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, 1999 . ----------------------------------------- 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, 1999 20,939,360 ------------------------------------------- (No par value)
2 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX - -------------------------------------------------------------------------- Page No. Part I: FINANCIAL INFORMATION Item 1: Financial Statements Statements of Consolidated Income - 2 Three Months Ended September 30, 1999 and 1998 Consolidated Balance Sheets - 3 September 30, 1999 and June 30, 1999 Statements of Consolidated Cash Flows 4 Three Months Ended September 30, 1999 and 1998 Statements of Consolidated Shareholders' Equity - 5 Three Months Ended September 30, 1999 and Year Ended June 30, 1999 Notes to Consolidated Financial Statements 6 - 7 Item 2: Management's Discussion and Analysis of 8 - 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 16 Signatures 17
3 PART I: FINANCIAL INFORMATION ITEM I: Financial Statements <TABLE> <CAPTION> APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME --------------------------------- (Unaudited) (Thousands, except per share amounts) - ------------------------------------------------------------------------------------------------------------------------------- Three Months Ended September 30 1999 1998 -------------------------------------- <S> <C> <C> Net Sales $ 380,671 $ 379,174 --------- --------- Cost and Expenses Cost of sales 286,906 288,538 Selling, distribution and administrative 81,680 85,864 --------- --------- 368,586 374,402 --------- --------- Operating Income 12,085 4,772 --------- --------- Interest Interest expense 2,255 2,658 Interest income (20) (186) --------- --------- 2,235 2,472 --------- --------- Income Before Income Taxes 9,850 2,300 --------- --------- Income Taxes Federal 3,600 854 State and local 388 88 --------- --------- 3,988 942 --------- --------- Net Income $ 5,862 $ 1,358 ========= ========= Net Income Per Share - Basic $ 0.28 $ 0.06 ========= ========= Net Income Per Share - Diluted $ 0.28 $ 0.06 ========= ========= Cash dividends per common share $ 0.12 $ 0.12 ========= ========= </TABLE> See notes to consolidated financial statements. 2
4 <TABLE> <CAPTION> APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands) - ---------------------------------------------------------------------------------------------------------------------------- September 30 June 30 1999 1999 --------- --------- (Unaudited) Assets <S> <C> <C> Current assets Cash and temporary investments $ 15,254 $ 19,186 Accounts receivable, less allowance of $3,690 and $3,515 194,617 195,736 Inventories (at LIFO) 158,329 169,689 Other current assets 6,045 6,235 --------- --------- Total current assets 374,245 390,846 --------- --------- Property - at cost Land 12,293 12,316 Buildings 66,884 69,329 Equipment 96,910 96,011 --------- --------- 176,087 177,656 Less accumulated depreciation 72,330 70,417 --------- --------- Property - net 103,757 107,239 --------- --------- Goodwill 61,332 62,351 Other assets 13,840 13,913 --------- --------- TOTAL ASSETS $ 553,174 $ 574,349 ========= ========= Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 74,265 $ 78,836 Compensation and related benefits 25,632 19,692 Other accrued liabilities 35,001 33,588 --------- --------- Total current liabilities 134,898 132,116 Long-term debt 100,500 126,000 Other liabilities 22,479 22,647 --------- --------- TOTAL LIABILITIES 257,877 280,763 --------- --------- Shareholders' Equity Preferred stock - no par value; 2,500 shares authorized; none issued or outstanding Common stock - no par value; 50,000 shares authorized; 24,095 shares issued 10,000 10,000 Additional paid-in capital 82,726 82,599 Income retained for use in the business 249,360 246,026 Less 3,113 and 2,994 treasury shares - at cost (42,188) (40,140) Less unearned restricted common stock compensation (4,601) (4,899) --------- --------- TOTAL SHAREHOLDERS' EQUITY 295,297 293,586 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 553,174 $ 574,349 ========= ========= </TABLE> See notes to consolidated financial statements. 3
5 <TABLE> <CAPTION> APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (Amounts in thousands) Three Months Ended September 30 -------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows from Operating Activities Net income $ 5,862 $ 1,358 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 4,562 3,967 Amortization of goodwill and restricted common stock compensation 1,320 1,178 Provision for losses on accounts receivable 568 554 Gain on sale of property (481) (96) Treasury shares contributed to employee benefit plans 1,009 1,283 Changes in current assets and liabilities, net of effects from acquisition of businesses: Accounts receivable 551 10,385 Inventories 11,360 (10,237) Other current assets 190 (2,967) Accounts payable and accrued expenses 2,610 9,431 Other - net 96 117 - -------------------------------------------------------------------------------------------------------------------------------- Net Cash provided by Operating Activities 27,647 14,973 - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Property purchases (2,801) (3,967) Proceeds from property sales 2,201 1,217 Net cash paid for acquisition of businesses (7,200) Deposits and other 70 9,820 - -------------------------------------------------------------------------------------------------------------------------------- Net Cash used in Investing Activities (530) (130) - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net borrowings under line-of-credit agreements 6,722 Repayments under revolving credit agreements - net (25,500) Dividends paid (2,528) (2,658) Purchase of treasury shares (3,061) (8,595) Exercise of stock options 40 34 - -------------------------------------------------------------------------------------------------------------------------------- Net Cash used in Financing Activities (31,049) (4,497) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease ) in cash and temporary investments (3,932) 10,346 Cash and temporary investments at beginning of period 19,186 9,344 - -------------------------------------------------------------------------------------------------------------------------------- Cash and Temporary Investments at End of Period $ 15,254 $ 19,690 ================================================================================================================================ Supplemental Cash Flow Information Cash paid during the period for: Income taxes $ 2,882 $ 392 Interest $ 1,945 $ 2,553 </TABLE> See notes to consolidated financial statements. 4
6 <TABLE> <CAPTION> APPLIED INDUSTIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ----------------------------------------------------- STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY For the Three Months Ended September 30, 1999 (Unaudited) and Year Ended June 30, 1999 (Thousands, except per share amounts ) Income Unearned Shares of Additional Retained Treasury Restricted Total Common Stock Common Paid-in for Use in Shares Common Stock Shareholders' Outstanding Stock Capital the Business - at Cost Compensation Equity - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at July 1, 1998 22,102 $ 10,000 $ 82,713 $ 236,109 $ (24,391) $ (4,929) $ 299,502 Net income 19,933 19,933 Cash dividends - $.48 per share (10,397) (10,397) Purchase of common stock for treasury (1,450) (21,746) (21,746) Treasury shares issued for: Retirement Savings Plan contributions 220 337 2,980 3,317 Exercise of stock options 109 (281) 1,442 1,161 Deferred compensation plans 24 55 309 364 Restricted common stock awards 96 (86) 1,266 (1,180) Amortization of restricted common stock compensation 28 1,210 1,238 Other (167) 381 214 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1999 21,101 10,000 82,599 246,026 (40,140) (4,899) 293,586 Net income 5,862 5,862 Cash dividends - $.12 per share (2,528) (2,528) Purchase of common stock for treasury (193) (3,061) (3,061) Treasury shares issued for: Retirement Savings Plan contributions 65 110 899 1,009 Exercise of stock options 3 2 38 40 Deferred compensation plans 6 20 76 96 Amortization of restricted common stock compensation 298 298 Other (5) (5) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1999 20,982 $ 10,000 $ 82,726 $ 249,360 $ (42,188) $ (4,601) $ 295,297 ================================================================================================================================== </TABLE> See notes to consolidated financial statements.
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, 1999 and June 30, 1999, and the results of operations and cash flows for the three months ended September 30, 1999 and 1998. The results of operations for the three month period ended September 30, 1999 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. Certain reclassifications have been made to the prior year consolidated financial statements in order to be consistent with the presentation for the current year. 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 1999 1998 -------------------------------------- <S> <C> <C> Net Income - ---------- Net income as reported in statements of consolidated income $ 5,862 $ 1,358 ==================================== Average Shares Outstanding - -------------------------- Weighted average common shares outstanding for basic computation 20,798 21,832 Dilutive effect of: Stock options 133 172 Performance Accelerated Restricted Stock (PARS) 51 5 -------------------------------------- Adjusted average common shares outstanding for diluted computation 20,982 22,009 ==================================== Net Income Per Share - -------------------- Net income per common share - basic $ 0.28 $ 0.06 ==================================== Net income per common share - diluted $ 0.28 $ 0.06 ==================================== </TABLE> 6
8 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts) (Unaudited) - -------------------------------------------------------------------------------- 3. SEGMENT INFORMATION The Company has identified one reportable segment: Service Center Based Distribution. The Service Center Based Distribution segment provides customers with solutions to their immediate maintenance repairs and original equipment manufacturing needs through the distribution of bearings, power transmission products and systems, industrial rubber products, linear motion products, fluid power components, general maintenance products and related specialty items. The Company also offers various levels of technical application support for these products and provides creative solutions to help customers minimize downtime and reduce overall procurement costs. The "Other" column consists of the aggregation of all other non-service center based distribution operations that sell directly to customers, including fluid power, electrical shop and fabricated rubber businesses and various electronic commerce businesses. The segments were established in fiscal 1999 primarily due to the acquisitions outside our core business segment and the related growth in these areas. The accounting policies of the segments are the same as those described in Note 1. Intersegment sales are not significant. All current segment operations are in the United States and Puerto Rico. The segment operations in Puerto Rico are not significant. SEGMENT FINANCIAL INFORMATION: <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30 ------------------------------------------------------------------------------- Service Center Based Total Distribution Other ------------------------- ---------------------- ------------------------ 1999 1998 1999 1998 1999 1998 -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Total net sales $380,671 $379,174 $366,000 $365,123 $ 14,671 $ 14,051 ---------------------- ---------------------- ---------------------- Segment operating profit $ 17,366 $ 16,651 $ 16,802 $ 16,179 $ 564 $ 472 ====================== ====================== Goodwill amortization 1,022 955 Corporate/Unallocated expense, net 4,259 10,924 ---------------------- Total operating profit 12,085 4,772 Interest expense, net 2,235 2,472 ---------------------- Income before taxes $ 9,850 $ 2,300 ====================== Assets used in the business $553,174 $615,034 $515,903 $588,685 $ 37,271 $ 35,725 ====================== ====================== ====================== Depreciation $ 4,562 $ 3,967 $ 4,407 $ 3,854 $ 155 $ 113 ====================== ====================== ====================== Capital Expenditures $ 2,801 $ 3,967 $ 2,771 $ 3,967 $ 30 ====================== ====================== ======== ======== <CAPTION> Sales By Product Category: Three Months Ended September 30 ---------------------- 1999 1998 -------- --------- <S> <C> <C> Industrial Products $267,946 $268,056 Engineered Systems Products 57,130 57,303 Fluid Power Products 37,851 35,643 Fabricated Rubber Products 17,744 18,172 ======== ======== $380,671 $379,174 ======== ======== </TABLE> 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, 1999 and June 30, 1999, 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 $27.6 million in the three months ended September 30, 1999. This compares to $15.0 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, 1999, inventories decreased approximately $11.4 million due to Company efforts to reduce inventory levels, while accounts receivable remained relatively stable. Net cash used in investing activities was $0.5 million in the three months ended September 30, 1999 from property purchases net of disposals. Net cash used in financing activities totaled $31.0 million in the three months ended September 30, 1999 as compared to $4.5 million for the period ended September 30, 1998. Cash provided from operations was used for net repayments under the Company's revolving credit agreements of $25.5 million. Working capital at September 30, 1999 was $239.3 million compared to $258.7 million at June 30, 1999. This decrease is primarily due to the decrease in inventory due to Company efforts to reduce inventory levels. Capital Resources - ----------------- Capital resources are obtained from income retained in the business, borrowings under the Company's credit facilities, and operating lease arrangements. Average combined borrowings were $104.3 million and $156.8 million for the three months ended September 30, 1999 and 1998, respectively. The weighted average interest rate on borrowings under revolving credit facilities for the three months ended September 30, 1999 decreased to 5.6% from an average rate of 5.9% for the three months ended September 30, 1998. The weighted average interest on 8
10 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- borrowing under other long-term debt agreements for the three months ended September 30, 1999 and 1998 was 7.1%. The Company has a committed revolving credit agreement with a five year term with a group of lending institutions. This agreement provides for unsecured borrowings of up to $150.0 million. The Company had $10.5 million of borrowings outstanding under this facility at September 30, 1999. Unused lines under this facility totaling $130.9 million are available to fund future acquisitions or other capital and operating requirements. The Company also has a $15.0 million short-term uncommitted line of credit with a commercial bank. The Company had no borrowings outstanding under this facility at September 30, 1999. Unused lines under this facility totaling $15.0 million are available to 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 193,000 shares of its common stock for $3.1 million during the three months ended September 30, 1999. The Company has remaining authorization to repurchase 685,000 shares as of September 30, 1999. Management expects that capital resources provided from operations, available lines of credit, unused amounts under the committed revolving credit facility 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 and contingency planning efforts. The Company's plan for assessment, remediation, replacement and testing of those of its internal computer systems affected by the Year 2000 issue is proceeding on schedule. For business reasons, the Company's financial information systems have been replaced with a new Year 2000-compliant system, which is fully operational. In addition, all of the Company's critical computer systems, including the OMNEX(R) inventory and sales information system, customer billing system, and corporate information system, have been remediated and tested, and are now Year 2000 compliant. 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 effects certain of the Company's non-critical computer systems and equipment containing embedded technology. The Company has largely completed its assessment, remediation and testing of these non-critical systems, with remaining work scheduled to be completed by various dates before the end of calendar year 1999. To date, following contacts with product suppliers, the Company has not identified any products regularly sold by the Company that are susceptible to the Year 2000 issue. The Company has sought written assurances from key product and service suppliers as to their Year 2000 compliance plans. Follow-up interviews are being conducted with those suppliers with whom the Company has the most significant relationships. The Company will consider appropriate measures, including substitution of suppliers, in the event that a supplier provides an inadequate response. If the Company's suppliers or customers fail to achieve Year 2000 compliance in a timely manner, then the Year 2000 issue could have a material adverse effect on the Company. For example, suppliers' failures to deliver products to the Company due to the Year 2000 issue could render the Company unable to fulfill commitments to customers unless those products or adequate substitutes can be secured elsewhere. Customers affected by the Year 2000 issue could reduce their volume of purchases from the Company or slow their payments for products already delivered. To reduce the risk of business interruption due to the Year 2000 issue, the Company is preparing contingency plans to address situations that may result from the failure of the Company or certain third parties (including utilities) to complete efforts necessary to achieve Year 2000 compliance on a timely basis. These plans are scheduled to be completed by various dates before the end of calendar year 1999. Despite its efforts, the Company will not be able to analyze fully the scope or nature of the risk represented by the failure of third parties, including suppliers and customers, to attain Year 2000 compliance. The Company expects, however, that the actions described in this section will significantly reduce the likelihood that the Year 2000 issue would have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows. Based on currently available information, the total cost of the Company's year 2000 activities is expected to be under $5 million, with approximately four-fifths of the total cost already incurred through September 30, 1999. The total amount spent to date includes a capital expenditure of approximately $1.6 million for the new Year 2000-compliant financial information system, which would have been acquired in the ordinary course, but whose acquisition was accelerated to ensure compliance by the end of calendar 1999. The effort to bring the Company's internal computer systems into compliance has largely been accomplished by redirecting internal programming 10
12 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- resources, with costs expensed as incurred. These costs, too, are included in the total cost estimate. Estimates of the Year 2000-related costs are based on numerous assumptions and there is no certainty that actual costs will not be significantly different from the estimates. To date, the costs of addressing the Year 2000 issue are not considered material to the Company's financial condition, results of operations or cash flows, and future costs are not expected to be material in such respects. The Company further anticipates that its current resources and sources of liquidity will be adequate to address the capital needs arising from its specific Year 2000 issues. 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 1999 and 1998 Amount Change ------ ------ <S> <C> <C> Net sales $1,497 0.4% Cost of sales (1,632) (0.6)% Selling, distribution and administrative expenses (4,184) (4.9)% Operating income 7,313 153.2% Interest expense - net (237) (9.6)% Income before income taxes 7,550 328.3% Income taxes 3,046 323.4% Net income 4,504 331.7% Net income per share - diluted .22 366.7% </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, 1999 and 1998 Net sales increased slightly from the prior year primarily due to acquisitions during fiscal 1999. Gross profit as a percentage of sales increased to 24.6% from 23.9%. This increase primarily is due to a change in product mix and higher discounts and allowances from suppliers. Selling, distribution and administrative expenses as a percent of sales, decreased to 21.5% from 22.6%. This change primarily relates to pretax restructuring and other special charges being recorded in the September 30, 1998 quarter of $5.4 million for costs of consolidation and workforce reductions. This charge decreased the September 30, 1998 net income by $3.2 million, or $.14 per share. Interest expense-net for the quarter decreased by 9.6% as compared to the prior year primarily as a result of a decrease in average borrowings. Income tax expense as a percentage of income before taxes was 40.5% for the quarter ended September 30, 1999 and 41.0% for the quarter ended September 30, 1998. This decrease is due to tax savings from lower effective state and local tax rates. As a result of the above factors, net income increased by 331.7% compared to the same quarter of last year. As a result of the impact of continued stock repurchases, net income per share - diluted increased $.22, or 366.7%. 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 in the statements will be achieved. Important risk factors include, but are not limited to, the following: changes in the economy or in specific customer industry sectors; changes in customer procurement policies and practices; changes in product manufacturer sales policies and practices; the availability of product and labor; changes in operating expenses; the effect of price increases or decreases; the variability and timing of business opportunities including acquisitions, alliances, customer agreements and supplier authorizations; the Company's ability to realize the anticipated benefits of the acquisitions and other business strategies, including electronic commerce initiatives; the 12
14 APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------------------------------------------ ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- incurrence of additional debt and contingent liabilities in connection with acquisitions; changes in accounting policies and practices; the effect of organizational changes within the Company; the emergence of new competitors, including firms with greater financial resources than the Company; adverse effects of the Year 2000 issue on businesses of the Company and its suppliers and customers; adverse results in significant litigation matters; adverse state and federal regulation and legislation; and the occurrence of extraordinary events (including prolonged labor disputes, natural events and acts of God, fires, floods and accidents). 13
15 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. ----------------- Applied Industrial Technologies, Inc. and/or one of its subsidiaries is a defendant in various product- and employment-related lawsuits. Based on circumstances presently known, the Company believes that these cases are not material to its business or financial condition. ITEM 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 19, 1999, there were 20,993,104 shares of common stock entitled to vote. The Shareholders voted on the matters submitted to the meeting as follows: 1. Election of three persons to be directors of Class III for a term of three years: For Withheld --- -------- William E. Butler 18,441,739 812,216 Russell R. Gifford 18,454,755 799,198 L. Thomas Hiltz 18,623,349 630,604 Directors of Class I, consisting of Thomas A. Commes, 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 II, consisting of William G. Bares, Roger D. Blackwell, Russel B. Every, and John J. Kahl, serve until the expiration of their term of office in 2001. 2. Amendment of the Company's Code of Regulations to increase the maximum size of the Board of Directors from 12 to 14 directors. For Withheld Abstain --- -------- ------- 18,503,875 409,019 260,060 3. Ratification of management's appointment of Deloitte & Touche LLP as the Company's independent auditors for the fiscal year ending June 30, 2000. 14
16 For Withheld Abstain --- -------- ------- 19,234,114 9,751 10,090 Discretionary voting was authorized as to the three matters submitted. There were no broker non-votes. (b) Election of Officers. --------------------- At its Organizational Meeting held on October 19, 1999, the Board of Directors elected the following officers of the Company: <TABLE> <S> <C> John C. Dannemiller Chairman & Chief Executive Officer David L. Pugh President & Chief Operating Officer Todd A. Barlett Vice President-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-Chief Marketing Officer 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> 15
17 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 (filed as Exhibit 3(a) to the Company's Form 10-Q for the quarter ended September 30, 1998, SEC File No. 1-2299, and incorporated here by reference). 3(b) Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999. 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). 16
18 4(e) $150,000,000 Credit Agreement dated as of November 5, 1998 among the Company, KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 4(e) to the Company's Form 10-Q for the quarter ended September 30, 1998, SEC File No. 1-2299, and incorporated here by reference). 4(f) Rights Agreement, dated as of February 2, 1998, between the Company and Harris Trust and Savings Bank, as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (filed as Exhibit No. 1 to the Company's Registration Statement on Form 8-A filed July 20, 1998, SEC File No. 1-2299, and incorporated here by reference). 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, 1999. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. APPLIED INDUSTRIAL TECHNOLOGIES, INC. (Company) Date: November 15, 1999 By: /s/ David L. Pugh ------------------------------------------ David L. Pugh President & Chief Operating Officer Date: November 15, 1999 By: /s/ Mark O. Eisele ------------------------------------------ Mark O. Eisele Vice President & Controller 17
19 APPLIED INDUSTRIAL TECHNOLOGIES, INC. EXHIBIT INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 EXHIBIT NO. DESCRIPTION PAGE 3(a) Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 8, 1998. (filed as Exhibit 3(a) to the Company's Form 10-Q for the quarter ended September 30, 1998, SEC File No. 1-2299, and incorporated here by reference). 3(b) Code of Regulations of Applied Industrial Attached Technologies, Inc., as amended October 19, 1999. 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
20 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) $50,000,000 Credit Agreement dated as of November 5, 1998 among Applied, KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 4(e) to the Company's Form 10-Q for the quarter ended September 30, 1998, SEC file No. 1-2299, and incorporated here by reference). 4(f) Rights Agreement, dated as of February 2, 1998, between the Company and Harris Trust and Savings Bank, as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (filed as Exhibit No. 1 to the Company's Registration Statement on Form 8-A filed July 20, 1998, SEC File No. 1-2299, and incorporated here by reference). 27 Financial Data Schedule. Attached