 with interest at 7.4%.
Invetech also has a $10,000,000 working capital authorization with
$8,000,000 in related debt outstanding at December 31, 1996. The outstanding
debt matures on December 21, 1998 and bears interest at 5.97%.
In addition, Invetech has a $5,000,000 revolving line of credit and two
unsecured lines of credit aggregating $11,000,000 with no related debt
outstanding at December 31, 1996. The bank has been granted a security interest
in all of Invetech's deposit accounts maintained with the bank. Interest on any
borrowings under these agreements is at negotiated rates not to exceed the prime
rate at the date of borrowing.
The capital lease obligation relates to warehouse and office facilities
financed by the proceeds of industrial development bonds. Interest payments at
68% of the prime interest rate are due semiannually. A lump-sum principal
payment was paid in 1996, at the end of the obligation. Invetech purchased the
facilities in 1996 upon satisfaction of the capital lease amounts.
A note was assumed, in connection with the purchase of Kentucky Bearings
Service, Inc. ("Kentucky Bearings") with an interest rate of 1%. The note has
been discounted to reflect an imputed interest of 8%. The note balloons on
October 1, 1999.
F-27
<PAGE> 106
INVETECH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The noninterest bearing obligations relate to covenants not to compete
pursuant to the acquisitions of Kentucky Bearings in 1995 and Southern Bearings
Services, Inc. in 1991. The obligations have been discounted to reflect an
imputed interest rate of 9% and 6% respectively.
In 1996 and 1995, policy loans represent open ended policy loans against
the cash surrender value of certain life insurance policies at interest rates
ranging from 6% to 8%. During 1995, a portion of the policy loans were repaid.
Based on the borrowing rates currently available to Invetech for bank loans
with similar terms and average maturities, the fair value of Invetech's
long-term debt approximates carrying value.
Financial covenants in certain of Invetech's term loan agreements, lines of
credit and the capital lease obligation require Invetech to maintain certain
financial ratios and tangible net worth amounts and restrict dividends to 50% of
Invetech's net earnings. Management believes Invetech has complied with the
covenants.
Maturities of long-term debt for the years ending December 31 are as
follows:
<TABLE>
<S> <C>
1997.................................................................. $13,684,231
1998.................................................................. 8,095,546
1999.................................................................. 103,644
2000.................................................................. 113,789
2001.................................................................. 23,980
Thereafter............................................................ 179,959
-----------
Total................................................................. $22,201,149
===========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Included in property, plant and equipment are assets acquired under a
capital lease having a net book value of approximately $237,000 and $452,000 at
December 31, 1996 and 1995, respectively. The assets are being amortized
(included in depreciation) over their estimated useful lives.
Invetech recorded depreciation expense on property, plant and equipment of
approximately $3,121,000, $3,171,000, and $2,832,000 for the years ended
December 31, 1996, 1995, and 1994, respectively.
5. EMPLOYEE RETIREMENT PLANS
Invetech and its subsidiaries participate in a profit-sharing and 401(k)
retirement plan which covers substantially all nonunion employees. Invetech
makes matching contributions to the plan equal to 50% of participant
contributions to a maximum of 1 1/2% of participant compensation. Semiannual
additional contributions are also made by Invetech as determined by the Board of
Directors. Total expense amounted to approximately $965,000, $715,400, and
$974,900 for the years ended December 31, 1996, 1995, and 1994 respectively.
Invetech also has a defined benefit plan for union employees. Disclosure of
pension expense and the funded status of the plan has been omitted as the
amounts are not significant.
F-28
<PAGE> 107
INVETECH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. LEASE COMMITMENTS
Invetech occupies certain facilities and leases equipment under operating
leases which expire at various dates through 2009. Future minimum rental
commitments as of December 31, 1996, were as follows:
<TABLE>
<S> <C>
1997................................................................... $2,269,000
1998................................................................... 1,630,000
1999................................................................... 1,285,000
2000................................................................... 1,194,000
2001................................................................... 824,000
Thereafter............................................................. 1,855,000
----------
Total.................................................................. $9,057,000
==========
</TABLE>
Lease expense for the years ended December 31, 1996, 1995, and 1994
amounted to approximately $2,962,000, $3,018,000, and $2,605,000, respectively.
7. ACQUISITION
Invetech purchased the assets and assumed certain liabilities of Kentucky
Bearings on March 30, 1995 for a purchase price of approximately $3,100,000.
Kentucky Bearings is a distributor of power transmission products, bearings, and
other industrial equipment with locations in Kentucky. In addition, a previous
owner of Kentucky Bearings entered into an agreement not to compete with
Invetech for a period of five years in exchange for a noninterest bearing
obligation of $500,000. The obligation is being paid and amortized over a five
year period.
The acquisition has been accounted for by the purchase method of
accounting; accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on the estimated fair values at the
date of acquisition. The operating results of Kentucky Bearings are included in
Invetech's consolidated results of operations from the date of acquisition.
8. OTHER POST-RETIREMENT BENEFIT PLANS
Invetech provides healthcare benefits for certain retirees. Invetech also
has agreements with certain key employees ("the Agreements") which take effect
at the time of the employee's normal retirement providing the employees continue
to work for Invetech until that date. The Agreements stipulate that the
employees, subsequent to normal retirement, will perform services at Invetech's
convenience and that the employees agree not to compete with Invetech for the
duration of the Agreements, generally 10 years.
Net periodic post-retirement benefit cost for the healthcare costs and the
Agreements for the years ended December 31, 1996, 1995, and 1994 included the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest cost on accumulated post-retirement benefit
obligation........................................ $313,000 $360,000 $351,000
Change in actuarial assumptions..................... (81,000) 212,000 223,000
-------- -------- --------
Net periodic post-retirement benefit cost........... $232,000 $572,000 $574,000
======== ======== ========
</TABLE>
F-29
<PAGE> 108
INVETECH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Invetech's post-retirement benefits are funded on a pay-as-you-go basis.
The status of the post-retirement benefits at December 31, is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accumulated post-retirement benefit obligations:
Retirees................................................. $3,206,000 $3,201,000
Fully eligible and other active participants............. 1,269,000 1,251,000
-------- --------
Total accrued post-retirement benefits..................... $4,475,000 $4,452,000
======== ========
</TABLE>
For measurement purposes, a 12% annual rate of increase in the per capita
cost of covered healthcare benefits was assumed for 1996 through the year 2004
and decreased to 5% per annum thereafter. The assumptions for the healthcare
cost trend rate has an effect on the amount of the obligation and period cost
reported. An increase in the assumed healthcare cost trend rates by 1% would
increase the accumulated post-retirement benefit obligation by approximately
$73,000 and the aggregate of the service and interest cost components of net
periodic post-retirement benefit cost by approximately $21,000 for the year.
The discount rate used in determining the accumulated post-retirement
healthcare benefit obligation was 7%. The estimated obligation under the
Agreements included in the above table has been recorded in the accompanying
financial statements at their present value, currently $1,760,000 in 1996 and
$1,770,000 in 1995. These future liabilities have been discounted at 7.70% and
7.25% in 1996 and 1995, respectively. Interest cost attributable to the
Agreements was $128,000 in 1996 and $177,000 in 1995.
9. STOCK REPURCHASE
In October 1994, Invetech extended an offer to purchase 808,407 shares of
the Invetech Class B Common Stock at $12.37 per share. On January 2, 1995,
780,755 shares were purchased under the offer at a total cost of $9,657,939. As
a result of the stock repurchase, the Invetech Class B Common Stock, additional
paid-in capital and retained earnings were reduced by $78,076, $117,113 and
$9,462,750, respectively.
F-30
<PAGE> 109
INVETECH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. INCOME TAXES
Temporary differences which give rise to the deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable................................................ $ 146,000 $ 146,000
Inventory.......................................................... 514,000 712,000
Accrued vacation................................................... 666,000 648,000
Accrued health..................................................... 129,000
Accrued relocation................................................. 25,000 108,000
Deferred compensation.............................................. 642,000 563,000
Accrued postretirement............................................. 1,515,000 1,514,000
Other.............................................................. 144,000 55,000
---------- ----------
Total deferred tax assets............................................ 3,652,000 3,875,000
---------- ----------
Deferred tax liabilities:
Plant and equipment................................................ 401,000 400,000
Accrued health..................................................... 47,000
Accrued rent....................................................... 41,000
Other liabilities.................................................. 49,000 933,000
---------- ----------
Total deferred tax liabilities....................................... 538,000 1,333,000
---------- ----------
Net deferred tax asset............................................... 3,114,000 2,542,000
Less: net deferred tax asset -- current.............................. 1,358,000 1,736,000
---------- ----------
Net deferred tax asset -- noncurrent................................. $1,756,000 $ 806,000
========== ==========
</TABLE>
Effective Tax Rates
A reconciliation from statutory tax rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ----
<S> <C> <C> <C>
Statutory tax rate..................................................... 34.0% 34.0% 34.0%
Effects of:
Adjustment of tax liability.......................................... (13.9) (6.4)
Other................................................................ (1.3) (0.8) 0.2
----
-
----- -----
Effective tax rate..................................................... 18.8% 26.8% 34.2%
===== ===== =====
</TABLE>
11. RELATED PARTY TRANSACTIONS
In the ordinary course of business Invetech purchases services and makes
payments to entities who employ certain of Invetech's outside board of directors
members. The total payments made to these entities was $269,000, $549,000 and
$633,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
12. SUBSEQUENT EVENT
Invetech signed a letter of intent on February 8, 1997 to exchange all the
outstanding common stock of Invetech for cash and Applied Common Stock valued at
approximately $83,000,000. On April 29, 1997, Invetech entered into the Merger
Agreement with Applied. The transaction is expected to be completed in 1997.
F-31
<PAGE> 110
INVETECH COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 1,072,111 $ 583,110
Trade accounts receivable, less allowance for doubtful accounts of
$450,000 in 1997 and 1996.............................................. 42,663,456 36,536,006
Inventories.............................................................. 30,046,610 33,273,283
Income tax receivable.................................................... 1,053,459 1,272,959
Deferred income taxes.................................................... 1,388,000 1,358,000
Other current assets..................................................... 614,922 844,825
------------ ------------
Total current assets................................................... 76,838,558 73,868,183
PROPERTY, PLANT AND EQUIPMENT:
Land..................................................................... 1,160,726 1,160,726
Buildings and improvements............................................... 11,717,461 11,782,247
Furniture and equipment.................................................. 17,687,875 18,647,245
------------ ------------
Total.................................................................. 30,566,062 31,590,218
Less accumulated depreciation............................................ 18,294,190 18,867,598
------------ ------------
Total property, plant and equipment.................................... 12,271,872 12,722,620
OTHER ASSETS:
Deferred income taxes.................................................... 1,756,000 1,756,000
Goodwill -- net of accumulated amortization.............................. 439,298 445,970
Cash surrender value of life insurance................................... 12,233,190 12,054,338
Covenants not to compete -- net of accumulated amortization.............. 385,950 456,288
Miscellaneous............................................................ 144,344 173,444
------------ ------------
Total other assets..................................................... 14,958,782 14,886,040
------------ ------------
TOTAL ASSETS............................................................... $104,069,212 $101,476,843
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable................................................... $ 17,239,398 $ 17,246,277
Compensation and related payroll taxes................................... 5,882,847 6,337,549
Taxes, other than income taxes........................................... 612,681..... 503,407
Current portion of long-term debt........................................ 13,636,123 13,684,273
Dividends payable........................................................ -- 649,571
Other current liabilities................................................ 3,191,748 1,255,919
------------ ------------
Total current liabilities.............................................. 40,562,797 39,676,996
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION................................ 8,516,876 8,516,876
DEFERRED COMPENSATION...................................................... 1,980,132 1,887,558
ACCRUED POST-RETIREMENT BENEFITS........................................... 4,471,101 4,475,000
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value:
Class A (voting), authorized 30,000 shares, issued and outstanding
20,000 shares......................................................... 2,000 2,000
Class B (non-voting), authorized 5,000,000 shares, issued and
outstanding 2,075,391 shares.......................................... 207,539 207,539
Additional paid-in capital............................................... 314,309 314,309
Retained earnings........................................................ 48,014,458 46,396,565
------------ ------------
Total stockholders' equity............................................. 48,538,306 46,920,413
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................. $104,069,212 $101,476,843
============ ============
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE> 111
INVETECH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Net sales........................................................ $83,295,962 $80,828,467
Other income..................................................... 63,990 87,401
---------- ----------
Total......................................................... 83,359,952 80,915,868
COSTS AND EXPENSES:
Cost of products sold............................................ 63,195,004 60,645,236
Operating, selling, administrative, and general.................. 17,156,592 17,590,250
---------- ----------
Total......................................................... 80,351,596 78,235,486
INCOME FROM OPERATIONS............................................. 3,008,356 2,680,382
OTHER INCOME (EXPENSE):
Interest income.................................................. 25,580 57,882
Interest expense................................................. (462,228) (636,214)
---------- ----------
EARNINGS BEFORE INCOME TAXES....................................... 2,571,708 2,102,050
INCOME TAXES:
Current.......................................................... 900,000 600,000
Deferred......................................................... (30,000) (205,000)
---------- ----------
Total......................................................... 870,000 395,000
---------- ----------
NET EARNINGS....................................................... $ 1,701,708 $ 1,707,050
========== ==========
NET EARNINGS PER SHARE............................................. $ 0.81 $ 0.81
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE> 112
INVETECH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net earnings..................................................... $ 1,701,708 $ 1,707,050
Adjustments to reconcile net earnings to net cash provided by
(used in)operating activities:
Depreciation and amortization................................. 857,047 851,554
Increase in cash surrender value of life insurance............ (178,852) (118,505)
Loss (gain) on sales of equipment............................. 7,329 (22,997)
Increase (decrease) in deferred compensation.................. 88,675 (3,691)
Increase in deferred income tax............................... (30,000) (204,422)
Changes in working capital items affecting operations:
Increase in accounts receivable............................. (6,127,450) (4,099,589)
Decrease in inventories..................................... 3,226,673 4,456,112
Decrease in income tax receivable........................... 219,500 163,700
Decrease in other current assets............................ 229,903 182,982
Decrease in accounts payable................................ (6,879) (5,289,068)
Increase (decrease) in other current liabilities............ 1,935,829 (37,020)
(Decrease) increase in other accrued expenses............... (316,328) 1,863,824
----------- -----------
Total adjustments........................................ (94,553) (2,257,120)
----------- -----------
Net cash provided by (used in) operations................ 1,607,155 (550,070)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property, plant and equipment.......... 83,970 273,384
Capital expenditures............................................. (420,588) (1,784,735)
----------- -----------
Net cash used in investing activities......................... (336,618) (1,511,351)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note................................................ (4,257) (1,687)
Repayment of long-term debt...................................... (43,893) (41,342)
Dividends paid................................................... (733,386) (523,848)
----------- -----------
Net cash used in financing activities......................... (781,536) (566,877)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 489,001 (2,628,298)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................... 583,110 285,731
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 1,072,111 $(2,342,567)
=========== ===========
OTHER CASH FLOW INFORMATION:
Interest paid.................................................... $ 375,000 $ 601,000
=========== ===========
Income taxes paid................................................ None None
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE> 113
INVETECH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTH PERIOD ENDED MARCH 31, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON
STOCK COMMON ADDITIONAL
CLASS STOCK PAID-IN RETAINED
A CLASS B CAPITAL EARNINGS
------ -------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996.......................... $2,000 $207,539 $ 314,309 $42,292,217
Net earnings.................................... 5,089,182
Cash dividends, $.47 per share.................. (984,834)
------ -------- -------- -----------
BALANCE, DECEMBER 31, 1996........................ 2,000 207,539 314,309 46,396,565
Net earnings.................................... 1,701,708
Cash dividends, $.04 per share.................. (83,815)
------ -------- -------- -----------
BALANCE, MARCH 31, 1997........................... $2,000 $207,539 $ 314,309 $48,014,458
====== ======== ======== ===========
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE> 114
INVETECH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared by management and, in the opinion of management, contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the consolidated financial position of Invetech and its wholly owned
subsidiaries as of March 31, 1997 and the results of its operations and its cash
flows for the three month periods ended March 31, 1997 and 1996.
The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included
elsewhere herein. The results of operations for the three month period ended
March 31, 1997 may not necessarily be indicative of the operating results of the
full year.
F-36
<PAGE> 115
ANNEXES TO PROSPECTUS
RELATING TO THE OFFERING OF UP TO
2,300,000 SHARES
OF
COMMON STOCK
OF
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
IN CONNECTION WITH THE MERGER OF
INVETECH COMPANY WITH AND INTO
I.C. ACQUISITION CORP.
<PAGE> 116
ANNEX A
PLAN AND AGREEMENT OF MERGER
BY AND AMONG
APPLIED INDUSTRIAL TECHNOLOGIES, INC.,
IC ACQUISITION CORPORATION
AND
INVETECH COMPANY
DATED APRIL 29, 1997
<PAGE> 117
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO. A-
-----------
<S> <C>
ARTICLE I. -- THE MERGER...................................................... 1
1.1 Effective Time; Effect of Merger................................... 1
1.2 Conversion of Capital Stock........................................ 2
1.3 Escrow Amount...................................................... 3
1.4 Exchange of Certificates........................................... 4
1.5 Stock Transfer Books............................................... 5
1.6 No Further Ownership Rights in Company Shares...................... 5
1.7 Lost, Stolen or Destroyed Certificates............................. 5
1.8 Dissenting Shares.................................................. 5
1.9 Tax Consequences................................................... 5
1.10 Closing............................................................ 5
1.11 Plan of Merger..................................................... 5
ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF THE COMPANY................... 6
2.1 Organization and Standing; Subsidiaries............................ 6
2.2 Organizational Documents and Corporate Records..................... 6
2.3 Authority; Shareholder Approval; Takeover Laws..................... 7
2.4 Capitalization..................................................... 7
2.5 Consents and Approvals; No Violation............................... 8
2.6 Absence of Undisclosed Liabilities................................. 8
2.7 Financial Statement; Absence of Certain Changes or Events.......... 8
2.8 Compliance with Laws and Permits................................... 9
2.9 Litigation and Arbitration......................................... 9
2.10 Brokers and Fees................................................... 9
2.11 Territorial Restrictions........................................... 10
2.12 Registration Statement............................................. 10
2.13 Taxes.............................................................. 10
2.14 Contracts.......................................................... 11
2.15 Assets; Inventory.................................................. 12
2.16 Environmental and Safety Matters................................... 12
2.17 Customers, Suppliers and Sales Representatives..................... 13
2.18 Outstanding Commitments............................................ 13
2.19 Insurance.......................................................... 13
2.20 Employee Benefits.................................................. 13
2.21 Labor Matters; Employees........................................... 14
2.22 Products; Product Liability........................................ 14
2.23 Real Property...................................................... 15
2.24 Banking Relationships.............................................. 15
ARTICLE IIA -- POST-EXECUTION SCHEDULE REVISIONS; CERTAIN MATTERS............. 15
2.A.1 Schedules and Amendments Thereto................................... 15
2.A.2 Certain Matters.................................................... 16
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF MERGER SUB AND PARENT........ 16
3.1 Organization and Standing; Subsidiaries............................ 16
3.2 Authority.......................................................... 16
3.3 Capitalization..................................................... 16
3.4 Consents and Approvals; No Violation............................... 16
3.5 Litigation and Arbitration......................................... 17
3.6 Registration Statement............................................. 17
</TABLE>
A-i
<PAGE> 118
<TABLE>
<CAPTION>
PAGE NO. A-
-----------
<S> <C>
3.7 SEC Filings........................................................ 17
3.8 Brokers and Fees................................................... 17
3.9 Parent Shares...................................................... 17
ARTICLE IV -- CONDUCT OF BUSINESS PENDING THE MERGER; FURTHER ASSURANCES; AND
CERTAIN COVENANTS........................................................ 18
4.1 Conduct of Business by the Company Pending the Merger.............. 18
4.2 No Solicitation.................................................... 19
4.3 Further Assurances; Cooperation.................................... 19
4.4 HSR Act............................................................ 19
4.5 Registration Statement............................................. 20
4.6 Shareholders Meetings.............................................. 20
4.7 Consents; Approvals................................................ 20
4.8 Agreements with Respect to Affiliates.............................. 20
4.9 Notification of Certain Matters.................................... 20
4.10 Public Announcements............................................... 21
4.11 Listing of Shares.................................................. 21
4.12 Access to Company Information...................................... 21
4.13 Access to Parent Information....................................... 21
4.14 Notice of Liabilities.............................................. 21
4.15 MESC Disclosure.................................................... 21
4.16 Ancillary Agreements............................................... 21
4.17 Consulting and Employment Agreements............................... 21
4.18 WARN Act Notices................................................... 21
4.19 Parent Tax Returns................................................. 21
4.20 Parent Dividends................................................... 22
4.21 Life Insurance..................................................... 22
4.22 Notification under Union Agreement................................. 22
4.23 Amendment or Termination of Certain Plans and Agreements........... 22
4.24 Inventory Record................................................... 22
4.25 Certain Employees.................................................. 22
4.26 Nomination as Director............................................. 22
4.27 Company and Plan Tax Returns....................................... 22
4.28 Confederation Life Policies........................................ 23
ARTICLE V -- SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION...... 23
5.1 Survival of Representations and Warranties......................... 23
5.2 Indemnification of Parent and Merger Sub........................... 23
5.3 Indemnification of Shareholders.................................... 23
5.4 Assertion of Claims................................................ 24
5.5 Limitation on Parent Liability..................................... 24
5.6 Indemnification is Net of Benefits................................. 24
5.7 Good Faith Claims.................................................. 24
ARTICLE VI -- CONDITIONS TO THE MERGER........................................ 24
6.1 Conditions to Obligations of Each Party to Effect the Merger....... 24
6.2 Additional Conditions to Obligations of Parent and Merger Sub...... 25
6.3 Additional Conditions to Obligations of the Company................ 26
ARTICLE VII -- TERMINATION.................................................... 27
7.1 Termination........................................................ 27
7.2 Effect of Termination.............................................. 28
7.3 Fees and Expenses.................................................. 28
</TABLE>
A-ii
<PAGE> 119
<TABLE>
<CAPTION>
PAGE NO. A-
-----------
<S> <C>
ARTICLE VIII -- MISCELLANEOUS................................................. 28
8.1 Parties in Interest; No Third Party Beneficiaries.................. 28
8.2 Exhibits and Schedules............................................. 28
8.3 Entire Agreement................................................... 28
8.4 Waiver of Compliance............................................... 28
8.5 Enforceability..................................................... 29
8.6 Counterparts....................................................... 29
8.7 Headings........................................................... 29
8.8 Governing Law...................................................... 29
8.9 Effectiveness of Representations, Warranties and Agreements........ 29
8.10 Notices............................................................ 29
8.11 Confidentiality; Solicitation of Employees......................... 30
8.12 Dispute Resolution; Arbitration.................................... 30
ARTICLE IX -- CERTAIN DEFINITIONS............................................. 31
9.1 Definitions........................................................ 31
</TABLE>
A-iii
<PAGE> 120
TABLE OF SCHEDULES & EXHIBITS
<TABLE>
<S> <C>
2.1(a) Organization and Standing; Subsidiaries
2.2 Organizational Documents and Corporate Records
2.4 Capitalization
2.5 Consents and Approvals; No Violation
2.6 Absence of Undisclosed Liabilities
2.7 Financial Statement; Absence of Certain Changes or Events
2.9 Litigation and Arbitration
2.10 Brokers and Fees
2.11 Territorial Restrictions
2.13 Power of Attorney
2.14 Contracts
2.15 Assets; Inventory
2.17 Customers, Suppliers and Sales Representatives
2.19 Insurance
2.20 Pension Plans
2.21 Labor Matters; Employees
2.22 Products; Product Liability
2.23 Real Property
2.24 Banking Relationships
2.A.2 Certain Matters
3.8 Brokers and Fees
4.17 Consulting and Employment Agreements
4.28 Confederation Life Policies
</TABLE>
Exhibit A Escrow Agreement
Exhibit B Lock-Up Letter
Exhibit C Preference Specification
Exhibit D Rule 145 Affiliate Letter
Exhibit E Consulting, Noncompetition and Confidentiality Agreement between
Parent and J. Michael Moore
Exhibit F Consulting, Noncompetition and Confidentiality Agreement between
Parent and James T. Moore II
Exhibit G Company Counsel Opinion
Exhibit H Parent Counsel Opinion
A-iv
<PAGE> 121
PLAN AND AGREEMENT OF MERGER
This PLAN AND AGREEMENT OF MERGER (this "Agreement") is entered into on
this 29th day of April, 1997, by and among APPLIED INDUSTRIAL TECHNOLOGIES,
INC., an Ohio corporation (the "Parent"), IC ACQUISITION CORPORATION, an Ohio
corporation (the "Merger Sub") and wholly-owned subsidiary of Parent, and
INVETECH COMPANY, a Michigan corporation (the "Company").
RECITALS
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have
determined that it is advisable and in the best interests of their respective
shareholders for Parent and Merger Sub to enter into a business combination with
the Company upon the terms and subject to the conditions set forth herein; and
WHEREAS, in furtherance of such combination, the Boards of Directors of
Parent, Merger Sub and the Company have each approved the merger of the Company
with and into the Merger Sub (the "Merger"), upon the terms and subject to the
conditions set forth herein, in accordance with applicable provisions of the
Michigan Business Corporation Act (the "MBCA"), in the case of the Company and
the Ohio General Corporation Law (the "OGCL"), in the case of Parent and Merger
Sub; and
WHEREAS, Parent, Merger Sub and the Company intend, by approving
resolutions authorizing this Agreement, to adopt this Agreement as a plan of
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and the regulations promulgated thereunder;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Merger Sub and the Company hereby agree as follows:
ARTICLE I
THE MERGER
1.1 EFFECTIVE TIME; EFFECT OF MERGER.
(a) Upon the terms and subject to the conditions set forth herein, the
Company shall be merged into and with Merger Sub. Merger Sub shall be the
surviving corporation (the "Surviving Corporation") of the Merger and shall
continue to exist and be governed by the laws of the State of Ohio. The Merger
shall become effective (the "Effective Time") upon the later of (i) the filing
of a certificate of merger (the "Ohio Certificate of Merger") with the Secretary
of State of the State of Ohio in accordance with the OGCL and (ii) the filing of
a certificate of merger (the "Michigan Certificate of Merger") with the
Corporations, Securities and Land Development Bureau of the State of Michigan in
accordance with the MBCA.
(b) At the Effective Time, (i) the separate corporate existence of the
Company shall cease; (ii) the Articles of Incorporation and Code of Regulations
of Merger Sub shall be the Articles of Incorporation and Code of Regulations of
the Surviving Corporation; (iii) the directors and officers of Merger Sub shall
be the directors and officers of the Surviving Corporation; and (iv) Merger Sub
shall continue as the Surviving Corporation and a wholly owned subsidiary of
Parent. At the Effective Time, all the property, rights, privileges, powers and
franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation. By
approving the Merger and the Merger Agreement, (i) the Shareholders shall also
thereby agree to be bound by the terms of the Escrow Agreement attached as
Exhibit A (the "Escrow Agreement") hereto and the lock-up letter attached as
Exhibit B hereto (the "Lock-up Letter"), and (ii) at the Effective Time, all
existing stock redemption agreements and shareholder agreements between the
Company and any Shareholder(s) relating to the capital stock of the Company
shall be deemed to have been terminated and shall have no further force or
effect.
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1.2 CONVERSION OF CAPITAL STOCK. At the Effective Time, by virtue of the
Merger and without any further action on the part of Parent, Merger Sub, the
Company or the holders of any of the following securities:
(a) Merger Consideration. The shares of Class A common stock, $0.10 par
value, of the Company (the "Company Class A Shares") and the shares of Class B
common stock, $0.10 par value, of the Company (the "Company Class B Shares")
issued and outstanding immediately prior to the Effective Time (collectively,
the "Company Shares") shall be converted into the right to receive shares of
common stock, without par value, of Parent ("Parent Shares") and cash
consideration (the "Cash Component"). The aggregate value of the Parent Shares
and the Cash Component shall be Eighty-Three Million Dollars ($83,000,000) (the
"Merger Consideration") with each Parent Share valued at Twenty-Eight Dollars
and Sixty-Two Cents ($28.62) per share (the "Parent Share Value"). The Cash
Component shall equal Eighty-Three Million Dollars ($83,000,000) less the
product of the number of Parent Shares issued as part of the Merger
Consideration (which number shall be designated by the Company in accordance
with this Section 1.2(a)) and the Parent Share Value. The Merger Consideration
shall be allocated in the following manner: (i) 15% to the holders of the
Company Class A Shares on a per share pro rata basis, and (ii) 85% to the
holders of the Company Class B Shares on a per share pro rata basis. Subject to
the limitations described in this Section 1.2(a) above, not less than five
business days prior to the Closing (as hereinafter defined), the Company shall
designate the number of Parent Shares and the amount of the Cash Component to be
delivered by Parent to each Shareholder in consideration of such Shareholder's
Company Shares. In connection with seeking approval of this Agreement and the
Merger from the Shareholders, the Company shall ask each Shareholder to specify
such Shareholder's preference for percentages of Parent Shares and cash to be
received in consideration of such Shareholder's Company Shares (the "Preference
Specification"). The Preference Specification shall (i) be in the form attached
as Exhibit C, (ii) be delivered by the Company to the Shareholders with the
notice of the meeting relating to the Merger, (iii) provide for each Shareholder
to designate that the Merger Consideration payable to such Shareholder shall be
allocated between Parent Shares and Cash Component as described therein, and
(iv) provide that the Preference Specification must be delivered to the Company
not less than five business days prior to the Closing to be effective. In the
event that an effective and fully completed Preference Specification for any
Shareholder is not received by the Company by such date, such Shareholder shall
be entitled to receive Merger Consideration allocated 50% to Parent Shares and
50% to Cash Component. If necessary to comply with the limitations described in
this Section 1.2(a), or if necessary to preserve the tax-free status of the
Merger under Section 368(a) of the Code, the Company shall prorate the Cash
Component and the Parent Shares among the Shareholders on a basis intended to
respect the preferences for cash or Parent Shares specified by each Shareholder
to the extent reasonably possible. Notwithstanding the foregoing, Parent shall
not be required to issue more than Two Million Three Hundred Thousand
(2,300,000) Parent Shares in connection with the Merger, but rather, may elect,
upon written notice delivered to the Company prior to Closing, to pay any
portion of the Merger Consideration in cash rather than Parent Shares to the
extent Parent would otherwise be required to issue in excess of such number of
Parent Shares.
(b) Adjustment of Merger Consideration. The Merger Consideration shall be
subject to adjustment on a dollar for dollar basis to the extent that
shareholders equity of the Company as reflected on the Closing Balance Sheet (as
hereinafter defined), reduced for any and all liabilities, transaction costs,
compensation and termination expenses (including expenses relating to
terminations required by Section 4.23), and other costs incurred (other than
those of Parent or Merger Sub), arising out of or in any way associated with the
transactions contemplated hereby or a change of control of the Company
(excluding expenses and costs associated with any termination of leases), is
greater than or less than Forty-Six Million Dollars ($46,000,000). In addition,
Parent shall pay interest on the Merger Consideration, as adjusted, in an amount
equal to the product of (x) the Merger Consideration, as adjusted, (y) the
number of days elapsed between the date of the Closing Balance Sheet to and
including the date of the Closing, and (z) 0.0002191. As soon as practicable,
but not later than seven business days prior to the Closing Date, the Company
shall prepare and deliver to Parent a balance sheet of the Company as of the end
of the month immediately preceding the Closing (the "Closing Balance Sheet").
The Closing Balance Sheet shall be prepared in accordance with generally
accepted accounting principles ("GAAP"), applied on a basis consistent with the
audited balance
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sheet dated as of December 31, 1996 (the "December Balance Sheet") and the
audited balance sheet of the Company dated as of December 31, 1995. Parent shall
have five business days from receipt of the Closing Balance Sheet to deliver a
written notice of disagreement to the Company (a "Notice of Disagreement").
During such period, the Company shall make the books and accounting records of
the Company (including work papers) and appropriate Company accounting personnel
reasonably available to Parent. Any such Notice of Disagreement shall specify in
reasonable detail the nature of any disagreement so asserted. If no Notice of
Disagreement is delivered within such five day period, the Closing Balance Sheet
shall become final and binding upon Parent and the Company. Following delivery
of a Notice of Disagreement, the parties shall attempt to resolve any
differences which they may have with respect to any matter specified in the
Notice of Disagreement. If prior to the scheduled Closing Date, the parties fail
to reach a written agreement with respect to all such matters, then all such
matters as specified in the Notice of Disagreement as to which such written
agreement has not been reached (the "Disputed Matters") shall be submitted to
and reviewed by an arbitrator (the "Arbitrator"), who shall be an audit partner
of any of the "big six" accounting firms (other than Deloitte & Touche LLP)
selected by Parent's and the Company's representatives at the Cleveland and
Detroit offices of Deloitte & Touche LLP, respectively. The Arbitrator shall act
promptly (in no event to exceed 20 days) to resolve all Disputed Matters and his
or her decision with respect to all Disputed Matters shall be final and binding
upon Parent and the Company. The fees and expenses of the Arbitrator incurred in
resolving the Disputed Matters shall be borne equally by Parent and the Company
(with the Company's portion of the fees and expenses being a further adjustment
to the Merger Consideration). The Closing Date shall be postponed until all
Disputed Matters have been resolved by the Arbitrator or waived by the parties.
(c) Cancellation. Each Company Share held in the treasury of the Company
and each Company Share owned by Parent, Merger Sub or any direct or indirect
wholly owned subsidiary of the Company or Parent immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, automatically cease to be outstanding, be canceled and be
retired without payment of any consideration therefor and cease to exist.
(d) Capital Stock of Merger Sub. Each share of capital stock of Merger Sub
issued and outstanding immediately prior to the Effective Time shall continue to
be outstanding and shall be unaffected by the Merger and shall constitute an
issued and outstanding share of capital stock of the Surviving Corporation.
(e) Antidilution Adjustments to Merger Consideration. The Merger
Consideration payable with respect to each Company Share shall be adjusted to
reflect fully the effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities convertible into Parent
Shares or Company Shares), reorganization, recapitalization or other like change
with respect to the Parent Shares or the Company Shares, as appropriate,
occurring after the date hereof and prior to the Effective Time.
(f) Fractional Shares. No certificates or scrip representing fractional
Parent Shares shall be issued in connection with the Merger, and such fractional
share interests will not entitle the owner thereof to vote or to any rights as a
shareholder of Parent. In lieu of any such fractional shares, each holder of
Company Shares upon surrender of a certificate (a "Certificate") for exchange
shall be paid an amount in cash (without interest), rounded up to the nearest
cent, determined by multiplying (i) Twenty-Eight Dollars and Sixty-Two Cents
($28.62) by (ii) the fractional interest to which such holder would otherwise be
entitled (after taking into account all Company Shares then held of record by
such holder).
1.3 ESCROW AMOUNT. At the Closing, as security for the general obligations
of the Company under this Agreement, immediately available funds in the amount
of Ten Million Dollars ($10,000,000) (the "Escrow Amount") shall be delivered by
Parent (on behalf of the Shareholders on a pro rata basis as to the total Merger
Consideration to be received by each Shareholder and as part of the Merger
Consideration) to NBD Bank, as escrow agent (the "Escrow Agent"), to be
deposited and held in and released from escrow pursuant to the Escrow Agreement
to be entered into at the Closing, and shall be deposited and held in escrow for
a period of up to five years following the Effective Time pursuant to the
provisions of the Escrow Agreement. By approving the Merger and the Merger
Agreement, the Shareholders thereby agree to be bound by the terms of the Escrow
Agreement.
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1.4. EXCHANGE OF CERTIFICATES.
(a) Exchange Agent. At or prior to the Effective Time, Parent shall
supply, or shall cause to be supplied, to or for the account of such bank or
trust company as shall be designated by Parent and subject to the reasonable
approval of the Company (the "Exchange Agent"), in trust for the benefit of the
holders of the Company Shares, for exchange in accordance with this Section 1.4
through the Exchange Agent, (i) certificates evidencing the Parent Shares
issuable pursuant to Section 1.2(a) in exchange for outstanding Company Shares
and (ii) cash in an aggregate amount sufficient to pay (x) the cash portion of
the Merger Consideration and (y) for fractional shares pursuant to Section
1.2(f), less the Escrow Amount (the shares and cash so deposited, together with
any dividends or distributions with respect to such Parent Shares to which the
Shareholders are entitled as shareholders of record of Parent Shares on the
record date therefor that are payable after the Effective Time which shall also
be deposited with the Exchange Agent, being hereinafter referred to collectively
as the "Exchange Fund"). Any interest, dividends or other income earned on the
investment of cash or other property (not including Parent Shares) held in the
Exchange Fund shall be for the account of and payable to Parent.
(b) Exchange Procedures. Promptly after the Effective Time, Parent will
instruct the Exchange Agent to mail to each holder of record of the Company
Shares (i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates to the Exchange Agent and shall be in such
form and have such other provisions as Parent may reasonably specify), (ii)
instructions to effect the surrender of the Certificates in exchange for the
certificates evidencing Parent Shares, (iii) the Lock-up Letter, and (iv) such
other documentation as is customary for transactions of this type. Upon
surrender of a Certificate for cancellation to the Exchange Agent together with
such letter of transmittal and lock-up letter, both of which shall be duly
executed, and such other customary documents as may be required pursuant to such
instructions, the holder of such Certificate shall be entitled to receive in
exchange therefor (A) certificates evidencing that number of whole Parent Shares
which such holder has the right to receive pursuant to Section 1.2(a) in respect
of the Company Shares formerly evidenced by such Certificate, (B) any dividends
or other distributions to which such holder is entitled pursuant to Section
1.4(c), and (C) cash in respect of the cash portion of the Merger Consideration
and of fractional shares as provided in Sections 1.2(a) and (f) hereof, less
such holder's proportionate Escrow Amount (which cash portion shall be disbursed
by wire transfer upon receipt by the exchange agent of the documents described
above and appropriate wire transfer instructions from a Shareholder) and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Company Shares which is not registered in the transfer
records of the Company as of the Effective Time, Parent Shares, dividends and
distributions may be issued and paid in accordance with this Article I to a
transferee if the Certificate evidencing such Shares is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer pursuant to this Section 1.4(b) and by evidence that any
applicable stock transfer taxes have been paid. Until so surrendered, each
outstanding Certificate that, prior to the Effective Time, represented Company
Shares will be deemed from and after the Effective Time, for all corporate
purposes, other than the exercise of voting rights and the payment of dividends
and subject to Section 1.2(c), to evidence the ownership of the number of full
Parent Shares into which such Company Shares shall have been so converted.
(c) Distributions with Respect to Unexchanged Parent Shares. No dividends
or other distributions declared or made after the Effective Time with respect to
Parent Shares with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to Parent Shares until the
holder of such Certificate shall surrender such Certificate for exchange in
accordance with this Section 1.4. Subject to applicable law, following surrender
of any such Certificate, there shall be paid to the record holder of the
certificates representing whole Parent Shares issued in exchange therefor,
without interest, at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to such whole Parent Shares.
(d) Transfers of Ownership. If any certificate for Parent Shares is to be
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it will be a condition of the issuance thereof
that the Certificate so surrendered will be properly endorsed and otherwise in
proper form for
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transfer and that the person requesting such exchange will have paid to Parent
or any agent designated by it any transfer or other taxes required by reason of
the issuance of a certificate for Parent Shares in any name other than that of
the registered holder of the certificate surrendered, or have established to the
reasonable satisfaction of Parent or any agent designated by it that such tax
has been paid or is not payable.
(e) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Company Shares as of the date which is
six months after the Effective Time shall be delivered to Parent, upon demand,
and thereafter such holders of Company Shares who have not theretofore complied
with this Section 1.4 shall be entitled to look only to Parent for payment of
the Merger Consideration to which they are entitled pursuant hereto.
(f) No Liability. Except as required by applicable law, none of Parent,
Merger Sub or the Company shall be liable to any holder of Company Shares for
any Merger Consideration delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(g) Withholding Rights. Parent or the Exchange Agent shall be entitled to
deduct and withhold from the Merger Consideration otherwise payable pursuant to
this Agreement to any holder of Company Shares such amounts as Parent or the
Exchange Agent is required to deduct and withhold with respect to the making of
such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by Parent or the Exchange Agent,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the Parent Shares in respect of which such
deduction and withholding was made by Parent or the Exchange Agent.
1.5. STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer books
of the Company shall be closed, and there shall be no further registration of
transfers of the Company Shares thereafter on the records of the Company.
1.6. NO FURTHER OWNERSHIP RIGHTS IN COMPANY SHARES. The Merger
Consideration delivered upon the surrender for exchange of Company Shares in
accordance with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to such Company Shares, and there shall be
no further registration of transfers of Company Shares which were outstanding
immediately prior to the Effective Time on the records of the Surviving
Corporation. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article I.
1.7. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such Parent Shares and cash as may
be required pursuant to Section 1.2; provided, however, that Parent may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificates to deliver a bond in such
sum as it may reasonably direct as indemnity against any claim that may be made
against Parent or the Exchange Agent with respect to the Certificates alleged to
have been lost, stolen or destroyed.
1.8 DISSENTING SHARES. No Shareholder shall have dissenter's rights in
connection with the Merger pursuant to Section 762(2)(b) of the MBCA.
1.9 TAX CONSEQUENCES. It is intended by the parties hereto that the Merger
shall constitute a reorganization within the meaning of Section 368(a) of the
Code. The parties hereto hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.10 CLOSING. The consummation of the transactions contemplated hereby
(the "Closing") shall take place at the offices of Squire, Sanders & Dempsey
L.L.P., 4900 Key Tower, 127 Public Square, Cleveland, Ohio 44114-1304, at 10:00
a.m. Cleveland time, as soon as possible following approval of the Shareholders,
as set forth in Section 2.3 hereof, or such other time, date and place as the
parties may mutually agree (the "Closing Date").
1.11 PLAN OF MERGER. The designation and number of outstanding shares of
the Company are 20,000 Company Class A Shares and 2,075,391 Company Class B
Shares. Holders of Company Class A Shares are
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entitled to vote on all matters submitted to Shareholders, including approval of
this Agreement and the Merger. Holders of Company Class B Shares shall vote as a
class on approval of this Agreement and the Merger as required by the MBCA. The
designation and number of outstanding shares of the Merger Sub are 75 shares of
common stock, without par value ("Merger Sub Common Stock"). Parent is the sole
holder of the Merger Sub Common Stock and is entitled to vote on all matters
submitted to shareholders of the Merger Sub, including approval of this
Agreement and the Merger. The number of shares outstanding for the Company and
the Merger Sub are not subject to change prior to the Effective Time.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
References to the Company in this Article II shall mean the Company and its
Subsidiaries, unless the context otherwise requires. The Company represents and
warrants to Merger Sub and Parent as follows:
2.1 ORGANIZATION AND STANDING; SUBSIDIARIES.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Michigan. The Company has all
requisite corporate power and authority and is in possession of all franchises,
grants, authorizations, licenses, permits, easements, consents, certificates,
approvals and orders ("Approvals") necessary to own, lease and operate the
properties and assets it now owns, operates and leases and to carry on its
business and operations as currently and heretofore conducted, except where the
failure to possess an Approval does not have a material adverse effect on the
Company. The Company is duly qualified to do business and is in good standing as
a foreign corporation in each jurisdiction where the failure to so qualify would
have a material adverse effect on the business or properties of the Company.
Schedule 2.1(a) sets forth a true and complete list of all jurisdictions in
which the Company is (i) presently doing business and (ii) duly qualified or
licensed to do business.
(b) Schedule 2.1(b) sets forth a true and complete list of each entity in
which the Company has any ownership interest, as well as the nature and
proportionate amount of such ownership interest (such entities to be hereinafter
referred to as "Subsidiaries"), and each jurisdiction in which each Subsidiary
is (i) organized, (ii) presently doing business and (iii) duly qualified or
licensed to do business. Each Subsidiary is duly organized, validly existing and
in good standing in the state of its incorporation and is qualified or licensed
to do business as a foreign corporation in each jurisdiction where the failure
to so qualify would have a material adverse effect on such Subsidiary. Other
than as set forth in Schedule 2.1(b), the Company neither owns nor has a right
or obligation to acquire any equity interest (or option therefor) of any
corporation, partnership, limited liability company, business trust, or other
business or entity. Except as set forth in Schedule 2.1(b), the Company neither
participates nor has an interest in any joint venture or collective production,
sales or marketing arrangement or agreement.
2.2 ORGANIZATIONAL DOCUMENTS AND CORPORATE RECORDS.
(a) The Company has heretofore delivered to Parent true and complete copies
of the Articles of Incorporation and Bylaws of the Company, as currently in
effect, including all amendments thereto. Except as set forth on Schedule 2.2,
the minute books of the Company have been delivered to Parent for its inspection
and contain complete and correct records of minutes of all meetings, and
consents in lieu of a meeting, of the Company's Board of Directors (and any
committees thereof) and of the Company's shareholders held or executed since the
Company's incorporation, and such records accurately reflect all transactions
referred to therein. The Company is not in violation of any of the provisions of
its Articles of Incorporation or Bylaws. There are no dissenters' rights
provided for in any provision of the Company's Articles of Incorporation or
Bylaws or in any resolution of the Company's Board of Directors. The stock books
and ledgers of the Company have been delivered to Parent for its inspection, and
such books and ledgers are complete and correct in all material respects.
(b) The Company has made available to Parent all accounting, corporate and
financial books and records (the "Accounting Books and Records") which relate to
the business of the Company, and such books and ledgers are true and complete in
all material respects.
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2.3 AUTHORITY; SHAREHOLDER APPROVAL; TAKEOVER LAWS.
(a) The Company has all requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement and the other documents
and agreements contemplated hereby and to consummate the transactions
contemplated hereby and thereby, subject only, with respect to the Merger, to
the approval and adoption of this Agreement by the holders of at least a
majority of the outstanding Company Class A Shares and Company Class B Shares,
voting separately as classes, in accordance with the MBCA and the Company's
Articles of Incorporation and Bylaws. All corporate proceedings on the part of
the Company which are necessary to execute, deliver and perform this Agreement
and the other documents and agreements contemplated hereby and to consummate the
transactions contemplated hereby and thereby have been duly authorized and
taken, except, with respect to the Merger, the approval and adoption of this
Agreement by the holders of at least a majority of the outstanding Company Class
A Shares and Company Class B Shares, voting separately as a class, entitled to
vote in accordance with the MBCA and the Company's Articles of Incorporation and
Bylaws. This Agreement has been duly authorized, executed and delivered by the
Company.
(b) Approval of the holders of a majority of the outstanding Company Class
A Shares and Company Class B Shares, voting separately as a class, is the only
vote of the holders of any class or series of the Company's capital stock
necessary to approve the Merger, this Agreement and the transactions
contemplated hereby. Following such approval and adoption of this Agreement by
the Shareholders and assuming due authorization, execution and delivery by
Parent and Merger Sub, as applicable, this Agreement and all such other
documents and agreements to which the Company is a party will constitute valid
and binding obligations of the Company and shall be enforceable against the
Company in accordance with their respective terms, except as such enforceability
may be limited by any applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally, and except as the availability of equitable remedies may be limited
by the application of general principles of equity (regardless of whether such
equitable principles are applied in a proceeding at law or in equity). No
Shareholder has any dissenter's rights or any similar rights in connection with
the Merger pursuant to any provision of the MBCA, the Company's organizational
documents, any resolution of shareholders or directors of the Company, any
agreement or otherwise.
(c) The Company is not subject to the provisions of any state takeover
laws, including Sections 778-784 of the MBCA regarding "Business Combinations"
and Sections 790-799 of the MBCA regarding "Control Share Acquisitions." The
Company is not an "issuing public corporation" within the meaning of Section
793(1) of the MBCA.
2.4 CAPITALIZATION. The authorized capital stock of the Company consists
of 30,000 Company Class A Shares and 5,000,000 Company Class B Shares. 20,000
Company Class A Shares and 2,075,391 Company Class B Shares are issued and
outstanding as of the date hereof, all of which are owned by the Shareholders
and in the amounts set forth on Schedule 2.4. The Company has no other class of
capital stock authorized or outstanding. None of the Company's shares of capital
stock have been reserved for any purpose. All outstanding Company Shares are
validly issued, fully paid and nonassessable and were not issued in violation of
any preemptive rights. Except as set forth in Schedule 2.4, there are no (i)
options, warrants, calls, commitments, or rights of any character to purchase or
otherwise acquire shares of its or any of its Subsidiaries' capital stock of any
class issued or outstanding, (ii) outstanding securities of the Company that are
convertible into or exchangeable or exercisable for any other security, (iii)
options, warrants or other rights to purchase any such convertible or
exchangeable securities, (iv) contracts, commitments, agreements, understandings
or arrangements of any kind relating to the issuance or transfer of any capital
stock of the Company or any of its Subsidiaries, nor (v) options, warrants or
rights, pursuant to which, in any of the foregoing cases, the Company or any of
its Subsidiaries is or would be subject or bound. Except as set forth in
Schedule 2.4, there are no obligations, contingent or otherwise, of the Company
or any of its Subsidiaries to repurchase, redeem or otherwise acquire any
securities of the Company or any Subsidiary or to provide funds to or make any
investment (in the form of a loan, capital contribution or otherwise) in any
such Subsidiary or any other entity other than guarantees of bank obligations of
Subsidiaries entered into in the ordinary course of business.
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2.5 CONSENTS AND APPROVALS; NO VIOLATION.
(a) Except as set forth in Schedule 2.5, neither the execution and delivery
of this Agreement and the other documents and agreements contemplated hereby,
nor the consummation of the transactions contemplated hereby or thereby, nor
compliance with any of the provisions hereof, will (i) conflict with any
provision of the Articles of Incorporation or Bylaws (or other similar
organizational documents) of the Company, (ii) violate any Law or any
restriction imposed by any Governmental Authority which is applicable to the
Company, or by which any of the Company's business, properties or assets are
bound or affected, nor (iii) violate, breach, or conflict with, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, cancellation or acceleration of any obligation to pay
or result in the imposition of any Encumbrance upon any of its property) under
any of the terms, conditions or provisions of any material note, bond, mortgage,
indenture, Encumbrance, contract, Permit, Order or other instrument or
obligation to which the Company is a party or by which any of the Company's
business, properties or assets are bound or affected.
(b) The execution and delivery of this Agreement by the Company does not,
and the performance of this Agreement by the Company will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental, judicial or regulatory authority, domestic or foreign,
except for (i) pre-merger notification requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder (the "HSR Act"), (ii) filing of the Certificate of Merger as required
by the MBCA, and (iii) filing and recordation of the Certificate of Merger as
required by the OGCL.
2.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except for those liabilities
reflected on the December Balance Sheet, as of the date hereof, and on the
Closing Balance Sheet, as of the Closing, and except for liabilities incurred in
the ordinary course of business (such as current payables to vendors, employees
and taxing authorities and excluding any liability arising from any threatened
or pending Proceeding (as hereinafter defined) following the date of the Closing
Balance Sheet, Schedule 2.6 sets forth a true, complete and accurate list of all
material liabilities of the Company, including all Encumbrances attaching to any
of the Company's Assets. Except for such liabilities, (i) the Company has no
material liabilities arising from or relating to its business and operations of
any nature (whether asserted or unasserted, known or unknown, absolute, accrued,
fixed, contingent, liquidated, unliquidated or otherwise and whether due or to
become due) and (ii) any and all liabilities or obligations incurred since
December 31, 1996 were incurred in the ordinary course of business and
consistent with past practices.
2.7 FINANCIAL STATEMENT; ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) The audited financial statements of the Company for the years ending
December 31, 1996, 1995 and 1994, including the December Balance Sheet, were
previously delivered to Parent. All such financial statements (including, in
each case, any related notes or schedules thereto) were prepared in accordance
with GAAP, applied on a consistent basis throughout and between the periods
involved (except as may be indicated therein or in the notes thereto), and
fairly present the consolidated financial position of the Company and its
consolidated subsidiaries at the respective dates thereof and the consolidated
results of its operations and cash flows for the periods indicated. The
Company's independent auditors have consented to the filing of such financial
statements in the Registration Statement (as hereinafter defined).
(b) Except as set forth on Schedule 2.7(b), since December 31, 1996, (i)
the Company has operated its business in the usual and ordinary course
consistent with past practice, has not sold or otherwise disposed of any assets
(other than the sale of inventory or collection of receivables in the ordinary
course of its business) with an aggregate value of $100,000 or more, and has not
declared or paid any dividends or made any other distributions on its capital
stock or repurchased or agreed to repurchase any of its capital stock; (ii)
there has been no material adverse change in the business, results of
operations, assets, liabilities, financial condition or prospects of the
Company; (iii) the Company has not incurred any material damage, destruction or
loss (whether or not covered by insurance) to its owned or leased property or
assets; (iv) there have not been any amendments or changes in the Articles of
Incorporation or Bylaws of the Company; (v) no Encumbrance has been created upon
property of the Company; (vi) there has not been any change by the Company in
its
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accounting methods, principles or practices; and (vii) there has not been any
revaluation by the Company of any of its assets, including, without limitation,
writing down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business.
(c) Schedule 2.7(c) contains all adjustments of $200,000 or more,
individually or in the aggregate, that were not recorded in the December 31,
1996 financial statements in accordance with generally accepted accounting
principles.
2.8 COMPLIANCE WITH LAWS AND PERMITS.
(a) The business and operations of the Company, at each of its facilities
and branches, have been conducted and are now being conducted in all material
respects in compliance with all Laws and Orders of all Governmental Authorities
having jurisdiction over the Company and with all Permits relating to any of its
properties or applicable to its business.
(b) The Company possesses all Permits necessary to own and operate its
property and assets and to conduct its business as it is currently conducted.
Such Permits are valid, subsisting in full force and effect, and the Company has
fulfilled its material obligations under each of the Permits, and to the
knowledge of the Company, no event has occurred or condition or state of facts
exists which constitutes or, after notice or lapse of time or both, would
constitute a default or violation under any of the Permits or would permit
revocation or termination of any of the Permits. No proceeding which might
involve the revocation or termination of any such Permits is pending or, to the
knowledge of the Company, threatened.
(c) The Company has made all filings and received all approvals relating to
the Permits which are necessary in order for the Company to legally and validly
own and operate its property and assets and to conduct the Company's business.
2.9 LITIGATION AND ARBITRATION.
(a) Except as set forth on Schedule 2.9(a), no claim, action, cause of
action, suit, proceeding, inquiry, investigation or Order ("Proceeding") by or
before any Governmental Authority, administrative body or arbitration or
mediation panel is pending or, to the knowledge of the Company, threatened,
against the Company. No order of any Governmental Authority, arbitrator or
mediator is outstanding against the Company, its business, operations or assets.
The Company has no knowledge of any fact or circumstance which could reasonably
be expected to result in any other material claim, action, cause of action,
suit, proceeding, inquiry, investigation or Order being filed against the
Company.
(b) To the knowledge of the Company, no claim, action, suit, proceeding,
inquiry or investigation has been instituted which threatens to restrain or
prohibit or to otherwise challenge the legality or validity of the transactions
contemplated by this Agreement or the other documents or agreements contemplated
hereby.
(c) Except as set forth in Schedule 2.9(c), neither the operation of its
business nor the products sold by the Company infringe upon the proprietary
rights of others, including without limitation any intellectual property rights
such as trademarks, service marks, copyrights, patents, and tradenames nor has
the Company received any notice alleging that the Company has infringed on any
other party's intellectual property rights. Except as set forth in Schedule
2.9(c), the Company has not given any indemnification for infringement of any
other party's intellectual property rights. The Company knows of no limitation
to the continued and/or expanded use of any trademarks, service marks,
tradenames or other intellectual property used by the Company.
(d) Schedule 2.9(d) sets forth a true and complete list of each claim,
action, cause of action, suit, proceeding, inquiry, investigation or Order by or
before any Governmental Authority, administrative body or arbitration or
mediation panel instituted or prosecuted against the Company since January 1,
1992.
2.10 BROKERS AND FEES. Except as set forth on Schedule 2.10, neither the
Company nor any Shareholder has an obligation to pay any broker, finder,
investment banker, financial advisor, attorney or similar fee in connection with
this Agreement or the other documents or agreements contemplated hereby or
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the transactions contemplated hereby or thereby. All amounts which are payable
by the Company for such fees are recorded as a liability in the Closing Balance
Sheet including amounts disclosed on Schedule 2.10.
2.11 TERRITORIAL RESTRICTIONS. Except as set forth on Schedule 2.11, the
Company is not restricted by any agreement or understanding with any third party
or by any writs, judgments or orders of any judicial or administrative body from
carrying on or competing with any business anywhere in the world.
2.12 REGISTRATION STATEMENT. Subject to the accuracy of the
representations of Parent in Section 3.6, the information supplied by the
Company for inclusion in the Registration Statement pursuant to which the Parent
Shares to be issued in the Merger will be registered with the United States
Securities and Exchange Commission ("SEC") shall not at the time the
Registration Statement is declared effective by the SEC contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. If at any time prior to the Effective Time, any event relating to
the Company or any of its respective affiliates, officers or directors should be
discovered by the Company which should be set forth in an amendment to the
Registration Statement, the Company shall promptly provide notice to Parent and
Merger Sub. Notwithstanding the foregoing, the Company makes no representation
or warranty with respect to any information supplied by Parent or Merger Sub
which is contained or incorporated by reference in any of the foregoing
documents.
2.13 TAXES.
(a) The Company has timely filed all tax and information returns required
to be filed by it pursuant to applicable federal, state, local and foreign law
and has paid all taxes required to be shown on such returns, or, if not yet due
and payable, the Closing Balance Sheet contains an adequate reserve for all
taxes payable by the Company accrued but unpaid through the date of Closing,
including any interest or penalties. All such returns are true, correct and
complete in all material respects. Except as set forth on Schedule 2.13, the
Company's federal income tax returns have never been audited by, and the Company
has received no notice of audit from, the Internal Revenue Service. Except as
set forth on Schedule 2.13, no deficiencies for any taxes have been proposed,
asserted or assessed against the Company by any Governmental Authority and the
Company is not a party to any action or proceeding for the assessment or
collection of taxes, has not received any claim for the assessment or collection
of taxes, has not received a claim made by a taxing authority or Governmental
Authority in a jurisdiction where it does not file tax returns that it is or may
be subject to taxation by that jurisdiction, and has not agreed to extend the
period for the assessment or collection of taxes. The federal income tax returns
of the Company for all years prior to 1993 are closed and there are no
proceedings or claims relating thereto or any facts which could give rise to the
reopening thereof. Neither the Company nor any of its affiliates have made any
agreement, waiver or other arrangement providing for an extension of time, nor
entered into any power of attorney, with respect to the assessment or collection
of any tax against the Company or filed a consent with the Internal Revenue
Service pursuant to Section 341(f) of the Code, or with any other Governmental
Authority to any similar effect.
(b) The Company has duly withheld and timely paid all withholding taxes
required to date with respect to payments to employees and others and has duly
collected and paid all applicable sales and use taxes. The Company has paid all
workers' compensation and unemployment compensation premiums due to date. The
Company has obtained properly completed sales tax exemption certificates for
sales where tax is not charged.
(c) Except as disclosed in Schedule 2.13, neither the Company nor any of
its Subsidiaries is obligated under any agreements with respect to industrial
development bonds or other obligations with respect to which the excludability
from gross income of the holder for federal or state income tax purposes would
be affected by the transactions contemplated hereunder. Neither the Company nor
any of its subsidiaries is, or has been, a United States real property holding
corporation (as defined in Section 897(c)(2) of the Code) during the applicable
period specified in Section 897(c)(1)(A)(ii) of the Code. To the knowledge of
the Company, neither the Company nor any of its Subsidiaries owns any property
of a character, the indirect transfer of which, pursuant to this Agreement,
would give rise to any material documentary, stamp or other transfer tax.
(d) Except as disclosed in Schedule 2.13, neither the Company nor any of
its Subsidiaries (i) is a party to or bound by (nor will it, prior to the
Effective Time, become a party to or become bound by) any tax-
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indemnity, tax sharing or tax allocation agreement (or administrative or
accounting practice having substantially the same effect as such an agreement);
(ii) has filed a consent under Section 341(f) of the Code (or any corresponding
provision of state, local, or foreign income tax law) or agreed to have Section
341(f) of the Code (or any corresponding provision of state, local, or foreign
income tax law) apply to any disposition of any asset owned by it; (iii) has
agreed to make or is required to make any material adjustment under Section
481(a) of the Code by reason of a change in accounting method or otherwise; (iv)
has been a member of an affiliated group of corporations, within the meaning of
Section 1504 of the Code, other than the affiliated group of which the Company
is the common parent corporation; or (v) owns material assets that directly or
indirectly secure debt the interest on which is tax-exempt under Section 103(a)
of the Code.
(e) For purposes of this Agreement, "tax" or "taxes" shall mean all taxes,
fees, levies, duties, tariffs, premiums, assessments, imposts, and governmental
impositions or charges of any kind in the nature of (or similar to) taxes,
payable to any federal, state, local or foreign taxing (or similar) authority,
including (without limitation) (i) income, franchise, profits, gross receipts,
ad valorem, net worth, value added, sales, use, service, real or personal
property, special assessments, capital stock, license, payroll, withholding,
employment, social security, workers' compensation, unemployment compensation,
utility, severance, production, excise, stamp, occupation, premiums, windfall
profits, transfer and gains taxes, and (ii) interest, penalties, additional
taxes or amounts and additions to tax imposed with respect thereto; and "tax
returns" shall mean returns, reports, declarations, information statements and
other documents with respect to taxes required to be filed with the IRS or any
other taxing (or similar) authority, domestic or foreign, including, without
limitation, consolidated, combined and unitary tax returns.
2.14 CONTRACTS. Schedule 2.14 contains an accurate and complete list of
all material plans, arrangements, leases, contracts and agreements (hereinafter
referred to as "contracts") to which the Company is a party, by which its
property is bound or affecting its business, whether written or oral, express or
implied or having any other legally binding basis, including:
(a) any contract involving commitments to make expenditures, purchases or
sales, any supplier contracts, rebate arrangements, and consignment or ledger
balance inventory contracts involving $200,000 or more, except contracts
terminable by the Company on not more than thirty days' notice without penalty
or financial obligation;
(b) any contract relating to any direct or indirect indebtedness for
borrowed money or securing the repayment thereof other than trade payables and
other accrued liabilities in the ordinary course of business;
(c) any contract directly or indirectly benefiting any affiliate of the
Company or the Shareholders;
(d) any collective bargaining, union, employment, or consulting contract;
(e) any pension, stock option, bonus, incentive compensation, retirement,
employee stock purchase, stock ownership, profit sharing, fringe benefit,
severance pay, welfare, health, death benefit, disability, dental or any other
employee benefit contract;
(f) any contract containing covenants limiting the freedom of the Company
to compete in any line of business, with any person or entity, or in any
territory;
(g) any contract relating to patents, trademarks, tradenames or other
intellectual property;
(h) any contract with any sales agent, manufacturer, dealer, distributor or
licensee of any products sold by the Company;
(i) any tax-sharing contract;
(j) any indemnity or hold harmless contract;
(k) any contract relating to the lease or sale to or by others of any of
real property; and
(l) any other contract not in the ordinary course.
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True, complete and correct copies of all written contracts and summaries of all
oral or implied contracts listed on Schedule 2.14 hereto have been delivered to
Parent. All such contracts are valid and binding obligations of the parties
thereto, enforceable in accordance with their respective terms and are in full
force and effect. No party to any such contract is in material default of its
obligations thereunder.
2.15 ASSETS; INVENTORY.
(a) Except as set forth in Schedule 2.15, the Company has good and
marketable title to all of its assets, free and clear of all Encumbrances of any
kind or description, including any conditional sale or other title retention
agreements. Except as set forth in Schedule 2.15, all of the Company's assets
reflected on the December Balance Sheet or subsequently acquired are presently
in service in the Company's business. The Company's assets constitute
substantially all of the assets used or held for use by the Company in the
conduct of its business as conducted prior to the Closing and are in
sufficiently good condition and repair to permit the operation of its business
after the Closing in the same manner in all material respects as it was operated
prior to the Closing.
(b) The inventory of the Company reflected on the Closing Balance Sheet or
subsequently acquired by the Company has been recorded on the books of the
Company in accordance with GAAP, applied on a basis consistent with past
practice. Notwithstanding anything else provided herein, Parent shall not be
entitled to indemnification for any breach of the representations set forth in
this Section 2.15(b).
2.16 ENVIRONMENTAL AND SAFETY MATTERS.
(a) The Company and each of its Subsidiaries (i) have obtained all
applicable permits, licenses and other authorizations that are required to be
obtained under all applicable federal, state or local laws or any regulation,
code, plan, order, decree, judgment, notice or demand letter issued, entered,
promulgated or approved thereunder ("Environmental Laws") relating to pollution
or protection of the environment, including laws relating to emissions,
discharges, releases or threatened releases of pollutants, contaminants, or
hazardous or toxic wastes into ambient air, surface water, ground water, or land
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants, contaminants
or hazardous or toxic materials or wastes by the Company or its Subsidiaries (or
their respective agents); (ii) are in compliance with all terms and conditions
of such required permits, licenses and authorizations, and also are in
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
applicable Environmental Laws, except to the extent any failure of compliance
does not have a material adverse effect on the Company's operations at any of
its facilities or branches; (iii) have no knowledge, nor have received notice,
of any past or present violations of Environmental Laws or any event, condition,
circumstance, activity, practice, incident, action or plan that is reasonably
likely to interfere with or prevent continued compliance with Environmental Laws
or that could give rise to any common law or statutory liability, or otherwise
form the basis of any claim, action, suit or proceeding, against the Company or
any of its Subsidiaries based on or resulting from the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge or release into the environment, of any pollutant,
contaminant or hazardous or toxic material or waste which (as to all matters
described in this clause (iii)) would have a material adverse effect on the
Company's operations at any of its facilities or branches; and (iv) have taken
all actions necessary under applicable Environmental Laws to register or give
notice with respect to any products or materials required to be registered or
noticed by the Company or its Subsidiaries (or any of their respective agents)
thereunder (including without limitation pursuant to any state and local "right
to know" Laws).
(b) Without in any way limiting the generality of the foregoing, no
polychlorinated biphenyls (PCB's) or PCB-containing items are used or stored at
a property owned or leased by the Company or any of the Subsidiaries.
(c) The business and operations of the Company, at each of its facilities
and branches, have been conducted and are now being conducted in compliance with
all material laws, whether federal, state or local, generally relating to the
protection of health or safety ("Safety Laws"). For the past ten years, the
Company has not received any written notification of any violation of Safety
Laws.
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2.17 CUSTOMERS, SUPPLIERS AND SALES REPRESENTATIVES. The Customers,
Suppliers and Sales Representatives List attached hereto as Schedule 2.17
contains a listing of all customers, suppliers and sales representatives of the
Company which, for the 12 months ended December 31, 1996, accounted for $500,000
or more of the Company's purchases or sales. Except as described in Schedule
2.17, the Company is not aware of any existing or anticipated changes in the
policies or conditions, financial or otherwise, of such customers, suppliers or
sales representatives which will materially and adversely affect the Company's
business. Except as set forth in Schedule 2.17, to the knowledge of the Company,
no such customer, supplier or sales representative has reduced, canceled or
otherwise terminated its relationship with the Company, or made any written or
oral threat to reduce, cancel or terminate its relationship with the Company for
any reason, including the consummation of the transactions contemplated hereby.
To the knowledge of the Company, no such customer or supplier listed in Schedule
2.17 intends to cancel or otherwise terminate its relationship with the Company
or to materially decrease its services or supplies to the Company or its usage
of the services or products of the Company.
2.18 OUTSTANDING COMMITMENTS. The Company is not bound by any commitments
for the performance of services or delivery of products in excess of its ability
to provide such services or deliver such products during the time available to
satisfy such commitments; all outstanding commitments for the performance of
services or delivery of products were made on a basis calculated to produce a
profit under the circumstances prevailing when such commitments were made.
2.19 INSURANCE. Schedule 2.19 lists all insurance policies and contracts
(including, without limitation, all life insurance, death benefit and similar
policies) presently maintained or maintained within the past seven (7) years,
indicating the insurer, the types and amounts of coverage, the applicable
deductible, the expiration date, any additional loss payees or additional
insureds and the cash surrender value (if applicable). Schedule 2.19 also lists
any claims filed with respect to such policies within the past twenty-four
months and all open claims. All such claims have been timely and properly
submitted. The Company has previously delivered true and complete copies of all
such insurance policies to Parent. Except as set forth on Schedule 2.19, the
Company has not entered into any policy which provides for, and is not otherwise
subject to, any retrospective premium adjustment with respect to any such
policies.
2.20 EMPLOYEE BENEFITS.
(a) Schedule 2.20 lists all Plans currently maintained by the Company (or
any ERISA Affiliate) which provide or has provided benefits to or for any
employee of the Company within the most recent five years. The Company has
delivered or made available to Parent copies of each Plan; all amendments
thereto; all related funding arrangements; all actuarial valuation reports for
the most recent five years; all Forms 5500 with schedules thereto for the most
recent four years; a copy of the most recent determination letter issued by the
Internal Revenue Service for each Pension Plan; and a copy of the most recent
summary plan description.
(b) Except as indicated on Schedule 2.20, each Plan and related funding
arrangements (i) are in form and have been administered in compliance in all
material respects with all applicable laws, including, without limitation, ERISA
and the Code; (ii) each Pension Plan intended to qualify under Section 401(a) of
the Code has received a favorable determination letter from the Internal Revenue
Service with respect to such qualification or has been submitted timely to the
Internal Revenue Service for such a favorable determination; (iii) each trust
maintained in conjunction with a Pension Plan intended to qualify under Section
401(a) of the Code has received a favorable determination letter from the
Internal Revenue Service with respect to the exemption thereof under Section
501(a) of the Code; (iv) none of the Pensions Plans or related trusts, or any
administrator or, to the knowledge of the Company, trustee thereof, or
party-in-interest or disqualified person thereto has engaged in a transaction
that could cause any of them to be liable for a civil penalty under Section 409
or 502(i) or any other section of ERISA or result in a tax under Section 4975 or
4976 or any other section of Chapter 43 of Subtitle D of the Code; (v) all
amounts required to be paid by the Company to or pursuant to each of the Plans
on or before the Closing Date have been paid within the time periods required by
the Plans or by law; (vi) no Pension Plan has incurred any "accumulated funding
deficiency," as defined in Section 412 of the Code; and (vii) no "reportable
event" within the meaning of Title IV of ERISA has occurred with respect to any
Pension Plan subject thereto.
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(c) Except as listed in Schedule 2.20, no employees of the Company or of an
ERISA Affiliate currently participate, or have participated within the last five
years, in any Multiemployer Plan. The Company represents that the consummation
of the Merger shall not cause a withdrawal to occur with respect to any
Multiemployer Pension Plan. The Company represents that there are no unpaid
withdrawal liability claims with respect to the Company or any ERISA Affiliate.
No liability under Title IV of ERISA has been incurred by the Company that has
not been satisfied in full, and no condition exists that presents a risk to the
Company of incurring a liability under Title IV other than liability for
premiums due the Pension Benefit Guaranty Corporation. The PBGC has not
instituted proceedings to terminate any Pension Plan in which the Company
participates, and no condition exists that presents a risk that such proceedings
will be instituted.
(d) Each Welfare Plan that provides medical benefits to employees of the
Company has been operated in compliance in all respects with the requirements of
Sections 601 through 608 of ERISA and Section 4980B of the Code ("COBRA"),
relating to the continuation of coverage under certain circumstances in which
coverage would otherwise cease.
(e) Notice of any Plan or Benefit Arrangement required to be given to the
Department of Labor under Section 2520.104.23 of Title 29 of the Code of Federal
Regulations has been given.
(f) Any Plan designed to satisfy the requirements of Section 125, Section
401(k), Section 409, Section 501(c)(9), Section 4975(e)(7), and/or Section 4980B
of the Code, satisfies such section in all material respects.
(g) Except as indicated on Schedule 2.20, there is no audit which is in
process by, or for which notification has been received from, the Internal
Revenue Service, the Department of Labor or the PBGC, with respect to any Plan.
2.21 LABOR MATTERS; EMPLOYEES.
(a) The Company is in compliance at each of its facilities and branches in
all material respects with all federal, state and local laws respecting
employment and employment practices (including the Americans with Disabilities
Act and the Family and Medical Leave Act), terms and conditions of employment,
wages and hours, and nondiscrimination in employment, and is not engaged in any
unfair labor practice.
(b) The Company is not a party to, or subject to any obligation, liability
or commitment with respect to any written or material oral employment,
compensation, consulting, severance pay or similar agreement other than the
agreements listed on Schedule 2.21(b). A payroll list as of April 11, 1997,
showing as of such date, each employee of the Company, his or her social
security number, annual salary and date of hire has been delivered to Parent.
(c) [Intentionally left blank]
(d) Except as set forth in Schedule 2.21(d), (i) there are no claims or
proceedings pending or, to the knowledge of the Company, threatened, between the
Company or any of its Subsidiaries and any of their respective employees; (ii)
neither the Company nor any of its Subsidiaries is a party to any collective
bargaining agreement or other labor union contract; and (iii) the Company is not
aware of, and during the past five years there have not been, any strikes,
slowdowns, work stoppages, corporate campaigns or threats thereof,
representation petitions, representation demands, demands for recognition,
lockouts, boycotts, grievances, corporate campaigns or threats thereof, by or
with respect to any employees of the Company or any of its Subsidiaries.
2.22 PRODUCTS; PRODUCT LIABILITY. Except as set forth on Schedule 2.22,
the Company has not sold any products which have been relabeled or repackaged
with a label or package specifying a different country of origin than originally
specified. Except as set forth on Schedule 2.22, during the past seven years,
the Company has not received notice or information of any claim or allegation of
personal death or material personal injury, property or economic damage, any
claim for punitive or exemplary damages, any material claim for contribution or
indemnification, or any claim for injunctive relief in connection with any
product sold or distributed or any service provided by it, except for routine
warranty claims.
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2.23 REAL PROPERTY.
(a) Schedule 2.23 contains a complete listing of all real property owned,
leased, used or held for use in connection with the Company's business and all
real property otherwise owned, leased or in or to which the Company has any
right or interest, along with a description of the Company's interest therein.
The Company has a good, marketable and valid fee or leasehold interest, as set
forth on such schedule, to all such real property free and clear of all
Encumbrances, other than taxes and assessments, both general and special, which
are a lien but not yet due and payable and that do not, individually or in the
aggregate, materially detract from the value of such real property or materially
impair the use and operation thereof in carrying on the Company's business.
There are no easements, conditions, reservations, covenants, or restrictions
presently of record or otherwise that would adversely affect the use of any such
real property by Parent or the Merger Sub after the Effective Time, including,
without limitation, in the operation of the business, for the same purposes and
uses as such real property has been heretofore used by the Company. No third
party has any right with respect to such real property (whether by option to
purchase, land contract, or otherwise). There are no pending or, to the
knowledge of the Company, threatened proceedings in eminent domain involving any
such real property or any portion thereof, or for a sale in lieu thereof, or of
any plans for a possible widening of the streets abutting any such real property
or the imposition of any special taxes or assessments against any such real
property or any portion thereof.
(b) All leases with respect to the leased real properties are in full force
and effect. The Company has heretofore provided to Parent complete, true, and
correct copies of all such leases, including any and all modifications or
amendments thereof and any supplements thereto. All principal terms, conditions,
and provisions of the leases to be performed have been duly and timely performed
and complied with by the parties thereto and all insurance, tax, and other
payments in respect of the leased property due or payable prior to the Closing
Date have been or, as of the Closing Date, will have been paid. There is no
default with respect to any principal term on the part of any party thereto and
no event has occurred or failed to occur which with the giving of notice, the
passage of time, or both, would constitute a default by any party thereto. To
the knowledge of the Company, the lessors under such leases have not waived, or
extended the time for the performance of, any obligation of the Company under
any lease. Except as set forth in Schedule 2.23, there are no security deposits
or prepaid rent (including last month's rent in advance) with respect to the
leased real property.
2.24 BANKING RELATIONSHIPS. Schedule 2.24 sets forth a true and complete
list of each financial institution with which the Company or any of its
Subsidiaries has an account (giving the account number therefor) or safe deposit
box and the names of the persons authorized at the date hereof to draw thereon
or to have access thereto and all powers of attorney granted or executed on
behalf of the Company.
ARTICLE IIA
POST-EXECUTION SCHEDULE REVISIONS; CERTAIN MATTERS
2.A.1 SCHEDULES AND AMENDMENTS THERETO. All schedules described in Article
II of this Agreement shall be contained in a separately bound Disclosure
Statement (the "Disclosure Statement") prepared by the Company, the contents of
which Disclosure Statement are hereby incorporated in the same manner as if
attached to this Agreement. The initial draft of the Disclosure Statement (the
"Initial Disclosure") shall be delivered to Parent and Merger Sub by the Company
on the date of this Agreement. The Company shall have the right to amend the
Disclosure Statement at any time prior to the third business day immediately
preceding the closing. Notwithstanding any amendment of, or supplement to, the
Initial Disclosure by the Company: (i) for purposes of indemnification under
section 5.2 of this Agreement, the representations and warranties described in
Article II shall be deemed made on and as of the date of this Agreement, without
any amendment or supplement to the Initial Disclosure; and (ii) Parent and
Merger Sub shall not have the right to terminate this Agreement as a result of
any breach of any representation or warranty set forth in Article II which is
disclosed by an amendment or supplement to the Initial Disclosure unless such
termination is pursuant to the provisions of section 7.1(g).
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2.A.2 CERTAIN MATTERS. Notwithstanding anything else contained in this
Agreement, Parent shall be entitled to indemnification pursuant to the
provisions of Section 5.2 for Losses incurred relating to the matters set forth
on Schedule 2.A.2 as if such matters had not been identified in the Initial
Disclosure Schedule.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MERGER SUB AND PARENT
Parent and Merger Sub represent and warrant to the Company and the Shareholders
as follows:
3.1 ORGANIZATION AND STANDING; SUBSIDIARIES. Each of Merger Sub and Parent
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Ohio. Each of Merger Sub and Parent has all requisite
corporate power and authority and is in possession of all Authorizations
necessary to own, lease and operate the properties and assets it now owns,
operates and leases and to carry on its business and operations as currently and
heretofore conducted, except where the failure to obtain an Authorization does
not have a material adverse effect on it. Each of Merger Sub and Parent is duly
qualified or licensed to do business and is in good standing in all
jurisdictions were the failure to be so qualified would have a material adverse
effect on the business or properties of Parent, taken as a whole.
3.2 AUTHORITY. Each of Merger Sub and Parent has all requisite corporate
power and authority to execute, deliver and perform its obligations under this
Agreement and the other documents and agreements contemplated hereby and to
consummate the transactions contemplated hereby and thereby. All corporate
proceedings on the part of Merger Sub and Parent which are necessary to execute,
deliver and perform this Agreement and the other documents and agreements
contemplated hereby and to consummate the transactions contemplated hereby and
thereby have been duly authorized and taken. This Agreement has been duly
authorized, executed and delivered by Merger Sub and Parent. No approval of the
holders of Parent Shares is necessary to approve the Merger, this Agreement and
the transactions contemplated hereby. Following approval and adoption of this
Agreement by the Shareholders and assuming due authorization, execution and
delivery by the Company and the Shareholders, as applicable, this Agreement and
all such other documents and agreements to which Parent or Merger Sub is a party
will constitute valid and binding obligations of Parent or Merger Sub and shall
be enforceable against Parent or Merger Sub in accordance with their respective
terms, except as such enforceability may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally, and except as the
availability of equitable remedies may be limited by the application of general
principles of equity (regardless of whether such equitable principles are
applied in a proceeding at law or in equity).
3.3 CAPITALIZATION. As of the date hereof, the authorized capital stock of
Merger Sub consists of 75 shares of common stock, without par value, all of
which are issued and outstanding and owned by Parent. As of the date hereof, the
authorized capital stock of Parent consists of (i) 30,000,000 shares of common
stock, without par value, of which approximately 12,350,000 are issued and
outstanding and (ii) 2,500,000 shares of authorized but unissued preferred
stock.
3.4 CONSENTS AND APPROVALS; NO VIOLATION.
(a) Neither the execution and delivery of this Agreement and the other
documents and agreements contemplated hereby, nor the consummation of the
transactions contemplated hereby or thereby, nor compliance with any of the
provisions hereof, will (i) conflict with any provision of the Articles of
Incorporation or Code of Regulations (or other similar organizational documents)
of Merger Sub or Parent; (ii) violate any Law of any Governmental Authority
which is applicable to Merger Sub or Parent, or by which any of their respective
businesses, properties or assets may be bound or affected; or (iii) violate,
breach, or conflict with, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration of any obligation to pay or result in the imposition of any
Encumbrance upon any of their respective properties) under any of the terms,
conditions or provisions of any material note, bond, mortgage, indenture,
Encumbrance, contract, Permit, Order or other instrument or obligation to which
Merger Sub or Parent is a party or by which any of the business, properties or
assets of Merger Sub or Parent are bound or affected.
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(b) The execution and delivery of this Agreement by the Company does not,
and the performance of this Agreement by the Company will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental, judicial or regulatory authority, domestic or foreign,
except for applicable requirements, if any, of the Securities Act, the Exchange
Act, and the rules and regulations thereunder, state securities laws ("Blue Sky
Laws"), state takeover laws, the pre-merger notification requirements of the HSR
Act and the rules and regulations thereunder, the listing requirements of the
NYSE and the filing and recordation of the Certificate of Merger or other
documents as required by the OGCL and the MBCA.
3.5 LITIGATION AND ARBITRATION. To the knowledge of Parent and Merger Sub,
no claim, action, suit, proceeding, inquiry or investigation has been instituted
which threatens to restrain or prohibit or to otherwise challenge the legality
or validity of the transactions contemplated by this Agreement or the other
documents or agreements contemplated herein.
3.6 REGISTRATION STATEMENT. Subject to the accuracy of the representations
of the Company in Section 2.12, the Registration Statement shall not, at the
time the Registration Statement (including amendments or supplements thereto) is
declared effective by the SEC, contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
included therein not misleading. If at any time prior to the Effective Time any
event relating to Parent, Merger Sub or any of their respective affiliates,
officers or directors should be discovered by Parent or Merger Sub which should
be set forth in an amendment to the Registration Statement, Parent or Merger Sub
will promptly inform the Company. Notwithstanding the foregoing, Parent and
Merger Sub make no representation or warranty with respect to any information
supplied by the Company which is contained or incorporated by reference in any
of the foregoing documents.
3.7 SEC FILINGS.
(a) Parent has filed all forms, reports, statements and other documents
required to be filed by it with the SEC since January 1, 1994 (such forms,
reports, statements and other documents are hereinafter referred to as the
"Parent SEC Reports"). To the knowledge of Parent, the Parent SEC Reports (i)
were prepared in all material respects in accordance with the applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
(ii) did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. None of Parent's subsidiaries is required to file any forms, reports
or other documents with the SEC.
(b) The consolidated financial statements (including, in each case, any
related notes and schedules thereto) contained in the Parent SEC Reports were
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated therein or in the notes thereto)
and fairly presented in all material respects the consolidated financial
position of Parent and its consolidated subsidiaries as at the respective dates
thereof and the consolidated results of its operations and cash flows for the
periods indicated, except that the unaudited interim financial statements were
or are subject to normal and recurring year-end adjustments.
3.8 BROKERS AND FEES. Except as set forth on Schedule 3.8, neither Parent
nor its subsidiaries has an obligation to pay any broker, finder, investment
banker, financial advisor, attorney or similar fee in connection with this
Agreement or the other documents or agreements contemplated hereby or the
transactions contemplated hereby or thereby.
3.9 PARENT SHARES. The Parent Shares, when issued by Parent to the
Shareholders as part of the Merger Consideration, shall be duly and validly
issued and outstanding, fully paid and nonassessable shares of Parent. Such
Parent Shares shall not have been issued in violation of any preemptive rights.
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ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER;
FURTHER ASSURANCES; AND CERTAIN COVENANTS
4.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. During the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, the Company covenants and
agrees that, unless Parent shall otherwise agree in writing, (i) the Company
shall conduct its business and shall cause the businesses of its Subsidiaries to
be conducted only in the ordinary course of business and in a manner consistent
with past practice; (ii) the Company shall, and shall cause its Subsidiaries to,
use commercially reasonable efforts to keep in full force and effect adequate
insurance coverage consistent with past practice and maintain and keep its
properties and assets in good repair, working order and condition, consistent
with past practice, normal wear and tear excepted; and (iii) the Company shall
use its reasonable efforts to preserve substantially intact the business
organization of the Company and its Subsidiaries, to keep available the services
of the present officers, employees and consultants of the Company and its
Subsidiaries and to preserve the present relationships of the Company and its
Subsidiaries with customers, suppliers and other persons with which the Company
or any of its Subsidiaries has significant business relations; provided,
however, Parent consents to the Company's purchase of directors and officers
insurance following the date hereof to the extent all premiums therefor are
accrued for on the Closing Balance Sheet. By way of amplification and not
limitation, except as contemplated by this Agreement, neither the Company nor
any of its Subsidiaries shall, during the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement or the
Effective Time, directly or indirectly do, or propose to do, any of the
following without the prior written consent of Parent:
(a) amend or otherwise change its Articles of Incorporation or Bylaws;
(b) issue, sell, pledge, dispose of or encumber, or authorize the issuance,
sale, pledge, disposition or encumbrance of, any shares of capital stock of any
class, or any options, warrants, convertible securities or other rights of any
kind to acquire any shares of capital stock, or any other ownership interest
(including, without limitation, any phantom interest) in the Company or any of
its Subsidiaries;
(c) except as set forth on Schedule 4.1(c), increase the compensation
payable or to become payable to any director, officer, consultant or employee of
the Company or any of its Subsidiaries, except for increases in salaries or
wages of employees or payments of bonuses which are consistent with past
practice or which are required pursuant to collective bargaining agreements or
other written agreements entered into prior to the date hereof, or grant any
severance or termination pay to, or enter into any employment or severance
agreement with any director, officer or other employee of the Company or any of
its subsidiaries, or establish, adopt, enter into or amend any collective
bargaining, bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any current or former directors, officers or
employees (any of the foregoing being an "Employee Benefit Arrangement"),
except, in each case, as may be required by law or collective bargaining
agreement or this Agreement and the Exhibits hereto;
(d) make any material tax election inconsistent with past practice or
settle or compromise any material federal, state, local or foreign tax liability
or agree to an extension of a statute of limitations;
(e) elect, pursuant to Section 783 of the MBCA, to be covered by the
provisions of Section 780 of the MBCA or take any action which could cause the
Company or the Company Shares held by Parent or any direct or indirect wholly
owned subsidiary of Parent to be covered by the provisions of Section 790 et
seq. of the MBCA;
(f) adopt any resolutions of the Board of Directors which would grant the
Shareholders dissenters' rights pursuant to the MBCA; or
(g)(i) record sales and maintain its books of account other than in
accordance with its prior practices consistently applied, (ii) maintain the
machinery and equipment and other fixed assets used in the business other than
in good operating and usable condition, and in a state of good maintenance and
repair, consistent
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with past practice, reasonable wear and tear excepted, and (iii) purchase or
enter into any agreement to purchase or lease (including any lease amendment,
renewal or extension) any real property, computer software or hardware, or
non-resale items or make or enter into any commitments to make any capital
expenditures; provided, however, Parent's consent will be required only to the
extent such commitments, purchases or leases exceed $100,000 in the aggregate.
4.2 NO SOLICITATION.
(a) Neither the Company nor any of its Subsidiaries shall (i) solicit or
initiate the submission of, any Acquisition Proposal (as hereinafter defined),
(ii) participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action intended to
facilitate any inquiries or the making of any proposal that constitutes or would
reasonably be expected to lead to, an Acquisition Proposal or (iii) enter into
any agreement with respect to, agree to, approve or recommend any Acquisition
Proposal, except to the extent that the Board of Directors of the Company
reasonably determines that failure to take such action would constitute a breach
of its fiduciary duties to the Shareholders.
(b) The Company shall immediately notify Parent after receipt of any
Acquisition Proposal, or any modification of or amendment to any Acquisition
Proposal, or any request for nonpublic information relating to the Company or
any of its Subsidiaries in connection with an Acquisition Proposal or for access
to the properties, books or records of the Company or any Subsidiary by any
person or entity that informs the Board of Directors of the Company or such
Subsidiary that it is considering making, or has made, an Acquisition Proposal.
(c) As used in this Agreement, "Acquisition Proposal" shall mean any
proposal or offer from any person (other than Parent, Merger Sub or any other
direct or indirect wholly owned subsidiary of Parent) relating to (i) any direct
or indirect acquisition or purchase of any equity interest in, or a substantial
amount of assets of, the Company or its Subsidiaries, (ii) any tender offer or
exchange offer (including a self-tender offer), (iii) any merger, consolidation,
recapitalization, liquidation, business combination or similar transaction
involving the Company other than the transactions contemplated by this Agreement
or (iv) any other extraordinary transaction the consummation of which would or
could reasonably be expected to impede, interfere with, prevent or materially
delay the Merger.
(d) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any persons (other than Parent and
Merger Sub) conducted heretofore with respect to any of the foregoing, except to
the extent that the Board of Directors of the Company reasonably determines that
failure to take such action would constitute a breach of its fiduciary duties to
the Shareholders. The Company agrees not to release any third party from the
confidentiality provisions of any confidentiality agreement to which the Company
is a party. At Closing, the Company shall provide Parent with copies of all such
confidentiality agreements (except for the Confidential Proprietary Information
Agreements of various dates between Kaman Industrial Technologies Corporation
and the Company), including any agreements entered into in connection with the
possible sale of the Company.
(e) The Company shall advise the Company Representatives of the
restrictions described in this Section 4.2. For purposes of this Section 4.2,
"Company Representatives" shall mean all officers, directors, investment
bankers, attorneys, financial advisors or other similar representatives retained
by the Company or any of its Subsidiaries.
4.3 FURTHER ASSURANCES; COOPERATION. The parties shall from time to time
after the Closing, upon the request of any other party and without further
consideration, execute, acknowledge and deliver in proper form any further
instruments or documents, and take such further actions as such other party may
reasonably require, to carry out effectively the intent of this Agreement and
the other documents and agreements contemplated herein.
4.4 HSR ACT. The Company and Parent have filed notifications under and in
accordance with the HSR Act. Following the date hereof, the Company and Parent
shall respond as promptly as practicable to any inquiries received from the
Federal Trade Commission and the Antitrust Division of the Department of Justice
for additional information or documentation and shall respond as promptly as
practicable to all
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inquiries and requests received from any State Attorney General or other
governmental authority (foreign or domestic) in connection with antitrust
matters.
4.5 REGISTRATION STATEMENT.
(a) As promptly as practicable after the execution of this Agreement,
Parent (with the cooperation of the Company) shall prepare and file with the SEC
under the Securities Act a registration statement on Form S-4 or any other form
as may be appropriate (such registration statement, together with any amendments
thereof or supplements thereto, the "Registration Statement") with respect to
the Parent Shares to be issued by Parent in connection with the Merger. Parent
and the Company (with respect to information regarding the Company) will cause
the Registration Statement to comply in all material respects with the
Securities Act and the rules and regulations thereunder. Each of Parent and the
Company shall use all reasonable efforts to have or cause the Registration
Statement to become effective as promptly as practicable thereafter, and shall
take any and all actions required under any applicable federal or state
securities or Blue Sky Laws in connection with the issuance of shares of Parent
Shares Stock pursuant to the Merger. Without limiting the generality of the
foregoing, each of Parent and the Company agrees to use all reasonable efforts,
after consultation with the other such party, to respond promptly to any
comments made by the SEC with respect to the Registration Statement. Each of
Parent and the Company shall, and shall cause its respective representatives to,
fully cooperate with the other such party and its respective representatives in
the preparation of the Registration Statement, and shall, upon request, furnish
the other such party with all information concerning it and its affiliates,
directors, officers and shareholders as the other may reasonably request in
connection with the Registration Statement.
(b) Without limiting the generality of the foregoing (i) the Company and
Parent shall each notify the other as promptly as practicable upon becoming
aware of any event or circumstance which should be described in an amendment of,
or a supplement to the Registration Statement, and (ii) the Company and Parent
shall each notify the other as promptly as practicable after the receipt by it
of any written or oral comments of the SEC on, or of any written or oral request
by the SEC for amendments or supplements to the Registration Statement, and
shall promptly supply the other with copies of all correspondence between it or
any of its representatives and the SEC with respect to any of the foregoing
filings.
4.6 SHAREHOLDERS MEETINGS. The Company shall call and hold a shareholder
meeting as promptly as practicable following the date hereof and in accordance
with applicable laws for the purpose of voting upon the approval of the Merger
and the adoption of this Agreement. Unless otherwise required under the
applicable fiduciary duties of the respective directors of the Company, as
determined by such directors in good faith after consultation with and based
upon the advice of their legal counsel, the Company shall recommend that
Shareholders vote in favor of the approval and adoption of this Agreement, the
Merger and the other transactions contemplated herein.
4.7 CONSENTS; APPROVALS. The Company shall use its reasonable efforts to
obtain, and Parent shall cooperate with Company in obtaining, all consents,
waivers, approvals, authorizations or orders, and the Company and Parent shall
make all filings required in connection with the authorization, execution and
delivery of this Agreement by the Company and Parent and the consummation by
them of the transactions contemplated hereby. Prior to the Closing or
termination of this Agreement, Parent agrees that it shall not initiate
discussions with any suppliers (other than suppliers to Parent or its
subsidiaries), employees or customers (other than customers of Parent or its
subsidiaries) of the Company regarding the Merger without obtaining the prior
consent of the Company pursuant to a mutually agreed upon written plan.
4.8 AGREEMENTS WITH RESPECT TO AFFILIATES. The Company shall request each
person who is identified by the Company as being an "affiliate" of the Company
at the time of the Company's shareholders meeting for purposes of Rule 145 under
the Securities Act ("Rule 145") to deliver to Parent, prior to the Effective
Time, a written agreement in connection with restrictions on affiliates under
Rule 145 in the form attached hereto as Exhibit D.
4.9 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice
to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or nonoccurrence of any event the occurrence or
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nonoccurrence of which would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate, (ii) any failure of the
Company, Parent or Merger Sub, as the case may be, materially to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder, or (iii) the occurrence or nonoccurrence of any event which might
result in a material adverse change in its financial condition, assets, business
or future prospects; provided, however, that the delivery of any notice pursuant
to this Section 4.9 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
4.10 PUBLIC ANNOUNCEMENTS. Parent and the Company shall consult with each
other before issuing any press release with respect to the Merger or this
Agreement and shall not issue any such press release or make any such public
statement without the prior consent of the other party, which shall not be
unreasonably withheld; provided, however, that a party may, without the prior
consent of the other party, issue such press release or make such public
statement as may upon the reasonable advice of outside legal counsel be required
by applicable law or the rules and regulations of the NYSE, if it has used all
reasonable efforts to consult with the other party and its counsel and allow
such other party and its counsel to comment thereon.
4.11 LISTING OF SHARES. Parent shall use its best efforts to cause the
Parent Shares to be issued in the Merger to be listed, upon official notice of
issuance, on the NYSE prior to the Effective Time.
4.12 ACCESS TO COMPANY INFORMATION. Upon reasonable notice, from and after
the date hereof through the Effective Time, the Company shall afford to the
officers, employees, accountants, counsel and other representatives of Parent,
reasonable access to all its properties, books, contracts, commitments and
records and, during such period, the Company shall furnish promptly to Parent
all information concerning its business, properties and personnel as Parent may
reasonably request, and shall make available to Parent appropriate individuals
(including attorneys, accountants and other professionals) for discussion of the
Company's business, properties and personnel as Parent may reasonably request.
4.13 ACCESS TO PARENT INFORMATION. Prior to the Closing, Parent shall,
promptly after receipt thereof, deliver to the Company copies of all
environmental reports obtained by Parent regarding the properties and/or
operations of the Company.
4.14 NOTICE OF LIABILITIES. Prior to the Closing, Parent shall use its
best efforts to disclose to the Company actual, liquidated liabilities of the
Company which have become known to Parent, but which Parent believes are not
known to the Company.
4.15 MESC DISCLOSURE. Upon receipt thereof, Parent shall acknowledge
receipt of the Business Transferor's Notice to Transfer of Unemployment Tax
Liability and Rate on Form 1027 from the Company.
4.16 ANCILLARY AGREEMENTS. At the Closing, Parent shall execute
consulting, confidentiality and noncompetition agreements between Parent and J.
Michael Moore and James T. Moore II, substantially in the form of Exhibits E and
F hereto.
4.17 CONSULTING AND EMPLOYMENT AGREEMENTS. At the Closing, Parent or
Merger Sub shall offer consulting and employment agreements to the key employees
identified on Schedule 4.17 on terms and conditions reasonably agreeable to
Parent or Merger Sub.
4.18 WARN ACT NOTICES. Prior to the Closing, at the direction of Parent,
the Company shall act as Parent's agent and promptly issue any and all Worker
Adjustment and Retraining Notification Act notices requested by Parent to the
Company's headquarters personnel, governmental agencies and units, and
organizations designated by Parent and in the manner and form directed by
Parent. Parent shall provide notices for the Company's use and shall reimburse
the Company for the cost of mailing or otherwise delivering the notices. Parent
shall hold the Company harmless from Losses arising directly from the giving of
any such notice.
4.19 PARENT TAX RETURNS. Parent and Merger Sub shall prepare, execute, and
file all tax returns and other documents necessary to constitute the Merger as a
reorganization within the meaning of Section 368(a) of the Code; provided,
however, that Parent and Merger Sub shall not be so obligated if Parent or
Merger Sub has a reasonable belief that one or more former shareholders of the
Company who received Parent Shares in
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the Merger have (prior to the filing of such tax returns) disposed of sufficient
Parent Shares so received so as to violate the "continuity of interest"
requirement contained in Treasury Regulation Section 1.368-1(b); provided,
further, that after forming a reasonable belief of a violation of such
continuity of interest requirement, that Parent and Merger Sub shall prepare,
execute, and file all tax returns and other documents necessary to constitute
the Merger as a reorganization within the meaning of Section 368(a) of the Code
if the Shareholder Representatives (as defined in the Escrow Agreement) deliver
an opinion of counsel reasonably acceptable to Parent (as to counsel, substance
and form) to the effect that the "continuity of interest" requirements have not
been violated and that the Merger qualifies as a reorganization within the
meaning of Section 368(a) of the Code. For purposes of this provision, the
"continuity of interest" requirement shall be interpreted so as to require such
former Company shareholders to retain (in the aggregate) Parent Shares received
in the Merger at least equal to forty percent of the total consideration
provided in the Merger until at least January 1, 1998. In the event Parent or
Merger Sub proposes to file any tax return or document inconsistent with the
treatment of the Merger as a reorganization within the meaning of Section 368(a)
of the Code, Parent and Merger Sub agree to notify the Shareholder
Representatives as far in advance as possible (but in any event, at least
fifteen days in advance of such filing unless delaying such filing to comply
with this notice requirement would violate applicable law) of such proposed
filing and to consider in good faith any objections raised to the filing of such
return or document.
4.20 PARENT DIVIDENDS. Prior to the Closing, Parent shall not declare or
pay any dividends or make any other distributions with regard to any shares of
its capital stock on or after the date hereof, except for the payment of cash
dividends not to exceed $0.25 per share per calendar quarter.
4.21 LIFE INSURANCE. For a period of thirty days after the Closing, Merger
Sub shall, at the request of any Shareholder who is the insured under a life
insurance policy acquired by Merger Sub pursuant to the Merger, sell and
transfer such policy to such Shareholder at a cash price equal to the value of
such policy as reflected on the Closing Balance Sheet.
4.22 NOTIFICATION UNDER UNION AGREEMENT. Upon execution of this Agreement,
the Company shall give notice of sale and any similar notice required to be
given under any collective bargaining agreement to which the Company or its
Subsidiaries are a party or by which any of them are bound.
4.23 AMENDMENT OR TERMINATION OF CERTAIN PLANS AND AGREEMENTS. No later
than fifteen days prior to the Closing, the Company shall deliver to Parent
forms of all documentation necessary to (i) terminate all salary continuation
agreements (other than those with J. Michael Moore, James T. Moore II, Robert
Maxon, Raymond Rench, Lester Schroeder and Thomas P. Moore II), phantom stock
rights and plans, split dollar and reverse split dollar agreements, death
benefit only agreements and all other post-employment benefit arrangements
(other than qualified plans) between or among the Company and any of its
directors, officers or employees and (ii) satisfy and discharge all obligations
arising thereunder. Prior to the Closing, the Company shall effect the
transactions contemplated in clauses (i) and (ii) of this Section 4.23 and shall
provide Parent with copies of all documentation relating to such action. No
later than fifteen days prior to the Closing, the Company shall amend any Plan
required to be amended to provide for any withdrawal made by any participant
thereunder and shall file full and correct Forms 5500 for the four years ending
prior to the Closing with respect to each Pension Plan and Welfare Plan.
4.24 INVENTORY RECORD. The Company will deliver to Parent a true and
complete copy of its perpetual inventory records as of the date of the Closing
Balance Sheet and the Effective Time. The Company will deliver to Parent a true
and complete schedule of all inventory held on consignment by or which is in the
possession of third parties and of any ledger balance or consignment arrangement
with any supplier.
4.25 CERTAIN EMPLOYEES. Prior to the Closing, the Company will use its
best efforts to inform Parent of any salaried employee who intends to terminate
his or her employment with the Company.
4.26 NOMINATION AS DIRECTOR. Parent will recommend J. Michael Moore to the
Nominating Committee of its Board of Directors for nomination as a director at
Parent's next annual meeting.
4.27 COMPANY AND PLAN TAX RETURNS. Prior to the Closing, the Company shall
use its best efforts to file all applicable federal, state, local and foreign
tax and information returns, including tax and information
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returns with respect to any Plan maintained by the Company or any of its
Subsidiaries, relating to all tax periods ending on or before December 31, 1996
and shall pay all taxes required to be shown on such returns, whether or not yet
due and payable.
4.28 CONFEDERATION LIFE POLICIES. After the Closing, Parent shall hold for
up to thirty months in order to maximize the cash surrender value of, life
insurance policies issued by Confederation Life listed on Schedule 4.28 (the
"Confederation Life Policies"). Prior to the expiration of such thirty month
period, the Shareholder Representatives shall have the sole right to direct the
disposition of the Confederation Life Policies.
ARTICLE V
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
5.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except as set forth in
Section 2.15(b), all representations and warranties of the Company,
Shareholders, Merger Sub or Parent contained herein or made pursuant hereto
shall survive the Closing and any investigation at any time made by or on behalf
of any party hereto until five years from the Effective Time. Notwithstanding
the foregoing, if a claim with respect to a breach of a representation and
warranty is made within the applicable period in accordance with the provisions
hereinafter set forth, such claim and any related claim may continue to be
asserted after such period. No party shall have liability under this Section 5.1
unless the notice specified in Section 5.4 is given prior to expiration of the
period specified in this Section 5.1.
5.2 INDEMNIFICATION OF PARENT AND MERGER SUB. The Company shall indemnify
Parent and Merger Sub from and against any Losses incurred by Parent or Merger
Sub (including any Losses incurred by the Company or its Subsidiaries following
the Closing) by reason of any breach of any representation, warranty, covenant
or agreement of the Company. Following the Closing, the Escrow Amount shall be
the sole and exclusive source for the indemnity provided for in this Section 5.2
and such indemnity shall be the sole and exclusive remedy for any Losses
incurred by Parent or Merger Sub arising from the Company's breach of any
provision of this Agreement. Notwithstanding anything else provided herein,
Parent and Merger Sub shall be entitled to indemnification only if, and to the
extent, Losses incurred by Parent or Merger Sub (including any Losses incurred
by the Company or its Subsidiaries) by reason of any breach of any
representation, warranty, covenant or agreement of the Company exceed One
Hundred Sixty Thousand Dollars ($160,000) (the "Deductible"); provided, however,
although the term "material" is used in certain representations, warranties and
covenants, the parties intend that solely for purposes of determining whether or
not there has been a breach of any representation, warranty, covenant or
agreement of the Company which would entitle Parent or Merger Sub to
indemnification under this Section 5.2, no effect shall be given in any such
representation, warranty, covenant or agreement to the use of the term
"material." For purposes of this Section 5.2, the term "Parent" shall be deemed
to include all direct and indirect Subsidiaries and affiliates of Parent.
Notwithstanding anything to the contrary provided herein, Parent and Merger Sub
shall be entitled to indemnification from the Escrow Amount on a dollar for
dollar basis (and without giving effect to the Deductible or any materiality
threshold) to the extent that the Adjusted Value of the Confederation Life
Policies on the Closing Balance Sheet exceeds the actual cash surrender value
received by Parent. Notwithstanding anything to the contrary provided herein,
Parent and Merger Sub shall also be entitled to indemnification from the Escrow
Amount on a dollar for dollar basis (and without giving effect to the Deductible
or any materiality threshold) to the extent that the reserve for workers'
compensation liabilities reflected on the Closing Balance Sheet is less than the
actual amounts incurred by Parent and its affiliates with respect to any and all
workers' compensation claims relating to injuries incurred by employees of the
Company and its Subsidiaries prior to the Closing plus a reasonable estimate of
any and all future liability with respect to such claims. Notwithstanding
anything to the contrary provided herein, Parent and Merger Sub shall not be
entitled to indemnification with respect to the adequacy of the reserve on the
Closing Balance Sheet for the DEC hardware and related software.
5.3 INDEMNIFICATION OF SHAREHOLDERS. Parent agrees to indemnify the
Shareholders from any Losses incurred by reason of any breach of any
representation, warranty, covenant or agreement of Parent or Merger Sub
contained herein.
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5.4 ASSERTION OF CLAIMS.
(a) The parties shall be free to bring all differences of interpretation
and disputes arising in connection with this Agreement to the attention of the
other at any time without prejudicing their harmonious relationship and
operations hereunder, and the good offices and facilities of either party shall
be available at all times for the prompt and effective adjustment of any and all
such differences, either by mail, telephone or personal meeting under friendly
and courteous circumstances.
(b) If a party claims ("Claiming Party") that it is entitled to
indemnification under this Article V, written notice of such claim specifying
with particularity the factual basis of the claim to the extent known (the
"Claim") shall be given to the party from whom the Claiming Party seeks
indemnification. The parties shall negotiate in good faith to determine the
validity and the value of the Claim. If the parties cannot reach an agreement as
to the value of the Claim, then such Claim shall be submitted to a mutually
acceptable party for arbitration in accordance with the Commercial Rules of the
American Arbitration Association in Toledo, Ohio, and the decision of such
arbitrator shall be final and binding upon the parties. The prevailing party in
any action brought before an arbitrator or any court shall be entitled to
recover all costs, including fees and expenses of counsel; provided, however,
following the Closing, if Parent or Merger Sub is the Claiming Party, all
matters relating to any Claim shall be noticed, administered and resolved as set
forth in the Escrow Agreement.
5.5 LIMITATION ON PARENT LIABILITY. The aggregate amount of the
indemnification payable by Parent pursuant to this Article V shall not exceed
Ten Million Dollars ($10,000,000) with respect to claims for indemnification
first asserted within the thirty month period following the Effective Time;
shall not exceed the lesser of (i) Five Million Dollars ($5,000,000) or (ii)
together with the aggregate of all claims for indemnification first asserted
within the thirty month period following the Effective Time, Ten Million Dollars
($10,000,000) with respect to claims for indemnification first asserted within
the thirty month period following the first aforementioned thirty month period;
and shall not exceed the lesser of (i) Two Million Five Hundred Thousand Dollars
($2,500,000) or (ii) together with the aggregate of all claims for
indemnification first asserted within the forty-five month period following the
Effective Time, Ten Million Dollars ($10,000,000) with respect to claims for
indemnification first asserted within the fifteen month period following the
aforementioned forty-five month period. Notwithstanding anything else provided
herein, Parent and Merger Sub shall be liable to indemnify Shareholders for any
Losses incurred by reason of any breach of any representation, warranty,
covenant or agreement of Parent or Merger Sub contained herein only if, and to
the extent, Losses incurred by Shareholders by reason of any breach of any
representation, warranty, covenant or agreement of Parent or Merger Sub exceed
One Hundred Sixty Thousand Dollars ($160,000).
5.6 INDEMNIFICATION IS NET OF BENEFITS. Any Claim for indemnification
under this Article V shall be net of any tax benefits.
5.7 GOOD FAITH CLAIMS. Parent and Merger Sub agree that they will use good
faith reasonable business judgment in taking any action that results in a Claim
by Parent for indemnification under Section 5.2.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction or waiver by the appropriate party at or prior to the Closing
of the following conditions:
(a) Effectiveness of the Registration Statement. The Registration
Statement shall have been declared effective by the SEC. No stop order
suspending the effectiveness of the Registration Statement shall have been
issued, initiated or threatened by the SEC;
(b) Shareholder Approval. This Agreement, the Merger and the transactions
contemplated hereby shall have been approved and adopted by the requisite vote
of the shareholders of the Company;
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(c) Listing. The Parent Shares to be issued in the Merger shall have been
authorized for listing on the NYSE, subject to official notice of issuance;
(d) HSR Act. All waiting periods applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated; and
(e) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger, shall be in effect; and there shall not be any
action taken, or any statute, rule, regulation or order enacted, entered or
enforced which makes the consummation of the Merger illegal.
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB. The
obligations of Parent and Merger Sub to effect the Merger are also subject to
the following conditions, which conditions may be waived by Parent:
(a) Representations and Warranties. The representations and warranties of
the Company contained in this Agreement shall be true and correct in all
material respects on and as of the Effective Time, except for (i) changes
contemplated by this Agreement, (ii) those representations and warranties which
address matters only as of a particular date (which shall have been true and
correct as of such date) and (iii) where the failure or failures of such
representations and warranties to be so true and correct, individually or in the
aggregate, does not result or would not reasonably be expected to result in an
adverse effect on the Company or its business of $3,000,000 or more (before
taxes). Parent and Merger Sub shall have received a certificate to such effect
signed by the President of the Company;
(b) Agreements and Covenants. The Company shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time, and Parent and Merger Sub shall have received a certificate to such effect
signed by the President of the Company;
(c) Environmental Condition. Parent shall be reasonably satisfied with the
environmental condition of the real property owned or held under lease by the
Company and with the Company's compliance with applicable environmental laws and
regulations;
(d) Consulting and Employment Agreements. Parent and Merger Sub shall have
received duly executed consulting and employment agreements between Parent (or
its designated affiliate) and the key employees identified on Schedule 4.17 on
terms reasonably acceptable to Parent;
(e) Continuity of Business. Parent shall be reasonably satisfied that all
material customers, product vendors, suppliers, sales representatives and
employees of the Company and its Subsidiaries will continue their respective
relationships with the business following the Effective Time;
(f) Shareholders Equity; Net Income. Parent shall be reasonably satisfied
that shareholders equity of the Company as of December 31, 1996 and as of the
Closing is not less than Forty-One Million Dollars ($41,000,000) or greater than
Fifty-One Million Dollars ($51,000,000) and that the net income after taxes of
the Company for the fiscal year ending December 31, 1996 is not less than Three
Million Three Hundred Thousand Dollars ($3,300,000);
(g) Material Contracts, Approvals, Permits and Leases. Parent shall be
reasonably satisfied that it or Merger Sub may assume all material contracts,
Approvals, Permits and leases of the Company and its Subsidiaries and that no
such contracts or leases will conflict with or result in a material breach or
default under any material contract, Approval, Permit or agreement of Parent. In
the event the Company is unable to obtain consent to the assignment of any
material lease, Parent and the Company shall negotiate in good faith an
equitable resolution to the issues arising therefrom;
(h) Amendment or Termination of Certain Plans and Agreements. Parent shall
be reasonably satisfied that (i) all salary continuation agreements (other than
those with J. Michael Moore, James T. Moore II, Robert Maxon, Raymond Rench,
Lester Schroeder and Thomas P. Moore II), phantom stock rights and
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plans, split dollar and reverse split dollar agreements, death benefit only
agreements and all other post-employment benefit arrangements (other than
qualified plans) between or among the Company and any of its directors, officers
or employees have been terminated and all obligations arising thereunder have
been satisfied and discharged and (ii) all Plans required to be amended and all
Forms 5500 required to be filed pursuant to Section 4.23 shall have been amended
and filed, respectively;
(i) Audit; Material Adverse Change. Deloitte & Touche LLP shall have
completed its annual audit of the Company's financial statements for the fiscal
year ended December 31, 1996 and issued an unqualified audit opinion with
respect thereto and there shall not have been an occurrence or nonoccurrence of
any event which results or might reasonably be expected to result in an adverse
effect on the Company or its business of $3,000,000 or more (before taxes);
(j) Consulting, Noncompetition and Confidentiality Covenants. Parent and
Merger Sub shall have received duly executed (i) consulting, noncompetition and
confidentiality agreements between Parent and J. Michael Moore and James T.
Moore II, respectively, substantially in the form of Exhibits E and F hereto,
and (ii) a duly executed confidentiality agreement between Parent and Dennis P.
Moore in a form satisfactory to Parent;
(k) Company Counsel Opinion. Parent and Merger Sub shall have received an
opinion of counsel to the Company substantially in the form of Exhibit G hereto;
and
(l) Price of Parent Common Stock. Prior to the Effective Time and after
the date of this Agreement, the closing price of Parent Shares on the New York
Stock Exchange for a single trading day shall not have been more than $38.00 per
share.
(m) Assignment of Motion Roller/Bearing Assembly. Prior to Closing, the
Company shall obtain the written consent of Richard K. Goldy ("Goldy") to the
assignment, without recourse to the Company, of all of the Company's rights and
obligations under the Assignment Agreement between Goldy and the Company dated
June 1, 1996 (which agreement assigned all of Goldy's right, title and interest
to and with respect to the Variable Curvilinear Recirculating Element Bearing
and a Traveling Windlass Drive Mechanism, also referred to as the Motion
Roller/Bearing Assembly, and the patent application relating thereto), to
INVETECH Holding Company, now known as MRBA Company and shall file an effective
assignment of the patent application with the United States Patent and Trademark
Office, each in a form reasonably acceptable to Parent. Parent and Merger Sub
hereby consent to such assignments and waive any rights in such intellectual
property.
(n) Termination of Regionalization Program. Parent shall be reasonably
satisfied that all benefits and expenses incurred in connection with the
Regionalization and Consolidation programs undertaken with respect to the
Detroit Metro Region and the Denver Region have been paid or have been reserved
for on the Closing Balance Sheet, that no person currently or in the future
shall be eligible to receive benefits or payments under such programs except as
reserved for on the Closing Balance Sheet, and that all steps necessary to
terminate such programs shall have been taken by the Company prior to the
Closing.
6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of
the Company to effect the Merger is also subject to the following conditions,
which conditions may be waived by the Company:
(a) Representations and Warranties. The representations and warranties of
the Parent and Merger Sub contained in this Agreement shall be true and correct
in all material respects on and as of the Effective Time, except for (i) changes
contemplated by this Agreement, (ii) those representations and warranties which
address matters only as of a particular date (which shall have been true and
correct as of such date) and (iii) where the failure or failures of such
representations and warranties to be so true and correct, individually or in the
aggregate, does not result or would not reasonably be expected to result in a
material adverse effect on Parent. The Company shall have received a certificate
to such effect signed by an executive officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have performed
or complied in all material respects with all agreements and covenants required
by this Agreement to be performed or complied
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with by them on or prior to the Effective Time, and the Company shall have
received a certificate to such effect signed by an executive officer of Parent.
(c) Tax Opinion. The Company shall have received a written opinion of its
legal counsel or accountants (addressed to the Company and the Shareholders) in
form and substance reasonably satisfactory to the Company to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code.
(d) Parent Counsel Opinion. The Company shall have received an opinion of
counsel to Parent substantially in the form of Exhibit H hereto.
(e) Price of Parent Common Stock. Prior to the Effective Time and after
the date of this Agreement, the closing price of Parent Shares on the New York
Stock Exchange for a single trading day shall not have been less than $24.875
per share.
(f) Change of Control of Parent. Prior to the Effective Time, control of
Parent shall not be transferred to persons other than those persons in control
of Parent on the date of this Agreement.
ARTICLE VII
TERMINATION
7.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, notwithstanding approval thereof by the Shareholders:
(a) by mutual written consent duly authorized by the Boards of Directors of
Parent and the Company;
(b) by either Parent or the Company, if the Merger shall not have been
consummated by July 31, 1997 (provided that the right to terminate this
Agreement under this Section 7.1(b) shall not be available to any party whose
failure to use all reasonable efforts to expedite a Closing or to fulfill any
material obligation under this Agreement has been the cause of or a substantial
contributor to the failure of the Merger to occur on or before such date);
(c) by either Parent or the Company, if a court of competent jurisdiction
or governmental, regulatory or administrative agency or commission shall have
issued a nonappealable final order, decree or ruling or taken any other action
having the effect of permanently restraining, enjoining or otherwise prohibiting
the Merger (provided that the right to terminate this Agreement under this
Section 7.1(c) shall not be available to any party who has not complied with its
obligations hereunder and such noncompliance materially contributed to the
issuance of any such order, decree or ruling or the taking of such action);
(d) by Parent, if (i) the Board of Directors of the Company shall withdraw,
modify or change its approval or recommendation of this Agreement or the Merger
in a manner adverse to Parent or shall have resolved to do so; or (ii) the Board
of Directors of the Company shall have recommended to the Shareholders of the
Company an Acquisition Proposal;
(e) by the Company, if (i) the Board of Directors of the Company shall
determine in good faith, based upon advice of outside legal counsel, that it is
required, in order to discharge properly its fiduciary duties, to withdraw,
modify or change its approval or recommendation of this Agreement or the Merger
in a manner adverse to Parent or shall have resolved to do so and (ii) the Board
of Directors of the Company shall have recommended to the Shareholders of the
Company an Acquisition Proposal; provided, that, the Company shall not be
entitled to exercise any termination rights under clause (ii) of this Section
7.1(e) unless (x) any action of the Board of Directors in order to discharge its
fiduciary duties is taken in good faith upon advice of outside legal counsel and
(y) the Company has complied with its other obligations hereunder;
(f) by Parent or the Company, if, at a duly held meeting of the
shareholders of the Company (including any adjournment thereof) held for the
purpose of voting on the Merger, this Agreement and the consummation of the
transactions contemplated hereby, the holders of the requisite number of Company
Shares shall not have approved the Merger, this Agreement and the consummation
of the transactions contemplated hereby; or
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(g) by Parent or the Company, upon a breach or breaches of this Agreement
by the other party, individually or in the aggregate, which results or would
reasonably be expected to result in an adverse effect on such party or its
business of $3,000,000 or more (before taxes).
7.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement pursuant to Section 7.1, this Agreement shall forthwith become void
and there shall be no liability on the part of any party hereto or any of its
affiliates, directors, officers or stockholders except (i) as set forth in
Section 7.3 hereof, and (ii) nothing herein shall relieve any party from
liability for any breach hereof.
7.3 FEES AND EXPENSES.
(a) Except as set forth in this Section 7.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that Parent shall pay and be responsible for the
filing fee and printing fees to be paid in connection with the Registration
Statement and Prospectus.
(b) In order to induce Parent to enter into this Agreement, the Company
agrees that if: (x) prior to termination of this Agreement, any person other
than Parent and its affiliates shall have commenced, proposed or communicated to
the Company an Acquisition Proposal (a "Pre-Termination Acquisition Proposal")
and (y) within one year of the termination of this Agreement, such person, or
any affiliate of such person, enters into any definitive agreement to effect a
transaction contemplated by an Acquisition Proposal (which is related to such
Pre-Termination Acquisition Proposal), then the Company shall pay to Parent
within five business days following the consummation of the transaction that was
contemplated by the Acquisition Proposal a fee of $3,000,000 in cash; provided,
however, that in no event shall the Company be obligated to pay more than one
such fee with respect to all such occurrences and provided further, no such fee
shall be payable if there has been a material misrepresentation by or material
breach of any material obligation of Parent hereunder which would entitle the
Company to terminate this Agreement under Section 7.1.
ARTICLE VIII
MISCELLANEOUS
8.1 PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES.
(a) This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the parties hereto and their respective successors and permitted
assigns. This Agreement and the rights and obligations of the Company,
Shareholders, Merger Sub and Parent hereunder may not be assigned by any of the
parties hereto without the prior written consent of the other parties, except
that Parent may assign its rights and obligations hereunder to a designated
wholly owned subsidiary at any time.
(b) This Agreement is not intended, nor shall it be construed, to confer
any rights or remedies under or by reason of this Agreement upon any Person
except the parties hereto and their heirs, representatives, successors and
permitted assigns.
8.2 EXHIBITS AND SCHEDULES. All exhibits and schedules attached hereto and
referred to herein are hereby incorporated in and made a part of this Agreement
as if set forth in full herein.
8.3 ENTIRE AGREEMENT. This Agreement, including all Exhibits, documents,
schedules, certificates and instruments referred to herein or therein, embody
the entire agreement and understanding of the parties hereto in respect of the
transactions contemplated by this Agreement. This Agreement supersedes all prior
agreements, arrangements and understandings of the parties with respect to such
transaction.
8.4 WAIVER OF COMPLIANCE. No amendment, modification, alteration,
supplement or waiver of compliance with any obligation, covenant, agreement,
provision or condition hereof or consent pursuant to this Agreement shall be
effective unless evidenced by an instrument in writing executed by all of the
parties hereto, or, in the case of a waiver the party against whom enforcement
of any waiver is sought. Any waiver or failure to insist upon strict compliance
with such obligations, covenant, agreement, provision or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
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8.5 ENFORCEABILITY. If any term, provision, covenant or restriction of
this Agreement or the application thereof to any person or circumstance should
be held by an administrative agency or court of competent jurisdiction to be
invalid, void, or unenforceable, then the remainder of this Agreement and the
application of such term, provision, covenant, or restriction to other persons
or circumstances shall not be affected thereby, but rather shall be enforced to
the greatest extent permitted by law. Further, it is the intent of the parties
that if any term, provision, covenant, or restriction of the Agreement should be
held to be invalid, void, or unenforceable as applied to any person or
circumstance, then such term, provision, covenant, or restriction shall be
modified to the extent necessary in order to render the same enforceable,
consistent with the expressed objectives of the parties hereto for entering into
this Agreement.
8.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
8.7 HEADINGS. The table of contents, article and section headings
contained in this Agreement are for convenience only and shall not control or
affect in any way the meaning or interpretation of the provisions of this
Agreement.
8.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the state of Ohio, without giving effect to the
conflicts of law principles thereof.
8.9 EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
representations, warranties and agreements of each party hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any person controlling any such party or
any of their officers or directors, whether prior to or after the execution of
this Agreement.
8.10 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given (i) at the time of delivery if personally delivered or telecopied
(with confirmation of receipt), (ii) the next day, if delivered by
nationally-recognized overnight express service, or (iii) in five (5) days, if
sent by registered or certified mail (postage prepaid, return receipt requested)
to the parties at the following addresses:
(a) If to Parent or Merger Sub to:
Applied Industrial Technologies, Inc.
3600 Euclid Avenue
Cleveland, Ohio 44115-1925
Telephone Number: (216) 881-8900
Facsimile Number: (216) 391-6217
Attn: Robert C. Stinson, Esq.
with copy to:
Squire, Sanders & Dempsey L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114-1304
Telephone Number: (216) 479-8500
Facsimile Number: (216) 479-8780
Attn: David A. Zagore, Esq.
(b) if to the Company:
INVETECH Company
1400 Howard Street
Detroit, Michigan 48216
Telephone Number: (313) 963-6011
Facsimile Number: (313) 963-5427
Attn: Mr. J. Michael Moore
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with a copy to:
Miller, Canfield, Paddock and Stone, P.L.C.
150 West Jefferson, Suite 2500
Detroit, Michigan 48226
Telephone Number: (313) 963-4240
Facsimile Number: (313) 496-7500
Attn: Bruce D. Birgbauer, Esq.
or to such other address as the person to whom notice is to be given may have
previously furnished to the other in writing in the manner set forth above,
provided that notice of a change of address shall be, deemed given only upon
receipt.
8.11 CONFIDENTIALITY; SOLICITATION OF EMPLOYEES. Each party to this
Agreement will maintain in confidence, hold in trust for the other, and not use
in any way except as expressly permitted, any information obtained from such
other party or such other party's Subsidiaries in connection with this Agreement
or the Merger, and each party to this Agreement will cause its respective
Subsidiaries, directors, officers, employees, agents, and advisers to do the
same, unless: (a) such information is or becomes publicly available through no
fault of the party disclosing or using such information; (b) the use of such
information is necessary or appropriate in making any filing or obtaining any
requisite regulatory approval; or (c) the furnishing or use of such information
is required by or necessary or appropriate in connection with legal proceedings;
provided, however, that the responding party shall first have given notice to
the other party hereto and shall have made a reasonable effort to obtain a
protective order to limit the disclosure. Information will be disclosed only on
a need to know basis and will only be used to the extent required to accomplish
the Merger. Information shall not be reproduced in any form except as required
to accomplish the Merger. If the Merger is not consummated, each party will
return or destroy such information of the other party (and all copies or
extracts) as the other party may request in writing and the chief executive
officers of the Company and Parent shall promptly execute and deliver
certifications to the other party that, at their request and to their knowledge,
all such information has been destroyed or returned to the other party. Each
party hereby acknowledges and agrees that in the event of any breach of this
Section by the other party, including, without limitation, the actual or
threatened disclosure or unauthorized use of a disclosing party's information,
in violation of this Section, the disclosing party will suffer an irreparable
injury, such that no remedy at law will afford it adequate protection against,
or appropriate compensation for, such injury. Accordingly, each party hereby
agrees that the other party shall be entitled to specific performance of the
receiving party's obligations under this Section as well as such further relief
as may be granted by a court of competent jurisdiction. If the Merger is not
consummated, until the earlier of (x) August 1, 1998 or (y) the acquisition of
the other party by a third party, each party further agrees that it shall not
initiate or maintain contact (except for those contacts made in the ordinary
course of business) with any director, officer or employee of the other party
with respect to the employment of any such director, officer or employee by the
first party; provided that, this provision shall not operate to prevent either
party from hiring any person who responds to an advertisement or makes an
unsolicited contact for employment. This Section 8.11 shall survive termination
of this Agreement.
8.12 DISPUTE RESOLUTION; ARBITRATION. Parent and the Company shall be free
to bring all differences of interpretation and disputes arising in connection
with this Agreement to the attention of the other at any time without
prejudicing their harmonious relationship and operations hereunder, and the good
offices and facilities of either party shall be available at all times for the
prompt and effective adjustment of any and all such differences, either by mail,
telephone or personal meeting under friendly and courteous circumstances. To the
extent any differences with respect to or arising out of the terms of this
Agreement cannot be resolved between the parties in accordance with the
procedures set forth in the previous sentence, either party may deliver a
written notice of disagreement (a "Notice of Disagreement") to the other
specifying with particularity the nature of the disagreement and the facts
related thereto.
Following delivery of a Notice of Disagreement, the parties shall attempt to
resolve any differences which they may have with respect to any matter specified
in the Notice of Disagreement. If prior to the scheduled Closing Date, the
parties fail to reach a written agreement with respect to all such matters, then
all such matters as
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specified in the Notice of Disagreement as to which such written agreement has
not been reached (the "Disputed Matters") shall be submitted to and reviewed by
an arbitrator (the "Arbitrator"), who shall be appointed in accordance with the
Commercial Rules of the American Arbitration Association. The Arbitrator shall
act promptly (in no event to exceed twenty days) to resolve all Disputed Matters
and shall issue a written decision resolving the disputed matters applying such
reasonable and equitable principles (consistent with this Agreement and
applicable law) as he or she deems appropriate. The Arbitrator's decision with
respect to all Disputed Matters shall be final and binding upon Parent and the
Company. The arbitration shall be conducted in Toledo, Ohio in accordance with
the Commercial Rules of the American Arbitration Association, and the decision
of such Arbitrator shall be final and binding upon the parties. The Arbitrator
shall issue a written decision with respect to any disputes relating to any
Notice of Disagreement submitted for arbitration. The decision of the Arbitrator
shall be final and binding upon the parties and judgment in accordance with such
decision may be entered in any court of competent jurisdiction. The fees and
expenses of the Arbitrator incurred in resolving the Disputed Matters shall be
borne equally by Parent and the Company (with the Company's portion of the fees
and expenses being a further adjustment to the Merger Consideration).
ARTICLE IX
CERTAIN DEFINITIONS
9.1 DEFINITIONS. For purposes of this Agreement, the following terms shall
have the meanings set forth below (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Adjusted Value" shall mean (i) the amount recorded with respect to the
Confederation Life Policies on the Closing Balance Sheet (which includes a 15%
reserve), minus (ii) in the event any death benefit is paid under any such
policies, an amount equal to the cash surrender value of such policies,
including any dividends credited thereto and without deduction for any loans (or
interest thereon), plus (iii) interest on the amount determined by subtracting
(ii) from (i) at a rate of 7% per annum (compounded annually), minus (iv) any
unpaid loans (and interest thereon) debited against the cash surrender value of
such policies to the extent recorded on the Closing Balance Sheet, plus (v) the
amount of any premium payments due after the Closing and not deducted directly
from the cash surrender value of such policies.
"Benefit Arrangements" means all bonus, incentive compensation, individual
employment contract, consulting contracts, termination, severance pay, holiday,
vacation, termination, severance pay, sick pay, sick leave, disability, tuition
refund, relocation, fringe benefit, collective bargaining agreements and other
policies or practices of the Company providing employee or executive
compensation or benefits to employees of the Company.
"Closing" shall have the meaning set forth in Section 1.10 hereof.
"Closing Date" shall have the meaning set forth in Section 1.10 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"The Company" shall mean INVETECH Company, a Michigan corporation.
"Encumbrance" shall mean any lien, encumbrance, proxy, voting trust arrangement,
pledge, security interest, collateral security agreement, financing statement
(and similar notices) filed with any Governmental Authority, claim (including
any claim as defined in the Code), charge, equities, mortgage, pledge,
objection, title defect, option, restrictive covenant or restriction on transfer
of any nature whatsoever, and the interest of the lessor in any property subject
to a capital lease.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended,
and the regulations and published interpretations promulgated thereunder.
"ERISA Affiliate" means an entity that would be treated as a single employer
with the Company under Section 414 of the Code.
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"Governmental Authority" shall mean any government or political subdivision
thereof, whether federal, state, local or foreign, or any agency, department,
commission, board, bureau, court, tribunal, body, administrative or regulatory
authority or instrumentality of any such government or Political subdivision.
"knowledge" means actual knowledge after reasonable investigation.
"Law" shall mean any law (including common law), rule, regulation, restriction
(including building or zoning code), code, statute, ordinance, order, writ,
injunction, judgment, decree or other requirement of a Governmental Authority.
"Losses" shall mean and include all demands, claims, actions, causes of action,
assessments, damages, losses, liabilities, judgments, settlements, fines,
penalties, sanctions, costs and expenses (including, without limitation,
interest, penalties, reasonable attorneys' fees and expenses as incurred, and
all other reasonable costs of investigating and defending third party claims as
incurred). With respect to Parent, "Losses" shall not include (and shall be net
of) any amounts reserved, if any, on the Company's Closing Balance Sheet
specifically with respect to such Losses or, to the extent paid, any amounts
relating to Losses which are payable through insurance, other than
self-insurance, maintained by the Company prior to the Closing which insurance
is not continued by Parent following the Closing.
"material" or "materiality" means, as applied in any particular representation,
warranty, covenant, in an effect, individually or in the aggregate, of $200,000
or more or substantial interference with the conduct of business at any facility
or branches for more than forty-eight hours.
"Merger" shall have the meaning set forth in the Recitals hereof.
"Merger Sub" shall mean IC Acquisition Corporation, an Ohio corporation and a
wholly-owned subsidiary of Parent.
"Multiemployer Plan" means a Plan which is a multiemployer pension plan as
defined in Section 3(37)(A) of ERISA.
"Order" shall mean any order, judgment, injunction, award, decree, writ, rule or
similar action of any Governmental Authority.
"Parent" shall mean Applied Industrial Technologies, Inc.
"Parent Shares" shall mean the shares of common stock, without par value, of
Applied Industrial Technologies, Inc.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto.
"Pension Plan" means any Plan that is an "employee benefit pension plan" as such
term is defined in Section 3(2) of ERISA.
"Permits" shall mean any franchise, license, certificate, approval, number,
registration, permit, authorization, order or approval of, and any required
registration with, any Governmental Authority.
"Person" shall mean any individual, partnership, firm, trust, association,
corporation, joint venture, joint stock company, unincorporated organization,
Governmental Authority or other entity.
"Plan" means any bonus, incentive compensation, deferred compensation, pension,
profit sharing, retirement, stock purchase, stock option, stock ownership, stock
appreciation rights, phantom stock, leave of absence, layoff, vacation day, or
dependent care, legal services, educational assistance, relocation assistance,
cafeteria, life, health, accident, disability, workers compensation or other
insurance, death benefit agreements, severance, separation or other employee
benefit plan, practice, policy or arrangement of any kind, whether written or
oral, including but not limited to an "employee benefit plan" within the meaning
of Section 393 of ERISA, which provides compensation or benefits to employees of
the Company.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
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"Shareholders" shall mean the shareholders of the Company immediately preceding
the Closing as set forth on Schedule 2.4.
"Welfare Plans" means all plans which are employee welfare benefit plans as
defined in Section 3(1) of ERISA.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of
the day and year first above written.
The Company:
INVETECH COMPANY
By: /s/ J. Michael Moore
--------------------------------
Chairman and Chief Executive
Officer
Parent:
APPLIED INDUSTRIAL TECHNOLOGIES,
INC.
By: /s/ John C. Dannemiller
--------------------------------
Name: John C. Dannemiller
Title: Chairman, Chief Executive
Officer and President
Merger Sub:
IC ACQUISITION CORPORATION
By: /s/ John C. Dannemiller
--------------------------------
Name: John C. Dannemiller
Title: Chairman, Chief Executive
Officer and President
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LIMITED JOINDER
The undersigned have executed this Agreement, as of the day and year first
written above, solely to evidence their agreement to vote all Company Shares
beneficially owned by them in favor of the authorization, approval and adoption
of the Merger and this Agreement by the Shareholders.
/s/ J. Michael Moore
------------------------------------
J. Michael Moore
/s/ James T. Moore II
------------------------------------
James T. Moore II
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SCHEDULE 2.A.2
CERTAIN MATTERS
Matters disclosed in the Initial Disclosure Statement relating to Encumbrances,
environmental, Plans, employee benefits, ERISA, equal employment opportunity,
labor, government contracts, affirmative action, taxes, and pending or
threatened Proceedings.
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EXHIBIT B
, 1997
Invetech Company
- ------------------------------------
- ------------------------------------
- ------------------------------------
GENTLEMEN:
This letter is delivered pursuant to the terms and provisions of that
certain Plan and Agreement of Merger dated April , 1997, among Invetech
Company, a Michigan corporation ("Invetech"), Applied Industrial Technologies,
Inc., an Ohio corporation ("Applied") and IC Acquisition Corporation, an Ohio
corporation (the "Merger Agreement"), a copy of which has been provided to the
undersigned. Capitalized terms not otherwise defined in this letter have the
meanings assigned to them in the Merger Agreement.
All shares of Applied Stock which the undersigned receives pursuant to the
Merger Agreement are referred to in this letter as "Merger Shares." The Merger
Shares and any other consideration to be received by the undersigned upon
consummation of the Merger are referred to collectively in this letter as
"Merger Consideration."
1. TAX MATTERS. The undersigned hereby agrees and represents that the
undersigned will at no time prior to January 1, 1998, sell or otherwise dispose
of any Merger Shares (other than a disposition by will or under the laws of
descent and distribution) unless the undersigned has first furnished to Applied
an opinion of nationally recognized tax counsel, satisfactory to Applied and its
counsel as to form and substance, to the effect that such disposition will not
violate the continuity of shareholder interest requirement set forth in Section
1.368-1 of the official Treasury Department interpretation of the Internal
Revenue Code of 1986, as amended, found in Title 26 of the Code of Federal
Regulations.
Any legal counsel issuing an opinion described in the preceding paragraph:
(a) must assume, for purposes of determining whether a disposition will violate
the continuity of shareholder interest requirement, that (i) each person that
held shares of Invetech Stock immediately before the Effective Time (other than
the undersigned) and who received shares of Applied Common Stock in connection
with the Merger effected one or more sales or other dispositions of the shares
of Applied Common Stock received by such person in connection with the Merger,
(ii) such sales or other dispositions reduced the aggregate fair value of such
shares of Applied Common Stock (with such fair value measured as of the
Effective Time) retained by such person to 40% (provided, however, that if such
person actually owns less than 40%, the actual percentage owned shall be
substituted for 40%) of the aggregate fair market value of the shares of
Invetech Stock held by such person immediately before the Effective Time, and
(iii) such sales or other dispositions were effected promptly following the
Effective Time pursuant to a plan or intention in existence immediately before
the Effective Time; and (b) may rely on the representations and warranties
contained in the Merger Agreement and the tax opinion of
issued pursuant to the Merger Agreement, provided that in the preparation of
such opinion, the opinion giver has made due inquiry of Applied as to whether
Applied has been advised that such representations and warranties were true and
correct when made.
2. LEGEND. The undersigned agrees to: (a) the placement of a legend on the
certificates evidencing the Merger Shares which shall state that any transfer of
such shares is subject to the terms of this letter; and (b) the issuance by
Applied of a stop- transfer order for a period of six months from the Effective
Time to the transfer agent for the Applied Common Stock.
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3. WARRANTIES AND REPRESENTATIONS. The undersigned warrants and represents
to Applied as follows:
(a) The undersigned has full power to execute this letter, to make the
representations, warranties, and agreements herein, and to perform the
undersigned's obligations hereunder.
(b) The undersigned has consulted such legal counsel and financial
advisers as the undersigned deems appropriate in connection with the
execution of this letter.
4. BINDING EFFECT; RELIANCE. This letter shall be binding upon and
enforceable against the undersigned, any administrators, executors,
representatives, heirs, legatees, and devisees of the undersigned, and any
pledgee holding any Merger Shares of the undersigned as collateral. The
undersigned acknowledges that the representations, warranties, and agreements of
the undersigned contained herein are part of the terms and conditions of the
Merger Agreement.
5. TERMINATION OF CERTAIN AGREEMENTS. The undersigned hereby agrees to the
termination of all existing stock redemption agreements and shareholder
agreements between Invetech and any shareholder(s) of Invetech relating to the
capital stock of Invetech.
6. ESCROW AGREEMENT. The undersigned hereby agrees to be bound by the
terms of the Escrow Agreement attached as Exhibit to the Merger Agreement.
Very truly yours,
------------------------------------
(Please type or print name)
------------------------------------
(Signature)
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ANNEX B
ESCROW AGREEMENT
THIS ESCROW AGREEMENT is made and entered into on , 1997
("Escrow Agreement") by and among NBD Bank (the "Escrow Agent"), INVETECH
Company, a Michigan corporation ("INVETECH"), Applied Industrial Technologies,
Inc., an Ohio corporation ("Applied"), IC Acquisition Corporation, an Ohio
corporation ("Merger Sub") and Thomas P. Moore II and Dennis P. Moore (the
"Shareholder Representatives"). Capitalized terms used and not otherwise defined
herein shall have the meanings assigned to such terms in the Merger Agreement
(as hereinafter defined).
RECITALS
WHEREAS, Applied, Merger Sub and INVETECH are parties to a Plan and
Agreement of Merger, dated as of April 29, 1997 (the "Merger Agreement"),
pursuant to which, at the Effective Time, INVETECH will merge with and into
Merger Sub; and
WHEREAS, pursuant to Section 1.3 of the Merger Agreement, at the Closing,
Applied has agreed to deposit with the Escrow Agent, Ten Million Dollars
($10,000,000) in immediately available funds (as reduced from time to time
pursuant to the terms hereof, the "Escrow Amount"); and
WHEREAS, INVETECH and Applied wish to enter into this Escrow Agreement
specifying the terms and conditions upon which the Escrow Amount will be held,
invested and disbursed by the Escrow Agent, and the Escrow Agent wishes to act
as escrow agent pursuant to the terms and conditions of this Escrow Agreement;
NOW, THEREFORE, in consideration of the premises and intending to be
legally bound hereby, the parties hereto agree as follows:
1. DEPOSITS INTO ESCROW ACCOUNT.
(a) On the date hereof, Applied has delivered to the Escrow Agent, and the
Escrow Agent hereby acknowledges receipt of, the Escrow Amount. The Escrow Agent
shall deposit the Escrow Amount into an escrow account under the account name
"Applied-INVETECH Escrow Account" (the "Escrow Account") and shall hold the
Escrow Amount separate and apart from its other funds and accounts and shall
keep an accurate record of all the transactions with respect thereto.
(b) After the date hereof, Applied shall deposit into the Escrow Account
for distribution to Shareholders any amount received prior to expiration of the
term of this Agreement from Wayne Fielding ("Fielding").
(c) After the date hereof, Applied shall deposit into the Escrow Account
for distribution to Shareholders any amount received by Applied in respect of
the cash surrender value of the Confederation Life Policies to the extent such
amount exceeds the Adjusted Value of the Confederation Life Policies on the date
such amount is received.
(d) Prior to the date which is sixty months following the date hereof,
Applied shall deposit into the Escrow Account for distribution to Shareholders
the amount, if any, by which the reserve for workers' compensation liabilities
reflected on the Closing Balance Sheet exceeds the actual amounts incurred by
Applied and its affiliates with respect to any and all workers' compensation
claims relating to injuries incurred by INVETECH and its Subsidiaries' employees
prior to the Closing Date plus a reasonable estimate of any and all future
liability with respect to such claims.
(e) After the date hereof, Applied shall deposit in the Escrow Account for
distribution to Shareholders one-half of the net proceeds received by Applied,
if any, from the sale of the assets identified on Schedule 1(e).
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2. PURPOSE OF ESCROW. The Escrow Amount shall be held by the Escrow Agent
for the purpose of securing the payment and performance of the indemnification
obligations of INVETECH set forth in Section 5.2 of the Merger Agreement.
3. INVESTMENT AND EARNINGS.
(a) During the term of this Escrow Agreement, the Escrow Agent shall invest
and reinvest cash, whether received as a portion of the Escrow Amount or as
proceeds thereof or earnings thereon, in U.S. treasury securities,
interest-bearing accounts maintained at, or interest bearing instruments issued
by, commercial banks designated in writing by Applied and the Shareholder
Representative (as hereinafter defined) or failing such designation, in U.S.
treasury securities. Any such investments comprising any portion of the Escrow
Amount shall be registered in the name of the Escrow Agent. The Escrow Agent
shall not be responsible for any loss arising out of or resulting from any such
investments, except for intentional wrongdoing or gross negligence. The Escrow
Agent is hereby authorized and directed to receive and hold in escrow pursuant
to the terms hereof, in its capacity as Escrow Agent, all proceeds and earnings
to which the cash and other property comprising the Escrow Amount would be
entitled. Subject to Section 3(b) hereof, all earnings (but not proceeds) on the
Escrow Amount and amounts, if any, deposited into the Escrow Account pursuant to
Sections 1(b), (c), (d) and (e) above shall be distributed to the Shareholders
by the Escrow Agent annually on or before December 31 each year in accordance
with the terms of the Escrow Release Instructions set forth on Schedule 4(b).
For purposes of this Escrow Agreement, "earnings" shall mean the amount, if any,
by which the property held by the Escrow Agent in the Escrow Account exceeds the
Escrow Amount (as reduced from time to time pursuant to the terms hereof).
(b) To the extent required by law, during the term of this Escrow
Agreement, all federal, state and local income or other taxes assessed on any
proceeds, interest or income received on, or on the value of, the Escrow Amount
which are required to be withheld, paid or deducted by the Escrow Agent shall be
withheld, paid, and deducted by the Escrow Agent from earnings, if any, prior to
distribution to the Shareholders in accordance with Section 3(a) or 4. During
the term of this Agreement, the Escrow Agent may retain such accountants,
attorneys and other experts as it shall deem advisable in connection with any
audits by any taxing authorities concerning the Escrow Amount. All reasonable
out-of-pocket costs, expenses or advances incurred by the Escrow Agent as a
result thereof shall be borne equally by Applied and the Shareholders; provided,
however, any such amounts to be borne by the Shareholders shall be deducted and
paid by the Escrow Agent first from any earnings on the Escrow Amount prior to
distribution to the Shareholders in accordance with Section 3(a) or 4, or if
earnings on the Escrow Amount shall be inadequate, then from the Escrow Amount.
All such amounts to be borne by Applied shall be paid directly by Applied upon
written request of the Escrow Agent. The Escrow Agent shall have no personal
liability for any such taxes or costs.
4. ESCROW DISTRIBUTIONS AND DELIVERY.
(a) The Escrow Agent shall hold the Escrow Amount until such time or times
as the Escrow Agent is directed to distribute all or any portion of the Escrow
Amount to the Shareholders or Applied pursuant to the terms hereof or pursuant
to the joint written instructions of Applied and the Shareholder Representative.
The respective percentage amounts of any distribution that, subject to the terms
and condition contained herein, shall be paid to each of the Shareholders in a
distribution to Shareholders, is set forth in Schedule 4(a) hereto. All
distributions by the Escrow Agent to the Shareholders pursuant to this Agreement
shall be divided among the Shareholders in proportion of the respective
percentages set forth on Schedule 4(a) corresponding to their respective names.
(b) On the dates set forth on Schedule 4(b) hereto, if no Notice of Claim
for indemnification has been submitted by Applied that remains pending pursuant
to the terms hereof, the Escrow Amount shall be reduced to the amount set forth
on Schedule 4(b) corresponding to such date. After payment of or provision for
all amounts to be borne and paid by the Shareholders hereunder, the Escrow Agent
shall disburse to the Shareholders from the Escrow Account an amount equal to
the excess of the fair cash value of all property held in the Escrow Account
(determined by the Escrow Agent in accordance with its ordinary practices) in
excess of the then applicable Escrow Amount (each amount to be so released, an
"Interim Release Amount") in accordance with the terms of the "Escrow Release
Instructions" set forth on Schedule 4(b). If any
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Notice(s) of Claim for indemnification have been submitted by Applied which
remain pending, the Escrow Agent shall distribute from the Escrow Account to the
Shareholders in accordance with the terms of the Escrow Release Instructions the
difference (if such amount is greater than zero) between (x) the Interim Release
Amount and (y) the aggregate amount of all pending claims for indemnification
specified in the Notice(s) of Claim for indemnification which have been
submitted by Applied and which remain pending pursuant to the terms hereof.
(c) On the date which is sixty months following the date hereof, if no
Notice of Claim for indemnification has been submitted by Applied that remains
pending pursuant to the terms hereof, the Escrow Agent shall distribute to the
Shareholders all amounts held in the Escrow Account (the "Final Release Amount")
in accordance with the terms of the Escrow Release Instructions. If any
Notice(s) of Claim for indemnification have been submitted by Applied which
remain pending, the Escrow Agent shall distribute from the Escrow Account to the
Shareholders in accordance with the terms of the Escrow Release Instructions the
difference (if such amount is greater than zero) between (x) the Final Release
Amount and (y) the aggregate amount of all pending claims for indemnification
specified in the Notice(s) of Claim for indemnification which have been
submitted by Applied and which remain pending pursuant to the terms hereof.
(d) Upon receipt of joint written instructions from Applied and the
Shareholder Representative, the Escrow Agent shall deliver the Escrow Amount, or
such portion thereof as is specified in such instructions, according to the
instructions contained therein.
(e) In the event that any amounts are withheld from distribution to the
Shareholders as a result of pending claims for indemnification under subsections
4(b) and (c) above and, thereafter, indemnification relating such pending claims
are determined pursuant to section 5(a) below to be payable in an amount less
than the amount specified in the applicable Notice of Claim, Applied and the
Shareholder Representative shall promptly execute joint written instructions to
the Escrow Agent instructing the Escrow Agent to deliver the difference to the
Shareholders in accordance with the terms of the "Escrow Release Instructions"
set forth on Schedule 4(b).
5. ASSERTION OF CLAIMS.
(a) If Applied claims that it is entitled to indemnification under the
Merger Agreement, written notice (a "Notice of Claim") of such claim specifying
with particularity the value and factual basis of the claim, to the extent then
known, shall be given to the Shareholder Representative and the Escrow Agent.
Applied and the Shareholder Representative shall discuss each Notice of Claim in
good faith to determine the validity and (if the claim is then liquidated) the
value of such claim for indemnification. If Applied and the Shareholder
Representative agree on the validity and the value of the claim for
indemnification, Applied and the Shareholder Representative shall execute joint
written instructions to the Escrow Agent instructing that the Escrow Agent shall
deliver to Applied such portion of the Escrow Amount as is specified in such
instructions, in accordance with the instructions contained therein. If Applied
and the Shareholder Representative cannot agree on the validity of the claim
(which shall include both the validity of the nature and amount of the claim
asserted) for indemnification and/or (if the claim is then liquidated) the value
of the claim specified in the Notice of Claim, then the claim may be submitted
by either party to an arbitrator, who shall be appointed in accordance with the
Commercial Rules of the American Arbitration Association, for arbitration in
Toledo, Ohio in accordance with the Commercial Rules of the American Arbitration
Association, and the decision of such arbitrator shall be final and binding upon
the parties. The arbitrator shall issue a written decision with respect to any
disputes relating to any Notice of Claim submitted to arbitration. Upon the
rendering of any such decision, Applied and the Shareholder Representative shall
promptly execute joint written instructions consistent with such decision
notifying the Escrow Agent of the resolution of such Notice of Claim and, as and
if appropriate, instructing the Escrow Agent to make distributions from the
Escrow Account consistent with such decision. Judgment in accordance with the
decision of the arbitrator may be entered in any court of competent
jurisdiction.
(b) During the time that any portion of the Escrow Amount is held by the
Escrow Agent and until distribution by the Escrow Agent to the Shareholders or
Applied, neither the Shareholders nor Applied shall
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be entitled to the Escrow Amount and the Escrow Amount shall not be subject to
any lien, security interest or encumbrance of any kind placed thereon by any of
them.
(c) Applied and the Shareholder Representative shall be free to bring all
differences of interpretation and disputes arising in connection with this
Agreement to the attention of the other at any time without prejudicing their
harmonious relationship and operations hereunder, and the good offices and
facilities of either party shall be available at all times for the prompt and
effective adjustment of any and all such differences, either by mail, telephone
or personal meeting under friendly and courteous circumstances.
(d) Promptly after receipt by Applied or Merger Sub of notice of the
commencement of any claim, action or proceeding ("Proceeding") against either of
them (including, but not limited to a Proceeding regarding any federal, state or
local tax) which either of them believes may result in a claim for
indemnification under the Merger Agreement, Applied will give notice to the
Shareholder Representative of the commencement of such Proceeding, but the
failure to notify the Shareholder Representative will not impair Applied's right
to indemnification, except to the extent that the Shareholder Representative
demonstrates that the defense of such action is prejudiced by Applied's failure
to give such notice.
(e) If any Proceeding referred to in Section 5(d) is brought against
Applied or Merger Sub and Applied gives notice to the Shareholder Representative
of the commencement of such Proceeding, the Shareholder Representative will be
entitled to participate in such Proceeding and his/her reasonable legal fees and
expenses shall be payable from the Escrow Amount. If notice is given to the
Shareholder Representative of the commencement of a Proceeding and the
Shareholder Representative does not, within thirty days after such notice is
given, give notice to Applied of its election to participate in the defense of
such Proceeding, the Shareholder Representative will be bound by any
determination made in such Proceeding or any compromise or settlement effected
by Applied or the Merger Sub. If the Shareholder Representative does so elect to
participate in the defense of such Proceeding, Applied or Merger Sub shall give
notice to the Shareholder Representative of any proposed settlement or
compromise and will not compromise or settle such Proceeding if within seven
days of Applied giving such notice, the Shareholder Representative objects to
the terms of such compromise or settlement; provided, further, under no
circumstances shall Shareholder Representative unreasonably withhold consent to
any compromise or settlement.
6. TERMINATION. Unless a Notice of Claim has been received by the Escrow
Agent and no joint instruction providing notice of resolution has subsequently
been received by the Escrow Agent indicating that the dispute has been resolved,
this Escrow Agreement shall terminate five years following the Effective Time
and the Escrow Agent shall deliver the Escrow Amount, or the portion thereof
remaining in the Escrow Account, to the Shareholders in accordance with the
terms of the Escrow Release Instructions.
7. SHAREHOLDER REPRESENTATIVE. As used herein, the term "Shareholder
Representative" shall mean Thomas P. Moore II and Dennis P. Moore, or their duly
appointed successors, and either shall be and hereby are severally empowered to
act with full authority of the Shareholder Representative under this Agreement.
If either Shareholder Representative dies, resigns or otherwise ceases to be a
Shareholder Representative, the remaining Shareholder Representative may appoint
a successor Shareholder Representative or, if no successor is appointed within
ninety days or there is no remaining Shareholder Representative, then a majority
in interest of the Shareholders may appoint a successor Shareholder
Representative.
8. THIRD PARTY BENEFICIARIES. The provisions of this Escrow Agreement
shall be binding upon, inure to the benefit of and be enforceable by the Escrow
Agent, Applied, Merger Sub, INVETECH, the Shareholder Representatives and the
Shareholders and each of their respective heirs, representatives, executives,
administrators, successors and assigns. No person is intended to be a third
party beneficiary hereunder.
9. INDEMNIFICATION; EXPENSES. The Shareholders and Applied jointly and
severally agree to hold the Escrow Agent harmless and indemnify it from any loss
or claim whatsoever arising in conjunction with the performance of the duties of
the Escrow Agent, but only to the extent that the Escrow Agent has fully
complied with the provisions of this Escrow Agreement. Said indemnification
shall survive the termination of this Escrow Agreement. The Shareholders and
Applied shall bear equally the fees and expenses of the Escrow Agent as set
forth on Schedule 9 hereto; provided, however, any such amounts to be borne by
the
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Shareholders shall be deducted and paid by the Escrow Agent first from any
earnings on the Escrow Amount prior to distribution to the Shareholders in
accordance with Section 3(a) or 4, or if earnings on the Escrow Amount shall be
inadequate, then from the Escrow Amount.
10. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given (i) at the time of delivery if personally delivered or telecopied
(with confirmation of receipt), (ii) the next day, if delivered by a
nationally-recognized overnight express service, or (iii) in five (5) days, if
sent by registered or certified mail (postage prepaid, return receipt requested)
to the parties at the following addresses:
(a) If to Applied to:
Applied Industrial Technologies, Inc.
3600 Euclid Avenue
Cleveland, Ohio 44115-1925
Telephone Number: (216) 881-8900
Facsimile Number: (216) 391-6217
Attn: Robert C. Stinson, Esq.
with copy to:
Squire, Sanders & Dempsey L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114-1304
Telephone Number: (216) 479-8500
Facsimile Number: (216) 479-8780
Attn: David A. Zagore, Esq.
(b) if to INVETECH or the Shareholder Representative:
INVETECH Company
1400 Howard Street
Detroit, Michigan 48216
Telephone Number: (313) 963-6011
Facsimile Number: (313) 963-5427
Attn: Thomas P. Moore II
Dennis P. Moore
with a copy to:
Miller, Canfield, Paddock and Stone, P.L.C.
150 West Jefferson, Suite 2500
Detroit, Michigan 48226
Telephone Number: (313) 963-4240
Facsimile Number: (313) 496-8451
Attn: Bruce D. Birgbauer, Esq.
(c) if to Escrow Agent:
NBD Bank
[Address]
or to such other address as the person to whom notice is to be given may have
previously furnished to the other in writing in the manner set forth above,
provided that notice of a change of address shall be deemed given only upon
receipt.
11. ENTIRE AGREEMENT. This Escrow Agreement is the entire agreement among
the parties with respect to the subject matter hereof and supersedes all prior
agreements, written or oral, with respect thereto.
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12. AMENDMENTS; WAIVER. This Escrow Agreement may be amended, modified,
superseded, canceled, renewed or extended, and the terms and conditions hereof
waived, only by a written instrument signed by the parties hereto or, in the
case of a waiver, the party waiving compliance.
13. ASSIGNMENT. No assignment of any rights or delegation of any
obligations provided for herein may be made by any party without the express
written consent of all of the other parties hereto. No Shareholders may assign
any rights under this Escrow Agreement.
14. COUNTERPARTS. This Escrow Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
15. GOVERNING LAW. This Escrow Agreement shall be governed by and
construed in accordance with the laws of the state of Ohio, without giving
effect to the conflicts of law principles thereof.
IN WITNESS WHEREOF, the parties hereto have affixed their signatures to
this Escrow Agreement upon the date first set forth above.
APPLIED:
APPLIED INDUSTRIAL TECHNOLOGIES,
INC.
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
INVETECH:
INVETECH COMPANY
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
ESCROW AGENT:
NBD BANK
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
B-6
<PAGE> 164
SHAREHOLDER REPRESENTATIVES:
- ------------------------------------
Thomas P. Moore II
- ------------------------------------
Dennis P. Moore
MERGER SUB:
IC ACQUISITION CORPORATION
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
B-7
<PAGE> 165
SCHEDULE 4(b)
<TABLE>
<CAPTION>
DATE ESCROW AMOUNT
- ------------------------------------------------------ -------------
<S> <C>
Effective Time........................................ $10,000,000
January 1, 2000....................................... $ 5,000,000
April 1, 2001......................................... $ 2,500,000
</TABLE>
B-8
<PAGE> 166
ANNEX C
[OPPENHEIMER LETTERHEAD]
April 29, 1997
PERSONAL AND CONFIDENTIAL
- -------------------------
The Board of Directors
INVETECH Company
1400 Howard Street
Detroit, Michigan 48216
Gentlemen:
You have asked Oppenheimer & Co., Inc. ("Oppenheimer") to render a written
opinion ("Fairness Opinion") to the Board of Directors as to the fairness to the
shareholders of INVETECH Company ("Invetech" or the "Company"), from a financial
point of view, of the consideration to be received pursuant to the Plan and
Agreement of Merger (the "Merger Agreement"), by and among Applied Industrial
Technologies, Inc. ("AIT"), IC Acquisition Corporation ("IC"), a wholly-owned
subsidiary of AIT and Invetech. The Merger Agreement provides that, among other
things, (i) the Company will be merged with IC (the "Merger"), a wholly-owned
subsidiary of AIT, and (ii) the shares of Class A common stock, $0.10 par value,
of the Company (the "Company Class A Shares") and the shares of Class B common
stock, $0.10 par value, of the Company (the "Class B Shares") issued and
outstanding (collectively, the "Company Shares") shall be converted into the
right to receive shares of common stock, without par value, of AIT ("AIT
Shares") and cash consideration (the "Cash Component"). The consideration to be
received pursuant to the Merger Agreement shall consist of up to 2.3 million AIT
shares valued at $28.62 per share (the "AIT Share Value"), and a Cash Component.
The Cash Component shall be the difference between $83,000,000 and the AIT Share
Value. The value of the consideration be received pursuant to the Merger
Agreement is the Cash Component plus the market value for each AIT share at the
time of closing, subject to the protective collars for Invetech shareholders and
AIT.
In arriving at our Fairness Opinion we:
<TABLE>
<S> <C>
(a) reviewed the draft Plan and Agreement of Merger, dated 4/29/97;
(b) reviewed Invetech's audited financial statements for the fiscal years ended
December 31, 1992, 1993, 1994, 1995 and 1996;
(c) reviewed AIT's audited financial statements for the fiscal years ended June 30,
1992, 1993, 1994, 1995 and 1996, and the unaudited financial statements for the six
months ended December 31, 1995 and 1996;
(d) reviewed financial projections of Invetech prepared by Invetech's management;
(e) reviewed financial projections for AIT, standalone, and pro forma combined with
Invetech, provided to us by AIT's management;
(f) reviewed the historical market prices and trading volume for AIT Common Stock;
(g) held discussions with senior management of AIT and Invetech with respect to the
business and prospects for future growth and the integration of the two companies;
(h) reviewed and analyzed the pro forma impact of the combination of Invetech and AIT;
(i) performed discounted cash flow analyses of Invetech and AIT standalone, and on a
combined entity basis using certain assumptions of future performance provided to
us by the managements of Invetech and AIT;
(j) reviewed and analyzed certain publicly available financial data for certain
companies we deem comparable to Invetech and AIT;
</TABLE>
C-1
<PAGE> 167
<TABLE>
<S> <C>
(k) reviewed certain publicly available financial data for transactions that we deem
comparable to the Acquisition;
(l) reviewed public information concerning Invetech and AIT; and
(m) performed such other analyses and reviewed such other information as we deemed
appropriate.
</TABLE>
In rendering our Fairness Opinion we relied upon (other than forecasts of
future financial condition and operating results supplied to us by AIT) and
assumed, without independent verification or investigation, the accuracy and
completeness of all of the financial and other information provided to us by the
Company and AIT and their respective employees, representatives and affiliates.
With respect to forecasts of future financial condition and operating results of
Invetech provided to us, we assumed, without independent verification or
investigation, that such forecasts were reasonably prepared on bases reflecting
the best available information, estimates and judgement of Invetech's
management. With respect to forecasts of future financial condition and
operating results of Invetech and AIT provided to us, we assumed, without
independent verification or investigation, that such forecasts were reasonably
prepared on bases reflecting the best available information, estimates and
judgement of AIT's management in light of the purposes for which such forecasts
were prepared. We have neither made nor obtained any independent evaluation or
appraisals of the assets or liabilities of Invetech, AIT, or such other
affiliated entities. We have assumed, without independent verification, the
accuracy of the advice and conclusions of Invetech's accountants with respect to
accounting and tax matters as provided to Oppenheimer by Invetech's management,
including without limitation, the treatment of the Merger as a tax free
reorganization for federal income tax purposes. We express no opinion as to what
the value of the AIT Shares actually will be when issued to the holders of the
Company Shares pursuant to the Merger or the price at which the AIT Shares will
trade subsequent to the Merger. We have made no assumptions as to the allocation
of the Merger Consideration between the Company Class A Shares and the Company
Class B Shares. Our opinion is necessarily based on the information available to
us and general economic, financial and stock market conditions and circumstances
as they exist and can be evaluated by us on the date hereof.
As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.
We acted as financial advisor to Invetech in connection with the Merger and
to the Board of Directors of Invetech in rendering this opinion and will receive
a fee for our services. An employee of Oppenheimer Capital, one of our
affiliates, serves on the Board of Directors of the Company. In the ordinary
course of its business, Oppenheimer and its affiliates may actively trade
securities of AIT for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Based upon and subject to the foregoing, and such other factors as we
deemed relevant, it is our opinion that, as of the date hereof, the
consideration to be received by the shareholders of Invetech pursuant to the
Merger Agreement is fair to such shareholders from a financial point of view.
This Fairness Opinion is for the exclusive use of the Board of Directors of
Invetech and may not be relied upon by any other person, entity or affiliate of
the Company. Neither this Fairness Opinion nor the services provided by
Oppenheimer in connection herewith may be publicly disclosed or referred to in
any manner by Invetech or AIT without Oppenheimer's prior written approval. This
Fairness Opinion may be reproduced in full in any proxy or information statement
mailed to shareholders of the Company and in any registration statement related
to the Merger filed by the Company or AIT with the Securities and Exchange
Commission pursuant to the Securities Act of 1933 but may not otherwise be
disclosed publicly in any manner without our prior written approval and must be
treated as confidential.
Very truly yours,
Oppenheimer & Co., Inc. Signature
Oppenheimer & Co., Inc.
C-2
<PAGE> 168
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Applied's Code of Regulations provides that Applied shall indemnify its
directors and officers to the fullest extent permitted by Ohio law, including
circumstances in which indemnification is otherwise discretionary under Ohio
law. Applied has entered into indemnification agreements with its officers and
directors containing provisions which are in some respects broader than the
specific indemnification provisions contained in the Ohio Law. The
indemnification agreements may require Applied, among other things, to indemnify
its directors against certain liabilities that may arise by reason of their
status or service as directors (other than liabilities arising from willful
misconduct or willful disregard of duties), to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified, and to obtain director's insurance if available on reasonable
terms.
Applied believes that the indemnification provisions in its Code of
Regulations and the indemnification agreements will facilitate Applied's ability
to continue to attract and retain qualified individuals to serve as directors
and officers of Applied. It is the opinion of the Commission that
indemnification provisions such as those contained in the Applied Code of
Regulations and these agreements have no effect on a director's or officer's
liability under the federal securities laws.
Applied has also obtained directors and officers' liability insurance
covering, subject to certain exceptions, actions taken by Applied's directors
and officers in their capacities as such.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
The following exhibits are filed herewith.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
<C> <S>
2(a) Plan and Agreement of Merger among Applied, Merger Sub and Invetech dated as of
April 29, 1997 included as Annex A to the Prospectus filed as part of this
Registration Statement.(1)
3(a) Amended and Restated Articles of Incorporation of Applied.(1)
3(b) Code of Regulations of Applied adopted September 6, 1988.(1)
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware)
filed with the Ohio Secretary of State on October 18, 1988, including an
Agreement of Merger and Plan of Reorganization between Bearings, Inc. (Ohio) and
Bearings, Inc. (Delaware) dated September 6, 1988.(1)
4(b) $80,000,000 Maximum Aggregate Principal Amount Note Purchase and Private Shelf
Facility dated October 31, 1992 between Applied and The Prudential Insurance
Company of America (as amended and restated).(1)
5(a) Opinion of Squire, Sanders & Dempsey L.L.P. as to the legality of the Applied
Common Stock being registered hereby.
8(a) Opinion of Deloitte & Touche LLP as to the federal income tax consequence of the
proposed merger of Invetech Company.
10(a) Form of Executive Severance Agreement between Applied and each of its executive
officers, together with schedule pursuant to Instruction 2 of Item 601(a) of
Regulation S-K identifying the officers and setting forth the material details
in which the agreements differ from the form of agreement that is filed.(1)
10(b) Consulting, Noncompetition and Confidentiality Agreement between Applied and J.
Michael Moore (to be entered into as of the Closing Date).(1)
</TABLE>
II-1
<PAGE> 169
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
<S> <C>
10(c) A written description of Directors' Compensation Program. (1)
10(d) Applied Deferred Compensation Plan for Non-Employee Directors (January 1, 1997
Restatement). (1)
10(e) A written description of Applied's Non-Contributory Life and Accidental Death
and Dismemberment Insurance for executive officers. (1)
10(f) A written description of Applied's Long-Term Disability Insurance for executive
officers. (1)
10(g) Form of Director and Officer Indemnification Agreement entered into between
Applied and its directors and its executive officers, together with a schedule
pursuant to Instruction 2 of Item 601(a) of Regulation S-K identifying the
directors and executive officers executing such Agreements. (1)
10(h) Applied Supplemental Executive Retirement Benefits Plan (July 1, 1993
Restatement) currently covering 7 executive officers of Applied (as well as
certain retired executive officers). (1)
10(i) First Amendment to Applied Supplemental Executive Retirement Benefits Plan (July
1, 1993 Restatement). (1)
10(j) Applied Deferred Compensation Plan (January 1, 1997 Restatement). (1)
10(k) Applied 1990 Long-Term Performance Plan. (1)
10(l) A written description of Applied's Management Incentive Plan. (1)
10(m) Applied Supplemental Defined Contribution Plan (January 1, 1997 Restatement).
(1)
10(n) Lease dated as of March 1, 1996 between Applied and the Cleveland-Cuyahoga Port
Authority. (1)
11(a) Computation of Net Income Per Share of Applied Common Stock. (1)
11(b) Computation of Net Income Per Share of Invetech Common Stock. (1)
21 Subsidiaries of Applied. (1)
23(a) Consent of Squire, Sanders & Dempsey L.L.P. (included in Exhibit 5(a)).
23(b) Consent of Deloitte & Touche LLP.
23(c) Consent of Deloitte & Touche LLP.
23(d) Consent of Deloitte & Touche LLP (included in Exhibit 8(a)).
24 Power of Attorney. (1)
27 Financial Data Schedules. (1)
</TABLE>
- ---------------
(1) Incorporated by reference to the same-numbered exhibit filed with the
Company's Registration Statement No. 333-27801 on Form S-4 (Commission File No.
1-2299), originally filed with the Commission on May 23, 1997.
II-2
<PAGE> 170
(b) FINANCIAL STATEMENT SCHEDULES.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------------------------------------- ---------- ---------- ---------- ----------
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND FROM AT END
DESCRIPTION OF PERIOD EXPENSES RESERVE OF PERIOD
---------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1996:
Reserve deducted from assets to which it
applies -- allowance for doubtful
accounts.............................. $2,300 $2,123 $2,023(A) $2,400
YEAR ENDED JUNE 30, 1995:
Reserve deducted from assets to which it
applies -- allowance for doubtful
accounts.............................. $1,900 $1,710 $1,310(A) $2,300
YEAR ENDED JUNE 30, 1994:
Reserve deducted from assets to which it
applies -- allowance for doubtful
accounts.............................. $2,000 $1,418 $1,518(A) $1,900
</TABLE>
- ---------------
(A) Amounts represent uncollectible accounts charged off.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE> 171
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 172
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS AMENDMENT NO. 1 TO
REGISTRATION STATEMENT 333-27801 ON FORM S-4 TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO,
ON JULY 8, 1997.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
By: /s/ JOHN C. DANNEMILLER
-------------------------------------
(Chairman, Chief Executive Officer &
President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT 333-27801 ON FORM S-4 HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---------------------------------------- --------------------------------------- -------------
<S> <C> <C>
/s/ JOHN C. DANNEMILLER Chairman, Chief Executive July 8, 1997
- ---------------------------------------- Officer & President
John C. Dannemiller
/s/ JOHN C. ROBINSON Vice Chairman July 8, 1997
- ----------------------------------------
John C. Robinson
/s/ JOHN R. WHITTEN Vice President-Finance & July 8, 1997
- ---------------------------------------- Treasurer (Principal Financial Officer)
John R. Whitten
/s/ MARK O. EISELE Controller (Principal Accounting July 8, 1997
- ---------------------------------------- Officer)
Mark O. Eisele
* Director July 8, 1997
- ----------------------------------------
William G. Bares
* Director July 8, 1997
- ----------------------------------------
William E. Butler
* Director July 8, 1997
- ----------------------------------------
Russel B. Every
* Director July 8, 1997
- ----------------------------------------
L. Thomas Hiltz
* Director July 8, 1997
- ----------------------------------------
Dr. Roger D. Blackwell
* Director July 8, 1997
- ----------------------------------------
Russell R. Gifford
* Director July 8, 1997
- ----------------------------------------
John J. Kahl
* Director July 8, 1997
- ----------------------------------------
Dr. Jerry Sue Thornton
</TABLE>
*By: /s/ ROBERT C. STINSON
---------------------------------
Robert C. Stinson,
as Attorney-in-fact
II-5
<PAGE> 173
EXHIBIT LIST
<TABLE>
<CAPTION>
LOCATION OF
EXHIBIT IN
SEQUENTIAL
NUMBERING
EXHIBIT NO. DESCRIPTION SYSTEM
- ----------- ------------------------------------------------------------------------ -----------
<C> <S> <C>
5(a) Opinion of Squire, Sanders & Dempsey L.L.P. as to the legality of the
Applied Common Stock being registered hereby.
8(a) Opinion of Deloitte & Touche LLP as to the federal income tax
consequence of the proposed merger of Invetech Company.
23(a) Consent of Squire, Sanders & Dempsey L.L.P. (included in Exhibit 5(a)).
23(b) Consent of Deloitte & Touche LLP.
23(c) Consent of Deloitte & Touche LLP.
23(d) Consent of Deloitte & Touche LLP (included in Exhibit 8(a)).
</TABLE>
II-6
<PAGE> 1
Exhibit 5(a)
SQUIRE, SANDERS & DEMPSEY L.L.P.
4900 KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114-1304
July 7, 1997
Applied Industrial Technologies, Inc.
One Applied Plaza
Cleveland, Ohio 44115
Re: Registration Statement No. 333-27801 on Form S-4 covering a Maximum of
2,300,000 Shares of Common Stock of Applied Industrial Technologies, Inc.
Ladies and Gentlemen:
We are delivering this opinion in connection with the Registration
Statement No. 333-27801 on Form S-4 (the "Registration Statement") of
Applied Industrial Technologies, Inc. (the "Company") originally filed May 23,
1997 with the Securities and Exchange Commission under the Securities Act of
1933, as amended, with respect to up to 2,300,000 shares (the "Shares")
of common stock, without par value, of the Company to be issued in connection
with the merger of INVETECH Company ("Invetech") with and into a subsidiary of
the Company ("Merger Sub") pursuant to the Plan and Agreement of Merger, dated
April 29, 1997, among the Company, Invetech and Merger Sub (the "Merger
Agreement").
In rendering this opinion, we have reviewed the Amended and Restated
Articles of Incorporation of the Company, resolutions by the Company's Board of
Directors, the Registration Statement and such corporate records and documents
as we have deemed relevant and necessary as the basis for this opinion, and
have made such investigation of law as we deemed necessary in order to render
the opinion hereinafter set forth.
Based upon the foregoing, it is our opinion that the Shares will, upon
their issuance and sale in accordance with the Registration Statement, be duly
authorized and vadidly issued, fully paid and non-assessable under the Ohio
General Corporation Law as in effect on this date.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our Firm under the heading
"Legal Matters" in the Prospectus included in the Registration Statement. In
giving this consent, we do not hereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Securities and Exchange Commission thereunder.
Respectfully submitted,
Squire, Sanders & Dempsey L.L.P.
<PAGE> 1
Exhibit 8(a)
July 7, 1997
Mr. J. Michael Moore
Mr. James T. Moore, II
Invetech Company
1400 Howard
Detroit, Michigan 48216
Dear Gentlemen:
This letter is in response to your request for our tax opinion on the federal
income tax consequences of the proposed merger ("Merger") of Invetech Company
("INVETECH") with and into IC Acquisition Corporation ("Merger Sub"), a
wholly-owned subsidiary of Applied Industrial Technologies, Inc. ("APPLIED"), as
described in the Plan and Agreement of Merger by and between INVETECH, APPLIED
and Merger Sub dated April 29, 1997 ("Agreement") and the Draft of Escrow
Agreement dated April 29, 1997 ("Escrow").
Our opinion presented herein is based upon the representations provided, our
understanding of the facts and the applicable tax law as it exists today.
Specifically, we have relied upon the representations of the Executive Officers
of INVETECH and APPLIED, and Miller, Canfield, Paddock & Stone provided in the
letters dated May 15, 1997, May 15, 1997 and May 15, 1997, respectively (these
letters will be referred to as "Representation Letter" or "Representation
Letters") and the Agreement, Escrow, and the Draft S-4 ("Documents").
FACTS
APPLIED, incorporated in 1928, is a corporation duly organized, validly existing
and in good standing under the laws of the State of Ohio. As of the date of the
Agreement, the authorized capital stock of APPLIED consists of (i) 30,000,000
shares of common stock, without par value, of which approximately 12,350,000 are
issued and outstanding and (ii) 2,500,000 shares of authorized but unissued
preferred stock. The common stock of APPLIED is traded on the New York Stock
Exchange. APPLIED and its subsidiaries file a consolidated federal income tax
return.
<PAGE> 2
July 7, 1997
Invetech Company
Page 2
Merger Sub, incorporated on April 18, 1997 in contemplation of this transaction,
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Ohio. As of the date of the Agreement, the authorized
capital stock of Merger Sub consists of 75 shares of common stock, without par
value, all of which are issued and outstanding and owned by APPLIED.
APPLIED, directly and through its subsidiaries, engages in the distribution and
sale of ball, roller, thrust, plane and linear type bearings, mechanical and
electrical drive system products, industrial rubber products, fluid power
products and specialty items used in connection with the foregoing products
manufactured by over 100 major suppliers. APPLIED's sales personnel advise and
assist customers with respect to product selection and application. APPLIED
considers this advice and assistance to be an integral part of its overall sales
efforts. Beyond acting as a mere distributor, APPLIED markets itself to selected
customers as a "single-source" technology supplier, offering product and process
solutions involving multiple product technologies, which solutions reduce
production downtime and overall procurement and maintenance costs for customers.
INVETECH, incorporated on December 12, 1917, is a corporation duly organized,
validly existing and in good standing under the laws of the State of Michigan.
As of the date of the Agreement, the authorized capital stock of INVETECH
consists of (i) 30,000 shares of Class A voting common stock, par value $0.10
per share, of which 20,000 shares are issued and outstanding and (ii) 5,000,000
shares of Class B non-voting common stock, par value $0.10 per share, of which
2,075,391 shares are issued and outstanding. INVETECH is a family-owned
corporation, with two Class A common stock shareholders and forty six Class B
nonvoting common stock shareholders. Thirty-three of INVETECH's shareholders
directly or beneficially own one percent or more of INVETECH's stock. Under the
agreement entered into by INVETECH's shareholders in July 1996, Class A
shareholders will be entitled to 15 percent of proceeds and Class B shareholders
will be entitled to 85 percent of proceeds in the case of a sale or liquidation
of INVETECH.
INVETECH engages in the distribution and sale of bearings, mechanical and
electrical drive system products, industrial rubber products, fluid power
products and specialty maintenance and repair products manufactured by over 350
major suppliers. INVETECH's sales personnel advise and assist customers with
respect to product selection and application. INVETECH offers product and
process solutions involving multiple technologies in an effort to reduce
production downtime and overall procurement and maintenance costs for customers.
INVETECH maintains inventory in each of its 86 branches that is designed to meet
the needs of its local customers. Distribution centers in Detroit, Michigan,
Charlotte, North Carolina and Denver, Colorado warehouse back-up inventory for
the branches. Branches and the master warehouses utilize the most effective
methods of transportation available to meet customer needs.
<PAGE> 3
July 7, 1997
Invetech Company
Page 3
THE TRANSACTION
APPLIED and INVETECH desire to combine their respective businesses through a
tax-free forward triangular merger. APPLIED believes that INVETECH's branch
locations in Michigan and the eastern mountain states would enable APPLIED to
better serve certain existing and potential national account customers, that the
acquisition of INVETECH would present significant new customer opportunities to
APPLIED, especially in the automobile industry, and would result in APPLIED
being able to market a broader product offering to customers of the combined
company. APPLIED also believes the Merger will present the combined company with
opportunities to service their respective customers better and more
cost-efficiently and opportunities both to consolidate field operations in areas
with overlapping branch locations and to eliminate certain overhead and
management expenses through the closing of INVETECH's headquarters. INVETECH
believes the Merger will provide INVETECH shareholders liquidity for their
current investment in INVETECH and address the need for INVETECH to rapidly
expand its business. INVETECH also believes that, at the same time as providing
enhanced liquidity to the INVETECH shareholders, the Merger will allow INVETECH
shareholders to retain an investment in INVETECH's business by becoming
shareholders of APPLIED, INVETECH's new parent company.
Pursuant to the Agreement, INVETECH shall be merged with and into Merger Sub.
Merger Sub shall be the surviving corporation ("Surviving Corporation") and
shall continue to exist and be governed by the laws of the State of Ohio. At the
Effective Time of the Merger, the separate corporate existence of INVETECH shall
cease and all its property, rights privileges, powers, franchises, debts,
liabilities and duties shall become the property, rights privileges, powers,
franchises, debts, liabilities and duties of Surviving Corporation.
By virtue of the Merger and without any further action on the part of APPLIED,
Merger Sub, INVETECH or INVETECH and APPLIED common stock shareholders:
a) Each issued and outstanding share of INVETECH Class A and Class B
common stock shall be converted into a right to receive shares of
common stock of APPLIED ("APPLIED Shares") and cash consideration
("Cash Component"). The aggregate value of the APPLIED Shares and the
Cash Component shall be $83,000,000 (the "Merger Consideration") with
each APPLIED Share valued at $28.62 per share.
b) The Merger Consideration shall be allocated in the following manner:
(i) 15% to holders of INVETECH Class A shares on a per share pro rata
basis, and (ii) 85% to the holders of INVETECH Class B shares on a per
share pro rata basis.
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c) INVETECH shall designate the number of APPLIED Shares and the amount of
the Cash Component to be delivered by APPLIED to each INVETECH
shareholder ("Shareholder") in consideration of such Shareholder's
INVETECH shares. INVETECH shall ask each Shareholder to specify such
Shareholder's preference for APPLIED Shares, cash or a combination
thereof, in consideration of such Shareholder's INVETECH shares. If
necessary to comply with the limitations described in the Agreement, or
if necessary to preserve the tax-free status of the Merger under
Section 368(a) of the Internal Revenue Code ("Code"), INVETECH shall
prorate the Cash Component and the APPLIED Shares among the
Shareholders on a basis intended to respect the preferences for cash or
APPLIED Shares specified by each Shareholder to the extent reasonably
possible.
d) Notwithstanding the foregoing, APPLIED shall not be required to issue
more than 2,300,000 APPLIED Shares in connection with the Merger.
e) The Merger Consideration shall be subject to adjustment on a dollar for
dollar basis to the extent that shareholders equity of INVETECH as
reflected on the Closing Balance Sheet, reduced for any and all
liabilities, transaction costs, compensation and termination expenses,
and other costs incurred, arising out of or in any way associated with
the transaction contemplated hereby or a change of control of INVETECH,
is greater than or less than $46,000,000.
f) Each share of capital stock of Merger Sub issued and outstanding
immediately prior to the Effective Time shall continue to be
outstanding and shall be unaffected by the Merger and shall constitute
an issued and outstanding share of capital stock of the Surviving
Corporation.
g) No fractional shares of APPLIED Share shall be issuable. Each
Shareholder who would otherwise be entitled to a fractional share
shall, in lieu thereof, be paid in cash an amount equal to such
fractional share interest multiplied by $28.62.
No shareholder has any dissenter's rights or any similar rights in connection
with the Merger pursuant to any provision of the Michigan Business Corporation
Act ("MBCA"), INVETECH's organizational documents, any resolution of
shareholders or directors of INVETECH, any agreement or otherwise.
One of the conditions to the Merger, unless waived, is the requirement that
prior to the Effective Time of the Merger and after the date of the Agreement,
the closing price of APPLIED Shares on the New York Stock Exchange for a single
trading day shall not have been more than $38.00 per share, or less than $24.875
per share.
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At the Closing, as security for the general obligations of INVETECH and its
shareholders arising under the Agreement, $10,000,000 cash shall be delivered by
APPLIED on behalf of Shareholders (as part of Merger Consideration) to an escrow
agent to be deposit and held in escrow. If no Notice of Claim for
indemnification has been submitted by APPLIED, then on January 1, 2000,
$5,000,000 will be released to the shareholders of INVETECH. Assuming the same,
$2,500,000 will be released on April 1, 2001. The remaining escrow balance up to
$2,500,000 will be released at the end of sixty months term.
REPRESENTATIONS
We have relied on the following representations of fact made by the Executive
Officers of INVETECH in connection with the Merger:
1) The fair market value of APPLIED common stock and cash consideration
(including the $10,000,000 placed in escrow) received by each INVETECH
Class A and Class B shareholder will be approximately equal to the fair
market value of INVETECH common stock surrendered in the exchange.
2) To the best of our knowledge, there is no plan or intention by the
shareholders of INVETECH who own one percent or more of INVETECH stock,
and to the best of the knowledge of management of INVETECH, there is no
plan or intention on the part of any other shareholders of INVETECH to
sell, exchange, or otherwise dispose of a number of shares of APPLIED
common stock received in the transaction that would reduce the
ownership by the shareholders of INVETECH of the stock of APPLIED to a
number of shares having a value, as of the date of the transaction, of
less than 50 percent of the value of all of the formerly outstanding
stock of INVETECH as of the same date. For purposes of this
representation, shares of INVETECH common stock exchanged for cash
(including the $10,000,000 placed in escrow) or other property, or
exchanged for cash in lieu of fractional shares of APPLIED common stock
will be treated as outstanding INVETECH common stock on the date of the
transaction. Moreover, shares of INVETECH common stock and shares of
APPLIED common stock held by INVETECH shareholders and otherwise sold,
redeemed, or disposed of prior or subsequent to the transaction will be
considered in making this representation. For purposes of this
representation, the additional shares of APPLIED stock that the Class B
shareholders (other than those who are also Class A shareholders) would
have received, if each Class A and Class B share had equal value,
should be considered otherwise sold, redeemed or disposed of.
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3) Merger Sub will acquire at least 90 percent of the fair market value of
the net assets and at least 70 percent of the fair market value of the
gross assets held by INVETECH immediately prior to the transaction. For
purposes of this representation, amounts paid by INVETECH to
shareholders that receive cash or other property, amounts used by
INVETECH to pay its reorganization expenses and all redemptions and
distributions (except for regular, normal dividends) made by INVETECH
immediately preceding the transfer will be included as assets of
INVETECH held immediately prior to the transaction.
4) The liabilities of INVETECH to be assumed by APPLIED plus the
liabilities, if any, to which the transferred assets are subject were
incurred by INVETECH in the ordinary course of its business and are
associated with the assets transferred.
5) INVETECH and shareholders of INVETECH will each pay their respective
expenses, if any, incurred in connection with the Merger.
6) There is no intercorporate indebtedness existing between APPLIED and
INVETECH or Merger Sub and INVETECH that was issued, acquired, or will
be settled at a discount.
7) INVETECH is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code. The term investment company in
this context means a corporation fifty percent or more of the value
whose total assets are stock and securities and eighty percent or more
of the value of whose total assets are assets held for investment. In
making the 50 percent and 80 percent determinations under the preceding
sentence, stock and securities in any subsidiary corporation shall be
disregarded and the parent corporation shall be deemed to own its
ratable share of the subsidiary's assets.
8) The fair market value of the assets of INVETECH transferred to Merger
Sub will equal or exceed the sum of the liabilities assumed by Merger
Sub, plus the amount of liabilities, if any, to which the transferred
assets are subject.
9) The total adjusted basis of the assets of INVETECH transferred to
Merger Sub will equal or exceed the sum of the liabilities assumed by
Merger Sub, plus the amount of liabilities, if any, to which the
transferred assets are subject.
10) INVETECH is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
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11) The payment of cash in lieu of fractional shares of APPLIED common
stock is solely for the purpose of avoiding the expense and
inconvenience to APPLIED of issuing fractional shares and does not
represent separately bargained-for consideration. The total cash
consideration that will be paid in the transaction to INVETECH
shareholders instead of APPLIED stock will not exceed one percent of
the total consideration that will be issued in the transaction to
INVETECH shareholders in exchange for their shares of INVETECH stock.
The fractional share interest of each INVETECH shareholder will be
aggregated, and no INVETECH shareholder will receive cash in an amount
equal to or greater than the value of one full share of APPLIED stock.
12) None of the compensation to be received by any shareholder-employees of
INVETECH will be separate consideration for, or allocable to, any of
their shares of INVETECH stock; none of the shares of APPLIED common
stock received by any shareholder-employees will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees will be for services
actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's-length for similar services.
We have also relied on the following representations of fact made by the
Executive Officers of APPLIED in connection with the Merger:
1) Following the transaction, Merger Sub will continue the historic
business of INVETECH or use a significant portion of INVETECH's
historic business assets in a business.
2) Following the Merger, Merger Sub will not issue additional shares of
its stock that would result in APPLIED losing control of Merger Sub
within the meaning of Section 368(c) of the Code.
3) APPLIED has no plan or intention to reacquire any of its stock issued
in the Merger.
4) APPLIED has no plan or intention to liquidate Merger Sub, to merge
Merger Sub with and into another corporation, to sell or otherwise
dispose of the stock of Merger Sub, or to cause Merger Sub to sell or
otherwise dispose of any of the assets of INVETECH acquired in the
transaction, except for dispositions made in the ordinary course of its
business or transfers described in Section 368(a)(2)(C) of the Code.
5) No stock of Merger Sub will be issued in the Merger.
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6) APPLIED and Merger Sub are not investment companies as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code. The term investment
company in this context means a corporation fifty percent or more of
the value whose total assets are stock and securities and eighty
percent or more of the value of whose total assets are assets held for
investment. In making the 50 percent and 80 percent determinations
under the preceding sentence, stock and securities in any subsidiary
corporation shall be disregarded and the parent corporation shall be
deemed to own its ratable share of the subsidiary's assets.
7) APPLIED and Merger Sub will each pay their respective expenses, if any,
incurred in connection with the Merger.
Lastly, we have also relied on the following representations of fact made by the
legal counsel of APPLIED and the legal counsel of INVETECH in connection with
the Merger:
1) The Merger will qualify under both the Michigan and Ohio corporate
statutes as a merger.
OPINION
Based on the Representation Letters, the information and facts contained in the
Documents, it is our opinion that:
1. The Merger will qualify as a reorganization within the meaning of
Section 368(a)(1)(A) and Section 368(a)(2)(D) of the Code. APPLIED,
Merger Sub and INVETECH will each be "a party to a reorganization"
within the meaning of Section 368(b).
2. No gain or loss will be recognized by INVETECH upon the transfer of its
assets to Merger Sub in exchange for APPLIED common stock, the
assumption by Merger Sub of the liabilities of INVETECH, cash to be
paid to INVETECH's shareholders and cash to be paid in lieu of
fractional shares, each of which will be distributed pursuant to the
Agreement. Sections 361(a), 361(b) and 357(a) of the Code.
3. No gain or loss will be recognized to APPLIED or Merger Sub upon the
receipt of INVETECH's assets by Merger Sub in exchange for APPLIED
common stock, cash and assumption by Merger Sub of INVETECH's
liabilities. Section 1.1032-2(b) of the Treasury Regulations
("Regulations").
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4. The basis of INVETECH's assets in the hands of Merger Sub will be the
same as the basis of such assets in INVETECH's hands immediately prior
to the Merger. Section 362(b) of the Code.
5. The holding period of INVETECH's assets in the hands of Merger Sub will
include the holding period of those assets in INVETECH's hands
immediately prior to the Merger. Section 1223(2) of the Code.
6. The basis of Merger Sub stock in the hands of APPLIED will be increased
by the basis of INVETECH's assets transferred to Merger Sub and
decreased by the sum of INVETECH's liabilities assumed by Merger Sub,
and the amount of liabilities, if any, to which the INVETECH's assets
may be subject, and the consideration not provided by APPLIED, if any.
Sections 1.358-6, 1.1502-30(b)(1) and (3) of the Regulations.
7. No gain or loss will be recognized by the INVETECH shareholders, who
elect to receive APPLIED common stock only in the Merger, on the
exchange of their INVETECH common stock solely for APPLIED common stock
(including fractional share interests they might otherwise be entitled
to receive). Section 354(a)(1) of the Code.
8. The gain, if any, to be realized by an INVETECH shareholder who
receives APPLIED common stock (including fractional share interests
they might otherwise be entitled to receive) and cash in exchange for
INVETECH stock will be recognized, but not in excess of the amount of
cash received. Section 356(a) of the Code. If the exchange has the
effect of the distribution of a dividend (determined with application
of Section 318(a)), then the amount of gain recognized that is not in
excess of each shareholder's ratable share of undistributed earnings
and profits will be treated as a dividend. The determination of whether
the exchange has the effect of the distribution of a dividend will be
made on a shareholder-by-shareholder basis in accordance with the
principles set forth in Commissioner v. Clark, 489 U.S. 726 (1989) and
Rev. Rul. 93-61, 1993-2 C.B. 118. No loss will be recognized on the
exchange. Section 356(c). Each shareholder should contact his, her or
its own tax advisor as to the application of Section 356(a).
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9. The basis of the APPLIED common stock (including fractional share
interests that an INVETECH shareholder would otherwise be entitled to)
received by an INVETECH shareholder who exchanges INVETECH stock solely
for APPLIED stock will be the same as the basis of the INVETECH common
stock surrendered in exchange therefor. The basis of the APPLIED common
stock (including fractional share interests that an INVETECH
shareholder would otherwise be entitled to) received by an INVETECH
shareholder who exchanges INVETECH stock for APPLIED stock and cash
will be the same as the basis of the INVETECH common stock surrendered
in the exchange, decreased by the amount of cash received, and
increased by the amount of cash received that is treated as a dividend
(if any), and by the amount of gain recognized on the exchange (not
including any portion of the gain that was treated as dividend).
Section 358(a) of the Code.
10. The holding period of APPLIED common stock to be received by INVETECH
shareholders will include the holding period of the INVETECH common
stock surrendered in exchange therefor, provided that the INVETECH
common stock was held as a capital asset on the date of the exchange.
Section 1223(1) of the Code.
11. Where only cash is received by a shareholder of INVETECH, such cash
will be treated as received by the shareholder as a distribution in
redemption of the shareholder's INVETECH common stock, subject to the
provisions and limitations of Section 302 of the Code.
12. Cash received by an INVETECH shareholder otherwise entitled to receive
a fractional share of APPLIED common stock in the exchange will be
treated as if the fractional shares were distributed as part of the
exchange and were then redeemed by APPLIED. These cash payments will be
treated as having been received as distributions in full payment in
exchange for the stock redeemed as provided in Section 302(a). This
receipt of cash will result in gain or loss measured by the difference
between the basis of such fractional share interest and the cash
received. Such gain or loss will be capital gain or loss to the
INVETECH shareholder, provided the INVETECH common stock was a capital
asset in the hands of such shareholder. Rev. Rul. 66-365, 1966-1 C.B.
116 and Rev. Proc. 77-41, 1977-2 C.B.574.
13. Merger Sub as the survivor of the Merger will succeed to and take into
account the items of INVETECH described in Section 381(c) of the Code,
as of the date or dates of transfer, subject to the conditions and
limitations specified in Sections 381(b) and 381(c). Section 381(a)(2).
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14. Merger Sub will succeed to and take into account the earnings and
profits, or deficit in earnings and profits of INVETECH, as of the date
or dates of transfer. Any deficit in earnings and profits should be
used only to offset earnings and profits accumulated after the date or
dates of transfer. Section 381(c)(2) of the Code and Section
1.381(c)(2)-1 of the Regulations.
LAW AND ANALYSIS
Section 368(a)(1)(A) of the Code provides that the term "reorganization" means a
statutory merger or consolidation. Under Section 1.368-2(b)(1) of the
Regulations, in order to qualify as a reorganization under Section 368(a)(1)(A),
the transaction must be a merger or consolidation effected pursuant to the
corporation laws of the United States or a State or Territory or the District of
Columbia. It has been represented that the Merger will qualify as a statutory
merger under the applicable state laws. Accordingly, the Merger will qualify as
a reorganization within the meaning of Section 368(a)(1)(A).
Section 368(a)(2)(D) of the Code provides that the acquisition by one
corporation, in exchange for stock of a corporation (referred to in this
subparagraph as "controlling corporation") which is in control of the acquiring
corporation (Merger Sub), of substantially all of the properties of another
corporation shall not disqualify a transaction under Section 368(a)(1)(A) if (i)
no stock of the acquiring corporation is used in the transaction, and (ii) in
the case of a transaction under Section 368(a)(1)(A), such transaction would
have qualified under Section 368(a)(1)(A) had the merger been into the
controlling corporation.
Section 368(c) of the Code provides that the term "control" means the ownership
of stock possessing at least eighty percent of the total combined voting power
of all classes of stock entitled to vote and at least eighty percent of the
total number of shares of each other class of stock of the corporation. At the
time of the transaction, APPLIED will own one hundred percent of the issued and
outstanding stock of Merger Sub; therefore, APPLIED will be in control of Merger
Sub within the meaning of Section 368(c).
Section 1.368-2(b)(2) of the Regulations, in discussing the requirement of
Section 368(a)(2)(D)(ii) of the Code that the merger of the target corporation
into the acquiring corporation would have qualified as a statutory merger under
Section 368(a)(1)(A) had the merger been into the controlling corporation,
states:
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The foregoing test of whether the transaction would have qualified
under Section 368(a)(1)(A) if the merger had been into the controlling
corporation means that the general requirements of a reorganization
under section 368(a)(1)(A) (such as a business purpose, continuity of
business enterprise, and continuity of interest) must be met in
addition to the special requirements of section 368(a)(2)(D). Under
this test, it is not relevant whether the merger into the controlling
corporation could have been effected pursuant to State or Federal
corporation law.
Based upon the discussion below that business purpose, continuity of business
enterprise, and continuity of interest will be met, the requirement of Section
368(a)(2)(D)(ii) will be met. In addition, it has been represented that no stock
of Merger Sub will be used in the Merger.
Rev. Proc. 77-37, 1977-2 C.B. 568, provides that the "substantially all"
requirement is satisfied if there is a transfer of assets representing at least
90% of the fair market value of the net assets and at least 70% of the fair
market value of the gross assets held by the corporations immediately prior to
the transfer. All payments to dissenters and all redemptions and distributions
(except for regular, normal distributions) made by the corporation immediately
preceding the transfer and which are part of the plan of reorganization should
be considered as assets held by the corporation immediately prior to the
transfer. It has been represented that Merger Sub will acquire at least 90
percent of the fair market value of the net assets and at least 70 percent of
the fair market value of the gross assets held by INVETECH immediately prior to
the Merger. Amounts paid by INVETECH to shareholders that receive cash or other
property, amounts used by INVETECH to pay its reorganization expenses, and all
redemptions and distributions (except for regular, normal dividends) made by
INVETECH immediately preceding the Merger will be included as assets of INVETECH
held immediately prior to the Merger. Thus, the substantially all requirement of
Section 368(a)(2)(D) will be met.
In addition to the definitional requirements set forth in the statute, in order
for a transaction to be a tax-free reorganization, certain requirements set
forth in the regulations under Section 368 of the Code must also be met. Section
1.368-1(b) of the Regulations provides that the purpose of the reorganization
provisions of the Code is to except from the general rule of taxability certain
specifically described exchanges incident to such readjustments of corporate
structures made in one of the particular ways specified in the Code as are
required by business exigencies and which affect only a readjustment of a
continuing interest in property under modified corporate form. Requisite to a
reorganization under the Code are a continuity of business enterprise under the
modified corporate form and a continuity of interest therein on the part of
those persons who, directly or indirectly, were the owners of the enterprise
prior to the reorganization.
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Section 1.368-1(d) of the Regulations provides that continuity of business
enterprise requires that the acquiring corporation either (i) continue the
acquired corporation's historic business or (ii) use a significant portion of
the acquired corporation's historic assets in a business. It has been
represented that after the Merger, Merger Sub will continue the historic
business of INVETECH or use a significant portion of INVETECH's historic
business assets in a business. Accordingly, the Merger will meet the continuity
of business enterprise requirement.
Under Section 1.368-1(b) of the Regulations, the continuity of interest doctrine
requires that in a reorganization there must be a continuity of interest therein
on the part of those persons who, directly or indirectly, were the owners of the
enterprise prior to the reorganization. Rev. Proc. 77-37 provides that the
"continuity of interest" requirement of Section 1.368-1(b) is satisfied if there
is continuing interest through stock ownership in the acquiring or transferee
corporation (or a corporation in "control" thereof within the meaning of Section
368(c) of the Code) on the part of the former shareholders of the acquired or
transferor corporation which is equal in value, as of the effective date of the
reorganization, to at least fifty percent of the value of all of the formerly
outstanding stock of the acquired or transferor corporation as of the same date.
It is not necessary that each shareholder of the acquired or transferor
corporation receive in the exchange stock of the acquiring or transferee
corporation, or a corporation in "control" thereof, which is equal in value to
at least 50 percent of the value of his former stock interest in the acquired or
transferor corporation, so long as one or more of the shareholders of the
acquired or transferor corporation have a continuing interest through stock
ownership in the acquiring or transferee corporation or a corporation in
"control" thereof which is, in the aggregate, equal to at least 50 percent of
the value of all of the formerly outstanding stock of the acquired or transferor
corporation. Sales, redemptions, and other dispositions which are part of the
plan of reorganization will be considered in determining whether there is a 50
percent continuing interest through stock ownership as of the effective date of
the reorganization.
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It has been represented that there is no plan or intention by the shareholders
of INVETECH who own one percent or more of INVETECH stock, and to the best of
the knowledge of management of INVETECH, there is no plan or intention on the
part of any other shareholders of INVETECH to sell, exchange, or otherwise
dispose of a number of shares of APPLIED Common Stock received in the
transaction that would reduce the shareholders of INVETECH's ownership of
APPLIED Common Stock to a number of shares having a value, as of the date of the
transaction, of less than fifty percent of the value of all of the formerly
outstanding INVETECH Common Stock as of the same date. For purposes of this
representation, shares of INVETECH common stock exchanged for cash (including
the $10,000,000 placed in escrow) or other property, or exchanged for cash in
lieu of fractional shares of APPLIED common stock will be treated as outstanding
INVETECH common stock on the date of the transaction. Moreover, shares of
INVETECH common stock and shares of APPLIED common stock held by INVETECH
shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to
the transaction will be considered in making this representation. Thus, the
continuity of interest requirement will be met.
In order to qualify as a reorganization described in Section 368(a)(1)(A) and
368(a)(2)(D) of the Code, there must be a genuine business purpose for the
transaction. APPLIED believes that INVETECH's branch locations in Michigan and
the eastern mountain states would enable APPLIED to better serve certain
existing and potential national account customers, that the acquisition of
INVETECH would present significant new customer opportunities to APPLIED,
especially in the automobile industry, and would result in APPLIED being able to
market a broader product offering to customers of the combined company. APPLIED
also believes the Merger will present the combined company with opportunities to
service their respective customers better and more cost-efficiently and
opportunities both to consolidate field operations in areas with overlapping
branch locations and to eliminate certain overhead and management expenses
through the closing of INVETECH's headquarters. INVETECH believes the Merger
will provide INVETECH shareholders liquidity for their current investment in
INVETECH and address the need for INVETECH to rapidly expand its business.
INVETECH also believes that, at the same time as providing enhanced liquidity to
the INVETECH shareholders, the Merger will allow INVETECH shareholders to retain
an investment in INVETECH's business by becoming shareholders of APPLIED,
INVETECH's new parent company. This will satisfy the genuine business purpose
for the Merger.
Based on the above law and analysis, the Merger of INVETECH with and into Merger
Sub will qualify as a statutory merger within the meaning of Section
368(a)(1)(A) and 368(a)(2)(D) of the Code.
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Section 368(b)(2) of the Code provides that the term "a party to a
reorganization" includes both corporations, in the case of a reorganization
resulting from the acquisition by one corporation of stock or properties of
another. In the case of a reorganization qualifying under Section 368(a)(1)(A)
by reason of Section 368(a)(2)(D), the term "a party to a reorganization" also
includes the controlling corporation referred to in Section 368(a)(2)(D).
Accordingly, INVETECH, APPLIED and Merger Sub will each be "a party to a
reorganization".
Section 361(a) of the Code provides that no gain or loss shall be recognized to
a corporation if such corporation is a party to a reorganization and exchanges
property, in pursuance of the plan of reorganization, solely for stock or
securities in another corporation a party to the reorganization.
Section 361(b) of the Code provides that if Section 361(a) would apply to an
exchange but for the fact that the property received in exchange consists not
only of stock or securities permitted by Section 361(a) to be received without
the recognition of gain, but also of other property or money, then
(A) Property distributed -- If the corporation receiving such other
property or money distributes it in pursuance of the plan of
reorganization, no gain to the corporation shall be recognized from the
exchange, but
(B) Property not distributed -- If the corporation receiving such other
property or money does not distribute it in pursuance of the plan of
reorganization, the gain, if any, to the corporation shall be
recognized.
The amount of gain recognized under subparagraph (B) shall not exceed the sum of
the money and the fair market value of the other property so received which is
not so distributed.
Section 357(a) of the Code provides that if the taxpayer receives property which
would be permitted to be received under Section 361 without the recognition of
gain if it were the sole consideration, and as part of the consideration,
another party to the exchange assumes a liability of the taxpayer, or acquires
from the taxpayer property subject to a liability, then such assumption or
acquisition shall not be treated as money or other property, and shall not
prevent the exchange from being within the provisions of Section 361.
Because the Merger qualifies as a reorganization under Sections 368(a)(1)(A) and
368(a)(2)(D) of the Code, and all cash that INVETECH will receive in the Merger
will be distributed to INVETECH's shareholders pursuant to the agreement, no
gain or loss will be recognized by INVETECH by reason of the Merger and Sections
361(a), 361(b) and 357(a) of the Code.
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Section 1032(a) of the Code provides that no gain or loss shall be recognized to
a corporation on the receipt of money or other property in exchange for stock of
such corporation. In a transaction to which Section 1032(a) applies, the
corporation receiving property exchanges its own stock for such property rather
than the stock of its parent corporation. Section 1.1032-2(b) of the Regulations
provides that in the case of a forward triangular merger (as described in
Section 1.358-6(b))1, P stock provided by P to S, or directly to T or T's
shareholders on behalf of S, pursuant to the plan of reorganization is treated
as a disposition by P of shares of its own stock for T's assets or stock, as
applicable. In the case at hand, INVETECH will merge with and into Merger Sub in
exchange for APPLIED common stock and cash, accordingly, no gain or loss will be
recognized to APPLIED or Merger Sub as a result of the Merger.
Section 362(b) of the Code provides that if property was acquired by a
corporation in connection with a reorganization, then the basis of such property
shall be the same as it would be in the hands of the transferor, increased by
the amount of gain recognized to the transferor on such transfer. Because Merger
Sub will receive property from INVETECH in connection with a reorganization
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D), and INVETECH will
not recognize any amount of gain pursuant to Sections 361(a), 361(b) and 357(a),
the basis of the assets to be received by Merger Sub will be the basis of those
assets in the hands of INVETECH immediately prior to the Merger.
Section 1223(2) of the Code provides that in determining the period for which
the taxpayer has held property, however acquired, there shall be included the
period for which such property was held by any other person, if such property
has, for purposes of determining gain or loss from a sale or exchange, the same
basis in whole or in part in his hands as it would have had in the hands of such
other person. Because the basis of the assets to be received by Merger Sub from
INVETECH will have the same basis as those assets in the hands of INVETECH
immediately prior to the transfer, the holding period for the assets of INVETECH
to be received by Merger Sub will include the period during which such assets
were held by INVETECH.
- --------
1 Section 1.358-6(b)(2) of the Regulations defines a forward triangular merger
as a statutory merger of the acquiring corporation ("S"), which is controlled by
the controlling corporation ("P"), and another corporation ("T"), with S
surviving, that qualifies as a reorganization under Sections 368(a)(1)(A) by
reason of the application of Section 368(a)(2)(D) of the Code.
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Section 1.358-6(c)(1)(i) of the Regulations provides that in a forward
triangular merger, P 's basis in its S stock is adjusted as if (A) P acquired
the T assets acquired by S in the reorganization (and P assumed any liabilities
which S assumed or to which the T assets acquired by S were subject) directly
from T in a transaction in which P 's basis in the T assets was determined under
section 362(b) (i.e., P would have the same basis in T's assets acquired as it
would be in the hands of T); and (B) P transferred the T assets (and liabilities
which S assumed or to which the T assets acquired by S were subject) to S in a
transaction in which P 's basis in S stock was determined under section 358
(i.e., P 's basis in its S stock is increased by the basis in the T assets
deemed transferred and decreased by the sum of T's liabilities assumed by S, and
the amount of liabilities to which the T assets acquired by S are subject).
Section 1.358-6(c)(1)(ii) further provides that if, in applying section 358, the
amount of T liabilities assumed by S or to which the T assets acquired by S are
subject equals or exceeds T's aggregate adjusted basis in its assets, the amount
of the adjustment is zero. P will not increase its basis in its S stock by any
cash contributed by P that is used as part of the cash component. See paragraph
(d) of example 1 in Reg. section 1.358-6(c)(4).
Section 1.358-6(d)(1) of the Regulations provides that the amount of P's
adjustment to basis in its S stock is decreased by the fair market value of any
consideration that is exchanged in the reorganization and that is not provided
by P pursuant to the plan of reorganization. Additionally, section 1.358-6(d)(2)
provides that P makes no adjustment to basis if the decrease required under
paragraph (d)(1) equals or exceeds the amount of the adjustment described in
paragraph (c) of section 1.358-6.
Section 1.1502-30(b)(1) of the Regulations provides that P adjusts its basis in
the stock of S as a result of a forward triangular merger under sections
1.358-6(c) and (d) of the Regulations, except that sections 1.358-6(c)(1)(ii)
and (d)(2) do not apply. Instead, P should adjust such basis by taking into
account the full amount of (i) T liabilities assumed by S or the amount of
liabilities to which the T assets acquired by S are subject, and (ii) the fair
market value of any consideration not provided by P pursuant to the plan of
reorganization. Section 1.1502-30(b)(3) provides that negative adjustments under
this section may exceed P 's basis in its S stock. The resulting negative amount
is P's excess loss account in its S stock.
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Because the Merger of INVETECH with and into Merger Sub qualifies as a statutory
merger within the meaning of Section 368(a)(1)(A) and 368(a)(2)(D) of the Code,
it is a forward triangular merger under the definition of Section 1.358-6(b)(2)
of the Regulations. It has been represented that the total adjusted basis of the
assets of INVETECH transferred to Merger Sub will equal or exceed the sum of the
liabilities assumed by Merger Sub, plus the amount of liabilities, if any, to
which the transferred assets are subject. Accordingly, the basis of Merger Sub
stock in the hands of APPLIED will be increased by the basis of INVETECH's
assets transferred to Merger Sub and decreased by the sum of INVETECH's
liabilities assumed by Merger Sub, and the amount of liabilities, if any, to
which INVETECH's assets may be subject, and any consideration not provided by
APPLIED, if any.
Section 354(a)(1) of the Code provides that no gain or loss shall be recognized
to a shareholder if stock or securities in a corporation a party to a
reorganization are, in pursuance of the plan of reorganization, exchanged solely
for stock or securities in such corporation or in another corporation a party to
the reorganization. The tax consequences of section 354 are based on a value for
value exchange. See section 356(f). In Rev. Rul. 73-233, a majority shareholder
received less than his proportional interest in the acquiring stock than the
proportional interest he owned in the acquired stock prior to the
reorganization. The Internal Revenue Service ruled that there was a constructive
transfer to the minority shareholders and it was considered a disposition giving
rise to gain or loss to the majority shareholder and as giving rise to income to
the minority shareholders. See also section 1.351-(1)(b)(1) of the Regulations.
It has been represented that the fair market value of APPLIED common stock and
cash consideration (including the $10,000,000 placed in escrow) received by each
INVETECH Class A and Class B shareholder will be approximately equal to the fair
market value of INVETECH common stock surrendered in the exchange. Therefore, no
gain or loss will be recognized by the INVETECH's shareholders, who elect to
receive APPLIED common stock only in the Merger, on the exchange of their
INVETECH common stock solely for APPLIED common stock. Each shareholder should
contact his, her or its own tax advisor.
Section 356(a)(1) of the Code provides, in part, that if Section 354 would apply
to an exchange but for the fact that the property received in the exchange
consists not only of property permitted by Section 354 to be received without
the recognition of gain but also of other property or money, the gain, if any,
to the recipient shall be recognized, but in an amount not in excess of the sum
of such money and the fair market value of such other property.
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Section 356(a)(2) of the Code provides that if an exchange is described in
Section 356(a)(1) but has the effect of the distribution of a dividend
(determined with the application of Section 318(a)), then there shall be treated
as a dividend to each distributee such an amount of the gain recognized under
Section 356(a)(1) as is not in excess of his ratable share of the undistributed
earnings and profits of the corporation accumulated after February 28, 1913. The
remainder, if any, of the gain recognized under Section 356(a)(1) shall be
treated as gain from the exchange of property.
Section 356(c)(1) of the Code provides, in part, that if Section 354 would apply
to an exchange but for the fact that the property received in the exchange or
distribution consists not only of property permitted by Section 354 to be
received without the recognition of gain or loss, but also of other property or
money, then no loss from the exchange or distribution shall be recognized.
The Supreme Court has taken the position that in determining whether an exchange
has the effect of the distribution of a dividend, the application of Section 302
of the Code is determined as if the gain is recognized as a result of a
post-reorganization redemption of acquiring corporation stock. Clark. See also
Rev. Rul. 93-61. Thus, each shareholder will be treated as having received
solely APPLIED common stock for his, her or its INVETECH stock, a portion of
which will then be treated as redeemed equal in value to the cash each
shareholder will actually receive. The determination as to whether an exchange
has the effect of distribution of a dividend is made on a
shareholder-by-shareholder basis.
Because of the application of Section 356 of the Code and Clark, the gain to be
realized by an INVETECH shareholder who receives APPLIED common stock and cash
in exchange for INVETECH's stock will be recognized, but not in excess of the
amount of cash received. If the exchange has the effect of the distribution of a
dividend (determined with application of Section 318(a)), then the amount of
gain recognized that is not in excess of each shareholder's ratable share of
undistributed earnings and profits should be treated as a dividend. The
determination of whether the exchange has the effect of the distribution of a
dividend will be made on a shareholder-by-shareholder basis. No loss should be
recognized on the exchange. This determination is based on the representation
that the fair market value of APPLIED common stock and cash consideration
(including the $10,000,000 placed in escrow) received by each INVETECH Class A
and Class B shareholder will be approximately equal to the fair market value of
INVETECH common stock surrendered in the exchange. Each shareholder should
contact his, her or its own tax advisor as to the application of Section 356(a).
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Section 358(a)(1) of the Code provides that in the case of an exchange to which
Section 354 or Section 356 applies, the basis of the property to be received
without the recognition of gain or loss shall be the same as that of the
property exchanged, decreased by (i) the fair market value of any other property
(except money) received by the taxpayer, (ii) the amount of money received by
the taxpayer, and (iii) the amount of loss to the taxpayer which was recognized
on such exchange, and increased by (i) the amount which was treated as a
dividend, and (ii) the amount of gain to the taxpayer which was recognized in
such exchange (not including any portion of such gain which was treated as a
dividend).
Because the Merger constitutes an exchange to which Section 354 or Section 356
of the Code applies, the basis of the APPLIED common stock (including fractional
share interests that an INVETECH shareholder would otherwise be entitled to)
received by an INVETECH shareholder who exchanges INVETECH stock solely for
APPLIED stock will be the same as the basis of the INVETECH common stock
surrendered in exchange therefor. The basis of the APPLIED common stock
(including fractional share interests that an INVETECH shareholder would
otherwise be entitled to) received by an INVETECH shareholder who exchanges
INVETECH stock for APPLIED stock and cash will be the same as the basis of the
INVETECH common stock surrendered in exchange, decreased by the amount of cash
received, and increased by the amount of cash received that is treated as a
dividend (if any), and by the amount of gain recognized on the exchange.
Section 1223(1) of the Code provides that in determining the period for which
the taxpayer has held property received in an exchange, there shall be included
the period for which the taxpayer held the property exchanged if the property
has, for the purpose of determining gain or loss from a sale or exchange, the
same basis (in whole or in part) in its hands as the property exchanged. In the
case of such exchanges after March 1, 1954, the property exchanged at the time
of such exchange must be a capital asset as defined in Section 1221 or property
described in Section 1231. Because the basis of the APPLIED common stock will
have the same basis (in whole or in part) as the INVETECH common stock
exchanged, the holding period of the APPLIED common stock will include the
period for which the INVETECH common stock was held, provided that such stock
was a capital asset on the date of the exchange.
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Section 302(b)(3) of the Code provides that if a redemption is in complete
redemption of all of the stock of a corporation owned by a shareholder, such
redemption shall be treated as a distribution in part or in full payment in
exchange for such stock. Accordingly, for the INVETECH shareholders that will
receive cash only in the Merger, such cash will be treated as received by the
INVETECH shareholder as a distribution in redemption of the shareholder's stock,
subject to the provisions and limitations of Section 302. This determination is
based on the representation that the fair market value of APPLIED common stock
and cash consideration (including the $10,000,000 placed in escrow) received by
each INVETECH Class A and Class B shareholder will be approximately equal to the
fair market value of INVETECH common stock surrendered in the exchange. Each
shareholder should contact his, her or its own tax advisor.
Revenue Ruling 66-365 provides that cash received by a shareholder as part of a
plan of reorganization under section 368(a)(1)(A) of the Code, which is
attributable to fractional shares of stock of the acquiring corporation, will be
treated as if the fractional shares were distributed as part of the exchange and
then were redeemed by the acquirer. Under section 302(a), such cash payments
will be treated as having been received as distributions in full payment in
exchange for the stock redeemed provided the redemption is not essentially
equivalent to a dividend.
Revenue Procedure 77-41 provides that the IRS will issue an advance ruling under
section 302(a) of the Code that cash to be distributed to shareholders in lieu
of fractional share interest arising in corporate reorganizations will be
treated as having been received in part or in full payment in exchange for the
stock redeemed if the cash distribution is undertaken solely for the purpose of
saving the corporation the expense and inconvenience of issuing and transferring
fractional shares, and is not separately bargained-for consideration. The
purpose of the transaction giving rise to the fractional share interest, the
maximum amount of cash that may be received by any one shareholder, and the
percentage of the total consideration that will be cash are among the factors
that will be considered in determining whether a ruling is to be issued.
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It has been represented that the payment of cash in lieu of fractional shares of
APPLIED common stock is solely for the purpose of avoiding the expense and
inconvenience to APPLIED of issuing fractional shares and does not represent
separately bargained-for consideration. The total cash consideration that will
be paid in the transaction to INVETECH shareholders instead of APPLIED stock
will not exceed one percent of the total consideration that will be issued in
the transaction to INVETECH shareholders in exchange for their shares of
INVETECH stock. The fractional share interest of each INVETECH shareholder will
be aggregated, and no INVETECH shareholder will receive cash in an amount equal
to or greater than the value of one full share of APPLIED stock. Accordingly,
cash received by an INVETECH shareholder otherwise entitled to receive a
fractional share of APPLIED common stock in the exchange will be treated as if
the fractional shares were distributed as part of the exchange and were then
redeemed by APPLIED. These cash payments will be treated as having been received
as distributions if full payment in exchange for the stock redeemed as provided
in Section 302(a). This receipt of cash will result in gain or loss measured by
the difference between the basis of such fractional share interest and the cash
received. Such gain or loss will be capital gain or loss to the INVETECH
shareholder, provided the INVETECH common stock was a capital asset in the hands
of such shareholder.
Section 381(a)(2) of the Code provides that in the case of the acquisition of
assets from another corporation in a transfer to which Sections 361 and
368(a)(1)(A) apply, the acquiring corporation shall succeed to and take into
account, as of the close of the date or dates of such transfer, the items of the
transferor described in Section 381(c), subject to the conditions and
limitations specified in Section 381(b) and (c). Section 1.381(a)-1(a) of the
Regulations provides that the items of the transferor described in Section
381(c) which the acquiring corporation succeeds to and takes into account are
subject to the provisions and limitations specified in Sections 381, 382 and 383
and the regulations thereunder. Because the assets of INVETECH will be
transferred to Merger Sub in a transaction to which Sections 361 and
368(a)(1)(A) apply, Merger Sub will succeed to and take into account the items
of INVETECH described in Section 381(c), subject to the conditions and
limitations specified in Sections 381(b) and (c).
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Section 381(c)(2) of the Code and Section 1.381(c)(2)-1 of the Regulations
provide that in the case of a transfer described in Section 381(a), the earnings
and profits of the transferor corporation, or deficit in earnings and profits,
shall be deemed to have been received or incurred by the acquiring corporation
as of the close of the date or dates of the transfer, except that any deficit in
earnings and profits of either the transferor corporation or the acquiring
corporation should be used only to offset earnings and profits accumulated after
the date of the transfer. Because the transfer of assets from INVETECH to Merger
Sub will be a transfer described in Section 381(a), the earnings and profits, or
deficit in earnings and profits, of INVETECH will be deemed to have been
received or incurred by Merger Sub as of the close of the date or dates of
transfer, except that any deficit in earnings and profits of INVETECH, on one
hand, or Merger Sub, on the other hand, should be used only to offset earnings
and profits accumulated after the date of transfer.
GENERAL
This opinion is based solely upon:
1. Our assumption (without independent investigation or review) that all
of the representations and all of the original, copies, and signatures
of documents are accurate, true and authentic.
2. Our assumption that there will be timely execution and delivery of, and
performance as required by the representations and documents.
3. The law, regulations, cases, rulings and other tax authorities in
effect as of the date of this letter. If there are any significant
changes of the foregoing tax authorities (for which we shall have no
responsibility to advise you), it may result in our opinion being
rendered invalid or necessitate, upon your request, a reconsideration
of the opinion.
4. APPLIED stock will be at least $28.62 per share at the time of closing.
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Our opinion is limited to the specific federal income tax consequences of the
Merger. We have not considered the consequences to the parties involved of any
tax besides the federal income tax.
We note that the federal income tax consequences to the parties involved
relating to the transactions described herein are complex and subject to varying
interpretations. While this opinion letter represents our considered judgment as
to the proper tax treatment to the parties concerned, it is not binding on the
IRS or the courts and should not be considered a guarantee that the IRS or the
courts will concur with our opinion.
Deloitte & Touche, LLP consents to inclusion of this opinion as an exhibit to
Registration Statement No. 333-27801 on Form S-4 and any amendments thereto.
This opinion letter is solely for the benefit of INVETECH, its shareholders and
for inclusion in Form S-4 as filed with the Securities and Exchange Commission
with regard to the transaction discussed herein. Other than the uses indicated
in the preceding sentence, this opinion may not be relied upon, distributed, or
disclosed by anyone without the prior written consent of Deloitte & Touche, LLP.
Deloitte & Touche, LLP
<PAGE> 1
EXHIBIT 23(b)
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES
We consent to the use in this Registration Statement No. 333-27801 of Applied
Industrial Technologies, Inc. on Form S-4 of our report dated August 6, 1996,
appearing in the Prospectus, which is part of this Registration Statement, and
to the reference to us under the heading "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Applied Industrial
Technologies, Inc., listed in Item 21(b). This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
July 7, 1997
<PAGE> 1
EXHIBIT 23(c)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of No. 333-27801 Applied
Industrial Technologies Inc. on Form S-4 of our report dated February 10, 1997
(April 29, 1997 as to Note 12) appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Detroit, Michigan
July 7, 1997
