1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For The Fiscal Year Ended June 30, 1997
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
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. [ ]
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 29, 1997:
$560,142,816.
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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 29, 1997
----- ------------------------------
Common Stock without par value 14,680,016
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. 1997 Annual Report to
shareholders for the fiscal year ended June 30, 1997, 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, 1997, portions of which are incorporated by reference
into Parts III and IV of this Form 10-K.
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PART I.
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ITEM 1. BUSINESS.
---------
Applied Industrial Technologies, Inc. ("Applied"), directly and through
its wholly owned operating subsidiaries, is engaged in the business of selling
and distributing bearings, mechanical and electrical drive system products,
industrial rubber products, fluid power products and specialty maintenance and
repair products manufactured by others. Applied and its predecessor companies
have been engaged in this business since 1923. Applied was incorporated pursuant
to the laws of Delaware in 1928 and reincorporated from Delaware to Ohio in
1988. Applied, formerly known as Bearings, Inc., adopted its current name as of
January 1, 1997.
(a) General Development of Business.
--------------------------------
Effective January 1, 1997, Applied changed its name from Bearings, Inc.
The new identity reflects the widening range of products and services offered by
Applied. Concurrently with the name change, two subsidiaries, King Bearing, Inc.
and Bruening Bearings, Inc., were merged into Applied.
In September 1996, Applied opened a new 155,000 square foot
distribution center in Douglas County, Georgia, replacing the former facility in
that area. In addition, a new 127,000 square foot distribution center opened in
May 1997 in Fort Worth, Texas, replacing the previous Fort Worth facility.
Applied also completed construction of its new 145,000 square foot headquarters
facility in Cleveland's Midtown Corridor. The complex opened in June 1997 and
replaced Applied's previous headquarters complex of five buildings spread over
three blocks in the Midtown Corridor.
On July 31, 1997, Applied acquired INVETECH Company ("Invetech"), a
privately held distributor of industrial components, for approximately 2.1
million shares of Applied Common Stock and $23.4 million in cash. Invetech,
together with its subsidiaries, American Bearing and Power Transmission, Inc.
and Moore Bearing Company, had approximately 980 employees and revenues of $321
million in the 12 months ended June 30, 1997. All Invetech locations will
operate under the Applied Industrial Technologies identity by December 31, 1997.
Following the acquisition, Applied operates branches in 44 states.
Further information regarding developments in Applied's business can be
found in Applied's 1997 Annual Report to shareholders under the caption
"Management's Discussion and Analysis" on pages 10 and 11, which is incorporated
herein by reference.
(b) Financial Information about Industry Segments.
---------------------------------------------
Applied considers its business to involve only one industry segment.
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(c) Narrative Description of Business.
---------------------------------
Products. Applied engages in the distribution and sale of ball, roller,
mounted, plane and linear type bearings, mechanical and electrical drive system
products, industrial rubber products, fluid power products and specialty items
used in connection with the foregoing such as seals, lubricants, locking
devices, sealing compounds, adhesives and maintenance tools. Although Applied
does not generally manufacture the products that it sells, it does assemble
filter carts, fluid power components, hydraulic power units, hydraulic and
pneumatic cylinders, speed reducers and electrical panels, modify conveyor belts
and rebuild precision machine tool spindles.
Applied is a non-exclusive distributor for numerous manufacturers of
the products that it sells. The principal bearing lines distributed by Applied
are: American, Barden, Cooper, FAG, Heim/RBC, INA, Kaydon, MB Manufacturing,
McGill, MRC, Sealmaster, SKF, Symmco, Thomson, Timken and Torrington/Fafnir. The
principal drive system product lines distributed by Applied are: Baldor, Boston
Gear, Browning, Falk, Foote Jones, Jeffrey, Kop-Flex, Lovejoy, Martin, Morse,
Reliance/Dodge, Rexnord/Link-Belt, Saftronics, Sumitomo, U.S. Electrical Motors,
and Winsmith. The principal industrial rubber product lines distributed by
Applied are Aeroquip, Boston, Dixon, Flexco, Gates, Goodyear, Habasit and
Weatherhead. The principal fluid power product lines distributed by Applied are
Dana, Denison, Donaldson, Eaton Char-Lynn, Ingersoll Rand-ARO and Schrader
Bellows. Specialty items, including seals, sealants, fluid sealing, "O" rings,
retaining rings, adhesives, lubricants, maintenance equipment, skin care
products and tools, are purchased from various manufacturers. The principal
specialty item lines distributed by Applied are CR Industries, Dow Corning,
Garlock, Gojo, Keystone, Loctite, Lubriplate, National/Federal Mogul, OTC/Power
Team, Parker Hannifin, Rotor Clip and Skil/Bosch. Applied believes that its
relationships with its suppliers are generally good and that Applied can
continue to represent these suppliers. The loss of certain of these suppliers
could have an adverse effect on Applied's business.
Based on Applied's analysis of product dollar sales volume for the
fiscal year ended June 30, 1997, bearings represented 41%, drive system products
represented 31%, specialty items represented 12%, and other items, including
industrial rubber and fluid power products, represented 16% of sales. For the
year ended June 30, 1996, bearings represented 43%, drive system products
represented 30%, specialty items represented 11%, and other items, including
industrial rubber and fluid power products, represented 15% of sales. For the
year ended June 30, 1995, bearings represented 45%, drive system products
represented 30%, specialty items represented 12%, and other items, including
industrial rubber and fluid power products, represented 13% of sales.
Applied rebuilds precision machine tool spindles at its Spindle Lab in
Cleveland, Ohio. Mechanical shops located in Corona, California; Tracy,
California; Atlanta, Georgia; Florence, Kentucky; Worcester, Massachusetts; Iron
Mountain, Michigan; Butte, Montana; Charlotte, North Carolina; Cleveland, Ohio;
Carlisle, Pennsylvania; Ft. Worth, Texas; and Longview, Washington rebuild and
assemble speed reducers, pumps, valves, cylinders and hydraulic motors, provide
custom machining and assemble electrical panels and fluid power systems to
customer specifications. Fluid power centers located in Corona, California;
Tracy, California; Baltimore, Maryland; Worcester,
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Massachusetts; Maryland Heights, Missouri; Limerick, Pennsylvania; Richmond,
Virginia; and Kent, Washington assemble fluid power systems and components and
provide customers with technical expertise. Applied also operates rubber shops
in Tucson, Arizona; Corona, California; Tracy, California; Atlanta, Georgia;
Crestwood, Illinois; Dayton, New Jersey; Fort Worth, Texas; Longview,
Washington; and Appleton, Wisconsin to modify conveyor belts and provide hose
assemblies in accordance with customer requirements. Shops and centers are
shown as of June 30, 1997.
Services. Applied's sales personnel advise and assist customers with
respect to product selection and application. Applied considers this advice and
assistance to be an integral part of its overall sales efforts. Beyond acting as
a mere distributor, Applied markets itself as a "single-source" applied
technology supplier, offering product and process solutions involving multiple
product technologies, which solutions reduce production downtime and overall
procurement and maintenance costs for customers. By providing a high level of
service, product knowledge and technical support, while at the same time
offering competitive pricing, Applied believes it will develop closer,
longer-lasting and more profitable relationships with its customers.
Applied's sales personnel consist of inside customer service and field
account representatives assigned to each Applied branch, in addition to
representatives assigned as industry and product specialists. Inside customer
service representatives receive, process and expedite customer orders, provide
pricing and product information, and assist field account representatives in
servicing customers. Field account representatives make on-site calls to
customers and potential customers to provide product and pricing information,
make surveys of customer requirements and recommendations, and assist in the
implementation of maintenance programs. The representatives will measure and
document for a customer the value to the customer of the services and advice
Applied provides, through cost savings or increased productivity. Specialists
assist with applications particular to their areas of technical expertise.
Applied maintains inventory levels in each branch that are tailored to
meet the immediate needs of its customers and maintains back-up inventory in its
distribution centers, thereby enabling customers to minimize their own
inventories. These inventories consist of certain standard items stocked at most
branches as well as other items related to the specific needs of customers in
the particular locale. As a result, the business of each branch is concentrated
largely in the geographic area in which it is located.
Timely delivery of products to customers is an integral part of
Applied's service. Branches and distribution centers utilize the most effective
method of transportation available to meet customer needs including both surface
and air common carrier and courier services. Applied also maintains a fleet of
vehicles to deliver products to customers. These transportation services and
delivery vehicles are also used for movement of products between suppliers,
distribution centers and branches to assure availability of merchandise for
customer needs.
Applied's ability to serve its customers is enhanced by its
computerized inventory and sales information systems. Applied's point-of-sale
OMNEX (R) 2.0 computer system gives each Applied location on-line access to
inventory, sales analysis and data. Inventory and sales information is updated
as transactions are entered. The system permits direct access for order entry,
pricing and price
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auditing, order expediting and back order review. Applied's computer system also
permits Electronic Data Interchange (EDI) with participating customers and
suppliers.
Applied's operations contrast sharply with those of manufacturers whose
products it sells in that the manufacturers generally confine their direct sales
activities to large-volume transactions with original equipment manufacturers
who incorporate the components purchased into the products they make. The
manufacturers generally do not sell replacement components directly to the
customer but refer the customer to Applied or another distributor. 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, among other things, continuing to
broaden its product offering and developing new methods for marketing its
products, such as through various integrated supply channels. There can be no
guarantee, however, that this trend will not have an adverse effect on Applied's
business.
Patents, trademarks and licenses do not have a significant effect on
Applied's business.
Markets and Methods of Distribution. Applied purchases from over 100
major suppliers of bearings, drive system products, industrial rubber products,
fluid power products and specialty items and resells to a wide variety of
industries, including industrial machinery, forest products, primary metals,
agriculture and food processing, chemical processing, transportation, mining,
textiles and utilities. Its customers range from the largest industrial concerns
in the country to the smallest. Applied's business is not significantly
dependent upon a single customer or group of customers, the loss of which would
have a material adverse effect upon Applied's business as a whole, and no single
customer of Applied accounts for more than 3% of Applied's net sales.
At June 30, 1997, Applied had 331 branches in 42 states. Applied has no
operations outside the continental United States.
Applied's export business during the fiscal year ended June 30, 1997
and prior fiscal years was less than 2% of net sales, and is not concentrated in
any one geographic area.
Competition. Applied considers its overall business to be highly
competitive. In addition, such markets present few economic or technological
barriers to entry. Applied's principal competitors are other specialized
bearing, drive system product, industrial rubber product, fluid power and
specialty item distributors, and, to a lesser extent, mill supply houses. These
competitors include single and multiple branch operations, some of which are
divisions or subsidiaries of larger organizations that may have greater
financial resources than Applied. There is a trend in the industry toward larger
multiple branch operations. Applied also competes with the manufacturers of
original equipment and their distributors in the sale of maintenance and
replacement bearings, power transmission components and related items. Some of
these manufacturers may have greater financial resources than Applied. The
identity and number of competitors vary throughout the geographic areas in which
Applied does
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business. Applied continues to develop and implement marketing strategies to
maintain a competitive position.
Applied is one of the leading distributors of replacement bearings,
drive system products, industrial rubber products, fluid power products and
specialty items in the United States, but Applied's share of the market for
those products is relatively small compared to the portion of that market
serviced by original equipment manufacturers and other distributors. Applied may
not be the largest distributor in each of the geographic areas in which a branch
is located.
Backlog and Seasonality. Applied does not have a substantial backlog of
orders and backlog is not significant in the business of Applied since prompt
delivery of the majority of Applied's products is essential to Applied's
business. Applied does not consider its business to be seasonal.
Raw Materials and General Business Conditions. Applied's operations are
dependent upon general industrial activities and economic conditions and would
be adversely affected by the unavailability of raw materials to its suppliers,
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, 1997, Applied had 4,101 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 13 of this Report and is
discussed in "Management's Discussion and Analysis" set forth in Applied's 1997
Annual Report to shareholders on pages 10 and 11.
Applied requires substantial working capital related to accounts
receivable and inventories. Significant amounts of inventory are carried to meet
rapid delivery requirements of customers. Applied generally requires all
payments for sales on account within 30 days and generally customers have no
right to return merchandise. Returns are not considered to have a material
effect on Applied's working capital requirements. Applied believes that such
practices are consistent with prevailing industry practices in these areas.
Environmental Laws. Applied believes that compliance with federal,
state and local provisions regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment will not
have a material adverse effect upon capital expenditures, earnings or
competitive position of Applied.
(d) Financial Information about Foreign and Domestic Operations and
---------------------------------------------------------------
Export Sales.
------------
Applied has no operations outside the continental United States.
Applied's export business during the fiscal year ended June 30, 1997, and prior
fiscal years, was less than 2% of net sales, and is not concentrated in any one
geographic area.
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(e) Cautionary Statement under Private Securities Litigation Reform
---------------------------------------------------------------
Act.
---
This report, including the documents incorporated by reference, may
contain 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
such forward-looking statements be subject to the safe harbors created thereby.
All forward-looking statements are based on current expectations regarding
important risk factors. Accordingly, actual results may differ materially from
those expressed in the forward-looking statements, and the making of such
statements should not be regarded as a representation by Applied or any other
person that the results expressed therein will be achieved.
Important risk factors include, but are not limited to, those
identified in "Narrative Description of Business", above, and the following:
changes in the economy; changes in customer procurement policies and practices;
changes in product manufacturer sales policies and practices; the availability
of product; changes in operating expenses; the effect of price increases; the
variability and timing of business opportunities including acquisitions,
customer agreements, supplier authorizations and other business strategies;
Applied's ability to realize the anticipated benefits of acquisitions; the
incurrence of additional debt and contingent liabilities in connection with
acquisitions; changes in accounting policies and practices; the effect of
organizational changes within Applied; adverse results in significant litigation
matters; adverse state and federal regulation and legislation; and the
occurrence of extraordinary events (including prolonged labor disputes, natural
events and acts of God, fires, floods and accidents).
ITEM 2. PROPERTIES.
-----------
Applied owns or leases the properties in which its offices, branches,
distribution centers, shops and corporate facilities are located. As of June 30,
1997, the real properties at 172 locations were owned by Applied, while 175
locations were leased by Applied. Certain property locations may contain
multiple operations, such as a branch and a distribution center.
The principal real properties owned by Applied (each of which has more
than 20,000 square feet of floor space) as of June 30, 1997 are: the Atlanta
Distribution Center, mechanical shop and rubber shop in Atlanta, Georgia; the
Midwest Distribution Center and mechanical shop in Florence, Kentucky; the
Prospect mechanical shop in Cleveland, Ohio; the Portland Distribution Center
and rubber shop in Portland, Oregon; and the John R. Cunin Distribution Center
and mechanical shop in Carlisle, Pennsylvania. In addition, Applied intends to
sell its remaining former corporate headquarters office buildings and the
Cleveland East branch in Cleveland, Ohio (which branch was relocated in
September 1997). The principal real properties leased by Applied (each of which
has more than 20,000 square feet of floor space) as of June 30, 1997 are: the
new corporate headquarters facility in Cleveland, Ohio; the Corona Distribution
Center, offices, mechanical shop and rubber shop in Corona, California; the Long
Beach branch in Long Beach, California; the San Jose branch in San Jose,
California; the Tracy fluid power shop, rubber shop and mechanical shop in
Tracy, California; the Worcester branch and mechanical shop in Worcester,
Massachusetts; the Portland branch in Portland,
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Oregon; the Fort Worth Distribution Center, mechanical shop and rubber shop in
Fort Worth, Texas; the Longview branch in Longview, Washington; the Longview
Distribution Center, mechanical shop and rubber shop in Longview, Washington;
the Appleton offices, branch and rubber shop in Appleton, Wisconsin; and the
Milwaukee branch and distribution center in Milwaukee, Wisconsin.
Applied considers the properties owned or leased to be generally
sufficient to meet its requirements for office space and inventory stocking. The
size of the buildings in which Applied's branches are located is primarily
influenced by the amount of inventory required to be carried to meet the needs
of the customers of the branch. All of the real properties owned or leased by
Applied are being utilized by Applied in its business except for certain
properties, which in the aggregate are not material and are either for sale or
lease to third parties due to relocation or closing of a facility. Unused
portions of buildings may be leased or subleased to others.
Generally, when opening a new branch, Applied will initially lease
space. Then, as the business develops, suitable property may be purchased or
leased for relocation of the branch. A new general-purpose office-storeroom
building may be constructed. However, Applied has no fixed policy in this
regard, and in each instance the final decision is made on the basis of
availability and cost of suitable property in the local real estate market,
whether purchased or leased. Applied does not consider any one of its properties
to be material, because it believes that if it becomes necessary or desirable to
relocate any of its branches and distribution centers, other suitable properties
could be found.
ITEM 3. PENDING LEGAL PROCEEDINGS.
--------------------------
In 1994, Dixie Bearings, Incorporated (now known as Applied Industrial
Technologies--Dixie, Inc.), a wholly-owned subsidiary of Applied, was served
with a First Amending and Supplemental Petition in a case captioned IN RE:
ROBERT LEE BICKHAM, ET AL. V. METROPOLITAN LIFE INSURANCE COMPANY, ET AL., 22nd
Judicial District Court for the Parish of Washington, Louisiana, Case No.
70,760-E, naming it as an additional defendant, along with over 50 other
defendants. The action was initially filed in 1993. The petition claims to have
been filed on behalf of approximately 1,118 persons or heirs of persons who were
allegedly exposed to asbestos-containing products while employed at the
Bogalusa, Louisiana, Paper Mill and/or Box Factory, currently operated by
Gaylord Container, Inc. Exposure is claimed to have occurred until approximately
1989. The plaintiffs claim that they or their decedents contracted
asbestos-related diseases, and where applicable, died as a result of exposure to
asbestos. Compensatory and punitive damages are sought, but no amount is
specified. Applied was subsequently served with Petitions in two related cases
pending in the same court as the BICKHAM case: IDA MAE WILLIAMS, ET AL. V.
METROPOLITAN LIFE INSURANCE COMPANY, ET AL., Case No. 72,986-F; and BENNIE L.
ADAMS, ET AL. V. METROPOLITAN LIFE INSURANCE COMPANY, ET AL., Case No. 72,154-B.
These cases, involving a total of approximately 124 persons or heirs of persons
who worked at the same Bogalusa facility, are essentially identical to the
BICKHAM case.
Preliminary information made available to Applied indicates that
Applied has been named a defendant in the foregoing cases only as a supplier of
certain products manufactured by others, which products allegedly contained a
small percentage of encapsulated asbestos fiber. Applied intends to
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defend these cases vigorously. Even if liability were assessed, Applied would
seek indemnification from its suppliers and its insurance carriers.
In 1992, a jury in a case captioned KING BEARING, INC., ET AL. V. CARYL
EDMUND ORANGES, ET AL., Superior Court of the State of California, County of
Orange, Case No. 53-42-31, awarded a $32.4 million judgment against King
Bearing, Inc., a wholly-owned subsidiary of Applied (but which has since been
merged into Applied). The verdict was based on contractual and other claims
asserted by various cross-complainants against King Bearing in a breach of
contract and unfair competition case initially filed by King Bearing in 1987.
The suit, which involved a former owner of King Bearing, was pending at the time
Applied acquired King Bearing in June 1990. All events relative to the judgment
occurred prior to Applied's purchase of King Bearing. On September 30, 1996, the
California Court of Appeal, Fourth Appellate District, affirmed the trial
court's grant of King Bearing's motion for a new trial. As a result, the matter
was remanded to the trial court for a new trial. Under the 1990 Stock Purchase
Agreement relative to the acquisition of King Bearing by Applied, Applied is
specifically indemnified by the ultimate parent of the former owner of King
Bearing (whose stockholders' equity exceeded $5 billion at June 30, 1997) for
any damages or losses relating to this action.
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 the fiscal year ended June 30, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT.
-------------------------------------
The Executive Officers are elected for a term of one year, or until
their successors are chosen and qualified, at the organizational meeting of the
Board of Directors held immediately following the annual meeting of
shareholders. The following is a listing of Applied's Executive Officers and a
description of their business experience during the past five years. Except as
otherwise stated, the positions and offices indicated are with Applied, and the
persons were elected to their present positions on October 22, 1996:
John C. Dannemiller. Mr. Dannemiller is Chairman
(since January 1992), Chief Executive Officer (since January
1992), President (since October 1996) and a Director (since
1985). He is 59 years of age.
John C. Robinson. Mr. Robinson is Vice Chairman
(since October 1996) and a Director (since 1991). He was
President (from January 1992 to October 1996) and Chief
Operating Officer (from January 1992 to October 1996). He is
55 years of age.
Mark O. Eisele. Mr. Eisele is Controller (since
October 1992). He was Manager of Internal Audit (from 1991 to
October 1992). He is 40 years of age.
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Francis A. Martins. Mr. Martins is Vice
President-Sales & Field Operations (since July 1996). Prior to
that he was Vice President-Sales & Marketing (October 1994 to
July 1996) and Vice President-Marketing (from May 1992 to
October 1994). He is 54 years of age.
Bill L. Purser. Mr. Purser is Vice
President-Marketing & National Accounts (since July 1996).
Prior to that he was Vice President-National Accounts (from
January 1995 to July 1996) and Director of National Accounts
(from December 1994 to January 1995). Before joining Applied,
he was Vice President of Business Development for INVETECH
Company (from December 1992 to December 1994) and Vice
President of Sales for that company (from 1990 to December
1992). He is 54 years of age.
Richard C. Shaw. Mr. Shaw is Vice
President-Communications, Organizational Learning & Quality
Standards (since July 1996). Prior to that he was Vice
President-Communications & Public Relations (from July 1993 to
July 1996) and Director of Corporate Communications (from 1989
to July 1993). He is 48 years of age.
Robert C. Stinson. Mr. Stinson is Vice
President-Administration, Human Resources, General Counsel &
Secretary (since October 1994) and has served as Secretary
since 1990. He was Vice President-General Counsel (from 1989
to October 1994). He is 51 years of age.
John R. Whitten. Mr. Whitten is Vice
President-Finance & Treasurer (since October 1992). He was
Vice President (since 1985) and Controller (from 1981 to
October 1992). He is 51 years of age.
PART II.
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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, 1997 and 1996 and the number of
shareholders of record as of August 20, 1997 is set forth in Applied's 1997
Annual Report to shareholders on page 25, under the caption "Quarterly Operating
Results and Market Data", and such information is incorporated here by
reference.
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ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
The summary of selected financial data for each of the last five years
is set forth in Applied's 1997 Annual Report to shareholders in the table on
pages 26 and 27 under the caption "10 Year Summary" and is incorporated here by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
------------------------------------
The "Management's Discussion and Analysis" is set forth in Applied's
1997 Annual Report to shareholders on pages 10 and 11 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 1997 Annual Report to shareholders at the
pages indicated, are incorporated here by reference and filed herewith:
<TABLE>
<CAPTION>
Caption Page No.
------- --------
<S> <C>
Financial Statements:
Statements of Consolidated
Income for the Years Ended
June 30, 1997, 1996 and 1995 12
Consolidated Balance Sheets
June 30, 1997 and 1996 13
Statements of Consolidated
Cash Flows for the Years Ended
June 30, 1997, 1996 and 1995 14
Statements of Consolidated
Shareholders' Equity for the
Years Ended June 30, 1997,
1996 and 1995 15
Notes to Consolidated
Financial Statements for the
Years Ended June 30, 1997, 1996
and 1995 16 - 22
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report 23
Supplementary Data:
Quarterly Operating Results and
Market Data 25
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
---------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
---------------------------------------
Not applicable.
PART III.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The information required by this Item as to the Directors is set forth
in Applied's Proxy Statement dated September 15, 1997 on pages 3 through 5 under
the caption "Election of Directors" and is incorporated here by reference. The
information required by this Item as to the Executive Officers has been
furnished in this Report on pages 9 and 10 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, 1997, under the captions "Summary Compensation" on
page 7, "Aggregate Option Exercises and Fiscal Year-End Option Value Table" on
page 8, "Estimated Retirement Benefits Under Supplemental Executive Retirement
Benefits Plan" on page 8, "Compensation of Directors" on pages 13 and 14,
"Deferred Compensation Plan for Non-employee Directors" on page 14, "Deferred
Compensation Plan" on pages 14 and 15, and "Severance Payment Agreements and
Other Change in Control Arrangements" on pages 15 and 16, and is incorporated
here by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
----------------------------------------
OWNERS AND MANAGEMENT.
----------------------
Information concerning the security ownership of certain beneficial
owners and management is set forth under the caption "Beneficial Ownership of
Certain Applied Shareholders and Management" on page 6 of Applied's Proxy
Statement dated September 15, 1997, and is incorporated here by reference.
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 13 of Applied's Proxy Statement dated September 15, 1997 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 1997 Annual Report to shareholders on pages 12 through 23 and page 25,
and are incorporated by reference in Item 8 of this Report.
Caption
-------
Statements of Consolidated Income for the
Years Ended June 30, 1997, 1996 and 1995
Consolidated Balance Sheets
June 30, 1997 and 1996
Statements of Consolidated Cash Flows for
the Years Ended June 30, 1997, 1996 and 1995
Statements of Consolidated Shareholders'
Equity for the Years Ended June 30, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
for the Years Ended June 30, 1997, 1996
and 1995
13
15
Independent Auditors' Report
Supplementary Data:
Quarterly Operating Results and Market Data
(a)2. Financial Statement Schedule.
-----------------------------
The following Report and Schedule are included in this Part IV, and are
found in this Report at the pages indicated:
<TABLE>
<CAPTION>
Caption Page No.
------- --------
<S> <C>
Independent Auditors' Report 18
Schedule VIII - Valuation and
Qualifying Accounts 19
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions, are not
applicable, or the required information is included in the consolidated
financial statements and notes thereto.
(a)3. Exhibits.
---------
* Asterisk indicates an executive compensation plan or
arrangement.
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <C>
3(a) Amended and Restated Articles of Incorporation of Applied
Industrial Technologies, Inc. (filed as Exhibit 3(a)
to Applied's Registration Statement on Form S-4 filed
May 23, 1997, Registration No. 333-27801, 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
</TABLE>
14
16
<TABLE>
<CAPTION>
<S> <C>
Form S-4 filed May 23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(b) $80,000,000 Maximum Aggregate Principal Amount Note Purchase
and Private Shelf Facility dated October 31, 1992 between
Bearings, Inc. and The Prudential Insurance Company of America
(as amended and restated) (filed as Exhibit 4(b) to Applied's
Registration Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by
reference).
*10(a) Form of Executive Severance Agreement between Applied and each
of its executive officers, together with schedule pursuant to
Instruction 2 of Item 601(a) of Regulation S-K identifying the
officers and setting forth the material details in which the
agreements differ from the form of agreement that is filed
(filed as Exhibit 10(a) to Applied's Registration Statement on
Form S-4 filed May 23, 1997, Registration No. 333-27801, and
incorporated here by reference).
*10(b) A written description of the Directors' compensation program is
found in Applied's Proxy Statement dated September 15, 1997,
SEC File No. 1-2299, on pages 13 and 14, under the caption
"Compensation of Directors", and is incorporated here by
reference.
*10(c) Applied Deferred Compensation Plan for Non-employee Directors
(January 1, 1997 Restatement) (filed as Exhibit 10(d) to
Applied's Registration Statement on Form S-4 filed
May 23, 1997, Registration No. 333-27801, and incorporated
here by reference).
*10(d) A written description of Applied's Non-Contributory Life and
Accidental Death and Dismemberment Insurance for executive
officers (filed as Exhibit 10(e) to Applied's Registration
Statement on Form S-4 filed May 23, 1997, Registration No.
333-27801, and incorporated here by reference).
*10(e) A written description of Applied's Long-Term Disability
Insurance for executive officers (filed as Exhibit 10(f) to
Applied's Registration Statement on Form S-4 filed May 23,
1997, Registration No. 333-27801, and incorporated here by
reference).
*10(f) Form of Director and Officer Indemnification Agreement entered
into between Applied and its directors and its executive
officers, together with a schedule pursuant to Instruction 2 of
Item 601(a) of Regulation S-K identifying the directors and
executive officers executing such Agreements (filed as Exhibit
10(g) to Applied's Registration Statement
</TABLE>
15
17
<TABLE>
<CAPTION>
<S> <C>
on Form S-4 filed May 23, 1997, Registration No. 333-27801,
and incorporated here by reference).
*10(g) Applied Supplemental Executive Retirement Benefits Plan (July
1, 1993 Restatement) presently covering 7 Applied executive
officers (as well as certain retired executive officers) (filed
as Exhibit 10(h) to Applied's Registration Statement on Form
S-4 filed May 23, 1997, Registration No. 333-27801, and
incorporated here by reference).
*10(h) First Amendment to Applied Supplemental Executive Retirement
Benefits Plan (filed as Exhibit 10(i) to Applied's Registration
Statement on Form S-4 filed May 23, 1997, Registration No.
333-27801, and incorporated here by reference).
*10(i) Applied Deferred Compensation Plan (January 1, 1997
Restatement) (filed as Exhibit 10(j) to Applied's Registration
Statement on Form S-4 filed May 23, 1997, Registration No.
333-27801, and incorporated here by reference).
*10(j) 1990 Long-Term Performance Plan adopted by Shareholders on
October 16, 1990 (filed as Exhibit 10(k) to Applied's
Registration Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by
reference).
*10(k) 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, 1997, SEC File No. 1-2299, on
pages 9 and 10, in the Report of the Executive Organization &
Compensation Committee of the Board of Directors on Executive
Compensation, under the subcaption "Management Incentive Plan",
and is incorporated here by reference.
*10(l) 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(m) 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).
</TABLE>
16
18
<TABLE>
<CAPTION>
<S> <C>
10(n) 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).
11 Computation of Net Income Per Share.
13 Applied 1997 Annual Report to shareholders (not deemed "filed"
as part of this Form 10-K except for those portions that are
expressly incorporated by reference).
21 Subsidiaries of Applied at June 30, 1997.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
</TABLE>
Applied will furnish a copy of any exhibit described above and not
contained herein upon payment of a specified reasonable fee which fee shall be
limited to Applied's reasonable expenses in furnishing such exhibit.
(b) Reports on Form 8-K.
--------------------
None during the quarter ended June 30, 1997.
17
19
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, 1997 and
1996 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,
1997 and have issued our report thereon dated August 7, 1997 (August 15, 1997 as
to Note 13); such consolidated financial statements and report are included in
your 1997 Annual Report to shareholders and are incorporated herein by
reference. Our audits also included the consolidated financial statement
schedule of the Company, listed in Item 14(a)2. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
August 7, 1997
18
20
<TABLE>
<CAPTION>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(in thousands)
--------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
--------- --------- --------- --------- ---------
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND FROM AT END OF
DESCRIPTION OF PERIOD EXPENSES RESERVE PERIOD
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30 1997:
Reserve deducted from assets to
which it applies - allowance for
doubtful accounts $2,400 $1,743 $1,743 (A) $2,400
YEAR ENDED JUNE 30 1996:
Reserve deducted from assets to
which it applies - allowance for
doubtful accounts $2,300 $2,123 $2,023 (A) $2,400
YEAR ENDED JUNE 30 1995:
Reserve deducted from assets to
which it applies - allowance for
doubtful accounts $1,900 $1,710 $1,310 (A) $2,300
<FN>
(A) Amounts represent uncollectible accounts charged off.
--------------------------------------------------------------------------------------------------
SCHEDULE VIII
</TABLE>
19
21
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
<S> <C>
/s/ John C. Dannemiller /s/ John C. Robinson
----------------------------------------- -----------------------------------------
John C. Dannemiller, Chairman, John C. Robinson, Vice Chairman
Chief Executive Officer & President
/s/ John R. Whitten /s/ Mark O. Eisele
----------------------------------------- -----------------------------------------
John R. Whitten Mark O. Eisele
Vice President-Finance & Treasurer Controller
(Principal Financial Officer) (Principal Accounting Officer)
</TABLE>
Date: September 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/ William G. Bares /s/ Roger D. Blackwell
----------------------------------------- -----------------------------------------
William G. Bares, Director Dr. Roger D. Blackwell, Director
/s/ William E. Butler /s/ John C. Dannemiller
----------------------------------------- -----------------------------------------
William E. Butler, Director John C. Dannemiller, Chairman,
Chief Executive Officer, President and Director
/s/ Russel B. Every /s/ Russell R. Gifford
----------------------------------------- -----------------------------------------
Russel B. Every, Director Russell R. Gifford, Director
/s/ L. Thomas Hiltz /s/ John J. Kahl
----------------------------------------- -----------------------------------------
L. Thomas Hiltz, Director John J. Kahl, Director
/s/ John C. Robinson /s/ Dr. Jerry Sue Thornton
----------------------------------------- -----------------------------------------
John C. Robinson, Vice Chairman Dr. Jerry Sue Thornton, Director
and Director
</TABLE>
-------------------------------------
William G. Bares, as attorney
in fact for persons indicated by "*"
Date: September 25, 1997
20
22
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-K FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Exhibit
No. Description Reference
--- ----------- ---------
<S> <C> <C>
3(a) Amended and Restated Articles of Incorporation
of Applied Industrial Technologies, Inc. Note (a)
3(b) Code of Regulations of Applied Industrial
Technologies, Inc., adopted September 6, 1988. Note (b)
4(a) Certificate of Merger of Bearings, Inc.
(Ohio) and Bearings, Inc. (Delaware)
filed with the Ohio Secretary of State
on October 18, 1988, including an Agreement
and Plan of Reorganization dated
September 6, 1988. Note (c)
4(b) $80,000,000 Maximum Aggregate Principal
Amount Note Purchase and Private Shelf
Facility dated October 31, 1992 between
Applied and The Prudential Insurance
Company of America (as amended and
restated). Note (d)
10(a) Form of Executive Severance Agreement
between Applied and each of its executive
officers, together with schedule identifying
officers and setting forth material details
by which the individual agreements differ
from the form. Note (e)
10(b) A written description of the directors'
compensation program. Note (f)
10(c) Applied Deferred Compensation Plan for Non-
Employee Directors (January 1, 1997 Restatement). Note (g)
</TABLE>
23
<TABLE>
<CAPTION>
<S> <C> <C>
10(d) A written description of Applied's Non-Contributory
Life and Accidental Death and Dismemberment
Insurance for executive officers. Note (h)
10(e) A written description of Applied's Long-Term
Disability Insurance for executive officers. Note (i)
10(f) Form of Director and Officer Indemnification
Agreement entered into between Applied
and its directors and executive officers, together
with a schedule identifying the directors and
executive officers executing such agreements. Note (j)
10(g) Applied Supplemental Executive Retirement
Benefits Plan (July 1, 1993 Restatement)
presently covering 7 Applied executive
officers. Note (k)
10(h) First Amendment to Applied Supplemental
Executive Retirement Benefits Plan (July 1, 1993
Restatement). Note (l)
10(i) Applied Deferred Compensation Plan
(January 1, 1997 Restatement). Note (m)
10(j) 1990 Long-Term Performance Plan adopted
by Shareholders on October 16, 1990. Note (n)
10(k) A written description of Applied's
Management Incentive Plan applicable to
key Applied executives, including the
five most highly compensated executive
officers. Note (o)
10(l) Applied Supplemental Defined Contribution Plan
(January 1, 1997 Restatement) Note (p)
10(m) Lease dated as of March 1, 1996 between
Applied and the Cleveland-Cuyahoga County
Port Authority Note (q)
10(n) Plan and Agreement of Merger among Applied,
I. C. Acquisition Corp. and INVETECH Company
dated as of April 29, 1997. Note (r)
</TABLE>
24
<TABLE>
<CAPTION>
<S> <C> <C>
11 Computation of Net Income Per Share. Attached
13 Applied 1997 Annual Report to shareholders
(not deemed "filed" as part of this Form 10-K
except for those portions that are expressly
incorporated by reference). Attached
21 Subsidiaries of Applied at June 30, 1997. Attached
23 Independent Auditors' Consent. Attached
27 Financial Data Schedule. Attached
<FN>
Notes: (a) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 3(a).
(b) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 3(b).
(c) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 4(a).
(d) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 4(b).
(e) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 10(a).
(f) Incorporated by reference from the Company's Proxy Statement dated
September 15, 1997, SEC File No. 1-2299, on pages 13 and 14, under
the caption "Compensation of Directors".
(g) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 10(d).
(h) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 10(e).
</TABLE>
25
<TABLE>
<CAPTION>
<S> <C>
<FN>
(i) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 10(f).
(j) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 10(g).
(k) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 10(h).
(l) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 10(i).
(m) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 10(j).
(n) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 10(k).
(o) Incorporated by reference from the Company's Proxy Statement dated
September 15, 1997, SEC File No. 1-2299, on pages 9 and 10, in the
Report of the Executive Organization & Compensation Committee of the
Board of Directors on Executive Compensation, under the sub-caption
"Management Incentive Plan".
(p) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 10(m).
(q) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 10(n).
(r) Incorporated by reference from the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No. 333-27801, at
Exhibit 2(a).
</TABLE>
1
Exhibit 11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
Computation of Net Income Per Share
(Thousands, except per share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Average Shares Outstanding (B)
------------------------------
1. Average common shares
outstanding 12,389 12,303 11,551
2. Net additional shares
outstanding assuming stock
options exercised and
proceeds used to purchase
treasury stock 345 264 197
----------- ----------- -----------
3. Adjusted average common
shares outstanding for
fully diluted computation 12,734 12,567 11,747
=========== =========== ===========
Net Income
----------
4. Net income as reported in
statements of consolidated
income $ 27,092 $ 23,334 $ 16,909
=========== =========== ===========
Net Income Per Share
--------------------
5. Net income per average
common share outstanding
(4/1) $ 2.19 $ 1.90 $ 1.46
=========== =========== ===========
6. Net income per common
share on a fully
dilutive basis (4/3) $ 2.13 (A) $ 1.86 (A) $ 1.44 (A)
=========== =========== ===========
<FN>
(A) Amount is not presented in the statements as the dilutive effect is less
than 3%.
(B) All per share data have been restated to reflect a three for two stock
split effective December 4, 1995.
</TABLE>
1
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year Ended June 30, 1997 vs 1996
--------------------------------
Sales in 1997 increased 1.4% to $1,160.3 million from 1996 sales of $1,143.7
million. The lower level of sales increase resulted from an overall slowing in
certain industries which exhibited strength in the prior year, particularly in
certain traditionally cyclical industries. The decline in sales growth was also
affected by the sale of the Dixie Bearings Aircraft Division during the first
quarter of fiscal 1997. The Company expects to continue expanding its business
through strategic acquisitions. The Company also expects to grow revenues
through sales of additional products to customers who traditionally relied on
the Company for bearing products.
Gross margin (net sales less cost of sales) as a percent of sales increased
to 26.4% in 1997 from 25.8% in 1996. The increase in the gross margin resulted
from an increase in favorable LIFO cost adjustments (see Note 5 to the
Consolidated Financial Statements) and from changes in the product mix, as sales
of lower margin bearing products declined and sales of non-bearing products with
higher margins continued to grow.
Selling, distribution and administrative expenses as a percent of sales were
22.0% in 1997 and 21.5% in 1996. The increase in expenses as a percent of sales
was primarily the result of increased compensation and health care costs.
Operating income increased to $50.6 million in 1997 from $49.3 million in
1996. As a percent of sales, operating income increased to 4.4% in 1997 from
4.3% in 1996. This improved operating margin resulted from higher gross margins
on sales.
Interest expense for 1997 decreased $2.5 million or 28% as a result of
decreased borrowings.
Income tax expense as a percentage of income before income taxes decreased to
39.9% in 1997 from 42.9% in 1996. The decrease in the effective tax rate
resulted from lower effective state and local income tax rates and from Federal
income tax credits.
Net income for the fiscal year ended June 30, 1997 improved 16.1% over the
prior year.
The number of associates was 4,101 at June 30, 1997 and 4,133 at June 30,
1996.
Year Ended June 30, 1996 vs 1995
--------------------------------
Sales in 1996 increased 8% to $1,143.7 million from 1995 sales of $1,054.8
million. The sales increase was approximately 4% due to price increases and 4%
due to volume increases. In 1996, the Company continued to implement its
strategy, which began in 1992, of selling additional products to its existing
customers, as well as better penetration of the market with products beyond the
traditional bearing product lines.
Gross margin, as a percent of sales was 25.8% in 1996 and 1995. Margins
remained constant, even though the benefits from favorable LIFO cost adjustments
were significantly lower in 1996 than 1995 (see Note 5 to the Consolidated
Financial Statements). The lower LIFO benefits were offset by a change in
product mix.
Selling, distribution and administrative expenses as a percent of sales were
21.5% in 1996 and 22.3% in 1995. The decrease in expenses as a percent of sales
was the result of a continued effort to control expenses and improve
productivity. While these expenses decreased as a percent of sales, they did
increase 5% in absolute dollars primarily due to higher compensation costs from
an increase in the number of associates, costs associated with acquisitions and
the accelerated vesting of Performance Accelerated Restricted Stock (PARS) based
upon the price performance of the Company's common stock during the year.
Operating income increased to $49.3 million in 1996 from $36.9 million in
1995. As a percent of sales, operating income increased to 4.3% in 1996 from
3.5% in 1995. This improved operating margin resulted from higher sales volume
and improved productivity.
Interest expense for 1996 increased $1.3 million as a result of increased
borrowings and higher interest rates on short-term debt.
Income tax expense as a percentage of income before income taxes was 42.9% in
1996 and 43.0% in 1995.
Net income for the fiscal year ended June 30, 1996 improved 38% over the
prior year.
The number of associates was 4,133 at June 30, 1996 and 4,080 at June 30,
1995.
Liquidity and Working Capital
-----------------------------
The Company generated cash from operating activities of $41.8 million and $36.4
million in 1997 and 1996, respectively.
Cash flow from operations depends primarily upon generating operating income,
controlling the investment in inventory and receivables, and managing the timing
of payments to suppliers.
The Company is obligated for rental payments for operating leases on 175 of
its 347 branch, distribution center and other operating locations. (See Note 11
to the Consolidated Financial Statements for annual rental commitments.)
2
Investments in property totaled $21.6 million and $23.5 million in 1997 and
1996, respectively. These capital expenditures were primarily made for building
and upgrading branch and distribution center facilities, furniture and equipment
for the new corporate headquarters facility in Cleveland, vehicles and data
processing equipment. A new company-owned distribution center in Atlanta opened
in September 1996 and a new Fort Worth, Texas build-to-suit distribution center
financed under an operating lease opened in May 1997. Working capital at June
30, 1997, was $164.7 million compared to $151.9 million at June 30, 1996. This
increase is primarily due to increased cash provided from operations, the
receipt of proceeds from the sale of the Aircraft Division, and the refund of
insurance deposits. The current ratio was 2.4 at June 30, 1997 and 2.1 at June
30, 1996.
Capital Resources
-----------------
Capital resources are obtained from income retained in the business,
indebtedness under the Company's lines of credit and long-term debt and from
operating lease arrangements.
Average combined short-term and long-term borrowing was $89.4 million in 1997
and $111.8 million in 1996. Effective interest rates on short-term borrowings
were 6.3% in 1997 and 6.2% in 1996. The Company has short-term lines of credit
with commercial banks totaling $155 million. The Company had $25.4 million of
borrowings under these bank short-term lines of credit at June 30, 1997. The
Company also has an agreement with the Prudential Insurance Company of America
for an uncommitted shelf facility to borrow up to $50 million in additional
long-term financing, at its sole discretion, with terms ranging from seven to
twenty years. The entire $50 million is available for future financing needs as
no borrowings have been made as of June 30, 1997.
The Company sold its Dixie Bearings Aircraft Division business in August
1996. The Company received proceeds from the sale of $9.1 million which were
used to reduce short-term borrowings.
The Board of Directors has authorized the purchase of up to 158,000 shares of
the Company's Common Stock during fiscal 1998 and beyond to fund employee
benefit programs and stock option and award programs. These purchases can be
made in open market or negotiated transactions, from time to time, depending
upon market conditions. Under a previous Board authorization, the Company
acquired 150,500 shares of its Common Stock for $4.1 million during the year
ended June 30, 1997.
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, business acquisitions, enhancement of
facilities and equipment and the purchase of additional Company Common Stock.
Management also believes that additional long-term debt and line of credit
financing could be obtained if desired.
Other Matters
-------------
Effective August 1, 1997, the Company completed the acquisition of Invetech
Company, a privately held industrial distributor based in Detroit, Michigan. The
aggregate purchase price including the issuance of 2.1 million shares of Company
Common Stock was $93.9 million. The cash portion of the purchase price of $23.4
million was financed through available short-term lines of credit. The Company
expects to incur a pre-tax nonrecurring charge of approximately $4.0 million in
the quarter ending September 30, 1997 for consolidation expenses and costs
associated with the disposal of duplicative capital assets. (See Note 2 to the
Consolidated Financial Statements.)
The 1990 agreement for the acquisition of King Bearing included specific
indemnification of Applied Industrial Technologies, Inc. and King for any
financial damages or losses related to a lawsuit pending against King in the
Superior Court of Orange County, California. The indemnification was also
guaranteed by the ultimate parent of King's former owner, a Fortune 500 company
with stockholders' equity exceeding five billion dollars at June 30, 1997. As
further explained in Note 12 to the Consolidated Financial Statements,
management believes that the outcome of this matter will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company due to the indemnification and guarantee.
3
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED INCOME
Applied Industrial Technologies, Inc. and Subsidiaries
Year Ended June 30
1997 1996 1995
(Thousands, except per share amounts)
...........................................................................................................................
<S> <C> <C> <C>
NET SALES $1,160,251 $1,143,749 $1,054,809
...........................................................................................................................
COST AND EXPENSES
Cost of sales 854,230 848,682 783,105
Selling, distribution and administrative 255,422 245,786 234,781
...........................................................................................................................
1,109,652 1,094,468 1,017,886
...........................................................................................................................
OPERATING INCOME 50,599 49,281 36,923
...........................................................................................................................
Interest Expense 6,463 8,975 7,650
Interest Income (956) (528) (386)
...........................................................................................................................
5,507 8,447 7,264
...........................................................................................................................
INCOME BEFORE INCOME TAXES 45,092 40,834 29,659
...........................................................................................................................
INCOME TAX EXPENSE
Federal 15,700 14,250 10,630
State and local 2,300 3,250 2,120
...........................................................................................................................
18,000 17,500 12,750
...........................................................................................................................
NET INCOME $ 27,092 $ 23,334 $ 16,909
---------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 2.19 $ 1.90 $ 1.46
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Applied Industrial Technologies, Inc. and Subsidiaries
June 30
1997 1996
(Amounts in thousands)
...........................................................................................................................
<S> <C> <C>
ASSETS
Current assets
Cash and temporary investments $ 22,405 $ 9,243
Accounts receivable, less allowance of $2,400 153,080 155,524
Inventories 103,069 127,937
Other current assets 6,905 2,434
...........................................................................................................................
Total current assets 285,459 295,138
...........................................................................................................................
Property - at cost
Land 12,281 13,529
Buildings 66,157 64,441
Equipment 81,132 71,938
...........................................................................................................................
159,570 149,908
Less accumulated depreciation 68,809 63,574
...........................................................................................................................
Property - net 90,761 86,334
...........................................................................................................................
Other assets 17,894 22,600
...........................................................................................................................
TOTAL ASSETS $394,114 $404,072
---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Notes payable $ 25,415 $ 30,056
Current portion of long-term debt 11,429 11,429
Accounts payable 49,469 67,652
Compensation and related benefits 19,025 19,081
Other current liabilities 15,398 14,964
...........................................................................................................................
Total current liabilities 120,736 143,182
Long-term debt 51,428 62,857
Other liabilities 14,366 8,741
...........................................................................................................................
TOTAL LIABILITIES 186,530 214,780
...........................................................................................................................
SHAREHOLDERS' EQUITY
Preferred stock - no par value; 2,500
shares authorized; none issued or outstanding
Common stock - no par value; 30,000 shares
authorized; 13,954 shares issued 10,000 10,000
Additional paid-in capital 10,311 7,528
Income retained for use in the business 216,642 197,232
Treasury shares - at cost (1,541 and 1,577 shares) (22,983) (21,260)
Shares held in trust for deferred compensation plans (5,436) (3,008)
Unearned restricted common stock compensation (950) (1,200)
...........................................................................................................................
TOTAL SHAREHOLDERS' EQUITY 207,584 189,292
...........................................................................................................................
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $394,114 $404,072
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
4
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS
Applied Industrial Technologies, Inc. and Subsidiaries
Year Ended June 30
1997 1996 1995
(Amounts in thousands)
..................................................................................................................................
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $27,092 $23,334 $16,909
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 13,574 13,478 13,275
Deferred income taxes 1,900 (1,444) (3,345)
Provision for losses on accounts receivable 1,743 2,123 1,710
Gain on sale of property (921) (1,119) (1,412)
Amortization of restricted common stock
compensation and goodwill 857 1,959 680
Treasury shares contributed to employee
benefit and deferred compensation plans 4,372 4,496 3,935
Changes in current assets and liabilities, net of acquisitions and dispositions:
Accounts receivable (2,315) (9,132) (16,313)
Inventories 18,868 (12,889) (5,075)
Other current assets (4,471) 1,722 (4)
Accounts payable and accrued expenses (18,949) 13,908 2,548
Other - net 513
..................................................................................................................................
NET CASH PROVIDED BY OPERATING ACTIVITIES 41,750 36,436 13,421
..................................................................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Property purchases (21,579) (23,536) (15,055)
Proceeds from property sales 6,898 4,803 4,081
Proceeds from sale of Dixie Bearings Aircraft Division 9,090
Acquisition of businesses, less cash acquired (4,328) (1,852)
Deposits and other 4,234 (7,729) (164)
..................................................................................................................................
NET CASH USED IN INVESTING ACTIVITIES (1,357) (30,790) (12,990)
..................................................................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayments) under:
Line-of-credit agreements - net (4,641) 11,481 (1,230)
Long-term debt (11,429) (5,714)
Exercise of stock options 1,089 1,781 3,924
Dividends paid (7,682) (6,528) (5,397)
Purchases of treasury shares (4,568) (2,212) (3,874)
..................................................................................................................................
NET CASH USED IN FINANCING ACTIVITIES (27,231) (1,192) (6,577)
..................................................................................................................................
Increase (decrease) in cash
and temporary investments 13,162 4,454 (6,146)
Cash and temporary investments
at beginning of year 9,243 4,789 10,935
..................................................................................................................................
CASH AND TEMPORARY INVESTMENTS
AT END OF YEAR $22,405 $ 9,243 $ 4,789
----------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information Cash paid during the year for:
Income taxes $19,107 $17,842 $14,827
Interest $ 6,873 $ 8,291 $ 8,411
</TABLE>
See notes to consolidated financial statements.
5
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Applied Industrial Technologies, Inc. and Subsidiaries
For the Years Ended June 30, 1997, 1996 and 1995
Income
Shares of Additional Retained for Treasury
Common Stock Common Paid-in Use in the Shares-at
Outstanding Stock Capital Business Cost
(Thousands, except per share amounts)
.........................................................................................................
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1994 11,319 $10,000 $6,962 $165,807 ($32,278)
Net income 16,909
Cash dividends - $.47 per share (5,397)
Purchases of common stock for treasury (180) (3,874)
Treasury shares issued for:
401(k) Savings Plan contributions 140 1,124 1,788
Exercise of stock options 225 1,565 2,789
Restricted common stock awards 138 1,232 1,727
Deferred compensation plans 46 428 595
Amortization of restricted
common stock compensation
Other 83
.........................................................................................................
BALANCE AT JUNE 30, 1995
As previously reported 11,688 10,000 11,311 177,402 (29,253)
Pooling of interests
with Engineered Sales 486 (6,499) 3,024 6,408
.........................................................................................................
BALANCE AS RESTATED 12,174 10,000 4,812 180,426 (22,845)
Net income 23,334
Cash dividends - $.54 per share (6,528)
Purchases of common stock for treasury (86) (2,212)
Treasury shares issued for:
Retirement Savings Plan contributions 138 1,692 1,805
Exercise of stock options 107 391 1,390
Restricted common stock awards 1 13 19
Deferred compensation plan 43 416 583
Amortization of restricted
common stock compensation 204
Increase in fair value of shares
held in trust
.........................................................................................................
BALANCE AT JUNE 30, 1996 12,377 10,000 7,528 197,232 (21,260)
Net income 27,092
Cash dividends - $.62 per share (7,682)
Purchases of common stock for treasury (166) (4,568)
Treasury shares issued for:
Retirement Savings Plan contributions 109 1,809 1,568
Exercise of stock options 52 342 747
Restricted common stock awards 6 68 67
Deferred compensation plans 35 532 463
Amortization of restricted
common stock compensation 32
Increase in fair value of shares
held in trust
.........................................................................................................
Balance at June 30, 1997 12,413 $10,000 $10,311 $216,642 ($22,983)
---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Held Unearned
in Trust for Restricted
Deferred Common Total
Compensation Stock Shareholders'
Plans Compensation Equity
.........................................................................................
<S> <C> <C> <C>
BALANCE AT JULY 1, 1994 $150,491
Net income 16,909
Cash dividends - $.47 per share (5,397)
Purchases of common stock for treasury (3,874)
Treasury shares issued for:
401(k) Savings Plan contributions 2,912
Exercise of stock options 4,354
Restricted common stock awards ($2,959)
Deferred compensation plans ($1,023)
Amortization of restricted
common stock compensation 326 326
Other (403) (320)
.........................................................................................
BALANCE AT JUNE 30, 1995
As previously reported (1,426) (2,633) 165,401
Pooling of interests
with Engineered Sales 2,933
.........................................................................................
BALANCE AS RESTATED (1,426) (2,633) 168,334
Net income 23,334
Cash dividends - $.54 per share (6,528)
Purchases of common stock for treasury (2,212)
Treasury shares issued for:
Retirement Savings Plan contributions 3,497
Exercise of stock options 1,781
Restricted common stock awards (32)
Deferred compensation plan (999)
Amortization of restricted
common stock compensation 1,465 1,669
Increase in fair value of shares
held in trust (583) (583)
.........................................................................................
BALANCE AT JUNE 30, 1996 (3,008) (1,200) 189,292
Net income 27,092
Cash dividends - $.62 per share (7,682)
Purchases of common stock for treasury (4,568)
Treasury shares issued for:
Retirement Savings Plan contributions 3,377
Exercise of stock options 1,089
Restricted common stock awards (135)
Deferred compensation plans (995)
Amortization of restricted
common stock compensation 385 417
Increase in fair value of shares held
in trust (1,433) (1,433)
.........................................................................................
BALANCE AT JUNE 30, 1997 ($5,436) ($950) $207,584
-----------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
6
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Applied Industrial Technologies, Inc. and Subsidiaries
Years Ended June 30, 1997, 1996 and 1995
(Dollar amounts in thousands, except per share amounts)
................................................................................
1. Business and Accounting Policies
Name Change
-----------
In October 1996, shareholders approved a change in the Company's name from
Bearings, Inc. to Applied Industrial Technologies, Inc. effective January 1,
1997.
Business
--------
The Company distributes bearings, electrical and mechanical drive systems
products, fluid power products and systems, industrial rubber products, general
maintenance products and related specialty items. The Company offers technical
application support for these products and provides creative solutions to help
customers minimize downtime and reduce overall procurement costs. Although the
Company does not generally manufacture the products it sells, it does assemble
and repair certain products and systems. Most of the Company's sales are in the
maintenance and replacement markets, to customers in a wide range of industries
principally in the United States.
Consolidation
-------------
The consolidated financial statements include the accounts of Applied Industrial
Technologies, Inc. and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the
period. Actual results may differ from the estimates and assumptions used in
preparing the consolidated financial statements.
Cash Equivalents
----------------
The Company considers all temporary investments with maturities of three months
or less to be cash equivalents for purposes of the statements of consolidated
cash flows.
Goodwill
--------
Goodwill is recorded for the purchase price of acquired operations in excess of
the fair value of identifiable net assets. Goodwill is amortized on a
straight-line basis over 15 to 20 years.
Inventories
-----------
Inventories are valued at the lower of cost or market, using the last-in,
first-out (LIFO) method. (See Note 5 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.
7
Income Taxes
------------
Income taxes are determined based upon income and expenses recorded for
financial reporting purposes. Deferred income taxes are recorded for estimated
future tax effects of differences between the bases of assets and liabilities
for financial reporting and income tax purposes giving consideration to enacted
tax laws.
Net Income Per Share
--------------------
Net income per share is computed using the weighted average number of common
shares outstanding for the period. Net income per share has not been adjusted
for the effect of stock options as the dilutive effect would be less than 3% for
each year. All shares and per-share data have been restated to reflect a
three-for-two stock split effective December 4, 1995.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.
This statement simplifies the current standard for computing earnings per share
(EPS). At June 30, 1997, the Company had stock options outstanding, which would
currently have a less than 3% dilution effect for reporting Diluted EPS under
SFAS No. 128. SFAS No. 128 becomes effective for interim and annual financial
statements beginning in the second quarter of fiscal 1998; earlier application
is not permitted.
2. Subsequent Event - Acquisition
Effective August 1, 1997, the Company completed the acquisition of the Invetech
Company (Invetech), a distributor of bearings, mechanical and electrical drive
system products, industrial rubber products and specialty maintenance and repair
products. The aggregate purchase price including the issuance of 2.1 million
shares of Company Common Stock was $93,900. The cash portion of the purchase
price of $23,400 includes a $10,000 escrow account and was financed through
available short-term lines of credit.
The Company will account for the acquisition as a purchase and will include
Invetech's results of operations from the effective date of the acquisition in
its fiscal 1998 financial statements. The Company expects to incur a pre-tax
nonrecurring charge of approximately $4,000 in the quarter ending September 30,
1997 for consolidation expenses and costs associated with disposal of
duplicative capital assets.
Unaudited pro forma combined net sales, net income and net income per share
for the year ended June 30, 1997 giving effect to the acquisition as if it
occurred at the beginning of the year would have been $1,481,200, $29,100 and
$2.01, respectively. This unaudited pro forma information includes adjustments
resulting from the allocation of the purchase price to the net assets of
Invetech based on a preliminary analysis of the fair value of assets and
liabilities assumed. The unaudited pro forma amounts do not include the expected
pre-tax nonrecurring charge of approximately $4,000 or any potential expense
reductions from the consolidation of certain facilities and administrative
functions of the two companies. The unaudited pro forma financial information is
not necessarily indicative of results of operations had the acquisition been
made at July 1, 1996 or of future results of operations.
3. Business Combinations
In February 1996, the Company exchanged 486,000 shares of the Company's Common
Stock for all of the outstanding shares of Engineered Sales, Inc., a distributor
of hydraulic, pneumatic and electro-hydraulic components, systems and related
fluid power engineering services. This business combination was accounted for as
a pooling of interests. The fiscal 1996 consolidated financial statements
include results of operations of Engineered Sales for the entire fiscal year.
The fiscal 1995 consolidated financial statements have not been restated as the
effects are not material. Separate 1996 results of operations for Engineered
Sales prior to the acquisition are not presented as the amounts are not
material.
In addition, during fiscal 1996, the Company acquired the assets of a
distributor of drive products and a distributor of rubber products, for a total
of $4,328. During fiscal 1995, the Company acquired the assets of a distributor
of fluid power products, and of a distributor of bearings and drive systems
products, for a total of $3,255. The acquisitions of these businesses were
accounted for as purchases and their results of operations are included in the
accompanying consolidated financial statements from their respective acquisition
dates. Results of operations for these acquisitions are not material for all
periods presented. Goodwill recognized in connection with these combinations is
being amortized over 15 years.
4. Sale of Division
In August 1996, the Company sold the Dixie Bearings Aircraft Division located in
Atlanta, Georgia to Aviation Sales Company for $9,090. The assets were sold at
their approximate net book value. The sale did not have a material effect on the
consolidated financial statements.
8
5. Inventories
Current Cost
------------
The current cost of inventories exceeds the LIFO cost as follows:
<TABLE>
<CAPTION>
June 30
1997 1996
................................................................................................
<S> <C> <C>
LIFO cost $103,069 $127,937
Excess of current cost over LIFO cost 98,740 100,835
................................................................................................
Current cost $201,809 $228,772
------------------------------------------------------------------------------------------------
</TABLE>
LIFO Liquidations
During the years ended June 30, 1997, 1996 and 1995, 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 $3,022, $1,754, and $.14 per share during
1997; $946, $515, and $.04 per share during 1996; and $3,127, $1,692 and $.15
per share during 1995.
6. Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
June 30
1997 1996
...............................................................................................
<S> <C> <C>
Deposits and investments $9,225 $12,024
Goodwill - net of amortization 5,080 5,281
Other 3,589 5,295
...............................................................................................
Total $17,894 $22,600
-----------------------------------------------------------------------------------------------
</TABLE>
Substantially all investments are restricted and consist of money-market or
similar liquid investments which have fair values approximately equal to their
carrying values.
7. Notes Payable and Long-Term Debt
Notes Payable
-------------
The Company has $155,000 of short-term lines of credit which require payment of
interest at various interest rate options, none of which is in excess of the
banks' prime rate at interest determination dates. Borrowings under these lines
of credit totaled $25,415 at June 30, 1997. The remaining unused lines available
for short-term borrowings at June 30, 1997 totaled $129,585.
Long-Term Debt
--------------
The Company has $62,857 of long-term Senior Unsecured Term Notes, including
$11,429 due during fiscal 1998. Interest is payable quarterly at a fixed
interest rate of 7.82%. The principal amount is to be paid in semi-annual
installments of $5,714 through 2003. These notes contain certain restrictive
covenants regarding liquidity, tangible net worth, financial ratios and other
covenants. At June 30, 1997, the most restrictive of these covenants required
that the Company maintain a minimum tangible net worth of $130,128. Based upon
current market rates for debt of similar maturities, the Company estimates that
the fair value of its long-term debt is more than its carrying value at June 30,
1997 by approximately $1,000.
The Company has entered into an agreement with Prudential Insurance Company
of America for an uncommitted shelf facility enabling the Company to borrow up
to $50,000 in additional long-term financing. The Company may make long-term
borrowings at its sole discretion, with terms ranging anywhere from seven to
twenty years under this agreement. At June 30, 1997, there were no borrowings
under this agreement.
9
Interest Rate Swaps
-------------------
Effective March 1, 1996, the Company entered into a two-year interest rate swap
agreement with a major bank that effectively converts $15,000 of variable rate
borrowings to a fixed rate. Under this agreement, the Company receives payments
at variable rates based on LIBOR as determined at monthly intervals and makes
payments at a fixed interest rate of 5.29%. The agreement is accounted for using
the settlement method in which the periodic net cash settlements are recognized
in interest expense when they accrue. The interest rate swap agreement had a
nominal fair value at June 30, 1997.
During fiscal 1995, the Company terminated a two-year interest rate swap
agreement initiated in fiscal 1994. Costs to terminate were amortized to
interest expense over the original term of the swap agreement.
8. Income Taxes
Provision
---------
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
Year Ended June 30
1997 1996 1995
................................................................................................
<S> <C> <C> <C>
Current $16,100 $18,944 $16,095
Deferred 1,900 (1,444) (3,345)
................................................................................................
Total $18,000 $17,500 $12,750
------------------------------------------------------------------------------------------------
</TABLE>
The exercise of non-qualified stock options during fiscal 1997, 1996 and 1995
resulted in $368, $501 and $431, respectively, of income tax benefits to the
Company derived from the difference between the market price at the date of
exercise and the option price. Also, the accelerated vesting of Performance
Accelerated Restricted Stock (PARS) in fiscal 1997 and 1996 resulted in $32 and
$204, respectively, of income tax benefits. These tax benefits were credited to
additional paid-in capital.
Effective Tax Rates
-------------------
The following is a reconciliation between the federal statutory income tax rate
and the Company's effective tax rate:
<TABLE>
<CAPTION>
Year Ended June 30
1997 1996 1995
.................................................................................................
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Effects of:
State and local income taxes 3.3 5.2 4.7
Non-deductible expenses 1.5 2.0 2.3
Other, net .1 .7 1.0
.................................................................................................
Effective tax rate 39.9% 42.9% 43.0%
-------------------------------------------------------------------------------------------------
</TABLE>
Balance Sheet
-------------
The significant components of the Company's deferred tax assets (liabilities)
are as follows:
<TABLE>
<CAPTION>
June 30
1997 1996
..............................................................................................
<S> <C> <C>
Depreciation and differences in property bases $(4,846) $(4,618)
Inventory (8,440) (8,301)
Compensation liabilities not currently deductible 4,760 5,623
Reserves not currently deductible 4,103 4,327
Goodwill 1,283 1,393
Other 408 744
..............................................................................................
Net deferred tax liability $(2,732) $ (832)
----------------------------------------------------------------------------------------------
</TABLE>
Certain balances from fiscal year 1996 have been reclassified to be consistent
with fiscal 1997.
10
9. Stock Incentive Plans
The 1990 Long-Term Performance Plan (the "1990 Plan") provides for granting of
stock options, stock awards, cash awards, and such other awards or combinations
as the Executive Organization and Compensation Committee of the Board of
Directors may determine. The number of shares of Common Stock which may be
awarded in each fiscal year under the 1990 Plan is two percent (2%) of the total
number of shares of Common Stock outstanding on the first day of each year for
which the plan is in effect. Common Stock available for distribution under the
1990 Plan, but not distributed, may be carried over to the following year.
Shares available for future grants at June 30, 1997 were 144,698 and 125,129 at
June 30, 1996.
Under the 1990 Plan, the Company has awarded PARS and stock options to
officers and other key associates. PARS recipients are entitled to receive
dividends and have voting rights on their respective shares but are restricted
from selling or transferring the shares prior to vesting. The restricted stock
vests after a period of six years, with accelerated vesting based upon
achievement of certain return on asset objectives or minimum stock price levels.
The aggregate fair market value of the restricted stock is considered unearned
compensation at the time of grant and is amortized over the six-year vesting
period or until such time as acceleration of vesting takes place. In fiscal 1997
and 1996, the Company recognized accelerated vesting of 5,000 and 64,000 shares,
respectively, of previously awarded PARS. The stock options vest over a period
of 4 years and expire after 10 years.
At June 30, 1997, the Company has a fixed stock option plan as described
above. The Company applied APB Opinion No. 25 and related interpretations in
accounting for options granted under the 1990 Plan; accordingly, no compensation
cost has been 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 1990 Plan consistent with the method of FASB No. 123,
the Company's net income and earnings per share would have been reduced to
$26,502 and $2.14 in 1997 and $22,984 and $1.87 in 1996.
Disclosures under the fair value method are estimated using the Black Scholes
option pricing model. The assumptions used for grants issued in 1997 and 1996
are:
<TABLE>
<CAPTION>
<S> <C>
Expected life ........................................................7 years
Risk-free interest rate ..............................................6.4%
Dividend yield .......................................................2.0%
Volatility ..........................................................20.1%
</TABLE>
Information regarding these option plans is as follows:
<TABLE>
<CAPTION>
1997 1996
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
.................................................................................................
<S> <C> <C> <C> <C>
Outstanding at July 1 584,750 $ 16.36 491,572 $ 13.12
Granted 223,100 28.79 217,275 21.71
Exercised (51,838) 13.89 (107,597) 12.01
Expired/canceled (11,376) 22.26 (16,500) 18.59
.................................................................................................
Outstanding at June 30 744,636 $ 20.17 584,750 $ 16.36
-------------------------------------------------------------------------------------------------
Options exercisable at June 30 337,946 $ 14.43 296,142 $ 12.88
-------------------------------------------------------------------------------------------------
Weighted-average
fair value of options
granted during the year $ 8.53 $ 6.45
</TABLE>
11
The following table summarizes information about stock options outstanding at
June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Ranges of Numbers Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
..............................................................................................
<S> <C> <C> <C> <C> <C>
$ 9 - $14 192,104 3.9 Years $ 12.04 192,104 $12.04
14 - 20 118,536 6.1 14.62 84,938 14.62
20 - 25 215,146 8.0 21.71 60,904 21.70
25 - 30 218,850 9.3 28.79
..............................................................................................
744,636 337,946
----------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1997, option prices related to outstanding options ranged from $9.46
to $29.94 per share.
10. Benefit Plans
Qualified Retirement Plans
--------------------------
Substantially all associates of the Company are covered by the Applied
Industrial Technologies, Inc. Retirement Savings Plan. This plan is the result
of a combination, effective July 1, 1995, of the Employees' Profit-Sharing Trust
and the 401(k) Savings Plan. The Company makes a discretionary profit-sharing
contribution to the Retirement Savings Plan generally based upon a percentage of
the Company's income before income taxes and before the amount of the
contribution. The Company also partially matches 401(k) contributions by
participants, who may elect to contribute up to 15 percent of their
compensation. The matching contribution is made with the Company's Common Stock
and is determined quarterly using rates based on achieving certain quarterly
earnings per share levels.
The Company's expense for contributions to the plan was $4,895, $4,953, and
$3,958 for the years ended June 30, 1997, 1996, and 1995, respectively.
Retiree Medical Benefits
------------------------
The Company provides health care benefits to eligible retired associates who
elect to pay the Company a specified monthly premium. Premium payments are based
upon current insurance rates for the type of coverage provided and are adjusted
annually. Certain monthly health care premium payments are partially subsidized
by the Company. At June 30, 1997 and 1996 the accumulated post-retirement
benefit obligation was $860 and $830, respectively. The costs recognized for
post-retirement benefits for fiscal 1997, 1996, and 1995 were not material.
Supplemental Executive Retirement Benefit Plan (SERP)
-----------------------------------------------------
The Company has a non-qualified pension plan to provide supplemental retirement
benefits to certain officers. Benefits are payable at retirement based upon a
percentage of the participant's compensation. The plan specifies minimum annual
retirement benefits for certain participants.
The funded status of the SERP plan is:
<TABLE>
<CAPTION>
June 30
1997 1996
.......................................................................................
<S> <C> <C>
Projected benefit obligation $5,228 $4,852
Unrecognized net loss (887) (802)
Unrecognized prior service cost (126) (145)
.......................................................................................
Accrued pension liability, included in
Other liabilities on the Consolidated
Balance Sheets $4,215 $3,905
---------------------------------------------------------------------------------------
Accumulated benefit obligation, fully vested $4,165 $3,848
---------------------------------------------------------------------------------------
</TABLE>
12
Periodic pension cost for the SERP consists of:
<TABLE>
<CAPTION>
Year Ended June 30
1997 1996 1995
...............................................................................................
<S> <C> <C> <C>
Service cost - benefits earned $ 145 $ 132 $115
Interest cost on projected benefit obligation 387 368 350
Net amortization and deferral 88 349 361
...............................................................................................
Total $ 620 $ 849 $826
-----------------------------------------------------------------------------------------------
</TABLE>
Pension cost and benefit obligations shown above were determined using a
discount rate of 8.0% and a rate of increase in compensation levels of 5.5%. At
June 30, 1997 there were no assets under the plan. The Company funds the
benefits when payments are made to participants.
Deferred Compensation Plans
---------------------------
The Company has deferred compensation plans that enable certain associates of
the Company to defer receipt of a portion of their compensation and non-employee
directors to defer receipt of director fees. The Company funds these deferred
compensation liabilities by making contributions to rabbi trusts. Contributions
consist of Company Common Stock and investments in money market and mutual
funds. While held in trust, the Common Stock is reported as a contra-equity
account and the money market and mutual fund investments are included in other
assets in the accompanying consolidated balance sheets. The deferred
compensation liabilities of $6,405 and $3,286 at June 30, 1997 and 1996,
respectively, are recorded in other liabilities in the consolidated balance
sheets.
11. Commitments, Lease Obligations and Rent Expenses
The Company leases its corporate headquarters along with certain branch and
distribution center facilities and computer equipment under non-cancellable
lease agreements accounted for as operating leases. The minimum annual rental
commitments under operating leases, are $11,274 in 1998; $7,700 in 1999; $5,860
in 2000; $4,390 in 2001; $3,611 in 2002 and $36,835 after 2002.
In connection with the lease of the corporate headquarters facility the
Company has 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 facility.
Rental expenses incurred for operating leases, principally from leases for
real property, vehicles and computer equipment were $12,891 in 1997, $12,077 in
1996, and $10,756 in 1995.
The Company had outstanding letters of credit of $7.8 million at June 30,
1997. These letters of credit secure certain employee benefit and insurance
obligations.
12. Litigation
The 1990 agreement for the acquisition of King Bearing, Inc. (King) included
specific indemnification of Applied Industrial Technologies, Inc. and King for
any financial damages or losses related to a lawsuit pending against King in the
Superior Court of Orange County, California. The indemnification was also
guaranteed by the ultimate parent of King's former owner, a Fortune 500 company
with stockholders' equity exceeding five billion dollars at June 30, 1997. A
$32,400 judgment relating to this lawsuit was rendered against King in June
1992. The judgment was strongly contested by counsel retained by the indemnitor
on behalf of King, and in September 1992, the trial court granted the motion of
King for a new trial as to all but $219 in damages returned by the jury. On
appeal, the California Court of Appeals, in September 1996, remanded the matter
to the trial court for a new trial and reversed the trial court's exclusion of
the $219 in damages from the new trial order. All alleged events relevant to the
judgment occurred prior to the Company's purchase of King, and the jury found no
liability on the part of the Company. In January 1997, King was merged into
Applied Industrial Technologies, Inc. Due to the indemnification and guarantee,
management believes that the outcome of this matter will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
The Company is a defendant in several lawsuits for product liability matters.
The Company is vigorously defending these lawsuits, which management believes
are without merit. Although management cannot predict the outcomes of these
lawsuits, they are not expected to have a material adverse effect on the
Company's consolidated financial position.
13. Subsequent Event-Stock Split
On August 15, 1997, the Company's Board of Directors approved a three-for-two
common stock split payable on September 15,1997 to shareholders of record on
August 29, 1997. Pro forma net income per share, giving retroactive effect to
the three-for-two split, is as follows: $1.46 in 1997, $1.27 in 1996, and $0.97
in 1995. Financial information contained elsewhere in this annual report has not
been adjusted to reflect the impact of the common stock split.
13
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
[DELOITTE AND TOUCHE LOGO]
Shareholders and Board of Directors
Applied Industrial Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Applied
Industrial Technologies, Inc. and its subsidiaries as of June 30, 1997 and 1996
and the related statements of consolidated income, shareholders' equity, and
cash flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at June 30, 1997 and
1996 and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
August 7, 1997 (August 15, 1997 as to Note 13.)
14
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
10 YEAR SUMMARY
1997 1996 1995 1994
(Thousands, except per share amounts)
...........................................................................................................................
<S> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS-
YEAR ENDED JUNE 30
Net sales $1,160,251 $1,143,749 $1,054,809 $936,254
Operating income 50,599 49,281 36,923 27,817
Net income 27,092 23,334 16,909 12,687
Per share data (A)
Net income 2.19 1.90 1.46 1.12
Cash dividend .62 .54 .47 .43
YEAR-END POSITION - JUNE 30
Working capital $164,723 $151,956 $153,555 $144,605
Long-term debt 51,428 62,857 74,286 80,000
Total assets 394,114 404,072 359,231 343,519
Shareholders' equity 207,584 189,292 165,401 150,491
YEAR-END STATISTICS - JUNE 30
Current ratio 2.4 2.1 2.4 2.4
Branches 331 337 338 339
Number of Shareholders 4,676 4,636 4,379 4,478
<FN>
(A) All per share data have been restated to reflect a three for two stock split effective December 4, 1995.
</TABLE>
<TABLE>
<CAPTION>
Applied Industrial Technologies, Inc. and Subsidiaries
1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C>
$831,432 $817,813 $814,000 $651,271 $630,281 $542,883
20,521 4,703 17,115 25,281 33,463 25,000
8,927 (1,666) 4,282 12,201 18,313 14,948
.82 (.16) .41 1.13 1.63 1.26
.43 .43 .43 .43 .37 .33
$130,860 $41,967 $54,695 $64,091 $75,134 $77,606
80,000
315,935 330,619 327,939 380,224 251,376 222,957
134,940 128,830 134,203 135,338 134,848 128,919
2.4 1.2 1.3 1.3 1.7 1.9
323 333 341 363 267 266
4,449 4,354 4,025 3,583 3,204 4,051
</TABLE>
1
Exhibit 21
APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 1997
SUBSIDIARIES
<TABLE>
<CAPTION>
Name Jurisdiction of
---- Incorporation or Organization
-----------------------------
<S> <C>
Applied Industrial Technologies--DBB, Inc. Ohio
(formerly known as I. C. Acquisition Corp.)
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
BER Capital, Inc. Delaware
BER International, Inc. Barbados
Bearings Continental, Inc. Ohio
Bearing Sales and Services, Inc. Washington
ESI Acquisition Corporation Ohio
(d.b.a. Engineered Sales, Inc.)
The Ohio Ball Bearing Company Ohio
</TABLE>
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, 333-10139 and 333-27801 of
Applied Industrial Technologies, Inc. on Forms S-3, S-4 and S-8 of our reports
dated August 7, 1997 (August 15, 1997 as to Note 13) 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, 1997.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
September 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 22,405
<SECURITIES> 0
<RECEIVABLES> 155,480
<ALLOWANCES> 2,400
<INVENTORY> 103,069
<CURRENT-ASSETS> 6,905
<PP&E> 159,570
<DEPRECIATION> 68,809
<TOTAL-ASSETS> 394,114
<CURRENT-LIABILITIES> 120,736
<BONDS> 51,428
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 10,000
<OTHER-SE> 197,584
<TOTAL-LIABILITY-AND-EQUITY> 394,114
<SALES> 1,160,251
<TOTAL-REVENUES> 1,160,251
<CGS> 854,230
<TOTAL-COSTS> 854,230
<OTHER-EXPENSES> 253,679
<LOSS-PROVISION> 1,743
<INTEREST-EXPENSE> 5,507
<INCOME-PRETAX> 45,092
<INCOME-TAX> 18,000
<INCOME-CONTINUING> 27,092
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,092
<EPS-PRIMARY> 2.19
<EPS-DILUTED> 2.13
</TABLE>