SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 31, 2000
APPLIED POWER INC.
(Exact name of Registrant as specified in its charter)
Wisconsin 1-11288 39-0168610
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification No.)
6100 N. Baker Road
Milwaukee, WI 53209
Mailing address: P.O. Box 325, Milwaukee, Wisconsin 53201
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:(414) 352-4160
Item 2. Acquisition or Disposition of Assets
On July 31, 2000, Applied Power Inc. distributed all the issued and
outstanding shares of APW Ltd. to its shareholders of record as of July 21,
2000. The APW Ltd. common stock was distributed on the basis of one share of
APW Ltd. common stock for every one share of Applied Power Inc. common stock
held at the close of business on July 21, 2000 as more specifically described in
the Information Statement sent to all shareholders. APW Ltd. owns, directly and
indirectly, the electronic business of Applied Power Inc.
On July 31, 2000, Applied Power Inc. also consummated its tender offer and
repurchased its subordinated notes outstanding pursuant to a tender offer.
Applied Power Inc. also issued $200 million of 13% senior subordinated notes due
2009.
In connection with the spin-off, Applied Power Inc. entered into a new
credit facility. The new credit facility consists of:
. the $115.0 million Tranche A Term Loan, which will mature in six
years,
. the $125.0 million Tranche B Term Loan, which will mature in eight
years, and
. a revolving credit facility of up to $100.0 million, which will mature
in six years.
In addition, Richard G. Sim, William Albrecht, Gustav Boel, Richard Carroll
and Joseph Lower resigned as officers of Applied Power Inc. in order to focus
more exclusively on APW Ltd. Richard G. Sim remains chairman of Applied Power
Inc. and Gustav Boel, an officer of APW Ltd., also became a director of Applied
Power Inc. As a result, Applied Power Inc.'s board now stands at seven
directors.
Item 7. Financial Statements and Exhibits
The following financial statements reflect the electronics business as a
discontinued operation and reflects the adjustments associated with the
distribution of APW Ltd. to Applied Power Inc. shareholders.
Consolidated statements of earnings for the year ended August 31, 1999,
1998, and 1997 and the quarters ended May 31, 2000 and 1999 present the results
as if the distribution of APW Ltd. occurred as of the first day of the financial
period being presented. The statements of earnings have been prepared by
adjusting the historical statements of earnings to reflect the electronics
business as a
discontinued operation and include the effect of estimated costs and expenses as
a result of distribution.
The consolidated balance sheet presents the consolidated financial position
of Applied Power Inc. assuming the distribution had occurred. Such balance sheet
has been prepared adjusting the historical balance sheet for the effect of
changes in assets, liabilities and capital associated with APW Ltd.
Financial statements may not necessarily reflect the consolidated results
of operations or financial position that would have existed on those dates had
the distribution of APW Ltd. occurred nor are they indicative of future results.
SIGNATURE
Pursuant to the requirements 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)
Date: August 14, 2000 By: /s/ Andrew G. Lampereur
----------------------------
Andrew G. Lampereur
Vice President Chief Financial
Officer (Duly authorized to sign on
behalf of the Registrant)
Exhibit Index
- -----------------------------------------------------------------------------
EXHIBIT DESCRIPTION FILED
- -----------------------------------------------------------------------------
10.1 Term Loan & Revolving Credit Leasehold Mortgage, X
Assignment of Leases and Rents, Security Agreement and
Fixture Filing by Applied Power Inc. Mortgagor, To Credit
Suisse First Boston, as Collateral Agent, Mortgagee
Securing Principal Indebtedness of $430,000,000 Dated as
of July 31, 2000 Relating to Premises in Milwaukee County,
Wisconsin
- -----------------------------------------------------------------------------
10.2 Term Loan & Revolving Credit Leasehold Mortgage, X
Assignment of Leases and Rents, Security Agreement and
Fixture Filing by APW Tools & Supplies, Inc. Mortgagor, to
Credit Suisse First Boston, as Collateral Agent, Mortgagee
Securing Principal Indebtedness of $430,000,000 Dated as
of July 31, 2000 Relating to Premises in Milwaukee County,
Wisconsin
- -----------------------------------------------------------------------------
10.3 Form of Borrowing Request X
- -----------------------------------------------------------------------------
10.4 Subsidiary Guarantee Agreement X
- -----------------------------------------------------------------------------
10.5 Form of Officers' Certificate of Applied Power Inc. X
- -----------------------------------------------------------------------------
10.6 Applied Power Inc. Letter of Credit Fee Letter X
- -----------------------------------------------------------------------------
10.7 Indemnity, Subrogation and Contribution Agreement X
- -----------------------------------------------------------------------------
10.8 Credit Agreement dated as of July 31, 2000 among Applied X
Power Inc. (doing business as Actuant Corporation), The
Lenders Named Herein and Credit Suisse First Boston, as
Lead Arranger, Collateral Agent and Administrative Agent,
First Union National Bank Syndication Agent and ING (U.S.)
Capital LLC Documentation Agent
- -----------------------------------------------------------------------------
10.9 Term Loan & Revolving Credit Mortgage, Assignment of X
Leases and Rents, Security Agreement and Fixture Filing by
APW Tools & Supplies, Inc. Mortgagor, to Credit Suisse
First Boston, as Collateral Agent, Mortgagee Securing
Principal Indebtedness of $430,000,000 Dated as of July
31, 2000 Relating to Premises in Milwaukee County,
Wisconsin
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
10.10 Term Loan & Revolving Credit Mortgage, Assignment of X
Leases and Rents, Security Agreement and Fixture Filing by
Mox-Med, Inc. Mortgagor to Credit Suisse First Boston, as
Collateral Agent, Mortgagee Securing Principal
Indebtedness of $430,000,000 Dated as of July 31, 2000
Relating to Premises in Columbia County, Wisconsin
- -----------------------------------------------------------------------------
10.11 $200,000,000 Applied Power Inc. 13% Senior Subordinated X
Notes Due 2009 Registration Rights Agreement, dated
August 1, 2000.
- -----------------------------------------------------------------------------
10.12 Applied Power Inc. as issuer and the Subsidiary Guarantors X
and Bank One Trust Company, N.A. Indenture, dated as of
August 1, 2000.
- -----------------------------------------------------------------------------
10.13 Applied Power Inc. Purchase Agreement, dated July 21, X
2000
- -----------------------------------------------------------------------------
10.14 Amendment to Purchase and Sale Agreement, dated April X
30, 2000
- -----------------------------------------------------------------------------
10.15 Assignment and Assumption Agreement between Applied X
Power Inc. and APW North America, Inc.
- -----------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
- ------------------------------------------ ----
Report of Independent Accountants................ F-2
Report of Independent Auditors................... F-3
Consolidated Statements of Earnings
For the years ended August 31, 1997, 1998
and 1999; and the nine months ended
May 31, 1999 (unaudited) and May 31, 2000
(unaudited)................................... F-4
Consolidated Balance Sheets
As of August 31, 1998 and 1999; and May 31,
2000 (unaudited).............................. F-5
Consolidated Statements of Shareholders' Equity
and Comprehensive Income
For the years ended August 31, 1997, 1998 and
1999; and the nine months ended May 31, 1999
(unaudited) and May 31, 2000 (unaudited)...... F-6
Consolidated Statements of Cash Flows
For the years ended August 31, 1997, 1998 and
1999; and the nine months ended May 31, 1999
(unaudited) and May 31, 2000 (unaudited)...... F-8
Notes to Consolidated Financial Statements....... F-9
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Applied Power Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, shareholders' equity and comprehensive
income, and cash flows present fairly, in all material respects, the financial
position of Applied Power Inc. (the Company) at August 31, 1998 and 1999, and
the results of their operations and their cash flows for each of the two years
in the period ended August 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, 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 audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
September 29, 1999, except for information
in Note B, for which the date is July 7, 2000
F-2
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors of Applied Power Inc.:
We have audited the accompanying consolidated statements of earnings,
shareholders' equity and comprehensive income, and cash flows of Applied Power
Inc. and subsidiaries for the year ended August 31, 1997. 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 based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements of Applied Power Inc.
and subsidiaries present fairly, in all material respects, the results of their
operations and their cash flows for the year ended August 31, 1997, in
conformity with accounting principles generally accepted in the United States
of America.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
September 25, 1997
(November 24, 1999 as to the
restatement for the 1998 pooling
of interests described in Notes
A and B)
(July 7, 2000 as to the
reclassification for the
discontinued operations as
described in Note B)
F-3
APPLIED POWER INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
Nine Months Ended
Years Ended August 31, May 31,
---------------------------- ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- ----------
(Unaudited) (Unaudited)
Net sales................ $522,440 $637,479 $695,704 $524,356 $535,655
Cost of products sold.... 341,906 436,594 443,020 334,104 341,816
-------- -------- -------- -------- --------
Gross profit............ 180,534 200,885 252,684 190,252 193,839
Engineering, selling and
administrative
expenses................ 139,782 153,892 136,671 105,558 103,329
Amortization of
intangible assets....... 4,971 12,582 8,748 6,656 5,902
Contract termination
costs (recovery)........ -- -- 7,824 7,824 (1,446)
Corporate reorganization
expenses................ -- -- -- -- 4,449
Restructuring charges.... -- 11,367 -- -- --
Merger related expenses.. -- 9,276 -- -- --
Provision for loss on
sale of subsidiary...... -- 4,500 -- -- --
-------- -------- -------- -------- --------
Operating earnings...... 35,781 9,268 99,441 70,214 81,605
Other expense (income):
Net financing costs..... 5,067 12,535 41,181 30,638 27,892
Gain on life insurance
policy................. -- (1,709) -- -- --
Gain on sale of
building............... -- (9,815) -- -- --
Other (income) expense-
net.................... (2,381) (872) 850 179 (823)
-------- -------- -------- -------- --------
Earnings from continuing
operations before income
tax expense............. 33,095 9,129 57,410 39,397 54,536
Income tax expense....... 10,463 9,076 22,830 14,663 19,584
-------- -------- -------- -------- --------
Earnings from continuing
operations.............. 22,632 53 34,580 24,734 34,952
Discontinued operations
(Note B):
Earnings from operations
of discontinued
Electronics segment
(less applicable income
taxes of $20,836,
$21,622, $24,524,
$11,604 and $14,691,
respectively).......... 35,293 26,634 44,817 31,481 34,232
-------- -------- -------- -------- --------
Earnings before
extraordinary item...... 57,925 26,687 79,397 56,215 69,184
Extraordinary loss on
sale of subsidiary, net
of income tax benefit
of $1,700.............. -- -- -- -- (12,186)
-------- -------- -------- -------- --------
Net earnings............. $ 57,925 $ 26,687 $ 79,397 $ 56,215 $ 56,998
======== ======== ======== ======== ========
Basic Earnings Per Share:
Earnings from continuing
operations per share... $ 0.60 $ 0.00 $ 0.89 $ 0.64 $ 0.89
Earnings from
discontinued operations
per share.............. 0.93 0.70 1.15 0.81 0.88
-------- -------- -------- -------- --------
Earnings per share
before extraordinary
item................... 1.53 0.70 2.04 1.45 1.77
Extraordinary loss per
share.................. -- -- -- -- (0.31)
-------- -------- -------- -------- --------
Net earnings per share.. $ 1.53 $ 0.70 $ 2.04 $ 1.45 $ 1.46
======== ======== ======== ======== ========
Weighted average common
shares outstanding..... 37,880 38,380 38,825 38,783 39,045
======== ======== ======== ======== ========
Diluted Earnings Per
Share:
Earnings from continuing
operations per share... $ 0.57 $ 0.00 $ 0.86 $ 0.62 $ 0.87
Earnings from
discontinued operations
per share.............. 0.90 0.66 1.12 0.78 0.85
-------- -------- -------- -------- --------
Earnings per share
before extraordinary
item................... 1.47 0.66 1.98 1.40 1.72
Extraordinary loss per
share.................. -- -- -- -- (0.30)
-------- -------- -------- -------- --------
Net earnings per share.. $ 1.47 $ 0.66 $ 1.98 $ 1.40 $ 1.42
======== ======== ======== ======== ========
Weighted average common
and equivalent shares
outstanding............ 39,307 40,174 40,200 40,204 40,302
======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
APPLIED POWER INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
August 31,
-------------------- May 31,
1998 1999 2000
-------- ---------- -----------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents.................. $ 5,069 $ 7,256 $ 6,808
Accounts receivable, net................... 57,796 63,502 79,732
Inventories, net........................... 85,797 100,724 93,276
Prepaid expenses........................... 12,286 8,769 7,122
Deferred income taxes...................... 17,558 7,564 8,599
-------- ---------- ----------
Total current assets..................... 178,506 187,815 195,537
Net property, plant and equipment............ 77,281 78,998 70,679
Goodwill, net................................ 163,448 158,448 140,696
Other intangibles, net....................... 30,544 30,987 28,750
Net assets of discontinued operations........ 249,696 598,458 597,489
Other assets................................. 12,051 5,166 2,385
-------- ---------- ----------
Total assets............................. $711,526 $1,059,872 $1,035,536
======== ========== ==========
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings...................... $ 91 $ 230 $ --
Trade accounts payable..................... 49,573 52,361 55,730
Accrued compensation and benefits.......... 25,609 20,340 16,448
Other current liabilities.................. 36,724 23,591 19,582
-------- ---------- ----------
Total current liabilities................ 111,997 96,522 91,760
Long-term debt............................... 225,135 521,016 456,907
Deferred income taxes........................ 16,049 7,720 8,485
Other deferred liabilities................... 16,463 16,785 15,620
Shareholders' equity
Class A common stock, $0.20 par value per
share, authorized 80,000,000 shares,
issued and outstanding 38,626,068,
38,978,340 and 39,084,661 shares,
respectively.............................. 7,725 7,796 7,822
Additional paid-in capital................. 5,817 12,388 14,255
Retained earnings.......................... 335,805 412,863 468,104
Accumulated other comprehensive income..... (7,465) (15,218) (27,417)
-------- ---------- ----------
Total shareholders' equity............... 341,882 417,829 462,764
-------- ---------- ----------
Total liabilities and shareholders'
equity.................................. $711,526 $1,059,872 $1,035,536
======== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
APPLIED POWER INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
Years Ended August 31, 1997, 1998 and 1999
-------------------------------------------------------
Class Accumulated
A Additional Other Total
Common Paid-in Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
------ ---------- -------- ------------- -------------
Balance at September 1,
1996................... $2,893 $(4,890) $250,576 $ 4,707 $253,286
Net earnings for the
year................. -- -- 57,925 -- 57,925
Currency translation
adjustments.......... -- -- -- (8,394) (8,394)
--------
Total comprehensive
income............. 49,531
Cash dividends
declared............. -- -- (3,114) -- (3,114)
Exercise of stock
options and issuance
of treasury stock.... 34 5,656 (861) -- 4,829
Tax benefit of stock
option exercises..... -- 1,052 -- -- 1,052
Stock repurchase and
other................ -- (223) -- -- (223)
------ ------- -------- -------- --------
Balance at August 31,
1997................... 2,927 1,595 304,526 (3,687) 305,361
Net earnings for the
year................. -- -- 26,687 -- 26,687
Currency translation
adjustments.......... -- -- -- (3,744) (3,744)
--------
Total comprehensive
income............. 22,943
Cash dividends
declared............. -- -- (2,564) -- (2,564)
Exercise of stock
options.............. 72 7,686 -- -- 7,758
Tax benefit of stock
option exercises..... -- 929 -- -- 929
Issuance of common
stock in 2-for-1
stock split.......... 2,778 (2,778) -- -- --
Effect of ZERO
excluded period (Note
A)................... 1,948 (1,615) 7,156 (34) 7,455
------ ------- -------- -------- --------
Balance at August 31,
1998................... 7,725 5,817 335,805 (7,465) 341,882
Net earnings for the
year................. -- -- 79,397 -- 79,397
Currency translation
adjustments.......... -- -- -- (7,753) (7,753)
--------
Total comprehensive
income............. 71,644
Cash dividends
declared............. -- -- (2,339) -- (2,339)
Exercise of stock
options.............. 71 4,641 -- -- 4,712
Tax benefit of stock
option exercises..... -- 1,930 -- -- 1,930
------ ------- -------- -------- --------
Balance at August 31,
1999................... $7,796 $12,388 $412,863 $(15,218) $417,829
====== ======= ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-6
APPLIED POWER INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
Nine Months Ended May 31, 1999 (unaudited)
-------------------------------------------------------
Class Accumulated
A Additional Other Total
Common Paid-in Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
------ ---------- -------- ------------- -------------
Balance at September 1,
1998................... $7,725 $ 5,817 $335,805 $ (7,465) $341,882
Net earnings for the
nine month period.... -- -- 56,215 -- 56,215
Currency translation
adjustments.......... -- -- -- (5,712) (5,712)
--------
Total comprehensive
income............. 50,503
Cash dividends
declared............. -- -- (1,755) -- (1,755)
Exercise of stock
options.............. 63 3,308 -- -- 3,371
------ ------- -------- -------- --------
Balance at May 31,
1999................... $7,788 $ 9,125 $390,265 $(13,177) $394,001
====== ======= ======== ======== ========
Nine Months Ended May 31, 2000 (unaudited)
-------------------------------------------------------
Class Accumulated
A Additional Other Total
Common Paid-in Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
------ ---------- -------- ------------- -------------
Balance at September 1,
1999................... $7,796 $12,388 $412,863 $(15,218) $417,829
Net earnings for the
nine month period.... -- -- 56,998 -- 56,998
Currency translation
adjustments.......... -- -- -- (12,199) (12,199)
--------
Total comprehensive
income............. 44,799
Cash dividends
declared............. -- -- (1,757) -- (1,757)
Exercise of stock
options.............. 26 1,867 -- -- 1,893
------ ------- -------- -------- --------
Balance at May 31,
2000................... $7,822 $14,255 $468,104 $(27,417) $462,764
====== ======= ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-7
APPLIED POWER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months
Years Ended August 31, Ended May 31,
------------------------------- -----------------------
1997 1998 1999 1999 2000
--------- --------- --------- ----------- -----------
(Unaudited) (Unaudited)
Operating activities
Earnings from
continuing
operations........... $ 22,632 $ 53 $ 34,580 $ 24,734 $22,766
Adjustments to
reconcile earnings
from continuing
operations to cash
provided by operating
activities of
continuing
operations:
Depreciation and
amortization........ 19,790 24,563 26,056 20,457 18,224
Gain from sale of
assets.............. -- (9,899) (323) (124) --
Extraordinary loss on
sale of subsidiary.. -- -- -- -- 13,886
Provision for
deferred income
taxes............... (1,716) (4,508) 1,804 -- --
Restructuring and
other non-recurring
items, net of income
tax benefit......... -- 41,741 4,694 -- --
Changes in operating
assets and
liabilities,
excluding the effects
of business
acquisitions and
disposals:
Accounts receivable.. 27 (1,834) 3,371 3,926 (14,849)
Inventories.......... 13,520 13,318 (17,664) (7,740) (4,971)
Prepaid expenses and
other assets........ (5,890) 6,478 (5,207) 2,338 2,402
Trade accounts
payable............. 3,356 7,564 (2,236) (4,627) 7,268
Other liabilities.... 436 (16,160) (14,169) (2,280) (7,890)
--------- --------- --------- --------- -------
Cash provided by (used
in) operating
activities of
continuing operations.. 52,155 61,316 30,906 36,684 36,836
Cash provided by
operating activities of
discontinued
operations............. 31,879 68,351 119,483 47,458 17,704
--------- --------- --------- --------- -------
Total cash provided by
operating activities... 84,034 129,667 150,389 84,142 54,540
Investing activities
Proceeds on sale of
property, plant and
equipment............ 3,591 16,908 4,884 4,760 703
Additions to property,
plant and equipment.. (15,734) (25,214) (22,885) (21,262) (9,170)
Business acquisitions,
net of cash
acquired............. -- (135,727) (7,320) (3,500) --
Product line
dispositions and
other................ 902 6,061 -- -- 15,233
Net investing
activities of
discontinued
operations........... (93,103) (313,999) (435,337) (409,078) (42,206)
--------- --------- --------- --------- -------
Cash used in investing
activities............. (104,344) (451,971) (460,658) (429,080) (35,440)
Financing activities
Net principal
borrowings (payments)
on long-term debt.... (30,565) 102,591 403,349 (27,130) (36,514)
(Decreases in)
additions to
receivables financing
facility............. (7,191) 25,399 1,634 1,950 (9,656)
Proceeds from
sale/leaseback
transactions......... -- -- 6,293 -- --
Dividends paid on
common stock......... (3,114) (2,564) (2,339) (1,171) (1,757)
Stock option exercises
and other............ 4,863 6,855 4,552 3,332 1,893
Net financing
activities of
discontinued
operations........... 71,767 165,348 (86,790) 377,053 11,657
--------- --------- --------- --------- -------
Cash provided by (used
in) financing
activities............. 35,760 297,629 326,699 354,034 (34,377)
Effect of exchange rate
changes on cash........ (1,422) (882) (521) 47 (173)
--------- --------- --------- --------- -------
Net increase (decrease)
in cash and cash
equivalents............ 14,028 (25,557) 15,909 9,143 (15,450)
Effect of change in cash
of discontinued
operations............. (7,190) 7,769 (13,722) 1,280 15,002
Cash and cash
equivalents--beginning
of year................ 6,160 12,998 5,069 5,069 7,256
Effect of ZERO excluded
period (Note A)........ -- 9,859 -- -- --
--------- --------- --------- --------- -------
Cash and cash
equivalents--end of
year................... $ 12,998 $ 5,069 $ 7,256 $ 15,492 $ 6,808
========= ========= ========= ========= =======
The accompanying notes are an integral part of these financial statements.
F-8
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Interim Financial Statements: The accompanying Consolidated
Statements of Earnings and Cash Flows for the nine months ended May 31, 1999
and May 31, 2000, the Consolidated Statement of Shareholders' Equity and
Comprehensive Income for the nine months ended May 31, 2000, the Consolidated
Balance Sheet as of May 31, 2000 and the related notes, have not been audited.
Note A--Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of Applied Power Inc. and its subsidiaries, doing business as
Actuant Corporation ("Applied Power," "Actuant," or the "Company"). Applied
Power 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 until 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 D--
"Merger, Acquisitions and Divestitures," 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 ("STB"), with and into ZERO (the
"Merger") pursuant to an Agreement and Plan of Merger by and among Applied
Power, ZERO and STB 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. Prior to the Merger, ZERO had
a March 31 fiscal year end. The Consolidated Balance Sheet and Statements of
Earnings, Shareholders' Equity and Comprehensive Income, 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 Statements of Earnings, Shareholders' Equity and
Comprehensive Income, and Cash Flows for the year ended August 31, 1997 reflect
the combination of the results of operations and cash flows of ZERO for the
year ended March 31, 1997 and the results of operations and cash flows of
Applied Power Inc. for the fiscal year ended August 31, 1997. 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 a fiscal 1998 adjustment to the Consolidated Statements of Shareholders'
Equity and Comprehensive Income and Cash Flows. Net sales and net income for
ZERO for the excluded period from April 1, 1997 to August 31, 1997 were $107.2
million and $7.9 million, respectively. The majority of the ZERO businesses are
part of the Electronics segment and are part of discontinued operations as
described more fully in Note B--"Discontinued Operations."
Unaudited Interim Financial Statements: The accompanying Consolidated
Statements of Earnings and Cash Flows for the nine months ended May 31, 1999
and May 31, 2000, the Consolidated Statement of Shareholders' Equity and
Comprehensive Income for the nine months ended May 31, 2000, the Consolidated
Balance Sheet as of May 31, 2000 and the related notes, have not been audited.
However, they have been prepared in conformity with the accounting principles
stated in the audited consolidated financial statements for the years ended
August 31, 1997, 1998, and 1999. In the opinion of management, all adjustments
have been made, including normal recurring adjustments, that are necessary to
present fairly the unaudited interim consolidated financial statements. The
results of operations for the interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
Cash Equivalents: The Company considers all highly liquid investments with
original maturities of 90 days or less to be cash equivalents.
F-9
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories: Inventories are comprised of material, direct labor and
manufacturing overhead, and are stated at the lower of cost or market.
Inventory cost is determined using the last-in, first-out ("LIFO") method for a
portion of U.S. owned inventory (approximately 63% and 62% of total inventories
in 1998 and 1999, 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
Sheets by approximately $8.6 million and $8.4 million at August 31, 1998 and
1999, respectively.
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 either the straight-line or regulatory
methods for income tax purposes. Capital leases and leasehold improvements are
amortized over the life of the related asset 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
as incurred.
Goodwill and Other 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. Impairment of goodwill, if any, is measured on the basis of whether
anticipated undiscounted operating cash flows generated by the underlying
assets exceeds the recorded goodwill. For the year ended August 31, 1998, the
Company recorded an impairment of goodwill of $5.6 million. For further
information, see Note H--"Merger, Restructuring and Other Non-recurring Items."
Based on the Company's evaluation, no impairment of goodwill was realized for
any other periods presented.
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 $9.5
million, $11.2 million and $7.6 million in fiscal 1997, 1998 and 1999,
respectively.
Financing Costs: Net financing costs represent interest expense, financing
fees, amortization of debt financing costs and accounts receivable financing
costs, net of interest and investment income earned, which were insignificant
for all periods presented.
Income Taxes: The Company uses the liability method to record deferred
income tax assets and liabilities relating to the expected future income tax
consequences of transactions that have been recognized in the consolidated
financial statements. Under this method, deferred tax assets and liabilities
are determined based on the temporary differences between financial statement
carrying amounts and income tax bases of assets and liabilities using tax rates
in effect in the years in which temporary differences are expected to reverse.
For further information, see Note M--"Income Taxes."
F-10
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share: The following table sets forth the computation of basic
and diluted earnings per share (fiscal 1998 and 1999 results include
restructuring charges and other one-time items--see Note H--"Merger,
Restructuring and Other Non-recurring Items"):
Nine Months
Years Ended August 31, Ended May 31,
----------------------- -----------------------
1997 1998 1999 1999 2000
------- ------- ------- ----------- -----------
(unaudited) (unaudited)
Numerator (in thousands):
Earnings from continuing
operations.................. $22,632 $ 53 $34,580 $24,734 $34,952
Earnings from discontinued
operations.................. 35,293 26,634 44,817 31,481 34,232
Extraordinary loss on sale of
subsidiary.................. -- -- -- -- (12,186)
------- ------- ------- ------- -------
Net earnings............... $57,925 $26,687 $79,397 $56,215 $56,998
======= ======= ======= ======= =======
Denominator (in thousands):
Weighted average common
shares outstanding for basic
earnings per share.......... 37,880 38,380 38,825 38,783 39,045
Net effect of dilutive stock
options based on the
treasury stock method using
average market price........ 1,427 1,794 1,375 1,421 1,257
------- ------- ------- ------- -------
Weighted average common and
potentially issuable
shares outstanding for
diluted earnings per
share..................... 39,307 40,174 40,200 40,204 40,302
======= ======= ======= ======= =======
Basic Earnings Per Share:
Earnings from continuing
operations per share........ $ 0.60 $ 0.00 $ 0.89 $ 0.64 $ 0.89
Earnings from discontinued
operations per share........ 0.93 0.70 1.15 0.81 0.88
Extraordinary loss per
share....................... -- -- -- -- (0.31)
------- ------- ------- ------- -------
Net earnings per share..... $ 1.53 $ 0.70 $ 2.04 $ 1.45 $ 1.46
======= ======= ======= ======= =======
Diluted Earnings Per Share:
Earnings from continuing
operations per share........ $ 0.57 $ 0.00 $ 0.86 $ 0.62 $ 0.87
Earnings from discontinued
operations per share........ 0.90 0.66 1.12 0.78 0.85
Extraordinary loss per
share....................... -- -- -- -- (0.30)
------- ------- ------- ------- -------
Net earnings per share..... $ 1.47 $ 0.66 $ 1.98 $ 1.40 $ 1.42
======= ======= ======= ======= =======
Stock options to purchase approximately 0.4 million shares of common stock
were outstanding during 1999 but were not included in the above computation of
diluted earnings per share because the exercise price was greater than the
average market price of the common shares. Less than 0.1 million stock options
were anti-dilutive for fiscal years 1997 and 1998.
Foreign Currency Translation: A significant portion of the Company's sales,
income and cash flow is derived from its international operations. The
financial position and the results of operations of Actuant's foreign
operations are measured using the local or regional currency of the countries
in which they operate and are translated into U.S. Dollars. Revenues and
expenses of foreign subsidiaries are translated into U.S. Dollars at the
average exchange rate effective during the period. Although the effects of
foreign currency fluctuations are mitigated by the fact that expenses of
foreign subsidiaries are generally incurred in the same currencies in which the
sales are generated, the reported results of operations of Actuant's foreign
subsidiaries are affected by changes in foreign currency exchange rates and, as
compared to prior periods, will be higher or lower depending on the weakening
or strengthening of the U.S. Dollar. In addition, a portion of Actuant's net
assets is
F-11
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
based in its foreign subsidiaries and translated into U.S. Dollars at the
foreign currency rate in effect at the end of each period. Accordingly,
Actuant's consolidated shareholders' equity will fluctuate depending upon the
strengthening or weakening of the U.S. Dollar versus other currencies. Such
currency translation amounts constitute the balance of accumulated other
comprehensive income in the accompanying Consolidated Balance Sheets. Net gains
(losses) resulting from foreign currency transactions, included in "Other
(income) expense--net" in the Consolidated Statements of Earnings, amounted to
$1.0 million, $(0.1) million and $(0.7) million for the years ended August 31,
1997, 1998 and 1999, respectively.
Foreign Currency Hedging and Derivative Financial Instruments: Borrowings
under long-term foreign currency loans are used to partially hedge against
declines in the value of net investments in certain foreign subsidiaries. The
Company also periodically enters into foreign currency contracts to hedge
certain exposures related to selected transactions. Applied Power had no
foreign currency contracts in place at August 31, 1999.
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. 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. Gains relating to terminations of qualifying hedges are deferred
and recognized in income at the same time as the underlying hedged
transactions.
Fair Value of Financial Instruments: The fair value of the Company's cash
and cash equivalents, accounts receivable, accounts payable, short-term
borrowings and long-term debt approximated book value as of August 31, 1998 and
1999 due to their short-term nature and the fact that the interest rates
approximated year-end market rates of interest. The fair value of debt
instruments is calculated by discounting the cash flow of such obligations
using the market interest rates for similar instruments.
Use of Estimates: The consolidated 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 periods presented. They
also affect the disclosure of contingencies. Actual results could differ from
those estimates and assumptions.
New Accounting Pronouncements: In June 1998, Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" was issued and was effective for all fiscal years
beginning after June 15, 1999. SFAS No. 133 was subsequently amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of SFAS No. 133," and will now be effective for
fiscal years beginning after June 15, 2000, with early adoption permitted. SFAS
No. 133, as amended, requires the Company to recognize all derivatives as
either assets or liabilities and measure those instruments at fair value. Upon
adoption, the Company will be required to report derivative and hedging
instruments at fair value in the balance sheet and recognize changes in the
fair value of derivatives in net earnings or other comprehensive income, as
appropriate. SFAS No. 133, as amended, will be effective for the Company's
fiscal year 2001 first quarter financial statements and restatement of prior
years will not be permitted. Given Applied Power's current derivative and
hedging activities, the pronouncement is not expected to have a material effect
on the Company's financial position or results of operations.
Reclassifications: Certain prior year amounts have been reclassified to
conform to the fiscal 1999 presentation.
F-12
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note B--Discontinued Operations
On January 27, 2000, Applied Power's board of directors authorized various
actions intended to enable Applied Power to distribute its Electronics segment
("APW Ltd.") to its shareholders (the "Distribution"). In the Distribution,
Applied Power shareholders will receive, in the form of a special dividend, one
share of APW Ltd. common stock for each Applied Power common share. As a
result, APW Ltd. will become a separately traded, publicly held company. The
Distribution was approved by the board of directors on July 7, 2000 and shares
of APW Ltd. will be distributed to Applied Power shareholders effective July
31, 2000 to shareholders of record at July 21, 2000.
Accordingly, the consolidated financial statements and related notes have
been reclassified to reflect the Company's Electronics segment as a
discontinued operation. Thus, the revenues, costs and expenses, assets and
liabilities, and cash flows of the Electronics segment have been excluded from
the respective captions in the accompanying consolidated financial statements.
The net operating results of the Electronics segment have been reported, net of
applicable taxes, as "Earnings from operations of discontinued Electronics
segment." The net operating results of the discontinued operations include
financing costs related to the debt of the Electronics segment. The net assets
of the Electronics segment have been reported in the Consolidated Balance
Sheets as "Net assets of discontinued operations."
For purposes of this presentation, the amount of debt allocated to
continuing and discontinued operations was determined based on preliminary
estimates of the amount of debt expected to be retained by Actuant and
allocated to APW Ltd. in the Distribution. The allocation of interest to
continuing and discontinued operations was based on relative debt levels
assigned. In conjunction with the Distribution, the majority of the Company's
existing credit facilities and Notes are anticipated to be replaced with new
facilities and notes. There were no general corporate expenses allocated to
discontinued operations during the periods presented.
The following selected financial data for the Electronics business segment
is presented for informational purposes only and does not necessarily reflect
what the results of operations and financial position would have been had the
segment operated as a stand-alone entity (in thousands).
Nine months
Fiscal year ended August 31, ended May 31,
---------------------------- ----------------------
1999 1997 1998 1999 2000
-------- -------- ---------- ----------- ----------
(unaudited) (unaudited)
Net sales................ $375,318 $593,210 $1,055,338 $773,763 $ 886,014
======== ======== ========== ======== ==========
Earnings before income
tax expense............. $ 56,129 $ 48,256 $ 69,341 $ 50,317 $ 59,105
Income tax expense....... 20,836 21,622 24,524 18,836 22,790
Extraordinary loss, net
of taxes -- -- -- -- (2,083)
-------- -------- ---------- -------- ----------
Earnings from operations
of discontinued
Electronics segment,
net of taxes.......... $ 35,293 $ 26,634 $ 44,817 $ 31,481 $ 34,232
======== ======== ========== ======== ==========
Current assets........... $188,935 $ 222,025 $ 257,338
======== ========== ==========
Total assets............. $715,769 $1,164,236 $1,170,102
======== ========== ==========
Current liabilities...... $182,392 $ 231,154 $ 237,364
======== ========== ==========
Total liabilities........ $466,073 $ 565,778 $ 572,613
======== ========== ==========
Net assets of
discontinued
operations.............. $249,696 $ 598,458 $ 597,489
======== ========== ==========
F-13
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In order to effect the Distribution, Applied Power and the Electronics
business segment will enter into the following agreements:
. Contribution Agreement, Plan and Agreement of Reorganization and
Distribution
. General Assignment, Assumption and Agreement regarding Litigation,
Claims, and other Liabilities
. Transitional Trademark Use and License Agreement
. Insurance Matters Agreement
. Bill of Sale and Assumption of Liabilities
. Employee Benefits and Compensation Agreement
. Tax Sharing and Indemnification Agreement
. Interim Administrative Services Agreement
. Confidentiality and Non Disclosure Agreement
. Assumption of Applied Power Inc. Debt Obligation
These Agreements define the ongoing relationship between the parties after
the Distribution. Applied Power and the Electronics business segment have
established pricing terms for services to be effective after the Distribution
believed to be comparable to what could be achieved through arm's-length
negotiations. Following the Distribution, additional or modified agreements,
arrangements and transactions may be entered into and such agreements and
transactions will be negotiated on an arm's-length basis.
Note C--Extraordinary Item
In May 2000, the Company recorded an extraordinary $13.9 million charge
($12.2 million net of $1.7 million tax benefit) related to the loss on the sale
of Air Cargo Corporation and related other assets. Applied Power Inc had
acquired Air Cargo Equipment Corporation as part of the ZERO pooling of
interests on July 1, 1998. It is presented as an extraordinary item due to
meeting the following criteria; (i) the divestiture occurred within two years
of the pooling of interest, (ii) the divestiture was not planned at that time
of the pooling of interest and (iii) operations divested are material based on
the relative criteria. See note D--"Merger, Acquisitions and Divestitures" for
additional information.
Note D--Merger, Acquisitions and Divestitures
Nine Months Ended May 31, 2000 (unaudited)--
Acquisition--
On January 28, 2000, Applied Power, through a wholly owned subsidiary,
acquired all of the outstanding stock of Metalade of Pennsylvania, Inc.
("Metalade"). Metalade specializes in metal fabrication relating to electronic
enclosures. The purchase price of this acquisition totaled $8.7 million,
including fees and expenses, plus future consideration not to exceed $5.0
million based on future achieved sales levels. The acquisition was funded by
borrowings under Applied Power credit facilities. The acquisition has been
accounted for using the purchase method. Metalade is included in discontinued
operations in the Consolidated Statements of Earnings from the acquisition
date. Preliminary allocations of the purchase price resulted in approximately
$6.7 million of goodwill.
F-14
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Divestiture--
The company completed the sale of Air Cargo Corporation, a business unit in
the Engineered Solutions segment, to Teleflex Incorporated on May 26, 2000. The
total consideration from the transaction, which was structured as both a sale
of stock of the Air Cargo Equipment Corporation and the sale of other assets,
was $12.0 million, resulting in an extraordinary loss of $13.9 million, $12.2
million after-tax.
On November 23, 1999, a wholly-owned subsidiary of the Company completed the
sale of the assets of Samuel Groves & Co. Ltd., a business unit in the
Engineered Solutions segment. Total consideration from the transaction was
approximately $3.0 million, which approximated the book value of such assets.
Fiscal 1999--
Acquisitions
On September 29, 1998, Applied Power, 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 (with a guaranteed loan note
alternative) for all outstanding shares of common stock at 2.35 pounds sterling
per share and all outstanding cumulative preference shares at 0.50 pounds
sterling per share. The tendered common shares accepted for payment exceeded
90% of the outstanding common shares on October 8, 1998, and APW Enclosure
Systems Limited invoked Section 429 of the UK Companies Act of 1985, as
amended, to acquire the remaining outstanding common shares of Rubicon. APW
Enclosure Systems Limited now owns all of the common shares of Rubicon. Rubicon
is a leading provider of electronic manufacturing services and engineered
magnetic solutions to major OEMs in the information technology and
telecommunication industries. Cash paid for Rubicon totaled $371.5 million,
with the purchase price allocation resulting in $340.6 million of goodwill.
Funds for the acquisition were provided through Applied Power's credit
facilities. The acquisition was accounted for using the purchase method of
accounting. The operating results of Rubicon subsequent to September 29, 1998
are included in discontinued operations in the Consolidated Statements of
Earnings.
In June 1999, Applied Power, through a wholly owned subsidiary, acquired all
of the outstanding stock of Innovative Metal Fabrication, Inc. ("Innovative").
Innovative designs and manufactures technical environments used in electronic
assembly operations, as well as electronic gaming enclosures, in Grass Valley,
CA and Austin, TX. In May 1999, Applied Power also acquired certain assets of
Connector Technology, Inc. ("CTI") of Anaheim, CA. CTI manufactures custom
backplanes and was integrated with Applied Power's Electronic Solutions
business unit. Also, in the fourth quarter of fiscal 1999, a wholly-owned
subsidiary of the Company purchased shares of Ergun Kriko San Ticaret
("Ergun"), an Akhisar, Turkey based company specializing in the manufacture of
hydraulic cab-tilting systems and hydraulic bottle jacks for the Turkish truck
market. The total purchase price of the combined Innovative, CTI and Ergun
acquisitions totaled approximately $17.0 million, including fees and expenses,
and was funded by borrowings under Applied Power credit facilities. Allocations
of the purchase price resulted in approximately $10.9 million of goodwill. All
three acquisitions have been accounted for using the purchase method. The
results of operations of Ergun are included in earnings from continuing
operations in the Consolidated Statements of Earnings from its acquisition
date, while the results of operations of Innovative and CTI are included in
discontinued operations.
Fiscal 1998--
Merger
On July 31, 1998, shareholders of Applied Power voted to approve the merger
of a newly created subsidiary of Applied Power into ZERO Corporation ("ZERO").
The Merger was completed after the approval of the shareholders of Applied
Power and ZERO at their respective special shareholder meetings. Under the
terms of the Merger Agreement, ZERO stockholders received 0.85 of a share of
Applied Power's Common
F-15
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock for each share of ZERO Common Stock. Applied Power issued approximately
10.6 million shares of its common stock in exchange for all outstanding common
stock of ZERO Corporation and assumed outstanding stock options to purchase
ZERO common stock that were converted into stock options to purchase
approximately 0.6 million shares of Applied Power's common stock pursuant to
the terms of the Merger. This equates to a purchase price of approximately $386
million based on the July 30, 1998 closing stock price of Applied Power. 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 ZERO Halliburton(R) line of
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, the consolidated
financial statements reflect the consolidated financial position, operating
results and cash flows of Applied Power and ZERO as if they had been
consolidated for all periods presented. The majority of the ZERO businesses are
included in discontinued operations in the Consolidated Statements of Earnings
as described more fully in Note B--"Discontinued Operations."
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 $20.1
million in 1998. This total includes transaction costs of approximately $9.3
million related to legal, accounting and financial advisory services. The
remaining $10.8 million reflects costs associated with organizational
realignment, closure of ZERO headquarters, facility consolidation and the
conforming of accounting policies. Substantially all of such amounts were
considered general corporate expense and therefore, included in continuing
operations.
Acquisitions
On June 5, 1998, Applied Power Limited, a United Kingdom subsidiary of
Applied Power, 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 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. Total purchase price for the transaction amounted
to approximately $191.7 million. Allocations of the purchase price resulted in
approximately $183.8 million of goodwill. VERO is a United Kingdom based
company that manufactures electronic enclosures, racks, backplanes and power
supplies. The acquisition has been accounted for using the purchase method of
accounting. The operating results of VERO subsequent to June 5, 1998 are
included in discontinued operations in the Consolidated Statements 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 $141.0 million. Allocations of the purchase price resulted in
approximately $104.5 million of goodwill. Funds for the acquisition were
primarily provided through Applied Power's credit facilities. 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
F-16
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
been accounted for using the purchase method of accounting. The operating
results of Versa/Tek subsequent to October 6, 1997 are included in earnings
from continuing operations in the Consolidated Statement of Earnings.
In addition to the VERO and Versa/Tek acquisitions discussed above, in
fiscal 1998 the Company acquired nine other companies, primarily in its
discontinued Electronics business segment, for an aggregate purchase price of
approximately $134.4 million, including $127.7 million in cash and the
assumption of approximately $6.7 million in debt. The cash portion of the
acquisitions was funded by borrowings under Applied Power 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 earnings from continuing operations in the Consolidated Statements of
Earnings from their respective acquisition dates, with the Electronics segment
acquisitions reported in discontinued operations. As a result of the
acquisitions, the Company recorded approximately $105.4 million of goodwill.
The following unaudited pro forma data summarize the results of operations
for the periods presented as if the acquisition of Versa/Tek had been completed
on September 1, 1996, the beginning of the Company's 1997 fiscal year. The pro
forma data give effect to actual operating results prior to the respective
acquisitions and adjustments to interest expense, 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 pro
forma effects of all other fiscal 1997, 1998, 1999 and nine months ended May
31, 2000 acquisitions are not included in the below data as they are included
in discontinued operations in the Consolidated Statements of Earnings from the
acquisition date or are not significant to the net sales, net earnings and
earnings per share amounts reported in the accompanying financial statements.
Fiscal Year Ended August 31,
-----------------------------
1997 1998
-------------- --------------
(in thousands, except
per share amounts)
Net Sales................................. $ 624,299 $ 646,809
Earnings from continuing operations....... $ 20,629 $ 130
Basic Earnings Per Share from continuing
operations............................... $ 0.55 $ 0.00
Shares Used in Computation................ 37,880 38,380
Diluted Earnings Per Share from continuing
operations............................... $ 0.53 $ 0.00
Shares Used in Computation................ 39,307 40,174
Divestiture
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 $6.0 million, which approximated book value of the assets.
Fiscal 1997--
Acquisitions
On September 26, 1996, the Company acquired the net assets of Everest
Electronic Equipment, Inc. ("Everest") for cash consideration of $52.0 million,
which was funded through borrowings under then existing Applied Power credit
facilities. Approximately $43.0 million 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 accounted for using the purchase method of accounting. The results of
Everest subsequent to the acquisition date are included in the Electronics
segment and are therefore included in discontinued operations in the
Consolidated Statements of Earnings.
F-17
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to the acquisition of Everest discussed above, in fiscal 1997
the Company acquired three other companies for an aggregate of approximately
$22.8 million in cash plus $5.8 million in subsequent earn-out payments. The
cash portion of the purchase price was funded by borrowings under then existing
Applied Power credit facilities. Each of these acquisitions was accounted for
as a purchase and the results of operations of the acquired companies, all in
the Electronics segment, are included in discontinued operations in the
Consolidated Statements of Earnings from their respective acquisition dates. As
a result of the acquisitions, the Company recorded approximately $17.0 million
in goodwill.
Note E--Accounts Receivable Financing
On November 20, 1997, the Company replaced its former $50.0 million accounts
receivable financing facility with a new facility that provided up to $80.0
million of multi-currency accounts receivable financing. This 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 to
$90.0 million. On December 18, 1998, the facility was increased to $150.0
million of multi-currency accounts receivable financing. All other substantive
terms of the amended agreements remained the same.
Applied Power and certain subsidiaries (collectively, "Originators") sell
trade accounts receivable to Applied Power Credit Corporation ("APCC"), a
wholly owned limited purpose subsidiary of Applied Power. 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. APCC has the risk of credit loss on such
receivables up to a maximum recourse amount of 16% of sold receivables. Applied
Power retains collection and administrative responsibilities on the
participation interests sold as servicer for APCC and the Purchasers.
At August 31, 1998, August 31, 1999 and May 31, 2000, accounts receivable
were reduced by $51.3 million, $52.9 million and $43.8 million, respectively,
representing receivable interests sold under this program. Sales of trade
receivables are reflected as a reduction of accounts receivable in the
accompanying Consolidated Balance Sheets and the proceeds received, which are
used to reduce debt, are included in cash flows from financing activities in
the accompanying Consolidated Statements of Cash Flows.
Accounts receivable financing costs totaling $1.8 million, $2.6 million and
$3.2 million for the years ended August 31, 1997, 1998 and 1999, respectively,
are included in net financing costs in the accompanying Consolidated Statements
of Earnings.
Immediately after the Distribution, the Company does not anticipate
continuing the accounts receivable financing program.
Note F--Net Inventories
The nature of the Company's products is such that they generally 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 impractical to determine. Several
other locations 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
inventories 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.
F-18
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note G--Shareholders' Equity
The authorized capital stock of the Company as of August 31, 1999 consists
of 80,000,000 shares of Class A Common Stock, $0.20 par value, of which
38,978,340 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 was issued on February 3, 1998.
All references in the 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 Stock from
40,000,000 to 80,000,000.
Note H--Merger, Restructuring and Other Non-recurring Items
Nine Months Ended May 31, 2000 (unaudited)--
In fiscal 2000, Applied Power recorded $4.4 million of fees and expenses
associated with the Distribution transaction and incorporating APW Ltd. Such
legal, accounting, tax and investment banking fees and expenses are reported
under the caption "Corporate Reorganization Expenses" in the Consolidated
Statement of Earnings for the nine months ended May 31, 2000.
In the first quarter of fiscal 2000, Applied Power recovered certain costs
associated with the cancellation of a contract within its Industrial business
segment for which a loss was recorded in a prior period. See fiscal 1999 below.
The gain of $1.4 million represents a reduction in the estimated loss
originally recorded in fiscal 1999.
Fiscal 1999--
In the first quarter of fiscal 1999, the Company incurred a $7.8 million
non-recurring charge due to the cancellation of a contract within the
Industrial business segment. The majority of these costs were incurred prior to
fiscal 1999.
Fiscal 1998--
In the fourth quarter of fiscal 1998, the Company recorded merger,
restructuring and other one-time charges of $50.4 million, $37.2 million net of
tax, or $0.93 per diluted share. The charge included $30.3 million relating to
action programs to eliminate less productive products and product lines,
consolidate Gardner
F-19
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bender and Enerpac headquarters and combine certain facilities. Also included
were costs relating primarily to the write-off of obsolete inventory to net
realizable value, employee severance, facility closures, operating lease
obligations, and, in two cases, the write-down of goodwill. The Company
completed its planned restructuring programs during fiscal 1999.
In connection with the Merger with ZERO consummated in fiscal 1998 (Note D--
"Merger, Acquisitions and Divestitures"), the Company recorded transaction
costs related to legal, accounting and financial advisory services which were
expensed as required under the pooling of interests method of accounting. In
addition, the Company incurred 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. Together these totaled approximately $20.1 million and were part of the
$50.4 million charge discussed above.
The following table summarizes the manner in which merger, restructuring and
other non-recurring items were recorded in the 1998 Consolidated Statement of
Earnings (in thousands):
Cost of products sold.................................................. $15,660
Engineering, selling and administrative expenses....................... 9,019
Amortization of intangible assets...................................... 5,062
Restructuring charges.................................................. 11,367
Merger related expenses................................................ 9,276
-------
Subtotal............................................................. 50,384
Less: Income tax benefit............................................... 13,143
-------
Total................................................................ $37,241
=======
Additionally, fiscal 1998 results included a pretax $4.5 million asset
impairment charge recorded to reduce the carrying amount of a European
subsidiary in the Industrial segment to estimated realizable value. This charge
is reported in the "Provision for loss on sale of subsidiary" caption in the
Consolidated Statement of Earnings. The assets of this European subsidiary were
sold in the first quarter of fiscal 2000. See Note D--"Mergers, Acquisitions
and Divestitures" for further discussion regarding the sale.
Note I--Debt
The Company's indebtedness was as follows (in thousands):
August 31,
----------------- May 31,
1998 1999 2000
-------- -------- -----------
(unaudited)
Borrowings under:
Multi-currency revolving credit agreement...... $360,672 $407,287 $423,914
Senior subordinated notes, due 2009............ -- 200,000 200,000
Commercial paper............................... 42,930 108,691 78,862
Senior promissory notes, due March 8, 2011..... 50,000 50,000 --
Floating rate unsecured loan notes, due 2003... 27,386 30,681 25,927
Pound Sterling multi-currency revolving credit
agreement..................................... 26,218 5,623 5,592
Other.......................................... 5,351 6,156 10,034
-------- -------- --------
Total long-term debt............................. 512,557 808,438 744,329
Less: Amounts attributable to discontinued
operations.................................... 287,422 287,422 287,422
-------- -------- --------
Long-term debt attributable to continuing
operations...................................... $225,135 $521,016 $456,907
======== ======== ========
On April 1, 1999, the Company issued $200.0 million of 8.75% Senior
Subordinated Notes due 2009 (the "1999 Notes"). Net proceeds from the 1999
Notes offering approximated $194.6 million after deducting
F-20
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
underwriting discounts and other offering expenses. Proceeds from the 1999
Notes were used to repay a portion of the borrowings outstanding under New
Facility discussed below, thereby restoring the Company's borrowing capacity
under that agreement. Interest on the 1999 Notes is payable semi-annually, and
the Company has the option to redeem all or a portion of the 1999 Notes at
certain specified redemption prices on or after April 1, 2004. The 1999 Notes
are subordinate in right of payment to the prior payment in full of all senior
debt as defined in the indenture.
To provide the necessary funds for the acquisition of Rubicon Group plc
("Rubicon") by the Company's Electronics segment, the Company and Enerpac B.V.,
a Netherlands subsidiary of the Company, as Borrowers, entered into a Multi-
currency Credit Agreement, dated as of October 14, 1998, providing for an
$850.0 million, five-year revolving credit facility (the "New Facility"). In
conjunction with the closing of the New Facility, the Company terminated its
prior $700.0 million, five-year revolving credit facility (the "Facility") and
used certain funds received under the New Facility to repay borrowings under
the Facility.
At August 31, 1999, direct outstanding borrowings under the New Facility
were $407.3 million and commercial paper borrowings and the floating rate
unsecured loan notes, considered a utilization of the New Facility, were $108.7
million and $30.7 million, respectively. At August 31, 1999, the Company had
borrowings under the New Facility of $235.0 million, $13.7 million and $158.6
million denominated in the U.S. Dollar, the Japanese Yen and the Euro,
respectively. Under the New Facility, the Company can borrow at a floating rate
of LIBOR plus 0.275% to 1.375% annually, depending on the Company's debt-to-
EBITDA ratio. Currently, the Company incurs interest at 1% above 30-day LIBOR,
determined by the underlying currency of the debt, which the Company is
borrowing. A non-use fee, currently computed at a rate of 0.275% annually, is
payable quarterly on the average unused credit line. The unused credit line of
the New Facility at August 31, 1999 was approximately $303.3 million.
The New Facility 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, 1999, the Company was in
compliance with all debt covenants.
Commercial paper outstanding at August 31, 1999 totaled $108.7 million, net
of discount, and carried an average interest rate of 5.4%. 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 New Facility.
The $50.0 million senior promissory notes due March 8, 2011 bear interest at
7.13%, and are payable in 11 annual installments of $4.5 million 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 in fiscal 1996 and for
payment of related expenses. In January 2000, the Company paid off the $50.0
million senior promissory notes in anticipation of the Distribution. In
connection with this early retirement of debt, the Company paid a $3.3 million
make-whole premium, $2.1 million net of the tax benefits. This premium has been
included in discontinued operations in the Consolidated Statement of Earnings
for the nine-month period ended May 31, 2000.
The floating rate unsecured loan notes were entered into by the Company as a
result of its acquisitions of VERO and Rubicon. The notes were exchanged with
individual shareholders of VERO and Rubicon, at their option, in lieu of
receiving cash payment for their tendered shares. The notes carry an interest
rate of LIBOR minus 0.50% and can be redeemed at the option of the note holder
on various dates through 2003.
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 under
this
F-21
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreement carry an interest rate of LIBOR plus 0.65%, determined by the
underlying currency of the debt, which the Company is borrowing. At August 31,
1999, the facility had outstanding borrowings denominated in Pounds Sterling,
German Marks, French Francs, U.S. Dollars, Danish Krone and Italian Lira. The
agreement has certain covenants regarding tangible net worth and debt-to-net
worth, neither of which was deemed restrictive at August 31, 1999. The total
unused line of credit available under this agreement at August 31, 1999 was
approximately $38.4 million.
"Other" long-term debt primarily consists of various foreign lines-of-
credit.
Debt allocated to discontinued operations was determined based on the amount
of debt expected to be assumed by APW Ltd. in the Distribution. Prior to the
Distribution, most debt instruments were held centrally, and as such, debt from
these specific instruments was not historically allocated. The allocation of
interest to continuing and discontinued operations was based on the Company's
average interest rate costs and relative debt levels assigned. In conjunction
with the Distribution, the majority of the Company's existing credit facilities
and the 1999 Notes are anticipated to be replaced with new facilities and
notes.
Short-term Debt: Certain of the Company's foreign subsidiaries had other
short-term borrowings under unsecured non-committed lines of credit with banks
at August 31, 1998 and 1999. Interest rates vary depending on the currency
being borrowed. The weighted-average interest rates on the short-term
borrowings were 5.24% and 5.45% at August 31, 1998 and 1999, respectively.
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, 1999 effectively converted
$436.8 million of the Company's variable rate debt to a weighted-average fixed
rate of 5.03%. The swap agreements expire on varying dates through 2006. During
the nine-month period ended May 31, 2000, the Company recorded a gain related
to the unwinding of interest rate swap agreements, which totaled $6.5 million,
in conjunction with final debt payments. The interest rate swap agreements were
unwound in anticipation of the spin-off of the Electronics segment and the
corresponding gain was included in discontinued operations in the Consolidated
Statement of Earnings for the nine-month period ended May 31, 2000.
The purpose of the Company's foreign currency hedging activities is to
protect the Company from the risk that the eventual U.S. 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 and, to a lessor degree, the impact of foreign
currency fluctuations on the net assets of foreign subsidiaries. Fluctuations
in the value of hedging instruments are offset by fluctuations in the value of
the underlying exposures being hedged. The Company uses from time to time
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, 1999 were negligible. The Company also uses
borrowings under long-term foreign currency loans to partially hedge against
declines in the value of net investments in certain foreign subsidiaries.
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.
F-22
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Values of Financial Instruments: The fair value of the Notes is
estimated based on quoted market prices. At August 31, 1999, the fair value of
the Notes was estimated to be approximately $189.0 million. At August 31, 1999,
the fair value of the Senior Promissory Notes was $50.7 million based on
current market interest rates of similar debt instruments.
The accompanying Consolidated Balance Sheets do not reflect a value for the
interest rate swap agreements. If the Company were to terminate its interest
rate swap agreements, the Company would have received $3.5 million at August
31, 1999, and would have had to pay $4.2 million at August 31, 1998. The
Company had no foreign currency contracts in place at August 31, 1999.
Adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," in fiscal 2001 will require the Company to record all derivative
instruments at their fair values. See Note A--"Summary of Significant
Accounting Policies--New Accounting Pronouncements."
Aggregate Maturities: Long-term debt outstanding at August 31, 1999 is
payable as follows: none in fiscal 2000; $11.8 million in fiscal 2001; none in
fiscal 2002; $24.3 million in fiscal 2003; $522.3 million in fiscal 2004 and
$250.0 million thereafter. These principal payments are expected to change
after the Distribution as the majority of the existing debt agreements and
facilities will be replaced concurrent with the Distribution.
The Company paid $15.5 million, $24.8 million and $61.5 million for
financing costs in fiscal 1997, 1998 and 1999, respectively, which included
both continuing and discontinued operations.
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 that enable the Company to renew the lease based upon fair
value rental rates on the date of expiration of the initial lease.
Future obligations under non-cancelable operating leases for both continuing
and discontinued business units in effect at August 31, 1999 are: $28.9 million
in fiscal 2000; $25.1 million in fiscal 2001; $29.9 million in fiscal 2002;
$20.2 million in fiscal 2003; $16.3 million in fiscal 2004 and $131.9 million
thereafter. It is expected that upon Distribution, the Electronics segment
leases will be assigned to APW Ltd. Future obligations related to the
continuing businesses in effect at August 31, 1999 are: $11.0 million in fiscal
2000; $9.5 million in fiscal 2001; $8.7 million in fiscal 2002; $7.6 million in
fiscal 2003; $6.7 million in fiscal 2004 and $17.5 million thereafter.
Total rental expense under operating leases related to the continuing
businesses was $11.1 million, $11.0 million and $11.5 million in fiscal 1997,
1998 and 1999, respectively.
Note K--Stock Option Plans
At August 31, 1999, a total of 8,715,638 shares of Class A Common Stock were
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 3,633,879 have been issued through exercises of option grants. At
August 31, 1999, 5,081,759 shares were reserved for issuance under the plans,
consisting of 2,548,290 shares subject to outstanding options and 2,533,469
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, stock options may be granted to
F-23
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (see Note D--"Merger, Acquisitions and
Divestitures"), 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.
A summary of stock option activity under the employee plans is as follows:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at August 31, 1996................... 3,198,520 $11.37
Granted........................................ 642,865 19.61
Exercised...................................... (502,379) 11.16
Cancelled...................................... (87,396) 14.51
---------
Outstanding at August 31, 1997................... 3,251,610 12.91
Effect of ZERO excluded period (Note A).......... (84,797) --
Granted........................................ 467,644 32.27
Exercised...................................... (721,160) 13.01
Cancelled...................................... (133,591) 18.85
---------
Outstanding at August 31, 1998................... 2,779,706 15.72
Granted........................................ 646,230 27.45
Exercised...................................... (539,138) 14.82
Cancelled...................................... (401,508) 26.57
---------
Outstanding at August 31,1999.................... 2,485,290 17.27
---------
Exercisable at August 31, 1999................... 1,499,045 11.74
=========
The following table summarizes information concerning currently outstanding
and exercisable options:
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of August 31, Remaining Average August 31, Average
Exercise 1999 Number Contractual Exercise 1999 Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
$ 6.75-$ 8.38 550,288 2.5 $ 8.04 550,288 $ 8.04
$ 8.56-$10.69 534,932 2.5 9.75 534,932 9.75
$11.13-$17.75 529,309 6.1 15.93 283,659 15.85
$18.09-$27.72 569,215 8.1 26.31 90,211 23.29
$31.63-$37.66 301,546 7.9 32.78 39,955 34.27
--------- ---------
$ 6.75-$37.66 2,485,290 5.2 17.27 1,499,045 11.74
========= =========
F-24
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 earnings from continuing operations
and related earnings per share would have been changed to the pro forma amounts
indicated below in thousands, except per share amounts:
Fiscal year ended
August 31,
------------------------
1997 1998 1999
------- ------- -------
Earnings from continuing operations -- as
reported......................................... $22,632 $ 53 $34,580
Earnings (loss) from continuing operations -- pro
forma............................................ $21,653 $(1,042) $33,164
Basic Earnings from continuing operations per
share -- as reported............................. $ 0.60 $ 0.00 $ 0.89
Basic Earnings (loss) from continuing operations
per share -- pro forma........................... $ 0.57 $ (0.03) $ 0.85
Diluted Earnings from continuing operations per
share -- as reported............................. $ 0.57 $ 0.00 $ 0.86
Diluted Earnings (loss) from continuing operations
per share -- pro forma........................... $ 0.55 $ (0.03) $ 0.82
The pro forma effects of applying SFAS No. 123 have not been allocated to
discontinued operations and 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 fiscal 1997, 1998 and 1999
are $4.90, $11.54 and $10.37, respectively. The following weighted-average
assumptions were used in completing the model:
Fiscal year ended August 31,
-----------------------------
1997 1998 1999
--------- --------- ---------
Dividend yield.................................... 0.33% 0.24% 0.20%
Expected volatility............................... 19.00% 23.50% 31.90%
Risk-free rate of return.......................... 6.30% 5.50% 6.40%
Expected life..................................... 5.0 years 5.6 years 4.7 years
It is anticipated that APW Ltd. will adopt its own stock option plan and the
existing outstanding stock options under the Applied Power stock option plan
will be converted into options to purchase an equivalent value of APW Ltd.
common shares based on the fair market value of APW Ltd. common shares at the
time of the Distribution. Options totaling 1,704,350, 1,657,673 and 1,966,394
shares were held by Electronics segment employees as of August 31, 1997, 1998
and 1999, respectively. At August 31, 1999, 1,224,988 of these options were
exercisable.
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 number of shares
granted was increased in 1997, from 2,000 shares, by an amendment to the plan
adopted on October 31, 1996. As required by SFAS No. 123, these options
resulted in compensation expense in the accompanying Consolidated Statement of
Earnings. Total compensation expense related to Director stock options was not
material in each of the periods presented. Options for a maximum of 120,000
shares may be issued under this plan. Director stock options completely vest 11
months after date of grant.
F-25
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of option activity under the Director's stock option plan is as
follows:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at August 31, 1996.................... 50,000 $10.77
Granted......................................... 15,000 19.44
Cancelled....................................... (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
Granted......................................... 15,000 37.06
Exercised....................................... (14,000) 10.09
-------
Outstanding at August 31, 1999.................... 63,000 25.17
-------
Exercisable at August 31, 1999.................... 48,000 21.45
=======
Note L -- Employee Benefit Plans
Defined Benefit Pension and Other Postretirement Benefit Plans
The Company provides defined benefit pension and other postretirement
benefits to certain employees of businesses acquired by Applied Power who were
entitled to those benefits prior to acquisition. The following tables provide a
reconciliation of benefit obligations, plan assets, funded status and net
periodic benefit cost for those plans (in thousands):
Versa/Tek
Pension Plan
----------------
Fiscal year Other
ended August Postretirement
31, Benefits
---------------- ----------------
1998 1999 1998 1999
------- ------- ------- -------
Reconciliation of benefit obligations
Benefit obligation at beginning of
year.................................. $ -- $11,416 $ 4,661 $ 5,224
Service cost........................... 409 81 18 19
Interest cost.......................... 786 787 363 354
Amendments............................. (1,890) -- -- --
Curtailment gain....................... (554) -- (34) --
Acquisition of business................ 11,605 -- 230 --
Actuarial (gain)/loss.................. 1,523 (213) 324 639
Benefits paid.......................... (463) (974) (338) (364)
------- ------- ------- -------
Benefit obligation at end of year...... $11,416 $11,097 $ 5,224 $ 5,872
======= ======= ======= =======
Reconciliation of plan assets
Fair value of plan assets at beginning
of year............................... $ -- $12,086 $ -- $ --
Actual return on plan assets........... 38 1,006 -- --
Acquisition of business................ 12,099 -- -- --
Company contributions.................. 342 129 -- --
Employee contributions................. -- -- -- --
Benefits paid from plan assets......... (393) (897) -- --
------- ------- ------- -------
Fair value of plan assets at end of
year.................................. $12,086 $12,324 $ -- $ --
======= ======= ======= =======
Funded (Unfunded) status of the plans.. $ 670 $ 1,227 $(5,224) $(5,872)
Unrecognized net loss/(gain)........... 567 411 (4,445) (2,828)
------- ------- ------- -------
Prepaid (accrued) benefit cost......... $ 1,237 $ 1,638 $(9,669) $(8,700)
======= ======= ======= =======
Weighted-average assumptions as of
August 31
Discount rate.......................... 7.00% 7.75% 7.00% 7.75%
Expected return on plan assets......... 8.50% 8.50%
Rate of compensation increase.......... 5.00% Frozen
F-26
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Versa/Tek
Pension Benefits
------------------- Other
Fiscal year ended Postretirement
August 31, Benefits
------------------- -------------------
1997 1998 1999 1997 1998 1999
---- ----- ------- ----- ----- -----
Components of net periodic
benefit cost
Service cost.................... $ -- $ 409 $ 81 $ 5 $ 18 $ 19
Employee contributions.......... -- -- -- -- -- --
Interest cost................... -- 786 787 353 363 354
Expected return on assets....... -- (972) (1,064) -- -- --
Amortization of actuarial
(gain)/loss.................... -- -- 1 (305) (331) (294)
---- ----- ------- ----- ----- -----
Benefit cost (credit)........... $ -- $ 223 $ (195) $ 53 $ 50 $ 79
==== ===== ======= ===== ===== =====
At August 31, 1999, the Versa/Tek pension benefits consisted of three plans
covering certain legacy Versa/Tek employees and executives. On March 31, 1999,
the Versa/Tek Hourly Plan was merged into the Versa/Tek Salaried Plan,
resulting in no change to the aggregate funding status of the two plans. In
fiscal 1998, the Company amended the plans to freeze the accumulation of
benefits. This change resulted in a decrease of approximately $1.9 million in
the projected benefit obligation of Versa/Tek. In March 1998, a $0.6 million
curtailment gain was realized associated with the sale of the Moxness
operation. The Company makes actuarially determined contributions to a trust
fund of the funded 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. The Company assumed the
prepaid benefit cost via acquisition of Versa/Tek in October 1997.
Certain former employees of acquired businesses who retired before February
1, 1994 (and their dependents) have the option of being covered by one of
several medical plans. Deferred vested employees who terminated employment
before February 1, 1994 are also eligible for this postretirement benefit. In
addition, retiree life insurance is available to all employees hired before
1988. The postretirement benefit liability related to these plans is unfunded.
Most individuals receiving postretirement health care and life insurance
benefits under the above 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.
The health care cost trend rate used in the actuarial calculations was 9.4%,
trending downward to 6.5% by the year 2009, and remaining level thereafter. A
one percentage-point increase or decrease in the assumed health care cost trend
rate would increase or decrease the postretirement benefit obligation by
approximately $0.4 million and would not have a material effect on aggregate
service and interest cost components.
Defined Contribution Benefit Plans
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 U.S. employees -- the APW 401(k) Plan
(the "401(k) Plan"). Substantially all of the Company's full-time U.S.
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 core contributions generally equal 3%
of each employee's 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% earnings.
F-27
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to the APW 401(k) Plan, the Company maintains the ZERO
Corporation Retirement Savings Plan which covers substantially all full-time
U.S. employees at former ZERO Corporation business units who have completed one
full year of service. Under the provisions of this plan, the Company makes core
contributions to employees' retirement accounts based upon percentages of
eligible employees' compensation, eligible employees may contribute a
percentage of their pre-tax compensation, subject to certain limitations, and
the Company matches a portion of the employee contributions up to 5% of the
participant's compensation for the period.
During the years ended August 31, 1997, 1998 and 1999, company contributions
to defined contribution benefit plans relating to continuing operations were
approximately $3.0 million, $2.6 million and $3.3 million, respectively.
Non-U.S. Benefit Plans--The Company contributes to a number of retirement
programs for employees outside the U.S. Pension expense under these programs
amounted to approximately $1.3 million, $1.4 million and $1.1 million in fiscal
1997, 1998 and 1999, respectively. As these plans are not significant, Applied
Power does not determine the actuarial value of accumulated plan benefits or
net assets available for benefits.
Note M--Income Taxes
Income tax expense of continuing operations consists of the following (in
thousands):
Fiscal year ended
August 31,
-------------------------
1997 1998 1999
------- ------- -------
Currently payable:
Federal......................................... $ 6,446 $ 3,347 $12,096
Foreign......................................... 5,068 8,436 6,348
State........................................... 665 1,801 2,583
------- ------- -------
Subtotals......................................... 12,179 13,584 21,027
------- ------- -------
Deferred:
Federal......................................... (1,585) (3,672) 607
Foreign......................................... 87 (951) 1,823
State........................................... (218) 115 (627)
------- ------- -------
Subtotals......................................... (1,716) (4,508) 1,803
------- ------- -------
Totals:........................................... $10,463 $ 9,076 $22,830
======= ======= =======
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 U.S. statutory rate to the effective tax rate for
continuing operations follows:
Fiscal year
ended
August 31,
-----------------
% of Pre-tax Earnings 1997 1998 1999
--------------------- ---- ----- ----
Federal statutory rate.................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal effect................. 0.9 13.6 2.2
Non-deductible amortization and other expenses............ 2.1 33.0 2.9
Net effects of foreign tax rates and credits.............. (5.7) 29.7 (1.5)
Other items............................................... (0.7) (11.9) 1.2
---- ----- ----
Effective tax rate........................................ 31.6% 99.4% 39.8%
==== ===== ====
F-28
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Temporary differences and carryforwards that gave rise to the deferred tax
assets and liabilities for continuing operations included the following items
(in thousands):
August 31,
----------------
1998 1999
------- -------
Deferred income tax assets:
Operating loss and state tax credit carry forwards...... $ 5,074 $ 5,674
Compensation and other employee benefits................ 5,092 5,436
Inventory items......................................... 13,341 4,889
Restructuring expenses.................................. 663 4,528
Deferred income......................................... 295 --
Book reserves and other items........................... 3,140 2,627
------- -------
Total deferred income tax assets...................... 27,605 23,154
Valuation allowance..................................... (5,074) (5,674)
------- -------
Net deferred income tax assets........................ 22,531 17,480
Deferred income tax liabilities:
Depreciation and amortization........................... 13,696 11,526
Inventory items......................................... 2,900 2,678
Other items............................................. 4,426 3,432
------- -------
Deferred income tax liabilities....................... 21,022 17,636
------- -------
Net deferred income tax................................... $ 1,509 $ (156)
======= =======
The valuation allowance represents a reserve for foreign and domestic
operating loss and state tax credit 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 2014.
Income taxes paid during fiscal 1997, 1998 and 1999 were $32.4 million,
$49.7 million and $37.2 million, respectively, which pertained to both
continuing and discontinued operations.
The Company's policy is to remit earnings from foreign subsidiaries only to
the extent any resultant foreign income taxes are creditable in the U.S.
Accordingly, the Company does not currently provide for the additional U.S. and
foreign income taxes which would become payable upon remission of undistributed
earnings of foreign subsidiaries. Undistributed earnings from continuing
operations on which additional income taxes have not been provided amounted to
approximately $87.0 million at August 31, 1999. If all such undistributed
earnings were remitted, an additional provision for income taxes of
approximately $5.1 million would have been necessary as of August 31, 1999.
Earnings from continuing operations before income taxes from non-U.S.
operations were $8.6 million, $7.5 million and $24.1 million for 1997, 1998 and
1999, respectively.
F-29
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note N--Supplemental Balance Sheet Information
August 31,
-----------------
1998 1999
-------- --------
(in thousands)
Accounts receivable
Accounts receivable..................................... $ 58,709 $ 67,572
Less allowances......................................... 4,259 4,070
-------- --------
Accounts receivable, net................................ $ 54,450 $ 63,502
======== ========
Property, plant and equipment
Property................................................ $ 3,184 $ 1,826
Plant................................................... 27,091 48,916
Machinery and equipment................................. 157,614 140,977
-------- --------
Total................................................. 187,889 191,719
Less accumulated depreciation........................... 110,608 112,721
-------- --------
Property, plant and equipment, net.................... $ 77,281 $ 78,998
======== ========
Goodwill
Goodwill................................................ $192,966 $190,840
Less accumulated amortization........................... 29,518 32,392
-------- --------
Goodwill, net........................................... $163,448 $158,448
======== ========
Other Intangibles
Other intangibles....................................... $ 44,342 $ 49,036
Less accumulated amortization........................... 13,798 18,049
-------- --------
Other intangibles, net.................................. $ 30,544 $ 30,987
======== ========
Note O--Business Segment, Geographic and Customer Information
The Company had been reporting two business segments. The Electronics
segment is now included, in its entirety, in discontinued operations.
Subsequent to the Distribution, the Company will be split into two reportable
segments with separate and distinct operating management and strategies. Tools
& Supplies is primarily involved in the design, manufacture and distribution of
tools and supplies to the construction, electrical wholesale, retail do-it-
yourself, retail automotive, industrial and production automation markets.
Engineered Solutions focuses on developing and marketing value-added,
customized solutions for original equipment manufacturers in the recreational
vehicle, automotive, truck, medical, aerospace, defense and industrial markets.
The following table summarizes financial information by reportable segment.
The information for Earnings before Income Tax Expense includes the effects of
the merger, restructuring and other non-recurring items discussed in Note H--
"Merger, Restructuring and Other Non-recurring Items." Fiscal 2000 results
include $4.4 million in fees and expenses associated with the spin-off and
incorporating the Electronics business segment offshore with the entire amount
being allocated to general corporate and other. Engineered Solutions results in
fiscal 1999 include a $7.8 million pre-tax charge related to a contract
termination, with a related recovery of $1.4 million recorded on this contract
termination during the nine month period ended May 31, 2000. The $50.4 million
restructuring and merger charge from fiscal 1998 was allocated by segment as
follows: $24.6 million to Tools & Supplies, $10.0 million in Engineered
Solutions and $15.8 million in general corporate and other. The $4.5 million
asset impairment charge from fiscal 1998 was reported in the Engineered
Solutions
F-30
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
segment. Earnings before Income Tax Expense for each reportable segment and
geographic region does not include general corporate expenses, interest expense
or currency exchange adjustments.
Nine Months
Ended May 31,
Years Ended August 31, -----------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- -----------
(in thousands) (Unaudited) (Unaudited)
Net Sales:
Tools & Supplies...... $292,492 $305,706 $309,276 $234,587 $230,166
Engineered Solutions.. 229,948 331,773 386,428 289,769 305,489
-------- -------- -------- -------- --------
Totals............... $522,440 $637,479 $695,704 $524,356 $535,655
======== ======== ======== ======== ========
Earnings (Loss) from
Continuing Operations
before Income Tax
Expense:
Tools & Supplies...... $ 22,346 $ (377) $ 31,210 $ 38,274 $ 41,248
Engineered Solutions.. 18,236 28,282 35,547 41,009 55,412
General corporate and
other................ (7,487) (18,776) (9,347) (39,886) (42,124)
-------- -------- -------- -------- --------
Totals............... $ 33,095 $ 9,129 $ 57,410 $ 39,397 $ 54,536
======== ======== ======== ======== ========
Depreciation and
Amortization:
Tools & Supplies...... $ 9,473 $ 11,590 $ 9,718 $ 7,573 $ 7,511
Engineered Solutions.. 9,311 12,773 15,954 12,740 10,098
General corporate and
other................ 1,006 200 384 144 615
-------- -------- -------- -------- --------
Totals............... $ 19,790 $ 24,563 $ 26,056 $ 20,457 $ 18,224
======== ======== ======== ======== ========
Capital Expenditures:
Tools & Supplies...... $ 8,078 $ 6,992 $ 9,127 $ 6,355 $ 4,525
Engineered Solutions.. 6,133 11,976 9,890 7,921 4,078
General corporate and
other................ 1,523 6,246 3,868 6,986 567
-------- -------- -------- -------- --------
Totals............... $ 15,734 $ 25,214 $ 22,885 $ 21,262 $ 9,170
======== ======== ======== ======== ========
August 31,
------------------- May 31,
1998 1999 2000
-------- ---------- -----------
(Unaudited)
Assets:
Tools & Supplies.......................... $182,183 $ 194,236 $ 194,964
Engineered Solutions...................... 261,826 247,414 228,759
Net assets of discontinued operations..... 249,696 598,458 597,489
General corporate and other............... 17,821 19,764 14,324
-------- ---------- ----------
Totals................................... $711,526 $1,059,872 $1,035,536
======== ========== ==========
The following table summarizes financial information by geographic region.
The information for Operating Earnings includes the effects of the merger,
restructuring and other non-recurring items discussed in Note H--"Merger,
Restructuring and Other Non-recurring Items." Fiscal 2000 results include $4.4
million in fees and expenses associated with the spin-off and incorporating the
Electronics business segment offshore with the entire amount being allocated to
General corporate and other. North America results in fiscal 1999 include a
$7.8 million pre-tax charge related to a contract termination, with a related
recovery of $1.4 million recorded on this contract termination during the nine-
month period ended May 31, 2000. Fiscal 1998 results include a $50.4 million
restructuring and merger charge that was allocated by geographic region as
follows: $21.6 million in North America, $6.9 million in Europe, $4.3 million
in Japan and Asia Pacific, $1.8 million in Latin America and $15.8 million in
General corporate and other. The $4.5 million asset impairment charge from
fiscal 1998 was reported in the Europe region.
F-31
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine Months
Years Ended August 31, Ended May 31,
------------------------------ -----------------------
(in thousands) 1997 1998 1999 1999 2000
-------- -------- ---------- ----------- -----------
(Unaudited) (Unaudited)
Net sales:
North America......... $318,943 $434,357 $ 468,023 $349,515 $ 364,265
Europe................ 146,123 159,534 190,473 146,992 141,164
Japan and Asia
Pacific.............. 46,795 31,331 27,003 20,133 22,524
Latin America......... 10,579 12,257 10,205 7,716 7,702
-------- -------- ---------- -------- ----------
Totals.............. $522,440 $637,479 $ 695,704 $524,356 $ 535,655
======== ======== ========== ======== ==========
Earnings (Loss) from
Continuing Operations
before Income Tax
Expense:
North America......... $ 35,244 $ 20,397 $ 41,029 $ 51,525 $ 70,608
Europe................ 11,269 11,132 24,053 24,028 22,636
Japan and Asia
Pacific.............. (4,017) (1,941) (203) 3,357 2,936
Latin America......... (1,914) (1,683) 1,878 373 480
General corporate and
other................ (7,487) (18,776) (9,347) (39,886) (42,124)
-------- -------- ---------- -------- ----------
Totals.............. $ 33,095 $ 9,129 $ 57,410 $ 39,397 $ 54,536
======== ======== ========== ======== ==========
August 31,
-------------------- May 31,
1998 1999 2000
-------- ---------- -----------
(Unaudited)
Assets:
North America......... $339,683 $ 321,461 $ 302,665
Europe................ 75,587 95,019 93,006
Japan and Asia
Pacific.............. 21,401 18,404 20,941
Latin America......... 7,338 6,766 7,111
Net assets of
discontinued
operations........... 249,696 598,458 597,489
General corporate and
other................ 17,821 19,764 14,324
-------- ---------- ----------
Totals.............. $711,526 $1,059,872 $1,035,536
======== ========== ==========
Corporate assets, which are not allocated, represent principally cash and
deferred income taxes.
No single customer accounted for more than 10% of total net sales in 1997,
1998 or 1999. Export sales from domestic operations were less than 3% of total
net sales in each of the periods presented.
Note P--Contingencies and Litigation
The Company had outstanding letters of credit totaling $6.6 million and $1.9
million at August 31, 1998 and 1999, 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 that have arisen in the
normal course of its business. These legal proceedings typically include
product liability, environmental, labor, patent claims and commission disputes.
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.
F-32
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has facilities in numerous geographic locations that 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 related to the continuing businesses of $1.9
million and $1.3 million were included in the Consolidated Balance Sheets at
August 31, 1998 and 1999, respectively.
Note Q--Subsequent Events
On June 30, 2000, Applied Power Inc. completed the sale of all outstanding
capital stock of Barry Wright Corporation, a wholly owned subsidiary of Applied
Power Inc. Barry Wright Corporation, comprised of the Barry Controls Aerospace
and Barry Controls Defense and Industrial divisions, and its UK subsidiary
Barry Controls Ltd., were sold to Hutchinson S.A., a subsidiary of the
TotalFinaElf Group, a French based multi-national corporation. The net of tax
cash proceeds were approximately $157.5 million.
On July 7, 2000, Applied Power Inc.'s Board of Directors approved the
distribution of its Electronics business. Shareholders of Applied Power Inc.
common stock will receive one share of APW Ltd. common stock for every Applied
Power Inc. share owned on the July 21, 2000 record date. APW Ltd. will trade
separately on the New York Stock Exchange (NYSE) as "APW" and Applied Power
Inc. will continue to trade on the NYSE, but will change its ticker symbol to
"ATU" and will subsequently change its name to Actuant Corporation during
fiscal year 2001.
Note R--Quarterly Financial Data (Unaudited)
(in millions, except per share amounts)
Fiscal 1998
----------------------------------
First(1) Second Third(2) Fourth(3)
-------- ------ -------- ---------
Net sales............................... $150.8 $153.9 $164.7 $168.1
Gross profit............................ 51.0 52.0 58.1 39.8
Earnings from continuing operations..... 9.9 8.2 14.2 (32.3)
Earnings from discontinued operations... 9.1 8.3 8.2 1.0
------ ------ ------ ------
Net earnings............................ $ 19.1 $ 16.5 $ 22.4 $(31.3)
====== ====== ====== ======
Earnings from continuing operations per
share
Basic................................. $ 0.26 $ 0.21 $ 0.37 $(0.84)
Diluted............................... $ 0.25 $ 0.20 $ 0.35 $(0.80)
Earnings from discontinued operations
per share
Basic................................. $ 0.23 $ 0.22 $ 0.21 $ 0.04
Diluted............................... $ 0.23 $ 0.21 $ 0.20 $ 0.02
Net earnings per share
Basic................................. $ 0.49 $ 0.43 $ 0.58 $(0.80)
Diluted............................... $ 0.48 $ 0.41 $ 0.55 $(0.78)
F-33
APPLIED POWER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal 1999
-----------------------------
First(4) Second Third Fourth
-------- ------ ------ ------
Net sales.................................... $172.5 $171.9 $180.0 $171.3
Gross profit................................. 61.6 62.5 66.2 62.4
Earnings from continuing operations.......... 3.4 11.0 10.1 10.1
Earnings from discontinued operations........ 13.0 8.3 10.4 13.1
------ ------ ------ ------
Net earnings................................. $ 16.4 $ 19.3 $ 20.5 $ 23.2
====== ====== ====== ======
Earnings from continuing operations per share
Basic...................................... $ 0.09 $ 0.28 $ 0.26 $ 0.26
Diluted.................................... $ 0.08 $ 0.27 $ 0.25 $ 0.26
Earnings from discontinued operations per
share
Basic...................................... $ 0.33 $ 0.22 $ 0.27 $ 0.33
Diluted.................................... $ 0.33 $ 0.21 $ 0.26 $ 0.32
Net earnings per share
Basic...................................... $ 0.42 $ 0.50 $ 0.53 $ 0.59
Diluted.................................... $ 0.41 $ 0.48 $ 0.51 $ 0.58
Fiscal 2000
---------------------------
First(5) Second(6) Third(7)
-------- --------- --------
Net sales...................................... $173.0 $184.1 $178.5
Gross profit................................... 62.1 65.7 66.0
Earnings from continuing operations............ 12.4 8.3 11.6
Earnings from discontinued operations.......... 11.3 12.2 13.4
Extraordinary loss on sale of subsidiary, net
of tax........................................ -- -- (12.2)
------ ------ ------
Net earnings................................... $ 23.7 $ 20.5 $ 12.8
====== ====== ======
Earnings from continuing operations per share
Basic........................................ $ 0.32 $ 0.21 $ 0.30
Diluted...................................... $ 0.31 $ 0.21 $ 0.29
Earnings from discontinued operations per share
Basic........................................ $ 0.29 $ 0.31 $ 0.34
Diluted...................................... $ 0.28 $ 0.30 $ 0.33
Extraordinary loss per share
Basic........................................ $ -- $ -- $(0.31)
Diluted...................................... $ -- $ -- $(0.30)
Net earnings per share
Basic........................................ $ 0.61 $ 0.52 $ 0.33
Diluted...................................... $ 0.59 $ 0.51 $ 0.32
- --------
(1) Includes a $1.7 million gain, with no tax impact, on life insurance
proceeds, or $0.04 per diluted share.
(2) Includes a $2.9 million net gain, after tax on the sale of a facility and
the write-down of a European subsidiary to its estimated realizable value,
or a net impact of $0.08 per diluted share.
(3) Earnings from continuing operations includes restructuring and other one-
time charges of $50.4 million ($37.2 million, after tax), or $0.93 per
diluted share. An additional $19.1 million ($12.3 million after tax) was
included within discontinued operations related to similar restructuring
costs associated with the Electronics segment.
(4) Includes a $7.8 million ($4.7 million after tax) loss as a result of a
contract termination, or $0.12 per diluted share.
(5) Includes a $1.4 million ($0.9 million after tax) recovery of costs related
to the contract termination recorded in the first quarter of fiscal 1999.
(6) Includes a charge of $3.5 million ($2.2 million, net of tax benefit) for
fees and expenses associated with the Distribution and the incorporation of
APW Ltd.
(7) Includes a charge of $1.0 million ($0.6 million, net of tax benefit) for
fees and expenses associated with the Distribution and the incorporation of
APW Ltd.
F-34