<PAGE> 1
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1998 .
-------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 1-2299
--------
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0117420
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Applied Plaza, Cleveland, Ohio 44115
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000
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(Former name, former address and former fiscal year, if changed since last
report)
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
----
Shares of common stock outstanding on January 31, 1999 21,652,085
----------------------------------------
(No par value)
<PAGE> 2
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
-------------------------------------
INDEX
<TABLE>
<CAPTION>
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Page No.
Part I: FINANCIAL INFORMATION
<S> <C>
Item 1: Financial Statements
Statements of Consolidated Income - 2
Three Months and Six Months Ended
December 31, 1998 and 1997
Consolidated Balance Sheets - 3
December 31, 1998 and June 30, 1998
Statements of Consolidated Cash Flows - 4
Six Months Ended December 31, 1998 and 1997
Statements of Consolidated Shareholders' Equity - 5
Six Months Ended December 31, 1998 and
Year Ended June 30, 1998
Notes to Consolidated Financial Statements 6 - 8
Item 2: Management's Discussion and Analysis of 9 - 14
Financial Condition and Results of Operations
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
Signatures 17
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
<TABLE>
<CAPTION>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
------------------------------ -------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 371,395 $ 368,623 $ 750,569 $ 713,349
--------- --------- --------- ---------
Cost and Expenses
Cost of sales 279,160 273,573 563,837 529,999
Selling, distribution and
administrative 81,808 80,786 171,533 159,278
--------- --------- --------- ---------
360,968 354,359 735,370 689,277
--------- --------- --------- ---------
Operating Income 10,427 14,264 15,199 24,072
--------- --------- --------- ---------
Interest
Interest expense 3,080 2,365 5,738 4,829
Interest income (145) (200) (331) (478)
--------- --------- --------- ---------
2,935 2,165 5,407 4,351
--------- --------- --------- ---------
Income Before Income Taxes 7,492 12,099 9,792 19,721
--------- --------- --------- ---------
Income Taxes
Federal 2,770 3,767 3,624 6,497
State and local 334 618 422 1,013
--------- --------- --------- ---------
3,104 4,385 4,046 7,510
--------- --------- --------- ---------
Net Income $ 4,388 $ 7,714 $ 5,746 $ 12,211
========= ========= ========= =========
Net Income per share - Basic $ 0.20 $ 0.36 $ 0.27 $ 0.58
========= ========= ========= =========
Net Income per share - Diluted $ 0.20 $ 0.35 $ 0.26 $ 0.57
========= ========= ========= =========
Cash dividends per common
share $ 0.12 $ 0.12 $ 0.24 $ 0.23
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
<TABLE>
<CAPTION>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
December 31 June 30
1998 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and temporary investments $ 13,808 $ 9,344
Accounts receivable, less allowance
of $3,772 and $3,500 186,199 206,313
Inventories (at LIFO) 187,581 192,042
Other current assets 8,946 7,214
------------------ ------------------
Total current assets 396,534 414,913
------------------ ------------------
Property - at cost
Land 12,387 12,363
Buildings 68,108 69,103
Equipment 98,177 94,705
------------------ ------------------
178,672 176,171
Less accumulated depreciation 68,414 63,102
------------------ ------------------
Property - net 110,258 113,069
------------------ ------------------
Goodwill 59,436 53,243
Other assets 19,151 24,866
------------------ ------------------
TOTAL ASSETS $ 585,379 $ 606,091
================== ==================
Liabilities and Shareholders' Equity
Current liabilities
Notes payable $ 42,973
Current portion of long-term debt 19,429
Accounts payable $ 77,262 79,091
Compensation and related benefits 20,101 22,702
Other accrued liabilities 34,933 28,952
------------------ ------------------
Total current liabilities 132,296 193,147
Long-term debt 137,715 90,000
Other liabilities 23,824 23,442
------------------ ------------------
TOTAL LIABILITIES 293,835 306,589
------------------ ------------------
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 shares issued 10,000 10,000
Additional paid-in capital 82,836 82,865
Income retained for use in the business 236,301 235,957
Less 2,477 and 1,993 treasury shares -
at cost (33,053) (24,391)
Less unearned restricted common
stock compensation (4,540) (4,929)
------------------ ------------------
TOTAL SHAREHOLDERS' EQUITY 291,544 299,502
------------------ ------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 585,379 $ 606,091
================== ==================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
<TABLE>
<CAPTION>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended
December 31
--------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income $ 5,746 $ 12,211
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 8,421 7,692
Amortization of goodwill and restricted common
stock compensation 2,432 2,310
Provision for losses on accounts receivable 1,008 989
Gain on sale of property (126) (250)
Treasury shares contributed to employee
benefit plans 2,065 2,597
Changes in current assets and liabilities, net of
effects from acquisition of businesses:
Accounts receivable 19,587 18,791
Inventories 5,118 (35,475)
Other current assets (1,654) 5,025
Accounts payable and accrued expenses 989 (13,169)
Other - net 193 576
- -------------------------------------------------------------------------------------------------------------------
Net Cash provided by Operating Activities 43,779 1,297
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Property purchases (7,603) (11,008)
Proceeds from property sales 2,405 2,373
Net cash paid for acquisition of businesses (10,460) (33,809)
Deposits and other 7,363 (1,928)
- -------------------------------------------------------------------------------------------------------------------
Net Cash used in Investing Activities (8,295) (44,372)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net borrowings (repayments) under line-of-credit
agreements (42,973) 53,297
Long-term debt borrowings 42,000
Long-term debt repayments (13,714) (6,361)
Exercise of stock options 490 791
Dividends paid (5,258) (4,982)
Purchase of treasury shares (11,565) (7,791)
- -------------------------------------------------------------------------------------------------------------------
Net Cash provided by (used in) Financing Activities (31,020) 34,954
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease ) in cash and temporary
investments 4,464 (8,121)
Cash and temporary investments
at beginning of period 9,344 22,405
- -------------------------------------------------------------------------------------------------------------------
Cash and Temporary Investments
at End of Period $ 13,808 $ 14,284
===================================================================================================================
Supplemental Cash Flow Information
Cash paid during the period for:
Income taxes $ 1,134 $ 6,098
Interest $ 5,333 $ 4,607
Significant noncash investing activity:
Issuance of common stock for the acquisition of Invetech Company $ 63,374
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
<TABLE>
<CAPTION>
APPLIED INDUSTIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------------
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
For the Six Months Ended December 31, 1998 (Unaudited)
and Year Ended June 30, 1998
(Thousands, except per share amounts )
Income Unearned Total
Shares of Additional Retained Treasury Restricted Share-
Common Stock Common Paid-in for Use in Shares Common Stock holders'
Outstanding Stock Capital the Business - at Cost Compensation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 18,621 $ 10,000 $ 10,311 $ 216,496 $ (22,983) $ (950) $ 212,874
Net income 30,125 30,125
Cash dividends - $.47 per share (10,277) (10,277)
Purchase of common stock
for treasury (291) (8,148) (8,148)
Issuance of common stock for the
acquisition of Invetech Company 3,165 63,374 63,374
Treasury shares issued for:
Retirement Savings Plan contributions 152 2,430 1,777 4,207
Exercise of stock options 103 610 1,179 1,789
Deferred compensation plans 28 450 288 738
Restricted common stock awards 201 3,560 2,005 (5,565)
Acquisition of Associated Bearings 123 1,770 1,491 3,261
Amortization of restricted common
stock compensation 360 1,586 1,946
Other (387) (387)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 22,102 10,000 82,865 235,957 (24,391) (4,929) 299,502
Net income 5,746 5,746
Cash dividends - $.24 per share (5,258) (5,258)
Purchase of common stock
for treasury (707) (11,565) (11,565)
Treasury shares issued for:
Retirement Savings Plan contributions 130 382 1,683 2,065
Exercise of stock options 63 (349) 839 490
Deferred compensation plans 11 51 142 193
Restricted common stock awards 19 (113) 239 (126)
Amortization of restricted common
stock compensation 515 515
Other (144) (144)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 21,618 $ 10,000 $ 82,836 $ 236,301 $ (33,053) $ (4,540) $ 291,544
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial
position as of December 31, 1998 and June 30, 1998, and the results of
operations for the three months ended and six months ended December 31,
1998 and 1997, and cash flows for the six months ended December 31,
1998 and 1997.
The results of operations for the three and six month periods ended
December 31, 1998 are not necessarily indicative of the results to be
expected for the fiscal year.
Cost of sales for interim financial statements are computed using
estimated gross profit percentages which are adjusted throughout the
year based upon available information. Adjustments to actual cost are
made based on the annual physical inventory and the effect of year-end
inventory quantities on LIFO costs.
2. NET INCOME PER SHARE
The following is a computation of the basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
---------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME
Net income as reported in statements of
consolidated income $4,388 $7,714 $5,746 $12,211
===================================================
AVERAGE SHARES OUTSTANDING
Weighted average common shares outstanding for basic
computation 21,436 21,604 21,634 21,130
Dilutive effect of:
Stock options 93 357 112 353
Performance Accelerated
Restricted Stock (PARS) 8 55 9 51
---------------------------------------------------
Adjusted average common shares outstanding for
diluted computation 21,537 22,016 21,755 21,534
===================================================
NET INCOME PER SHARE
Net income per common share - basic $0.20 $0.36 $0.27 $0.58
===================================================
Net income per common share - diluted $0.20 $0.35 $0.26 $0.57
===================================================
</TABLE>
6
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
3. DEBT
During the quarter ended December 31, 1998, the Company replaced its
existing short-term lines of credit with a committed revolving credit
agreement with a five year term with a group of lending institutions.
This agreement provides for unsecured borrowings of up to $150,000 at
various interest rate options, none of which is in excess of the banks'
prime rate at interest determination dates. Borrowings under this
agreement totaled $42,000 at December 31, 1998. Fees on this facility
range from .12% to .40% per year on the average amount of the total
revolving credit commitments during the year. This facility enables the
Company to refinance short-term debt on a long-term basis. Accordingly,
the current portion of long-term borrowings intended to be refinanced
are classified as long-term debt. Unused lines under this facility
totaling $108,000 are available to fund future acquisitions or other
capital and operating requirements.
4. BUSINESS COMBINATIONS
During the six months ended December 31, 1998 the Company acquired
three distributors for a total purchase price of $12,300. Two of the
companies are distributors of bearings, mechanical and electrical drive
systems and industrial products. The third company is a distributor of
fluid power products. The acquisitions were accounted for as purchases
and their results of operations are included in the accompanying
consolidated financial statements from their respective acquisition
dates. Results of operations for these acquisitions are not material
for all periods presented. Goodwill recognized in connection with these
combinations are being amortized over periods of 15 to 20 years.
5. TREASURY SHARES
At December 31, 1998, 476 shares of the Company's common stock held as
treasury shares are restricted as collateral under escrow arrangements
relating to certain change in control and director and officer
indemnification agreements.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued 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
7
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
30, 1999 financial statements. The Company has not completed its
evaluation of the impact SFAS No. 131 will have on its financial
statement disclosures.
Effective July 1, 1998, the Company adopted Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". Adoption of this SOP did not have a
material impact on the consolidated financial statements.
During the quarter ended September 30, 1998, the Company adopted the
Emerging Issues Task Force (EITF) Issue No. 97-14, "Accounting for
Deferred Compensation Arrangements Where Amounts Earned are Held in a
Rabbi Trust and Invested". All prior periods have been restated to
conform to the new presentation.
8
<PAGE> 10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following is Management's Discussion and Analysis of certain significant
factors which have affected the Company's: (1) financial condition at December
31, 1998 and June 30, 1998, and (2) results of operations and cash flows during
the periods included in the accompanying Statements of Consolidated Income and
Consolidated Cash Flows.
FINANCIAL CONDITION
LIQUIDITY AND WORKING CAPITAL
Cash provided by operating activities was $43.8 million in the six months ended
December 31, 1998. This compares to $1.3 million provided by operating
activities in the same period a year ago.
Cash flow from operations depends primarily upon generating operating income,
controlling the investment in inventories and receivables, and managing the
timing of payments to suppliers. The Company has continuing programs to monitor
and control these investments. During the six month period ended December 31,
1998, inventories decreased approximately $5.1 million due to Company efforts to
reduce inventory levels. Accounts receivable decreased $19.6 million due to a
slowing of sales in comparison to the previous two quarters.
Cash used in investing activities was $7.9 million in the six months ended
December 31, 1998 as compared to $44.4 million for the period ended December 31,
1997. The primary reason for the decrease was the net cash paid for the Invetech
and other acquisitions in the prior year. Also contributing to the decrease were
lower property and equipment purchases of approximately $3.5 million.
The Company is building a new 160,000 square foot distribution center in the
city of Fontana, California, in the greater Los Angeles area. Construction is
expected to be completed by the end of the third quarter of fiscal 1999. This
build-to-suit facility will be leased by the Company under a 10 year lease which
is expected to be accounted for as an operating lease. The Company is planning
to move out of its current Corona Distribution Center and into the new facility
in March 1999 upon completion of the new facility.
Working capital at December 31, 1998 was $264.2 million compared to $221.8
million at June 30, 1998. This increase is primarily due to refinancing of
short-term debt and reclassification of other current obligations as long-term
debt as these borrowings are intended to be refinanced under the new revolving
credit facility.
CAPITAL RESOURCES
Capital resources are obtained from income retained in the business,
indebtedness under the Company's debt agreements, and operating lease
arrangements. Average combined short-term and long-term borrowing was $150.4 and
$107.9 million for the six months ended December 31, 1998 and 1997,
respectively. The weighted average interest rate on borrowings under revolving
9
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
credit facilities for the six months ended December 31, 1998 decreased to 5.9%
from an average rate of 6.0% for the six months ended December 31, 1997.
In November 1998, the Company entered into a committed revolving credit
agreement with a five year term with a group of lending institutions. This
agreement provides for unsecured borrowings of up to $150 million. This facility
was used to pay down the current short term line of credit borrowings. The
Company had $42.0 million of borrowings outstanding under this facility at
December 31, 1998. Unused lines under this facility totaling $108.0 million are
available to fund future acquisitions or other capital and operating
requirements. In January 1999, the Company entered into an agreement with a
commercial bank for a $15 million short-term uncommitted line of credit.
The Board of Directors has authorized an ongoing program to purchase shares of
the Company's common stock to fund employee benefit programs, stock option and
award programs, and future acquisitions. These purchases are made in open market
and negotiated transactions, from time to time, depending upon market
conditions. The Company acquired 707,000 shares of its common stock for $11.6
million during the six months ended December 31, 1998. The Company has remaining
authorization to acquire up to 776,000 shares of Company stock.
Management expects that capital resources provided from operations, available
lines of credit, and long-term debt and operating leases will be sufficient to
finance normal working capital needs, business acquisitions, enhancement of
facilities and equipment, and the purchase of additional Company common stock.
Management also believes that additional long-term debt and line of credit
financing could be obtained if desired.
YEAR 2000 READINESS DISCLOSURE
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. Certain modules of the
new financial information system are already in use and the Company expects that
the complete system will be operating by early calendar year 1999. The Company's
OMNEX(R) inventory and sales information system and customer billing system have
been remediated and tested, and are now Year 2000-compliant. In addition, the
Company has completed its assessment and remediation, and is currently
conducting testing, of its other critical systems, including its corporate
information system. The Company expects to have completed testing of these
systems in early calendar year 1999.
10
<PAGE> 12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Year 2000 issue also affects certain of the Company's non-critical computer
systems and equipment containing embedded technology. The Company has largely
completed its assessment of these non-critical systems, and 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
completed in a timely manner, then the Year 2000 issue could have a material
adverse effect on the Company's business, financial condition, results of
operations, or cash flow. 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 field locations 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.
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. 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.
11
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
A summary of the period-to-period changes in principal items included in the
statements of consolidated income follows:
<TABLE>
<CAPTION>
Increase (Decrease)
(Dollars in Thousands Except Per Share Amounts)
Three Months Ended Six Months Ended
December 31 December 31
1998 and 1997 1998 and 1997
Amount Change Amount Change
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $2,772 0.8% $37,220 5.2%
Cost of sales 5,587 2.0% 33,838 6.4%
Selling,distribution and
administrative expenses 1,022 1.3% 12,255 7.7%
Operating income (3,837) (26.9%) (8,873) (36.9)%
Interest expense - net 770 35.6% 1,056 24.3%
Income before income taxes (4,607) (38.1)% (9,929) (50.3)%
Income taxes (1,281) (29.2)% (3,464) (46.1)%
Net income (3,326) (43.1)% (6,465) (52.9)%
Net income per share - diluted (.15) (42.9)% (.31) (54.4)%
</TABLE>
12
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APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Three Months Ended December 31, 1998 and 1997
- ---------------------------------------------
The increase in net sales from the prior year related primarily to companies
acquired since December 1997. Gross profit as a percentage of sales decreased to
24.8% from 25.8%. This decrease primarily is due to lower discounts and
allowances from suppliers.
Selling, distribution and administrative expenses as a percent of sales,
increased slightly to 22.0% from 21.9%. This was primarily due to increased
goodwill amortization associated with the companies acquired since December
1997.
Interest expense-net for the quarter increased by 35.6% as compared to the prior
year primarily as a result of an increase in average borrowings relating to
acquisitions.
Income tax expense as a percentage of income before taxes was 41.4% in the
quarter ended December 31, 1998 and 36.2% in the quarter ended December 31,
1997. The increase is primarily due to an adjustment of tax liability accounts
from a resolution of certain tax contingencies in December 1997 and the effect
of higher nondeductible goodwill.
As a result of the above factors, net income decreased by 43.1% compared to the
same quarter of last year.
Six Months Ended December 31, 1998 and 1997
- -------------------------------------------
The increase in net sales from the prior year related primarily to the
acquisition of Invetech effective August 1, 1997 and other companies during
fiscal 1998. Gross profit as a percentage of sales decreased to 24.9% from
25.7%. This decrease primarily is due to lower discounts and allowances from
suppliers.
Selling, distribution and administrative expenses as a percent of sales,
increased to 22.9% from 22.3%. This was primarily due to the acquisition of
Invetech and other companies during fiscal 1998. Also contributing to the
increase were higher goodwill amortization, outside consulting and temporary
employment expenses. Additional increases during the period related to a pretax
restructuring and other special charges of $5.4 million for costs of branch
consolidation, downsizing and workforce reductions. This charge decreased net
income by $3.2 million, or $.14 per share. The prior year results included a
$4.0 million pretax restructuring charge that decreased net income by $2.4
million or $.11 per share associated with the acquisition of Invetech.
Interest expense-net for the quarter increased by 24.3% as compared to the prior
year primarily as a result of an increase in average borrowings.
Income tax expense as a percentage of income before taxes was 41.3% in the six
months ended December 31, 1998 and 38.1% in the six months ended December 31,
1997. The increase is
13
<PAGE> 15
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
primarily due to an adjustment of tax liability accounts from a resolution of
certain tax contingencies 1997 and the effect of higher nondeductible goodwill.
As a result of the above factors, net income decreased by 52.9% compared to the
same quarter of last year.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
- -------------------------------------------------------------------
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; the
Company's ability to complete, in a timely manner and within cost estimates, its
Year 2000 project; 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).
14
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
-----------------
(a) The Company incorporates by reference herein the description of the
case captioned WALTER R. REED, ET AL. V. METROPOLITAN LIFE INS. CO., ET
AL., 20th Judicial District Court for the Parish of West Feliciana,
Louisiana, Case No. 13,836, found in Item 3 "Pending Legal Proceedings"
contained in the Company's Form 10-K for the fiscal year ended June 30,
1998. In December 1998, the Company was dismissed without prejudice
from this case.
(b) Applied Industrial Technologies, Inc. and/or one of its subsidiaries is
a defendant in several other product and employment-related lawsuits.
Based on circumstances presently known, the Company believes that these
cases are not material to its business or financial condition.
ITEM 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
At the Annual Meeting of Shareholders of the Company held on October
20, 1998, the Shareholders (i) elected William G. Bares, Dr. Roger D.
Blackwell, Russel B. Every, and John J. Kahl as Directors of Class II
for a term expiring in 2001, and (ii) ratified the appointment of
Deloitte & Touche LLP as the Company's independent auditors for the
fiscal year ending June 30, 1999. Substantially the same information
was previously reported in Part II, Item 5 "Other Information" of the
Company's Form 10-Q for the quarter ended September 30, 1998.
ITEM 5. Other Information.
-----------------
David L. Pugh was elected the Company's President and Chief Operating
Officer as of January 1, 1999.
ITEM 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
---------
Exhibit No. Description
----------- -----------
3(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc. (filed as Exhibit
3(a) to the Company's Form 10-Q for the
quarter ended September 30, 1998, SEC
File No. 1-2299, and incorporated here
by reference).
15
<PAGE> 17
3(b) Code of Regulations of Applied
Industrial Technologies, Inc.
adopted September 6, 1988 (filed as
Exhibit 3(b) to the Company'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 the Company'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 the Company and The
Prudential Insurance Company of
America (filed as Exhibit 4(b) to
the Company'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 and Private Shelf Facility
dated October 31, 1992 between the
Company and The Prudential Insurance
Company of America (filed as Exhibit
4(g) to the Company'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
the Company and The Prudential
Insurance Company of America (filed
as Exhibit 4(f) to the Company's
Form 10-Q for the quarter ended
March 31, 1998, SEC File No. 1-2299,
and incorporated here by reference).
4(e) $150,000,000 Credit Agreement dated
as of November 5, 1998 among the
Company, KeyBank National
Association as Agent, and various
financial institutions (filed as
Exhibit 4(e) to the Company's Form
10-Q for the quarter ended
16
<PAGE> 18
September 30, 1998, SEC File No.
1-2299, and incorporated here by
reference).
4(f) Rights Agreement, dated as of
February 2, 1998, between the
Company 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 the Company's
Registration Statement on Form 8-A
filed July 20, 1998, SEC File No.
1-2299, and incorporated here by
reference).
10(a) First Amendment to the Supplemental
Executive Retirement Benefits Plan
effective as of August 5, 1998.
10(b) Employment Agreement dated December
21, 1998 between David L. Pugh and
the Company.
27 Financial Data Schedule.
(b) The Company did not file, nor was it required to file, a Report on Form
8-K with the Securities and Exchange Commission during the quarter
ended December 31, 1998.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Company)
Date: February 12, 1999 By: /s/ John C. Dannemiller
-----------------------------
John C. Dannemiller
Chairman & Chief Executive Officer
Date: February 12, 1999 By: /s/ John R. Whitten
-------------------------
John R. Whitten
Vice President-Chief Financial Officer
& Treasurer
17
<PAGE> 19
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1998
EXHIBIT NO. DESCRIPTION PAGE
3(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc. (filed as Exhibit
3(a) to the Company's Form 10-Q for
the quarter ended September 30,
1998, SEC File No. 1-2299, and
incorporated here by reference).
3(b) Code of Regulations of Applied Industrial
Technologies, Inc., adopted September 6,
1988 (filed as Exhibit 3(b) to the Company'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 the Company'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 the Company and The Prudential Insurance
Company of America (filed as Exhibit 4(b) to the Company'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 and Private Shelf Facility dated
October 31, 1992 between the Company and The Prudential
Insurance Company of America (filed as Exhibit 4(g) to the
Company's Form 10-Q for the quarter ended March 31, 1996,
<PAGE> 20
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 the Company and The Prudential Insurance
Company of America (filed as Exhibit 4(f) to the
Company's Form 10-Q for the quarter ended March
31, 1998, SEC File No. 1-2299, and incorporated
here by reference).
4(e) $150,000,000 Credit Agreement dated as of November
5, 1998 among the Company, KeyBank National
Association as Agent, and various financial
institutions (filed as Exhibit 4(e) to the
Company's Form 10-Q for the quarter ended
September 30, 1998, SEC File No. 1-2299, and
incorporated here by reference).
4(f) Rights Agreement, dated as of February 2, 1998,
between the Company 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 the Company's Registration
Statement on Form 8-A filed July 20, 1998, SEC
File No. 1-2299, and incorporated here by
reference).
10(a) First Amendment to the Supplemental Executive Attached
Retirement Benefits Plan effective as of
August 5, 1998.
10(b) Employment Agreement dated December 21, 1998 Attached
between David L. Pugh and the Company.
27 Financial Data Schedule. Attached
<PAGE> 1
FIRST AMENDMENT
TO THE
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(JULY 1, 1997 RESTATEMENT)
WHEREAS, the Applied Industrial Technologies, Inc. Supplemental
Executive Retirement Plan (formerly known as the Bearings, Inc. Supplemental
Executive Retirement Plan and hereinafter referred to as the "Plan") was
established on January 21, 1988, by Applied Industrial Technologies, Inc.
(formerly known as Bearings, Inc. and hereinafter referred to as the "Company")
to provide supplemental retirement benefits for certain key executives of the
Company; and
WHEREAS, effective as of July 1, 1997, the Plan was amended and
restated; and
WHEREAS, the Company desires to amend certain distribution provisions
of the Plan;
NOW, THEREFORE, effective as of August 5, 1998, the Plan is hereby
amended in the respects hereinafter set forth.
1. Section 1.1 of the Plan is hereby amended by the addition of a
Paragraph (16) at the end thereof to provide as follows:
(16) The term "POTENTIAL CHANGE OF CONTROL" shall mean the
occurrence of either of the following events:
(i) any "person" becomes the "beneficial owner"
(as those terms are defined by the
Securities Exchange Act of 1934), directly
or indirectly, of Company securities
representing 15% or more of the combined
voting power of then outstanding securities
of the Company; or
(ii) any person publicly announces an intention
to take or to consider taking actions which,
if consummated, would constitute a Change of
Control.
2. Section 7.3 of the Plan is hereby amended to provide as follows:
7.3 PAYMENT OF BENEFITS UPON A CHANGE IN CONTROL. Except as
otherwise provided in this Section 7.3 any monthly supplemental
retirement benefit which is calculated under Section 7.2 and which
is payable to an eligible Participant shall not be paid in a
monthly annuity form but instead shall be paid in a single sum
<PAGE> 2
determined using the actuarial factors and interest rate set forth
in Section 11.7, unless such Participant elects (i) during the
30-day period after a Potential Change of Control, or (ii) prior
to the occurrence of a Change of Control, whichever occurs
earlier, to receive, after his termination of employment with the
Company such monthly supplemental retirement benefits in one of
the optional payments forms described in Section 6.1 of the Plan.
Moreover, in the event of a Change of Control, each Participant
and each Contingent Annuitant of a deceased Participant, who is
receiving monthly supplemental retirement benefits under the Plan,
shall receive the actuarial present value of future payments of
such monthly benefits in a single sum determined pursuant to the
provisions of Section 11.7. Any such single sum payment payable
under this Section 7.3 shall be made to an eligible Participant or
an eligible Contingent Annuitant as soon as reasonably practicable
but in no event later than 60 days after such Change of Control.
Executed at Cleveland, Ohio this 21st day of December, 1998.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
By: /s/ John R. Whitten
------------------------------------
Title: Vice President
<PAGE> 1
December 21, 1998
Mr. David L. Pugh PERSONAL AND CONFIDENTIAL
2900 Hidden Lake Road
Mequon, Wisconsin 53092
Re: Offer of Employment; President & Chief Operating Officer
Dear David:
This letter sets forth the proposed terms of your employment with
Applied Industrial Technologies, Inc. ("Applied"), commencing effective January
1, 1999:
1. POSITION. Your title will be President & Chief Operating
Officer and you will report to me.
2. BASE SALARY. As is the case with all Applied officers,
compensation and benefits are set by the Board's Executive
Organization & Compensation Committee (the "Committee").
Under present procedures, annual base salary is reviewed in
October of each year, with changes effective November 1.
Your starting annual base salary will be $375,000.
3. 1999 MANAGEMENT INCENTIVE PLAN. You will be designated a
participant in the Management Incentive Plan for the fiscal
year ending June 30, 1999. The Management Incentive Plan
provides for incentive payments based on both Applied and
the officer achieving certain goals. The Committee and the
full Board of Directors set the goals at the beginning of
each fiscal year, with payments, if any, distributed in
August following the end of the year. If Applied fails to
achieve its corporate goals, there are no payments under
the Plan. Assuming the corporate goals are achieved, the
payout is based upon a formula. The target incentive
payment for each officer is a multiple of the salary
midpoint for the officer position as set by the Committee
and a target percentage assigned to the position.
For fiscal 1999, you and I will have Applied's corporate
goals (which were set in July) for our individual goals.
Your midpoint for fiscal 1999 will be $375,000 and the
target percentage assigned is 60%,
<PAGE> 2
Mr. David Pugh
Page 2
giving you a target incentive payment, if all target goals
are met, of $225,000 multiplied by a fraction, the
numerator of which is equal to the number of full months
during fiscal 1999 that you are an Applied employee and the
denominator of which is 12. The maximum payment, if the
maximum levels for all corporate and individual goals are
met, would be 150% of the target payment and the minimum
payment, if only the threshold levels for all goals are
met, would be 50% of the target payment. Your incentive
payment for fiscal 1999 is guaranteed to be at least
$100,000.
Under Applied's Deferred Compensation Plan (described in
greater detail in the "Overview of Executive Benefit
Programs," enclosed), you may defer your receipt of (and
payment of taxes on) all or a portion of your Management
Incentive Plan awards. If you defer at least 50% of an
annual Management Incentive Plan award and elect to have it
invested in Applied common stock, your Deferred
Compensation Plan account will be credited with 110% of
that deferred amount (i.e. a 10% kicker).
4. STOCK-BASED AWARDS. The Committee will grant you the
following stock-based awards under our 1997 Long-Term
Performance Plan promptly following the commencement of
your employment with Applied:
a. Stock Options. You will be awarded non-statutory
options to purchase 60,000 shares of Applied common
stock. The exercise price for the stock options will
be the fair market value of Applied common stock on
the date of grant. The options will become 25%
exercisable after the first year of continuous
employment following the date of grant and an
additional 25% for each year of continuous
employment thereafter. The option agreement term
will be 10 years. In addition, you will be paid cash
in the amount of the aggregate spread on the options
in the event of your termination following a change
in control of Applied under the circumstances
described in "Change in Control Agreement," below.
b. Restricted Stock. You will be awarded 40,000
restricted shares of Applied common stock. The
shares will become 25% vested after the first year
of continuous employment following the date of grant
and an additional 25% for each year of continuous
employment thereafter. The shares will bear transfer
restrictions for a period of two years following
vesting. In the event of a change in control, these
shares will become 100% vested and the transfer
restrictions will be removed.
<PAGE> 3
Mr. David Pugh
Page 3
c. Performance-Accelerated Restricted Stock. You will
be awarded 40,000 shares of Performance-Accelerated
Restricted Stock ("PARS") under the terms of a
standard PARS agreement. The PARS are restricted
shares of Applied common stock that will vest
automatically on August 7, 2003 assuming your
continuous employment through that date. The PARS
can vest at an earlier date, however, if Applied
achieves certain performance hurdles based on stock
price and annual pre-tax return on assets ("ROA").
Fifty percent of the PARS will vest on the
achievement of either an ROA of 13.5%, or a stock
price of $33.33 per share for 20 consecutive trading
days. The remaining 50% will vest on the achievement
of either an ROA of 17.5%, or a stock price of
$37.33 for 20 consecutive trading days. The shares
will become 100% vested in the event of a change in
control.
5. CHANGE IN CONTROL AGREEMENT. You will receive our standard
officer change-in-control agreement. This agreement
provides that if, within three years following a change in
control of Applied, your employment with Applied is
terminated either by you "for good cause" or by Applied
"without cause", then you will receive a severance payment
equal to three times your total compensation (base salary
plus the average of your three most recent years'
incentive pay), plus three years of continued benefits.
6. SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS PLAN ("SERP").
The Committee will name you a participant in the SERP. The
SERP provides a non-qualified straight life retirement
benefit at age 65 equal to 45% of the average of your
highest three years' total compensation (base salary plus
incentive), reduced by 1/20th for each year that the number
of your years of service with Applied is less than 20. The
SERP also provides that in the event of a change in
control, you are eligible to receive the present value
actuarial equivalent of your retirement benefit in a lump
sum. Your annual straight life benefit at age 65 will be
guaranteed to be at least $50,000. In addition, if, while
employed by Applied, you die prior to the end of your fifth
year of service with Applied, you shall be credited with
five years of service for purposes of the SERP. The SERP is
described in greater detail in the enclosed "Overview of
Executive Benefit Programs."
<PAGE> 4
Mr. David Pugh
Page 4
7. OTHER EXECUTIVE PLANS AND PROGRAMS. As an Applied officer,
you will be eligible to participate in the following
executive plans and programs:
a. Life Insurance Program;
b. Long-Term Disability Program; and,
c. Deferred Compensation Plan (also referenced above
under "Management Incentive Plan").
Each of these benefits is detailed in the "Overview of
Executive Benefit Programs." The plan descriptions set
forth in the overview are supplemented and qualified in
their entirety by the plans themselves.
8. VACATION. You will be eligible to take five weeks of
vacation time annually, which amount will be prorated for
fiscal 1999 based on the date you commence employment.
9. RELOCATION. It is understood that you will relocate to
Cleveland immediately following your acceptance of this
offer. You will receive our standard relocation package,
subject to our understanding that you are not using Cendant
Mobility in connection with the sale of your home. I have
enclosed a copy of our relocation policy for your review.
Applied will also reimburse you for your family's
reasonable temporary residence expenses until you find a
permanent residence; this reimbursement obligation will
not, however, extend to expenses incurred after May 1999.
10. AUTOMOBILE ALLOWANCE. You will receive an allowance for
your automobile. The current monthly allowance for your
position is $1,026.10.
11. PERQUISITES. In addition to the foregoing, you are eligible
to receive the following at Applied's expense:
a. Executive tax preparation services;
b. Membership dues for The Union Club and a country
club; and,
c. An annual physical examination.
For personal income tax purposes, the annual value of these
items will be included in your W-2 form.
<PAGE> 5
Mr. David Pugh
Page 5
12. OTHER ASSOCIATE BENEFITS. Normal benefits available to all
Applied employees include:
a. Health Insurance. We offer HMO and PPO options
administered by Aetna and dental coverage
administered by Jardine. Because you become eligible
for this benefit only after a 30-60 day waiting
period, Applied will reimburse you for interim COBRA
costs.
b. Retirement Savings Plan. Applied's section 401(k)
plan provides for compensation deferral and a
company match in Applied common stock with respect
to the first 6% of compensation deferred. A variety
of investment options are available. The company
match ranges from a minimum of 25% to a maximum of
100% per quarter based on Applied achieving certain
earnings hurdles set annually by the Board. An
additional 5% bonus match is made with respect to
officer contributions invested in the Applied Stock
Fund. Applied also makes annual profit sharing
contributions depending on Applied's profitability
during the previous fiscal year. The company match
and profit sharing contributions vest at the rate of
25% for each year of your employment with Applied.
c. Supplemental Defined Contribution Plan (the "Shadow
Plan"). Highly compensated associates are eligible
for the Shadow Plan, a non-qualified plan maintained
in conjunction with the Retirement Savings Plan. The
Shadow Plan provides you a vehicle for saving on a
tax-deferred basis even if the tax laws limit the
amount of contributions you can make to the
Retirement Savings Plan
I have enclosed a copy of our brochure, "Your Ticket to
Your 1998 Benefits," which provides additional information
about various plans available to our associates. The plan
descriptions set forth in this letter are supplemented and
qualified in their entirety by the materials contained in
the enclosed benefits materials and the plans themselves.
13. Your Covenants.
--------------
a. Noncompetition Covenant. During the two-year period
following the date of termination of any and all of
your relationships with Applied (other than as a
shareholder), including any and all relationships as
a director, officer or employee of Applied or its
affiliates, you covenant and agree that you will
not, directly or indirectly, with or through another
individual or organization, whether as a shareholder
(other than as the holder of less than 1%
<PAGE> 6
Mr. David Pugh
Page 6
of the outstanding shares of a publicly held
company), partner, member, director, officer,
employee, agent or consultant, or in any other
capacity, in competition with Applied or any of its
affiliates, anywhere within the United States,
Canada, or any other nation in which Applied or its
affiliates hereafter conducts business, (i)
distribute products that are the same or similar to
products now or hereafter sold, designed, or
distributed by Applied or any of its affiliates, or
(ii) provide services that are the same or similar
to services now or hereafter provided by Applied or
any of its affiliates. The foregoing clause "(ii)"
shall not, however, be deemed to prevent you from
being a shareholder, partner, member, director,
officer, employee, agent or consultant of any
organization whose primary operations are not in
direct competition with Applied or its affiliates so
long as the organization was not among the top 25
product suppliers to Applied and its affiliates (as
determined by the dollar volume of purchases from
the organization) during the fiscal year ending
prior to your termination.
b. Confidential Information. During the five-year
period following the date of termination of any and
all of your relationships with Applied (other than
as a shareholder), including any and all
relationships as a director, officer or employee of
Applied or its affiliates, you covenant and agree to
keep confidential and not disclose to others
information relating to Applied or any of its
affiliates, or their respective businesses,
including, but not limited to, information regarding
(i) customers or potential customers; (ii) vendors
or suppliers; (iii) pricing structure and profit
margins; (iv) business plans and strategies; (v)
employees and payroll policies; (vi) computer
systems; (vii) facilities or properties; and (viii)
other proprietary, confidential or secret
information relating to Applied or any of its
affiliates ("Confidential Information"). You shall
use all reasonable care to protect, and prevent
unauthorized disclosure of, any Confidential
Information unless such information (a) is now or
becomes generally known or available to the public
without any violation of this agreement; or (b) is
required to be disclosed by applicable law or court
or governmental order.
c. Remedies; Severability. You acknowledge that a
breach of your covenants in this Section 13 would
result in irreparable injury to Applied for which
monetary damages alone would not be an adequate
remedy. Therefore, you consent to the issuance of
injunctive relief in the event of a breach of your
covenants, in addition to any other remedies to
which Applied may be entitled at
<PAGE> 7
Mr. David Pugh
Page 7
law or in equity. In addition, if any provision of
this Section 13 or the application of any provision
to any person or circumstances is held invalid,
unenforceable, or otherwise illegal, including
without limitation, as to time, geographic area, or
scope of activity, that provision shall be severable
from the other provisions of this Section and the
remainder of this Section and the application of
that provision to any other person or circumstance
shall not be affected, and the provision so held to
be invalid, unenforceable or otherwise illegal shall
be reformed to the extent (and only to the extent)
necessary to make it enforceable, valid, and legal.
14. YOUR REPRESENTATIONS. You represent to Applied that (a)
entering into an employment relationship with Applied will
not violate any provision of or result in a breach under
any agreement to which you are a party or by which you are
bound; (b) you are not a party to, or bound by, any
agreement, understanding, covenant, policy, other
arrangement, or fiduciary obligation, that would affect or
limit your ability to provide services to, or to carry out
your responsibilities with Applied, including without
limitation any noncompetition, nonsolicitation, employment,
consulting or other agreement; and (c) you have not
retained, nor will you use in connection with your
employment with Applied, any proprietary or confidential
information of any previous employer or other person or
entity.
As with the other Applied officers, you will not have an
employment agreement assuring continued employment. Officers serve at the will
of our Board of Directors.
<PAGE> 8
Mr. David Pugh
Page 8
I hope the foregoing and the enclosures are useful to you in
understanding the program we are offering. We are all excited about the prospect
of having you as our President & Chief Operating Officer.
Please acknowledge your acceptance of our offer and your agreement
to the matters set forth in this letter by signing and returning the enclosed
extra copy of this letter. If you have any questions about the details of our
compensation plans, please call Bob Stinson, our Vice President-Chief
Administrative Officer, General Counsel & Secretary, at 216-426-4510; or if I
can be of any further assistance, please call me.
Cordially,
/s/ John C. Dannemiller
-------------------------------------
John C. Dannemiller
Chairman, Chief Executive Officer
& President
Enclosures
I acknowledge and accept this offer to commence employment
effective January 1, 1999.
Date: December 21 , 1998 /s/ David L. Pugh
-------------------- -------------------------------------
David L. Pugh
<TABLE> <S> <C>
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<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
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0
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<NET-INCOME> 5,746
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
</TABLE>
