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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended June 30, 1998
Commission File No. 1-2299
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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OHIO 34-0117420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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ONE APPLIED PLAZA, CLEVELAND, OHIO 44115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000.
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
Common Stock, without par value New York Stock Exchange
Preferred Stock Purchase Rights
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the price at which
the common equity was sold as of the close of business on August 31, 1998:
$353,475,647.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 31, 1998
Common Stock, without par value 22,107,433
DOCUMENTS INCORPORATED BY REFERENCE
Listed hereunder are the documents, portions of which are incorporated by
reference, and the Parts of this Form 10-K into which such portions are
incorporated:
(1) Applied Industrial Technologies, Inc. 1998 Annual Report
to shareholders for the fiscal year ended June 30, 1998,
portions of which are incorporated by reference into Parts I,
II and IV of this Form 10-K; and,
(2) Applied Industrial Technologies, Inc. Proxy Statement
dated September 15, 1998, portions of which are incorporated
by reference into Parts III and IV of this Form 10-K.
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PART I.
ITEM 1. BUSINESS.
Applied Industrial Technologies, Inc. ("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, hydraulic and pneumatic (together referred to as
fluid power) products and systems, linear motion products and general
maintenance and specialty repair items manufactured by others. Applied
distributes its products to a wide variety of industrial customers primarily in
the United States. Applied and its predecessor companies have been engaged in
this business since 1923. The company 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.
(a) GENERAL DEVELOPMENT OF BUSINESS.
Effective August 1, 1997, Applied acquired INVETECH Company
("Invetech"), a privately held distributor of industrial components, for
approximately 3.2 million shares of Applied Common Stock (as adjusted for the
September 15, 1997 three-for-two stock split) and $23.4 million in cash.
Invetech, together with its subsidiaries, American Bearing and Power
Transmission, Inc. and Moore Bearing Company, had approximately 980 employees
and revenues of $321 million in the 12 months ended June 30, 1997. All Invetech
locations now operate under the Applied Industrial Technologies name.
The Invetech acquisition extended Applied's geographic reach into
Michigan and Colorado and added substantial expertise in serving the automotive
industry. Invetech's experience with linear motion technology enabled Applied to
establish linear motion products as a new strategic business unit in fiscal
1998. The linear motion offering has been expanded nationwide with additional
products.
Applied completed six other acquisitions in fiscal 1998 for purchase
prices totaling $18.1 million: Midwest Rubber and Supply Company, a full-service
rubber fabrication and repair shop in Denver; Air and Hydraulics Engineering,
Inc., a fluid power distributor with locations in Birmingham and Atlanta; Power
Hydraulics, Inc., a fluid power distributor in Chicago; Associated Bearings
Company, an eight-branch distributor of bearings, power transmission products
and industrial supplies serving Arkansas, Kansas and Missouri; Rubber Supply
Company, a distributor and fabricator of industrial rubber products with
branches in Salt Lake City and Elko, Nevada; and La Porte Maintenance Supply,
Inc., a bearings and power transmission products distributor in La Porte,
Indiana. In addition, in July 1998 Applied acquired Elect-Air Tool Co. and
Fornaciari Company, distributors of pneumatic power components and hydraulic
power components, respectively, each with two locations in California.
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Applied achieved ISO 9002 registration at its corporate headquarters,
34 branches and 12 shops in fiscal 1998. Additional facilities will seek
registration in fiscal 1999.
Further information regarding developments in Applied's business can be
found in Applied's 1998 Annual Report to shareholders under the caption
"Management's Discussion and Analysis" on pages 12 and 13, which is incorporated
herein by reference.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Applied considers its business to involve only one industry segment.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
Products. Applied engages in the distribution and sale of ball, roller,
mounted and plane bearings, mechanical and electrical drive system products,
industrial rubber products, fluid power products and systems, linear motion and
position control products and general maintenance and specialty items used in
connection with the foregoing such as seals, sealants, fluid sealing, "O" rings,
retaining rings, adhesives, lubricants, maintenance tools and equipment, and
safety and hygiene products. Although Applied does not generally manufacture the
products that it sells, it does assemble certain products and perform
product-related services as described below in "Services".
Applied is a non-exclusive distributor for numerous manufacturers of
the products that it sells. The following are the principal product lines
distributed by Applied:
- Bearings. American, Barden, Dodge, FAG, INA, Kaydon,
Link-Belt, McGill, MRC, Rexnord, Sealmaster, SKF, Symmco,
Timken and Torrington/Fafnir.
- Drive Systems. Baldor, Boston Gear, Browning, Control
Techniques, Falk, Foote Jones, Jeffrey, Kop-Flex, Lovejoy,
Martin, Morse, Reliance/Dodge, Rexnord/Link-Belt, Saftronics,
Sumitomo, U.S. Electrical Motors and Winsmith.
- Industrial Rubber. Aeroquip, Dixon, Flexco, Fusion, Gates,
Goodyear, Habasit, Scandura, Siegling and Weatherhead.
- Fluid Power. Bimba, Bosch, Dana, Denison, Donaldson, Eaton
Char-Lynn, Ingersoll Rand-ARO and Schrader Bellows.
- Linear Motion. Applied Motion Products, Duff-Norton, INA,
Nook, Thomson and Star.
- Specialty items. 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 supplier relationships are generally good and
that Applied can continue to represent these suppliers. The loss of certain
suppliers could have an adverse effect on Applied's business.
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Based on Applied's analysis of product dollar sales volume for fiscal
1998, bearings represented 35%, drive system products represented 31%, specialty
items represented 12%, and other items, including industrial rubber, fluid power
products and linear motion products, represented 22% of sales. Sales of linear
motion products have been counted separately from bearings beginning in fiscal
1998. In fiscal 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. In fiscal
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.
Fluid power products are distributed not only though Applied's branch
network, but also by several businesses focused on fluid power. These businesses
operate in distinct geographic areas under the following names: Air and
Hydraulics Engineering (Southeast), Dees Fluid Power (Mid-Atlantic), Elect-Air
(California and Arizona), Engineered Sales (Midwest) and Fornaciari (California
and Arizona).
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 sales efforts. Beyond acting as a mere
distributor, Applied markets itself 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's sales personnel consist of customer service and field account
representatives assigned to each Applied branch, in addition to industry and
product specialists. Customer service representatives receive, process and
expedite customer orders, provide product and pricing information, and assist
field account representatives in serving customers. Field account
representatives make on-site calls to customers and potential customers to
provide product and pricing information, conduct surveys of customer
requirements and make recommendations, and assist in implementing maintenance
programs. Using Applied's proprietary Documented Value Added(R) software
program, representatives can measure and document for a customer the value to
the customer, through cost savings or increased productivity, of Applied's
services and advice. Industry and product specialists assist with applications
particular to their areas of technical expertise. Applied has also established
Centers of Expertise, staffed by skilled technicians who provide consultation
and training services with respect to particular product technologies.
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Applied maintains inventory levels at each branch that are tailored to
meet customers' immediate needs. Applied also maintains back-up inventory in its
distribution centers, enabling customers to minimize their own inventories.
These inventories consist of certain standard items stocked at most branches as
well as other items related to customers' specific needs in the particular
locale. As a result, each branch's business is concentrated largely in the
geographic area in which the branch is located.
In addition to its branches, Applied maintains a network of mechanical,
rubber and fluid power shops. Applied's mechanical shops rebuild and assemble
speed reducers, pumps, valves, cylinders and hydraulic motors, provide custom
machining, assemble electrical panels and fluid power systems to customer
specifications, and perform systems automation services. These shops are located
in the following cities:
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- Corona, California - Iron Mountain, Michigan
- Tracy, California - Butte, Montana
- Denver, Colorado - Cleveland, Ohio
- Atlanta, Georgia - Carlisle, Pennsylvania
- Florence, Kentucky - Ft. Worth, Texas
- Worcester, Massachusetts - Longview, Washington
- Detroit, Michigan
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Applied's rubber shops modify and repair belts and provide hose
assemblies in accordance with customer requirements. These shops are located in
the following cities:
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- Tucson, Arizona - Billings, Montana
- Corona, California - Dayton, New Jersey
- Tracy, California - Fort Worth, Texas
- Denver, Colorado - Longview, Washington
- Atlanta, Georgia - Appleton, Wisconsin
- Crestwood, Illinois
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Besides the services offered at the rubber shops, Applied's field crews
perform belt installation and repair services and rubber lining installation
services on-site at customer locations in select geographic areas.
Applied's fluid power centers assemble fluid power systems and
components and offer technical expertise to customers. These centers are located
in the following cities:
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- Birmingham, Alabama - Worcester, Massachusetts
- Corona, California - Maryland Heights, Missouri
- Ontario, California - Limerick, Pennsylvania
- Tracy, California - Richmond, Virginia
- Baltimore, Maryland - Kent, Washington
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Timely delivery of products to customers is an integral part of
Applied's service. Branches and distribution centers use 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 vehicles to deliver products to customers. These transportation
services and delivery vehicles are also used to move products between suppliers,
distribution centers and branches in order to assure availability of merchandise
for customer needs.
Applied's ability to serve its customers is enhanced by its
computerized inventory and sales information systems. Applied's point-of-sale
OMNEX(R) computer system gives each Applied location on-line access to
inventory, sales analysis and data. Inventory and sales information is updated
as transactions are entered. The system permits direct access for order entry,
pricing and price auditing, order expediting and back order review. Applied's
computer systems also permit Electronic Data Interchange (EDI) and Electronic
Funds Transfer (EFT) 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. There can be
no assurance that this practice will continue, however, and any discontinuance
of this practice could have an adverse effect on Applied's business.
There is a trend among large industrial customers towards reducing the
number of suppliers of maintenance and replacement products with whom they deal.
Applied is responding to this trend by continuing to broaden its product
offering and developing new methods for marketing its products, such as through
various integrated supply channels. There can be no guarantee, however, that
this trend will not have an adverse effect on Applied's business.
Applied's industry has experienced an increase in the number of
customers wishing to order product by electronic means, including through
electronic catalogs and Internet-based marketing systems. Applied is responding
to this trend by developing new avenues (in addition to EDI) to accommodate
current customers and to reach new customers adopting electronic purchasing
methods.
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, linear motion products and general maintenance and
specialty items and resells to a wide variety of industries, including
industrial machinery, forest products, automotive, primary metals, agriculture
and food processing, chemical processing, transportation, mining, textiles and
utilities. Its customers range
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from the largest industrial concerns in the United States to the smallest.
Applied's business is not significantly dependent on a single customer or group
of customers, the loss of which would have a material adverse effect on
Applied's business as a whole, and no single customer accounts for more than 2%
of Applied's net sales.
At June 30, 1998, Applied had 400 branches in 45 states. Applied has no
operations outside the United States.
Applied's export business during the fiscal year ended June 30, 1998
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, its markets present few economic or technological
barriers to entry, although longstanding supplier and customer relationships may
operate as barriers. Applied's principal competitors are other specialized
bearing, drive system product, industrial rubber product, fluid power, linear
motion 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. A number of these
competitors may have greater financial resources than Applied. There is a trend
in the industry toward larger multiple branch operations.
Applied also competes with the original equipment manufacturers and
their distributors in the sale of maintenance and replacement components. Some
of these manufacturers may have greater financial resources than Applied. The
identity and 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.
Applied is one of the leading distributors of replacement bearings,
drive system products, industrial rubber products, fluid power products, linear
motion products and specialty items in the United States, but Applied's market
share for those products in any given geographic area may be relatively small
compared to the portion of the market served by original equipment manufacturers
and other distributors.
Backlog and Seasonality. Applied does not have a substantial backlog of
orders and backlog is not significant in the business of Applied because prompt
delivery of most 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 on general industrial activities and economic conditions and would be
adversely affected by the unavailability of raw materials to its suppliers,
prolonged labor disputes experienced by suppliers or customers, or by any
prolonged recession or depression that has an adverse effect on American
industrial activity generally. In recent months, for example, Applied was
adversely affected by the General Motors Corporation labor strike and the impact
of the Asian economic slowdown on the operations of certain of Applied's
customers.
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Number of Employees. On June 30, 1998, Applied had 5,061 employees.
Applied considers its relationship with its employees to be generally favorable.
Working Capital. Applied's working capital position is disclosed in the
financial statements referred to at Item 14 on page 15 of this Report and is
discussed in "Management's Discussion and Analysis" set forth in Applied's 1998
Annual Report to shareholders on pages 12 and 13.
Applied requires substantial working capital related to accounts
receivable and inventories. Significant amounts of inventory are 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 these
practices are consistent with prevailing industry practices.
Environmental Laws. Applied believes that compliance with federal,
state and local provisions regulating the discharge of materials into the
environment or otherwise relating to environmental protection will not have a
material adverse effect upon Applied's capital expenditures, earnings or
competitive position.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES.
Applied has no operations outside the United States. Applied's export
business during the fiscal year ended June 30, 1998, and prior fiscal years, was
less than 2% of net sales, and is not concentrated in any one geographic area.
(e) CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM
ACT.
This report, including the documents incorporated by reference,
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. Applied intends that
all 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 those
statements should not be regarded as a representation by Applied or any other
person that the results expressed in the statements will be achieved.
Important risk factors include, but are not limited to, those
identified in "Narrative Description of Business", above, and the following:
changes in the economy; changes in customer procurement policies and practices;
changes in product manufacturer sales policies and practices; the availability
of product; changes in operating expenses; the effect of price increases; the
variability and timing of business opportunities including acquisitions,
customer agreements, supplier authorizations and other business strategies;
Applied's ability to realize the anticipated benefits of acquisitions; the
incurrence of additional debt and contingent liabilities in connection
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with acquisitions; changes in accounting policies and practices; the effect of
organizational changes within Applied; adverse effects of the Year 2000 problem
on the businesses of Applied, its suppliers and customers; adverse results in
significant litigation matters; adverse state and federal regulation and
legislation; and the occurrence of extraordinary events (including prolonged
labor disputes, natural events and acts of God, fires, floods and accidents).
ITEM 2. PROPERTIES.
Applied owns or leases the properties in which its offices, branches,
distribution centers, shops and corporate facilities are located. As of June 30,
1998, Applied owned real properties at 187 locations and leased 230 locations.
Certain 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) as of June 30, 1998 were:
- the distribution center, mechanical shop and rubber shop in
Atlanta, Georgia
- the distribution center and mechanical shop in Florence,
Kentucky
- the mechanical shop in Cleveland, Ohio
- the distribution center and rubber shop in Portland, Oregon
- the distribution center and mechanical shop in Carlisle,
Pennsylvania
The principal real properties leased by Applied (each of which has more
than 20,000 square feet of floor space) as of June 30, 1998 were:
- the corporate headquarters facility in Cleveland, Ohio
- the distribution center, offices, mechanical shop and rubber shop
in Corona, California the branch in Long Beach, California
- the branch in San Jose, California
- the fluid power shop, rubber shop and mechanical shop in Tracy,
California
- the distribution center in Denver, Colorado
- the rubber shop and mechanical shop in Denver, Colorado
- the branch in Kansas City, Missouri
- the branch and mechanical shop in Worcester, Massachusetts
- the branch in Grand Rapids, Michigan
- the branch in Southfield, Michigan
- the branch in Portland, Oregon
- the distribution center, mechanical shop and rubber shop in Fort
Worth, Texas
- the branch in Longview, Washington
- the distribution center, mechanical shop and rubber shop in
Longview, Washington
- the offices, branch and rubber shop in Appleton, Wisconsin
- the branch in Milwaukee, Wisconsin
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Applied considers its owned and leased properties generally sufficient
to meet its requirements for office space and inventory stocking. The size of
Applied's branches is primarily influenced by the amount of inventory the branch
requires to meet its customers' needs. Applied uses in its business all of its
owned and leased properties except for certain properties, which in the
aggregate are not material and are either for sale or lease to third parties due
to a facility's relocation or closing. Applied may lease or sublease to others
unused portions of buildings.
Generally, when opening a new branch, Applied will 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. Although Applied has emphasized leasing real property in recent
years, 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 leased or purchased. 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 branch or distribution
center, other suitable property could be found.
ITEM 3. PENDING LEGAL PROCEEDINGS.
In May 1998, Applied Industrial Technologies--Dixie, Inc., a
wholly-owned subsidiary of Applied, was served with a Fifth Amending and
Supplemental Petition in a case captioned WALTER R. REED, ET AL. V. METROPOLITAN
LIFE INSURANCE COMPANY, ET AL., 20th Judicial District Court for the Parish of
West Feliciana, Louisiana, Case No. 13,836, naming it as an additional
defendant, along with approximately 75 other defendants. The action was
initially filed in 1995. The petition claims to have been filed on behalf of
approximately 449 persons or heirs of persons who were allegedly exposed to
asbestos-containing products while employed at a St. Francisville, Louisiana,
paper mill currently owned by Crown Vantage Corporation. Exposure is claimed to
have occurred until approximately 1988. The plaintiffs claim they or their
decedents contracted asbestos-related diseases, and where applicable, died as a
result of exposure to asbestos. Compensatory and punitive damages are sought,
but no amount is specified.
Preliminary information made available to Applied indicates that
Applied has been named a defendant in the foregoing cases only as a possible
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of Applied's security holders
during the last quarter of fiscal 1998.
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EXECUTIVE OFFICERS OF THE REGISTRANT.
The Executive Officers 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 list of Applied's Executive Officers 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 21, 1997:
John C. Dannemiller. Mr. Dannemiller is Chairman (since 1992),
Chief Executive Officer (since 1992) and President (since October
1996), and has served as a member of the Board of Directors since 1985.
He is 60 years of age.
Todd A. Barlett. Mr. Barlett is Vice President-National
Accounts & Alliance Systems (since August 1998). He was Vice
President-Southeast Area (from January 1995 to August 1998) and
Southeast Area Manager (from July 1993 to January 1995). He is 43 years
of age.
Donald L. Chargin. Mr. Chargin is Vice President-Sales and
Field Operations (since August 1998). He was Vice President-Western
Area (from January 1995 to August 1998) and Western Area Manager (from
July 1993 to January 1995). He is 43 years of age.
Mark O. Eisele. Mr. Eisele is Vice President & Controller
(since October 1997). He was Controller (from 1992 to October 1997). He
is 41 years of age.
James T. Hopper. Mr. Hopper is Vice President-Information
Systems (since January 1995). He was Director of Information Systems
from July 1993 to January 1995. He is 55 years of age.
Justin M. Jacobi. Mr. Jacobi is Vice President-Marketing &
Strategic Planning (since August 1998). He was Vice President-Field
Operations (from March 1998 to August 1998), Vice President-Northeast
Area (from January 1997 to March 1998) and Marketing Director for
Bearing Products (from July 1994 to January 1997). Prior to joining
Applied, he was General Manager, Western Region with FAG Bearings
Corporation (from April 1993 to July 1994). He is 38 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 Company (from 1992 to December 1994). He is 55 years of
age.
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Jeffrey A. Ramras. Mr. Ramras is Vice President-Logistics
(since January 1995). He was Director of Logistics (from September 1994
to January 1995) and Marketing Director of Bearing Products (from 1992
to September 1994). He is 43 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). He is 49 years of age.
Robert C. Stinson. Mr. Stinson is Vice President-Chief
Administrative Officer, General Counsel & Secretary (since October
1997). He was Vice President-Administration, Human Resources, General
Counsel & Secretary (from October 1994 to October 1997) and has served
as Secretary since 1990. He was Vice President-General Counsel (from
1989 to October 1994). He is 52 years of age.
John R. Whitten. Mr. Whitten is Vice President-Chief Financial
Officer & Treasurer (since October 1997). He was Vice President-Finance
& Treasurer (from 1992 to October 1997). He is 52 years of age.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Applied's Common Stock, without par value, is listed for trading on the
New York Stock Exchange under the ticker symbol APZ. The information concerning
the principal market for Applied's Common Stock, the quarterly stock prices and
dividends for the fiscal years ended June 30, 1998 and 1997 and the number of
shareholders of record as of August 17, 1998 is set forth in Applied's 1998
Annual Report to shareholders on page 27, under the caption "Quarterly Operating
Results and Market Data", and that information is incorporated here by
reference.
ITEM 6. SELECTED FINANCIAL DATA.
The summary of selected financial data for each of the last five years
is set forth in Applied's 1998 Annual Report to shareholders in the table on
pages 28 and 29 under the caption "10 Year Summary" and is incorporated here by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The "Management's Discussion and Analysis" is set forth in Applied's
1998 Annual Report to shareholders on pages 12 and 13 and is incorporated here
by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and supplementary data
of Applied and its subsidiaries and the independent auditors' report listed
below, which are included in Applied's 1998 Annual Report to shareholders at the
pages indicated, are incorporated here by reference and filed herewith:
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CAPTION PAGE NO.
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Financial Statements:
Statements of Consolidated
Income for the Years Ended
June 30, 1998, 1997 and 1996 14
Consolidated Balance Sheets
June 30, 1998 and 1997 15
Statements of Consolidated
Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996 16
Statements of Consolidated
Shareholders' Equity for the
Years Ended June 30, 1998,
1997 and 1996 17
Notes to Consolidated
Financial Statements for the
Years Ended June 30, 1998, 1997
and 1996 18 - 24
Independent Auditors' Report 25
Supplementary Data:
Quarterly Operating Results and
Market Data 27
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item as to the Directors is set forth
in Applied's Proxy Statement dated September 15, 1998 on pages 3 through 5 under
the caption "Election of Directors" and is incorporated here by reference. The
information required by this Item as to the Executive Officers has been
furnished in this Report on pages 11 and 12 in Part I, after Item 4, under the
caption "Executive Officers of the Registrant". The information required by this
Item as to Forms 3, 4 or 5 reporting delinquencies is set forth in Applied's
Proxy Statement on page 16 under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated here by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth in Applied's Proxy
Statement dated September 15, 1998, under the captions "Summary Compensation" on
page 7, "Aggregate Option Exercises and Fiscal Year-End Option Value Table" on
page 8, "Estimated Retirement Benefits Under Supplemental Executive Retirement
Benefits Plan" on page 8, "Compensation of Directors" on pages 12 and 13,
"Deferred Compensation Plan for Non-employee Directors" on page 13, "Deferred
Compensation Plan" on pages 13 and 14, and "Change in Control Agreements and
Other Related Arrangements" on pages 14 and 15, and is incorporated here by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
Information concerning the security ownership of certain beneficial
owners and management is set forth under the caption "Beneficial Ownership of
Certain Applied Shareholders and Management" on page 6 of Applied's Proxy
Statement dated September 15, 1998, and is incorporated here by reference.
14
<PAGE> 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions
is set forth under the caption "Certain Relationships and Related Transactions"
on page 12 of Applied's Proxy Statement dated September 15, 1998 and is
incorporated here by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K.
(a)1. FINANCIAL STATEMENTS.
The following consolidated financial statements of Applied, notes
thereto, the independent auditors' report and supplemental data are included in
Applied's 1998 Annual Report to shareholders on pages 14 through 25 and page 27,
and are incorporated by reference in Item 8 of this Report.
CAPTION
Statements of Consolidated Income for the
Years Ended June 30, 1998, 1997 and 1996
Consolidated Balance Sheets
June 30, 1998 and 1997
Statements of Consolidated Cash Flows for
the Years Ended June 30, 1998, 1997 and 1996
Statements of Consolidated Shareholders'
Equity for the Years Ended June 30, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
for the Years Ended June 30, 1998, 1997
and 1996
Independent Auditors' Report
Supplementary Data:
Quarterly Operating Results and Market Data
15
<PAGE> 17
(a)2. FINANCIAL STATEMENT SCHEDULE.
The following Report and Schedule are included in this Part IV, and are
found in this Report at the pages indicated:
<TABLE>
<CAPTION>
CAPTION PAGE NO.
<S> <C>
Independent Auditors' Report 20
Schedule VIII - Valuation and
Qualifying Accounts 21
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions, are not
applicable, or the required information is included in the consolidated
financial statements and notes thereto.
(a)3. EXHIBITS.
* Asterisk indicates an executive compensation plan or
arrangement.
Exhibit
No. DESCRIPTION
3(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc., as amended on November
5, 1997 (filed as Exhibit 4(a) to Applied's
Form 10-Q for the quarter ended December 31,
1997, SEC File No. 1-2299, and incorporated
here by reference).
3(b) Code of Regulations of Applied adopted
September 6, 1988 (filed as Exhibit 3(b) to
Applied's Registration Statement on Form S-4
filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
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 and Plan of
Reorganization dated September 6, 1988
(filed as Exhibit 4(a) to Applied's
Registration Statement on Form S-4 filed May
23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(b) $80,000,000 Maximum Aggregate Principal
Amount Note Purchase and Private Shelf
Facility dated October 31, 1992 between
Applied
16
<PAGE> 18
and The Prudential Insurance Company of
America (as amended and restated) (filed as
Exhibit 4(b) to Applied's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated
here by reference).
4(c) Amendment to $80,000,000 Maximum Aggregate
Principal Amount Note Purchase Agreement and
Private Shelf Facility dated October 31,
1992 between Applied and The Prudential
Insurance Company of America (filed as
Exhibit 4(g) to Applied's Form 10-Q for the
quarter ended March 31, 1996, SEC file No.
1-2299, and incorporated here by reference).
4(d) $50,000,000 Private Shelf Agreement dated as
of November 27, 1996, as amended on January
30, 1998, between Applied and The Prudential
Insurance Company of America (filed as
Exhibit 4(f) to Applied's Form 10-Q for the
quarter ended March 31, 1998, SEC File No.
1-2299, and incorporated here by reference).
4(e) Rights Agreement, dated as of February 2,
1998, between Applied and Harris Trust and
Savings Bank, as Rights Agent, which
includes as Exhibit B thereto the Form of
Rights Certificate (filed as Exhibit No. 1
to Applied's Registration Statement on Form
8-A filed July 20, 1998, SEC File No.
1-2299, and incorporated here by reference).
*10(a) Form of Amended and Restated Change in
Control Agreement between Applied and each
of its executive officers (filed as Exhibit
10(b) to Applied's Form 10-Q for the quarter
ended March 31, 1998, SEC File No. 1-2299,
and incorporated here by reference).
*10(b) A written description of the Directors'
compensation program is found in Applied's
Proxy Statement dated September 15, 1998,
SEC File No. 1-2299, on pages 12 and 13,
under the caption "Compensation of
Directors", and is incorporated here by
reference.
*10(c) Applied Deferred Compensation Plan for
Non-employee Directors (January 1, 1997
Restatement) (filed as Exhibit 10(d) to
Applied's Registration Statement on Form S-4
filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
*10(d) First Amendment to Deferred Compensation
Plan for Non-employee Directors (January 1,
1997 Restatement) dated May 1, 1998.
*10(e) A written description of Applied's Life and
Accidental Death and Dismemberment Insurance
for executive officers (filed as Exhibit
17
<PAGE> 19
10(b) to Applied's Form 10-Q for the quarter
ended December 31, 1997, SEC File No.
1-2299, and incorporated here by reference).
*10(f) A written description of Applied's Long-Term
Disability Insurance for executive officers
(filed as Exhibit 10(c) to Applied's Form
10-Q for the quarter ended December 31,
1997, SEC File No. 1-2299, and incorporated
here by reference).
*10(g) Form of Director and Officer Indemnification
Agreement entered into between Applied and
each of its directors and executive officers
(filed as Exhibit 10(g) to Applied's
Registration Statement on Form S-4 filed May
23, 1997, Registration No. 333-27801, and
incorporated here by reference).
*10(h) Applied Supplemental Executive Retirement
Benefits Plan (July 1, 1997 Restatement)
presently covering 8 Applied executive
officers (as well as certain former
executive officers) (filed as Exhibit 10(a)
to Applied's Form 10-Q for the quarter ended
September 30, 1997, SEC File No. 1-2299, and
incorporated here by reference).
*10(i) Applied Deferred Compensation Plan (January
1, 1997 Restatement) (filed as Exhibit 10(j)
to Applied's Registration Statement on Form
S-4 filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
*10(j) First Amendment to Deferred Compensation
Plan (January 1, 1997 Restatement) dated
May 1, 1998.
*10(k) 1997 Long-Term Performance Plan adopted by
Shareholders on October 21, 1997 (filed as
Exhibit 10(a) to Applied's Form 10-Q for the
quarter ended December 31, 1997, SEC File
No. 1-2299, and incorporated here by
reference).
*10(l) A written description of Applied's
Management Incentive Plan applicable to key
executives, including the five most highly
compensated executive officers, is found in
Applied's Proxy Statement dated September
15, 1998, SEC File No. 1-2299, on pages 9
and 10, in the Report of the Executive
Organization & Compensation Committee of the
Board of Directors on Executive
Compensation, under the subcaption
"Management Incentive Plan", and is
incorporated here by reference.
*10(m) Applied Supplemental Defined Contribution
Plan (January 1, 1997 Restatement) (filed as
Exhibit 10(m) to Applied's Registration
18
<PAGE> 20
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated
here by reference).
10(n) Lease dated as of March 1, 1996 between
Applied and the Cleveland-Cuyahoga County
Port Authority (filed as Exhibit 10(n) to
Applied's Registration Statement on Form S-4
filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
10(o) Plan and Agreement of Merger among Applied,
I. C. Acquisition Corp. and INVETECH Company
dated as of April 29, 1997 (filed as Exhibit
2(a) to Applied's Registration Statement on
Form S-4 filed May 23, 1997, Registration
No. 333-27801, and incorporated here by
reference).
*10(p) Consulting, Non-competition and
Confidentiality Agreement among Applied, Oak
Grove Consulting Group, Inc. and J. Michael
Moore dated July 31, 1997 (filed as Exhibit
10(c) to Applied's Form 10-Q for the quarter
ended September 30, 1997, SEC File No.
1-2299, and incorporated here by reference).
*10(q) Non-qualified Deferred Compensation
Agreement between Applied and J. Michael
Moore effective as of December 31, 1997
(filed as Exhibit 10(a) to Applied's Form
10-Q for the quarter ended March 31, 1998,
SEC File No. 1-2299, and incorporated here
by reference).
13 Applied 1998 Annual Report to shareholders
(not deemed "filed" as part of this Form
10-K except for those portions that are
expressly incorporated by reference).
21 Subsidiaries of Applied at June 30, 1998.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
Applied will furnish a copy of any exhibit described above and not
contained herein upon payment of a specified reasonable fee which fee shall be
limited to Applied's reasonable expenses in furnishing such exhibit.
(b) REPORTS ON FORM 8-K.
None during the quarter ended June 30, 1998.
19
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Applied Industrial Technologies, Inc.
We have audited the consolidated balance sheets of Applied Industrial
Technologies, Inc. and its subsidiaries (the "Company") as of June 30, 1998 and
1997 and the related statements of consolidated income, shareholders' equity,
and cash flows for each of the years in the three year period ended June 30,
1998 and have issued our report thereon dated August 6, 1998; such consolidated
financial statements and report are included in your 1998 Annual Report to
shareholders and are incorporated herein by reference. Our audits also included
the consolidated financial statement schedule of the Company, listed in Item
14(a)2. This consolidated 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 consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 6, 1998
20
<PAGE> 22
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- --------
-----------------------------------
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND OTHER FROM AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30 1998:
Reserve deducted from assets to
which it applies - allowance for
doubtful accounts $2,400 $2,075 $1,165 (B) $2,140 (A) $3,500
YEAR ENDED JUNE 30 1997:
Reserve deducted from assets to
which it applies - allowance for
doubtful accounts $2,400 $1,743 $1,743 (A) $2,400
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
(A) Amounts represent uncollectible accounts charged off.
(B) Represents reserves recorded through purchase accounting for acquisitions made during the year.
- ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE VIII
</TABLE>
21
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
<TABLE>
<S> <C>
/s/ John C. Dannemiller
- ----------------------------------------
John C. Dannemiller, Chairman,
Chief Executive Officer & President
/s/ John R. Whitten /s/ Mark O. Eisele
- ----------------------------------------- ----------------------------------------
John R. Whitten Mark O. Eisele
Vice President-Chief Financial Officer Vice President & Controller
& Treasurer (Principal Accounting Officer)
</TABLE>
Date: September 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C>
/s/ William G. Bares /s/ Roger D. Blackwell
- ----------------------------------------- ----------------------------------------
William G. Bares, Director Dr. Roger D. Blackwell, Director
/s/ William E. Butler /s/ John C. Dannemiller
- ----------------------------------------- ----------------------------------------
William E. Butler, Director John C. Dannemiller, Chairman,
Chief Executive Officer, President and
Director
/s/ Russel B. Every /s/ Russell R. Gifford
- ----------------------------------------- ----------------------------------------
Russel B. Every, Director Russell R. Gifford, Director
/s/ L. Thomas Hiltz /s/ John J. Kahl
- ----------------------------------------- ----------------------------------------
L. Thomas Hiltz, Director John J. Kahl, Director
/s/ J. Michael Moore /s/ Dr. Jerry Sue Thornton
- ----------------------------------------- ----------------------------------------
J. Michael Moore, Director Dr. Jerry Sue Thornton, Director
- -------------------------------------
William G. Bares, as attorney
in fact for persons indicated by "*"
Date: September 22, 1998
</TABLE>
22
<PAGE> 24
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Exhibit
No. DESCRIPTION REFERENCE
- ------- ----------- ---------
<S> <C> <C>
3(a) Amended and Restated Articles of Incorporation
of Applied Industrial Technologies, Inc. Note (a)
3(b) Code of Regulations of Applied Industrial
Technologies, Inc., adopted September 6, 1988. Note (b)
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 and Plan of
Reorganization dated
September 6, 1988. Note (c)
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). Note (d)
4(c) Amendment to $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. Note (e)
4(d) $50,000,000 Private Shelf Agreement dated as of November 27,
1996, as amended on January 30, 1998, between Applied and The
Prudential Insurance Company of America. Note (f)
4(e) Rights Agreement, dated as of February 2, 1998, between
Applied and Harris Trust and Savings Bank, as Rights Agent,
which includes as Exhibit B thereto the Form of
Rights Certificate. Note (g)
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C> <C>
10(a) Form of Amended and Restated Change in
Control Agreement between Applied and
each of its executive officers. Note (h)
10(b) A written description of the Directors'
compensation program. Note (i)
10(c) Applied Deferred Compensation Plan for Non-
Employee Directors (January 1, 1997 Restatement). Note (j)
10(d) First Amendment to Deferred Compensation Plan
for Non-employee Directors (January 1, 1997
Restatement) dated May 1, 1998. Attached
10(e) A written description of Applied's Life and
Accidental Death and Dismemberment
Insurance for executive officers. Note (k)
10(f) A written description of Applied's Long-Term
Disability Insurance for executive officers. Note (l)
10(g) Form of Director and Officer Indemnification
Agreement entered into between Applied
and each of its directors and executive officers. Note (m)
10(h) Applied Supplemental Executive Retirement
Benefits Plan (July 1, 1997 Restatement)
presently covering 8 Applied executive officers
(as well as certain former executive officers). Note (n)
10(i) Applied Deferred Compensation Plan
(January 1, 1997 Restatement). Note (o)
10(j) First Amendment to Deferred Compensation
Plan (January 1, 1997 Restatement) dated
May 1, 1998. Attached
10(k) 1997 Long-Term Performance Plan adopted
by Shareholders on October 21, 1997. Note (p)
10(l) A written description of Applied's
Management Incentive Plan applicable to
key executives, including the five most
highly compensated executive officers. Note (q)
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C> <C>
10(m) Applied Supplemental Defined Contribution Plan
(January 1, 1997 Restatement). Note (r)
10(n) Lease dated as of March 1, 1996 between
Applied and the Cleveland-Cuyahoga County
Port Authority. Note (s)
10(o) Plan and Agreement of Merger among Applied,
I. C. Acquisition Corp. and INVETECH Company
dated as of April 29, 1997. Note (t)
10(p) Consulting, Non-competition and Confidentiality
Agreement among Applied, Oak Grove Consulting
Group, Inc. and J. Michael Moore dated July 31,
1997. Note (u)
10(q) Non-qualified Deferred Compensation Agreement
between Applied and J. Michael Moore effective
as of December 31, 1997. Note (v)
13 Applied 1998 Annual Report to shareholders
(not deemed "filed" as part of this Form 10-K
except for those portions that are expressly
incorporated by reference). Attached
21 Subsidiaries of Applied at June 30, 1998. Attached
23 Independent Auditors' Consent. Attached
27 Financial Data Schedule. Attached
</TABLE>
<PAGE> 27
Notes: (a) Incorporated by reference from Applied's Form 10-Q
for the quarter ended December 31, 1997, SEC File No.
1-2299, at Exhibit 4(a).
(b) Incorporated by reference from Applied's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, at Exhibit 3(b).
(c) Incorporated by reference from Applied's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, at Exhibit 4(a).
(d) Incorporated by reference from Applied's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, at Exhibit 4(b).
(e) Incorporated by reference from Applied's Form 10-Q
for the quarter ended March 31, 1996, SEC File No.
1-2299, at Exhibit 4(g).
(f) Incorporated by reference from Applied's Form 10-Q
for the quarter ended December 31, 1997, SEC File No.
1-2299, at Exhibit 4(f).
(g) Incorporated by reference from Applied's Registration
Statement on Form 8-A filed July 20, 1998, SEC File
No. 1-2299, at Exhibit 1.
(h) Incorporated by reference from Applied's Form 10-Q
for the quarter ended March 31, 1998, SEC File No.
1-2299, at Exhibit 10(b).
(i) Incorporated by reference from Applied's Proxy
Statement dated September 15, 1998, SEC File No.
1-2299, on pages 12 and 13, under the caption
"Compensation of Directors".
(j) Incorporated by reference from Applied's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, at Exhibit 10(d).
(k) Incorporated by reference from Applied's Form 10-Q
for the quarter ended December 31, 1997, SEC File No.
1-2299, at Exhibit 10(b).
(l) Incorporated by reference from Applied's Form 10-Q
for the quarter ended December 31, 1997, SEC File No.
1-2299, at Exhibit 10(c).
(m) Incorporated by reference from Applied's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, at Exhibit 10(g).
<PAGE> 28
(n) Incorporated by reference from Applied's Form 10-Q
for the quarter ended September 30, 1997, SEC File
No. 1-2299, at Exhibit 10(a).
(o) Incorporated by reference from Applied's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, at Exhibit 10(j).
(p) Incorporated by reference from Applied's Form 10-Q
for the quarter ended December 31, 1997, SEC File No.
1-2299, at Exhibit 10(a).
(q) Incorporated by reference from Applied's Proxy
Statement dated September 15, 1998, SEC File No.
1-2299, on pages 9 and 10, in the Report of the
Executive Organization & Compensation Committee of
the Board of Directors on Executive Compensation,
under the subcaption "Management Incentive Plan".
(r) Incorporated by reference from Applied's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, at Exhibit 10(m).
(s) Incorporated by reference from Applied's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, at Exhibit 10(n).
(t) Incorporated by reference from Applied's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, at Exhibit 2(a).
(u) Incorporated by reference from Applied's Form 10-Q
for the quarter ended September 30, 1997, SEC File
No. 1-2299, at Exhibit 10(c).
(v) Incorporated by reference from Applied's Form 10-Q
for the quarter ended March 31, 1998, SEC File No.
1-2299, at Exhibit 10(a).
<PAGE> 1
Exhibit 10(d)
FIRST AMENDMENT
TO THE
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
(JANUARY 1, 1997 RESTATEMENT)
WHEREAS, the Applied Industrial Technologies, Inc. Deferred
Compensation Plan for Non-Employee Directors (formerly known as Bearings, Inc.
Deferred Compensation Plan for Non-Employee Directors and hereinafter referred
to as the "Plan") was established, effective as of July 1, 1991, by Applied
Industrial Technologies, Inc. (formerly known as Bearings, Inc. and hereinafter
referred to as the "Company") to provide non-employee Directors of the Company
with the option to defer receipt of all or a portion of the compensation payable
to them for services as Directors; and
WHEREAS, effective as of January 1, 1997, the Plan was amended and
restated; and
WHEREAS, the Company desires to amend the Plan;
NOW, THEREFORE, effective as of May 1, 1998, the Plan is hereby amended
in the following respects.
1. Section 2.2 of the Plan is hereby amended to provide as
follows:
2.2 EFFECTIVENESS OF ELECTIONS. Elections to defer
compensation for future services as a Director shall be
effective upon the delivery of an Election Form to the
Committee and, subject to the provisions of Section 2.3, shall
be irrevocable upon the commencement of the next subsequent
Fiscal Year quarter. Subject to the provisions of Article IV
and Section 6.7, amounts deferred pursuant to any election
hereunder shall be invested and distributed in the manner and
at the time set forth in such Election Form.
2. Section 2.3 of the Plan is hereby amended to provide as
follows:
2.3 AMENDMENT AND TERMINATION OF ELECTIONS. A
Director may terminate or amend his election to defer receipt
of compensation as a Deferral under the Plan with respect to
subsequent Fiscal Year quarters in a written notice delivered
to the Committee prior to commencement of the Fiscal Year
quarter with respect to which such compensation will be earned
and such notice will be effective. Any amendment which serves
only to change a designation of a Beneficiary shall be
permitted at any time and shall be effective upon delivery to
the Committee in such form and manner as may be required by
the Committee. Any amendment which changes the time or manner
for payment of amounts credited to a Participant's Deferral
Account pursuant to Section 3.1 shall be made only pursuant to
the provisions of Article IV.
<PAGE> 2
3. Section 4.1 of the Plan is hereby amended to provide as
follows:
4.1 METHOD OF DISTRIBUTION. The value of a
Participant's Deferral Account deemed invested in a fund
comprised of Common Shares shall be distributed in Common
Shares and the value of a Participant's Deferral Account
deemed otherwise invested shall be distributed in cash. Such
value shall be determined as of the most recent Valuation
Date. Subject to the provisions of Section 4.2, a distribution
from a Participant's Deferral Account shall be made either in
a lump sum or in equal annual installments over a period of
not more than ten years as specified in such Participant's
Election Form.
4. Section 4.2 of the Plan is hereby amended to provide as
follows:
4.2 TIME OF PAYMENTS. Except as otherwise provided in
this Section 4.2 or Section 4.3, distribution of the value of
a Deferral from a Participant's Deferral Account shall
commence on the date specified in his applicable Election
Form. Notwithstanding any other provision of the Plan to the
contrary, a Participant may elect to change the manner and the
time of the distribution of the value of any Deferral no later
than 30 days prior to his termination as a Director or, if
earlier, the date he had previously elected to receive
distribution of such Deferral; provided, however, that if such
Participant is terminated as a Director with less than 30 days
notice, such Participant may elect to change the manner and
time of distribution of the value of any Deferral during the
period which commences as of the day he receives notice of his
termination as a Director and ends ten days thereafter.
Notwithstanding the foregoing, except in the case of the
termination of a Participant as a Director, in no event may a
Participant change the time and manner of the distribution of
a Deferral which has been previously changed in the
immediately preceding three-year period.
5. Section 4.4 of the Plan is hereby amended to provide as
follows:
4.4 DISTRIBUTIONS UPON DEATH. Upon the death of a
Participant, the balance of his Deferral Account shall be paid
to his Beneficiary either in a lump sum or equal installments
over a period of not more than ten years pursuant to an
election of the Beneficiary; provided, however, that such
election shall be subject to the approval of the Committee.
Executed at Cleveland, Ohio this 1st day of May , 1998.
------- ----------
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
By: /s/ John R. Whitten
----------------------------------------------
Title: Vice President-Chief Financial Officer &
Treasurer
-2-
<PAGE> 1
Exhibit 10(j)
FIRST AMENDMENT
TO THE
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
DEFERRED COMPENSATION PLAN
(JANUARY 1, 1997 RESTATEMENT)
WHEREAS, the Applied Industrial Technologies, Inc. Deferred
Compensation Plan (formerly known as the Bearings, Inc. Deferred Compensation
Plan and hereinafter referred to as the "Plan") was established, effective as of
July 1, 1993, by Applied Industrial Technologies, Inc. (formerly known as
Bearings, Inc. and hereinafter referred to as the "Company") to provide key
executives of the Company and its affiliates with a means by which to defer
receipt of all or a portion of their incentive compensation payable under the
Applied Industrial Technologies, Inc. Management Incentive Plan; and
WHEREAS, effective as of January 1, 1997, the Plan and was amended and
restated; and
WHEREAS, the Company desires to amend the Plan;
NOW, THEREFORE, effective as of May 1, 1998, the Plan is hereby amended
in the following respects.
1. Section 2.2 of the Plan is hereby amended to provide as
follows:
2.2 EFFECTIVENESS OF ELECTIONS. Elections to defer
receipt of an Award shall be effective and irrevocable upon
the delivery of an Election Form to the Committee. Subject to
the provisions of Article IV and Section 6.7, amounts deferred
pursuant to any election hereunder shall be invested and
distributed in the manner and at the time set forth in such
Election Form.
2. Section 4.1 of the Plan is hereby amended to provide as
follows:
4.1 METHOD OF DISTRIBUTION. The value of a
Participant's Deferral Account deemed invested in a fund
comprised of Common Shares shall be distributed in Common
Shares and the value of a Participant's Deferral Account
deemed otherwise invested shall be distributed in cash. Such
value shall be determined as of the most recent Valuation
Date. Subject to the provisions of Section 4.2, a distribution
from a Participant's Deferral Account shall be made either in
a lump sum or in equal annual installments over a period of
not more than ten years as specified in such Participant's
Election Form.
3. Section 4.2 of the Plan is hereby amended to provide as
follows:
4.2 TIME OF PAYMENTS. Except as otherwise provided in
this Section 4.2 or Section 4.3, distribution of the value of
a Deferral from a Participant's Deferral Account shall
commence on the date specified in his applicable Election
Form. Notwithstanding any other provision of the Plan
<PAGE> 2
to the contrary, a Participant may elect to change the manner
and the time of the distribution of the value of any Deferral
no later than 30 days prior to his termination of his
employment or, if earlier, the date he had previously elected
to receive distribution of such Deferral; provided, however,
that if the employment of such Participant is terminated with
less than 30 days notice, such Participant may elect to change
the manner and time of distribution of the value of any
Deferral during the period which commences as of the day he
receives notice of his termination and ends ten days
thereafter. Notwithstanding the foregoing, except in the case
of the termination of his employment, in no event may a
Participant change the time and manner of the distribution of
a Deferral which has been previously changed in the
immediately preceding three-year period.
4. Section 4.4 of the Plan is hereby amended to provide as follows:
4.4 DISTRIBUTIONS UPON DEATH. Upon the death of a
Participant, the balance of his or her Deferral Account shall
be paid to his Beneficiary either in a lump sum or equal
installments over a period of not more than ten years pursuant
to an election of the Beneficiary; provided, however, that
such election shall be subject to the approval of the
Committee.
Executed at Cleveland, Ohio this 1st day of May , 1998.
------- ------------
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
By: /s/ John R. Whitten
-----------------------------------------------
Title: Vice President-Chief Financial Officer &
Treasurer
-2-
<PAGE> 1
Exhibit 13
MANAGEMENT'S DISCUSSION ANDANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1998 VS 1997
The Company acquired Invetech Company (Invetech), a privately held industrial
distributor based in Detroit, Michigan, effective August 1, 1997. Invetech's
operations were consolidated with those of the Company as of the acquisition
date. The increases in net sales, cost of sales and selling, distribution and
administrative expenses from the prior year relate primarily to Invetech's
operations. The Company expects to continue expanding its business through
strategic acquisitions. The Company also seeks to grow revenues by selling
additional products to customers who have traditionally relied on the Company
for bearing products. The Company does not expect inflation to have a material
impact on future revenues.
The Company's gross margin (net sales less cost of sales) as a percentage of
sales of 26.3% in 1998 was consistent with the 26.4% gross margin in 1997. The
1998 margin was slightly lower than prior years due to favorable LIFO cost
adjustments of $3.0 million or .3% of sales in 1997 (See Note 4 to the
Consolidated Financial Statements) offset in part by changes in the product mix
and lower merchandise costs. The fourth quarter gross margin of 27.6% was higher
than the comparable prior year quarter of 26.9% primarily due to the annual
physical inventory adjustment.
Selling, distribution and administrative expenses, as a percentage of sales,
increased slightly in 1998 to 22.4% from 22.0% in 1997. This increase was
primarily due to a pre-tax nonrecurring $4.0 million charge for consolidation
expenses and costs associated with the disposal of duplicate property and other
assets related to Invetech and other acquisitions and higher goodwill
amortization. These increased costs were partially offset by the benefits from
consolidating certain administrative functions of Invetech and other acquired
companies.
Operating income increased to $58.5 million in 1998 from $50.6 million in
1997. As a percentage of sales, operating income decreased slightly to 3.9% in
1998 from 4.4% in 1997. The $7.9 million increase in operating income was
primarily due to Invetech and other acquisitions while the percentage decrease
is primarily due to higher selling, distribution and administrative expenses as
a percentage of sales.
Interest expense for 1998 increased $3.1 million or 48% as compared to prior
year primarily as a result of an increase in average borrowings related to
Invetech and other acquisitions and higher working capital balances.
Income tax expense as a percentage of income before income taxes decreased
to 39.5% in 1998 from 39.9% in 1997. The decrease in the effective tax rate
resulted from lower effective state and local income tax rates and from the
resolution of certain tax contingencies.
Net income for the fiscal year ended June 30, 1998 improved 11.2% over the
prior year. Net income per share-diluted decreased 4.2% to $1.38 in 1998 from
$1.44 in 1997 primarily due to the 3.2 million increase in the average number of
shares outstanding as a result of the Invetech acquisition.
The number of associates was 5,061 at June 30, 1998 and 4,101 at June 30,
1997.
YEAR ENDED JUNE 30, 1997 VS 1996
Sales in 1997 increased 1.4% to $1,160.3 million from 1996 sales of $1,143.7
million. The lower level of sales increase resulted from an overall slowing in
certain industries which exhibited strength in the prior year, particularly in
certain traditionally cyclical industries. The decline in sales growth was also
affected by the sale of the Dixie Aircraft division during the first quarter of
fiscal 1997.
Gross margin as a percentage of sales increased to 26.4% in 1997 from 25.8%
in 1996. The increase in the gross margin resulted from an increase in favorable
LIFO cost adjustments (See Note 4 to the Consolidated Financial Statements) and
from changes in the product mix, as sales of lower margin bearing products
declined and sales of non-bearing products with higher margins continued to
grow.
Selling, distribution and administrative expenses as a percentage of sales
were 22.0% in 1997 and 21.5% in 1996. The increase in expenses as a percent of
sales was primarily the result of increased compensation and health care costs.
Operating income increased to $50.6 million in 1997 from $49.3 million in
1996. As a percentage of sales, operating income increased to 4.4% in 1997 from
4.3% in 1996. This improved operating margin resulted from higher gross margins
on sales.
Interest expense for 1997 decreased $2.5 million or 28% as a result of
decreased borrowings.
Income tax expense as a percentage of income before income taxes decreased
to 39.9% in 1997 from 42.9% in 1996. The decrease in the effective tax rate
resulted from lower effective state and local income tax rates and from Federal
income tax credits.
Net income for the fiscal year ended June 30, 1997 improved 16.1% over the
prior year. Earnings per share-diluted increased 15.2% to $1.44 in 1997 from
$1.25 in 1996.
The number of associates was 4,101 at June 30, 1997 and 4,133 at June 30,
1996.
LIQUIDITY AND WORKING CAPITAL
The Company generated $1.2 million from operating activities in 1998 compared to
$41.8 million in 1997. The primary reasons for the difference relate to
increases in inventory and receivables without a corresponding increase in
operating liabilities. Operating liabilities decreased due to the timing of
inventory purchases and settlement of certain liabilities incurred in connection
with various acquisitions. Inventories have increased to support higher growth
technologies and due to a temporary duplication attributable to the
consolidation of branches and distribution centers after the Invetech
acquisition. These differences are partially offset by a decrease in other
current assets and by increases in the Company's goodwill amortization and
depreciation expense.
Cash provided from operations is expected to improve as inventory levels are
reduced and the sales of the non-bearing technologies continue to expand.
Cash used in investing activities increased approximately $52 million in
1998 compared with 1997. The increase is primarily due to the net cash paid for
business acquisitions of $32.9 million and an increase in property purchases of
$12.3 million.
The investments in property of $33.9 million in 1998 were primarily for
building and upgrading branch and distribution center facilities, and acquiring
vehicles and data processing equipment.
Cash provided by financing activities increased $66.1 million in 1998 due to
the use of credit facilities and long term debt to finance acquisitions and
increases in working capital.
The Company is obligated for rental payments under operating leases on 230
of its 442 branch, distribution center and other operating locations. See Note
10 to the Consolidated Financial Statements for annual rental commitments.
Working capital at June 30, 1998 was $221.8 million compared to $164.7
million at June 30, 1997. This increase is primarily due to the acquisition of
Invetech and other companies. The current ratio was 2.1 and 2.4 at June 30, 1998
and 1997 respectively.
CAPITAL RESOURCES
Capital resources are obtained from income retained in the business, borrowings
under the Company's lines of credit and long-term debt facilities and from
operating lease arrangements.
Average combined short-term and long-term borrowing was $130.1 million in
1998 and $89.4 million in 1997. Effective
12
<PAGE> 2
interest rates on short-term borrowings were 6.0% in 1998 and 6.3% in 1997. The
Company has short-term lines of credit with commercial banks totaling $160
million. The Company had $43 million of borrowings under these bank short-term
lines of credit at June 30, 1998. Unused lines of credit totaling $117 million
are available for future short-term financing needs.
In January 1998 the Company borrowed $50 million at 6.6% under a shelf
facility agreement with the Prudential Insurance Company of America. Proceeds
from these notes were used to repay short-term debt.
The Company is negotiating with a group of lending institutions to establish
a $150 million committed revolving credit facility. Management anticipates this
facility will be finalized during the first quarter of fiscal 1999. The proceeds
are expected to be used to pay down the current short term line of credit
borrowings, and fund future acquisitions or other capital requirements and other
operating activities.
The Board of Directors has authorized the purchase of up to 1,000,000 shares
of the Company's common stock to fund employee benefit programs, stock option
and award programs and other corporate purposes. These purchases can be made in
open market or negotiated transactions, from time to time, de-pending upon
market conditions. Under a previous Board authorization, the Company acquired
291,000 shares of its common stock for $8.1 million during the year ended June
30, 1998.
Management expects that capital resources provided from operations,
available lines of credit, long-term debt and operating leases will be
sufficient to finance normal working capital needs, 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.
OTHER MATTERS
Effective August 1, 1997, the Company completed the acquisition of Invetech. The
aggregate purchase price including the issuance of 3.2 million shares of the
Company common stock was $93.9 million plus the assumption of $8.0 million of
term debt. The cash portion of the purchase price of $23.4 million was financed
through available short-term lines of credit.
The Company incurred a pre-tax nonrecurring charge of approximately $4.0
million in the quarter ended September 30, 1997 for consolidation expenses and
costs associated with the disposal of duplicative capital assets. See Note 2 to
the Consolidated Financial Statements.
YEAR 2000 ISSUE
The Company's progress in completing its Year 2000 activities is overseen by an
executive task force made up of representatives from all key management areas.
The task force in turn reports to the audit committee of the Board of Directors.
Additionally, the Company has retained an outside Year 2000 consultant to
provide an independent assessment of the Company's Year 2000 compliance efforts.
The Company's plan for assessment, remediation, replacement and testing of
those of its internal computer systems affected by the Year 2000 issue is
proceeding on schedule. For business reasons, the Company's financial
information systems are being replaced with a new Year 2000-compliant system,
which the Company expects to be operating by early calendar year 1999. The
Company has completed its assessment, and is presently conducting remediation,
of its other critical systems, including its corporate information system and
its OMNEX(R) inventory and sales information system. The Company expects to have
completed remediation and testing of these systems by early calendar year 1999.
The Year 2000 issue also affects certain of the Company's non-critical
computer systems and equipment containing embedded technology. While the Company
has largely completed its assessment of these non-critical systems, remediation
and testing are scheduled to be completed by various dates before the end of
calendar year 1999.
If the requisite changes to the Company's critical systems are not made or
are not completed in a timely manner, then the Year 2000 issue could have a
material adverse effect on the Company's business, financial condition or
results of operations. For example, the Company could be rendered unable to
process ordinary business transactions electronically. The Company's order
fulfillment process could be interrupted, leaving the Company unable to fulfill
commitments to customers. To reduce the risk of business interruption, the
Company is preparing contingency plans to operate its branch locations and
distribution centers without computers. These plans are scheduled to be
completed by various dates before the end of calendar year 1999.
Nearly all of the products sold by the Company do not contain date logic. The
Company is attempting, through contacts with its product suppliers, to identify
any products sold by the Company that are susceptible to the Year 2000 issue. To
date, no such products have been identified.
The Company has sought written assurances from key product and service
suppliers as to their Year 2000 compliance plans. Follow-up interviews are being
conducted with those suppliers with whom the Company has the most significant
relationships and with certain key customers. The Company will consider
appropriate measures, including substitution of suppliers, in the event that a
supplier provides an inadequate response. If the Company's suppliers or
customers fail to achieve Year 2000 compliance in a timely manner, then the Year
2000 issue could have a material adverse effect on the Company. For example,
suppliers' failures to deliver products to the Company due to the Year 2000
issue could render the Company unable to fulfill commitments to customers unless
those products or adequate substitutes can be secured elsewhere. Customers
affected by the Year 2000 issue could reduce their volume of purchases from the
Company or slow their payments for products already delivered.
Despite its efforts, the Company will not be able to analyze fully the scope
or nature of the risk represented by the failure of third parties, including
suppliers and customers, to attain Year 2000 compliance. The Company expects,
however, that the actions described in this section will significantly reduce
the likelihood that the Year 2000 issue would have a material adverse effect on
the Company's business, financial condition, results of operations or cash
flows.
Based on currently available information, the total cost of the Company's
Year 2000 activities is not expected to be material to its financial condition
or results of operations. The Company further anticipates that its current
resources and sources of liquidity will be adequate to address the capital needs
arising from its specific Year 2000 issues.
CAUTIONARY STATEMENT
UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
This Annual Report to shareholders, including management's discussion and
analysis, 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. The Company 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 the
Company or any other person that the results expressed therein will be achieved.
Important risk factors include, but are not limited to, the following:
changes in the economy or in specific customer industry sectors; changes in
customer procurement policies and practices; changes in product manufacturer
sales policies and practices; the availability of product; changes in operating
expenses; the effect of price increases; the variability and timing of business
opportunities including acquisitions, customer agreements, supplier
authorizations and other business strategies; the Company's ability to realize
the anticipated benefits of acquisitions and other business opportunities;
adverse effects of the Year 2000 issue on the business of the Company, its
suppliers and customers; changes in accounting policies and practices; the
effect of organizational changes within the Company; adverse results in
significant litigation matters; adverse state and federal regulation and
legislation; and the occurrence of extraordinary events (including prolonged
labor disputes, natural events and acts of God, fires, floods and accidents).
13
<PAGE> 3
Applied Industrial Technologies, Inc. and Subsidiaries
STATEMENTS OF
CONSOLIDATED INCOME
<TABLE>
<CAPTION>
------------------------------------------------------
Year Ended June 30
------------------------------------------------------
1998 1997 1996
(In thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 1,491,405 $ 1,160,251 $ 1,143,749
- ----------------------------------------------------------------------------------------------------------
COST AND EXPENSES
Cost of sales 1,099,472 854,230 848,682
Selling, distribution and administrative 333,413 255,422 245,786
- ----------------------------------------------------------------------------------------------------------
1,432,885 1,109,652 1,094,468
- ----------------------------------------------------------------------------------------------------------
OPERATING INCOME 58,520 50,599 49,281
- ----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE 9,549 6,463 8,975
INTEREST INCOME (854) (956) (528)
- ----------------------------------------------------------------------------------------------------------
8,695 5,507 8,447
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 49,825 45,092 40,834
- ----------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE
Federal 17,400 15,700 14,250
State and local 2,300 2,300 3,250
- ----------------------------------------------------------------------------------------------------------
19,700 18,000 17,500
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 30,125 $ 27,092 $ 23,334
==========================================================================================================
NET INCOME PER SHARE - BASIC $ 1.40 $ 1.47 $ 1.26
==========================================================================================================
NET INCOME PER SHARE - DILUTED $ 1.38 $ 1.44 $ 1.25
==========================================================================================================
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 4
Applied Industrial Technologies, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------------------
June 30
-----------------------------------
1998 1997
-----------------------------------
(In thousands)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary investments $ 9,344 $ 22,405
Accounts receivable, less allowances of $3,500 and $2,400 206,313 153,080
Inventories 192,042 103,069
Other current assets 7,214 6,905
- ----------------------------------------------------------------------------------------------------
Total current assets 414,913 285,459
- ----------------------------------------------------------------------------------------------------
Property - at cost
Land 12,363 12,281
Buildings 69,103 66,157
Equipment 94,705 81,132
- ----------------------------------------------------------------------------------------------------
176,171 159,570
Less accumulated depreciation 63,102 68,809
- ----------------------------------------------------------------------------------------------------
Property - net 113,069 90,761
- ----------------------------------------------------------------------------------------------------
Goodwill - net 53,243 5,604
Other assets 24,866 12,290
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 606,091 $ 394,114
====================================================================================================
LIABILITIES
Current liabilities
Notes payable $ 42,973 $ 25,415
Current portion of long-term debt 19,429 11,429
Accounts payable 79,091 49,469
Compensation and related benefits 22,702 19,025
Other current liabilities 28,952 15,398
- ----------------------------------------------------------------------------------------------------
Total current liabilities 193,147 120,736
Long-term debt 90,000 51,428
Other liabilities 28,439 14,366
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 311,586 186,530
- ----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock - no par value; 2,500 shares
authorized; none issued or outstanding
Common stock - no par value; 50,000 shares
authorized; 24,095 and 20,931 shares issued 10,000 10,000
Additional paid-in capital 82,865 10,311
Income retained for use in the business 236,109 216,642
Treasury shares - at cost (1,993 and 2,310 shares) (24,391) (22,983)
Shares held in trust for deferred compensation plans (5,149) (5,436)
Unearned restricted common stock compensation (4,929) (950)
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 294,505 207,584
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 606,091 $ 394,114
====================================================================================================
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 5
Applied Industrial Technologies, Inc. and Subsidiaries
STATEMENTS OF
CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
---------------------------------
Year Ended June 30
---------------------------------
1998 1997 1996
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 30,125 $ 27,092 $ 23,334
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 16,428 13,574 13,478
Deferred income taxes 5,065 1,900 (1,444)
Provision for losses on accounts receivable 2,075 1,743 2,123
Gain on sale of property (1,015) (921) (1,119)
Amortization of restricted common stock compensation and goodwill 4,569 857 1,959
Treasury shares contributed to employee benefit and deferred
compensation plans 4,945 4,372 4,496
Changes in current assets and liabilities, net of acquisitions and disposition:
Accounts receivable (11,280) (2,315) (9,132)
Inventories (34,519) 18,868 (12,889)
Other current assets 1,193 (4,471) 1,722
Accounts payable and accrued expenses (16,383) (18,949) 13,908
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,203 41,750 36,436
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Property purchases (33,861) (21,579) (23,536)
Proceeds from property sales 9,955 6,898 4,803
Proceeds from sale of Aircraft Division 9,090
Net cash paid for acquisition of businesses, net of cash
acquired of $5,307 in 1998 (32,949) (4,328)
Deposits and other 3,744 4,234 (7,729)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (53,111) (1,357) (30,790)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------------
Borrowings (repayments) under line of credit agreements - net 17,558 (4,641) 11,481
Long-term debt borrowings 50,000
Long-term debt repayments (12,075) (11,429) (5,714)
Exercise of stock options 1,789 1,089 1,781
Dividends paid (10,277) (7,682) (6,528)
Purchases of treasury shares (8,148) (4,568) (2,212)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 38,847 (27,231) (1,192)
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and temporary investments (13,061) 13,162 4,454
Cash and temporary investments at beginning of year 22,405 9,243 4,789
- ------------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY INVESTMENTS AT END OF YEAR $ 9,344 $ 22,405 $ 9,243
=========================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 16,953 $ 19,107 $ 17,842
Interest $ 10,043 $ 6,873 $ 8,291
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 6
Applied Industrial Technologies, Inc. and Subsidiaries
STATEMENTS OF
CONSOLIDATED SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
For the Years Ended June 30, 1998, 1997 and 1996
--------------------------------------------------------------------------
Income
Shares of Additional Retained for
Common Stock Common Paid-in Use in the
Outstanding Stock Capital Business
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1995 18,261 $ 10,000 $ 4,812 $ 180,426
Net income 23,334
Cash dividends - $.36 per share (6,528)
Purchases of common stock for treasury (129)
Treasury shares issued for:
Retirement Savings Plan contributions 206 1,692
Exercise of stock options 161 391
Restricted common stock awards 2 13
Deferred compensation plans 65 416
Amortization of restricted
common stock compensation 204
Increase in fair value of shares held in trust
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 18,566 10,000 7,528 197,232
Net income 27,092
Cash dividends - $.41 per share (7,682)
Purchases of common stock for treasury (249)
Treasury shares issued for:
Retirement Savings Plan contributions 164 1,809
Exercise of stock options 78 342
Restricted common stock awards 9 68
Deferred compensation plans 53 532
Amortization of restricted
common stock compensation 32
Increase in fair value of shares held in trust
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 18,621 10,000 10,311 216,642
Net income 30,125
Cash dividends - $.47 per share (10,277)
Purchases of common stock for treasury (291)
Issuance of common stock for the
acquisition of Invetech Company 3,165 63,374
Treasury shares issued for:
Retirement Savings Plan contributions 152 2,430
Exercise of stock options 103 610
Restricted common stock awards 201 3,560
Deferred compensation plans 28 450
Acquisition of Associated Bearings
Company 123 1,770
Amortization of restricted
common stock compensation 360
Decrease in fair value of shares held in trust
Other (381)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 22,102 $ 10,000 $ 82,865 $ 236,109
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
For the Years Ended June 30, 1998, 1997 and 1996
--------------------------------------------------------------------------
Shares Held Unearned
in Trust for Restricted
Treasury Deferred Common Total
Shares-at Compensation Stock Shareholders'
Cost Plans Compensation Equity
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1995 $ (22,845) $ (1,426) $ (2,633) $ 168,334
Net income 23,334
Cash dividends - $.36 per share (6,528)
Purchases of common stock for treasury (2,212) (2,212)
Treasury shares issued for:
Retirement Savings Plan contributions 1,805 3,497
Exercise of stock options 1,390 1,781
Restricted common stock awards 19 (32)
Deferred compensation plans 583 (999)
Amortization of restricted
common stock compensation 1,465 1,669
Increase in fair value of shares held in trust (583) (583)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 (21,260) (3,008) (1,200) 189,292
Net income 27,092
Cash dividends - $.41 per share (7,682)
Purchases of common stock for treasury (4,568) (4,568)
Treasury shares issued for:
Retirement Savings Plan contributions 1,568 3,377
Exercise of stock options 747 1,089
Restricted common stock awards 67 (135)
Deferred compensation plans 463 (995)
Amortization of restricted
common stock compensation 385 417
Increase in fair value of shares held in trust (1,433) (1,433)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 (22,983) (5,436) (950) 207,584
Net income 30,125
Cash dividends - $.47 per share (10,277)
Purchases of common stock for treasury (8,148) (8,148)
Issuance of common stock for the
acquisition of Invetech Company 63,374
Treasury shares issued for:
Retirement Savings Plan contributions 1,777 4,207
Exercise of stock options 1,179 1,789
Restricted common stock awards 2,005 (5,565)
Deferred compensation plans 288 (738)
Acquisition of Associated Bearings
Company 1,491 3,261
Amortization of restricted
common stock compensation 1,586 1,946
Decrease in fair value of shares held in trust 1,025 1,025
Other (381)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 $ (24,391) $ (5,149) $ (4,929) $ 294,505
==========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 7
Applied Industrial Technologies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
----------------------------------------
Years Ended June 30, 1998, 1997 and 1996
----------------------------------------
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
1. BUSINESS AND ACCOUNTING POLICIES
Business
The Company distributes bearings, power transmission products and systems,
industrial rubber products, hydraulic and pneumatic (together referred to as
fluid power) products and systems, linear motion 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 Applied Industrial
Technologies, Inc. and its wholly owned subsidiaries. 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 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 30 years. The accumulated amortization was $5,474
at June 30, 1998, and $2,491 at June 30, 1997.
Inventories
Inventories are valued at the lower of cost or market, using the last-in,
first-out (LIFO) method. See Note 4 for further information regarding
inventories.
Depreciation
Depreciation of buildings and equipment is computed using the straight-line
method over the estimated useful lives of the assets. Buildings and related
improvements are depreciated over 10 to 30 years and equipment over 3 to 8
years.
Revenue Recognition
Revenue is recognized when products are shipped to the customer.
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
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share. All prior amounts have been
restated to conform to the basic and diluted presentation.
All share and per share data have also been restated to reflect three-for-two
stock splits effective September 15, 1997 and December 4, 1995. The following is
a computation of the basic and diluted earnings per share:
18
<PAGE> 8
<TABLE>
<CAPTION>
------------------------------------------
Year Ended June 30
------------------------------------------
1998 1997 1996
(In thousands, except per share amounts)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME
Net income as reported in statements
of consolidated income $30,125 $ 27,092 $23,334
===============================================================================================
AVERAGE SHARES OUTSTANDING
Weighted average common shares
outstanding for basic computation 21,466 18,465 18,462
Dilutive effect of:
Stock options 310 252 226
Performance Accelerated Restricted Stock (PARS) 51 52 40
-----------------------------------------------------------------------------------------------
Weighted average common shares
outstanding for diluted computation 21,827 18,769 18,728
===============================================================================================
NET INCOME PER SHARE
Net income per share - basic $ 1.40 $ 1.47 $ 1.26
===============================================================================================
Net income per share - diluted $ 1.38 $ 1.44 $ 1.25
===============================================================================================
</TABLE>
New Accounting Standard
In June 1997, the Financial Accounting Standards Board issued the Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information". This statement establishes standards for
the reporting of financial information about reportable segments in annual and
interim financial statements. SFAS No. 131 also requires disclosure of revenues
from each group of products and services, geographic areas and major customers.
This statement is effective for the June 30, 1999 financial statements. The
Company has not completed its evaluation of the impact SFAS No. 131 will have on
its financial statement disclosures.
2. BUSINESS COMBINATIONS
Effective August 1, 1997, the Company completed the acquisition of Invetech
Company (Invetech), a distributor of bearings, mechanical and electrical drive
system products, industrial rubber products, linear technologies and specialty
maintenance and repair products. The aggregate purchase price was $93,900
including the issuance of 3,165,000 shares of Company common stock, plus the
assumption of $8,000 of term debt. The $23,400 cash portion of the purchase
price was financed through available short-term lines of credit.
The Company accounted for the acquisition as a purchase and has included
Invetech's results of operations from the effective date of the acquisition. The
Company incurred a pre-tax nonrecurring charge of $4,000 in the quarter ended
September 30, 1997 for consolidation expenses and costs associated with disposal
of duplicative property and other assets. The purchase price was allocated based
on estimated fair values at the date of acquisition. Goodwill representing the
excess of the purchase price over assets acquired of $34,843 is being amortized
on a straight-line basis over 30 years.
During the year ended June 30, 1998, the Company acquired certain assets of
two rubber fabrication and repair shops, the stock of two distributors of fluid
power products, and two distributors of bearings, power transmission products
and industrial supplies for an aggragate purchase price of $18,117 including the
issuance of 123,000 shares of Company stock. The $14,856 cash portion of the
aggregate purchase price was financed through available short-term lines of
credit. 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. Goodwill of
$9,959, recognized in connection with these combinations, is being amortized
over 15 years.
The following table summarizes the unaudited consolidated pro forma results
of operations, as if these acquisitions had occurred at the beginning of the
following periods:
<TABLE>
<CAPTION>
---------------------------
Year Ended June 30
---------------------------
1998 1997
(Unaudited)
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,539,890 $1,530,533
Income before income taxes 48,242 48,094
Net income 29,175 29,140
Net income per share-basic 1.34 1.34
Net income per share-diluted 1.32 1.32
</TABLE>
The unaudited pro forma amounts include the pre-tax nonrecurring charge of
$4,000 for the year ended June 30, 1998. This pro forma information is not
necessarily indicative of the results that actually would have been attained if
the operations had been combined during the periods presented and is not
intended to be a projection of future results.
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. 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. The acquisitions of these businesses
were accounted for as purchases and
19
<PAGE> 9
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.
3. 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.
4. INVENTORIES
Current Cost
The current cost of inventories exceeds the LIFO cost as follows:
<TABLE>
<CAPTION>
---------------------------
June 30
---------------------------
1998 1997
<S> <C> <C>
-----------------------------------------------------------------------------------------------
LIFO cost $192,042 $103,069
Excess of current cost over LIFO cost 103,298 98,740
-----------------------------------------------------------------------------------------------
Current cost $295,340 $201,809
===============================================================================================
</TABLE>
LIFO Liquidations
During the years ended June 30, 1997 and 1996, 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, $3,022, $1,754, and $.09 per share during
1997 and $946, $515 and $.03 per share during 1996.
5. OTHER BALANCE SHEET INFORMATION
Other assets consist of the following:
<TABLE>
<CAPTION>
---------------------------
June 30
---------------------------
1998 1997
<S> <C> <C>
-----------------------------------------------------------------------------------------------
Deposits and investments $ 13,877 $ 9,225
Deferred tax assets 4,447 599
Other 6,542 2,466
-----------------------------------------------------------------------------------------------
Total $ 24,866 $12,290
===============================================================================================
</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.
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
---------------------------
June 30
---------------------------
1998 1997
<S> <C> <C>
-----------------------------------------------------------------------------------------------
Deferred tax liabilities $ 11,242 $ 3,331
Accrued insurance 4,756 5,106
Other 12,954 6,961
-----------------------------------------------------------------------------------------------
Total $ 28,952 $15,398
===============================================================================================
</TABLE>
20
<PAGE> 10
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable
The Company has $160,000 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 $42,973 at June 30, 1998. The weighted average interest rate
for outstanding borrowings at June 30, 1998 was 6.0%. The remaining unused lines
available for short-term borrowings at June 30, 1998 totaled $117,027.
<TABLE>
<CAPTION>
Long-Term Debt
Long-term debt consists of:
-----------------------------
June 30
-----------------------------
1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
7.82% Senior unsecured term notes, due in semi-annual
installments of $5,714 through 2003 $ 51,429 $62,857
6.6% Senior unsecured term note, due at maturity
in December 2007 50,000
5.97% Bank term loan, due in December 1998 8,000
-------------------------------------------------------------------------------------------------
Total 109,429 62,857
Less current portion 19,429 11,429
-------------------------------------------------------------------------------------------------
Noncurrent portion $ 90,000 $51,428
==================================================================================================
</TABLE>
The senior unsecured term notes contain certain restrictive covenants regarding
liquidity, tangible net worth, financial ratios and other covenants. At June 30,
1998, the most restrictive of these covenants required that the Company maintain
a minimum tangible net worth of $139,166. 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, 1998 by approximately
$1,618.
The Company is in the process of negotiating a $150,000 committed revolving
credit facility with a group of lending institutions. Management anticipates
this facility will be used to fund future acquisitions or other capital
requirements.
7. INCOME TAXES
<TABLE>
<CAPTION>
Provision
The provision (benefit) for income taxes consists of:
-----------------------------------------------
Year Ended June 30
-----------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $14,635 $ 16,100 $18,944
Deferred 5,065 1,900 (1,444)
-------------------------------------------------------------------------------------------------
Total $19,700 $ 18,000 $17,500
=================================================================================================
</TABLE>
The exercise of non-qualified stock options during fiscal 1998, 1997 and 1996
resulted in $645, $368 and $501, 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 1998, 1997 and 1996 resulted in
$360, $32 and $204, respectively, of incremental income tax benefits over the
amounts previously reported for financial reporting purposes. 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
-----------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Effects of:
State and local income taxes 3.0 .3 5.2
Non-deductible expenses 2.1 1.5 2.0
Other, net (.6) .1 .7
-------------------------------------------------------------------------------------------------
Effective tax rate 39.5% 39.9% 42.9%
=================================================================================================
</TABLE>
21
<PAGE> 11
Balance Sheet
The significant components of the Company's deferred tax assets (liabilities)
are as follows:
<TABLE>
<CAPTION>
-----------------------------
June 30
-----------------------------
1998 1997
<S> <C> <C>
-------------------------------------------------------------------------------------------------
Depreciation and differences in property bases $(5,765) $(4,846)
Inventories (16,075) (8,440)
Compensation liabilities not currently deductible 8,877 4,760
Reserves not currently deductible 3,989 4,103
Goodwill 1,118 1,283
Other 1,061 408
-------------------------------------------------------------------------------------------------
Net deferred tax liability $(6,795) $(2,732)
=================================================================================================
</TABLE>
8. STOCK INCENTIVE PLANS
In October 1997, the 1990 Long-Term Performance Plan was amended and renamed the
1997 Long-Term Performance Plan (the "1997 Plan"). The 1997 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 1997 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 1997 Plan, but not distributed, may be carried over to the following
year. 327,000 shares were available for future grants at June 30, 1998 and
217,000 shares were available at June 30, 1997.
Under the 1997 Plan, the Company has 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 1998
and 1997 the Company recognized accelerated vesting of 95,000 and 5,000 shares,
respectively, of previously awarded PARS.
At June 30, 1998 the Company has a fixed stock option plan as described
above. The stock options vest over a period of 4 years and expire after 10
years. The Company applies APB Opinion No. 25 and related interpretations in
accounting for options granted under the 1997 Plan; accordingly, no compensation
cost is recognized for stock options granted. Had compensation cost for the
Company's stock options been determined based on fair value at the grant dates
for awards under the Plan consistent with the method of FASB No. 123, the
Company's net income and net income per share-diluted would have been reduced to
$29,616 and $1.36 in 1998, $26,502 and $1.41 in 1997, and $22,984 and $1.23 in
1996.
Disclosures under the fair value method are estimated using the Black
Scholes option pricing model. The assumptions used for grants issued in 1998,
1997 and 1996 are:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life 7 years 7 years 7 years
Risk free interest rate 5.7% 6.4% 6.4%
Dividend yield 2.0% 2.0% 2.0%
Volatility 25.0% 20.1% 20.1%
</TABLE>
Information regarding these option plans is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding July 1 1,116,997 $13.36 877,168 $10.91 737,358 $ 8.75
Granted 40,950 26.98 334,650 19.19 325,912 14.47
Exercised (102,774) 11.13 (77,757) 9.26 (161,395) 8.01
Expired/canceled (36,095) 17.59 (17,064) 14.84 (24,750) 12.39
-----------------------------------------------------------------------------------------------
Outstanding June 30 1,019,078 $14.01 1,116,997 $13.36 877,125 $10.91
===============================================================================================
Options exercisable June 30 614,292 $11.23 506,919 $ 9.62 444,213 $ 8.59
Weighted-average fair value
of options granted
during the year $7.80 $ 5.69 $ 4.30
</TABLE>
22
<PAGE> 12
The following table summarizes information about stock options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
------------------------------------- -----------------------
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Ranges of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6 - $ 9 101,287 2.3 Years $ 6.31 101,287 $ 6.31
9 - 13 297,701 4.1 9.41 297,701 9.41
13 - 17 279,836 7.0 14.47 139,851 14.47
17 - 21 299,504 8.2 19.01 75,453 19.01
21 - 28 40,750 9.6 26.98
----------------------------------------------------------------------------------------------------
Total 1,019,078 614,292
====================================================================================================
</TABLE>
At June 30, 1998 option prices related to outstanding options ranged from $6.31
to $27.50 per share.
9. BENEFIT PLANS
Qualified Retirement Plans
Substantially all associates of the Company are covered by the Applied
Industrial Technologies, Inc. Retirement 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 the amount of the contribution. The Company also partially matches 401(k)
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 plan was $5,579, $4,895,
and $4,953 for the years ended June 30, 1998, 1997, and 1996, 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. In conjunction with the Invetech acquisition, the Company
assumed the obligation for the Invetech post-retirement medical benefit plan.
This plan provides health care benefits to eligible retired associates at no
cost to the individual. The benefit obligation related to the plan was $2,717 at
June 30, 1998. This plan is only open to current participants. At June 30, 1998
and 1997 the accumulated post-retirement benefit obligation for all plans was
$3,717 and $860, respectively. The costs recognized for post-retirement medical
benefits for fiscal 1998, 1997, and 1996 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.
The funded status of the SERP plan is:
<TABLE>
<CAPTION>
-----------------------------
June 30
-----------------------------
1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation $ 8,261 $ 5,228
Unrecognized net loss (1,766) (887)
Unrecognized prior service cost (1,842) (126)
Adjustment required to recognize minimum liability 2,461
-------------------------------------------------------------------------------------------------
Accrued pension liability, included in other liabilities
on the Consolidated Balance Sheets $ 7,114 $ 4,215
=================================================================================================
Accumulated benefit obligation, fully vested $ 7,114 $ 4,165
=================================================================================================
</TABLE>
Periodic pension cost for the SERP consists of:
<TABLE>
<CAPTION>
-------------------------------------------
Year Ended June 30
-------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned $ 279 $ 145 $132
Interest cost on projected benefit obligation 550 387 368
Net amortization and deferral 239 88 349
-------------------------------------------------------------------------------------------------
Total $1,068 $ 620 $849
=================================================================================================
</TABLE>
23
<PAGE> 13
Benefit obligations shown above were determined using a discount rate of 7.0%
in 1998 and 8.0% in 1997 and a rate of increase in compensation levels of 5.5%.
At June 30, 1998 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 making contributions to rabbi trusts. Contributions
consist of Company Common Stock 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 $6,731 and $6,405 at June 30, 1998 and 1997,
respectively, are recorded in other liabilities in the consolidated balance
sheets.
Salary Continuation Benefits
The Company has agreements with certain retirees of Invetech to pay monthly
retirement benefits for a period not in excess of 15 years. The salary
continuation liability of $3,968 at June 30, 1998 is discounted at 7% and
recorded in other liabilities in the consolidated balance sheet.
10. COMMITMENTS, LEASE OBLIGATIONS AND RENT EXPENSES
The Company leases its corporate headquarters facility along with certain branch
and distribution center facilities, vehicles and computer equipment under
non-cancelable lease agreements accounted for as operating leases. The minimum
annual rental commitments under operating leases are $12,906 in 1999; $10,017 in
2000; $8,005 in 2001; $6,180 in 2002; $5,551 in 2003 and $35,290 after 2003.
In connection with the lease of the corporate headquarters facility the
Company has agreed to guarantee repayment of $5,678 of bonds issued by the
Cleveland-Cuyahoga County Port Authority as lessor and Cuyahoga County to fund
construction of the headquarters facility.
Rental expenses incurred for operating leases, principally from leases for
real property, vehicles and computer equipment were $20,004 in 1998, $12,891 in
1997, and $12,077 in 1996.
The Company had outstanding letters of credit of $10,500 at June 30, 1998.
These letters of credit secure certain employee benefit and insurance
obligations.
11. LITIGATION
The Company is a defendant in several lawsuits for product liability 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 or results of operations.
12. SHAREHOLDER RIGHTS PLAN
On January 15, 1998, the Company's Board of Directors adopted a Shareholder
Rights Plan and declared a dividend distribution of one preferred share purchase
right for each outstanding share of Company common stock held of record as of
February 2, 1998. The rights become exercisable only if a person or group
acquires beneficial ownership of or commences a tender or exchange offer for 20%
or more of the Company's common stock, unless the tender or exchange offer is
for all outstanding shares of the Company upon terms determined by Applied's
continuing directors to be in the best interests of the Company and its
shareholders. When exercisable, the Rights would entitle the holders (other than
the acquirer) to buy shares of the Company's common stock having a market value
equal to two times the right's exercise price or, in certain circumstances, to
buy shares of the acquiring company having a market value equal to two times the
right's exercise price.
24
<PAGE> 14
INDEPENDENT AUDITORS'
REPORT
[DELOITTE & TOUCHE LLP LOGO]
Shareholders and Board of Directors
Applied Industrial Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Applied
Industrial Technologies, Inc. and its subsidiaries (the "Company") as of June
30, 1998 and 1997 and the related statements of consolidated income,
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at June 30, 1998 and
1997 and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1998 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 6, 1998
25
<PAGE> 15
Applied Industrial Technologies, Inc. and Subsidiaries
QUARTERLY OPERATING
RESULTS AND MARKET DATA (UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------------------------------------
Per Common Share (B)(C)
-----------------------------------------------------------
Price Range
------------------------
Net
Net Gross Net Income - Cash
Sales Profit Income Diluted Dividend High Low
(Dollars in thousands,
except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 (A)
FIRST QUARTER $ 344,726 $ 88,300 $ 4,497 $0.21 $0.11 $34.81 $23.83
SECOND QUARTER 368,623 95,050 7,714 0.35 0.12 34.44 24.94
THIRD QUARTER 393,871 102,491 9,115 0.41 0.12 29.31 23.13
FOURTH QUARTER 384,185 106,092 8,799 0.40 0.12 27.88 20.50
- ---------------------------------------------------------------------------------------------------
$ 1,491,405 $ 391,933 $ 30,125 $1.38 $0.47
===================================================================================================
1997 (A)
First Quarter $ 282,249 $ 73,474 $ 5,405 $0.29 $0.09 $20.75 $17.09
Second Quarter 274,992 74,967 6,003 0.32 0.11 19.50 17.17
Third Quarter 297,190 75,199 6,755 0.36 0.11 23.92 18.25
Fourth Quarter 305,820 82,381 8,929 0.48 0.11 24.50 19.83
- ---------------------------------------------------------------------------------------------------
$ 1,160,251 $ 306,021 $ 27,092 $1.44 $0.41
===================================================================================================
1996 (A)
First Quarter $ 277,059 $ 70,215 $ 4,528 $0.24 $0.08 $15.11 $13.39
Second Quarter 275,140 71,894 5,176 0.27 0.09 19.75 15.00
Third Quarter 296,064 75,610 6,122 0.33 0.09 19.59 16.00
Fourth Quarter 295,486 77,348 7,508 0.40 0.09 22.50 17.83
- ---------------------------------------------------------------------------------------------------
$ 1,143,749 $ 295,067 $ 23,334 $1.25 $0.36
===================================================================================================
</TABLE>
(A) 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 primarily based upon the
annual physical inventory and the effect of year-end inventory quantities on
LIFO costs. These cost adjustments in 1998, 1997 and 1996 increased gross profit
by $9,707, $5,624 and $1,591; net income by $5,625, $3,259 and $862; and diluted
net income per share by $.26, $.17 and $.05, respectively. Reductions in
inventories during the fiscal years ended June 30, 1997 and 1996 resulted in
liquidations of LIFO inventory quantities carried at lower costs prevailing in
prior years. The effect of these liquidations for the years ended June 30, 1997
and 1996 increased annual gross profit by $3,022 and $946; annual net income by
$1,754 and $515; and diluted net income per share by $.09 and $.03,
respectively. (See Note 4 to Consolidated Financial Statements.)
(B) On August 17, 1998, there were 2,741 shareholders of record. Additionally at
June 30, 1998, there were 3,987 shareholders in the Applied Industrial
Technologies, Inc. Retirement Savings Plan. The Company's common stock is listed
on the New York Stock Exchange. The closing price on August 17, 1998, was $20.38
per share.
(C) Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share. All prior net income per share
amounts have been restated to conform to the diluted presentation.
All per share data have been restated to reflect three-for-two stock splits
effective September 15, 1997, and December 4, 1995.
27
<PAGE> 16
Applied Industrial Technologies, Inc. and Subsidiaries
10 YEAR
SUMMARY
<TABLE>
<CAPTION>
1998 1997 1996 1995
(In thousands, except per share amounts and statistical information)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS-
YEAR ENDED JUNE 30
Net sales $ 1,491,405 $ 1,160,251 $ 1,143,749 $ 1,054,809
Operating income 58,520 50,599 49,281 36,923
Net income 30,125 27,092 23,334 16,909
Per share data (A)
Net income - basic 1.40 1.47 1.26 .97
Net income - diluted 1.38 1.44 1.25 .96
Cash dividends .47 .41 .36 .31
YEAR-END POSITION - JUNE 30
Working capital $ 221,766 $ 164,723 $ 151,956 $ 153,555
Long-term debt 90,000 51,428 62,857 74,286
Total assets 606,091 394,114 404,072 359,231
Shareholders' equity 294,505 207,584 189,292 165,401
YEAR-END STATISTICS - JUNE 30
Current ratio 2.1 2.4 2.1 2.4
Branches 400 331 337 338
Number of shareholders 6,731 (B) 4,676 4,636 4,379
<FN>
(A) Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share. Net
income per share amounts prior to fiscal 1998 have been restated to conform to the basic and diluted presentation.
(B) The 1998 amount includes, for the first time, approximately 1,400 shareholders in the Applied Industrial Technologies, Inc.
Automatic Dividend Reinvestment Plan.
All per share data have been restated to reflect three-for-two stock splits effective September 15, 1997 and December 4, 1995.
</FN>
</TABLE>
28
<PAGE> 17
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 936,254 $ 831,432 $ 817,813 $ 814,000 $ 651,271 $ 630,281
27,817 20,521 4,703 17,115 25,281 33,463
12,687 8,927 (1,666) 4,282 12,201 18,313
.75 .55 (.11) .27 .75 1.08
.73 .54 (.11) .27 .75 1.08
.29 .29 .29 .29 .29 .25
$ 144,605 $ 130,860 $ 41,967 $ 54,695 $ 64,091 $ 75,134
80,000 80,000
343,519 315,935 330,619 327,939 380,224 251,376
150,491 134,940 128,830 134,203 135,338 134,848
2.4 2.4 1.2 1.3 1.3 1.7
339 323 333 341 363 267
4,478 4,449 4,354 4,025 3,583 3,204
</TABLE>
29
<PAGE> 1
EXHIBIT 21
APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 1998
SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of
Name* Incorporation or Organization
----- -----------------------------
<S> <C>
Air and Hydraulics Engineering, Incorporated Alabama
(d/b/a Air and Hydraulics Engineering)
American Bearing and Power Transmission, Inc. Michigan
Applied Industrial Technologies -- ABC, Inc. Ohio
Applied Industrial Technologies -- DBB, Inc. Ohio
Applied Industrial Technologies -- Dixie, Inc. Tennessee
Applied Industrial Technologies -- GA LP Georgia
Applied Industrial Technologies -- Mainline, Inc. Wisconsin
Applied Industrial Technologies -- Midwest, Inc. Ohio
Applied Industrial Technologies -- PA LLC Pennsylvania
Applied Industrial Technologies -- TN LP Tennessee
Applied Industrial Technologies -- TX LP Texas
Bearings Pan American, Inc. Ohio
Bearing Sales & Services, Inc. Washington
BER International, Inc. Barbados
BER Capital, Inc. Delaware
ESI Acquisition Corporation Ohio
(d/b/a Engineered Sales, Inc.)
Moore Bearing Company Michigan
The Ohio Ball Bearing Company Ohio
</TABLE>
* Except as noted, operating companies conduct business under Applied
Industrial Technologies name
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
Applied Industrial Technologies, Inc.
We consent to the incorporation by reference in Registration Statement Nos.
33-43506, 33-53401, 33-60687, 33-65509 and 33-65513 of Applied Industrial
Technologies, Inc. on Form S-8 of our reports dated August 6, 1998 appearing in
and incorporated by reference in this Annual Report on Form 10-K of Applied
Industrial Technologies, Inc. for the year ended June 30, 1998.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Cleveland, Ohio
September 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 9,334
<SECURITIES> 0
<RECEIVABLES> 209,813
<ALLOWANCES> 3,500
<INVENTORY> 192,042
<CURRENT-ASSETS> 414,913
<PP&E> 176,171
<DEPRECIATION> 63,102
<TOTAL-ASSETS> 606,091
<CURRENT-LIABILITIES> 193,147
<BONDS> 90,000
0
0
<COMMON> 10,000
<OTHER-SE> 284,505
<TOTAL-LIABILITY-AND-EQUITY> 606,091
<SALES> 1,491,405
<TOTAL-REVENUES> 1,491,405
<CGS> 1,099,472
<TOTAL-COSTS> 1,099,472
<OTHER-EXPENSES> 333,413
<LOSS-PROVISION> 2,075
<INTEREST-EXPENSE> 9,549
<INCOME-PRETAX> 49,285
<INCOME-TAX> 19,700
<INCOME-CONTINUING> 30,125
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,125
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.38
</TABLE>
