UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______.
Commission File No. 1 - 11288
APPLIED POWER INC.
(Exact name of Registrant as specified in its charter)
Wisconsin 39-0168610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
N22 W23685 Ridgeview Parkway West
Waukesha, Wisconsin, 53188-1013
Mailing address: P.O. Box 325, Milwaukee, Wisconsin 53201
(Address of principal executive offices)
(262) 523-7600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, New York Stock Exchange
$.20 par value per share (Name of each exchange on
(Title of each class) which registered)
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, 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. [ ]
As of October 30, 1998, the aggregate market value of Common Stock held by non-
affiliates was approximately $1,036.9 million, and there were 38,654,903 shares
of the Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on January 8, 1999 are incorporated by reference into
Part III hereof.
This Form 10-K/A (Amendment No. 1) contains the full text of Applied Power
Inc.'s Form 10-K for the fiscal year ended August 31, 1998, as amended, to
reflect amendments in Item 7 (Management's Discussion and Analysis of Financial
Condition and Results of Operations) and Item 8 (Financial Statements and
Supplementary Data) in Part II of this report.
PART I
Item 1. Business
General Development of the Company
Applied Power Inc. (the "Company"), a Wisconsin corporation incorporated in
1910, is a diversified global company engaged in the business of providing
tools, equipment, systems and supply items to a variety of end users and
original equipment manufacturers ("OEMs") in the manufacturing, computer,
semiconductor, telecommunication, datacom, construction, electrical,
transportation, recreational vehicle, aerospace, defense and other industries.
The Company's operations are divided into three business segments:
Enclosure Products and Systems
Electronic enclosure products, systems and technical environment solutions
sold into the telecommunication, computer networking, semiconductor
equipment, medical, electronic and manufacturing environments.
Engineered Solutions
Motion, vibration control and magnetic applications and systems primarily
for OEM customers.
Tools and Supplies
Industrial and electrical tools and supplies sold primarily through
distributors and mass merchandisers.
Merger and Acquisitions
During the fiscal year, the Company's Enclosure Products and Systems segment
acquired several businesses. Substantially all of the assets of Performance
Manufactured Products Inc., located in San Jose, California, and a related
entity ("PMP") were acquired in January 1998. In February 1998, the Company
acquired AA Manufacturing, Inc. ("AA"), located in Garland, Texas. The Company
purchased certain assets of Product Technology Inc. ("PTI"), located in Irvine,
California, in May 1998. Premier Industries ("Premier"), located in Hudson, New
Hampshire, was purchased in May 1998. In June 1998, the Company, through a
wholly-owned subsidiary, acquired all of the outstanding shares of VERO Group
plc ("VERO"). VERO is a United Kingdom based company that manufactures
electronic enclosures, racks, backplanes and power supplies. The Company
purchased certain assets of Brown Manufacturing Company ("Brown"), located in
Austin, Texas, in June 1998. On July 31, 1998, the Company and ZERO Corporation
("ZERO") completed the merger of a newly created subsidiary of the Company into
ZERO following special meetings for both companies at which shareholders voted
to approve the merger. ZERO's operations had two business segments: "Enclosures
and Accessories" for the electronics industry and "Other" which serves the air
cargo and other/consumer markets. The ZERO units have been integrated into the
Enclosure Products and Systems and Engineered Solutions segments of the Company.
Following the end of the fiscal year, in September, 1998, the Company announced
that the Boards of Directors of the Company and Rubicon Group plc ("Rubicon")
had agreed to terms of a recommended cash offer by the Company to acquire the
entire issued share capital of Rubicon. Rubicon is comprised of two business
divisions. The Electronic Manufacturing Services ("EMS") division is a contract
manufacturer of complex electronic enclosures and related system sub-assemblies.
The second division is Rubicon's magnetics business, which specializes in the
design, prototyping, manufacturing and testing of bonded magnets, using rare
earth and ferric magnet materials for applications in the information
technology, automotive and consumer electronic industries.
All of the above acquisitions in aggregate relate to electronic enclosures
manufacturing, assembly, integration and supporting critical components such as
backplanes, thermal management and power supplies.
With respect to the Engineered Solutions segment, in October 1997, the Company,
through a wholly-owned subsidiary, acquired all of the outstanding shares of
Versa Technologies Inc. ("Versa/Tek"). Versa/Tek, operating out of several
locations in Wisconsin, is a value-added manufacturer of custom engineered
components and
2
systems for diverse industrial markets, and has been integrated into the
Company's Engineered Solutions and Tools and Supplies segments.
During the year, the Company also made several acquisitions in the Tools and
Supplies segment. The outstanding capital stock of Del City Wire Co., Inc. ("Del
City") was acquired in February 1998. Headquartered in Oklahoma City, Oklahoma,
Del City is a direct catalog supplier of electrical wire, consumables, and
accessories to wholesale and OEM customers in the heavy equipment, automotive,
trucking, marine and industrial markets. Del City is also a domestic
manufacturer of solderless terminals, molded electrical plugs, battery cables
and related products. In January 1998, the Company completed the acquisition of
all of the outstanding capital stock of Ancor Products, Inc. ("Ancor"). Ancor,
headquartered in Cotati, California, is a market leader in electrical products
to the marine industry. In October 1997, the Company's CalTerm subsidiary
acquired substantially all of the assets of Nylo-Flex Manufacturing Company,
Inc. ("Nylo-Flex"). Nylo-Flex, which does business under the TAM name, is
headquartered in Mobile, Alabama. Nylo-Flex is a manufacturer, packager, and
distributor of high quality battery terminals, battery cables, and battery
maintenance accessories to the automotive, marine, farm, fleet and industrial
markets.
For further information regarding the Company's acquisitions, see Note B -
"Merger and Acquisitions" and Note P - "Subsequent Events" in Notes to
Consolidated Financial Statements.
Financial information by segment and geographic area, as well as information
related to export sales, is included in Note N - "Segment Information" in Notes
to Consolidated Financial Statements, which is included as part of Item 8 of
Part II of this report and is incorporated herein by reference.
All dollar amounts are in US$ thousands unless otherwise indicated.
Description of Business Segments
ENCLOSURE PRODUCTS AND SYSTEMS
Enclosure Products and Systems ("EPS"), formerly known as Technical Environments
and Enclosures, provides users and manufacturers of electronic equipment with
technical furniture and electronic enclosure products and systems. Technical
furniture, sold primarily under the Wright Line brand name, is used to configure
the environment in which computers reside, including computer room,
manufacturing or technical office environments. Electronic enclosure products
are cabinets, racks and subracks that are sold under the Stantron and VERO brand
names. Other products include backplanes, power supplies and cases sold under
the VERO, Danica and ZERO Halliburton(R) brand names, respectively. In addition
to providing standard products, EPS sells customized electronic enclosure
systems allowing the Company to provide completely integrated and tested
products to a wide array of customers including the telecommunication, computer
networking, semiconductor manufacturing equipment and automated teller machines
markets. The systems business is driven by the desire of many producers of
electronic components to outsource manufacturing and it relies heavily on EPS'
skills in new product development, supply chain management, assembly and
testing. EPS also has a global drop ship capability.
EPS products are primarily sold direct, with specific standard products going
through distribution in selected markets. EPS sales and manufacturing locations
are mainly in Europe and North America. EPS' largest single customer, IBM, is
expected to account for just under ten percent of total EPS sales in 1999. Sales
to the Federal Government, which now average approximately 7% of total EPS net
sales, are made pursuant to a contract between EPS and the US Government's
General Services Administration ("GSA"). The government sales are primarily for
technical furniture. As the enclosure product line grows within EPS, it is
expected that the percent of total EPS sales attributable to the GSA contract
will decline considerably in 1999.
ENGINEERED SOLUTIONS
Engineered Solutions ("ES") is a technology based business providing customized
solutions to OEM customers in the truck, aerospace, automotive, recreational
vehicle, electrical/electronic enclosures and other general industrial markets.
ES possesses particular competence in hydraulic, electromechanical,
rubber/elastomer molding, magnetic, thermal systems and electronic control
techniques. Principle brand names that ES trades under include McLean, Barry
Controls, Power Gear, Power Packer, Vlier, Mox-Med and Eder. The segment's
sales,
3
engineering and manufacturing activities are primarily in Europe and North
America. As an OEM supplier, ES operates as a just-in-time supplier and
maintains numerous quality certifications including ISO 9001 and ISO 9000. Most
ES sales are diversified by customer and end user industry and are primarily
sold through direct sales persons, with sales representatives and distributors
used in certain situations.
TOOLS AND SUPPLIES
Tools and Supplies ("TS") provides a wide array of electrical and industrial
tools and supplies to wholesale distributors, catalogs and various retail
channels of distribution. TS provides over 10,000 stock keeping units ("SKUs"),
most of which are designed and manufactured by the Company in North America. TS
has particular expertise in hydraulic design and plastic injection molding. The
Company maintains a sophisticated sourcing operation to supply additional
products to supplement its own products and meet its customers' needs. Principal
brand names used by the Company include Enerpac, GB Gardner Bender, Ancor,
Calterm and Del City. End user markets include general industrial, construction,
retail marine, retail automotive, do-it-yourself and production automation. To
provide its customers with the service levels required, TS maintains a
sophisticated warehouse and physical distribution capability in North America,
Europe and Asia. Certain products are sold on an OEM basis.
Competition
The Company competes on the basis of product design, quality, availability,
performance, customer service and price. The Company believes that its technical
skills, global presence, shared technology base, close working relationships
with customers as well as patent protection bolster its competitive position.
The Company's businesses face competition to varying degrees in each of their
markets. In general, each product line competes with a small group of different
competitors. No one company competes directly with the Company across all of its
businesses.
Research and Development
The Company maintains engineering staffs at several locations that design new
products and make improvements to existing product lines. Expenditures for
research and development were $13,947, $10,437 and $10,247 in fiscal years 1998,
1997 and 1996, respectively, the majority of which was expended by the
Engineered Solutions segment. Substantially all research, development and
product improvement expenditures are Company funded.
Patents and Trademarks
The Company has been issued a number of patents that provide protection for
valuable designs and processes primarily in its Tools and Supplies and
Engineered Solutions businesses. The Company owns numerous other United States
and foreign patents and trademarks. No such individual patent or trademark (or
group thereof) is believed to be of sufficient importance that its termination
would have a material adverse effect on the Company's businesses.
Manufacturing, Materials and Suppliers
The majority of the Company's manufacturing operations include the assembly of
parts and components which have been purchased by the Company from a number of
suppliers. In the absence of unusual circumstances, substantially all such parts
and components are normally available from a number of local and national
suppliers.
Order Backlogs and Seasonality
At August 31, 1998, the Company had approximately $251,900 in backlog, compared
to approximately $164,200 at August 31, 1997. Substantially all orders are
expected to be completed prior to August 31, 1999. The Company's sales are
subject to minor seasonal fluctuations, with second quarter sales traditionally
being the lowest of the year.
4
Employee Relations
As of August 31, 1998, the Company employed approximately 10,150 people on a
full-time basis, of which approximately 80 were represented by a collective
bargaining agreement. In general, the Company enjoys good relationships with its
employees.
Environmental Compliance
The Company has facilities in numerous geographic locations that are subject to
a range of environmental laws and regulations. Compliance with these laws has
and will require expenditures on a continuing basis. The Company has been
identified by the United States Environmental Protection Agency as a
"Potentially Responsible Party" regarding various multi-party Superfund sites.
Based on its investigations, the Company believes it is a de minimis participant
in each case, and that any liability which may be incurred as a result of its
involvement with such Superfund sites, taken together with its expenditures for
environmental compliance, will not have a material adverse effect on its
financial position. Environmental costs are expensed or capitalized depending on
their future economic benefits. Expenditures that have no future economic value
are expensed. Liabilities are recorded when environmental remediation is
probable and the costs can be reasonably estimated. Environmental expenditures
over the last three years have not been material. Although the level of future
expenditures for environmental remediation is impossible to determine with any
degree of certainty, it is management's opinion that such costs are not
presently expected to have a material adverse effect on the Company's financial
position, results of operations or cash flows. Environmental remediation
accruals of $4,049 and $1,608 were included in the Consolidated Balance Sheet
at August 31 , 1998 and 1997, respectively. For further information, refer to
Note O "Contingencies and Litigation" in Notes to Consolidated Financial
Statements.
Item 2. Properties
The following table summarizes the principal manufacturing, warehouse and office
facilities owned or leased by the Company:
Location and Business Size (sq. feet) Owned/Leased
- ---------------------------------------------------------------------------------------------------------
ENCLOSURE PRODUCTS AND SYSTEMS
Anaheim, California 360,000 Leased
Monson, Massachusetts 320,000 Owned
North Salt Lake, Utah 292,000 Owned
Worcester, Massachusetts 240,000 Owned
Dublin, Ireland 205,000 Leased/Owned
Eastleigh, England 186,000 Leased
San Jose, California 177,000 Leased
Middlesex, England 151,000 Leased
Monon, Indiana 150,000 Owned
Hudson, New Hampshire 140,000 Leased
Pacoima, California 113,000 Leased
Southampton, England 95,000 Leased
Garland, Texas 80,000 Leased
El Monte, California 78,000 Leased
Wallingford, Connecticut 76,000 Leased
Cork, Ireland 70,000 Leased
West Boylston, Massachusetts 60,000 Owned
Portsmouth, New Hampshire 55,000 Leased
Bremen, Germany 54,000 Owned
Austin, Texas 51,000 Leased
San Diego, California 49,000 Owned
Garden Grove, California 47,000 Leased
Aarup, Denmark 38,000 Owned
Irvine, California 35,000 Leased
Beauvais, France 32,000 Owned
5
Location and Business Size (sq. feet) Owned/Leased
- ---------------------------------------------------------------------------------------------------------
ENGINEERED SOLUTIONS
Champlin, Minnesota 186,000 Owned
Birmingham, England 145,000 Owned/Leased
Brighton, Massachusetts 144,000 Leased
Robbinsville, New Jersey 133,000 Owned
Burbank, California 126,000 Leased
Oldenzaal, Netherlands 126,000 Owned/Leased
Rancho Dominguez, California 110,000 Leased
Waukesha, Wisconsin 83,000 Leased
Pachuca, Mexico 73,000 Leased
Oak Creek, Wisconsin 72,000 Owned
Hartford, Connecticut 65,000 Owned
Portage, Wisconsin 56,000 Owned
Westfield, Wisconsin 40,000 Owned
Hersham, England 39,000 Leased
Beaver Dam, Wisconsin 38,000 Owned
Camarillo, California 36,000 Leased
Tijuana, Mexico 35,000 Leased
Middlesex, England 32,000 Leased
Smethwick, England 29,000 Leased
Sao Paulo, Brazil 22,000 Leased
TOOLS AND SUPPLIES
Glendale, Wisconsin 313,000 Leased
Troyes, France 185,000 Leased
Columbus, Wisconsin 130,000 Leased
Veenendaal, Netherlands 97,000 Owned
Mobile, Alabama 75,000 Leased
Cudahy, Wisconsin 73,000 Owned
San Diego, California 69,000 Leased
Oklahoma City, Oklahoma 56,000 Leased
Reno, Nevada 55,000 Owned
Tecate, Mexico 54,000 Leased
Tokyo, Japan 39,000 Leased
Charlotte, North Carolina 36,000 Leased
Matthews, North Carolina 33,000 Owned
Alexandria, Minnesota 25,000 Owned
Sydney, Australia 23,000 Leased
Cotati, California 20,000 Leased
Taipei, Taiwan 19,000 Leased
Ontario, Canada 18,000 Leased
Corsico, Italy 18,000 Owned
Seoul, South Korea 18,000 Leased
Lancaster, Pennsylvania 16,000 Leased
Dusseldorf, Germany 15,000 Leased
Singapore, Singapore 15,000 Leased
In addition to these properties, the Company utilizes a number of smaller
facilities in Spain, Italy, Canada, Brazil, France, Germany, Russia, Taiwan,
India, Hong Kong, Malaysia, the Peoples Republic of China, the United Kingdom
and the United States. The above table does not include facilities acquired with
Rubicon in September 1998. The Company's headquarters are based in a leased
office facility in Butler, Wisconsin.
The Company's strategy is to lease properties when available and economically
advantageous. Leases for the majority of the Company's facilities include
renewal options. For additional information, see Note J - "Leases" in
Notes to Consolidated Financial Statements. The Company believes its current
properties are well maintained and in general are adequately sized to house
existing operations.
Item 3. Legal Proceedings
The Company is a party to various legal proceedings that have arisen in the
normal course of its business. These legal proceedings typically include product
liability, environmental, labor and patent claims. (For further information
related to environmental claims, refer to the section titled "Environmental
Compliance" in Item 1). The Company has recorded reserves for estimated losses
based on the specific circumstances of each case. Such reserves are recorded
when the occurrence of loss is probable and can be reasonably estimated. In the
opinion of management, the resolution of these contingencies is not expected to
have a material adverse effect on the Company's financial condition, results of
operations or cash flows. For further information, refer to
Note O--"Contingencies and Litigation" in Notes to Consolidated Financial
Statements.
Item 4. Submission of Matters to a Vote of Security Holders
On July 31, 1998, ZERO Corporation, a Delaware corporation ("ZERO"), became a
wholly-owned subsidiary of the Company through the merger of STB Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of the Company
("Acquisition"), with and into ZERO (the "Merger") pursuant to an Agreement and
Plan of Merger by and among the Company, ZERO and Acquisition dated as of April
6, 1998 (the "Merger Agreement"). The shareholders of the Company approved the
issuance of shares of the Company's common stock pursuant to the Merger
Agreement to effect the transactions contemplated by the Merger Agreement by the
requisite vote at the special meeting of shareholders of the Company held on
July 31, 1998. The voting results were: 22,160,498 for; 77,950 against; 608,361
abstentions; and, no broker non-votes.
Executive Officers of the Registrant
The names, ages and positions of all of the executive officers of the Company
are listed below.
Name Age Position
- ---- --- --------
Richard G. Sim 54 Chairman, President and Chief Executive
Officer; Director
William J. Albrecht 47 Senior Vice President
Philip T. Burkart 41 Senior Vice President
Timothy R. Wightman 52 Senior Vice President
Gustav H.P. Boel 54 Vice President
Theodore M. Lecher 47 Vice President
Robert C. Arzbaecher 38 Senior Vice President and Chief Financial
Officer
Richard D. Carroll 35 Treasurer and Controller
Anthony W. Asmuth III 56 Secretary
Richard G. Sim was elected President and Chief Operating Officer in 1985, Chief
Executive Officer in 1986 and Chairman of the Board in 1988. From 1982 through
1985, Mr. Sim was a General Manager in the General Electric Medical Systems
Business Group. He is also a director of IPSCO Inc. and Oshkosh Truck
Corporation.
William J. Albrecht was named Senior Vice President of Engineered Solutions in
1994. Prior to that, he served as Vice President and President of Power-Packer
and APITECH since 1991. He joined the Company in 1989 as Director of Marketing
of the APITECH Division in the United States and became General Manager shortly
7
thereafter. Prior to joining the Company, Mr. Albrecht was Director of National
Accounts and Industrial Power Systems at Generac Corp. from 1987 to 1989.
Philip T. Burkart was elected Senior Vice President of the Company in 1998.
Prior to that, he served as Vice President of the Company since 1995 and
President of Enclosure Products and Systems since 1994. From 1990 to 1994, Mr.
Burkart held various positions within Enclosure Products and Systems including:
General Manager, Vice President, Marketing and Operations and Director of
Marketing. Prior to joining the Company, Mr. Burkart was a Marketing Manager for
GE Medical Systems.
Timothy R. Wightman joined the Company in September 1998 with the acquisition of
Rubicon Group plc where he was Chief Executive Officer since 1992. Prior to
joining Rubicon, Mr. Wightman was Chief Executive of Credit Ancillary Services
Ltd from 1987 to 1992.
Gustav H.P. Boel was appointed Vice President with responsibilities for Tools
and Supplies in 1998. Prior to that, Mr. Boel was President of Enerpac since
1995. From 1991 to 1995, he managed the Company's Engineered Solutions business
in Europe. From 1990 to 1991, Mr. Boel was Technical Director for Groeneveld,
located in the Netherlands. Prior to 1990, Mr. Boel worked in Europe in various
positions in the industrial tool business.
Theodore M. Lecher was appointed Business Development Leader in 1998. Prior to
that, he served as President of GB Electrical, Inc. (Gardner Bender, Inc. prior
to its acquisition by the Company in 1988) since 1986. He has been a Company
Vice President since 1988. He was Vice President-General Manager of Gardner
Bender, Inc. from 1983 to 1986, and prior to that, Director of Sales and
Marketing since 1980. Mr. Lecher has been associated with GB Electrical, Inc.
since 1977.
Robert C. Arzbaecher was named Vice President and Chief Financial Officer in
1994 and Senior Vice President in 1998. He had served as Vice President, Finance
of Tools and Supplies from 1993 to 1994. He joined the Company in 1992 as
Corporate Controller. From 1988 through 1991, Mr. Arzbaecher was employed by
Grabill Aerospace Industries LTD, where he last held the position of Chief
Financial Officer.
Richard D. Carroll joined the Company as Corporate Controller in 1996 and was
appointed Treasurer and Controller in 1998. Mr. Carroll was previously employed
with the Northwest Indiana Water Company as its Vice President/Controller during
1995. Prior to that, he was Controller for Nypro Chicago from 1993 to 1995.
Anthony W. Asmuth III is a partner in the law firm of Quarles & Brady,
Milwaukee, Wisconsin, having joined that firm in 1989. Quarles & Brady performs
legal services for the Company and certain of its subsidiaries. Prior to joining
Quarles & Brady, he was a shareholder of the law firm of Whyte Hirschboeck Dudek
S.C. Mr. Asmuth had previously served as Secretary of the Company from 1986 to
1993. He was re-elected Secretary in 1994.
Each officer is appointed by the Board of Directors and holds office until he
resigns, dies, is removed or a different person is appointed to the office. The
Board of Directors generally appoints officers at its meeting following the
Annual Meeting of Shareholders.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On February 3, 1998, the Company effected a two-for-one stock split in the form
of a 100 percent stock dividend. Unless otherwise indicated, all financial and
other data contained in this report have been restated to give retroactive
effect to such stock split.
The Company's common stock is traded on the New York Stock Exchange under the
symbol APW. At October 30, 1998, the approximate number of record shareholders
of common stock was 4,865. The high and low sales prices of the common stock by
quarter for each of the past two years (adjusted to reflect the 1998 stock
split) are as follows:
FISCAL YEAR PERIOD HIGH LOW
- ------------- -------------------------- --------- ----------
1998 June 1 to August 31 $ 38 $ 24 3/4
March 1 to May 31 40 33 1/2
December 1 to February 28 35 3/4 34 11/16
September 1 to November 30 34 1/4 29 1/2
1997 June 1 to August 31 $ 31 3/4 $ 21 7/8
March 1 to May 31 22 9/16 19 9/16
December 1 to February 28 21 7/16 18 3/16
September 1 to November 30 18 3/4 14 11/16
Quarterly dividends of $0.015 per share were declared and paid by the Company
for each of the quarters above.
9
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial information of
the Company for the five fiscal years in the period ended August 31, 1998. This
selected financial information should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included herein. The
selected financial data reflect the combined results of operations and financial
position of Applied Power Inc. and ZERO Corporation restated for all periods
presented pursuant to the pooling of interests method of accounting and includes
the results of other acquired companies from their respective effective dates of
acquisition in accordance with the purchase method of accounting. See Notes A -
"Summary of Significant Accounting Policies" and B - "Merger and Acquisitions"
in Notes to Consolidated Financial Statements.
(In Millions, except per share amounts)
For the years ended August 31,
-------------------------------------------------------------------------
1998 (1) 1997 (1) 1996 (1) 1995 (1) 1994 (1)
----------- ----------- --------- ----------- ----------
Net Sales $ 1,230.7 $ 897.8 $ 777.5 $ 706.8 $ 605.5
Gross Profit 395.0 327.2 290.5 263.0 219.4
Earnings(Loss)
Continuing Operations 26.7(2)(3) 57.9 50.7 39.8 29.7
Discontinued Operations - - - - (0.4)
Extraordinary Loss - - - (4.9) -
----------- ----------- --------- ----------- ----------
Net Earnings $ 26.7 $ 57.9 $ 50.7 $ 34.9 $ 29.4
Basic Earnings(Loss) Per Share
Continuing Operations $ 0.70(2)(3) $ 1.53 $ 1.26 $ 0.99 $ 0.75
Discontinued Operations - - - - (0.01)
Extraordinary Loss - - - (0.12) -
----------- ----------- --------- ----------- ----------
Net Earnings Per Share $ 0.70 $ 1.53 $ 1.26 $ 0.87 $ 0.74
Diluted Earnings(Loss) Per Share
Continuing Operations $ 0.66(2)(3) $ 1.47 $ 1.22 $ 0.97 $ 0.74
Discontinued Operations - - - - (0.01)
Extraordinary Loss - - - (0.12) -
----------- ----------- --------- ----------- ----------
Net Earnings Per Share (4) $ 0.66 $ 1.47 $ 1.22 $ 0.85 $ 0.73
Dividends Per Common Share See (5) below
August 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- --------- ----------- ----------
Total Assets $ 1,174.7 $ 649.5 $ 547.1 $ 504.5 $ 476.1
Long-term Obligations $ 512.6 $ 153.2 $ 128.1 $ 74.2 $ 78.0
Shareholders' Equity $ 341.9 $ 305.4 $ 253.3 $ 277.3 $ 243.8
Actual Shares Outstanding 38.6 38.0 37.6 40.4 39.8
- --------------
(1) Prior to the Merger, ZERO had a March 31 fiscal year end. The historical
results have been combined using an August 31 year end for ZERO for the
year ended August 31, 1998. For all prior periods, the results of
operations and financial position reflect the combination of ZERO with a
March 31 fiscal year end and the Company with an August 31 fiscal year end.
Net sales and net income for ZERO for the period April 1, 1997 through
August 31, 1997 (which results are not included in the historical combined
results) were $107.2 and $7.9, respectively.
(2) Earnings from continuing operations in fiscal 1998 include a gain of
approximately $4.6, $0.11 per share on a diluted basis, for special items
recognized by ZERO.
(3) Earnings from continuing operations in fiscal 1998 include charges related
to merger, restructuring and other non-recurring costs of $52.6, $1.31 per
share on a diluted basis. See Note G - "Merger, Restructuring and Other
Non-recurring Charges" in Notes to Consolidated Financial Statements.
(4) Per share amounts for all periods presented have been restated to give
effect to the Merger and a two-for-one stock split effected in the form of
a 100 percent stock dividend distributed to the Company's shareholders of
record as of January 22, 1998. To effect the stock split, a total of 13.9
shares of the Company's common stock were issued on February 3, 1998.
(5) Prior to the Merger, ZERO declared quarterly dividends of $0.03 per share
in its fiscal years ended March 31, 1998 and 1997, $0.11 per share in
fiscal 1996 and the fourth quarter of fiscal 1995 and $0.10 per share in
the first three quarters of fiscal 1995 and each quarter of fiscal 1994.
The Company declared quarterly dividends of $0.015 per share (as adjusted
for the stock split) in its fiscal years ended August 31, 1998, 1997, 1996,
1995 and 1994.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in Millions unless otherwise indicated, except per share amounts)
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in this report.
Business Combination
On July 31, 1998, the Company completed its Merger with ZERO Corporation
("ZERO"), a leading supplier of electrical and electronic system enclosure
products and thermal management products. The Merger was accounted for as a
pooling of interests. The Company issued approximately 10.6 million shares of
its common stock in exchange for all outstanding common stock of ZERO
Corporation and assumed outstanding options to purchase ZERO common stock that
were converted into options to purchase approximately 0.6 million shares of the
Company's common stock pursuant to the terms of the Merger.
All financial data of Applied Power Inc. and its subsidiaries (the "Company" or
"APW") presented in this Form 10-K have been restated to include the historical
financial information of ZERO Corporation in accordance with generally accepted
accounting principles and pursuant to Regulation S-X. Prior to the Merger, ZERO
had a March 31 fiscal year end. The historical results have been combined using
an August 31 year end for ZERO for the year ended August 31, 1998. For all
preceding years, the results of operations and financial position reflect the
combination of ZERO with a March 31 fiscal year end and the Company with an
August 31 fiscal year end. Net sales and net income for ZERO for the period
April 1, 1997 through August 31, 1997 (which results are not included in the
historical combined results) were $107.2 and $7.9, respectively.
- --------------------------------------------------------------------------------------------------------------------
Results of Operations Years Ended August 31, Percentage of Net Sales
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Net Sales $1,230.7 $897.8 $777.5 100.0% 100.0% 100.0%
Gross Profit 395.0 327.2 290.5 32.1 36.4 37.4
Operating Expenses 323.7 225.5 206.5 26.3 25.1 26.6
Operating Earnings 71.3 101.7 84.0 5.8 11.3 10.8
Other Expenses 13.9 12.5 6.6 1.1 1.4 0.8
Earnings Before Income Tax Expense 57.4 89.2 77.4 4.7 9.9 10.0
Income Tax Expense 30.7 31.3 26.7 2.5 3.5 3.4
Net Earnings $ 26.7 $ 57.9 $ 50.7 2.2% 6.4% 6.6%
- --------------------------------------------------------------------------------------------------------------------
11
Merger, Restructuring and Other Non-recurring Items
- ---------------------------------------------------
The Company recorded restructuring and other one-time charges in the fourth
quarter of fiscal 1998 of $52.6, or $1.31 per share on a diluted basis. The
pre-tax charges of $69.4 included costs associated with a number of initiatives,
including: the ZERO merger and headquarters closing; rationalization of the
Company's electronic enclosure manufacturing facilities and infrastructure;
elimination of less profitable product lines and products across all three
business segments; and the consolidation of certain support functions in the
Tools and Supplies segment.
With respect to rationalization of its Enclosure Products and Systems segment,
it is the Company's strategy to become the premier, global electronic enclosure
manufacturer. In line with that strategy, the Company has completed eleven
electronic enclosure acquisitions over the last two years, operating 34
facilities in 11 countries. As a result of the Company's rapid expansion into
the electronic enclosure business, there are significant rationalization and
integration opportunities within and between the acquired businesses. In late
fiscal 1998, the Company formalized a plan to eliminate redundancies and
streamline operations within these acquired businesses. These rationalization
efforts include consolidating three facilities into one in the northeastern
United States, the consolidation of production of several product lines between
facilities, standardization of design and development functions, and other
organizational realignments. As a result of this plan, the Company recorded
$17.7 for related charges, including provisions of $4.5 for cost associated with
employee severance, $4.9 related to the closing of facilities and $8.3 resulting
from the write-off of discontinued inventory. The Company expects that the
reorganization of its Enclosure Products and Systems segment will be largely
complete in the first half of fiscal 1999.
Also in late fiscal 1998, the Company initiated aggressive programs, spanning
all three of the Company's business segments, to eliminate or reduce product
lines and items which were not generating sufficient economic return. The
programs include the elimination of slow moving or marginal products and the
entire exit of less productive product lines. As a result of these programs, the
Company recorded a one-time $25.8 charge to Cost of products sold for the write-
down of discontinued or obsolete inventory to estimated net realizable value.
The Company expects its product line initiatives to be materially complete by
the end of fiscal 1999.
Also in the fourth quarter of fiscal 1998, the Company adopted a plan to
consolidate the headquarters functions of the Enerpac and Gardner Bender
business units of the Tools and Supplies segment into a single headquarters in
Glendale, Wisconsin and plans to reorganize and to combine certain North
American and European facilities of the Company's Engineered Solutions segment.
As a result of these initiatives, the Company recorded a charge of $36.0,
including $6.4 related to employee severance payments, $7.0 in facility closure
costs and operating lease obligations, $17.5 as a result of the inventory
initiatives discussed above and $5.1 for, in two cases, the write-down of
related goodwill in accordance with Statement of Financial Accounting Standard
No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". For further information on the write-down of
goodwill, see Note A - "Summary of Significant Accounting Policies". The Company
expects that its Tools and Supplies and Engineered Solutions reorganization
efforts will be substantially completed in fiscal 1999.
Lastly, in the fourth quarter of fiscal 1998, the Company recorded charges of
$9.3 in ZERO merger costs and $6.4 for the closing of the ZERO headquarters and
related severance expense. The closing of the ZERO headquarters was
substantially completed in August 1998.
The Company anticipates that the above discussed initiatives will result in
operating efficiencies, reduced overhead infrastructure, and the resulting
financial benefit of improved operating margin and enhanced return on assets
deployed, beginning in fiscal 1999.
The above programs resulted in total pre-tax charges of $69.4, including $13.6
for severance payments for a reduction of approximately 400 employees, of which
a negligible amount was paid in fiscal 1998, and $9.3 in ZERO merger costs. In
addition to the charges above, ZERO recognized a net gain of $4.6, $0.11 per
share on a diluted basis, for special items relating to a gain from life
insurance and sale of property offset by a $4.5 provision for the estimated loss
on the sale of a subsidiary. The following table reconciles reported results to
results of operations on an ongoing basis:
12
- --------------------------------------------------------------------------------------------------------------------
Comparative Statement of Earnings Year Ended August 31, 1998
- --------------------------------------------------------------------------------------------------------------------
(In Thousands, except per share amounts)
Fourth APW
APW ZERO Non- Quarter Excluding
As recurring One-time One-time
Reported Items Charges Items
--------------- -------------- ------------- ----------------
Net sales $ 1,230,689 $ - $ - $ 1,230,689
Cost of products sold 835,716 - (25,785) 809,931
--------------- -------------- ------------ ----------------
Gross Profit 394,973 - 25,785 420,758
Engineering, selling and administrative expense 269,227 - (9,019) 260,208
Amortization of intangible assets 20,353 - (5,062) 15,291
Provision for estimated loss on sale of subsidiary 4,500 (4,500) - -
Restructuring charges 20,298 - (20,298) -
Merger related expenses 9,276 - (9,276) -
--------------- -------------- ------------ ----------------
Operating Earnings 71,319 4,500 69,440 145,259
Other Expense (Income):
Net financing costs 28,531 - - 28,531
Other - net (14,597) 11,524 - (3,073)
--------------- -------------- ------------ ----------------
Earnings Before Income Tax Expense 57,385 (7,024) 69,440 119,801
Income Tax Expense 30,698 (2,438) 16,803 45,063
--------------- -------------- ------------ ----------------
Net Earnings $ 26,687 $ (4,586) $ 52,637 $ 74,738
=============== ============== ============= ================
Basic Earnings Per Share $ 0.70 $ (0.12) $ 1.36 $ 1.94
=============== ============== ============= ================
Weighted Average Common
Shares Outstanding (000's) 38,380 38,380 38,380 38,380
Diluted Earnings Per Share $ 0.66 $ (0.11) $ 1.31 $ 1.86
=============== ============== ============= ================
Weighted Average Common and
Equivalent Shares Outstanding (000's) 40,174 40,174 40,174 40,174
- --------------------------------------------------------------------------------------------------------------------
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to the fiscal 1998
presentation, including, but not limited to, the reclassification of financial
data previously reported in Tools and Supplies into Engineered Solutions.
13
Net Sales
Net sales increased 37% during fiscal 1998 to $1,230.7 from $897.8 in fiscal
1997. The incremental effect of acquisitions was approximately $256.0 in fiscal
1998. Price changes have not had a significant impact on the comparability of
net sales during the last three years. Excluding the unfavorable impact on
translated sales from the stronger US Dollar, sales increased approximately 39%
over 1997.
- -------------------------------------------------------------------------------------------------
Sales Percentage Change from Prior Year
- -------------------------------------------------------------------------------------------------
Segment Sales 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Enclosure Products and Systems $ 482.4 $296.2 $190.1 63% 56% 25%
Engineered Solutions 432.0 312.3 308.9 38 1 4
Tools and Supplies 316.3 289.3 278.5 9 4 9
- -------------------------------------------------------------------------------------------------
Totals $1,230.7 $897.8 $777.5 37% 15% 10%
- -------------------------------------------------------------------------------------------------
Enclosure Products and Systems increased sales 63% over 1997. The acquisitions
of VERO, Brown, Premier, PTI, AA and PMP in 1998 as well as Everest, CFAB and
Hormann in 1997 resulted in additional sales of $133.5. The continued expansion
of end user markets in the US and Europe also contributed to the growth.
Excluding acquisitions net of the negative impact of the stronger US Dollar,
Enclosure Products and Systems sales in 1998 grew 22%. In 1997, sales grew 56%
due to the effect of acquisitions, continued demand for its products, the
expansion of its direct sales force and geographic expansion in Europe and Asia.
Sales for the Engineered Solutions segment improved 38% compared to 1997. The
increase was the result of the acquisition of Versa/Tek in October 1997, which
contributed $91.1, along with growth primarily in European truck and automotive
markets. The strengthening US Dollar negatively impacted sales by 2% in 1998.
Sales increased 1% in 1997 over 1996, primarily the result of increased sales in
the thermal management market.
Sales in the Tools and Supplies segment increased 9% in 1998 to $316.3 from
$289.3 in 1997. The increase was primarily the result of $31.4 of increased
sales from acquisitions offset by declining Asian sales and the effect of the
strengthening US Dollar. The impact of the stronger US Dollar negatively
impacted reported sales by approximately 3% for the year. In 1997, sales for
Tools and Supplies increased 4% over 1996. The increase for 1997 was attributed
to approximately $11.7 from acquisitions net of product line dispositions. The
impact of the stronger US Dollar in 1997 over 1996 negatively impacted sales by
approximately 5%.
- -------------------------------------------------------------------------------------------------
Sales Percentage Change from Prior Year
- -------------------------------------------------------------------------------------------------
Geographic Sales 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------
North America $ 895.3 $653.3 $547.6 37% 20% 12%
Europe 284.2 181.0 163.2 57 9 9
Japan and Asia Pacific 37.6 52.0 56.8 (28) (8) 3
Latin America 13.6 11.5 9.9 18 16 (18)
- -------------------------------------------------------------------------------------------------
Totals $1,230.7 $897.8 $777.5 37% 15% 10%
- -------------------------------------------------------------------------------------------------
The Company does business in many different geographic regions and is subject to
various economic conditions. The improved economic environment in North America
and the effect of acquisitions combined to increase sales 37% in this region
over 1997. Sales increased 20% in 1997 over 1996 primarily due to the improving
US economy and the acquisitions made in the third quarter of 1996 and the first
quarter of 1997.
Sales in Europe grew 57% in 1998 compared to 1997. The combination of the VERO
acquisition, which contributed $53.9, along with strong internal growth
accounted for the 1998 growth. Sales grew 9% in 1997 compared to 1996, primarily
the result of two acquisitions. Sales in Japan and Asia Pacific fell 28% in 1998
due to the general economic down-turn in this region. In 1997, sales decreased
8% in Japan and Asia Pacific, 6% of which was attributable to foreign currency
fluctuations. The remaining decrease was caused by weakening economic
conditions. The sales growth generated in Latin America during 1998 and 1997 was
the result of geographic expansion in this region. As the Company's recent
acquisition strategy has focused on North America and Europe, sales from Japan,
Asia Pacific and Latin America are expected to become a smaller percentage of
the Company's total sales in 1999.
14
Gross Profit
Gross profit increased 21% in 1998 to $395.0 compared to $327.2 in 1997 and
$290.5 in 1996. The increases in gross profit resulted primarily from increased
sales in 1998 and 1997.
- ----------------------------------------------------------------------------------------------------------------
Gross Profit Percentages By Segment 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Enclosure Products and Systems 32.1% 39.4% 42.4%
Engineered Solutions 31.8 32.5 31.4
Tools and Supplies 32.5 37.6 40.5
- ----------------------------------------------------------------------------------------------------------------
Totals 32.1% 36.4% 37.4%
- ----------------------------------------------------------------------------------------------------------------
The one-time charges that were recorded in the fourth quarter of fiscal 1998
negatively impacted gross profit by $25.8. These charges primarily relate to a
decision to discontinue certain product lines and SKUs, principally within Tools
and Supplies. To a lesser extent, charges were incurred to conform ZERO's
product lines to the Company's. Excluding the impact of these charges, the gross
profit percentages by segment would have been:
- ----------------------------------------------------------------------------------------------------------------
Gross Profit Percentages By Segment
(excluding one-time charges) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Enclosure Products and Systems 33.8% 39.4% 42.4%
Engineered Solutions 32.5 32.5 31.4
Tools and Supplies 37.1 37.6 40.5
- ----------------------------------------------------------------------------------------------------------------
Totals 34.2% 36.4% 37.4%
- ----------------------------------------------------------------------------------------------------------------
The following discussion addresses the gross profit percentages by segment
excluding the effect of the one-time charges discussed above. The overall gross
profit percentage for the Company is primarily influenced by the relative sales
mix between Enclosure Products and Systems, Engineered Solutions and Tools and
Supplies. Engineered Solutions gross profit percentages are lower than either
Enclosure Products and Systems or Tools and Supplies because a much higher
proportion of its sales are made to OEM customers, which typically generate
lower margins than non-OEM customers. The gross profit percentage in Engineered
Solutions increased in 1997 versus 1996 as a result of efforts to reduce costs
associated with manufacturing. Tools and Supplies gross profit percentage
remained relatively flat in 1998 compared to 1997, however, the decline in 1997
compared to 1996 was primarily due to $2.1 of non-recurring charges recorded in
1997 and competitive pricing pressures. Since 1996, gross profit percentages in
Enclosure Products and Systems have been declining. This is the result of the
effect of the enclosure related acquisitions that took place during 1998 and
1997. These enclosures are sold primarily to OEM customers and carry a lower
gross profit margin. With the recent acquisition of Rubicon and the Company's
continued focus on OEM customers, the gross profit percentage within Enclosure
Products and Systems is expected to moderately decline in the future. However,
as discussed below, these enclosure businesses operate with lower selling,
administrative and engineering expenses. The overall gross profit margin of the
Company will vary depending on the levels of OEM sales within Engineered
Solutions and Enclosure Products and Systems.
Operating Expenses
Operating expenses increased $98.1 in 1998, of which one-time charges
represented $48.2. These one-time charges related to costs associated with the
ZERO merger, goodwill impairment on two APW business units, and restructuring
and downsizing efforts in all three business segments and a $4.5 write-down to
reduce a ZERO subsidiary to its estimated realizable value. To a lesser extent,
charges were incurred to reflect changes in ZERO accounting estimates.
Excluding the one-time charges, operating expenses increased 22% and 9% in 1998
and 1997, respectively. During the corresponding periods, sales increased 37%
and 15%, respectively. The majority of the increase since 1996 relates to
variable selling expenses and increased amortization of goodwill associated with
recent acquisitions.
In addition to variable selling expenses, total operating costs have increased
as a result of acquisitions, product development programs and expenditures for
geographic expansion into emerging markets. Approximately $40.8 of the increase
in fiscal 1998 was attributable to businesses acquired since 1997.
15
Overall, the lower corporate expenses as a percent of sales are attributed to
the effects of the lower operating cost enclosure businesses and the Company's
goal to continually identify ways to be more cost efficient and have allowed the
Company to reduce operating costs as a percent of sales. Excluding 1998
restructuring and other one-time items, operating costs as a percent of sales
were 22%, 25%, and 27% in 1998, 1997 and 1996, respectively.
Other Expense (Income)
- --------------------------------------------------------------------------------------------------------------------
Other Expense (Income) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Net financing costs $ 28.5 $ 16.2 $ 7.9
Other - net (14.6) (3.7) (1.3)
- --------------------------------------------------------------------------------------------------------------------
The trend of increased net financing costs over the last three years is the
result of increased debt levels following the Company's acquisitions during this
period. For further information, see "Liquidity and Capital Resources" below.
"Other - net" includes foreign exchange gains and losses as well as
miscellaneous other income and expenses. The Company recognized gains on the
sale of two properties in 1998 totaling $11.6 and life insurance proceeds of
$1.7. Additionally, in 1998 and 1997, the US Dollar strengthened against most
other major currencies and the Company realized foreign exchange gains of $0.7
and $1.3, respectively, due to transactions denominated in currencies outside
of the functional currencies of certain of its foreign units.
Income Tax Expense
The Company's effective income tax rate was 53.5%, 35.1% and 34.5% in 1998, 1997
and 1996, respectively. The rate for 1998 is largely impacted by the current
non-deductibility of the one-time charges recorded in the fourth quarter.
Excluding the one-time items, the 1998 effective income tax rate was 37.6%. The
non-deductibility of goodwill on many of the Company's acquisitions over the
last three years has led to the gradual increase in the Company's effective tax
rate. With the Rubicon acquisition subsequent to year end, this trend is
expected to continue in 1999.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for the reporting and display of
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from nonowner sources. Examples of items to be included in comprehensive income,
which are excluded from net income, include foreign currency translation
adjustments, unrealized gain(loss) on available-for-sale securities, and mark-
to-market adjustments for hedging activities. The disclosures required by this
Statement will be made beginning with the Company's first quarter of fiscal
1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
the way companies report information about operating segments in financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company is in the
process of reassessing its current business segment reporting to determine if
changes in reporting will be required in adopting this new standard, but does
not expect that adoption of this Statement will have a significant impact on the
Company's disclosures. The disclosures required by this Statement will be
adopted in the Company's 1999 annual report and subsequent interim periods.
During February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises disclosures
about pension and other postretirement benefit plans. This Statement is
effective for the Company's 1999 fiscal year financial statements and
restatement of disclosures for earlier years provided for comparative purposes
will be required unless the information is not readily available. The Company is
currently evaluating the extent to which its financial statement disclosures
will be affected by SFAS No. 132.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which
16
specifies the accounting treatment provided to computer software costs depending
upon the type of costs incurred. This Statement is effective for the Company's
fiscal year 2000 financial statements and restatement of prior years will not be
permitted. The Company does not believe that the adoption of this Statement will
have a significant impact on its financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities," which requires costs of start-up activities and organization costs
to be expensed as incurred. This Statement is effective for the Company's fiscal
year 2000 financial statements and initial application will be reported as a
cumulative effect of a change in accounting principle. The Company is currently
evaluating the extent to which its financial statements will be affected by SOP
98-5.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires that an entity recognize
derivative instruments, including certain derivative instruments embedded in
other contracts, as either assets or liabilities and measure those instruments
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. This Statement is effective for the
Company's fiscal year 2000 first quarter financial statements and restatement of
prior years will not be permitted. The Company is currently evaluating the
extent to which its financial statements will be affected by SFAS No. 133, which
is not expected to have a material effect on the Company based on its current
derivative and hedging activities.
Cash Flow
In order to minimize interest expense, the Company intentionally maintains low
cash balances and uses available cash to reduce short-term bank borrowings. Cash
and cash equivalents decreased $25.6 in fiscal 1998 as compared to a $14.0
increase in fiscal 1997. Outstanding debt totaled $512.6 , $174.6 and $144.2 at
August 31 of each of fiscal 1998, 1997 and 1996, respectively. Increased net
borrowings in fiscal 1998 reflect incremental borrowings to fund acquisitions.
Net cash provided by operations, after considering non-cash items and changes in
operating assets and liabilities, totaled $129.7 in fiscal 1998 as compared to
$84.0 and $50.1 in fiscal 1997 and 1996, respectively. The increase in fiscal
1998 resulted primarily from a higher level of earnings before non-cash
depreciation, amortization and restructuring expenses combined with a $64.1
reduction in working capital. The increase in cash provided by operations in
fiscal 1997 over fiscal 1996 was a result of increased operating earnings before
non-cash expenses.
Net cash used for investing activities was $452.0 in fiscal 1998 versus $104.3
and $50.1 in fiscal 1997 and 1996, respectively. Fiscal 1998 included uses of
$426.0 to fund acquisitions and $56.8 to fund capital expenditures, partially
offset by proceeds of $30.8 from the sale of assets and product lines. Investing
activities in fiscal 1997 included $77.0 for acquisitions and $33.5 for capital
expenditures. Fiscal 1996 uses for investing included $45.7 for acquisitions and
a $31.4 use for capital expenditures, partially offset by $26.6 in proceeds from
the sale of investments, product lines and assets.
Financing activities provided net cash of $297.6 , $35.8 and a net use of $10.0
in fiscal 1998, 1997 and 1996, respectively. Net borrowings in fiscal years 1998
and 1997 primarily reflect increased debt incurred to fund acquisitions.
Additionally, fiscal 1998 included $39.7 in proceeds from the financing of trade
receivables, partially offset by a use of $17.8 of cash to fund the obligations
of two ZERO employee benefit programs as a result of the Company's merger with
ZERO. The $10.0 net use of cash for financing activities in fiscal 1996 resulted
primarily in the repurchase by ZERO of $71.9 of outstanding ZERO common shares,
partially offset by increased net borrowings and a $13.3 increase in accounts
receivable financed.
Liquidity and Capital Resources
Outstanding debt at August 31, 1998 totaled $512.6, an increase of $338.0 since
the beginning of the year. The increase in debt is a direct result of the
business acquisitions that were made during 1998. End of year debt to total
capital was 58% in 1998 compared to 35% in 1997.
On June 18, 1998, the Company and Enerpac B.V., a Netherlands subsidiary of the
Company, entered into a Multicurrency Credit Agreement (the "Credit Agreement"),
providing for a $700.0, 5-year revolving credit facility
17
(the "Facility") in order to provide the necessary funds to Applied Power
Limited to acquire all of the VERO Group plc shares. In conjunction with the
closing of the Facility, the Company terminated its prior $350.0, 5-year
revolving credit facility (the "Prior Facility"), and used certain funds
received under the Facility to repay borrowings under the Prior Facility. The
Facility was used to finance the remaining expenses of the VERO Group plc
acquisition, provide for working capital, capital expenditures and for other
general corporate purposes. At August 31, 1998, the Company had borrowings
denominated in the US Dollar and the Japanese Yen. The Credit Agreement contains
customary restrictions concerning investments, liens on assets, sales of assets,
maximum levels of debt and minimum levels of shareholders' equity. In addition,
the agreement requires the Company to maintain certain financial ratios. As of
August 31, 1998, the Company was in compliance with all debt covenants. For
additional information, see Note I - "Long-term Debt" in Notes to Consolidated
Financial Statements and "Subsequent Events" below.
To reduce risk of interest rate increases, the Company has entered into interest
rate swap agreements which effectively convert $239.3 of the Company's variable
rate debt to a weighted average fixed rate of 5.95% at August 31, 1998. The swap
agreements expire on varying dates through 2005.
On August 28, 1998, the Company amended its accounts receivable financing
facility by increasing the amount of multi-currency accounts receivable
financing from $80.0 to $90.0. All other terms of the agreement remain the same.
An incremental $39.7 of receivables was financed in 1998, bringing the total
balance financed to $89.7 at August 31, 1998. Proceeds were used to reduce debt.
For additional information, see Note D - "Accounts Receivable Financing" in
Notes to Consolidated Financial Statements.
The Company does not purchase or hold any derivative financial instruments for
trading purposes.
The following table summarizes the Company's total capitalization over the last
three years:
- ------------------------------------------------------------------------------------------------------------------
Dollars Percentage of Total Capitalization
- ------------------------------------------------------------------------------------------------------------------
Total Capitalization 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Total Debt $ 512.6 $ 174.6 $ 144.2 58 % 35 % 35 %
Shareholders' Equity 341.9 305.4 253.3 39 62 61
Deferred Income Taxes 23.1 14.6 15.4 3 3 4
- ------------------------------------------------------------------------------------------------------------------
Totals $ 877.6 $ 494.6 $ 412.9 100 % 100 % 100 %
- ------------------------------------------------------------------------------------------------------------------
In order to minimize interest expense, the Company intentionally maintains low
cash balances and uses available cash to reduce short-term bank borrowings.
Funds available under unused non-committed lines and the $700.0 multi-currency
credit agreement totaled $34.1 and $269.0, respectively, as of August 31, 1998.
The Company believes that such availability, plus funds generated from
operations, will be adequate to fund operating activities, including capital
expenditures and working capital, for the next fiscal year.
Year 2000 Considerations
As is the case for most companies, the Year 2000 computer issue creates a risk
for the Company. If systems do not correctly recognize date information when the
year changes to 2000, there could be a material adverse impact on the Company's
operations. However, the impact cannot be quantified at this time.
The Company is taking actions intended to ensure that its computer systems are
capable of processing periods for the Year 2000 and beyond. The Company has
developed and has clearly articulated a written policy that Year 2000 readiness
is an important responsibility for all its business leaders. In addition, the
Company is aggressively pursuing a comprehensive set of programs intended to
reduce the risk of disruptions due to the Year 2000 problem. Issues addressed in
the context of these efforts include, but are not limited to, creating
management awareness regarding the Year 2000 problem and the need to become Year
2000 ready, mitigating known Year 2000 readiness problems, communicating the
Company's Year 2000 readiness commitment to its customers, conducting a company-
wide Year 2000 readiness check, the official designation of Year 2000 readiness
contacts within each business unit, comprehensive testing and compliance
certification for all of the Company's mission-critical business and
manufacturing control systems, proactive Year 2000 compliance certification of
key suppliers, and the development of contingency plans to deal with emergent
Year 2000 situations. The Company expects to complete the majority of its
efforts in this area by the end of its fiscal 1999. This should leave adequate
time to perform additional testing and make any further modifications that are
deemed necessary.
18
The Company is continuing an ongoing process of assessing potential Year 2000
risks and uncertainties. However, it is currently premature to define the most
reasonably likely worst case scenarios related to the Year 2000 problem. The
Company's Year 2000 readiness initiatives are intended to address its critical
business functions, and the Company currently expects to successfully mitigate
its controllable internal year 2000 issues. However, the Company also relies
upon third parties whose failure to identify and remediate their Year 2000
problems could have a material impact on the Company's operations and financial
condition. The Company's Year 2000 readiness efforts will include attempting to
identify, assess and mitigate third party risks where possible, but the
potential impact and related costs and consequences of third party failures have
not yet been identified.
Based on the current status of the Company's compliance and readiness efforts,
the costs associated with identified Year 2000 issues are not expected to have a
material effect on the results of operations or financial condition of the
Company. Most of the Company's business units have installed or are in the
process of installing new business management systems which go beyond just Year
2000 compliance. The costs of purchased software are capitalized. Some
businesses have chosen to upgrade existing systems to be compliant. These costs
are being expensed as incurred. Additionally, the Company is developing a
contingency plan to deal with any issues that are not resolved on a timely
basis. The Company historically has not quantified the costs of Year 2000
compliance and remediation, but believes costs incurred to date were immaterial.
The Company estimates remaining costs to range between $3.0 and $5.0, which is
expected to be funded with cash flow from operations.
At this time, the Company does not expect the reasonably foreseeable
consequences of the Year 2000 problem to have material adverse effects on the
Company's business, operations or financial condition. However, the Company
cannot be certain that it will not suffer business interruptions, either due to
its own Year 2000 problems or those of its customers or suppliers whose Year
2000 problems may make it difficult or impossible to fulfill their commitments
to the Company. Furthermore, the Year 2000 problem has many elements and
potential consequences, some of which may not be reasonably foreseeable, and
there can be no assurances that every material Year 2000 problem will be
identified and addressed or that unforeseen consequences will not arise and
possibly have a material adverse effect on the Company. Unanticipated factors
while implementing the changes necessary to mitigate Year 2000 problems,
including, but not limited to, the ability to locate and correct all relevant
codes in computer and imbedded systems, or the failure of critical third parties
to communicate and mitigate their Year 2000 problems could result in
unanticipated adverse impacts on the business activities or operations of the
Company.
European Economic Monetary Union
On January 1, 1999, eleven of the European Union countries (including eight
countries where APW operations are located) are scheduled to adopt the Euro as
their single currency, and there will be fixed conversion rates between their
existing currencies ("legacy currencies") and the Euro. The Euro will then trade
on currency exchanges and be available for noncash transactions. Following the
introduction of the Euro, the legacy currencies will remain legal tender in the
participating countries during the transition period from January 1, 1999
through January 1, 2002. Beginning on January 1, 2002, the European Central Bank
will issue Euro-denominated bills and coins for use in cash transactions. On or
before July 1, 2002, the participating countries will withdraw all legacy bills
and coins and use the Euro as their legal currency.
The Company's various operating units located in Europe which are affected by
the Euro conversion intend to keep their books in their respective legacy
currency through a portion of the three year introductory period. At this time,
the Company does not expect the reasonably foreseeable consequences of the Euro
conversion to have material adverse effects on the Company's business,
operations or financial condition.
Inflation
No meaningful measures of inflation are available because the Company has a
significant number of small operations which operate in countries with diverse
rates of inflation and currency rate movements.
19
Outlook
The Company expects its trend of increasing sales and earnings per share to
continue into fiscal 1999, assuming no significant downturn in the economy in
North America or Western Europe. Net sales are expected to be approximately
$1,900.0 with increased sales at all three of the Company's business segments.
The strength of its core markets and the incremental effect of recent
acquisitions will be the driving forces of the growth. Operating profit is
expected to improve as a result of the increased sales and the streamlining and
cost reduction efforts initiated in the fourth quarter of 1998. The improved
operating profit is expected to be partially offset by higher interest expense
and a higher effective income tax rate, generating record earnings per share.
Risk Factors That May Affect Future Results
Certain statements in this Form 10-K, including the above section entitled
"Outlook," as well as statements in other Company communications, which are not
historical facts, are forward looking statements that involve risks and
uncertainties. The terms "anticipate", "believe", "estimate", "expect",
"objective", "plan", "project" and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements are subject to
inherent risks and uncertainties that may cause actual results or events to
differ materially from those contemplated by such forward-looking statements. In
addition to the assumptions and other factors referred to specifically in
connection with such statements, factors that may cause actual results or events
to differ materially from those contemplated by such forward-looking statements
include, without limitation, general economic conditions and market conditions
in the industrial production, trucking, construction, aerospace, automotive,
recreational vehicle, computer, semiconductor, telecommunication, electronic and
defense industries in North America, Europe and, to a lesser extent, Asia,
market acceptance of existing and new products, successful integration of
acquisitions, competitive pricing, foreign currency risk, interest rate risk,
unforeseen costs or consequences of Year 2000 issues and other factors that may
be referred to in the Company's reports filed with the Securities and Exchange
Commission from time to time.
Subsequent Events
On September 29, 1998, the Company, through its wholly-owned subsidiary, APW
Enclosure Systems Limited, accepted for payment all shares of Rubicon Group plc
("Rubicon") common stock which had been tendered pursuant to the APW Enclosure
Systems Limited tender offer for all outstanding shares of common stock at 2.35
pounds sterling per share and all outstanding shares of cumulative preferred
stock at 0.50 pounds sterling per share, which constituted control, and
continued with steps to acquire the remaining outstanding shares. Rubicon is a
leading provider of electronic manufacturing services and engineered magnetic
solutions to major OEMs in the information technology and telecommunication
industries. Consideration for the transaction totaled approximately $365.0,
including related fees and expenses. APW Enclosure Systems Limited obtained all
of the funds it expended from the Company. To provide the necessary funds, the
Company and Enerpac B.V., a Netherlands subsidiary of the Company, as Borrowers,
entered into a Multicurrency Credit Agreement, dated as of October 14, 1998,
providing for an $850.0, 5-year revolving credit facility (the "New Facility").
In conjunction with the closing of the New Facility, the Company terminated its
prior $700.0, 5-year revolving credit facility (the "Facility"), and used
certain funds received under the New Facility to repay borrowings under the
Facility.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign exchange and
interest rates and, to a lesser extent, commodities. To reduce such risks, the
Company selectively uses financial instruments. All hedging transactions are
authorized and executed pursuant to clearly defined policies and procedures,
which strictly prohibit the use of financial instruments for trading purposes.
A discussion of the Company's accounting policies for derivative financial
instruments is included in Note A - "Summary of Significant Accounting Policies"
in Notes to Consolidated Financial Statements, and further disclosure relating
to financial instruments is included in Note I - "Long-term Debt."
Currency Risk - The Company has significant international operations. In most
instances, the Company's products are produced at manufacturing facilities
located near the customer. As a result, significant volumes of finished goods
are manufactured in countries for sale into those markets. For goods purchased
from other Company affiliates, the Company denominates the transaction in the
functional currency of the producing operation.
20
The Company has adopted the following guidelines to manage its foreign exchange
exposures:
(i) increase the predictability of costs associated with goods whose purchase
price is not denominated in the functional currency of the buyer;
(ii) minimize the cost of hedging through the use of naturally offsetting
positions (borrowing in local currency), netting, pooling; and
(iii) where possible, sell product in the functional currency of the producing
operation.
The Company's identifiable foreign exchange exposures result primarily from the
anticipated purchase of product from affiliates and third-party suppliers along
with the repayment of intercompany loans with foreign subsidiaries denominated
in foreign currencies. The Company identifies naturally occurring offsetting
positions and then purchases hedging instruments to protect anticipated
exposures. The Company's financial position is not materially sensitive to
fluctuations in exchange rates as any gains or losses on foreign currency
exposures are generally offset by gains and losses on underlying payables,
receivables and net investments in foreign subsidiaries.
Interest Rate Risk - The Company enters into interest rate swaps to stabilize
financing costs by minimizing the effect of potential interest rate increases on
floating-rate debt in a rising interest rate environment. Under these
agreements, the Company contracts with a counter-party to exchange the
difference between a fixed rate and a floating rate applied to the notional
amount of the swap. The Company's existing swap contracts range between two and
seven years in duration. The differential to be paid or received on interest
rate swap agreements is accrued as interest rates change and is recognized in
net income as an adjustment to interest expense. Credit and market risk is
minimized through diversification among counter-parties with high credit
ratings.
Commodity Prices - The Company is exposed to fluctuation in market prices for
steel. Therefore, the Company has established a program for centralized
negotiation of steel prices. This program allows the Company to take advantage
of economies of scale as well as to cap pricing. All business units are able to
purchase steel under this arrangement. In general, the contracts lock steel
pricing for 18 months and enable the Company to pay less if market prices fall.
See Note I - "Long-term Debt" in Notes to Consolidated Financial Statements for
additional information concerning derivative financial instruments.
21
Item 8. Financial Statements and Supplementary Data
Quarterly financial data for 1998 and 1997 is as follows:
(In Millions, except per share amounts)
1998
-------------------------------------------------
FIRST/(1)/ SECOND THIRD/(2)/ FOURTH/(3)/
---------- ------- ---------- -----------
Net Sales $ 275.4 $ 279.4 $ 303.9 $ 372.0
Gross Profit 95.7 96.1 106.4 96.8
Net Earnings 19.1 16.5 22.4 (31.3)
======= ======= ======= =======
Basic Earnings Per Share $ 0.49 $ 0.43 $ 0.58 $ (0.81)
======= ======= ======= =======
Diluted Earnings Per Share $ 0.48 $ 0.41 $ 0.55 $ (0.78)
======= ======= ======= =======
1997
----------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
Net Sales $ 207.8 $ 210.6 $ 232.4 $ 247.0
Gross Profit 79.4 77.8 83.8 86.2
Net Earnings 13.3 13.2 15.3 16.1
======= ======= ======= =======
Basic Earnings Per Share $ 0.36 $ 0.35 $ 0.40 $ 0.42
======= ======= ======= =======
Diluted Earnings Per Share $ 0.34 $ 0.34 $ 0.39 $ 0.41
======= ======= ======= =======
(1) Includes a $1.7 gain, after tax, on life insurance proceeds, or $0.04 per
diluted share.
(2) Includes a $2.9 net gain, after tax, on the sale of a facility and the
writedown of a European subsidiary to its estimated realizable value, or
$0.08 per diluted share.
(3) Includes restructuring and other one-time charges of $52.6, after tax, or
$1.31 per diluted share.
The Consolidated Financial Statements are included on pages 29 to 51 and are
incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
A change in the Company's independent public accountants was previously reported
in a Current Report on Form 8-K dated November 4, 1997 and filed on November 10,
1997. The information reported in the Form 8-K is also contained in the 1999
Annual Meeting Proxy Statement (identified in Item 10) under the caption "Other
Information Independent Public Accountants," and is set forth below:
On November 3, 1997, the Audit Committee of the Board of Directors
recommended the replacement of Deloitte & Touche LLP with Coopers & Lybrand
L.L.P. (now PricewaterhouseCoopers LLP) as the Company's independent public
accountants for the fiscal year ended August 31, 1998. On November 4, 1997,
the Board of Directors of the Company accepted and approved the Audit
Committee's recommendation. On the same day, Deloitte & Touche LLP was
notified of its dismissal and PricewaterhouseCoopers LLP was notified of
its engagement. Through November 4, 1997, there were no disagreements with
Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Deloitte & Touche
LLP, would have caused that firm to make reference to the subject matter of
the disagreement in connection with its report. Deloitte & Touche LLP's
report on the Company's financial statements for the previous two fiscal
years contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting
principles.
22
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from the
"Election of Directors" and "Other Information -- Section 16(a) Beneficial
Ownership Reporting Compliance" sections of the Company's Proxy Statement for
its Annual Meeting of Shareholders to be held on January 8, 1999 (the "1999
Annual Meeting Proxy Statement"). See also "Executive Officers of the
Registrant" in Part I hereof.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the
"Board Meetings, Committees and Director Compensation" section and the
"Executive Compensation" section (other than the subsections thereof entitled
"Report of the Compensation Committee of the Board of Directors on Executive
Compensation" and "Performance Graph") of the 1999 Annual Meeting Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
"Certain Beneficial Owners" and "Election of Directors" sections of the 1999
Annual Meeting Proxy Statement.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Consolidated Financial Statements
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" on page 25, the Report of Independent
Accountants and Independent Auditors' Reports on pages 26 to 28
and the Consolidated Financial Statements on pages 29 to 51,
all of which are incorporated herein by reference.
2. Financial Statement Schedules
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" on page 25, the Report of Independent
Accountants on Financial Statement Schedule on page 52 and the
Financial Statement Schedule on page 53, all of which are
incorporated herein by reference.
3. Exhibits
See "Index to Exhibits" on pages 55 to 59, which is
incorporated herein by reference.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the last quarter of
fiscal 1998:
On June 22, 1998, the Company filed a Current Report on Form 8-K dated
June 5, 1998 reporting under Item 2 that the Company had accepted for
payment all the VERO Group plc shares which had been tendered pursuant
to the Company's tender offer to acquire all outstanding shares at a
cash price of 192 pence per share. The required Item 7 VERO financial
statements and pro forma financial information were also filed. The
Company filed an amendment to the Current Report on Form 8-K/A on July
1, 1998.
On August 12, 1998, the Company filed a Current Report on Form 8-K
dated July 31, 1998 reporting under Item 2 the merger of ZERO
Corporation, a Delaware corporation ("ZERO"), with a wholly-owned
subsidiary of the Company. The required Item 7 ZERO financial
statements and pro forma financial information were also filed.
On August 12, 1998, the Company filed a Current Report on Form 8-K
dated August 12, 1998 for the purpose of updating and superseding
(under Item 5) the description of the Class A Common Stock of the
Company contained in the Company's Registration Statement on Form 8-A
filed on August 11, 1987, as previously updated by the Company's
Current Report on Form 8-K dated January 28, 1991.
Subsequent to the end of the fiscal year, on October 14, 1998, the Company filed
a Current Report on Form 8-K dated September 29, 1998 reporting under Item 2
that the Company had accepted for payment all the Rubicon Group plc shares
tendered pursuant to the Company's tender offer to acquire all outstanding
shares, and indicating that the required Item 7 Rubicon financial statements and
pro forma financial information would be filed as an amendment to such report.
24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
-------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.............................................. 26
Independent Auditors' Reports.................................................. 27 - 28
Consolidated Statement of Earnings
For the years ended August 31, 1998, 1997 and 1996....................... 29
Consolidated Balance Sheet
As of August 31, 1998 and 1997........................................... 30
Consolidated Statement of Shareholders' Equity
For the years ended August 31, 1998, 1997 and 1996....................... 31
Consolidated Statement of Cash Flows
For the years ended August 31, 1998, 1997 and 1996....................... 32
Notes to Consolidated Financial Statements..................................... 33 - 51
INDEX TO FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants on Financial Statement Schedule.............. 52
Schedule II - Valuation and Qualifying Accounts................................ 53
All other schedules are omitted because they are not applicable, not required or
because the required information is included in the consolidated financial
statements or notes thereto.
25
Report of Independent Accountants
To the Shareholders and Directors of Applied Power Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Applied Power Inc.
and its subsidiaries at August 31, 1998, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles. 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 audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The consolidated financial statements of Applied Power Inc. for the years ended
August 31, 1997 and 1996, prior to restatement for pooling of interests, and the
separate financial statements of ZERO Corporation included in the 1997 and 1996
restated consolidated financial statements, for the years ended March 31, 1997
and 1996, were audited and reported on separately by other independent
accountants. We also audited the combination of the accompanying consolidated
balance sheet as of August 31, 1997, and the related consolidated statements of
earnings, shareholders' equity and cash flows for each of the two years in the
period then ended, after restatement for the 1998 pooling of interests; in our
opinion, such consolidated statements have been properly combined on the basis
described in Note A of Notes to Consolidated Financial Statements.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
September 30, 1998
26
Independent Auditors' Report
To the Shareholders and Directors of Applied Power Inc.:
We have audited the consolidated balance sheet of Applied Power Inc. and
subsidiaries as of August 31, 1997 and the related consolidated statements of
earnings, shareholders' equity, and cash flows for each of the two years in the
period ended August 31, 1997 (none of which are presented herein). Our audits
also included the consolidated financial statement schedule for the two years in
the period ended August 31, 1997 (which is not presented herein) listed in the
Index at Item 14. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Applied Power Inc. and subsidiaries
at August 31, 1997, and the results of their operations and their cash flows for
each of the two years in the period ended August 31, 1997 in conformity with
generally accepted accounting principles. Also, 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
Milwaukee, Wisconsin
September 25, 1997
(October 16, 1997 as to Note O)
27
Independent Auditors' Report
To the Stockholders of ZERO Corporation:
We have audited the consolidated balance sheet of ZERO Corporation and its
subsidiaries as of March 31, 1997, and the related statements of consolidated
income, stockholders' equity, and cash flows for each of the two years in the
period ended March 31, 1997 (none of which are presented herein). Our audit also
included the consolidated financial statment schedule of the Company for each of
the two years in the period ended March 31, 1997 (which is not presented herein)
listed in the Index at Item 14. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ZERO Corporation and its
subsidiaries at March 31, 1997, and the results of their operations and their
cash flows for each of the two years in the period ended March 31, 1997 in
conformity with generally accepted accounting principles. Also 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
Los Angeles, California
May 11, 1998
28
APPLIED POWER INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in Thousands, except per share amounts)
Years ended August 31,
-------------------------------------------
1998 1997 1996
---------- -------- --------
Net sales $1,230,689 $897,758 $777,462
Cost of products sold 835,716 570,551 486,991
---------- -------- --------
Gross Profit 394,973 327,207 290,471
Engineering, selling and administrative expenses 269,227 217,522 201,333
Amortization of intangible assets 20,353 8,013 5,140
Provision for estimated loss on sale of subsidiary 4,500 - -
Restructuring charges 20,298 - -
Merger related expenses 9,276 - -
---------- -------- --------
Operating Earnings 71,319 101,672 83,998
Other Expense(Income):
Net financing costs 28,531 16,158 7,892
Other - net (14,597) (3,710) (1,308)
---------- -------- --------
Earnings Before Income Tax Expense 57,385 89,224 77,414
Income Tax Expense 30,698 31,299 26,735
---------- -------- --------
Net Earnings $ 26,687 $ 57,925 $ 50,679
========== ======== ========
Basic Earnings Per Share:
Earnings Per Share $ 0.70 $ 1.53 $ 1.26
========== ======== ========
Weighted Average Common Shares
Outstanding (000's) 38,380 37,880 40,318
========== ======== ========
Diluted Earnings Per Share:
Earnings Per Share $ 0.66 $ 1.47 $ 1.22
========== ======== ========
Weighted Average Common and Equivalent
Shares Outstanding (000's) 40,174 39,307 41,453
========== ======== ========
The accompanying notes are an integral part of these financial statements
29
APPLIED POWER INC.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, except per share amounts)
August 31,
-------------------------
1998 1997
---------- ---------
ASSETS
Current Assets
Cash and cash equivalents $ 6,349 $ 22,047
Accounts receivable, less allowances of $6,758 and $4,936, respectively 147,380 120,663
Inventories 164,786 150,771
Deferred income taxes 29,905 11,209
Prepaid expenses 16,144 12,564
---------- ---------
Total Current Assets 364,564 317,254
Property, Plant and Equipment
Property 6,249 5,063
Plant 74,411 71,982
Machinery and equipment 337,555 211,532
---------- ---------
418,215 288,577
Less: Accumulated depreciation (193,045) (153,622)
---------- ---------
Net Property, Plant and Equipment 225,170 134,955
Goodwill, net of accumulated amortization of $36,803 and $17,870, respectively 499,973 139,681
Other Intangibles, net of accumulated amortization of $19,338 and $14,690, respectively 42,896 30,723
Other Assets 42,119 26,933
---------- ---------
Total Assets $1,174,722 $ 649,546
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 91 $ 21,463
Trade accounts payable 127,470 63,456
Accrued compensation and benefits 45,457 31,315
Income taxes payable 12,898 7,093
Other current liabilities 74,792 25,955
---------- ---------
Total Current Liabilities 260,708 149,282
Long-term Debt 512,557 153,166
Deferred Income Taxes 23,065 14,596
Other Deferred Liabilities 36,510 27,141
Shareholders' Equity
Class A common stock, $0.20 par value per share, authorized 80,000,000 shares,
issued and outstanding 38,626,068 and 38,046,219 shares, respectively 7,725 2,927
Additional paid-in capital 5,817 1,595
Retained earnings 335,805 304,526
Cumulative translation adjustments (7,465) (3,687)
---------- ---------
Total Shareholders' Equity 341,882 305,361
---------- ---------
Total Liabilities and Shareholders' Equity $1,174,722 $ 649,546
========== =========
The accompanying notes are an integral part of these financial statements
30
APPLIED POWER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
Years Ended August 31, 1998, 1997 and 1996
-----------------------------------------------------
Class A Additional Cumulative
Common Paid-in Retained Translation
Stock Capital Earnings Adjustments
------- ---------- -------- -----------
Balance at September 1, 1995,
as previously reported $2,681 $ 28,328 $ 94,285 $ 6,392
Restatement for pooling of interests with
ZERO (as described in Note A ) 161 29,418 115,754 261
------ -------- -------- -------
Balance at September 1, 1995, as restated 2,842 57,746 210,039 6,653
Net earnings for the year - - 50,679 -
Cash dividends declared - - (8,681) -
Exercise of stock options and
issuance of treasury stock 26 4,762 (1,461) -
Issuance of stock in acquisition 25 3,905 - -
Tax benefit of option exercises - 568 - -
Stock repurchase - (71,871) - -
Currency translation adjustments - - - (1,946)
------ -------- -------- -------
Balance at August 31, 1996 2,893 (4,890) 250,576 4,707
Net earnings for the year - - 57,925 -
Cash dividends declared - - (3,114) -
Exercise of stock options and
issuance of treasury stock 34 5,656 (861) -
Tax benefit of option exercises - 1,052 - -
Stock repurchase - (293) - -
Currency translation adjustments and other - 70 - (8,394)
------ -------- -------- -------
Balance at August 31, 1997 2,927 1,595 304,526 (3,687)
Effect of ZERO excluded period
(as described in Note A) 1,948 (1,615) 7,156 (34)
Net earnings for the year - - 26,687 -
Cash dividends declared - - (2,564) -
Exercise of stock options 72 7,686 - -
Tax benefit of option exercises - 929 - -
Issuance of stock in 2-for-1 stock split 2,778 (2,778) - -
Currency translation adjustments - - - (3,744)
------ -------- -------- -------
Balance at August 31, 1998 $7,725 $ 5,817 $335,805 $(7,465)
====== ======== ======== =======
The accompanying notes are an integral part of these financial statements
31
APPLIED POWER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
Years ended August 31,
--------------------------------------------
1998 1997 1996
--------- --------- --------
Operating Activities
Net Earnings $ 26,687 $ 57,925 $ 50,679
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 47,570 31,112 27,233
Gain from sale of assets (11,647) (511) (46)
Provision for deferred income taxes (8,508) (583) (2,467)
Provision for loss on sale of subsidiary 4,500 - -
Restructuring and other one-time charges, net of tax benefit 52,637 - -
Changes in operating assets and liabilities, excluding
the effects of business acquisitions and disposals:
Accounts receivable (3,273) (11,193) (10,536)
Inventories 10,696 3,410 (16,071)
Prepaid expenses and other assets 486 (6,637) (3,423)
Trade accounts payable 11,736 6,501 2,254
Other liabilities (1,217) 4,010 2,517
--------- --------- --------
Net Cash Provided by Operating Activities 129,667 84,034 50,140
Investing Activities
Sales of short-term investments, net - 965 18,937
Proceeds on sale of property, plant and equipment 24,841 5,168 2,491
Additions to property, plant and equipment (56,827) (33,463) (31,391)
Business acquisitions (426,046) (76,951) (45,697)
Product line dispositions 6,000 - 5,181
Other 61 (63) 389
--------- --------- --------
Net Cash Used in Investing Activities (451,971) (104,344) (50,090)
Financing Activities
Proceeds from issuance of long-term debt 384,418 77,000 92,433
Principal payments on long-term debt (129,137) (50,205) (38,130)
Net borrowings on short-term credit facilities 16,158 6,691 3,484
Net commercial paper repayments - - (3,276)
Additional receivables financed 39,700 525 13,275
Pre-funding of trusts (17,801) - -
Stock repurchases - (293) (71,871)
Dividends paid on common stock (2,564) (3,114) (8,681)
Stock option exercises and other 6,855 5,156 2,768
--------- --------- --------
Net Cash Provided by(Used in) Financing Activities 297,629 35,760 (9,998)
Effect of Exchange Rate Changes on Cash (882) (1,422) (76)
--------- --------- --------
Net (Decrease)Increase in Cash and Cash Equivalents (25,557) 14,028 (10,024)
Cash and Cash Equivalents - Beginning of Year 22,047 8,019 18,043
Effect of the ZERO excluded period
(as described in Note A) 9,859 - -
--------- --------- --------
Cash and Cash Equivalents - End of Year $ 6,349 $ 22,047 $ 8,019
========= ========= ========
The accompanying notes are an integral part of these financial statements
32
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except per share amounts)
Note A - Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the
accounts of Applied Power Inc. and its subsidiaries ("Applied Power," "APW" or
the "Company"). The Company consolidates companies in which it owns or controls
more than fifty percent of the voting shares. The results of companies acquired
or disposed of during the fiscal year are included in the consolidated financial
statements from the effective date of acquisition or up to the date of disposal
except in the case of pooling of interests (see "Basis of Presentation" below).
All significant intercompany balances, transactions and profits have been
eliminated in consolidation.
Basis of Presentation: The consolidated financial statements have been prepared
in United States Dollars in accordance with generally accepted accounting
principles in the United States. As described more fully in Note B - "Merger and
Acquisitions," on July 31, 1998, ZERO Corporation, a Delaware corporation
("ZERO"), became a wholly-owned subsidiary of Applied Power through the merger
of STB Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Applied Power ("Acquisition"), with and into ZERO (the "Merger")
pursuant to an Agreement and Plan of Merger by and among Applied Power, ZERO and
Acquisition dated as of April 6, 1998 (the "Merger Agreement"). The consolidated
financial statements have been prepared following the pooling of interests
method of accounting for the Merger and therefore reflect the combined financial
position, operating results and cash flows of ZERO as if they had been combined
for all periods presented. In accordance with the pooling of interests method of
accounting, the fiscal 1996 beginning balances in the Consolidated Statement of
Shareholders' Equity have been restated to record the Merger with ZERO. Prior to
the Merger, ZERO had a March 31 fiscal year end. The Consolidated Balance Sheet,
Statements of Earnings, Shareholders' Equity and Cash Flows as of and for the
year ended August 31, 1998 reflect the combination of an August 31 year end
consolidated financial position, results of operations and cash flows for ZERO.
The Consolidated Balance Sheets, Statements of Earnings, Shareholders' Equity
and Cash Flows as of and for the years ended August 31, 1997 and 1996 reflect
the combination of the March 31 fiscal year end financial positions, results of
operations and cash flows of ZERO and the August 31 fiscal year end financial
positions, results of operations and cash flows of Applied Power Inc. The
results of operations and cash flows for ZERO from April 1, 1997 to August 31,
1997, which have been excluded from these consolidated financial statements, are
reflected as adjustments in the 1998 Consolidated Statements of Shareholders'
Equity and Cash Flows. Net sales and net income for ZERO for the excluded period
from April 1, 1997 to August 31, 1997 were $107,237 and $7,891, respectively.
Cash Equivalents: The Company considers all highly liquid investments with
original maturities of 90 days or less to be cash equivalents.
Inventories: Inventories are comprised of material, direct labor and
manufacturing overhead, and are stated at the lower of cost or market.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. Plant and equipment are depreciated over the estimated useful lives of the
assets, ranging from two to thirty years, under the straight-line method for
financial reporting purposes and both straight-line and accelerated methods for
tax purposes. Capital leases and leasehold improvements are amortized over the
life of the related assets or the life of the lease, whichever is shorter.
Expenditures for maintenance and repairs not expected to extend the useful life
of an asset beyond its normal useful life are expensed.
Intangible Assets: Goodwill is amortized on a straight-line basis over periods
of fifteen to forty years. Other intangible assets, consisting primarily of
purchased patents, trademarks and noncompete agreements, are amortized over
periods from two to forty years. The Company periodically evaluates the carrying
value of goodwill and other intangible assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Impairment of
goodwill, if any, is measured on the basis of whether anticipated undiscounted
operating cash flows generated by the acquired businesses will recover the
recorded goodwill balances over the remaining amortization period. For the year
ended August 31, 1998, the Company recorded an impairment of goodwill of $5,062.
For further information, see Note
33
G - "Merger, Restructuring and Other Non-recurring Charges." No impairment of
goodwill was indicated at August 31, 1997
Revenue Recognition: Revenues and costs of products sold are recognized as the
related products are shipped.
Research and Development Costs: Research and development costs are expensed as
incurred. Such costs incurred in the development of new products or significant
improvements to existing products totaled approximately $13,947, $10,437 and
$10,247 in 1998, 1997 and 1996, respectively.
Financing Costs: Net financing costs represent interest expense on debt
obligations, investment income and accounts receivable financing costs.
Income Taxes: The Company utilizes the liability method to recognize deferred
income tax assets and liabilities for the expected future income tax
consequences of events that have been recognized in the Company's financial
statements. Under this method, deferred tax assets and liabilities are
determined based on the temporary differences between financial statement
carrying amounts and the income tax basis of assets and liabilities using
enacted tax rates in effect in the years in which the temporary differences are
expected to reverse. For further information, see Note M - "Income Taxes."
Earnings Per Share: During the second quarter of fiscal 1998, the Company
adopted the provisions of SFAS No. 128, "Earnings Per Share," which was issued
by the Financial Accounting Standards Board ("FASB") in February 1997. Under the
new pronouncement, the dilutive effect of stock options is excluded from the
calculation of primary earnings per share, now called basic earnings per share.
Earnings per share information for all prior periods presented has been restated
to conform with the new calculation under SFAS No. 128.
In accordance with SFAS No. 128, earnings per share were computed as follows
(1998 results include restructuring charges and other one-time items - see Note
G - "Merger, Restructuring and Other Non-recurring Charges"):
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Numerator:
Net earnings for basic and diluted earnings per share $ 26,687 $ 57,925 $ 50,679
- --------------------------------------------------------------------------------------------------------------------
Denominator:
Weighted average common shares outstanding for
basic earnings per share (000's) 38,380 37,880 40,318
Net effect of dilutive options based on the treasury
stock method using average market price (000's) 1,794 1,427 1,135
- --------------------------------------------------------------------------------------------------------------------
Weighted average common and equivalent shares
outstanding for diluted earnings per share (000's) 40,174 39,307 41,453
- --------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.70 $ 1.53 $ 1.26
- --------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 0.66 $ 1.47 $ 1.22
- --------------------------------------------------------------------------------------------------------------------
Foreign Currency Translation: Assets and liabilities of the Company's
subsidiaries operating outside of the United States which accounts are
denominated in a functional currency other than US Dollars are translated into
US Dollars using year-end exchange rates. Revenues and expenses are translated
at the average exchange rates effective during the year. Foreign currency
translation adjustments are generally excluded from the Consolidated Statement
of Earnings and are included in cumulative translation adjustments in the
Consolidated Balance Sheet and Consolidated Statement of Shareholders' Equity.
Net gains of $700 and $1,300 in fiscal 1998 and 1997, respectively, and a net
loss of $400 in fiscal 1996 resulting from foreign currency transactions are
included in "Other - net" in the Consolidated Statement of Earnings.
34
Derivative Financial Instruments: Derivative financial instruments are
primarily utilized by the Company to manage risks associated with interest rate
market volatility and foreign exchange exposures. The Company does not hold or
issue derivative financial instruments for trading purposes. The Company
currently holds only interest rate swap agreements. For interest rate swap
agreements, the differential to be paid or received is accrued monthly as an
adjustment to interest expense. The Company also utilizes foreign currency
forward contracts to hedge existing foreign exchange exposures. Gains and losses
resulting from these instruments are recognized in the same period as the
underlying transaction. For further information, see Note I - "Long-term Debt."
Use of Estimates: The financial statements have been prepared in accordance
with generally accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses for the years presented. They also affect the
disclosure of contingencies. Actual results could differ from those amounts.
New Accounting Pronouncements: In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for the
reporting and display of comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income as defined includes all changes in equity (net
assets) during a period from nonowner sources. Examples of items to be included
in comprehensive income, which are excluded from net income, include foreign
currency translation adjustments, unrealized gain(loss) on available-for-sale
securities, and mark-to-market adjustments for hedging activities. The
disclosures required by this Statement will be made beginning with the Company's
first quarter of fiscal 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
the way companies report information about operating segments in financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company is in the
process of reassessing its current business segment reporting to determine if
changes in reporting will be required in adopting this new standard, but does
not expect that adoption of this Statement will have a significant impact on the
Company's disclosures. The disclosures required by this Statement will be
adopted in the Company's 1999 annual report and subsequent interim periods.
During February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises disclosures
about pension and other postretirement benefits plans. This Statement is
effective for the Company's 1999 fiscal year financial statements and
restatement of disclosures for earlier years provided for comparative purposes
will be required unless the information is not readily available. The Company is
currently evaluating the extent to which its financial statement disclosures
will be affected by SFAS No. 132.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which specifies the accounting
treatment provided to computer software costs depending upon the type of costs
incurred. This Statement is effective for the Company's fiscal year 2000
financial statements and restatement of prior years will not be permitted. The
Company does not believe that the adoption of this Statement will have a
significant impact on its financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities," which requires costs of start-up activities and organization costs
to be expensed as incurred. This Statement is effective for the Company's fiscal
year 2000 financial statements and initial application will be reported as a
cumulative effect of a change in accounting principle. The Company is currently
evaluating the extent to which its financial statements will be affected by SOP
98-5.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires that an entity recognize
derivative instruments, including certain derivative instruments embedded in
other contracts, as either assets or liabilities and measure those instruments
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. This Statement is effective for the
Company's fiscal year 2000 first quarter financial statements and restatement of
prior years will not be permitted. The Company is currently evaluating
35
the extent to which its financial statements will be affected by SFAS No. 133,
which is not expected to have a material effect on the Company based on its
current derivative and hedging activities.
Reclassifications: Certain prior year amounts shown have been reclassified to
conform to the fiscal 1998 presentation, including but not limited to, the
reclassification of certain financial data previously reported in Tools and
Supplies into Engineered Solutions.
Note B - Merger and Acquisitions
Merger
On July 31, 1998, at special meetings for both companies, shareholders voted to
approve the merger of a newly created subsidiary of the Company into ZERO
Corporation. The Merger was completed after the approval of the shareholders of
the Company and ZERO at their respective shareholder meetings. Under the terms
of the Merger Agreement, ZERO stockholders received 0.85 of a share of the
Company's Common Stock for each share of ZERO Common Stock. The Company issued
approximately 10.6 million shares of its common stock in exchange for all
outstanding common stock of ZERO Corporation and assumed outstanding options to
purchase ZERO common stock that were converted into options to purchase
approximately .6 million shares of the Company's common stock pursuant to the
terms of the Merger. This equates to a purchase price of approximately $386,000
based on the July 30, 1998 closing stock price of the Company. ZERO's primary
business is protecting electronics. ZERO's system packaging, thermal management
and engineered cases serve the telecommunication, instrumentation and data-
processing markets. ZERO also produces the line of ZERO Halliburton(R) cases for
consumers worldwide and cargo containers and proprietary loading systems to the
airline industry. The Merger has been accounted for using the pooling of
interests method of accounting and therefore reflects the combined financial
position, operating results and cash flows of ZERO as if they had been combined
for all periods presented. See Note A - "Summary of Significant Accounting
Policies - Basis of Presentation."
All fees and expenses related to the ZERO merger and to the integration of the
combined companies have been expensed as required under the pooling of interests
method of accounting. Such fees and expenses amounted to $20,129 in 1998. This
total includes transaction costs of approximately $9,276 related to legal,
accounting and financial advisory services. The remaining $10,853 reflects costs
associated with organizational realignment, closure of ZERO headquarters,
a change in estimate of a receivable valuation and the write-off of obsolete
inventory due to conforming of product lines. The following table presents the
separate results of ZERO and the Company, for reported periods prior to the date
of merger.
(Unaudited) Nine
Months Ended Fiscal Year Ended Fiscal Year Ended
May 31, 1998 August 31, 1997 August 31, 1996
----------------------------------------------------------------------------
Net Sales
Applied Power $667,487 $672,316 $571,215
ZERO Corporation $191,227 $225,442 $206,247
---------------------- ------------------------- ----------------------
Combined $858,714 $897,758 $777,462
====================== ========================= ======================
Net Earnings
Applied Power $ 39,055 $ 42,038 $ 33,729
ZERO Corporation 18,944 15,887 16,950
---------------------- ------------------------- ----------------------
Combined $ 57,999 $ 57,925 $ 50,679
====================== ========================= ======================
Acquisitions
Fiscal 1998
On June 5, 1998, Applied Power Limited, a United Kingdom subsidiary of the
Company, accepted for payment all of the VERO Group plc ("VERO") stock tendered,
which totaled over 72% of the outstanding VERO shares, pursuant to Applied Power
Limited's tender offer to acquire the entire issued share capital of VERO at a
price of 192 pence per VERO share (the "Offer"). Applied Power Limited had
previously acquired approximately 10% of VERO's
36
shares, so that after accepting the shares tendered, Applied Power Limited owned
or had accepted over 82% of VERO's shares. On June 19, 1998, Applied Power
Limited announced that additional shares tendered brought the total of the
shares it owned or had accepted for payment to over 90% of VERO's issued share
capital and that it would invoke Section 429 of the U.K. Companies Act of 1985,
as amended, to acquire the remaining outstanding shares of VERO stock. After the
required procedures were completed, Applied Power Limited owned all of the
issued share capital of VERO. Cash paid for the transaction totaled
approximately $191,700. Preliminary allocations of the purchase price resulted
in approximately $172,700 of goodwill. VERO is a United Kingdom based company
that manufactures electronic enclosures, racks, backplanes and power supplies.
The acquisition has been recorded using the purchase method of accounting. The
operating results of VERO subsequent to June 5, 1998 are included in the
Consolidated Statement of Earnings.
On October 6, 1997, the Company, through a wholly-owned subsidiary, accepted for
payment all shares of Versa Technologies, Inc. ("Versa/Tek") common stock which
were tendered pursuant to the Company's tender offer to purchase all outstanding
shares at a cash price of $24.625 net per share. The balance of the outstanding
shares was acquired for the same per share cash price in a follow-up merger on
October 9, 1997. Cash paid for the transaction totaled approximately $141,000.
Preliminary allocations of the purchase price resulted in approximately $108,000
of goodwill. The transaction was primarily funded with proceeds from a $140,000,
364-day revolving credit facility from the Company's then existing lenders.
Versa/Tek, operating out of several locations in Wisconsin, is a value-added
manufacturer of custom engineered components and systems for diverse industrial
markets. The acquisition has been recorded using the purchase method of
accounting. The operating results of Versa/Tek subsequent to October 6, 1997 are
included in the Consolidated Statement of Earnings.
In addition to the above acquisitions made in fiscal 1998, the pro forma data
for fiscal 1997 in the table below give effect to the purchase of the net assets
of Everest Electronic Equipment, Inc. ("Everest") on September 26, 1996 for cash
consideration of $52,000, which was funded through borrowings under then
existing credit facilities. Approximately $43,000 of the purchase price was
assigned to goodwill. Everest is a manufacturer of custom and standard
electronic enclosures used by the computer, telecommunication, datacom and other
industries and is headquartered in Anaheim, California. The acquisition has been
recorded using the purchase method of accounting. The results of Everest
subsequent to the acquisition date are included in the Consolidated Statement of
Earnings.
The following unaudited pro forma data summarize the results of operations for
the periods indicated as if the acquisitions described above had been completed
on September 1, 1996, the beginning of the 1997 fiscal year. The pro forma data
give effect to actual operating results prior to the acquisitions and
adjustments to interest expense, depreciation, goodwill amortization and income
tax expense. These pro forma amounts do not purport to be indicative of the
results that would have actually been obtained if the acquisition had occurred
on September 1, 1996 or that may be obtained in the future. The following data
do not give pro forma effect to the other acquisitions completed subsequent to
August 31, 1996, which are discussed below.
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
Net Sales $ 1,392,833 $ 1,270,045
Net Earnings $ 27,556 $ 57,137
Basic Earnings Per Share $ 0.72 $ 1.51
Shares Used in Basic Computation (000's) 38,380 37,880
Diluted Earnings Per Share $ 0.69 $ 1.45
Shares Used in Diluted Computation (000's) 40,174 39,307
- ---------------------------------------------------------------------------
In addition to the Merger and material acquisitions discussed above, in fiscal
1998 the Company acquired eight other companies, primarily in its Enclosure
Products and Systems business segment, for an aggregate of approximately
$125,600, including $118,900 in cash and the assumption of approximately $6,700
in debt. The cash portion of the acquisitions was paid utilizing borrowings
under existing credit facilities. Each of these acquisitions was accounted for
using the purchase method of accounting and the results of operations of the
acquired companies are included in the Consolidated Statement of Earnings from
their respective acquisition dates. As a result of the acquisitions,
approximately $90,700 in goodwill was recorded by the Company.
37
Fiscal 1997
In addition to the acquisition of Everest discussed above, in fiscal 1997 the
Company acquired three other companies for an aggregate of approximately $22,800
in cash. The cash portion of the acquisitions' purchase price was made utilizing
borrowings under then existing credit facilities. Each of these acquisitions was
accounted for as a purchase and the results of operations of the acquired
companies are included in the Consolidated Statement of Earnings from their
respective acquisition dates. As a result of the acquisitions, approximately
$11,200 in goodwill was recorded by the Company.
Fiscal 1996
In fiscal 1996, the Company acquired four companies for an aggregate of
approximately $45,700, including approximately $33,700 in cash, the assumption
of approximately $7,400 in debt, the forgiveness of accounts receivable
outstanding of approximately $700, and the issuance of Applied Power Inc. Class
A Common Stock valued at approximately $3,900. The cash portion of the
acquisitions' purchase price was paid utilizing borrowings under then existing
credit facilities. Each of these acquisitions was accounted for as a purchase
and the results of operations of the acquired companies are included in the
Consolidated Statement of Earnings from their respective acquisition dates. As a
result of the acquisitions, approximately $5,300 in goodwill was recorded by the
Company.
Note C - Sales of Product Lines
On March 31, 1998, the Company completed the sale of the assets of Moxness
Industrial Products, a division of Versa/Tek. Total consideration from the
transaction was $6,000, which approximated book value of the assets.
On January 24, 1996, the Company sold substantially all of the assets and
liabilities of its APITECH mobile equipment product line. Total consideration
from the transaction, which included future collection of retained accounts
receivable, was approximately $5,200, which approximated the book value of the
product line.
On December 13, 1995, the Company's GB Electrical subsidiary sold its HIT spring
steel product line for approximately $2,400 in cash. Proceeds from the sale
approximated the book value of the product line.
Note D - Accounts Receivable Financing
On November 20, 1997, the Company replaced its former $50,000 accounts
receivable financing facility with a new facility that provided up to $80,000 of
multi-currency accounts receivable financing. The new agreement expires in
November 2000. On August 28, 1998, the Company amended the facility by
increasing the amount of multi-currency accounts receivable financing from
$80,000 to $90,000. All other terms of the agreement remain the same.
Under the terms of this agreement, the Company and certain subsidiaries
(collectively, "Originators") sell trade accounts receivable to Applied Power
Credit Corporation ("APCC"), a wholly-owned limited purpose subsidiary of the
Company. APCC is a separate corporate entity that sells participating interests
in its pool of accounts receivable to financial institutions ("Purchasers"). The
Purchasers, in turn, receive an ownership and security interest in the pool of
receivables. Participation interests in new receivables generated by the
Originators are purchased by APCC and resold to the Purchasers as collections
reduce previously sold participation interests. The sold accounts receivable are
reflected as a reduction of receivables in the Consolidated Balance Sheet. APCC
has the risk of credit loss on such receivables up to a maximum recourse amount
of 16% of sold receivables. The Company retains collection and administrative
responsibilities on the participation interests sold as servicer for APCC and
the Purchasers.
At August 31, 1998 and 1997, accounts receivable were reduced by $89,700 and
$50,000, respectively, representing receivable interests sold under this
program. The proceeds from the sales were used to reduce debt.
Accounts receivable financing costs totaling $4,349, $2,978 and $2,324 for the
years ended August 31, 1998, 1997 and 1996, respectively, are included with net
financing costs in the accompanying Consolidated Statement of Earnings.
38
Note E - Net Inventories
Inventory cost is determined using the last-in, first-out ("LIFO") method for a
portion of US owned inventory (approximately 37% and 57% of total inventories in
1998 and 1997, respectively). The first-in, first-out or average cost methods
are used for all other inventories. If the LIFO method was not used, inventory
balances would be higher than the amounts in the Consolidated Balance Sheet by
approximately $8,239 and $7,920 at August 31, 1998 and 1997, respectively.
The nature of the Company's products in several significant parts of its
business is such that they have a very short production cycle. Consequently, the
amount of work-in-process at any point in time is minimal. In addition, many
parts or components are ultimately either sold individually or assembled with
other parts making a distinction between raw materials and finished goods
unclear. At these locations, the Company has not deemed it necessary or cost
effective to categorize inventory by state of completion in its ledgers, but
rather between material, labor and overhead. Several other parts of the Company
maintain and manage their inventories using a job cost system where the
distinction of categories of inventory by state of completion is also not
available.
As a result of these factors, it is neither practical nor cost effective to
segregate the amounts of raw materials, work-in-process or finished goods at the
respective balance sheet dates, as segregation would only be possible as the
result of physical inventories which are taken at dates different from the
balance sheet dates.
Note F - Shareholders' Equity
The authorized capital stock of the Company as of August 31, 1998 consisted of
80,000,000 shares of Class A Common Stock, $0.20 par value, of which 38,626,068
shares were issued and outstanding; 7,500,000 shares of Class B Common Stock,
$0.20 par value, none of which were issued and outstanding; and 800,000 shares
of Cumulative Preferred Stock, $1.00 par value ("Preferred Stock"), none of
which have been issued. Holders of both classes of the Company's Common Stock
are entitled to such dividends as the Company's Board of Directors may declare
out of funds legally available, subject to any contractual restrictions on the
payment of dividends or other distributions on the Common Stock. If the Company
were to issue any of its Preferred Stock, no dividends could be paid or set
apart for payment on shares of Common Stock, unless paid in Common Stock, until
dividends on all of the issued and outstanding shares of Preferred Stock had
been paid or set apart for payment and provision had been made for any mandatory
sinking fund payments. In the event of dissolution or liquidation of the
Company, the holders of both classes of Common Stock are entitled to share
ratably all assets of the Company remaining after payment of the Company's
liabilities and satisfaction of the rights of any series of Preferred Stock
which may be outstanding. There are no redemption or sinking fund provisions
with respect to the Common Stock.
On January 8, 1998, the Board of Directors authorized a two-for-one stock split
effected in the form of a 100 percent stock dividend to shareholders of record
on January 22, 1998. To effect the stock split, a total of 13,891,578 shares of
the Company's Class A Common Stock were issued on February 3, 1998. All
references in the accompanying consolidated financial statements to the average
number of common shares and related per share amounts have been restated to
reflect the stock split.
At the Annual Meeting of Shareholders on January 9, 1998, the shareholders voted
to increase the number of authorized shares of Class A Common from 40,000,000 to
80,000,000.
Prior to the Merger, as discussed in Note B - "Merger and Acquisitions," ZERO
Corporation repurchased approximately 4,019,000 shares of its common stock at a
cost of approximately $71,871 in a Dutch Auction Tender Offer in February 1996.
The source of the funds to repurchase the shares was provided by the issuance of
promissory notes totaling $50,000 by ZERO Corporation (see also Note I -"Long-
term Debt"), together with available cash and cash derived from the sale of
short-term investments.
39
Note G - Merger, Restructuring and Other Non-recurring Charges
The Company recorded restructuring and other one-time charges in the fourth
quarter of fiscal 1998 of $52,637, or $1.31 per share on a diluted basis. The
pre-tax charges of $69,440 included costs associated with a number of
initiatives, including: the ZERO merger and headquarters closing;
rationalization of the Company's electronic enclosure manufacturing facilities
and infrastructure; elimination of less profitable product lines and products
across all three business segments; and the consolidation of certain support
functions in the Tools and Supplies segment. The charges were reflected in the
financial statements as follows:
- ----------------------------------------------------------------------------
Merger, Restructuring and Other Non-recurring Charges
- ----------------------------------------------------------------------------
Cost of products sold $ 25,785
Engineering, selling and administrative expenses 9,019
Amortization of intangible assets 5,062
Restructuring charges 20,298
Merger related expenses 9,276
- ----------------------------------------------------------------------------
Subtotal 69,440
Less: Income tax benefit 16,803
- ----------------------------------------------------------------------------
Total $ 52,637
- ----------------------------------------------------------------------------
In connection with the Merger with ZERO consummated in fiscal 1998 (Note B -
"Merger and Acquisitions"), the Company recorded transaction costs of
approximately $9,276 related to legal, accounting and financial advisory
services. These were expensed as required under the pooling of interests method
of accounting. In addition, the Company incurred costs of $10,853 associated
with organizational realignment, closure of ZERO headquarters, a change in
estimate of a receivable valuation and the write-off of obsolete inventory due
to conforming of product lines.
In August 1998, the Company also recorded restructuring and one-time charges of
$49,311 related to the product line rationalization of certain acquired
companies, combination of certain production facilities and exiting of several
product lines. As of August 31, 1998, there was $21,471 remaining in the reserve
for organizational realignments and other cash related items and $27,840 for
non-cash charges related to inventory rationalization, facility consolidation
and goodwill impairment. Of the total charges incurred, $13,600 was recorded for
severance payments of approximately 400 employees of which a negligible amount
was paid in fiscal 1998.
With respect to rationalization of the Company's Enclosure Products and Systems
segment, it is the Company's strategy to become the premier, global electronic
enclosure manufacturer. In line with that strategy, the Company has completed
eleven electronic enclosure acquisitions over the last two years, operating 34
facilities in 11 countries. As a result of the Company's rapid expansion into
the electronic enclosure business, there are significant rationalization and
integration opportunities within and between the acquired businesses. In late
fiscal 1998, the Company formalized a plan to eliminate redundancies and
streamline operations within these acquired businesses. These rationalization
efforts include consolidating three facilities into one in the northeastern
United States, the consolidation of production of several product lines between
facilities, standardization of design and development functions, and other
organizational realignments. As a result of this plan, the Company recorded
$17,730 for related charges, including provisions of $4,571 for cost associated
with employee severance, $4,900 related to the closing of facilities and $8,259
resulting from the write-off of discontinued inventory. The Company expects that
the reorganization of its Enclosure Products and Systems segment will be largely
complete in the first half of fiscal 1999.
In late fiscal 1998, the Company initiated aggressive programs, spanning all
three of the Company's business segments, to eliminate or reduce product lines
and items which were not generating sufficient economic return. The programs
include the elimination of slow moving or marginal products and the entire exit
of less productive product lines. As a result of these programs, the Company
recorded a one-time $25,785 charge to Cost of products sold for the write-down
of discontinued or obsolete inventory to estimated net realizable value. The
Company expects its product line initiatives to be materially complete by the
end of fiscal 1999.
Also in the fourth quarter of fiscal 1998, the Company adopted a plan to
consolidate the headquarters functions of
40
the Enerpac and Gardner Bender business units of the Tools and Supplies segment
into a single headquarters in Glendale, Wisconsin and plans to reorganize and to
combine certain North American and European facilities of the Company's
Engineered Solutions segment. As a result of these initiatives, the Company
recorded a charge of $35,990, including $6,402 related to employee severance
payments, $7,000 in facility closure costs and operating lease obligations,
$17,526 as a result of the inventory initiatives discussed above and $5,062 for,
in two cases, the write-down of related goodwill in accordance with Statement of
Financial Accounting Standard No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". For further information on
the write-down of goodwill, see Note A - "Summary of Significant Accounting
Policies". The Company expects that its Tools and Supplies and Engineered
Solutions reorganization efforts will be substantially completed in fiscal 1999.
The Company anticipates that the above discussed initiatives will result in
operating efficiencies, reduced overhead infrastructure, and the resulting
financial benefit of improved operating margin and enhanced return on assets
deployed, beginning in fiscal 1999.
In addition to the $69,440 charges discussed above, ZERO recognized a net gain
of $4,586, $0.11 per share on a diluted basis, for special items relating to a
gain from life insurance and sale of property offset by a $4,500 provision for
the estimated loss on the sale of a European subsidiary.
Note H - Short-term Borrowings
- ------------------------------
The Company had borrowings under non-collateralized non-committed lines of
credit with banks aggregating approximately $91 and $21,463 at August 31, 1998
and 1997, respectively. Interest rates vary depending on the currency being
borrowed. The weighted average interest rates on the US and non-US short-term
borrowings were 5.24% and 6.22% at August 31, 1998 and 1997, respectively. The
amount of unused available borrowings under such lines of credit was
approximately $80,872 at August 31, 1998.
Note I - Long-term Debt
- -----------------------
- --------------------------------------------------------------------------------------------------------------------
August 31,
- --------------------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------
Borrowings under:
Multi-currency revolving credit agreement $ 360,672 $101,663
Commercial paper 42,930 -
Pound Sterling multi-currency revolving credit agreement 26,218 -
Floating rate unsecured notes, due December 31, 2003 27,386 -
Senior promissory notes, due March 8, 2011 50,000 50,000
Other 5,351 1,503
- --------------------------------------------------------------------------------------------------------------------
Total Long-term Debt $ 512,557 $153,166
- --------------------------------------------------------------------------------------------------------------------
On June 18, 1998, the Company and Enerpac B.V., a Netherlands subsidiary of the
Company, as Borrowers, entered into a Multicurrency Credit Agreement (the
"Credit Agreement"), providing for a $700,000, 5-year revolving credit facility
(the "Facility"). In conjunction with the closing of the Facility, the Company
terminated its prior $350,000, 5-year revolving credit facility (the "Prior
Facility"), and used certain funds received under the Facility to repay
borrowings under the Prior Facility. The Facility was used to finance expenses
related to the acquisition of VERO, provide for working capital, capital
expenditures and for other general corporate purposes. At August 31, 1998,
direct outstanding borrowings under the Facility were $360,672 and commercial
paper borrowings and certain loan
41
notes, considered a utilization of the Facility, were $42,930 and $27,386,
respectively. The Company can borrow at a floating rate of LIBOR plus 0.275 to
1.00 basis points annually, depending on the debt-to-EBITDA ratio. Currently,
the Company incurs interest at 0.625 basis points above 30-day LIBOR, determined
by the underlying currency of the debt which the Company is borrowing. At August
31, 1998, the Company had borrowings denominated in the US Dollar and the
Japanese Yen. A non-use fee, currently computed at a rate of 0.175 basis points
annually, is payable quarterly on the average unused credit line. The unused
credit line at August 31, 1998 was approximately $269,000.
The Credit Agreement contains customary restrictions concerning investments,
liens on assets, sales of assets, maximum levels of debt and minimum levels of
shareholders' equity. In addition, the agreement requires the Company to
maintain certain financial ratios. As of August 31, 1998, the Company was in
compliance with all debt covenants. See also Note P - "Subsequent Events."
Commercial paper outstanding at August 31, 1998 totaled $42,930, net of
discount, and carried an average interest rate of 5.70%. The Company has the
ability and intent to maintain these commercial paper obligations, classified as
long term, for more than one year. Amounts outstanding as commercial paper
reduce the amount available for borrowings under the Credit Agreement. There was
no commercial paper outstanding at August 31, 1997.
The Pound Sterling multi-currency revolving credit agreement was entered into by
the Company's VERO subsidiary in April 1998, prior to the acquisition of VERO by
the Company. The facility provides up to 27.5 million Pounds Sterling of multi-
currency borrowings and expires in 2003. Any borrowings carry an interest rate
of LIBOR plus 0.65 basis points determined by the underlying currency of the
debt which the Company is borrowing. At August 31, 1998 the facility had
borrowings denominated in Pounds Sterling, German Marks, French Francs, US
Dollars, Danish Krone and Italian Lira. The agreement has customary covenants
regarding tangible net worth and debt-to-net worth, neither of which were deemed
restrictive at August 31, 1998. The total unused line available at August 31,
1998 was 9.1 million Pounds Sterling or approximately $15,000.
The floating rate unsecured notes were entered into by the Company as a result
of its acquisition of VERO. The notes were exchanged with individual
shareholders of VERO, at their option, in lieu of receiving cash payment for
their tendered shares. The notes carry an interest rate of LIBOR minus 0.50
basis points and can be redeemed at the option of the note holder on various
dates through 2003.
The senior promissory notes bear interest at 7.13%, and are payable in 11 annual
installments of $4,545 beginning March 8, 2001. The proceeds from the notes were
used solely for the repurchase of ZERO's common stock in a Dutch Auction Tender
Offer and for payment of related expenses. See also Note F - "Shareholders'
Equity."
Derivative Financial Instruments: As part of its interest rate management
program, the Company periodically enters into interest rate swap agreements with
respect to portions of its outstanding debt. The purpose of these swaps is to
protect the Company from the effect of an increase in interest rates. The
interest rate swap agreements in place at August 31, 1998 effectively convert
$239,264 of the Company's variable rate debt to a weighted average fixed rate of
5.95%. The swap agreements expire on varying dates through 2005. The
accompanying Consolidated Balance Sheet at August 31, 1998 does not reflect a
value for these swap agreements.
The purpose of the Company's foreign currency hedging activities is to protect
the Company from the risk that the eventual US Dollar cash flows resulting from
the sale and purchase of products in foreign currencies will be adversely
affected by changes in exchange rates. In addition, the Company seeks to manage
the impact of foreign currency fluctuations related to the repayment of
intercompany borrowings. Fluctuations in the value of hedging instruments are
offset by fluctuations in the value of the underlying exposures being hedged.
The Company uses forward exchange contracts to hedge certain firm purchase and
sales commitments and the related receivables and payables including other third
party or intercompany foreign currency transactions. Cross-currency swaps are
used to hedge foreign currency denominated payments related to intercompany loan
agreements. Hedged transactions are denominated primarily in European
currencies. The net realized and unrealized gains or losses on forward contracts
deferred at August 31, 1998 were negligible.
The counterparties to these financial instruments consist of major financial
institutions with investment grade or better credit ratings. The Company does
not expect any losses from nonperformance by these counterparties.
42
Adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," in fiscal 2000 will require the Company to record these instruments
at their fair values. See Note A - "Summary of Significant Accounting Policies -
New Accounting Pronouncements."
Fair Values: The fair value of the Company's short-term borrowings and long-term
debt approximated book value as of August 31, 1998 and 1997 due to their short-
term nature and the fact that the interest rates approximate market rates,
respectively. The fair value of debt instruments is calculated by discounting
the cash flow of such obligations using the market interest rates for similar
instruments. If the Company decided to terminate its interest rate swap
agreements, the Company would have had to pay $4,223 and $553 as of August 31,
1998 and 1997, respectively. The Company had no foreign currency contracts in
place at August 31, 1998.
Aggregate Maturities: Long-term debt outstanding at August 31, 1998 is payable
as follows: none in 1999; $1,572 in 2000; $6,259 in 2001; $5,871 in 2002;
$434,950 in 2003 and $63,905 thereafter.
The Company paid $24,832, $15,506 and $8,202 for financing costs in 1998, 1997
and 1996, respectively.
Note J - Leases
- ---------------
The Company leases certain facilities, computers, equipment and vehicles under
various lease agreements generally over periods of one to twenty years. Under
most arrangements, the Company pays the property taxes, insurance, maintenance
and expenses related to the leased property. Many of the leases include
provisions which enable the Company to renew leases based upon the fair values
on the date of expiration of the initial lease.
Future obligations on non-cancelable operating leases in effect at August 31,
1998 are: $24,484 in 1999; $20,660 in 2000; $17,090 in 2001; $21,984 in 2002;
$12,134 in 2003 and $101,906 thereafter.
Total rental expense under operating leases was $20,117, $14,385 and $12,798 in
1998, 1997 and 1996, respectively.
Note K - Stock Option Plans
- ---------------------------
A total of 8,715,638 shares of Class A Common are authorized for issuance under
the Company's employee and director stock option plans (including the assumed
ZERO stock options described below), of which a total of 3,080,741 have been
issued through exercises of option grants. At August 31, 1998, 5,634,897 shares
were reserved for issuance under the plans, consisting of 2,841,706 shares
subject to outstanding options and 2,793,191 shares available for further
grants.
Employee Plans: On January 8, 1997, shareholders of the Company approved the
adoption of the Applied Power Inc. 1996 Stock Plan (the "1996 Plan").
Previously, the Company had three nonqualified stock option plans for employees-
the 1985, 1987 and 1990 plans. No further options may be granted under the 1985,
1987 or 1990 plans, although options previously issued and outstanding under
these plans remain exercisable pursuant to the provisions of the plans. Under
the terms of the 1996 Plan, options may be granted to officers and key
employees. Options generally have a maximum term of ten years and an exercise
price equal to 100% of the fair market value of a share of the Company's common
stock at the date of grant. Options generally vest 50% after two years and 100%
after five years.
In connection with the Merger occurring in fiscal 1998 (see Note B - "Merger and
Acquisitions"), all of the options outstanding under the former ZERO stock
option plans were assumed by the Company and converted into options to purchase
shares of the Company's Class A Common Stock on terms adjusted to reflect the
Merger exchange ratio. Options to acquire a total of 735,767 ZERO shares were
converted into options to acquire a total of 625,402 Company shares. These
options, as so adjusted, retain all of the rights, terms and conditions of the
respective plans under which they were originally granted.
ZERO's plans provided for the granting of options to purchase shares of ZERO
common stock to directors, officers and other key employees at a price not less
than the fair market value on the date of grant. Options were granted for terms
of five to eight years and become exercisable in annual installments (generally
one-third of the total grant) commencing one year from the date of grant, on a
cumulative basis.
43
A summary of option activity under the employee plans is as follows:
- --------------------------------------------------------------------------------------------------------------------
Number of Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------
Outstanding at September 1, 1995 3,623,519 $ 10.61
Granted 377,183 17.03
Exercised (457,138) 10.42
Canceled (345,044) 11.42
- --------------------------------------------------------------------------------------------------------------------
Outstanding at August 31, 1996 3,198,520 $ 11.37
Granted 642,865 19.61
Exercised (502,379) 11.16
Canceled (87,396) 14.51
- --------------------------------------------------------------------------------------------------------------------
Outstanding at August 31, 1997 3,251,610 $ 12.91
Effect of ZERO excluded period (as described in Note A) (84,797) -
Granted 467,644 32.27
Exercised (721,160) 13.01
Canceled (133,591) 18.85
- --------------------------------------------------------------------------------------------------------------------
Outstanding at August 31, 1998 2,779,706 $ 15.72
- --------------------------------------------------------------------------------------------------------------------
Exercisable at August 31, 1998 1,616,503 $ 10.63
- --------------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and
exercisable options:
- --------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------------------------------------------
$ 6.75 - $ 8.38 632,208 3.6 years $ 8.02 632,208 $ 8.02
$ 8.56 - $10.69 690,682 3.2 years $ 9.74 588,532 $ 9.57
$11.13 - $16.18 439,542 5.6 years $ 14.57 278,592 $ 14.68
$17.75 - $26.13 582,029 6.6 years $ 19.51 112,200 $ 19.96
$31.63 - $36.13 435,245 8.3 years $ 32.46 4,971 $ 31.84
- --------------------------------------------------------------------------------------------------------------------
2,779,706 $ 15.72 1,616,503 $ 10.63
- --------------------------------------------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
employee stock option plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans other than for the outside
director plan discussed below. If the Company had accounted for these stock
options issued to employees in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net earnings and earnings per share
would have been changed to the pro forma amounts indicated below:
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Net Earnings - as reported $ 26,687 $ 57,925 $ 50,679
Net Earnings - pro forma 25,592 56,946 50,334
Basic Earnings Per Share - as reported $ 0.70 $ 1.53 $ 1.26
Basic Earnings Per Share - pro forma 0.67 1.50 1.25
Diluted Earnings Per Share - as reported $ 0.66 $ 1.47 $ 1.22
Diluted Earnings Per Share - pro forma 0.64 1.45 1.21
- --------------------------------------------------------------------------------------------------------------------
44
The pro forma effects of applying SFAS No. 123 may not be representative of the
effects on reported net income and earnings per share for future years since
options vest over several years and additional awards are made each year.
The fair value of Applied Power stock options used to compute pro forma net
earnings and pro forma earnings per share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model. The weighted
average fair values per share of options granted in 1998, 1997 and 1996 are
$11.54, $4.90 and $4.03, respectively. The following weighted average
assumptions were used in completing the model:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Dividend yield 0.24% 0.33% 0.40%
Expected volatility 23.5% 19.0% 18.3%
Risk-free rate of return 5.5% 6.3% 6.3%
Expected life 5.6 years 5.0 years 5.0 years
- --------------------------------------------------------------------------------
Outside Director Plan: Annually, each outside director is granted stock options
to purchase 3,000 shares of common stock at a price equal to the market price of
the underlying stock on the date of grant. The amount of shares granted was
increased in 1997, from 2,000 shares, by an amendment to the plan adopted on
October 31, 1996. These options are recorded as compensation expense as required
by SFAS No. 123. A maximum of 120,000 shares may be issued under this plan.
Options vest 100% after 11 months.
A summary of option activity under this plan is as follows:
- --------------------------------------------------------------------------------
Number of Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at September 1, 1995 40,000 $ 9.63
Granted 12,000 13.82
Exercised (2,000) 8.50
- --------------------------------------------------------------------------------
Outstanding at August 31, 1996 50,000 $ 10.77
Granted 15,000 19.44
Canceled (4,000) 8.42
- --------------------------------------------------------------------------------
Outstanding at August 31, 1997 61,000 $ 13.03
Granted 15,000 34.50
Exercised (14,000) 10.09
- --------------------------------------------------------------------------------
Outstanding at August 31, 1998 62,000 $ 18.88
- --------------------------------------------------------------------------------
Exercisable at August 31, 1998 47,000 $ 13.90
- --------------------------------------------------------------------------------
Note L - Employee Benefit Plans
Postretirement Benefit Plans - The Company does not offer postretirement health
care and life insurance benefits to employees. However, certain employees of
businesses previously acquired by the Company were entitled to such benefits
upon retirement. Most individuals receiving health care benefits under these
programs are required to make monthly contributions to defray a portion of the
cost. Retiree contributions are adjusted annually. Retirees currently do not
contribute toward the cost of life insurance. The accounting for retiree health
care benefits assumes retirees will continue to contribute toward the cost of
such benefits. Net periodic postretirement benefit expense for 1998, 1997 and
1996 was not material. The Company's postretirement benefit obligation is not
funded. Benefits paid in 1998, 1997 and 1996 were $41, $128 and $22 higher than
that expensed during those years, respectively.
45
The Company's accumulated postretirement benefit obligation for such benefits is
as follows:
- --------------------------------------------------------------------------------
August 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Retirees $ 4,388 $ 3,843
Vested former employees 606 748
Active employees 230 174
- --------------------------------------------------------------------------------
Subtotal 5,224 4,765
Unrecognized gain 4,445 4,312
- --------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation $ 9,669 $ 9,077
- --------------------------------------------------------------------------------
The health care cost trend rate used in the actuarial calculations was 9.8%,
trending downward to 6.5% by the year 2009, and remaining level thereafter. The
discount rate used in determining the accumulated postretirement benefit
obligation was 7.0%, 7.75% and 7.75% for the years 1998, 1997 and 1996,
respectively. The effect of a one percentage-point increase in health care cost
trend rates would increase the accumulated postretirement benefit obligation by
approximately 8%.
Defined Benefit Pension Plans - The Company does not offer defined benefit
pensions to employees. However, certain employees of the Versa/Tek businesses
acquired by the Company during 1998 were entitled to such benefits upon
retirement. Two of the plans cover certain hourly production employees and
provide benefits of stated amounts for specified periods of service. Another
plan covers certain salaried, administrative and clerical employees and provides
benefits based on years of service and compensation. In 1998, the Company
amended the plans to freeze the accumulation of benefits. This change resulted
in a decrease of approximately $1,890 in the projected benefit obligation.
The Company makes actuarially determined contributions to a trust fund for these
plans which represents the maximum allowable for deduction in determination of
Federal taxable income. Trust assets consist primarily of participating units in
common stock and bond funds. Net pension cost for fiscal 1998 for the defined
benefit plans was not material. Benefits paid in 1998 were approximately $200
higher than that expensed.
The defined benefit plans' funded status at August 31, 1998 was as follows:
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 10,418
- --------------------------------------------------------------------------------
Accumulated benefit obligation 10,778
- --------------------------------------------------------------------------------
Projected benefit obligation 10,778
Plan assets at fair value 12,086
- --------------------------------------------------------------------------------
Plan assets in excess of accumulated benefits (1,308)
Unrecognized net actuarial loss (515)
- --------------------------------------------------------------------------------
Prepaid Pension Cost $ (1,823)
- --------------------------------------------------------------------------------
The projected benefit obligation assumes a 7.0% actuarial discount rate and an
expected long-term rate of return on plan assets of 8.5%.
In place of participation in any of the above defined benefit pension plans, the
Company makes cash contributions to a labor management (union) multi-employer
pension fund based on hours worked in accordance with a negotiated labor
contract for tool makers employed at one of the Company's manufacturing
facilities.
The Company also assumed an unfunded supplemental pension agreement with a
former Versa/Tek key executive officer. The actuarially computed provision for
this agreement was $41 for 1998.
46
Defined Contribution Plans - US Employees: Effective January 1, 1998, the
Company merged its former Employee Savings Plan with the Applied Power Inc.
Employee Stock Ownership Plan to create a single retirement program for eligible
employees - the APW 401(k) Plan (the "401(k) Plan"). Substantially all of the
Company's full-time US employees are eligible to participate in the 401(k) Plan.
Under the provisions of the 401(k) Plan, the plan administrator acquires shares
of Class A Common Stock on the open market and allocates such shares to accounts
set aside for Company employees' retirements. Company contributions generally
equal 3% of each employees' annual cash compensation, subject to IRS
limitations. Additionally, employees generally may contribute up to 15% of their
base compensation. The Company also matches approximately 25% of each employee's
contribution up to the participant's first 6% of earnings. During the years
ended August 31, 1998, 1997 and 1996, pre-tax expense related to the defined
contribution plans was approximately $3,800, $4,100 and $2,800, respectively.
Non-US Employees: The Company contributes to a number of retirement programs for
employees outside the US. Pension expense under these programs amounted to
approximately $2,102, $1,215 and $1,046 in 1998, 1997 and 1996, respectively.
These plans are not required to report to US governmental agencies under the
Employee Retirement Income Security Act of 1974 and, therefore, the Company does
not determine the actuarial value of accumulated plan benefits or net assets
available for benefits.
Note M - Income Taxes
Income tax expense consists of the following:
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Currently Payable:
Federal $ 25,323 $ 23,607 $18,941
Foreign 9,626 5,015 6,510
State 4,257 3,260 3,751
- --------------------------------------------------------------------------------------------------------------------
Subtotals 39,206 31,882 29,202
- --------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (8,887) (488) (1,451)
Foreign 1,007 87 (780)
State (628) (182) (236)
- --------------------------------------------------------------------------------------------------------------------
Subtotals (8,508) (583) (2,467)
- --------------------------------------------------------------------------------------------------------------------
Totals $ 30,698 $ 31,299 $26,735
- --------------------------------------------------------------------------------------------------------------------
Components of deferred income tax benefits include the following:
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Compensation and other employee benefits $ (1,007) $ (1,565) $ (312)
Inventory items (7,478) (747) (694)
Depreciation and amortization 4,330 684 (1,875)
Restructuring expenses (4,734) (65) 373
Deferred income (88) 526 574
Book reserves and other items 469 584 (533)
- --------------------------------------------------------------------------------------------------------------------
Totals $ (8,508) $ (583) $(2,467)
- --------------------------------------------------------------------------------------------------------------------
47
Income tax expense differs from the amounts computed by applying the Federal
income tax rate to earnings before income tax expense. A reconciliation of
income taxes at the US statutory rate to the effective tax rate follows:
- --------------------------------------------------------------------------------------------------------------------
Percent of Pre-tax Earnings
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal effect 4.1 2.5 2.8
Non-deductible amortization and other expenses 12.1 1.0 1.1
Net effects of foreign tax rates and credits 5.7 (3.1) (3.2)
Other items (3.4) (0.3) (1.1)
- --------------------------------------------------------------------------------------------------------------------
Effective Tax Rate 53.5% 35.1% 34.6%
- --------------------------------------------------------------------------------------------------------------------
Temporary differences and carryforwards which gave rise to the deferred tax
assets and liabilities included the following items:
- -------------------------------------------------------------------------------------------------------------------
August 31,
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Operating loss and state tax credit carryforwards $ 5,846 $ 4,206
Compensation and other employee benefits 15,803 11,357
Inventory items 15,012 7,228
Restructuring expenses 6,012 242
Deferred income 700 611
Book reserves and other items 6,599 2,892
- --------------------------------------------------------------------------------------------------------------------
49,972 26,536
Valuation allowance (5,846) (4,206)
- --------------------------------------------------------------------------------------------------------------------
44,126 22,330
- --------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Depreciation and amortization 27,496 13,385
Inventory items 3,342 3,882
Other items 6,448 6,586
- --------------------------------------------------------------------------------------------------------------------
37,286 23,853
- --------------------------------------------------------------------------------------------------------------------
Net Deferred Income Tax Asset(Liability) $ 6,840 $ (1,523)
- --------------------------------------------------------------------------------------------------------------------
The valuation allowance represents a reserve for foreign and state loss
carryforwards for which utilization is uncertain. The increase in the valuation
allowance represents the current year increase in such loss carryforwards. The
majority of the foreign losses may be carried forward indefinitely. The state
loss carryforwards expire in various years through 2013.
Income taxes paid during 1998, 1997 and 1996 were $49,672, $32,362 and $29,104,
respectively.
The Company's policy is to remit earnings from foreign subsidiaries only to the
extent any resultant foreign income taxes are creditable in the US. Accordingly,
the Company does not currently provide for the additional US and foreign income
taxes which would become payable upon remission of undistributed earnings of
foreign subsidiaries. Undistributed earnings on which additional income taxes
have not been provided amounted to approximately $79,000 at August 31, 1998. If
all such undistributed earnings were remitted, an additional provision for
income taxes of approximately $3,800 would have been necessary as of August 31,
1998.
Earnings from continuing operations before income taxes from non-US operations
were $15,351, $10,471 and $11,928 for 1998, 1997 and 1996, respectively.
48
Note N - Segment Information
The Company's operations are classified into three business segments: Enclosure
Products and Systems, Engineered Solutions and Tools and Supplies. Enclosure
Products and Systems designs, manufactures and sells furnishings and enclosures
utilized in technology intensive business environments. Engineered Solutions
focuses on developing and marketing value-added, customized solutions for OEMs
in the automotive, truck, off-highway equipment, medical, aerospace, defense and
industrial markets. Tools and Supplies is involved in the design, manufacture
and distribution of tools and supplies to the construction, electrical
wholesale, retail do-it-yourself, datacom, retail automotive, industrial and
production automation markets.
The following table summarizes financial information by business segment. The
information for Earnings Before Income Tax Expense includes the effects of the
Merger, restructuring and other non-recurring charges of $69,440 discussed in
Note G - "Merger, Restructuring and Other Non-recurring Charges." Such charges
allocated by segment are $17,730 in Enclosure Products and Systems, $11,375 in
Engineered Solutions, $24,615 in Tools and Supplies and $15,720 in General
corporate and other.
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Net Sales:
Enclosure Products and Systems $ 482,361 $ 296,235 $ 190,031
Engineered Solutions 432,070 312,254 308,907
Tools and Supplies 316,258 289,269 278,524
- --------------------------------------------------------------------------------------------------------------------
Totals $ 1,230,689 $ 897,758 $ 777,462
- --------------------------------------------------------------------------------------------------------------------
Earnings Before Income Tax Expense:
Enclosure Products and Systems $ 39,318 $ 46,293 $ 26,343
Engineered Solutions 56,521 41,783 36,473
Tools and Supplies 13,150 28,717 35,138
General corporate and other (51,604) (27,569) (20,540)
- --------------------------------------------------------------------------------------------------------------------
Totals $ 57,385 $ 89,224 $ 77,414
- --------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization:
Enclosure Products and Systems $ 19,409 $ 9,533 $ 5,830
Engineered Solutions 17,059 12,344 13,099
Tools and Supplies 10,467 9,049 8,184
General corporate and other 635 186 120
- --------------------------------------------------------------------------------------------------------------------
Totals $ 47,570 $ 31,112 $ 27,233
- --------------------------------------------------------------------------------------------------------------------
Capital Expenditures:
Enclosure Products and Systems $ 25,191 $ 13,822 $ 11,044
Engineered Solutions 22,328 11,375 10,834
Tools and Supplies 8,914 7,965 9,290
General corporate and other 394 301 223
- --------------------------------------------------------------------------------------------------------------------
Totals $ 56,827 $ 33,463 $ 31,391
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
August 31,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Assets:
Enclosure Products and Systems $ 639,776 $ 241,027 $ 140,963
Engineered Solutions 324,581 192,476 183,992
Tools and Supplies 202,176 193,605 205,746
General corporate 8,189 22,438 16,377
- --------------------------------------------------------------------------------------------------------------------
Totals $ 1,174,722 $ 649,546 $ 547,078
- --------------------------------------------------------------------------------------------------------------------
49
The following table summarizes financial information by geographic region. The
information for Earnings Before Income Tax Expense includes the effects of the
Merger, restructuring and other non-recurring charges of $69,440 discussed in
Note G - "Merger, Restructuring and Other Non-recurring Charges." Such charges
allocated by geographic region are $39,907 in North America, $7,743 in Europe,
$4,320 in Japan and Asia Pacific, $1,750 in Latin America and $15,720 in General
corporate and other.
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Net Sales:
North America $ 895,355 $ 653,333 $ 547,561
Europe 284,189 180,995 163,213
Japan and Asia Pacific 37,588 51,962 56,750
Latin America 13,557 11,468 9,938
- --------------------------------------------------------------------------------------------------------------------
Totals $1,230,689 $ 897,758 $ 777,462
- --------------------------------------------------------------------------------------------------------------------
Earnings Before Income Tax Expense:
North America $ 91,511 $ 103,599 $ 77,836
Europe 20,474 15,818 17,531
Japan and Asia Pacific (1,250) (1,121) 3,772
Latin America (1,746) (1,503) (1,185)
General corporate and other (51,604) (27,569) (20,540)
- --------------------------------------------------------------------------------------------------------------------
Totals $ 57,385 $ 89,224 $ 77,414
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
August 31,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Assets:
North America $ 743,943 $ 458,077 $ 387,225
Europe 390,588 125,335 93,325
Japan and Asia Pacific 24,412 33,669 38,834
Latin America 7,590 10,027 11,317
General corporate 8,189 22,438 16,377
- --------------------------------------------------------------------------------------------------------------------
Totals $1,174,722 $ 649,546 $ 547,078
- --------------------------------------------------------------------------------------------------------------------
Earnings before income tax expense for each business and geographic segment do
not include general corporate expenses, interest expense or currency exchange
adjustments. Sales between business segments and geographic areas are
insignificant and are accounted for at prices intended to yield a reasonable
return to the selling affiliate. No single customer accounted for more than 10%
of total sales in 1998, 1997 or 1996. Export sales from domestic operations were
less than 10% in each of the periods presented.
Corporate assets, which are not allocated, represent principally cash and
deferred income taxes.
Note O - Contingencies and Litigation
The Company had outstanding letters of credit totaling $6,625 and $6,396 at
August 31, 1998 and 1997, respectively. The letters of credit generally serve as
collateral for liabilities included in the Consolidated Balance Sheet.
The Company is a party to various legal proceedings which have arisen in the
normal course of its business. These legal proceedings typically include product
liability, environmental, labor and patent claims. The Company has recorded
reserves for loss contingencies based on the specific circumstances of each
case. Such reserves are recorded when it is probable that a loss has been
incurred as of the balance sheet date and such loss can be reasonably estimated.
In the opinion of management, the resolution of these contingencies will not
have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
The Company has facilities at numerous geographic locations which are subject to
a range of environmental laws and regulations. Environmental costs are expensed
or capitalized depending on their future economic benefits. Expenditures that
have no future economic value are expensed. Liabilities are recorded when
environmental remediation is probable and the costs can be reasonably estimated.
Environmental expenditures over the last three years have not been material.
Although the level of future expenditures for environmental remediation is
impossible to determine with any degree of certainty, it is management's opinion
that such costs will not have a material adverse effect on the Company's
financial position, results of operations or cash flows. Environmental
remediation accruals of $4,049 and $1,608 were included in the Consolidated
Balance Sheet at August 31, 1998 and 1997, respectively.
Note P - Subsequent Events
On September 29, 1998, the Company, through its wholly-owned subsidiary, APW
Enclosure Systems Limited, accepted for payment all shares of Rubicon Group plc
("Rubicon") common stock which had been tendered pursuant to the APW Enclosure
Systems Limited tender offer for all outstanding shares of common stock at 2.35
pounds sterling per share and all outstanding shares of cumulative preferred
stock at 0.50 pounds sterling per share, which constituted control, and
continued with steps to acquire the remaining outstanding shares. Rubicon is a
leading provider of electronic manufacturing services and engineered magnetic
solutions to major OEMs in the information technology and telecommunication
industries. Consideration for the transaction totaled approximately $365,000,
including related fees and expenses. APW Enclosure Systems Limited obtained all
of the funds it expended from the Company. To provide the necessary funds, the
Company and Enerpac B.V., a Netherlands subsidiary of the Company, as Borrowers,
entered into a Multicurrency Credit Agreement, dated as of October 14, 1998,
providing for an $850,000, 5-year revolving credit facility (the "New
Facility"). In conjunction with the closing of the New Facility, the Company
terminated its prior $700,000, 5-year revolving credit facility (the
"Facility"), described in Note I - "Long-term Debt," and used certain funds
received under the New Facility to repay borrowings under the Facility.
SUPPLEMENTARY DATA
Unaudited quarterly financial data for the Company for 1998 and 1997 is included
in Item 8 - "Financial Statements and Supplementary Data."
51
Report of Independent Accountants on Financial Statement Schedule
To the Directors of Applied Power Inc.:
Our audit of the consolidated financial statements referred to in our report
dated September 30, 1998 appearing on page 24 of this Form 10-K also included an
audit of the information as of and for the year ended August 31, 1998 in the
Financial Statement Schedule listed in Item 14(a) of this Form 10-K. The
Financial Statement Schedules for the years ended August 31, 1997 and 1996,
prior to the restatement for pooling of interests, and the separate Financial
Statement Schedules of ZERO Corporation in the 1997 and 1996 restated
consolidated financial statements, for the years ended March 31, 1997 and 1996,
were audited and reported on separately by other independent accountants. We
also audited the combination of the information for each of the two years in the
period ended August 31, 1997, after restatement for the 1998 pooling of
interests. In our opinion, this Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein as of and for the year
ended August 31, 1998 when read in conjunction with the related consolidated
financial statements, and, in our opinion, the information for each of the two
years in the period ended August 31, 1997, has been properly combined on the
basis described in Note A of Notes to Consolidated Financial Statements.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
September 30, 1998
52
APPLIED POWER INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
(Dollars in Thousands)
Additions Deductions
----------------------- ------------------------
Accounts
Balance at Effect of Charged to Written Off Balance
Beginning Excluded Costs and Net Less at End
Description of Period Activity Expenses Acquired Recoveries Other of Period
- ------------------------------ ---------- --------- ----------- -------- ----------- ---------- ----------
- --------------------------
Deducted from assets to
which they apply:
- --------------------------
Allowance for losses -
trade accounts receivable
August 31, 1998 $ 4,936 $ 74 $ 3,018 $ 722 $ 1,485 $ 507 $ 6,758
======== ====== ======== ======= ======== ====== ========
August 31, 1997 $ 4,938 $ - $ 1,797 $ 133 $ 1,623 $ 309 $ 4,936
======== ====== ======== ======= ======== ====== ========
August 31, 1996 $ 4,317 $ - $ 1,439 $ 100 $ 863 $ 55 $ 4,938
======== ====== ======== ======= ======== ====== ========
Allowance for losses -
inventory
August 31, 1998 $ 13,741 $ 415 $ 31,118 $ 5,612 $ 9,004 $ 614 $ 41,268
======== ====== ======== ======= ======== ====== ========
August 31, 1997 $ 12,164 $ - $ 7,676 $ 465 $ 6,120 $ 444 $ 13,741
======== ====== ======== ======= ======== ====== ========
August 31, 1996 $ 8,437 $ - $ 7,794 $ 30 $ 4,006 $ 91 $ 12,164
======== ====== ======== ======= ======== ====== ========
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 POWER INC.
(Registrant)
Dated: December 8, 1999 By:/s/ Robert C. Arzbaecher
------------------------
Robert C. Arzbaecher
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer
and duly authorized to sign
on behalf of the registrant)
54
APPLIED POWER INC.
(the "Registrant")
(Commission File No. 1-11288)
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
INDEX TO EXHIBITS
Incorporated Herein Filed
Exhibit Description By Reference To Herewith
- ------------ ------------------------------------- ----------------------------------- -------------
2.1 Agreement and Plan of Merger, dated Exhibit (c)(1) to the
as of September 2, 1997, among Registrant's Tender Offer
Applied Power Inc., TVPA Corp. and Statement on Schedule 14D-1 filed
Versa Technologies, Inc. on September 5, 1997 (File No.
5-13342)
2.2 (a) Agreement and Plan of Merger, Appendix A to the Joint Proxy
dated as of April 6, 1998, by and Statement/Prospectus contained in
among Applied Power Inc., ZERO the Registrant's Registration
Corporation and STB Acquisition Statement on Form S-4 (File No.
Corporation 333-58267)
(b) Certified copy of Certificate Exhibit 2.2 to the Registrant's
of Merger of STB Acquisition Form 8-K dated July 31, 1998
Corporation with and into ZERO
Corporation, dated July 31, 1998
3.1 Restated Articles of Incorporation Exhibit 4.1 to the Registrant's
of the Registrant (dated as of Registration Statement on Form
February 13, 1998) S-8 (File No. 333-46469)
3.2 Amended and Restated Bylaws of the Exhibit 3.2 to the Registrant's
Registrant (effective as of Form 10-K for the fiscal year
January 8, 1997) ended August 31, 1997 ("1997
10-K")
4+
4.1 Articles III, IV and V the Restated See Exhibit 3.1 above
Articles of Incorporation
+ Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant agrees
to furnish to the Securities and Exchange Commission upon request a copy of any
unfiled instruments, or any unfiled exhibits or schedules to filed instruments,
defining the rights of security holders.
55
Incorporated Herein Filed
Exhibit Description By Reference To Herewith
- ------------ ------------------------------------- ----------------------------------- -------------
4.2 Agreement for Purchase and Sale, Exhibit 19.2(a)-(g) to the
dated August 29, 1990, between Registrant's Form 10-Q for
Minnesota Mining and quarter ended May 31, 1991
Manufacturing Company and
Applied Power Inc., and seven related
Leases, each dated April 29, 1991,
between Bernard Garland and
Sheldon Garland, d/b/a Garland
Enterprises, as Landlord, and
Applied Power Inc., as Tenant
4.3 Multicurrency Credit Agreement, dated Exhibit 4.1 to the Registrant's
as of June 18, 1998, among Applied Form 8-K dated June 5, 1998
Power Inc. and Enerpac B.V., as
Borrowers, various financial
institutions from time to time party
thereto, as Lenders, The First
National Bank of Chicago, as
Syndication Agent, Societe Generale,
as Documentation Agent, and Bank of
America National Trust and Savings
Association, as Administrative Agent,
arranged by BancAmerica Robertson
Stephens
4.4 Multicurrency Credit Agreement, dated X/(1)/
as of October 14, 1998, among Applied
Power Inc. and Enerpac B.V., as
Borrowers, various financial
institutions from time to time party
thereto, as Lenders, The First
National Bank of Chicago, as
Syndication Agent, Societe Generale,
as Documentation Agent, and Bank of
America National Trust and Savings
Association, as Administrative Agent,
arranged by NationsBanc Montgomery
Securities LLC (Replaced Exhibit 4.3)
4.5 (a) Receivables Purchase Agreement, Exhibit 4.1 to the Registrant's
dated as of November 20, 1997, among Form 10-Q for quarter ended
Applied Power Credit Corporation as November 30, 1997
Seller, Applied Power Inc.
individually and as Servicer and
Barton Capital Corporation as
Purchaser and Societe Generale as
Agent
/1)/ Filed with the original filing of this Form 10-K.
56
Incorporated Herein Filed
Exhibit Description By Reference To Herewith
- ----------- --------------------------------------- ------------------------------------ -------------
(b) First Amendment to Receivables X(1)
Purchase Agreement dated as of August
28, 1998
10.1* Employment Agreement dated Exhibit 10.1 to the Registrant's
May 9, 1994 between Applied Form 10-K for fiscal year ended
Power Inc. and Richard G. Sim August 31, 1994
(superseding Employment Agreement
dated July 5, 1985, as amended)
10.2* (a) Applied Power Inc. 1985 Stock Exhibit 10.2(a) to the Registrant's
Option Plan adopted by Board of Form 10-K for fiscal year ended
Directors on August 1, 1985 and August 31, 1989
approved by shareholders on ("1989 10-K")
January 6, 1986, as amended
("1985 Plan")
(b) Amendment to 1985 Plan adopted Exhibit 10.2(b) to 1989 10-K
by Board of Directors on November
8, 1989 and approved by shareholders
on January 13, 1990
(c) Amendment to 1985 Plan adopted Exhibit 10.2(c) to the Registrant's
by Board of Directors on August 9, Form 10-K for fiscal year ended
1990 August 31, 1990 ("1990 10-K")
(d) Amendment to 1985 Plan adopted Exhibit 10.2(d) to 1997 10-K
by Board of Directors on May 8,
1997
10.3* (a) Applied Power Inc. 1987 Exhibit 10.8 to the Registrant's
Nonqualified Stock Option Plan Form 10-K for fiscal year ended
adopted by Board of Directors on August 31, 1987
November 3, 1987 and approved by
shareholders on January 7, 1988
("1987 Plan")
(b) Amendment to 1987 Plan adopted See Exhibit 10.2(b)
by Board of Directors on November
8, 1989 and approved by shareholders
on January 13, 1990
1) Filed with the original filing of this Form 10-K.
* Management contracts and executive compensation plans and arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
57
Incorporated Herein Filed
Exhibit Description By Reference To Herewith
- ----------- --------------------------------------- ------------------------------------ -------------
(c) Amendment to 1987 Plan adopted Exhibit 10.3(c) to 1997 10-K
by Board of Directors on May 8,
1997
10.4* (a) Applied Power Inc. 1990 Stock Exhibit A to the Registrant's Proxy
Option Plan adopted by Board of Statement dated December 5, 1990
Directors on August 9, 1990 and for 1991 Annual Meeting of
approved by shareholders on Shareholders
January 7, 1991 ("1990 Plan")
(b) Amendment to 1990 Plan adopted Exhibit 10.5(b) to the Registrant's
by Board of Directors on August 10, Form 10-K for fiscal year ended
1992 and approved by shareholders August 31, 1992
on January 7, 1993
(c) Amendment to 1990 Plan adopted Exhibit 10.4(c) to 1997 10-K
by Board of Directors on May 8,
1997
10.5* Description of Fiscal 1999 X(1)
Management Bonus Arrangements
10.6* Description of Fiscal 1998 Exhibit 10.6 to 1997 10-K
Management Bonus Arrangements
10.7* (a) Applied Power Inc. 1989 Exhibit 10.7 to 1989 10-K
Outside Directors' Stock Option
Plan adopted by Board of Directors
on November 8, 1989 and
approved by shareholders on
January 13, 1990 ("1989 Plan")
(b) Amendment to 1989 Plan Exhibit 10.7(b) to 1990 10-K
adopted by Board of Directors on
November 9, 1990 and approved
by shareholders on January 7, 1991
(c) Amendment to 1989 Plan Exhibit 10.7(c) to the Registrant's
adopted by Board of Directors on Form 10-K for fiscal year ended
October 31, 1996 August 31, 1996 ("1996 10-K")
1) Filed with the original filing of this Form 10-K.
* Management contracts and executive compensation plans and arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
58
Incorporated Herein Filed
Exhibit Description By Reference To Herewith
- ------------ -------------------------------------- ------------------------------------ -------------
10.8* Outside Directors' Deferred Exhibit 10.8 to the Registrant's
Compensation Plan adopted by Board Form 10-K for fiscal year ended
of Directors on May 4, 1995 August 31, 1995
10.9 Asset Purchase Agreement Exhibit 2.1 to the Registrant's
between Applied Power Inc. and Form 8-K dated October 11, 1996
Wright Line Inc., on the one hand
and Everest Electronic Equipment,
Inc., Wallace H. Twedt, Terry D.
Wells and Robert L. Wells, on the
other hand dated August 27, 1996
10.10* (a) 1996 Stock Plan adopted by Board Annex A to the Registrant's Proxy
of Directors on August 8, 1996 and Statement dated November 19, 1996
proposed for shareholder approval for 1997 Annual Meeting of
on January 8, 1997 Shareholders
(b) Amendment to 1996 Stock Plan Exhibit 10.10(b) to 1997 10-K
adopted by Board of Directors on
May 8, 1997
10.11* Executive Deferred Compensation Exhibit 10.11 to 1996 10-K
Plan adopted by Board of Directors
on October 31, 1996
21 Subsidiaries of the Registrant X(1)
23.1 Consent of Deloitte & Touche LLP X(1)
Milwaukee, Wisconsin
23.2 Consent of Deloitte & Touche LLP X(1)
Los Angeles, California
23.3 Consent of PricewaterhouseCoopers X(1)
LLP
24 Power of Attorney See Signature Page of this report
27.1 Financial Data Schedule X(1)
27.2 Restated Financial Data Schedule X(1)
(fiscal year ended August 31, 1997)
27.3 Restated Financial Data Schedule X(1)
(fiscal year ended August 31, 1996)
(1) Filed with the original filing of this Form 10-K.
* Management contracts and executive compensation plans and arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
59