-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E6bUFeoHkpF5xbqeAncFQE+rQMPlegRC1FkyMqaNGKfhgHr0sTJFUpqszZhIRh9m WkXz8UlrIVrSM/0pgOiUlQ== 0000950152-99-007647.txt : 19990920 0000950152-99-007647.hdr.sgml : 19990920 ACCESSION NUMBER: 0000950152-99-007647 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED INDUSTRIAL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000109563 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 340117420 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02299 FILM NUMBER: 99713115 BUSINESS ADDRESS: STREET 1: 3600 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2168818900 MAIL ADDRESS: STREET 1: 3600 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 FORMER COMPANY: FORMER CONFORMED NAME: BEARINGS INC /OH/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BROWN JIM STORES INC DATE OF NAME CHANGE: 19600201 10-K405 1 APPLIED INDUSTRIAL TECHNOLOGIES, INC. 1 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, 1999 Commission File No. 1-2299 APPLIED INDUSTRIAL TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) OHIO 34-0117420 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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: Title of each class Name of exchange on which registered ------------------- ------------------------------------ Common Stock, without par value New York Stock Exchange Preferred Stock Purchase Rights 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] 2 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, 1999: $286,267,648. 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, 1999 ----- ------------------------------ Common Stock, without par value 20,993,104 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. 1999 Annual Report to shareholders for the fiscal year ended June 30, 1999, 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, 1999, portions of which are incorporated by reference into Parts III and IV of this Form 10-K. 1 3 PART I. ------- ITEM 1. BUSINESS. --------- Applied Industrial Technologies, Inc. ("Applied"), directly and through its wholly owned operating subsidiaries, distributes industrial products, including bearings, power transmission components, hydraulic and pneumatic (together referred to as fluid power) components, industrial rubber products, linear motion products, and general maintenance and specialty items manufactured by others. In addition, Applied provides mechanical, rubber, and fluid power shop services, including engineering design, and electrical, gearing, material handling, hose, and fluid power systems. 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 in Delaware in 1928 and reincorporated in Ohio in 1988. Applied, formerly known as Bearings, Inc., adopted its current name as of January 1, 1997. (a) GENERAL DEVELOPMENT OF BUSINESS. In fiscal 1999, Applied acquired the following companies, for purchase prices totaling $14.8 million, in order to extend its geographic reach and expertise in targeted product technologies: - Elect-Air Tool Co. and Fornaciari Company, distributors of pneumatic power components and hydraulic power components, respectively, each with two locations in California - Rafael Benitez Carrillo, Inc., a bearings and power transmission component distributor with two locations in Puerto Rico - Nicholson Supply Company, a bearings and power transmission component distributor with two locations in Nebraska - BPC Supply Company, a bearings and power transmission component distributor with three locations in Utah Applied launched several electronic commerce initiatives during the year. First, Applied formed an alliance with Datastream Systems, Inc. to be a supplier to Datastream's new online procurement system. The system, named e-MRO (a Datastream service mark), is an extension of Datastream's industrial maintenance procurement software and offers users a direct electronic commerce link to Applied through the Internet, making it easier to order replacement parts electronically. In June, Applied announced the launch of two Internet sites, AppliedAccess(R) and Farm Warehouse (SM). AppliedAccess (www.applied-access.com) provides customers a quick and easy method to search for products in Applied's vast electronic catalog, view prices, place orders, and track order status online. Farm Warehouse (www.farmwarehouse.com) provides farmers and ranchers the convenience of locating and ordering replacement parts for their equipment online. 2 4 David L. Pugh joined Applied as President & Chief Operating Officer in January 1999. Mr. Pugh most recently was senior vice president of Rockwell Automation's Industrial Control Group and brings with him broad marketing, operations, and general management experience. Further information regarding developments in Applied's business can be found in Applied's 1999 Annual Report to shareholders under the caption "Management's Discussion and Analysis" on pages 10 through 12, which is incorporated here by reference. (b) FINANCIAL INFORMATION ABOUT SEGMENTS. Applied considers its business to involve only one reportable business segment, service center-based distribution. This business provides customers with solutions to their maintenance, repair, and original equipment manufacturing needs by distributing bearings, power transmission components and systems, fluid power components, industrial rubber products, linear motion products, general maintenance products, and related specialty items through Applied's service centers. Applied also offers technical product application support and provides creative solutions to help customers minimize downtime and reduce overall procurement costs. In addition to the service center-based distribution business, Applied operates several smaller businesses that primarily sell their products and services directly to customers rather than through the service centers. These businesses include specialized fluid power operations, certain electrical and fabricated rubber service operations, and Applied's electronic commerce businesses. Financial information on the service center-based distribution segment and Applied's other businesses can be found in Applied's 1999 Annual Report to shareholders in note 11 to the financial statements on page 24, and that information is incorporated here by reference. (c) NARRATIVE DESCRIPTION OF BUSINESS. Overview. Applied's service centers, located in 46 states and Puerto Rico, serve as the company's primary business channel. The products and services marketed through the service centers involve varying levels of complexity, technical skill, and support. As noted in "Financial Information about Segments," above, Applied also operates other businesses that sell products and services directly to customers rather than through the service centers. These businesses include specialized fluid power operations, certain electrical and fabricated rubber service operations, and Applied's electronic commerce businesses. In fiscal 1999, in an effort to provide additional focus to its higher value-added services and systems, as differentiated from products sold as components, Applied formed the following marketing divisions related to specific product and service categories: - Industrial Products Division. This division provides procurement and technical support for the service centers with respect to industrial products sold as components, including bearings, power transmission components, fluid power components, linear motion 3 5 products, and general maintenance and specialty items. As noted in the sales data below, the products supported by this division represent the bulk of Applied's sales dollars. - Engineered Systems Division. This division is responsible for Applied's power transmission and electrical systems business, including mechanical shop operations. The division provides the service centers with technical training, and design and fabrication support. The service centers represent the primary sales channel for this division. As such, most of this division's operations are included in the service center-based distribution segment described above. - Fabricated Rubber Division. This division's primary operations are rubber shops, which fabricate heavy and lightweight conveyor belt, hydraulic hose, and industrial hose to meet customer requirements. In addition, the division has a field service group that performs belt installation and repair. Except for the field service group, the division sells its services primarily through the service centers. Most of this division's operations are therefore included in the service center-based distribution segment described above. - Fluid Power Division. This division includes Applied's specialized fluid power businesses, which market their products and services directly to customers rather than through the service centers. These businesses operate in various geographic areas throughout the United States under the following names: Air and Hydraulics Engineering (Southeast), Dees Fluid Power (Mid-Atlantic and Northeast), Elect-Air (California and Arizona), Engineered Sales (Midwest), ESI Power Hydraulics (Illinois and Wisconsin), and Fornaciari (California and Arizona). In addition, the Fluid Power Division operates several geographically dispersed fluid power shops in support of the service centers. Based on Applied's analysis of dollar sales volume for fiscal 1999 (for Applied's service center-based distribution and other businesses), the Industrial Products Division represented 70%, the Engineered Systems Division represented 15%, and the Fluid Power and Fabricated Rubber Divisions together represented 14% of sales. Although the divisional structure was not created until fiscal 1999, a pro forma analysis for fiscal 1998 shows the Industrial Products Division represented 72%, the Engineered Systems Division represented 15%, and the Fluid Power and Fabricated Rubber Divisions together represented 12% of sales. Comparable figures are not available for fiscal 1997. The sum of percentages shown is less than 100% due to rounding. Products. Applied engages in the distribution and sale of ball, roller, mounted, and plane bearings, power transmission components, fluid power components, industrial rubber products, linear motion products, and general maintenance and specialty items such as seals, sealants, fluid sealing, "O" rings, retaining rings, adhesives, lubricants, maintenance tools and equipment, and safety and cleaning products. Applied does not generally manufacture the products that it sells. Applied is a non-exclusive distributor for numerous manufacturers. The principal product lines distributed by Applied are the following: - Bearings. American, Barden, Dodge, FAG, INA, Kaydon, Link-Belt, McGill, MRC, Rexnord, Sealmaster, SKF, Symmco, Timken, and Torrington/Fafnir. 4 6 - Power Transmission. 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, Dayco, Dixon, Flexco, Fusion, Gates, Goodyear, Habasit, Scandura, Siegling, and Weatherhead. - Fluid Power. 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. Services. Applied's service center associates 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 technologies. These 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 continue to develop closer, longer-lasting, and more profitable customer relationships. Applied's sales associates consist of customer service representatives and field account managers assigned to each Applied service center, in addition to product specialists. Customer service representatives receive, process, and expedite customer orders, provide product and pricing information, and assist field account managers in serving customers. Field account managers make on-site calls to customers and potential customers to provide product and price 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, account managers can measure and document the value to the customer, through cost savings and/or increased productivity, of Applied's services and advice. Product specialists from the Engineered Systems, Fabricated Rubber, and Fluid Power Divisions assist with applications in their areas of technical expertise. Applied has also established Centers of Expertise and technical call centers within those divisions, staffed by skilled technicians who provide consulting and training services with respect to particular product technologies. Applied maintains inventory levels at each service center that are tailored to meet customers' immediate needs. These inventories consist of standard items stocked at most service centers as well as other items related to customers' needs in the particular locale. As a result, each service center's business is concentrated largely in the geographic area where the service center is located. Applied also maintains back-up inventory in its eight regional distribution centers. The inventory 5 7 maintained at Applied's facilities enables customers to minimize their own inventories of industrial products. In addition to the service centers, Applied maintains a network of mechanical, rubber, and fluid power shops. These shops are operated through the Engineered Systems, Fabricated Rubber, and Fluid Power Divisions, respectively. Applied's mechanical shops, within the Engineered Systems Division, rebuild and assemble speed reducers, provide custom machining, assemble electrical panels to customer specifications, and perform systems automation services. These shops are located in the following cities: - Fontana, California - Detroit, Michigan - Denver, Colorado - Cleveland, Ohio - Atlanta, Georgia - Fort Worth, Texas - Florence, Kentucky - Longview, Washington Applied's Fabricated Rubber Division operates shops that modify and repair belts and provide hose assemblies in accordance with customer requirements. These rubber shops are located in the following cities: - Tucson, Arizona - Cranbury, New Jersey - Fontana, California - Clackamas, Oregon - Tracy, California - Fort Worth, Texas - Denver, Colorado - Salt Lake City, Utah - Crestwood, Illinois - Longview, Washington - Billings, Montana - Appleton, Wisconsin Besides the services offered by the Fabricated Rubber Division at its shops, Applied's field crews perform belt installation and repair services and rubber lining installation services at customer locations in select geographic areas. Applied's Fluid Power Division operates shops that assemble fluid power systems and components and offer technical advice to customers. These shops are located in the following cities: - Birmingham, Alabama - Worcester, Massachusetts - Fontana, California - Maryland Heights, Missouri - San Jose, California - Fort Worth, Texas - Atlanta, Georgia - Kent, Washington - Baltimore, Maryland - Longview, Washington Timely delivery of products to customers is an integral part of Applied's service. Service centers 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 6 8 delivery vehicles are also used to move products between suppliers, distribution centers, and service centers to assure availability of merchandise for customer needs. Applied's inventory and sales information systems enhance its ability to serve customers. Applied's point-of-sale OMNEX(R) computer system gives each Applied location on-line access to inventory and sales information. The system permits direct access for order entry, pricing, order expediting, and back order review. Applied's computer systems also support electronic data interchange (EDI) and electronic funds transfer (EFT) with participating customers and suppliers. AppliedAccess(R), introduced in June 1999, provides customers an Internet-based means to search for products in Applied's vast electronic catalog, view prices, place orders, and track order status. Applied's operations contrast sharply with those of the manufacturers whose products Applied 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 by developing new methods for marketing its products. There can be no guarantee, however, that this trend will not have an adverse effect on Applied's business. Customers have also increasingly demonstrated a desire to order industrial products 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. AppliedAccess, Farm Warehouse, and e-MRO (described in greater detail in Item 1, subsection (a)) were introduced in fiscal 1999 and Applied is planning additional Internet-based businesses and services targeted at specific market niches. Patents, trademarks, and licenses do not have a significant effect on Applied's business. Markets and Methods of Distribution. Applied purchases from over 2,500 manufacturers of bearings, power transmission components, industrial rubber products, fluid power products, linear motion products, and general maintenance and specialty items. Applied then resells the products to a wide variety of industries, including agriculture and food processing, automotive, chemical processing, forest products, industrial machinery and equipment, mining, paper products, primary metals, textiles, transportation, and utilities. Customers range 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 3% of Applied's net sales. 7 9 At June 30, 1999, Applied had 394 service centers in 46 states and Puerto Rico. Applied has no operations outside the United States. Applied's export business during the fiscal year ended June 30, 1999 and prior fiscal years was less than 2% of net sales, and is not concentrated in a specific 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, power transmission, industrial rubber, fluid power, linear motion, and specialty item distributors, and, to a lesser extent, mill supply houses. These competitors include single and multiple facility operations, some of which are divisions or subsidiaries of larger organizations. A number of these competitors may have greater financial resources than Applied. The trend towards industry consolidation continues, producing larger multiple facility 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, power transmission components, fluid power components, industrial rubber 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. Because of Applied's extensive product resources and distribution network, Applied does not have a substantial backlog of orders, nor are backlog orders significant at any given time. 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. Number of Employees. On June 30, 1999, Applied had 4,558 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 16 of this Report and is discussed in "Management's Discussion and Analysis" in Applied's 1999 Annual Report to shareholders on pages 10 and 11. 8 10 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. Returns are not considered to have a material effect on Applied's working capital requirements. Applied believes these practices are consistent with prevailing industry practices. Environmental Laws. Applied believes that compliance with federal, state and local laws 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, 1999, and prior fiscal years, was less than 2% of net sales, and is not concentrated in a specific 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 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 and labor; changes in operating expenses; the effect of price increases or decreases; the variability and timing of business opportunities including acquisitions, alliances, customer agreements, and supplier authorizations; Applied's ability to realize the anticipated benefits of acquisitions and other business strategies, including electronic commerce initiatives; the incurrence of additional debt and contingent liabilities in connection with acquisitions; changes in accounting policies and practices; the effect of organizational changes within Applied; the emergence of new competitors, including firms with greater financial resources than Applied; adverse effects of the Year 2000 issue on the businesses of Applied and 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). 9 11 ITEM 2. PROPERTIES. ----------- Applied owns or leases the properties in which its offices, service centers, distribution centers, shops, and corporate facilities are located. As of June 30, 1999, Applied owned real properties at 180 locations and leased 232 locations. Certain locations contain multiple operations, such as a shop and a distribution center. Applied's principal owned real properties (each of which has more than 20,000 square feet of floor space) as of June 30, 1999 were: - the distribution center, fluid power shop, and mechanical shop in Atlanta, Georgia - the distribution center and mechanical shop in Florence, Kentucky - the service center in Monroe, Louisiana - the service center in Omaha, Nebraska - the distribution center in Portland, Oregon - the distribution center in Carlisle, Pennsylvania Applied's principal leased real properties (each of which has more than 20,000 square feet of floor space) as of June 30, 1999 were: - the corporate headquarters facility in Cleveland, Ohio - the distribution center, offices, fluid power shop, mechanical shop, and rubber shop in Fontana, California - the service center in Long Beach, California - the service center in San Jose, California - the rubber shop in Tracy, California - the distribution center in Denver, Colorado - the rubber shop and mechanical shop in Denver, Colorado - the service center in Grand Rapids, Michigan - the service center in Iron Mountain, Michigan - the service center in Kansas City, Missouri - the mechanical shop in Cleveland, Ohio - the distribution center, fluid power shop, mechanical shop, and rubber shop in Fort Worth, Texas - the service center in Longview, Washington - the distribution center, fluid power shop, mechanical shop, and rubber shop in Longview, Washington - the offices, service center, and rubber shop in Appleton, Wisconsin - the service center in Milwaukee, Wisconsin All of the properties listed above are used by Applied's service center-based distribution segment. 10 12 Applied considers its properties generally sufficient to meet its requirements for office space and inventory stocking. A service center's size is primarily influenced by the amount of inventory the service center requires to meet its customers' needs. Applied uses in its business all of its owned and leased properties except for certain properties (several of which have floor space exceeding 20,000 square feet), which in the aggregate are not material and are either for sale, lease, or sublease to third parties due to a facility's relocation or closing. Applied also may lease or sublease to others unused portions of buildings. Generally, when opening a new service center, Applied will lease space. Then, as the business develops, suitable property may be purchased or leased for relocation of the service center. 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 based on availability and cost of suitable property in the local real estate market, whether leased or purchased. Applied does not consider any of its service center, distribution center, or shop properties to be material, because it believes that if it becomes necessary or desirable to relocate one of those operations, other suitable property could be found. ITEM 3. PENDING LEGAL PROCEEDINGS. -------------------------- Applied and/or one of its subsidiaries is a defendant in several product and employment-related lawsuits. Based on circumstances currently known Applied believes these cases are not material to its business or financial condition. 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 1999. 11 13 EXECUTIVE OFFICERS OF THE REGISTRANT. ------------------------------------- Applied's 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 the 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 current positions on October 20, 1998: John C. Dannemiller. Mr. Dannemiller is Chairman (since 1992) and Chief Executive Officer (since 1992), and has served as a member of the Board of Directors since 1985. He was also President (from October 1996 to January 1999). He is 61 years of age. David L. Pugh. Mr. Pugh was elected President & Chief Operating Officer in January 1999. Prior to joining Applied, he was Senior Vice President of the Industrial Control Group (from February 1996 to June 1998) of Rockwell Automation, a division of Rockwell International Corporation. In that position, he was responsible for a global manufacturing operation encompassing three business groups, 5,000 employees, and 13 operating locations. He was also Rockwell Automation's Senior Vice President of Global Operations (from November 1994 to February 1996) and Senior Vice President of Global Market Development (from June 1994 to November 1994). He is 50 years of age. Todd A. Barlett. Mr. Barlett is Vice President-Alliance Systems (since August 1999). He was Vice President-National Accounts & Alliance Systems (from August 1998 to August 1999), Vice President-Southeast Area (from January 1995 to August 1998), and Southeast Area Manager (from 1993 to January 1995). He is 44 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 1993 to January 1995). He is 44 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 42 years of age. James T. Hopper. Mr. Hopper is Vice President-Information Systems (since January 1995). He was Director of Information Systems from 1993 to January 1995. He is 56 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). He is 39 years of age. 12 14 Bill L. Purser. Mr. Purser is Vice President-Chief Marketing Officer (since February 1999). Prior to that he was Vice President-Marketing & National Accounts (from July 1996 to February 1999), 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 56 years of age. Jeffrey A. Ramras. Mr. Ramras is Vice President-Logistics (since January 1995). He was Director of Logistics (from September 1994 to January 1995). He is 44 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 1993 to July 1996). He is 50 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 53 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 53 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, 1999 and 1998 and the number of shareholders of record as of August 17, 1999 is set forth in Applied's 1999 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 the last five years is set forth in Applied's 1999 Annual Report to shareholders in the table on pages 28 and 29 under the caption "10 Year Summary" and is incorporated here by reference. 13 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS. ------------------------------------ "Management's Discussion and Analysis" is set forth in Applied's 1999 Annual Report to shareholders on pages 10 through 12 and is incorporated here by reference. 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 1999 Annual Report to shareholders at the pages indicated, are incorporated here by reference and filed with this Report: Caption Page No. ------- -------- Financial Statements: Statements of Consolidated 13 Income for the Years Ended June 30, 1999, 1998, and 1997 Consolidated Balance Sheets 14 June 30, 1999 and 1998 Statements of Consolidated 15 Cash Flows for the Years Ended June 30, 1999, 1998, and 1997 Statements of Consolidated 16 Shareholders' Equity for the Years Ended June 30, 1999, 1998, and 1997 Notes to Consolidated 17 - 24 Financial Statements for the Years Ended June 30, 1999, 1998, and 1997 Independent Auditors' Report 25 Supplementary Data: Quarterly Operating Results and 27 Market Data 14 16 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 Applied's directors is set forth in Applied's Proxy Statement dated September 15, 1999 on pages 4 through 6 under the caption "Election of Directors" and is incorporated here by reference. The information required by this Item as to Applied's executive officers has been furnished in this Report on pages 12 and 13 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 19 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, 1999, under the captions "Summary Compensation" on page 8, "Option Grants in Last Fiscal Year" and "Aggregate Option Exercises and Fiscal Year-End Option Value Table" on page 9, "Estimated Retirement Benefits Under Supplemental Executive Retirement Benefits Plan" on page 10, "Compensation of Directors" on pages 14 and 15, "Deferred Compensation Plan for Non-employee Directors" and "Deferred Compensation Plan" on page 15, "Employment Agreement" on page 16, and "Change in Control Agreements and Other Related Arrangements" on pages 16 and 17, 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 7 of Applied's Proxy Statement dated September 15, 1999, and is incorporated here by reference. 15 17 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 14 of Applied's Proxy Statement dated September 15, 1999 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 1999 Annual Report to shareholders on pages 13 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, 1999, 1998, and 1997 Consolidated Balance Sheets June 30, 1999 and 1998 Statements of Consolidated Cash Flows for the Years Ended June 30, 1999, 1998, and 1997 Statements of Consolidated Shareholders' Equity for the Years Ended June 30, 1999, 1998, and 1997 Notes to Consolidated Financial Statements for the Years Ended June 30, 1999, 1998, and 1997 Independent Auditors' Report Supplementary Data: Quarterly Operating Results and Market Data 16 18 (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: Caption Page No. ------- -------- Independent Auditors' Report 22 Schedule VIII - Valuation and 23 Qualifying Accounts 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 October 8, 1998 (filed as Exhibit 3(a) to Applied'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 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 Agreement and Private Shelf Facility dated October 31, 1992 between Applied and The Prudential Insurance Company of America 17 19 (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) $150,000,000 Credit Agreement dated as of November 5, 1998 among Applied, KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 4(e) to Applied'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 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 Applied's director compensation program is found in Applied's Proxy Statement dated September 15, 1999, SEC File No. 1-2299, on pages 14 and 15, 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). 18 20 *10(d) First Amendment to Deferred Compensation Plan for Non-employee Directors (January 1, 1997 Restatement) dated May 1, 1998 (filed as Exhibit 10(d) to Applied's Form 10-K for the year ended June 30, 1998, SEC File No. 1-2299, and incorporated here by reference). *10(e) A written description of Applied's Life and Accidental Death and Dismemberment Insurance for executive officers (filed as Exhibit 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) in which 10 Applied executive officers (as well as certain former executive officers) currently participate (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) First Amendment to Supplemental Executive Retirement Benefits Plan effective as of August 5, 1998 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended December 31, 1998, SEC File No. 1-2299, and incorporated hereby reference). *10(j) 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(k) First Amendment to Deferred Compensation Plan (January 1, 1997 Restatement) dated May 1, 1998 (filed as Exhibit 10(j) to Applied's Form 10-K for the year ended June 30, 1998, SEC File No. 1-2299, and incorporated hereby reference). *10(l) 1997 Long-Term Performance Plan adopted by Shareholders on October 21, 1997 (filed as Exhibit 10(a) to Applied's Form 10-Q for 19 21 the quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated here by reference). *10(m) 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, 1999, SEC File No. 1-2299, on pages 11 and 12, 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(n) Employment Agreement between Applied and David L. Pugh dated December 21, 1998 (filed as Exhibit 10(b) to Applied's Form 10-Q for the quarter ended December 31, 1998, SEC File No. 1-2299, and incorporated here by reference). *10(o) Applied Supplemental Defined Contribution Plan (January 1, 1997 Restatement) (filed as Exhibit 10(m) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 10(p) 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(q) 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(r) 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(s) 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). 20 22 13 Applied 1999 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 Applied's subsidiaries at June 30, 1999. 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 shall be limited to Applied's reasonable expenses in furnishing the exhibit. (b) REPORTS ON FORM 8-K. None during the quarter ended June 30, 1999. 21 23 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, 1999 and 1998, 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, 1999 and have issued our report thereon dated August 5, 1999; such consolidated financial statements and report are included in your 1999 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. /s/ Deloitte & Touche LLP Cleveland, Ohio August 5, 1999 22 24 APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES ---------------------------------------------------- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED JUNE 30 1999: Reserve deducted from assets to which it applies - allowance for doubtful accounts $3,500 $3,014 $100 (B) $3,099 (A) $3,515 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
(A) Amounts represent uncollectible accounts charged off. (B) Represents reserves recorded through purchase accounting for acquisitions made during the year. - -------------------------------------------------------------------------------- SCHEDULE VIII 25 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. /s/ John C. Dannemiller /s/ Mark O. Eisele - -------------------------------------- ----------------------------------- John C. Dannemiller, Chairman & Mark O. Eisele Chief Executive Officer Vice President & Controller (Principal Accounting Officer) /s/ John R. Whitten - -------------------------------------- John R. Whitten Vice President-Chief Financial Officer & Treasurer Date: September 17, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ William G. Bares /s/ Dr. Roger D. Blackwell - ------------------------------------- -------------------------------- William G. Bares, Director Dr. Roger D. Blackwell, Director /s/ William E. Butler /s/Thomas A. Commes - ------------------------------------- -------------------------------- William E. Butler, Director Thomas A. Commes, Director /s/ John C. Dannemiller /s/ Russel B. Every - ------------------------------------- -------------------------------- John C. Dannemiller, Chairman & Russel B. Every, Director Chief Executive Officer, and Director /s/ Russell R. Gifford /s/ L. Thomas Hiltz - ------------------------------------- -------------------------------- Russell R. Gifford, Director L. Thomas Hiltz, Director /s/ John J. Kahl /s/ J. Michael Moore - ------------------------------------- -------------------------------- John J. Kahl, Director J. Michael Moore, Director /s/ Dr. Jerry Sue Thornton - ------------------------------------- Dr. Jerry Sue Thornton, Director - ------------------------------------- Robert C. Stinson, as attorney in fact for persons indicated by "*" Date: September 17, 1999 26 APPLIED INDUSTRIAL TECHNOLOGIES, INC. EXHIBIT INDEX TO FORM 10-K FOR THE YEAR ENDED JUNE 30, 1999
Exhibit No. Description Reference - ------- ----------- --------- 3(a) Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 8, 1998. 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 Agreement 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 Agreement 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) $150,000,000 Credit Agreement dated as of November 5, 1998 among Applied, KeyBank National Association as Agent, and various financial institutions. Note (g)
27
4(f) 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 (h) 10(a) Form of Amended and Restated Change in Control Agreement between Applied and each of its executive officers. Note (i) 10(b) A written description of Applied's director compensation program. Note (j) 10(c) Applied Deferred Compensation Plan for Non- employee Directors (January 1, 1997 Restatement). Note (k) 10(d) First Amendment to Deferred Compensation Plan for Non-employee Directors (January 1, 1997 Restatement) dated May 1, 1998. Note (l) 10(e) A written description of Applied's Life and Accidental Death and Dismemberment Insurance for executive officers. Note (m) 10(f) A written description of Applied's Long-Term Disability Insurance for executive officers. Note (n) 10(g) Form of Director and Officer Indemnification Agreement entered into between Applied and each of its directors and executive officers. Note (o) 10(h) Applied Supplemental Executive Retirement Benefits Plan (July 1, 1997 Restatement) currently covering 10 Applied executive officers (as well as certain former executive officers). Note (p) 10(i) First Amendment to Supplemental Executive Retirement Benefits Plan effective as of August 5, 1998. Note (q) 10(j) Applied Deferred Compensation Plan (January 1, 1997 Restatement). Note (r)
28
10(k) First Amendment to Deferred Compensation Plan (January 1, 1997 Restatement) dated May 1, 1998. Note (s) 10(l) 1997 Long-Term Performance Plan adopted by Shareholders on October 21, 1997. Note (t) 10(m) A written description of Applied's Management Incentive Plan applicable to key executives, including the five most highly compensated executive officers. Note (u) 10(n) Employment Agreement between Applied and David L. Pugh dated December 21, 1998. Note (v) 10(o) Applied Supplemental Defined Contribution Plan (January 1, 1997 Restatement). Note (w) 10(p) Lease dated as of March 1, 1996 between Applied and the Cleveland-Cuyahoga County Port Authority. Note (x) 10(q) Plan and Agreement of Merger among Applied, I. C. Acquisition Corp. and INVETECH Company dated as of April 29, 1997. Note (y) 10(r) Consulting, Non-competition and Confidentiality Agreement among Applied, Oak Grove Consulting Group, Inc., and J. Michael Moore dated July 31, 1997. Note (z) 10(s) Non-qualified Deferred Compensation Agreement between Applied and J. Michael Moore effective as of December 31, 1997. Note (aa) 13 Applied 1999 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 Applied's subsidiaries at June 30, 1999. Attached 23 Independent Auditors' Consent. Attached 27 Financial Data Schedule. Attached
29 Notes: (a) Incorporated by reference from Applied's Form 10-Q for the quarter ended September 30, 1998, SEC File No. 1-2299, at Exhibit 3(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 March 31, 1998, SEC File No. 1-2299, at Exhibit 4(f). (g) Incorporated by reference from Applied's Form 10-Q for the quarter ended September 30, 1998, SEC File No. 1-2299, at Exhibit 4(e). (h) Incorporated by reference from Applied's Registration Statement on Form 8-A filed July 20, 1998, SEC File No. 1-2299, at Exhibit 1. (i) 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). (j) Incorporated by reference from Applied's Proxy Statement dated September 15, 1999, SEC File No. 1-2299, at pages 14 and 15, under the caption "Compensation of Directors." (k) Incorporated by reference from Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, at Exhibit 10(d). (l) Incorporated by reference from Applied's Form 10-K for the year ended June 30, 1998, SEC File No. 1-2299, at Exhibit 10(d). (m) 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). 30 (n) 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). (o) Incorporated by reference from Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, at Exhibit 10(g). (p) 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). (q) Incorporated by reference from Applied's Form 10-Q for the quarter ended December 31, 1998, SEC File No. 1-2299, at Exhibit 10(a). (r) Incorporated by reference from Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, at Exhibit 10(j). (s) Incorporated by reference from Applied's Form 10-K for the year ended June 30, 1998, SEC File No. 1-2299, at Exhibit 10(j). (t) 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). (u) Incorporated by reference from Applied's Proxy Statement dated September 15, 1999, SEC File No. 1-2299, at pages 11 and 12, in the Report of the Executive Organization & Compensation Committee of the Board of Directors on Executive Compensation, under the subcaption, "Management Incentive Plan." (v) Incorporated by reference from Applied's Form 10-Q for the quarter ended December 31, 1998, SEC File No. 1-2299, at Exhibit 10(b). (w) Incorporated by reference from Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, at Exhibit 10(m). (x) Incorporated by reference from Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, at Exhibit 10(n). (y) Incorporated by reference from Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, at Exhibit 2(a). 31 (z) 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). (aa) 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). EX-13 2 EXHIBIT 13 1 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------- OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS -------------------------------------------------- YEAR ENDED JUNE 30, 1999 VS 1998 Net sales in 1999 increased to $1.53 billion or 2.5% greater than the $1.49 billion generated in 1998. This increase was partially due to the acquisition of five distributors in an effort to expand the technological and geographical presence of Applied Industrial Technologies, Inc. (Company) and to provide additional customer support services. The Company will continue to seek to grow sales by selling additional products and services 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 sales. Although net sales increased from the prior year, the gross margin (net sales less cost of sales) for the year decreased from 26.3% in 1998 to 25.1% in 1999. The 1999 margin was lower than in the prior year due to lower discounts and allowances from suppliers, customer mix, higher scrap and obsolete inventory expense and favorable cost adjustments in the prior year. While still below the prior year's margin, gross margins have shown a positive trend in the last quarter. With the implementation of specific marketing programs and cost control measures during the fourth quarter, management is expecting this trend to continue. Selling, distribution and administrative (S,D&A) expenses decreased slightly in 1999 as a percentage of sales to 22.3% from 22.4% in 1998. Total S,D&A was approximately $6.9 million higher than in the prior year. The increase is primarily due to the acquisitions made during fiscal 1999 and late fiscal 1998. Operating income decreased to $42.5 million in 1999 from $58.5 million in 1998. As a percentage of sales, operating income decreased to 2.8% in 1999 from 3.9% in 1998. The $16.0 million decrease in operating income was primarily due to the lower gross margins discussed previously. Net interest expense for 1999 increased $1.2 million or 13.3% as compared to the prior year primarily as a result of an increase in average borrowings related to higher working capital balances and the repurchase of Company stock during the year. Income tax expense as a percentage of income before income taxes decreased to 38.9% in 1999 from 39.5% in 1998. The decrease in the effective tax rate resulted from lower effective state and local income tax rates. Net income for the fiscal year ended June 30, 1999 declined $10.2 million or 33.8% compared to the prior year. Net income per share decreased 32.6% to $.93 in 1999 from $1.38 in 1998 primarily due to the factors described above. The number of associates was 4,558 at June 30, 1999 and 5,061 at June 30, 1998. 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 S,D&A expenses from the prior year relate primarily to Invetech's operations. The Company's gross margin as a percent of sales of 26.3% in 1998 was consistent with the 26.4% gross margin in 1997. The 1998 margin was slightly lower than in prior years due to favorable LIFO cost adjustments of $3.0 million or .3% of sales in 1997 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 the Invetech and other acquisitions and to 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 the Invetech and other acquisitions while the percentage decrease is primarily due to higher S,D&A expenses as a percentage of sales. Net interest expense for 1998 increased $3.2 million or 58% as compared to the prior year, primarily as a result of an increase in average borrowings related to the 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 decreased 4.2% to $1.38 in 1998 from $1.44 in 1997 primarily due to the increase of 3.2 million in the average shares outstanding related to the Invetech acquisition. The number of associates was 5,061 at June 30, 1998 and 4,101 at June 30, 1997. LIQUIDITY AND WORKING CAPITAL The Company generated $83.1 million of cash flow from operating activities in 1999 compared to $1.2 million in 1998. The primary reasons for the improvement relate to better management of the Company's investments in inventory and receivables without a corresponding impact on operating liabilities. Inventories have decreased due to improved controls over the carrying levels of various products within our logistics 10 2 system and the consolidation of several service centers during the year. The receivables decrease is attributable to improved collection rates following completion of the integration of the prior year's acquisitions, the implementation of a new receivables software package and the internal restructuring of the cash applications and collection organization. Cash used in investing activities decreased approximately $37.2 million in 1999 compared with 1998. The decrease is primarily due to less acquisition activity in 1999 compared to 1998 and a decrease in property purchases of $20.3 million. The decrease in property investments is attributable to the large expenditures in 1998 relating to several major projects that did not continue into 1999. Those projects included building and upgrading service and distribution center facilities and acquiring vehicles and data processing equipment. Cash used in financing activities was $57.4 million in 1999 as compared to cash provided by financing activities of $38.8 million in 1998. The primary reason for the change was the net repayments under the Company's debt arrangements of $26.4 million in 1999 compared to net borrowings of $55.5 million in 1998. Another reason for the change was the stock repurchase program whereby the Company repurchased $21.7 million of the Company's stock in 1999 compared to prior year stock repurchases of $8.1 million. The Company is obligated for rental payments under operating leases on 232 of its 415 service center, distribution center and other operating locations. See Note 10 to the Consolidated Financial Statements for annual rental commitments. Working capital at June 30, 1999 was $257.1 million compared to $221.8 million at June 30, 1998. The current ratio was 2.9 and 2.1 at June 30, 1999 and 1998, respectively. These increases are primarily due to the refinancing of short-term debt under the new revolving credit facility and classification of the current portion of long-term debt as non-current, as these borrowings are also intended to be refinanced under the revolving credit facility. CAPITAL RESOURCES Capital resources are obtained from income retained in the business, borrowings under the Company's lines of credit, revolving credit agreement and long-term debt facilities, and operating lease arrangements. Average combined short-term and long-term borrowings were $140.9 million in 1999 and $130.1 million in 1998. The weighted average interest rate on borrowings under revolving credit facilities decreased to 5.6% in 1999 from an average rate of 6.0% in 1998. The weighted average interest on borrowings under other long-term debt agreements decreased to 7.1% in 1999 from an average rate of 7.5% in 1998. In November 1998, the Company entered into a five-year committed revolving credit agreement with a group of lending institutions. This agreement provides for unsecured borrowings of up to $150.0 million. This facility was used to reduce short-term line of credit borrowings. The Company had $24.5 million of borrowings outstanding under this facility at June 30, 1999. Unused capacity under this facility totaling $115.9 million is 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 an unsecured $15.0 million uncommitted line of credit. The Company has $11.5 million of borrowings outstanding under this facility at June 30, 1999 with remaining unused capacity of $3.5 million. In January 1998, the Company borrowed $50 million at 6.6% under a shelf facility agreement with the Prudential Insurance Company of America. The funds were used to repay short-term debt. 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 other corporate purposes. These purchases can be made in open market or negotiated transactions, from time to time, depending upon market conditions. The Company acquired 1.5 million shares of its common stock for $21.7 million during the year ended June 30, 1999. The Company has remaining authorization to repurchase 0.9 million shares as of June 30, 1999. 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's 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 first quarter of fiscal 1998 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 have been replaced with a new Year 2000 compliant system. 11 3 The new system is fully operational. In addition, all of the Company's critical computer systems, including the OMNEX(R) inventory and sales information system, customer billing system, and corporate information system, have been remedied and tested, and are now Year 2000 compliant. 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. To date, following contacts with product suppliers, the Company has not identified any products regularly 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. To reduce the risk of business interruption due to the Year 2000 issue, the Company is preparing contingency plans to address situations that may result from the failure of the Company or certain third parties (including utilities) to complete efforts necessary to achieve Year 2000 compliance on a timely basis. These plans are scheduled to be completed by various dates before the end of calendar year 1999. 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 current available information, the total cost of the Company's Year 2000 activities is expected to be under $5 million, with approximately three-fourths of the total cost already incurred through June 30, 1999. The total amount spent to date includes a capital expenditure of approximately $1.6 million for the new Year 2000 compliant financial information system, which would have been acquired in the ordinary course, but whose acquisition was accelerated to ensure compliance by the end of calendar year 1999. The effort to bring the Company's internal computer systems into compliance has largely been accomplished by redirecting internal programming resources, with costs expensed as incurred. These costs are included in the total cost estimate. Estimates of the Year 2000 related costs are based on numerous assumptions and there is no certainty that actual costs will not be significantly different from the estimates. To date, the costs of addressing the Year 2000 issue are not considered material to the Company's financial condition, results of operations or cash flows, and future costs are not expected to be material in such respects. 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 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 such statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements 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 and labor; changes in operating expenses; the effect of price increases or decreases; the variability and timing of business opportunities including acquisitions, alliances, customer agreements and supplier authorizations; the Company's ability to realize the anticipated benefits of the acquisitions and other business strategies, including electronic commerce initiatives; the incurrence of additional debt and contingent liabilities in connection with acquisitions; changes in accounting policies and practices; the effect of organizational changes within the Company; the emergence of new competitors, including firms with greater financial resources than the Company; adverse effects of the Year 2000 issue on the businesses of the Company and 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). 12 4 Applied Industrial Technologies, Inc. and Subsidiaries ---------------------------------------------------------- STATEMENTS OF CONSOLIDATED INCOME ----------------------------------------------------------
----------------------------------------- Year Ended June 30 ----------------------------------------- 1999 1998 1997 ----------------------------------------- (In thousands, except per share amounts) - --------------------------------------------------------------------------------------- NET SALES $ 1,527,928 $ 1,491,405 $ 1,160,251 - --------------------------------------------------------------------------------------- COST AND EXPENSES Cost of sales 1,145,116 1,099,472 854,230 Selling, distribution and administrative 340,324 333,413 255,422 - --------------------------------------------------------------------------------------- 1,485,440 1,432,885 1,109,652 - --------------------------------------------------------------------------------------- OPERATING INCOME 42,488 58,520 50,599 INTEREST EXPENSE 10,063 9,549 6,463 INTEREST INCOME (208) (854) (956) - --------------------------------------------------------------------------------------- 9,855 8,695 5,507 - --------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 32,633 49,825 45,092 - --------------------------------------------------------------------------------------- INCOME TAX EXPENSE Federal 11,900 17,400 15,700 State and local 800 2,300 2,300 - --------------------------------------------------------------------------------------- 12,700 19,700 18,000 - --------------------------------------------------------------------------------------- NET INCOME $ 19,933 $ 30,125 $ 27,092 - --------------------------------------------------------------------------------------- NET INCOME PER SHARE - BASIC $ 0.93 $ 1.40 $ 1.47 - --------------------------------------------------------------------------------------- NET INCOME PER SHARE - DILUTED $ 0.93 $ 1.38 $ 1.44 - ---------------------------------------------------------------------------------------
See notes to consolidated financial statements. 13 5 Applied Industrial Technologies, Inc. and Subsidiaries ---------------------------------------------------------- CONSOLIDATED BALANCE SHEETS ----------------------------------------------------------
---------------------- June 30 ---------------------- 1999 1998 ---------------------- (In thousands) - --------------------------------------------------------------------------------------- ASSETS Current assets Cash and temporary investments $ 19,186 $ 9,344 Accounts receivable, less allowances of $3,515 and $3,500 195,736 206,313 Inventories 169,689 192,042 Other current assets 4,596 7,214 - --------------------------------------------------------------------------------------- Total current assets 389,207 414,913 - --------------------------------------------------------------------------------------- Property - at cost Land 12,316 12,363 Buildings 69,329 69,103 Equipment 96,011 94,705 - --------------------------------------------------------------------------------------- 177,656 176,171 Less accumulated depreciation 70,417 63,102 - --------------------------------------------------------------------------------------- Property - net 107,239 113,069 - --------------------------------------------------------------------------------------- Goodwill - net 62,351 53,243 Other assets 15,552 24,866 - --------------------------------------------------------------------------------------- TOTAL ASSETS $ 574,349 $ 606,091 ======================================================================================= LIABILITIES Current liabilities Notes payable $ 42,973 Current portion of long-term debt 19,429 Accounts payable $ 78,836 79,091 Compensation and related benefits 19,692 22,702 Other current liabilities 33,588 28,952 - --------------------------------------------------------------------------------------- Total current liabilities 132,116 193,147 Long-term debt 126,000 90,000 Other liabilities 22,647 23,442 - --------------------------------------------------------------------------------------- TOTAL LIABILITIES 280,763 306,589 - --------------------------------------------------------------------------------------- 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 82,599 82,713 Income retained for use in the business 246,026 236,109 Treasury shares - at cost (2,994 and 1,993 shares) (40,140) (24,391) Unearned restricted common stock compensation (4,899) (4,929) - --------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 293,586 299,502 - --------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 574,349 $ 606,091 =======================================================================================
See notes to consolidated financial statements. 14 6 Applied Industrial Technologies, Inc. and Subsidiaries ---------------------------------------------------------- STATEMENTS OF CONSOLIDATED CASH FLOWS ----------------------------------------------------------
-------------------------------- Year Ended June 30 -------------------------------- 1999 1998 1997 -------------------------------- (In thousands) - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 19,933 $ 30,125 $ 27,092 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 17,325 16,428 13,574 Deferred income taxes (2,936) 5,065 1,900 Amortization of restricted common stock compensation and goodwill 5,331 4,569 857 Provision for losses on accounts receivable 3,014 2,075 1,743 (Gain) loss on sale of property 187 (1,015) (921) Treasury shares contributed to employee benefit and deferred compensation plans 3,681 4,882 4,323 Changes in current assets and liabilities, net of acquisitions and disposition: Accounts receivable 9,348 (11,280) (2,315) Inventories 25,367 (34,519) 18,868 Other current assets 2,717 1,193 (4,471) Accounts payable and accrued expenses (837) (16,320) (18,900) - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 83,130 1,203 41,750 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Property purchases (13,527) (33,861) (21,579) Proceeds from property sales 4,123 9,955 6,898 Proceeds from sale of Aircraft Division 9,090 Net cash paid for acquisition of businesses, net of cash acquired of $597 and $5,307 in 1999 and 1998, respectively (12,533) (32,949) Deposits and other 6,033 3,744 4,234 - ------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (15,904) (53,111) (1,357) - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (repayments) under line of credit agreements - net (42,973) 17,558 (4,641) Borrowings under revolving credit agreements - net 36,000 Long-term debt borrowings 50,000 Long-term debt repayments (19,429) (12,075) (11,429) Exercise of stock options 1,161 1,789 1,089 Dividends paid (10,397) (10,277) (7,682) Purchases of treasury shares (21,746) (8,148) (4,568) - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (57,384) 38,847 (27,231) - ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and temporary investments 9,842 (13,061) 13,162 Cash and temporary investments at beginning of year 9,344 22,405 9,243 - ------------------------------------------------------------------------------------------------------------------------ CASH AND TEMPORARY INVESTMENTS AT END OF YEAR $ 19,186 $ 9,344 $ 22,405 ======================================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ 11,176 $ 16,953 $ 19,107 Interest $ 10,401 $ 10,043 $ 6,873
See notes to consolidated financial statements. 15 7 Applied Industrial Technologies, Inc. and Subsidiaries ---------------------------------------------------------- STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY ----------------------------------------------------------
---------------------------------------------------------------- For the Years Ended June 30, 1999, 1998, and 1997 ---------------------------------------------------------------- Income Shares of Additional Retained for Treasury Common Stock Common Paid-in Use in the Shares-at Outstanding Stock Capital Business Cost (In thousands, except per share amounts) - -------------------------------------------------------------------------------------------------------------- BALANCE AT JULY 1, 1996 18,566 $ 10,000 $ 7,492 $ 197,232 $ (21,260) Net income 27,092 Cash dividends - $.41 per share (7,682) Purchases of common stock for treasury (249) (4,568) Treasury shares issued for: Retirement Savings Plan contributions 164 1,760 1,568 Exercise of stock options 78 342 747 Restricted common stock awards 9 68 67 Deferred compensation plans 53 532 463 Amortization of restricted common stock compensation 32 Other (61) - -------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1997 18,621 10,000 10,165 216,642 (22,983) Net income 30,125 Cash dividends - $.47 per share (10,277) Purchases of common stock for treasury (291) (8,148) Issuance of common stock for the acquisition of Invetech Company 3,165 63,374 Treasury shares issued for: Retirement Savings Plan contributions 152 2,367 1,777 Exercise of stock options 103 610 1,179 Restricted common stock awards 201 3,560 2,005 Deferred compensation plans 28 450 288 Acquisition of Associated Bearings Company 123 1,770 1,491 Amortization of restricted common stock compensation 360 Other 57 (381) - -------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1998 22,102 10,000 82,713 236,109 (24,391) Net income 19,933 Cash dividends - $.48 per share (10,397) Purchases of common stock for treasury (1,450) (21,746) Treasury shares issued for: Retirement Savings Plan contributions 220 337 2,980 Exercise of stock options 109 (281) 1,442 Restricted common stock awards 96 (86) 1,266 Deferred compensation plans 24 55 309 Amortization of restricted common stock compensation 28 Other (167) 381 - -------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1999 21,101 $ 10,000 $ 82,599 $ 246,026 $ (40,140) ==============================================================================================================
-------------------------- For the Years Ended June 30, 1999, 1998, and 1997 -------------------------- Unearned Restricted Common Total Stock Shareholders' Compensation Equity (In thousands, except per share amounts) - ------------------------------------------------------------------------ BALANCE AT JULY 1, 1996 $ (1,200) $ 192,264 Net income 27,092 Cash dividends - $.41 per share (7,682) Purchases of common stock for treasury (4,568) Treasury shares issued for: Retirement Savings Plan contributions 3,328 Exercise of stock options 1,089 Restricted common stock awards (135) Deferred compensation plans 995 Amortization of restricted common stock compensation 385 417 Other (61) - ------------------------------------------------------------------------ BALANCE AT JUNE 30, 1997 (950) 212,874 Net income 30,125 Cash dividends - $.47 per share (10,277) Purchases of common stock for treasury (8,148) Issuance of common stock for the acquisition of Invetech Company 63,374 Treasury shares issued for: Retirement Savings Plan contributions 4,144 Exercise of stock options 1,789 Restricted common stock awards (5,565) Deferred compensation plans 738 Acquisition of Associated Bearings Company 3,261 Amortization of restricted common stock compensation 1,586 1,946 Other (324) - ------------------------------------------------------------------------ BALANCE AT JUNE 30, 1998 (4,929) 299,502 Net income 19,933 Cash dividends - $.48 per share (10,397) Purchases of common stock for treasury (21,746) Treasury shares issued for: Retirement Savings Plan contributions 3,317 Exercise of stock options 1,161 Restricted common stock awards (1,180) Deferred compensation plans 364 Amortization of restricted common stock compensation 1,210 1,238 Other 214 - ------------------------------------------------------------------------ BALANCE AT JUNE 30, 1999 $ (4,899) $ 293,586 ========================================================================
See notes to consolidated financial statements. 16 8 Applied Industrial Technologies, Inc. and Subsidiaries ---------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------------- ------------------------------------------------ Years Ended June 30, 1999, 1998 and 1997 ------------------------------------------------ (Dollars in thousands, except per share amounts) - -------------------------------------------------------------------------------- 1. BUSINESS AND ACCOUNTING POLICIES Business The Company is one of the nation's leading distributors of industrial products, including bearings and seals, power transmission and fluid power components, and general maintenance products and related specialty items. The Company also provides mechanical, rubber and fluid power shop services, including engineering design, electrical, gearing, material handling, hose and hydraulic and pneumatic systems. 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 and disclosure of contingent 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 and Temporary Investments 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 $9,596 at June 30, 1999 and $5,474 at June 30, 1998. The Company assesses the recoverability of goodwill by determining whether the amortization over the remaining life can be recovered through projected undiscounted cash flows from future operations. 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. 17 9 Net Income Per Share The following is a computation of the basic and diluted earnings per share:
---------------------------- Year Ended June 30 ---------------------------- 1999 1998 1997 ------------------------------------------------------------------------------- NET INCOME Net income as reported in statements of consolidated income $19,933 $30,125 $27,092 ------------------------------------------------------------------------------- AVERAGE SHARES OUTSTANDING Weighted average common shares outstanding for basic computation 21,386 21,466 18,465 Dilutive effect of: Stock options 120 310 252 Performance Accelerated Restricted Stock (PARS) 40 51 52 ------------------------------------------------------------------------------- Weighted average common shares outstanding for diluted computation 21,546 21,827 18,769 ------------------------------------------------------------------------------- NET INCOME PER SHARE Net income per share - basic $ .93 $ 1.40 $ 1.47 ------------------------------------------------------------------------------- Net income per share - diluted $ .93 $ 1.38 $ 1.44 -------------------------------------------------------------------------------
New Accounting Standard 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. 2. BUSINESS COMBINATIONS During the year ended June 30, 1999, the Company acquired five distributors for a total purchase price of $14,800 financed through available credit facilities (see Note 6). Three of the companies are distributors of bearings, mechanical and electrical drive systems and industrial products. Two of the companies are distributors 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 of $11,239 recognized in connection with these combinations is being amortized over periods of 15 to 20 years. Effective August 1, 1997, the Company acquired the 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 3.2 million 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 this 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 of $36,699, representing the excess of the purchase price over assets acquired, is being amortized on a straight-line basis over 30 years. During the year ended June 30, 1998, the Company also 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 aggregate 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 the fiscal 1998 acquisitions had occurred at the beginning of the following periods:
--------------------------- Year Ended June 30 --------------------------- 1998 1997 (Unaudited) ------------------------------------------------------------------------------- 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
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. 18 10 3. SALE OF DIVISION On August 9, 1996, the Company sold the Dixie Bearing 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:
------------------------- June 30 ------------------------- 1999 1998 --------------------------------------------------------------------------------- LIFO cost $169,689 $192,042 Excess of current cost over LIFO cost 103,671 103,298 --------------------------------------------------------------------------------- Current cost $273,360 $295,340 ---------------------------------------------------------------------------------
LIFO Liquidations During the years ended June 30, 1999 and 1997, the Company liquidated LIFO inventory quantities carried at lower costs prevailing in prior years. The effect of these liquidations reduced cost of sales and increased net income and net income per share, respectively, by $456, $252, and $.01 per share during 1999 and $3,022, $1,754 and $.09 per share during 1997. 5. OTHER BALANCE SHEET INFORMATION Other assets consist of the following:
------------------------- June 30 ------------------------- 1999 1998 --------------------------------------------------------------------------------- Deposits and investments $ 5,158 $13,877 Deferred tax assets 6,161 4,447 Other 4,233 6,542 Total $ 15,552 $24,866 ---------------------------------------------------------------------------------
All investments have fair values approximately equal to their carrying values. Other current liabilities consist of the following:
------------------------- June 30 ------------------------- 1999 1998 --------------------------------------------------------------------------------- Deferred tax liabilities $ 10,161 $11,242 Accrued income and other taxes 8,669 4,636 Accrued self insurance 5,216 4,756 Other 9,542 8,318 Total $ 33,588 $28,952 ---------------------------------------------------------------------------------
6. DEBT In November 1998, the Company replaced previously existing short-term lines of credit, which aggregated $42,973 at June 30, 1998, with a five-year committed revolving credit agreement with a group of banks. 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 $24,500 at June 30, 1999. Fees 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 short-term debt and the current portion of long-term borrowings intended to be refinanced are classified as long-term debt. Unused lines under this facility totaling $115,905 are available to fund future acquisitions or other capital and operating requirements. In January 1999, the Company also entered into an agreement with a commercial bank for a $15,000 short-term uncommitted line of credit. This agreement provides for payment of interest at various interest rate options, none of which is in excess of the bank's prime rate at interest determination dates. At June 30, 1999, borrowing under this line 19 11 of credit totaled $11,500 and is classified as long-term debt in connection with the refinancing ability of the revolving credit agreement. The remaining amount available for borrowings under this line at June 30, 1999, was $3,500. Long-term debt consists of:
------------------------- June 30 ------------------------- 1999 1998 ----------------------------------------------------------------------------------------------- Revolving credit facility, effective rate 5.7% $ 24,500 Uncommitted lines of credit, effective rate 6.22% 11,500 7.82% Senior unsecured term notes, due in semi-annual installments of $5,714 through 2003 40,000 $51,429 6.6% Senior unsecured term note, due at maturity in December 2007 50,000 50,000 5.97% Bank term loan, due in December 1998 8,000 ----------------------------------------------------------------------------------------------- Total 126,000 109,429 Less current portion 19,429 ----------------------------------------------------------------------------------------------- Noncurrent portion $126,000 $90,000 -----------------------------------------------------------------------------------------------
The revolving credit facility and senior unsecured term notes contain certain restrictive covenants regarding liquidity, tangible net worth, financial ratios and other covenants. At June 30, 1999, the most restrictive of these covenants required that the Company maintain a minimum consolidated net worth of $245,980. Based upon current market rates for debt of similar maturities, the Company estimates that the fair value of its debt is less than its carrying value at June 30, 1999, by $1,444. 7. INCOME TAXES Provision The provision (benefit) for income taxes consists of:
------------------------------------------ Year Ended June 30 ------------------------------------------ 1999 1998 1997 ----------------------------------------------------------------------------------------------- Current $15,636 $ 14,635 $16,100 Deferred (2,936) 5,065 1,900 ----------------------------------------------------------------------------------------------- Total $12,700 $ 19,700 $18,000 -----------------------------------------------------------------------------------------------
The exercise of non-qualified stock options during fiscal 1999, 1998 and 1997 resulted in $199, $645 and $368, 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 1999, 1998 and 1997 resulted in $28, $360 and $32, 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:
---------------------------------------- Year Ended June 30 ---------------------------------------- 1999 1998 1997 --------------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Effects of: State and local income taxes 1.6 3.0 3.3 Non-deductible expenses 2.6 2.1 1.5 Other, net (.3) (.6) .1 --------------------------------------------------------------------------------------------- Effective tax rate 38.9% 39.5% 39.9% ---------------------------------------------------------------------------------------------
20 12 Balance Sheet The significant components of the Company's deferred tax assets (liabilities) are as follows:
------------------------- June 30 ------------------------- 1999 1998 ------------------------------------------------------------------------------------------------ Depreciation and differences in property bases $(4,447) $(5,765) Inventories (15,994) (16,075) Compensation liabilities not currently deductible 9,164 8,877 Reserves not currently deductible 4,634 3,989 Goodwill 1,013 1,118 Other 1,630 1,061 ------------------------------------------------------------------------------------------------ Net deferred tax liability $(4,000) $(6,795) ------------------------------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY Stock Incentive Plans The 1997 Long-Term Performance 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. Shares available for future grants at June 30, 1999 and 1998 were 46,000 and 327,000, respectively. Under the 1997 Plan, the Company has awarded PARS and/or stock options to officers, other key associates and members of the Board of Directors. 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 1999 and 1998 the Company recognized accelerated vesting of 17,000 and 95,000 shares, respectively, of previously awarded PARS. At June 30, 1999, the Company has a stock option plan as described above. The stock options generally 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 Statement of Financial Accounting Standards (SFAS) No. 123, the Company's net income and net income per share-diluted would have been reduced to $19,118 and $.89 in 1999, $29,616 and $1.36 in 1998, and $26,502 and $1.41 in 1997. Disclosures under the fair value method are estimated using the Black Scholes option pricing model. The assumptions used for grants issued in 1999, 1998 and 1997 are:
1999 1998 1997 --------------------------------------------------------------------------------------------- Expected life 7 years 7 years 7 years Risk free interest rate 5.2% 5.7% 6.4% Dividend yield 3.0% 2.0% 2.0% Volatility 28.0% 25.0% 20.1%
Information regarding these option plans is as follows:
1999 1998 1997 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------------------------------------------------------------------------------------------------------- Outstanding July 1 1,019,078 $ 14.01 1,116,997 $ 13.36 877,168 $ 10.91 Granted 607,628 14.94 40,950 26.98 334,650 19.19 Exercised (108,547) 8.86 (102,774) 11.13 (77,757) 9.26 Expired/canceled (54,105) 17.48 (36,095) 17.59 (17,064) 14.84 --------------------------------------------------------------------------------------------------------- Outstanding June 30 1,464,054 $ 14.67 1,019,078 $ 14.01 1,116,997 $ 13.36 --------------------------------------------------------------------------------------------------------- Options exercisable June 30 663,259 $ 13.05 614,292 $ 11.23 506,919 $ 9.62 Weighted-average fair value of options granted during the year $ 4.13 $ 7.80 $ 5.69
21 13 The following table summarizes information about stock options outstanding at June 30, 1999:
------------------------------------- ----------------------- 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 ---------------------------------------------------------------------------------------------------- $ 6 - $ 9 61,314 1.3 Years $ 6.31 61,314 $ 6.31 9 - 13 241,713 3.2 9.40 241,713 9.40 13 - 17 605,187 8.1 13.85 206,803 14.47 17 - 21 516,490 8.0 18.13 143,595 19.00 21 - 28 39,350 8.6 26.98 9,834 26.98 ---------------------------------------------------------------------------------------------------- Total 1,464,054 663,259 ----------------------------------------------------------------------------------------------------
At June 30, 1999, option prices related to outstanding options ranged from $6.31 to $27.50 per share. Shareholders Rights On January 15, 1998, the Company's Board of Directors adopted a Shareholder's 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 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. Treasury Shares At June 30, 1999, 596,000 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. 9. BENEFIT PLANS Retirement Savings Plan Substantially all associates of the Company are eligible to participate in 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 before 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 expenses for contributions to the above plan were $3,417, $5,579, and $4,895 for the years ended June 30, 1999, 1998, and 1997, respectively. 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. During the first quarter of fiscal 1999, 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." This statement requires the deferred compensation obligation for certain plans to be classified as an equity instrument, with no recognition of changes in the fair value of the amount owed to the employee. The adoption of this accounting standard resulted in an increase in shareholders' equity and a decrease in other liabilities of approximately $5,000. Amounts for prior periods have been reclassified to conform to the new presentation. Postemployment Benefit Plans At June 30 1999, the Company adopted SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits." This statement revises disclosures about pensions and postretirement benefit plans but does not change the manner in which obligations or expenses are measured or recognized in the financial statements. 22 14
--------------------- --------------------- Pension Benefits Other Benefits --------------------- --------------------- 1999 1998 1999 1998 ------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of the year $ 14,199 $ 12,389 $ 3,132 $ 978 Service cost 465 329 41 42 Interest cost 997 938 216 80 Benefits paid (983) (995) (113) (6) Prior service cost incurred during year 690 752 229 Actuarial (gain)/loss during year (318) 843 (95) 169 Business combination 1,982 Curtailment (57) ------------------------------------------------------------------------------------------------- Benefit obligation at June 30 $ 15,050 $ 14,199 $ 3,410 $ 3,245 CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year$ 1,825 $ 1,442 Actual return on plan assets 108 284 Employer contribution 933 1,094 $ 113 $ 6 Benefits paid (983) (995) (113) (6) ------------------------------------------------------------------------------------------------- Fair value of plan assets at June 30 $ 1,883 $ 1,825 $ 0 $ 0 RECONCILIATION OF FUNDED STATUS: Funded status $(13,168) $(12,373) $ (3,410) $ (3,245) Unrecognized net (gain)/loss 1,413 1,761 (581) 347 Unrecognized prior service cost 2,400 1,969 226 (6) ------------------------------------------------------------------------------------------------- Accrued pension cost at June 30 $ (9,355) $ (8,643) $ (3,765) $ (2,904) AMOUNTS RECOGNIZED IN THE BALANCE SHEET AT JUNE 30 CONSIST OF: Accrued benefit liability $(11,728) $(11,226) $ (3,765) $ (2,904) Intangible asset 2,373 2,583 ------------------------------------------------------------------------------------------------- Net amount recognized, included in other liabilities on the consolidated balance sheet $ (9,355) $ (8,643) $ (3,765) $ (2,904) WEIGHTED-AVERAGE ASSUMPTIONS AS OF JUNE 30: Discount rate 7.0% 7.0% 7.0% 7.0% Expected return on plan assets 9.0% 9.0% N/A N/A Rate of compensation increase 5.5% 5.5% N/A N/A COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 465 $ 329 $ 41 $ 42 Interest cost 997 938 216 80 Expected return on plan assets (163) (122) Amortization of actuarial (gain)/loss 86 45 (15) 27 Amortization of prior service cost 260 194 (3) (3) ------------------------------------------------------------------------------------------------- Net periodic pension cost $ 1,645 $ 1,384 $ 239 $ 146
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for postretirement benefits other than pensions as of June 30, 1999, were 8.0% decreasing to 5.0% by 2006. A one-percentage point change in the assumed health care cost trend rates would have had the following effects:
---------------- ---------------- One-Percentage One-Percentage Point Increase Point Increase ---------------- ---------------- Effect on total service and interest cost components of periodic expense $ 38 $ (31) Effect on postretirement benefit obligation $ 485 $(399)
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. Qualified Retirement Plan The Company has a qualified defined benefit plan that provides benefits to certain Detroit area associates at retirement. The benefits are based on length of service and date of retirement. Salary Continuation Benefits The Company has agreements with certain retirees of Invetech to pay monthly retirement benefits for a period not to exceed 15 years. 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 participants' monthly health care premium payments are partially subsidized by the Company. Additionally, 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. 23 15 10. COMMITMENTS, LEASE OBLIGATIONS AND RENT EXPENSES The Company leases its corporate headquarters facility along with certain service center 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 $14,420 in 2000; $11,912 in 2001; $8,902 in 2002; $7,965 in 2003; $5,666 in 2004; and $35,053 after 2004. In connection with the lease of the corporate headquarters facility, the Company guaranteed 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 $19,365 in 1999, $20,004 in 1998, and $12,891 in 1997. The Company had outstanding letters of credit of $9,595 at June 30, 1999. These letters of credit secure certain employee benefit and insurance obligations. 11. SEGMENT INFORMATION Effective June 30, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The statement establishes standards for the manner in which public business enterprises report information about operating segments in financial statements. The adoption of SFAS No. 131 did not affect results of operations or financial position. The Company has identified one reportable segment: Service Center Based Distribution. The Service Center Based Distribution segment provides customers with solutions to their immediate MRO and OEM needs through the distribution of bearings, power transmission products and systems, industrial rubber products, linear motion products, fluid power components, general maintenance products and related specialty items. The Company also offers various levels of technical application support for these products and provides creative solutions to help customers minimize downtime and reduce overall procurement costs. The "Other" column consists of other businesses that sell directly to customers, including fluid power, electrical shop and fabricated rubber businesses and various electronic commerce businesses. The segments were established in fiscal 1999 primarily due to the acquisitions outside the Company's core business segment and the related growth in these areas. Prior period information is presented where practicable. Estimates have been used to determine some of the prior period information based on the current segment structure. Amounts prior to 1998 are not considered to be material and therefore not presented. The accounting policies of the segments are the same as those described in Note 1. Intersegment sales are not significant. All current segment operations are in the United States and Puerto Rico. The segment operations in Puerto Rico are not significant relative to the Company's overall results of operations. Segment Financial Information:
------------------------------------------------------------------------------------ Year Ended June 30 ------------------------------------------------------------------------------------ Total Service Center Based Distribution Other ----------------------- --------------------------------- ----------------------- 1999 1998 1999 1998 1999 1998 ------------------------------------------------------------------------------------------------------------------ Total net sales $1,527,928 $1,491,405 $1,466,836 $1,454,376 $ 61,092 $ 37,029 Segment operating profit $ 65,246 $ 89,340 $ 62,786 $ 87,226 $ 2,460 $ 2,114 Goodwill amortization 4,122 2,983 ---------------------------------------------------------- Corporate/Unallocated expense, net 18,636 27,837 ----------------------------------------------------- Total operating profit 42,488 58,520 Interest expense, net 9,855 8,695 Income before taxes $ 32,633 $ 49,825 ----------------------------------------------------- Assets used in the business $ 574,349 $ 606,091 $ 538,723 $ 577,984 $ 35,626 $ 28,107 ------------------------------------------------------------------------------------------------------------------ Depreciation $ 17,325 $ 16,428 $ 16,822 $ 16,094 $ 503 $ 334 ------------------------------------------------------------------------------------------------------------------ Capital Expenditures $ 13,527 $ 33,861 $ 12,317 $ 33,261 $ 1,210 $ 600 ------------------------------------------------------------------------------------------------------------------
----------------------- Year Ended June 30 ----------------------- Sales By Product and Service Category: 1999 1998 ----------------------------------------------------- Industrial Products $1,073,924 $1,078,507 Engineered Systems Products 233,407 229,984 Fluid Power Products 146,828 112,718 Fabricated Rubber Products 73,769 70,196 ----------------------------------------------------- $1,527,928 $1,491,405 -----------------------------------------------------
12. LITIGATION The Company is a defendant in several lawsuits for product liability and employment-related matters. The Company is vigorously defending these lawsuits. Although management cannot predict the outcomes of these lawsuits, they are not expected to have a material adverse effect on the Company's consolidated financial position or results of operations. 24 16 ---------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT ---------------------------------------------------------------------------- [LOGO] DELOITTE& TOUCHE LLP 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, 1999 and 1998, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Cleveland, Ohio August 5, 1999 25 17 Applied Industrial Technologies, Inc. and Subsidiaries ---------------------------------------------------------- QUARTERLY OPERATING RESULTS AND MARKETING DATA (UNAUDITED) ----------------------------------------------------------
-------------------------------------------------- Per Common Share (C) -------------------------------------------------- Stock Price Range ---------------------- Net Net Gross Net Income - Cash Sales Profit Income Diluted Dividend High Low (Dollars in thousands, except per share amounts) - --------------------------------------------------------------------------------------------------------------------------------- 1999 (A) FIRST QUARTER (B) $ 379,174 $ 94,497 $ 1,358 $0.06 $0.12 $20.81 $15.75 SECOND QUARTER 371,395 92,235 4,388 0.20 0.12 16.50 12.00 THIRD QUARTER 386,616 97,454 6,372 0.30 0.12 14.50 11.13 FOURTH QUARTER 390,743 98,626 7,815 0.37 0.12 19.00 11.31 - --------------------------------------------------------------------------------------------------- $ 1,527,928 $ 382,812 $ 19,933 $0.93 $0.48 =================================================================================================== 1998 (A) First Quarter (B) $ 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 ===================================================================================================
(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 made based upon the annual physical inventory and the effect of year-end inventory quantities on LIFO costs. These cost adjustments were immaterial in 1999. Adjustments in 1998 and 1997 increased gross profit by $9,707 and $5,624; net income by $5,625 and $3,259; and diluted net income per share by $.26 and $.17, respectively. Reductions in inventories during the fiscal years ended June 30, 1999 and 1997 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, 1999 and 1997 increased annual gross profit by $456 and $3,022; annual net income by $252 and $1,754; and diluted net income per share by $.01 and $.09, respectively. (See Note 4 to Consolidated Financial Statements.) (B) During the first quarter of fiscal 1999, the Company recorded pretax restructuring and other special charges of $5,400 to cover certain costs of consolidation and workforce reductions. Net of income taxes, this charge decreased net income by $3,186, or $.14 per share. During the first quarter of fiscal 1998, in connection with the acquisition of Invetech, a pretax restructuring charge of $4,000 was recorded for consolidation expenses and costs associated with the disposal of duplicative property and other assets. Net of income taxes, this charge decreased net income by $2,360, or $.11 per share. (C) On August 17, 1999, there were 6,815 shareholders of record. Additionally at August 17, 1999, there were 3,696 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, 1999, was $14.75 per share. 27 18 Applied Industrial Technologies, Inc. and Subsidiaries ---------------------------------------------------------- 10 YEAR SUMMARY ----------------------------------------------------------
1999 1998 1997 1996 (Dollars in thousands, except per share amounts) - --------------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS- YEAR ENDED JUNE 30 Net sales $1,527,928 $1,491,405 $1,160,251 $1,143,749 Operating income 42,488 58,520 50,599 49,281 Net income 19,933 30,125 27,092 23,334 Per share data Net income - basic .93 1.40 1.47 1.26 Net income - diluted .93 1.38 1.44 1.25 Cash dividends .48 .47 .41 .36 YEAR-END POSITION - JUNE 30 Working capital $ 257,091 $ 221,766 $ 164,723 $ 151,956 Long-term debt 126,000 90,000 51,428 62,857 Total assets 574,349 606,091 394,114 404,072 Shareholders' equity 293,586 299,502 212,874 192,264 YEAR-END STATISTICS - JUNE 30 Current ratio 2.9 2.1 2.4 2.1 Service Centers 394 400 331 337 Shareholders of record (A) 6,869 6,731 4,676 4,636
(A)Includes participant-shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan, and since 1998, shareholders in the Automatic Dividend Reinvestment Plan. 28 19
1995 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------- $1,054,809 $ 936,254 $ 831,432 $ 817,813 $ 814,000 $ 651,271 36,923 27,817 20,521 4,703 17,115 25,281 16,909 12,687 8,927 (1,666) 4,282 12,201 .97 .75 .55 (.11) .27 .75 .96 .73 .54 (.11) .27 .75 .31 .29 .29 .29 .29 .29 $ 153,555 $ 144,605 $ 130,860 $ 41,967 $ 54,695 $ 64,091 74,286 80,000 80,000 359,231 343,519 315,935 330,619 327,939 380,224 169,760 150,491 134,940 128,830 134,203 135,338 2.4 2.4 2.4 1.2 1.3 1.3 338 339 323 333 341 363 4,379 4,478 4,449 4,354 4,025 3,583
29 EX-21 3 EXHIBIT 21 1 EXHIBIT 21 APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR FISCAL YEAR ENDED JUNE 30, 1999 SUBSIDIARIES Jurisdiction of Name* Incorporation or Organization ----- ----------------------------- Air and Hydraulics Engineering, Incorporated Alabama (d/b/a Air and Hydraulics Engineering) Applied Industrial Technologies - ABC, Inc. Ohio Applied Industrial Technologies - DBB, Inc. Ohio Applied Industrial Technologies - Dixie, Inc. Tennessee Applied Industrial Technologies - GA LP Delaware Applied Industrial Technologies - Mainline, Inc. Wisconsin Applied Industrial Technologies - PA LLC Pennsylvania Applied Industrial Technologies - TN LP Delaware Applied Industrial Technologies - TX LP Delaware Applied - Michigan, Ltd. Ohio AppliedLink, Inc. (d/b/a AppliedLink) Ohio Bearings Pan American, Inc. Ohio Bearing Sales & Service, Inc. Washington BER International, Inc. Barbados BER Capital, Inc. Delaware ESI Acquisition Corporation Ohio (d/b/a Engineered Sales, Inc.) Farm Warehouse, Inc. (d/b/a Farm Warehouse) Missouri Rafael Benitez Carrillo Inc. Puerto Rico (d/b/a Rafael Benitez Carrillo) The Ohio Ball Bearing Company Ohio * Except as noted, operating companies conduct business under Applied Industrial Technologies name EX-23 4 EXHIBIT 23 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, 33-65513, and 333-83809 of Applied Industrial Technologies, Inc. on Form S-8 of our reports dated August 5, 1999 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, 1999. /s/Deloitte & Touche LLP Cleveland, Ohio September 17, 1999 EX-27 5 EXHIBIT 27
5 1,000 YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 19,186 0 199,251 3,515 169,689 389,207 177,656 70,417 574,349 132,116 126,000 0 0 10,000 283,586 574,349 1,527,928 1,527,928 1,145,116 1,145,116 340,324 3,014 10,063 32,633 12,700 19,933 0 0 0 19,933 .93 .93
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