1 FORM 10 - Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1998 . ----------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission File Number 1-2299 ---------- APPLIED INDUSTRIAL TECHNOLOGIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0117420 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One Applied Plaza, Cleveland, Ohio 44115 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 426-4000 -------------- - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Shares of common stock outstanding on October 31, 1998 21,671,568 ------------------------------------------ (No par value)
2 APPLIED INDUSTRIAL TECHNOLOGIES, INC. ------------------------------------- INDEX <TABLE> <CAPTION> - -------------------------------------------------------------------------- Page No. <S> <C> <C> Part I: FINANCIAL INFORMATION Item 1: Financial Statements Statements of Consolidated Income - 2 Three Months Ended September 30, 1998 and 1997 Consolidated Balance Sheets - 3 September 30, 1998 and June 30, 1998 Statements of Consolidated Cash Flows 4 Three Months Ended September 30, 1998 and 1997 Statements of Consolidated Shareholders' Equity - 5 Three Months Ended September 30, 1998 and Year Ended June 30, 1998 Notes to Consolidated Financial Statements 6 - 9 Item 2: Management's Discussion and Analysis of 10 - 13 Financial Condition and Results of Operations Part II: OTHER INFORMATION Item 1: Legal Proceedings 14 Item 5: Other Information 14 Item 6: Exhibits and Reports on Form 8-K 15 Signatures 17 </TABLE>
3 PART I: FINANCIAL INFORMATION ITEM I: Financial Statements APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ STATEMENTS OF CONSOLIDATED INCOME (Unaudited) (Thousands, except per share amounts) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Three Months Ended September 30 1998 1997 --------- --------- <S> <C> <C> Net Sales $ 379,174 $ 344,726 --------- --------- Cost and Expenses Cost of sales 284,677 256,426 Selling, distribution and administrative 89,725 78,492 --------- --------- 374,402 334,918 --------- --------- Operating Income 4,772 9,808 --------- --------- Interest Interest expense 2,658 2,464 Interest income (186) (278) --------- --------- 2,472 2,186 --------- --------- Income Before Income Taxes 2,300 7,622 --------- --------- Income Taxes Federal 854 2,730 State and local 88 395 --------- --------- 942 3,125 --------- --------- Net Income $ 1,358 $ 4,497 ========= ========= Net Income Per Share - Basic $ 0.06 $ 0.22 ========= ========= Net Income Per Share - Diluted $ 0.06 $ 0.21 ========= ========= Cash dividends per common share $ 0.12 $ 0.11 ========= ========= </TABLE> See notes to consolidated financial statements. 2
4 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ CONSOLIDATED BALANCE SHEETS (Amounts in thousands) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------- September 30 June 30 1998 1998 ------------ ------- (Unaudited) Assets <S> <C> <C> Current assets Cash and temporary investments $ 19,690 $ 9,344 Accounts receivable, less allowance of $3,729 and $3,500 195,855 206,313 Inventories (at LIFO) 202,936 192,042 Other current assets 8,952 7,214 --------- --------- Total current assets 427,433 414,913 --------- --------- Property - at cost Land 12,280 12,363 Buildings 69,175 69,103 Equipment 96,267 94,705 --------- --------- 177,722 176,171 Less accumulated depreciation 65,488 63,102 --------- --------- Property - net 112,234 113,069 --------- --------- Goodwill 60,322 53,243 Other assets 15,045 24,866 --------- --------- TOTAL ASSETS $ 615,034 $ 606,091 ========= ========= Liabilities and Shareholders' Equity Current liabilities Notes payable $ 49,695 $ 42,973 Current portion of long-term debt 19,429 19,429 Accounts payable 87,564 79,091 Compensation and related benefits 22,053 22,702 Other accrued liabilities 32,689 28,952 --------- --------- Total current liabilities 211,430 193,147 Long-term debt 90,000 90,000 Other liabilities 22,361 23,442 --------- --------- TOTAL LIABILITIES 323,791 306,589 --------- --------- Shareholders' Equity Preferred stock - no par value; 2,500 shares authorized; none issued or outstanding Common stock - no par value; 50,000 shares authorized; 24,095 shares issued 10,000 10,000 Additional paid-in capital 83,171 82,865 Income retained for use in the business 234,636 235,957 Less 2,383 and 1,993 treasury shares - at cost (31,810) (24,391) Less unearned restricted common stock compensation (4,754) (4,929) --------- --------- TOTAL SHAREHOLDERS' EQUITY 291,243 299,502 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 615,034 $ 606,091 ========= ========= </TABLE> See notes to consolidated financial statements. 3
5 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (Amounts in thousands) <TABLE> <CAPTION> Three Months Ended September 30 ------------------------ 1998 1997 - -------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows from Operating Activities Net income $ 1,358 $ 4,497 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 3,967 3,995 Amortization of goodwill and restricted common stock compensation 1,178 1,289 Provision for losses on accounts receivable 554 447 Gain on sale of property (96) (99) Treasury shares contributed to employee benefit plans 1,283 1,898 Changes in current assets and liabilities, net of effects from acquisition of businesses: Accounts receivable 10,385 6,336 Inventories (10,237) (14,768) Other current assets (1,626) 1,644 Accounts payable and accrued expenses 9,431 12,782 Other - net 117 506 - -------------------------------------------------------------------------------------------------- Net Cash provided by Operating Activities 16,314 18,527 - -------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Property purchases (3,967) (6,034) Proceeds from property sales 1,217 180 Net cash paid for acquisition of businesses (7,200) (27,815) Deposits and other 8,479 (494) - -------------------------------------------------------------------------------------------------- Net Cash used in Investing Activities (1,471) (34,163) - -------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net borrowings under line-of-credit agreements 6,722 16,296 Exercise of stock options 34 374 Dividends paid (2,658) (2,357) Purchase of treasury shares (8,595) (7,790) - -------------------------------------------------------------------------------------------------- Net Cash provided by (used in) Financing Activities (4,497) 6,523 - -------------------------------------------------------------------------------------------------- Increase (decrease ) in cash and temporary investments 10,346 (9,113) Cash and temporary investments at beginning of period 9,344 22,405 - -------------------------------------------------------------------------------------------------- Cash and Temporary Investments at End of Period $ 19,690 $ 13,292 ================================================================================================== Supplemental Cash Flow Information Cash paid during the period for: Income taxes $ 392 $ 96 Interest $ 2,553 $ 2,376 Significant noncash investing activity: Issuance of common stock for the acquisition of Invetech Company $ 63,374 </TABLE> See notes to consolidated financial statements. 4
6 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY For the Three Months Ended September 30, 1998 (Unaudited) and Year Ended June 30, 1998 (Thousands, except per share amounts ) <TABLE> <CAPTION> Income Shares of Additional Retained Treasury Common Stock Common Paid-in for Use in Shares Outstanding Stock Capital the Business - at Cost - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance at July 1, 1997 18,621 $ 10,000 $ 10,311 $ 216,496 $ (22,983) Net income 30,125 Cash dividends - $.47 per share (10,277) Purchase of common stock for treasury (291) (8,148) Issuance of common stock for the acquisition of Invetech Company 3,165 63,374 Treasury shares issued for: Retirement Savings Plan contributions 152 2,430 1,777 Exercise of stock options 103 610 1,179 Deferred compensation plans 28 450 288 Restricted common stock awards 201 3,560 2,005 Acquisition of Associated Bearings 123 1,770 1,491 Amortization of restricted common stock compensation 360 Other (387) - --------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1998 22,102 10,000 82,865 235,957 (24,391) Net income 1,358 Cash dividends - $.12 per share (2,658) Purchase of common stock for treasury (484) (8,595) Treasury shares issued for: Retirement Savings Plan contributions 76 333 950 Exercise of stock options 3 (6) 40 Deferred compensation plans 6 43 74 Restricted common stock awards 9 (64) 112 Amortization of restricted common stock compensation Other (21) - --------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1998 21,712 $ 10,000 $ 83,171 $ 234,636 $ (31,810) ================================================================================================================================= Unearned Restricted Total Common Stock Shareholders' Compensation Equity - ------------------------------------------------------------------------------------- <S> <C> <C> Balance at July 1, 1997 $ (950) $ 212,874 Net income 30,125 Cash dividends - $.47 per share (10,277) Purchase of common stock for treasury (8,148) Issuance of common stock for the acquisition of Invetech Company 63,374 Treasury shares issued for: Retirement Savings Plan contributions 4,207 Exercise of stock options 1,789 Deferred compensation plans 738 Restricted common stock awards (5,565) Acquisition of Associated Bearings 3,261 Amortization of restricted common stock compensation 1,586 1,946 Other (387) - ----------------------------------------------------------------------------------- Balance at June 30, 1998 (4,929) 299,502 Net income 1,358 Cash dividends - $.12 per share (2,658) Purchase of common stock for treasury (8,595) Treasury shares issued for: Retirement Savings Plan contributions 1,283 Exercise of stock options 34 Deferred compensation plans 117 Restricted common stock awards (48) Amortization of restricted common stock compensation 223 223 Other (21) - ----------------------------------------------------------------------------------- Balance at September 30, 1998 $ (4,754) $ 291,243 =================================================================================== </TABLE> See notes to consolidated financial statements. 5
7 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) (Unaudited) - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 1998 and June 30, 1998, and the results of operations and cash flows for the three months ended September 30, 1998 and 1997. The results of operations for the three month period ended September 30, 1998 are not necessarily indicative of the results to be expected for the fiscal year. Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are made based on the annual physical inventory and the effect of year-end inventory quantities on LIFO costs. 2. NET INCOME PER SHARE The following is a computation of the basic and diluted earnings per share: <TABLE> <CAPTION> Three Months Ended September 30 1998 1997 ------- ------- <S> <C> <C> Net Income - ---------- Net income as reported in statements of consolidated income $ 1,358 $ 4,497 ======= ======= Average Shares Outstanding - -------------------------- Weighted average common shares outstanding for basic computation 21,832 20,657 Dilutive effect of: Stock options 172 339 Performance Accelerated Restricted Stock (PARS) 5 34 ------- ------- Adjusted average common shares outstanding for diluted computation 22,009 21,030 ======= ======= Net Income Per Share - -------------------- Net income per common share - basic $ 0.06 $ 0.22 ======= ======= Net income per common share - diluted $ 0.06 $ 0.21 ======= ======= </TABLE> 6
8 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) (Unaudited) - -------------------------------------------------------------------------------- 3. BUSINESS COMBINATIONS During the three months ended September 30, 1998 the Company acquired certain assets of a distributor of fluid power products for a cash purchase price of $8,000. The acquisition was accounted for as a purchase and their results of operations are included in the accompanying consolidated financial statements from the acquisition date. Results of operations for this acquisition are not material for all periods presented. Goodwill recognized in connection with this combination is being amortized over 20 years. 4. TREASURY SHARES At September 30, 1998, 476 of the Company's common stock held as treasury shares are restricted as collateral under escrow arrangements relating to certain change in control agreements. 5. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information". This statement establishes standards for the reporting of financial information about reportable segments in annual and interim financial statements. SFAS No. 131 also requires disclosure of revenues from each group of products and services, geographic areas and major customers. This statement is effective for the June 30, 1999 financial statements. The Company has not completed its evaluation of the impact SFAS No. 131 will have on its financial statement disclosures. Effective July 1, 1998, the Company adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". Adoption of this SOP did not have a material impact on the consolidated financial statements. During the quarter ended September 30, 1998, the Company adopted the Emerging Issues Task Force (EITF) Issue No. 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested". All prior periods have been restated to conform to the new presentation. 7
9 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following is Management's Discussion and Analysis of certain significant factors which have affected the Company's: (1) financial condition at September 30, 1998 and June 30, 1998, and (2) results of operations and cash flows during the periods included in the accompanying Statements of Consolidated Income and Consolidated Cash Flows. FINANCIAL CONDITION Liquidity and Working Capital - ----------------------------- Cash provided by operating activities was $16.3 million in the three months ended September 30, 1998. This compares to $18.5 million provided by operating activities in the same period a year ago. Cash flow from operations depends primarily upon generating operating income, controlling the investment in inventories and receivables, and managing the timing of payments to suppliers. The Company has continuing programs to monitor and control these investments. During the three month period ended September 30, 1998, inventories increased approximately $10.2 million due to timing of purchases. Accounts receivable decreased $10.3 million due to a slowing of sales in comparison to the previous two quarters. Investments in property totaled $4.0 million and $6.0 million in the three months ended September 30, 1998 and 1997 respectively. Capital expenditures were primarily made for building and upgrading branch and distribution center facilities and acquiring data processing equipment and vehicles. The capital expenditures for quarter ended September 30, 1997 were higher than normal due to the integration of Invetech Company, which was acquired in August 1997. The Company is building a new 160,000 square foot distribution center in the city of Fontana, California, in the greater Los Angeles area. Construction is expected to be completed by the third quarter of fiscal 1999. This build-to-suit facility will be leased by the Company under a 10 year lease which is expected to be accounted for as an operating lease. The Company is planning to move out of its current Corona Distribution Center and into the new facility upon expiration of its current lease. Working capital at September 30, 1998 was $216.0 million compared to $221.8 million at June 30, 1998. This decrease is primarily due to an increase in short-term notes payable due to acquisition activity and an increase in accounts payable due to the timing of certain inventory payments. Capital Resources - ----------------- Capital resources are obtained from income retained in the business, indebtedness under the Company's lines of credit and long-term debt agreements, and operating lease arrangements. Average combined short-term and long-term borrowing was $156.8 and $100.0 million for the three months ended September 30, 1998 and 1997, respectively. The average effective interest rate on the short-term borrowings for the three months ended September 30, 1998 decreased 8
10 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- to 5.9% from an average rate of 6.2% for the three months ended September 30, 1997 due to lower interest rates on short-term debt. The Company has $145 million of short-term lines of credit with commercial banks that provide for payment of interest at various interest rate options, none of which are in excess of the banks' prime rate. The Company had $49.7 million of borrowings outstanding under short-term bank lines of credit on September 30, 1998. Unused lines of credit totaling $95.3 million are available for future short-term financing needs. In November, the Company entered into an agreement with a group of lending institutions to establish a $150 million committed revolving credit facility. This facility will be used to pay down the current short term line of credit borrowings and fund future acquisitions or other capital and operating requirements. The Board of Directors has authorized an ongoing program to purchase shares of the Company's common stock to fund employee benefit programs, stock option and award programs, and future acquisitions. These purchases are made in open market and negotiated transactions, from time to time, depending upon market conditions. The Company acquired 484,000 shares of its common stock for $8.6 million during the three months ended September 30, 1998. The Company currently has authorization to acquire up to 1 million shares of Company stock. Management expects that capital resources provided from operations, available lines of credit, and long-term debt and operating leases will be sufficient to finance normal working capital needs, business acquisitions, enhancement of facilities and equipment, and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained if desired. Year 2000 Readiness Disclosure - ------------------------------ The Company's progress in completing its Year 2000 activities is overseen by an executive task force made up of representatives from all key management areas. The task force in turn reports to the audit committee of the Board of Directors. Additionally, the Company has retained an outside Year 2000 consultant to provide an independent assessment of the Company's Year 2000 compliance efforts. The Company's plan for assessment, remediation, replacement and testing of those of its internal computer systems affected by the Year 2000 issue is proceeding on schedule. For business reasons, the Company's financial information systems are being replaced with a new Year 2000-compliant system. Certain modules of the new financial information system are already in use and the Company expects that the complete system will be operating by early calendar year 1999. The Company has completed its assessment, and is currently conducting remediation and/or testing, of its other critical systems, including its corporate information system and its OMNEX(R) inventory and sales information system. The Company expects to have completed remediation and testing of these systems by early calendar year 1999. 9
11 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The Year 2000 issue also affects certain of the Company's non-critical computer systems and equipment containing embedded technology. The Company has largely completed its assessment of these non-critical systems, and remediation and testing are scheduled to be completed by various dates before the end of calendar year 1999. If the requisite changes to the Company's critical systems are not made or completed in a timely manner, then the Year 2000 issue could have a material adverse effect on the Company's business, financial condition, results of operations, or cash flow. For example, the Company could be rendered unable to process ordinary business transactions electronically. The Company's order fulfillment process could be interrupted, leaving the Company unable to fulfill commitments to customers. To reduce the risk of business interruption, the Company is preparing contingency plans to operate its field locations without computers. These plans are scheduled to be completed by various dates before the end of calendar year 1999. Nearly all of the products sold by the Company do not contain date logic. The Company is attempting, through contacts with its product suppliers, to identify any products sold by the Company that are susceptible to the Year 2000 issue. The Company has sought written assurances from key product and service suppliers as to their Year 2000 compliance plans. Follow-up interviews are being conducted with those suppliers with whom the Company has the most significant relationships. The Company will consider appropriate measures, including substitution of suppliers, in the event that a supplier provides an inadequate response. If the Company's suppliers or customers fail to achieve Year 2000 compliance in a timely manner, then the Year 2000 issue could have a material adverse effect on the Company. For example, suppliers' failures to deliver products to the Company due to the Year 2000 issue could render the Company unable to fulfill commitments to customers unless those products or adequate substitutes can be secured elsewhere. Customers affected by the Year 2000 issue could reduce their volume of purchases from the Company or slow their payments for products already delivered. Despite its efforts, the Company will not be able to analyze fully the scope or nature of the risk represented by the failure of third parties, including suppliers and customers, to attain Year 2000 compliance. The Company expects, however, that the actions described in this section will significantly reduce the likelihood that the Year 2000 issue would have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows. Based on currently available information, the total cost of the Company's Year 2000 activities is not expected to be material to its financial condition or results of operations. The Company further anticipates that its current resources and sources of liquidity will be adequate to address the capital needs arising from its specific Year 2000 issues. 10
12 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - --------------------- A summary of the period-to-period changes in principal items included in the statements of consolidated income follows: <TABLE> <CAPTION> Increase (Decrease) (Dollars in Thousands, Except per Share Amounts) Three Months Ended September 30 1998 and 1997 Amount Change ------ ------ <S> <C> <C> Net sales $ 34,448 10.0% Cost of sales 28,251 11.0% Selling, distribution and administrative expenses 11,233 14.3% Operating income (5,036) (51.3)% Interest expense - net 286 13.1% Income before income taxes (5,322) (69.8)% Income taxes (2,183) (69.9)% Net income (3,139) (69.8)% Net income per share - diluted (.15) (71.4)% </TABLE> 11
13 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Three Months Ended September 30, 1998 and 1997 The increase in net sales from the prior year related primarily to the acquisition of Invetech effective August 1, 1997 and other companies during fiscal 1998. Gross profit as a percentage of sales decreased to 24.9% from 25.6%. This decrease primarily is due to lower discounts and allowances from suppliers. Selling, distribution and administrative expenses as a percent of sales, increased to 23.7% from 22.8%. This was primarily due to increased compensation associated with additional outside sales representatives and marketing personnel. Also contributing to the increase were higher goodwill amortization, outside consulting and temporary employment expenses. Additional increases during the quarter related to a pretax restructuring and other special charges of $5.4 million for costs of branch consolidation, downsizing and workforce reductions. This charge decreased net income by $3.2 million, or $.14 per share. The prior year results included a $4.0 million pretax restructuring charge that decreased net income by $2.4 million or $.11 per share associated with the acquisition of Invetech. Interest expense-net for the quarter increased by 13.1% as compared to the prior year primarily as a result of an increase in average borrowings. Income tax expense as a percentage of income before taxes was 41.0% in the quarters ended September 30, 1998 and September 30, 1997. As a result of the above factors, net income decreased by 69.8% compared to the same quarter of last year. CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT - ------------------------------------------------------------------- Management's Discussion and Analysis contains statements that are forward-looking, as that term is defined by the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules, regulations and releases. The Company intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed therein will be achieved. Important risk factors include, but are not limited to, the following: changes in the economy or in specific customer industry sectors; changes in customer procurement policies and practices; changes in product manufacturer sales policies and practices; the availability of product; changes in operating expenses; the effect of price increases; the variability and timing of business opportunities including acquisitions, customer agreements, supplier authorizations and other business strategies; the Company's ability to realize the anticipated benefits of 12
14 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- acquisitions and other business opportunities; the Company's ability to complete, in a timely manner and within cost estimates, its Year 2000 project; changes in accounting policies and practices; the effect of organizational changes within the Company; adverse results in significant litigation matters; adverse state and federal regulation and legislation; and the occurrence of extraordinary events (including prolonged labor disputes, natural events and acts of God, fires, floods and accidents). 13
15 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. ------------------ (a) The Company incorporates by reference herein the description of the case captioned WALTER R. REED, ET AL. V. METROPOLITAN LIFE INS. CO., ET AL., 20th Judicial District Court for the Parish of West Feliciana, Louisiana, Case No. 13,836, found in Item 3 "Pending Legal Proceedings" contained in the Company's Form 10-K for the fiscal year ended June 30, 1998. Based on circumstances presently known, the Company believes that this case, which is still in its preliminary stage, is not material to its business or financial condition. (b) Applied Industrial Technologies, Inc. and/or one of its subsidiaries is a defendant in several other product-related lawsuits. Based on circumstances presently known, the Company believes that these cases are not material to the Company's business or financial condition. ITEM 5. Other Information. ------------------ (a) Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- At the Annual Meeting of Shareholders of the Company held on October 20, 1998, there were 22,107,433 shares of common stock entitled to vote. The Shareholders voted on the matters submitted to the meeting as follows: 1. Election of four persons to be directors of Class II for a term of three years: <TABLE> <CAPTION> For Withheld --- -------- <S> <C> <C> William G. Bares 18,605,458 771,269 Roger D. Blackwell 18,605,485 771,242 Russel B. Every 18,601,942 774,785 John J. Kahl 18,606,853 769,874 </TABLE> Directors of Class I, consisting of John C. Dannemiller, J. Michael Moore and Jerry Sue Thornton, serve until the expiration of their term of office in 2000 and Directors of Class III, consisting of William E. Butler, Russell R. Gifford and L. Thomas Hiltz, serve until the expiration of their term of office in 1999. 2. Ratification of the appointment by management of Deloitte & Touche LLP as independent auditors of the Company for the fiscal year ending June 30, 1999. 14
16 <TABLE> <CAPTION> For Withheld Abstain --- -------- ------- <S> <C> <C> 19,316,500 27,042 33,185 </TABLE> Discretionary voting was authorized as to the two matters submitted. There were no broker non-votes. (b) Election of Officers. --------------------- At its Organizational Meeting held on October 20, 1998, the Board of Directors elected the following officers of the Company: <TABLE> <S> <C> John C. Dannemiller Chairman, Chief Executive Officer & President Todd A. Barlett Vice President-National Accounts & Alliance Systems Donald L. Chargin Vice President-Sales & Field Operations Mark O. Eisele Vice President & Controller James T. Hopper Vice President-Information Systems Justin M. Jacobi Vice President-Marketing & Strategic Planning Bill L. Purser Vice President-Marketing & National Accounts Jeffrey A. Ramras Vice President-Logistics Richard C. Shaw Vice President-Communications, Organizational Learning & Quality Standards Robert C. Stinson Vice President-Chief Administrative Officer, General Counsel & Secretary John R. Whitten Vice President-Chief Financial Officer & Treasurer Fred D. Bauer Assistant Secretary Jody A. Chabowski Assistant Controller Michael L. Coticchia Assistant Secretary Alan M. Krupa Assistant Treasurer </TABLE> ITEM 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits. --------- Exhibit No. Description ----------- ----------- 3(a) Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 8, 1998. 15
17 3(b) Code of Regulations of Applied Industrial Technologies, Inc. adopted September 6, 1988 (filed as Exhibit 3(b) to the Company's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to the Company's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 4(b) $80,000,000 Maximum Aggregate Principal Amount Note Purchase and Private Shelf Facility dated October 31, 1992 between the Company and The Prudential Insurance Company of America (filed as Exhibit 4(b) to the Company's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 4(c) Amendment to $80,000,000 Maximum Aggregate Principal Amount Note Purchase and Private Shelf Facility dated October 31, 1992 between the Company and The Prudential Insurance Company of America (filed as Exhibit 4(g) to the Company's Form 10-Q for the quarter ended March 31, 1996, SEC File No. 1-2299, and incorporated here by reference). 4(d) $50,000,000 Private Shelf Agreement dated as of November 27, 1996, as amended on January 30, 1998, between the Company and The Prudential Insurance Company of America (filed as Exhibit 4(f) to the Company's Form 10-Q for the quarter ended March 31, 1998, SEC File No. 1-2299, and incorporated here by reference). 4(e) $150,000,000 Credit Agreement dated as of November 5, 1998 among the Company, KeyBank National Association as Agent, and various financial institutions. 4(f) Rights Agreement, dated as of February 2, 1998, between the Company and Harris Trust and Savings Bank, as Rights Agent, which includes as Exhibit B thereto the Form of Rights 16
18 Certificate (filed as Exhibit No. 1 to the Company's Registration Statement on Form 8-A filed July 20, 1998, SEC File No. 1-2299, and incorporated here by reference). 27 Financial Data Schedule. (b) The Company did not file, nor was it required to file, a Report on Form 8-K with the Securities and Exchange Commission during the quarter ended September 30, 1998. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. <TABLE> <CAPTION> <S> <C> APPLIED INDUSTRIAL TECHNOLOGIES, INC. (Company) Date: November 13, 1998 By: /s/ John C. Dannemiller ----------------------------------------------------- John C. Dannemiller Chairman, Chief Executive Officer & President Date: November 13, 1998 By: /s/ Mark O. Eisele ----------------------------------------------------- Mark O. Eisele Vice President & Controller </TABLE> 17
19 APPLIED INDUSTRIAL TECHNOLOGIES, INC. EXHIBIT INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION PAGE <S> <C> <C> 3(a) Amended and Restated Articles of Attached Incorporation of Applied Industrial Technologies, Inc., as amended on October 8, 1998. 3(b) Code of Regulations of Applied Industrial Technologies, Inc., adopted September 6, 1988 (filed as Exhibit 3(b) to the Company's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to the Company's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 4(b) $80,000,000 Maximum Aggregate Principal Amount Note Purchase and Private Shelf Facility dated October 31, 1992 between the Company and The Prudential Insurance Company of America (filed as Exhibit 4(b) to the Company's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 4(c) Amendment to $80,000,000 Maximum Aggregate Principal Amount Note Purchase and Private Shelf Facility dated October 31, 1992 between the Company and The Prudential Insurance Company of America (filed as Exhibit 4(g) to the Company's Form 10-Q for the quarter ended March 31, 1996, SEC File No. 1-2299, and incorporated here by reference). 4(d) $50,000,000 Private Shelf Agreement dated as of November 27, 1996, as amended on January 30, 1998, </TABLE>
20 <TABLE> <S> <C> <C> between the Company and The Prudential Insurance Company of America (filed as Exhibit 4(f) to the Company's Form 10-Q for the quarter ended March 31, 1998, SEC File No. 1-2299, and incorporated here by reference). 4(e) $150,000,000 Credit Agreement dated as of Attached November 5, 1998 among the Company, KeyBank National Association as Agent, and various financial institutions. 4(f) Rights Agreement, dated as of February 2, 1998, between the Company and Harris Trust and Savings Bank, as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (filed as Exhibit No. 1 to the Company's Registration Statement on Form 8-A filed July 20, 1998, SEC File No. 1-2299, and incorporated here by reference). 27 Financial Data Schedule. Attached </TABLE>