-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBNqT/c2wlzYdPC1ClGU/vhEfMUDgEsh3Yfds9hbtOVGp8f/9wLnMEQTQC0IOjBX cgJkSXlrH0rH1lXsbNPh0w== 0000950152-02-007147.txt : 20020923 0000950152-02-007147.hdr.sgml : 20020923 20020923162723 ACCESSION NUMBER: 0000950152-02-007147 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020923 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED INDUSTRIAL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000109563 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 340117420 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02299 FILM NUMBER: 02770175 BUSINESS ADDRESS: STREET 1: 3600 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 BUSINESS PHONE: 2168818900 MAIL ADDRESS: STREET 1: 3600 EUCLID AVE CITY: CLEVELAND STATE: OH ZIP: 44115 FORMER COMPANY: FORMER CONFORMED NAME: BROWN JIM STORES INC DATE OF NAME CHANGE: 19600201 FORMER COMPANY: FORMER CONFORMED NAME: BEARINGS INC /OH/ DATE OF NAME CHANGE: 19920703 10-K 1 l96320ae10vk.txt APPLIED INDUSTRIAL TECHNOLOGIES, INC. 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 2002 Commission File No. 1-2299 APPLIED INDUSTRIAL TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) OHIO 34-0117420 -------------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Applied Plaza, Cleveland, Ohio 44115 ---------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 426-4000. Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered ------------------- ------------------------------------ Common Stock, without par value New York Stock Exchange Preferred Stock Purchase Rights Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the common equity was sold as of the close of business on August 27, 2002: $281,516,053. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at August 27, 2002 ----- ------------------------------ Common Stock, without par value 19,171,924 DOCUMENTS INCORPORATED BY REFERENCE Listed hereunder are the documents, portions of which are incorporated by reference, and the Parts of this Form 10-K into which such portions are incorporated: (1) Applied Industrial Technologies, Inc. Annual Report to shareholders for the fiscal year ended June 30, 2002, portions of which are incorporated by reference into Parts I, II and IV of this Form 10-K; and, (2) Applied Industrial Technologies, Inc. Proxy Statement dated September 16, 2002, portions of which are incorporated by reference into Parts III and IV of this Form 10-K. 1 - -------------------------------------------------------------------------------- CAUTIONARY STATEMENT -------------------- UNDER PRIVATE SECURITIES LITIGATION REFORM ACT ---------------------------------------------- THIS REPORT, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE, CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING, BASED ON MANAGEMENT'S CURRENT EXPECTATIONS ABOUT THE FUTURE. FORWARD-LOOKING STATEMENTS ARE OFTEN IDENTIFIED BY QUALIFIERS SUCH AS "EXPECT," "BELIEVE," "INTEND," "WILL," AND SIMILAR EXPRESSIONS. APPLIED INTENDS THAT THE FORWARD-LOOKING STATEMENTS BE SUBJECT TO THE SAFE HARBORS ESTABLISHED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS, AND RELEASES. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS REGARDING IMPORTANT RISK FACTORS, MANY OF WHICH ARE OUTSIDE APPLIED'S CONTROL. ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS, AND THE MAKING OF THOSE STATEMENTS SHOULD NOT BE REGARDED AS A REPRESENTATION BY APPLIED OR ANY OTHER PERSON THAT THE RESULTS EXPRESSED IN THE STATEMENTS WILL BE ACHIEVED. IN ADDITION, APPLIED ASSUMES NO OBLIGATION PUBLICLY TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER BECAUSE OF NEW INFORMATION OR EVENTS, OR OTHERWISE. APPLIED BELIEVES ITS PRIMARY RISK FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED IN "NARRATIVE DESCRIPTION OF BUSINESS," IN PART I, ITEM 1, SECTION (c), BELOW, AND THE FOLLOWING: CHANGES IN THE ECONOMY OR IN SPECIFIC CUSTOMER INDUSTRY SECTORS; REDUCTION IN MANUFACTURING CAPACITY IN OUR TARGETED GEOGRAPHIC MARKETS DUE TO CONSOLIDATION IN CUSTOMER INDUSTRIES OR THE TRANSFER OF MANUFACTURING CAPACITY TO FOREIGN COUNTRIES; CHANGES IN INTEREST RATES; CHANGES IN CUSTOMER PROCUREMENT POLICIES AND PRACTICES; CHANGES IN PRODUCT MANUFACTURER SALES POLICIES AND PRACTICES; THE AVAILABILITY OF PRODUCTS AND LABOR; CHANGES IN OPERATING EXPENSES; THE EFFECT OF PRICE INCREASES OR DECREASES; THE VARIABILITY AND TIMING OF BUSINESS OPPORTUNITIES INCLUDING ACQUISITIONS, ALLIANCES, CUSTOMER AGREEMENTS, AND SUPPLIER AUTHORIZATIONS; OUR ABILITY TO REALIZE THE ANTICIPATED BENEFITS OF ACQUISITIONS AND MARKETING AND OTHER BUSINESS STRATEGIES, INCLUDING ELECTRONIC COMMERCE AND CATALOG INITIATIVES; THE INCURRENCE OF ADDITIONAL DEBT AND CONTINGENT LIABILITIES IN CONNECTION WITH ACQUISITIONS; CHANGES IN ACCOUNTING POLICIES AND PRACTICES; THE EFFECT OF ORGANIZATIONAL CHANGES WITHIN THE COMPANY; THE EMERGENCE OF NEW COMPETITORS, INCLUDING FIRMS WITH GREATER FINANCIAL RESOURCES; RISKS AND UNCERTAINTIES ASSOCIATED WITH APPLIED'S EXPANSION INTO FOREIGN MARKETS, INCLUDING INFLATION RATES, RECESSIONS, AND FOREIGN CURRENCY EXCHANGE RATES; ADVERSE RESULTS IN SIGNIFICANT LITIGATION MATTERS; ADVERSE REGULATION AND LEGISLATION; AND THE OCCURRENCE OF EXTRAORDINARY EVENTS (INCLUDING PROLONGED LABOR DISPUTES, NATURAL EVENTS AND ACTS OF GOD, FIRES, FLOODS, AND ACCIDENTS). - -------------------------------------------------------------------------------- 2 PART I. ITEM 1. BUSINESS. --------- In this Annual Report on Form 10-K, "Applied" refers to Applied Industrial Technologies, Inc. References to "we," "us," "our," and "the company" refer to Applied and its subsidiaries. The company is one of North America's leading distributors of industrial products and fluid power products and systems. In addition, we provide fluid power, mechanical, electrical, and rubber shop services, as well as material handling components and systems. We offer technical application support for our products and provide creative solutions to help customers minimize downtime and reduce overall procurement costs. Although we do not generally manufacture the products we sell, we do assemble and repair certain products and systems. Our sales are primarily in the maintenance and repair operations (MRO) markets, to customers in a wide range of industries, principally in North America. We also sell in original equipment manufacturing (OEM) markets. Applied and its predecessor companies have been engaged in this business since 1923. Applied was incorporated in Delaware in 1928 and reincorporated in Ohio in 1988. (a) General Development of Business. -------------------------------- The company expanded its presence in Mexico through the October 2001 acquisition of Baleros Industriales, S.A. de C.V. The acquired company has been integrated with the operations of our Applied Mexico subsidiary. We also launched the 450-page Fluid Power Connection(TM) catalog of hydraulic and pneumatic components, including air preparation components, pneumatic cylinders and valves, fluid connectors, and hydraulic power units, pumps, motors, brakes, gearboxes, filtration components, and cylinders. Further information regarding developments in our business can be found in our 2002 Annual Report to shareholders under the caption "Management's Discussion and Analysis" on pages 10 through 13, which is incorporated here by reference. (b) Financial Information about Segments. ------------------------------------- We have identified only one reportable business segment, service center-based distribution. This business provides customers with solutions to their maintenance, repair, and original equipment manufacturing needs by distributing, through our service center network, bearings and seals, linear motion products, power transmission products, fluid power products, industrial rubber products, general maintenance products, and related specialty items. We also offer technical product application support and provide creative solutions to help customers minimize downtime and reduce overall procurement costs. 3 In addition to service center-based distribution, we operate several smaller businesses that primarily sell their products and services directly to customers rather than through the service centers. These operations include specialized fluid power companies and the Engineered Systems and Automation Division. Segment financial information can be found in the 2002 Annual Report to shareholders in note 11 to the financial statements on pages 25 and 26, and that information is incorporated here by reference. (c) Narrative Description of Business. ---------------------------------- Overview. Our service centers, located in 47 states, five western Canadian provinces, Puerto Rico, and Mexico, serve as our primary business channel. As noted in "Financial Information about Segments," above, we also own other operations that sell products and services directly to customers rather than through the service centers. Our U.S. operating structure is built around two platforms - industrial products, and fluid power products and systems. The structure divides our U.S. field operations into two primary business units: - Industrial Products Unit. This unit includes all of the domestic service centers, through which we distribute bearings and seals, linear motion products, power transmission products, fluid power components, industrial rubber products, general maintenance products, and related specialty items, primarily for maintenance and repair applications. In addition, the Industrial Products Unit includes the company's regional fabricated rubber shops, which modify and repair conveyor belts and provide hose assemblies in accordance with customer requirements, and field crews that perform belt and rubber lining installation and repair services at customer locations. The Industrial Products Unit accounts for a substantial majority of our field operations and sales dollars. - Fluid Power Unit. This unit includes our specialized fluid power businesses, which market their products and services directly to customers rather than through the service center network. In addition to distributing fluid power components, the businesses operate shops that assemble fluid power systems and components, perform equipment repair, and offer technical advice to customers. Customers include businesses purchasing for maintenance and repair applications, as well as for original equipment manufacturing applications. The Fluid Power Unit operates in various geographic areas throughout the United States under the following names: Air and Hydraulics Engineering (Southeast), Air Draulics Engineering (Mississippi Valley), Dees Fluid Power (Mid-Atlantic and Northeast), Elect-Air (West Coast), Engineered Sales (Midwest), ESI Power Hydraulics (Midwest), and Kent Fluid Power (West Coast). 4 In addition to the foregoing, we operate other businesses within separate organizational structures. Among these businesses are the following: - Our Canadian subsidiary, Applied Industrial Technologies Ltd., which operates service centers and shops in five western Canadian provinces under the names Bearing & Transmission, HyPower, and B&T Rubber. - Our majority-owned Mexican subsidiary, Applied Mexico, S.A. de C.V., with five service centers in Mexico, four of which operate under the name Baleros Industriales. - Our Puerto Rican subsidiary, Rafael Benitez Carrillo, Inc., which operates three service centers. - The Engineered Systems and Automation Division, which offers electrical and mechanical design, fabrication, installation, and support services, primarily in the U.S. Products. We are one of North America's leading distributors of industrial and fluid power products and systems. Industrial products include bearings and seals, linear motion products, power transmission products, industrial rubber products, general maintenance products, and related specialty items. Fluid power products include hydraulic, pneumatic, lubrication, and filtration components and systems. These products are generally manufactured by other companies for whom we serve as a non-exclusive distributor. In addition to products, our supplier relationships offer access to technical product training, as well as sales and marketing support. We believe that these relationships are generally good. The loss of certain suppliers could have an adverse effect on our business. Authorizations to represent suppliers may vary by geographic region. Net sales by product category for the past three fiscal years can be found in the 2002 Annual Report to shareholders in note 11 to the financial statements on page 26, and that information is incorporated here by reference. Services. Our service center associates advise and assist customers with respect to product selection and application. We consider this advice and assistance to be an integral part of our sales efforts. Beyond acting as a mere distributor, we offer product and process solutions involving multiple technologies. These solutions reduce production downtime, as well as overall procurement and maintenance costs for customers. By providing high levels of service, product and industry expertise, and technical support, while at the same time offering competitive pricing, we believe we develop closer, longer-lasting, and more profitable customer relationships. Our sales associates include customer service representatives and account managers, as well as product and industry specialists. Customer service representatives receive, process, and expedite customer orders, provide product and pricing information, and assist account managers in serving customers. Account managers make on-site calls to current and potential customers to provide product and price information, identify customer requirements, provide recommendations, and assist in implementing equipment maintenance and storeroom management programs, including our AppliedStore(R) storeroom replenishment system. Using our Documented Value Added(R) software 5 program, account managers measure and document the value to the customer, through cost savings and/or increased productivity, of our services and recommendations. Product and industry specialists assist with applications in their areas of technical expertise. We also have call centers for specific product groups, staffed by technicians who provide consulting and training services. We maintain inventory levels at each service center tailored to the local market it serves. These inventories consist of standard items as well as other items that are specific to local customers' immediate needs. We also maintain back-up inventory in nine distribution centers that directly support our service center network and customer needs. The inventory maintained at our facilities allows us to satisfy the just-in-time industrial product needs of our customers. In addition to product distribution-related services, we offer shop services to customers. Our fabricated rubber shops modify and repair conveyor belts and provide hose assemblies (also available at select service centers) in accordance with customer requirements. Rubber service field crews perform belt and rubber lining installation and repair services at customer locations in certain geographic areas. We also offer, through an alliance with an outside provider, mechanical shop services, including rebuilding and assembly of speed reducers, pumps, valves, cylinders, and hydraulic motors, and custom machining. Timely delivery of products to customers is an integral part of our service. Service centers and distribution centers use the most effective method of transportation available to meet customer needs, including our own delivery vehicles, dedicated third-party logistics providers, as well as both surface and air common carrier and courier services. These transportation services and delivery vehicles also move products between suppliers, distribution centers, and service centers to assure availability of merchandise for customer needs. Our inventory and sales information systems enhance our ability to serve customers. The point-of-sale OMNEX(R) computer system, on which U.S. service centers operate, gives each service center on-line access to inventory and sales history information. The system permits direct access for order entry, pricing, order expediting, and order review. We also engage in electronic data interchange (EDI) and electronic funds transfer (EFT) with participating customers and suppliers. We support our service center network with website and paper catalog marketing channels. AppliedAccess(R) (www.applied-access.com) is our broad line website, providing customers a convenient method to search for products in a vast electronic database, view prices, check inventory levels, place orders, and track order status. Our Maintenance America(R) specialty product catalog and website (www.maintenanceamerica.com) facilitate the ordering of specialty products used by maintenance professionals. And in fiscal 2002, we launched the Fluid Power Connection(TM) catalog of hydraulic and pneumatic components and a related website (www.fluidpowerconnection.com) to facilitate the ordering of these products from our service centers. The Fluid Power Unit businesses operate independently of the service centers, but as product distributors, share the same focus on customer service. Product and application recommendations, inventory availability, and delivery speed are all key to the fluid power businesses' success. The 6 businesses distinguish themselves, though, from most component distributors by also offering engineering, design, fabrication, and installation services. Each business has account managers with extensive technical knowledge, who handle sophisticated projects for customers primarily within the business' geographic region. Our operations contrast with those of our product manufacturers because the manufacturers generally confine their direct sales activities to large-volume transactions with original equipment manufacturers, which incorporate the components purchased into the products they make. The manufacturers generally do not sell replacement components directly to the customer but instead refer the customer to us or another distributor. There is no assurance that this practice will continue, however, and any discontinuance of this practice could have an adverse effect on our business. Markets and Methods of Distribution. We purchase from several thousand product manufacturers and resell the products to customers in a wide variety of industries, including agriculture and food processing, automotive, chemical processing, forest products, industrial machinery and equipment, mining, primary metals, transportation, and utilities. Customers range from the largest industrial concerns in North America to the smallest. We are not significantly dependent on a single customer or group of customers, the loss of which would have a material adverse effect on our business as a whole, and no single customer accounts for more than 4% of our net sales. We have witnessed continued consolidation in recent years in various customer industries. In addition, we continue to observe instances of manufacturing capacity being transferred to foreign countries. Each of these trends could result in reduced manufacturing capacity in our targeted geographic markets and, consequently, reduced demand for our products and services in those markets. In recent years, there has been a trend among large industrial customers towards reducing the number of their suppliers of maintenance and replacement products. We have responded to this trend by expanding our geographic reach, broadening our product offering, and developing new methods for marketing our products. There can be no guarantee, however, that this trend will not have an adverse effect on our business. Customers have also increasingly demonstrated a desire to order products through electronic catalogs and Internet-based procurement systems. We have responded to this trend by developing avenues, such as the AppliedAccess(R) website, described above, to provide customers the flexibility to order through their preferred procurement method. Some customers have turned to e-commerce software providers and Internet marketplaces to facilitate purchases from multiple suppliers through one electronic interface. We believe that our product and services offerings, geographic breadth, and related immediate and accurate product fulfillment capabilities position us to grow our market share through relationships with selected e-commerce companies. On the other hand, it is possible that emerging electronic procurement models may tend to devalue distributor services such as product selection and application-specific 7 advice, and to narrow product sales margins. At this time, it is too early to assess the long-term impact of this trend on our business. Competition. We consider our business to be highly competitive. In addition, our markets present few economic or technological barriers to entry, contributing to the high fragmentation of market share in our industry. Longstanding supplier and customer relationships and our associates' experience do, however, support our competitive position. Competition is based generally on product and service offerings, product availability, price, and having a local presence. Our principal competitors are other specialized bearing, power transmission, industrial rubber, fluid power, linear motion, and specialty item distributors, and, to a lesser extent, mill supply and catalog companies. These competitors include local, regional, national, and international operations. We also compete with original equipment manufacturers and their distributors in the sale of maintenance and replacement components. Some competitors have greater financial resources than we do. The identity and number of our competitors vary throughout the geographic and product markets in which we conduct business. Although we are one of the leading distributors in North America for the major product categories we carry, our market share for those products in any given geographic area may be relatively small compared to the portion of the market served by original equipment manufacturers and other distributors. Backlog and Seasonality. Because of our product resources and distribution network, we do not have a substantial backlog of orders, nor are backlog orders significant at any given time. We do not consider our overall business to be seasonal. Patents, Trademarks, and Licenses. Customer recognition of our service marks and trade names, including Applied Industrial Technologies(R), Applied(R), and AIT(R), is an important contributing factor to our sales. Patents and licenses are not of material importance to our business. Raw Materials and General Business Conditions. Our operations are dependent on general industrial activities and economic conditions and would be adversely affected by the unavailability of raw materials to our suppliers, prolonged labor disputes experienced by suppliers or customers, or by any recession or depression that has an adverse effect on industrial activity generally or on key customer industries served by us. Number of Employees. On June 30, 2002, we had 4,508 employees. Working Capital. Our working capital position is disclosed in the financial statements referred to at Item 15 on page 16 of this Report and is discussed in "Management's Discussion and Analysis" in the 2002 Annual Report to shareholders on page 11. We require substantial working capital related to accounts receivable and inventories. Significant amounts of inventory are carried to meet rapid delivery requirements of customers. We 8 generally require all payments for sales on account within 30 days. Returns are not considered to have a material effect on our working capital requirements. We believe these practices are consistent with industry practices. Environmental Laws. We believe that compliance with federal, state and local laws regulating the discharge of materials into the environment or otherwise relating to environmental protection will not have a material adverse effect on our capital expenditures, earnings, or competitive position. (d) Financial Information about Geographic Areas. --------------------------------------------- Sales by our Canadian and Mexican operations represented 5.5% of our total net sales in fiscal 2002 and 4.7% in 2001. Long-lived assets located outside the United States are not and have not been material. Our U.S. operations' export sales during the fiscal year ended June 30, 2002, and prior fiscal years, were less than 2% of net sales, and were not concentrated in a specific geographic area. Additional information regarding our foreign operations is included in the 2002 Annual Report to shareholders in note 11 to the financial statements on page 25, and in "Quantitative and Qualitative Disclosures About Market Risk" on page 13, and that information is incorporated here by reference. ITEM 2. PROPERTIES. ----------- We own or lease the properties in which our offices, service centers, distribution centers, and shops are located. At June 30, 2002, we owned real properties at 164 locations and leased 261 locations. Certain locations contain multiple operations, such as a shop and a distribution center. Our principal owned real properties (each of which has more than 20,000 square feet of floor space) at June 30, 2002 were: - the distribution center in Atlanta, Georgia - the distribution center in Florence, Kentucky - the service center in West Monroe, Louisiana - the service center and rubber shop in Omaha, Nebraska - the distribution center in Portland, Oregon (operations were moved to a new leased facility in July 2002) - the distribution center in Carlisle, Pennsylvania Our principal leased real properties (each of which has more than 20,000 square feet of floor space) at June 30, 2002 were: 9 - the corporate headquarters facility in Cleveland, Ohio - the distribution center and rubber shop in Fontana, California - the service center in Long Beach, California - the service center in San Jose, California - the rubber shop in Tracy, California - the distribution center and service center in Denver, Colorado - the rubber shop in Denver, Colorado - the fluid power sales office and warehouse in Joppa, Maryland - the service center in Grand Rapids, Michigan - the service center and mechanical and fluid power shop in Iron Mountain, Michigan - the service center in Kansas City, Missouri - the inventory return center in Elyria, Ohio - the new distribution center in Portland, Oregon (commenced operations in July 2002) - the distribution center and rubber shop in Fort Worth, Texas - the service center in Longview, Washington - the distribution center, fluid power shop, and rubber shop in Longview, Washington - the offices, service center, and rubber shop in Appleton, Wisconsin - the service center in Milwaukee, Wisconsin - the service center and distribution center in Winnipeg, Manitoba - the offices and fluid power shop in Saskatoon, Saskatchewan Except for the Saskatoon fluid power shop and the Joppa, Maryland facility, all of the properties listed above are used in our service center-based distribution segment. The Winnipeg and Longview facilities are used in operations both inside and outside the service center-based distribution segment. We consider our properties generally sufficient to meet our requirements for office space and inventory stocking. A service center's size is primarily influenced by the amount of inventory the service center requires to meet its customers' needs. We use all of our owned and leased properties except for certain properties which in the aggregate are not material and are either for sale, lease, or sublease to third parties due to a relocation or closing. We also may lease or sublease to others unused portions of buildings. In recent years, when opening new locations, we have emphasized leasing rather than owning real property. We do not consider any of our service center, distribution center, or shop properties to be material, because we believe that if it becomes necessary or desirable to relocate one of those operations, other suitable property could be found. ITEM 3. PENDING LEGAL PROCEEDINGS. -------------------------- Applied and/or one of its subsidiaries is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, we do not believe that any 10 liabilities that may result from these proceedings are reasonably likely to have a material adverse effect on our consolidated financial position, results of operations, or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ---------------------------------------------------- No matters were submitted to a vote of Applied's security holders during the last quarter of fiscal 2002. EXECUTIVE OFFICERS OF THE REGISTRANT. ------------------------------------- Applied's executive officers are elected by the Board of Directors for a term of one year, or until their successors are chosen and qualified, at the Board's organizational meeting held immediately following the annual meeting of shareholders. The following is a list of the executive officers and a description of their business experience during the past five years. Except as otherwise stated, the positions and offices indicated are with Applied, and the persons were elected to their current positions on October 16, 2001: David L. Pugh. Mr. Pugh is Chairman & Chief Executive Officer (since October 2000) and has served as a member of the Board of Directors since January 2000. He was President & Chief Executive Officer (from January 2000 to October 2000), and prior to that was President & Chief Operating Officer (from January 1999 to January 2000). Prior to joining Applied, he was Senior Vice President of the Industrial Control Group (from 1996 to 1998) of Rockwell Automation, a division of Rockwell International Corporation. In that position, he was responsible for a global manufacturing operation encompassing three business groups, 5,000 employees, and 13 operating locations. He is 53 years of age. Bill L. Purser. Mr. Purser is President & Chief Operating Officer (since October 2000). Prior to that he was Vice President-Chief Marketing Officer (from February 1999 to October 2000), and Vice President-Marketing & National Accounts (from 1996 to February 1999). He is 59 years of age. Todd A. Barlett. Mr. Barlett is Vice President-Global Business Development (since October 2000). He had served as Vice President-Alliance Systems (from August 1999 to October 2000), Vice President-National Accounts & Alliance Systems (from August 1998 to August 1999), and Vice President-Southeast Area (from 1995 to August 1998). He is 47 years of age. Fred D. Bauer. Mr. Bauer is Vice President-General Counsel (since April 2002) and Secretary (since October 2001). He had served as Vice President-Legal Services (from May 2000 to April 2002) and Assistant Secretary (from 1994 to October 2001), and had also been Assistant General Counsel (from 1994 to May 2000). He is 36 years of age. 11 Robert A. Christensen. Mr. Christensen is Vice President-Unit President, Fluid Power (since November 2000). Prior to that he was Vice President-Fluid Power Business Development (from April to November 2000) and Director of Fluid Power Products (from 1994 to April 2000). He is 61 years of age. Michael L. Coticchia. Mr. Coticchia is Vice President-Human Resources and Administration (since April 2002). Prior to that, he served as Vice President-Human Resources and Risk Management (from October 1998 to April 2002) and Assistant Secretary (from 1990 to January 2002), and had also been Director-Human Resources and Risk Management (from 1994 to October 1998). He is 40 years of age. Mark O. Eisele. Mr. Eisele is Vice President & Controller (since October 1997). He was Controller (from 1992 to October 1997). He is 45 years of age. James T. Hopper. Mr. Hopper is Vice President-Chief Information Officer (since January 2000). He had served as Vice President-Information Systems (from 1995 to January 2000). He is 59 years of age. Jeffrey A. Ramras. Mr. Ramras is Vice President-Marketing and Supply Chain Management (since September 2002). He had served as Vice President-Supply Chain Management (from January 2000 to September 2002) and as Vice President-Logistics (from 1995 to January 2000). He is 47 years of age. Richard C. Shaw. Mr. Shaw is Vice President-Communications and Learning (since January 2000). He had served as Vice President-Communications, Organizational Learning & Quality Standards (from 1996 to January 2000). He is 53 years of age. John R. Whitten. Mr. Whitten is Vice President-Chief Financial Officer & Treasurer (since October 1997). He was Vice President-Finance & Treasurer (from 1992 to October 1997). He is 56 years of age. PART II. -------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED ------------------------------------------------- STOCKHOLDER MATTERS. -------------------- Applied's Common Stock, without par value, is listed for trading on the New York Stock Exchange under the ticker symbol AIT. The information concerning the principal market for Applied's Common Stock, the quarterly stock prices and dividends for the fiscal years ended June 30, 2002, 2001, and 2000 and the number of shareholders of record as of August 16, 2002 is set forth in the 2002 Annual Report to shareholders on page 29, under the caption "Quarterly Operating Results and Market Data," and that information is incorporated here by reference. 12 Information concerning securities authorized for issuance under Applied's equity compensation plans is set forth in Applied's proxy statement dated September 16, 2002 under the caption, "Equity Compensation Plan Information" on page 10, and that information is incorporated here by reference. ITEM 6. SELECTED FINANCIAL DATA. ------------------------ The summary of selected financial data for the last five years is set forth in the 2002 Annual Report to shareholders in the table on pages 30 and 31 under the caption "10 Year Summary" and is incorporated here by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS. ------------------------------------ "Management's Discussion and Analysis" is set forth in the 2002 Annual Report to shareholders on pages 10 through 13 and is incorporated here by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ---------------------------------------- ABOUT MARKET RISK. ------------------ The disclosures about market risk required by this item are set forth in Applied's 2002 Annual Report to shareholders on page 13, which information is incorporated here by reference. For further information relating to borrowing and interest rates, see the Liquidity and Capital Resources section of "Management's Discussion and Analysis" and Notes 5 and 6 to the Consolidated Financial Statements in Applied's 2002 Annual Report to shareholders on pages 11, 20 and 21, respectively, which information is incorporated here by reference. In addition, please see "Cautionary Statement under Private Securities Litigation Reform Act" at page 2, above, for additional risk factors relating to our business. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. -------------------------------------------- The following consolidated financial statements and supplementary data of Applied and its subsidiaries and the independent auditors' report listed below, which are included in the 2002 Annual Report to shareholders at the pages indicated, are incorporated here by reference and filed with this Report: 13 Caption Page No. ------- -------- Financial Statements: Statements of Consolidated Income 14 for the Years Ended June 30, 2002, 2001, and 2000 Consolidated Balance Sheets 15 June 30, 2002 and 2001 Statements of Consolidated Cash Flows 16 for the Years Ended June 30, 2002, 2001, and 2000 Statements of Consolidated Shareholders' 17 Equity for the Years Ended June 30, 2002, 2001, and 2000 Notes to Consolidated Financial Statements 18 - 26 for the Years Ended June 30, 2002, 2001, and 2000 Independent Auditors' Report 27 Supplementary Data: Quarterly Operating Results and 29 Market Data ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS --------------------------------------------- ON ACCOUNTING AND FINANCIAL DISCLOSURE. --------------------------------------- Not applicable. PART III. --------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. --------------------------------------------------- The information required by this Item as to Applied's directors is set forth in Applied's Proxy Statement dated September 16, 2002 on pages 4 through 6 under the caption "Election of Directors" and is incorporated here by reference. The information required by this Item as to 14 Applied's executive officers has been furnished in this Report on pages 11 and 12 in Part I, after Item 4, under the caption "Executive Officers of the Registrant." The information required by this Item as to compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth in Applied's Proxy Statement on page 24 under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated here by reference. ITEM 11. EXECUTIVE COMPENSATION. ----------------------- The information required by this Item is set forth in Applied's Proxy Statement dated September 16, 2002, under the captions "Summary Compensation" on page 8, "Option Grants in Last Fiscal Year," "Aggregated Option Exercises and Fiscal Year-End Option Value Table," and "Long-Term Incentive Plans - Awards in Last Fiscal Year" on pages 9 and 10, "Estimated Retirement Benefits Under Supplemental Executive Retirement Benefits Plan" on page 11, "Deferred Compensation Plan," "Officer Retention Program," and "Change in Control Agreements and Other Related Arrangements" on pages 11 through 13, and "Compensation of Directors" and "Deferred Compensation Plan for Non-Employee Directors" on page 17, and is incorporated here by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT AND RELATED STOCKHOLDER MATTERS. ------------------------------------------- Information concerning the security ownership of certain beneficial owners and management and related stockholder matters is set forth in Applied's proxy statement dated September 16, 2002, under the captions "Beneficial Ownership of Certain Applied Shareholders and Management" on page 7 and "Equity Compensation Plan Information" on page 10, and is incorporated here by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ----------------------------------------------- Information concerning certain relationships and related transactions is set forth under the caption "Certain Relationships and Related Transactions" on page 18 of Applied's Proxy Statement dated September 16, 2002 and is incorporated here by reference. ITEM 14. CONTROLS AND PROCEDURES. ------------------------ There have not been any significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation of those controls. 15 PART IV. ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT ---------------------------------------------------- SCHEDULES AND REPORTS ON FORM 8-K. ---------------------------------- (a)1. Financial Statements. --------------------- The following consolidated financial statements, notes thereto, the independent auditors' report, and supplemental data are included in the 2002 Annual Report to shareholders on pages 14 through 27 and page 29, and are incorporated by reference in Item 8 of this Report. Caption ------- Statements of Consolidated Income for the Years Ended June 30, 2002, 2001, and 2000 Consolidated Balance Sheets at June 30, 2002 and 2001 Statements of Consolidated Cash Flows for the Years Ended June 30, 2002, 2001, and 2000 Statements of Consolidated Shareholders' Equity for the Years Ended June 30, 2002, 2001, and 2000 Notes to Consolidated Financial Statements for the Years Ended June 30, 2002, 2001, and 2000 Independent Auditors' Report Supplementary Data: Quarterly Operating Results and Market Data (a)2. Financial Statement Schedule. ----------------------------- The following report and schedule are included in this Part IV, and are found in this Report at the pages indicated: 16 Caption Page No. ------- -------- Independent Auditors' Report 22 Schedule II - Valuation and 23 Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto. (a)3. Exhibits. --------- * Asterisk indicates an executive compensation plan or arrangement. Exhibit No. Description --- ----------- 3(a) Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 8, 1998 (filed as Exhibit 3(a) to Applied's Form 10-Q for the quarter ended September 30, 1998, SEC File No. 1-2299, and incorporated here by reference). 3(b) Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference). 4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 4(b) Private Shelf Agreement dated as of November 27, 1996, as amended on January 30, 1998, between Applied and The Prudential Insurance Company of America (filed as Exhibit 4(f) to Applied's Form 10-Q for the quarter ended March 31, 1998, SEC File No. 1-2299, and incorporated here by reference). 17 4(c) Amendment dated October 24, 2000 to November 27, 1996 Private Shelf Agreement between Applied and The Prudential Insurance Company of America (filed as Exhibit 4(e) to Applied's Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference). 4(d) $150,000,000 Credit Agreement dated as of November 5, 1998 among Applied, KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 4(e) to Applied's Form 10-Q for the quarter ended September 30, 1998, SEC File No. 1-2299, and incorporated here by reference). 4(e) Rights Agreement, dated as of February 2, 1998, between Applied and Computershare Investor Services LLP (successor to Harris Trust and Savings Bank), as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (filed as Exhibit No. 1 to Applied's Registration Statement on Form 8-A filed July 20, 1998, SEC File No. 1-2299, and incorporated here by reference). *10(a) Form of Change in Control Agreement (amended and restated as of August 8, 2001) between Applied and each of its executive officers (filed as Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31, 2001, SEC File No. 1-2299, and incorporated here by reference). *10(b) A written description of Applied's director compensation program is found in Applied's Proxy Statement dated September 16, 2002, SEC File No. 1-2299, on page 17, under the caption "Compensation of Directors," and is incorporated here by reference. *10(c) Applied Deferred Compensation Plan for Non-Employee Directors (January 1, 1997 Restatement) (filed as Exhibit 10(d) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(d) First Amendment to Deferred Compensation Plan for Non-Employee Directors (January 1, 1997 Restatement) dated May 1, 1998 (filed as Exhibit 10(d) to Applied's Form 10-K for the year ended June 30, 1998, SEC File No. 1-2299, and incorporated here by reference). *10(e) A written description of Applied's Life and Accidental Death and Dismemberment Insurance for executive officers (filed as Exhibit 10(b) to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated here by reference). 18 *10(f) A written description of Applied's Long-Term Disability Insurance for executive officers (filed as Exhibit 10(c) to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated here by reference). *10(g) Form of Director and Officer Indemnification Agreement entered into between Applied and each of its directors and executive officers (filed as Exhibit 10(g) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(h) Applied Supplemental Executive Retirement Benefits Plan (January 1, 2002 Restatement) in which 7 executive officers (as well as certain former executive officers) currently participate (filed as Exhibit 10 to Applied's Form 10-Q for the quarter ended March 31, 2002, SEC File No. 1-2299, and incorporated here by reference). *10(i) Applied Deferred Compensation Plan (January 1, 1997 Restatement) (filed as Exhibit 10(j) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(j) First Amendment to Deferred Compensation Plan dated May 1, 1998 (filed as Exhibit 10(j) to Applied's Form 10-K for the year ended June 30, 1998, SEC File No. 1-2299, and incorporated here by reference). *10(k) Second Amendment to Deferred Compensation Plan effective as of October 1, 2000 (filed as Exhibit 10(b) to Applied's Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference). *10(l) Third Amendment to Deferred Compensation Plan effective as of January 16, 2001 (filed as Exhibit 10(b) to Applied's Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299, and incorporated here by reference). *10(m) 1997 Long-Term Performance Plan adopted by Shareholders on October 21, 1997 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated here by reference). 19 *10(n) Applied Supplemental Defined Contribution Plan (January 1, 1997 Restatement) (filed as Exhibit 10(m) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(o) First Amendment to Applied Supplemental Defined Contribution Plan effective as of October 1, 2000 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference). *10(p) Second Amendment to Applied Supplemental Defined Contribution Plan effective as of January 16, 2001 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299, and incorporated here by reference). *10(q) Retention Program for James T. Hopper, Vice President-Chief Information Officer, dated March 30, 2000 (filed as Exhibit 10(o) to Applied's Form 10-K for the year ended June 30, 2000, SEC File No. 1-2299, and incorporated here by reference). 10(r) Lease dated as of March 1, 1996 between Applied and the Cleveland-Cuyahoga County Port Authority (filed as Exhibit 10(n) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(s) Consulting, Non-competition and Confidentiality Agreement among Applied, Oak Grove Consulting Group, Inc., and J. Michael Moore dated July 31, 1997 (filed as Exhibit 10(c) to Applied's Form 10-Q for the quarter ended September 30, 1997, SEC File No. 1-2299, and incorporated here by reference). *10(t) Non-qualified Deferred Compensation Agreement between Applied and J. Michael Moore effective as of December 31, 1997 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended March 31, 1998, SEC File No. 1-2299, and incorporated here by reference). 13 Applied 2002 Annual Report to shareholders (not deemed "filed" as part of this Form 10-K except for those portions that are expressly incorporated by reference). 21 Applied's subsidiaries at June 30, 2002. 23 Independent Auditors' Consent. 20 24 Powers of attorney. 99(a) Statement Under Oath of Principal Executive Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. 99(b) Statement Under Oath of Principal Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. 99(c) Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. 1350. Applied will furnish a copy of any exhibit described above and not contained herein upon payment of a specified reasonable fee which shall be limited to Applied's reasonable expenses in furnishing the exhibit. Certain instruments with respect to long-term debt have not been filed as exhibits because the total amount of securities authorized under any one of the instruments does not exceed 10 percent of the total assets of Applied and its subsidiaries on a consolidated basis. Applied agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each such instrument. (b) Reports on Form 8-K. -------------------- None during the quarter ended June 30, 2002. 21 INDEPENDENT AUDITORS' REPORT ---------------------------- Shareholders and Board of Directors Applied Industrial Technologies, Inc. We have audited the consolidated balance sheets of Applied Industrial Technologies, Inc. and its subsidiaries (the "Company") as of June 30, 2002 and 2001, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the years in the three year period ended June 30, 2002 and have issued our report thereon dated August 6, 2002; such consolidated financial statements and report are included in your 2002 Annual Report to shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company, listed in Item 14(a)2. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Cleveland, Ohio August 6, 2002 22 APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES ---------------------------------------------------- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------------------------- -------- -------- ADDITIONS ADDITIONS BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE BEGINNING COSTS AND OTHER FROM AT END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD - ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED JUNE 30 2002: Reserve deducted from assets to which it applies - accounts receivable allowances $5,400 $4,488 $3,888 (A) $5,600 400 (B) YEAR ENDED JUNE 30 2001: Reserve deducted from assets to which it applies - accounts receivable allowances $3,800 $6,995 $700 (B) $6,500 (A) $5,400 405 (C) YEAR ENDED JUNE 30 2000: Reserve deducted from assets to which it applies - accounts receivable allowances $3,515 $3,058 $500 (B) $3,273 (A) $3,800
(A) Amounts represent uncollectible accounts charged off. (B) Amounts represent reserves for the return of merchandise by customers. (C) Represents reserves recorded through purchase accounting for acquisitions made during the year. - -------------------------------------------------------------------------------- SCHEDULE II 23 SIGNATURES ---------- Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLIED INDUSTRIAL TECHNOLOGIES, INC. /s/ David L. Pugh /s/ Bill L. Purser - ---------------------------------------- ----------------------------------- David L. Pugh, Chairman & Bill L. Purser, President & Chief Executive Officer Chief Operating Officer /s/ John R. Whitten /s/ Mark O. Eisele - ---------------------------------------- ----------------------------------- John R. Whitten Mark O. Eisele Vice President-Chief Financial Officer Vice President & Controller & Treasurer (Principal Accounting Officer) Date: September 23, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. * * - ---------------------------------------- ----------------------------------- William G. Bares, Director Dr. Roger D. Blackwell, Director * * - ---------------------------------------- ----------------------------------- William E. Butler, Director Thomas A. Commes, Director * * - ---------------------------------------- ----------------------------------- Peter A. Dorsman, Director Russell R. Gifford, Director * * - ---------------------------------------- ----------------------------------- L. Thomas Hiltz, Director Edith Kelly-Green, Director * /s/ David L. Pugh - ---------------------------------------- ----------------------------------- J. Michael Moore, Director David L. Pugh, Chairman & Chief Executive Officer and Director * * - ---------------------------------------- ----------------------------------- Dr. Jerry Sue Thornton, Director Stephen E. Yates, Director /s/ Fred D. Bauer - ---------------------------------------- Fred D. Bauer, as attorney in fact for persons indicated by "*" Date: September 23, 2002 24 CERTIFICATIONS -------------- I, David L. Pugh, Chairman & Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Applied Industrial Technologies, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and, 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 23, 2002 /s/ David L. Pugh --------------------------------------- David L. Pugh Chairman & Chief Executive Officer I, John R. Whitten, Vice President-Chief Financial Officer & Treasurer, certify that: 1. I have reviewed this annual report on Form 10-K of Applied Industrial Technologies, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and, 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 23, 2002 /s/ John R. Whitten --------------------------------------- John R. Whitten Vice President-Chief Financial Officer & Treasurer 25 APPLIED INDUSTRIAL TECHNOLOGIES, INC. EXHIBIT INDEX TO FORM 10-K FOR THE YEAR ENDED JUNE 30, 2002 Exhibit No. Description - --- ----------- 3(a) Amended and Restated Articles of Incorporation of Applied Industrial Technologies, Inc., as amended on October 8, 1998 (filed as Exhibit 3(a) to Applied's Form 10-Q for the quarter ended September 30, 1998, SEC File No. 1-2299, and incorporated here by reference). 3(b) Code of Regulations of Applied Industrial Technologies, Inc., as amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form 10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299, and incorporated here by reference). 4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc. (Delaware) filed with the Ohio Secretary of State on October 18, 1988, including an Agreement and Plan of Reorganization dated September 6, 1988 (filed as Exhibit 4(a) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 4(b) Private Shelf Agreement dated as of November 27, 1996, as amended on January 30, 1998, between Applied and The Prudential Insurance Company of America (filed as Exhibit 4(f) to Applied's Form 10-Q for the quarter ended March 31, 1998, SEC File No. 1-2299, and incorporated here by reference). 4(c) Amendment dated October 24, 2000 to November 27, 1996 Private Shelf Agreement between Applied and The Prudential Insurance Company of America (filed as Exhibit 4(e) to Applied's Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference). 4(d) $150,000,000 Credit Agreement dated as of November 5, 1998 among Applied, KeyBank National Association as Agent, and various financial institutions (filed as Exhibit 4(e) to Applied's Form 10-Q for the quarter ended September 30, 1998, SEC File No. 1-2299, and incorporated here by reference). 4(e) Rights Agreement, dated as of February 2, 1998, between Applied and Computershare Investor Services LLP (successor to Harris Trust and Savings Bank), as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (filed as Exhibit No. 1 to Applied's Registration Statement on Form 8-A filed July 20, 1998, SEC File No. 1-2299, and incorporated here by reference). *10(a) Form of Change in Control Agreement (amended and restated as of August 8, 2001) between Applied and each of its executive officers (filed as Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31, 2001, SEC File No. 1-2299, and incorporated here by reference). *10(b) A written description of Applied's director compensation program is found in Applied's Proxy Statement dated September 16, 2002, SEC File No. 1-2299, on page 17, under the caption "Compensation of Directors," and is incorporated here by reference. *10(c) Applied Deferred Compensation Plan for Non-Employee Directors (January 1, 1997 Restatement) (filed as Exhibit 10(d) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(d) First Amendment to Deferred Compensation Plan for Non-Employee Directors (January 1, 1997 Restatement) dated May 1, 1998 (filed as Exhibit 10(d) to Applied's Form 10-K for the year ended June 30, 1998, SEC File No. 1-2299, and incorporated here by reference). *10(e) A written description of Applied's Life and Accidental Death and Dismemberment Insurance for executive officers (filed as Exhibit 10(b) to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated here by reference). *10(f) A written description of Applied's Long-Term Disability Insurance for executive officers (filed as Exhibit 10(c) to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated here by reference). *10(g) Form of Director and Officer Indemnification Agreement entered into between Applied and each of its directors and executive officers (filed as Exhibit 10(g) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(h) Applied Supplemental Executive Retirement Benefits Plan (January 1, 2002 Restatement) in which 7 executive officers (as well as certain former executive officers) currently participate (filed as Exhibit 10 to Applied's Form 10-Q for the quarter ended March 31, 2002, SEC File No. 1-2299, and incorporated here by reference). *10(i) Applied Deferred Compensation Plan (January 1, 1997 Restatement) (filed as Exhibit 10(j) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(j) First Amendment to Deferred Compensation Plan dated May 1, 1998 (filed as Exhibit 10(j) to Applied's Form 10-K for the year ended June 30, 1998, SEC File No. 1-2299, and incorporated here by reference). *10(k) Second Amendment to Deferred Compensation Plan effective as of October 1, 2000 (filed as Exhibit 10(b) to Applied's Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference). *10(l) Third Amendment to Deferred Compensation Plan effective as of January 16, 2001 (filed as Exhibit 10(b) to Applied's Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299, and incorporated here by reference). *10(m) 1997 Long-Term Performance Plan adopted by Shareholders on October 21, 1997 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated here by reference). *10(n) Applied Supplemental Defined Contribution Plan (January 1, 1997 Restatement) (filed as Exhibit 10(m) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(o) First Amendment to Applied Supplemental Defined Contribution Plan effective as of October 1, 2000 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference). *10(p) Second Amendment to Applied Supplemental Defined Contribution Plan effective as of January 16, 2001 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended March 31, 2001, SEC File No. 1-2299, and incorporated here by reference). *10(q) Retention Award Program for James T. Hopper, Vice President-Chief Information Officer, dated March 30, 2000 (filed as Exhibit 10(o) to Applied's Form 10-K for the year ended June 30, 2000, SEC File No. 1-2299, and incorporated here by reference). 10(r) Lease dated as of March 1, 1996 between Applied and the Cleveland-Cuyahoga County Port Authority (filed as Exhibit 10(n) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(s) Consulting, Non-competition and Confidentiality Agreement among Applied, Oak Grove Consulting Group, Inc., and J. Michael Moore dated July 31, 1997 (filed as Exhibit 10(c) to Applied's Form 10-Q for the quarter ended September 30, 1997, SEC File No. 1-2299, and incorporated here by reference). *10(t) Non-qualified Deferred Compensation Agreement between Applied and J. Michael Moore effective as of December 31, 1997 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended March 31, 1998, SEC File No. 1-2299, and incorporated here by reference). 13 Applied 2002 Annual Report to shareholders (not deemed "filed" as part of this Form 10-K except for those portions that are expressly incorporated by reference). Attached 21 Applied's subsidiaries at June 30, 2002. Attached 23 Independent Auditors' Consent. Attached 24 Powers of Attorney. Attached 99(a) Statement Under Oath of Principal Executive Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. Attached 99(b) Statement Under Oath of Principal Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. Attached 99(c) Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. 1350. Attached EX-13 3 l96320aexv13.txt EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations YEAR ENDED JUNE 30, 2002 VS. 2001 Net sales in 2002 decreased to $1.45 billion or 11% below the $1.63 billion generated in 2001. This decrease was primarily due to the slowdown in U.S. industrial activity. Sectors hardest hit by the slowdown include the industrial machinery and equipment, durable goods and the electronic equipment industries, all more than 20% below prior year sales levels. These sales decreases were partially offset by stronger sales in the food products and automotive sectors. The Company does not expect inflation to have a material impact on future revenues. Gross margin (net sales less cost of sales) for the year increased slightly from 25.2% in 2001 to 25.3% in 2002. The 2002 margin was higher than in the prior year due to improved buying practices and increased sales through catalog channels which improved the profitability of our product mix. Selling, distribution and administrative (SD&A) expenses were approximately $19.4 million lower than in the prior year. The decreased amounts were due to lower incentive and employee benefit expenses attributable to the lower sales volumes, better overall expense management and additional operational efficiencies. SD&A as a percentage of sales was 23.1% in 2002 versus 21.8% in 2001. The increase in SD&A as a percent of sales was due to the lower overall sales noted above. Operating income decreased to $30.8 million in 2002 from $55.0 million in 2001. As a percent of sales, operating income decreased to 2.1% in 2002 from 3.4% in 2001. The $24.2 million decline in operating income was due to the sales decrease noted above. Interest expense, net for 2002, decreased $2.4 million or 26.0% compared with the prior year primarily as a result of a decrease in average borrowings related to strong cash flows from operations and lower interest rates. Income tax expense as a percentage of income before income taxes decreased to 37.9% in 2002 from 38.1% in 2001. The decrease in the effective tax rate resulted from a reduction in the impact of non-deductible items offset somewhat by higher effective state and local income tax rates. Net income before the cumulative effect of the accounting change for the fiscal year ended June 30, 2002, decreased $13.3 million or 47.4% from the prior year. Net income per share before the cumulative effect of the accounting change decreased 46.1% to $.76 in 2002 from $1.41 in 2001 primarily due to the factors described above. In connection with the adoption of Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets", the Company recorded a non-cash impairment charge totaling $12.1 million, after tax, or $.63 per share as a change in accounting principle effective July 1, 2001. This charge wrote-off all of the remaining goodwill relating to the Company's fluid power business. (See Note 1 to the Consolidated Financial Statements). The number of associates was 4,508 at June 30, 2002 and 4,789 at June 30, 2001. YEAR ENDED JUNE 30, 2001 VS. 2000 Net sales in 2001 increased to $1.63 billion or 1.5% over the $1.60 billion generated in 2000. This increase was primarily due to the acquisition of the operations of Dynavest to form Applied Industrial Technologies Ltd. of Canada, and the acquisition of Air Draulics Engineering Co. (see Note 2 to Consolidated Financial Statements). The increase in sales from these acquisitions offset the decline in sales of the Company's existing U.S. operations during the year. Gross margin for the year increased from 24.5% in 2000 to 25.2% in 2001 primarily due to improved buying practices as well as a better product mix. Selling, distribution and administrative expenses increased in 2001 as a percentage of sales to 21.8% from 20.8% in 2000. Total SD&A was approximately $20.5 million higher than in the prior year. The increase was primarily due to the operating expenses for our newly acquired operations and increased bad debt expense due to the slowing industrial economy. This increase was partially offset by lower incentive compensation costs. Operating income decreased to $55.0 million in 2001 from $57.8 million in 2000. As a percent of sales, operating income decreased to 3.4% in 2001 from 3.6% in 2000. The $2.8 million reduction in operating income was primarily due to the increase in SD&A expenses discussed previously. Interest expense, net for 2001, increased $1.6 million or 21.2% compared with the prior year primarily as a result of the increased average daily borrowing to fund the Company's Canadian acquisition. Income tax expense as a percentage of income before income taxes decreased to 38.1% in 2001 from 38.6% in 2000. The decrease in the effective tax rate resulted from lower effective state, local and Canadian tax rates. Net income for the fiscal year ended June 30, 2001 decreased $3.0 million or 9.7% from the prior year. Net income per share decreased 6.0% to $1.41 in 2001 from $1.50 in 2000 primarily due to the factors described above. The number of associates was 4,789 at June 30, 2001 and 4,847 at June 30, 2000. 10 LIQUIDITY AND CAPITAL RESOURCES The Company generated $68.9 million of cash from operating activities in 2002 compared to $37.2 million in 2001. The primary reason for the increase relates to the reduction of the Company's inventories and accounts receivable balances. Cash used by investing activities decreased approximately $4.5 million in 2002 compared with 2001. The decrease is primarily due to a reduction in acquisition activity from the previous year. Cash used in financing activities was $51.1 million in 2002 compared to $22.3 million in 2001. The primary reason for the increase was the additional cash generated from operating activities used for debt reduction and stock repurchases. During 2002, the Company repaid $30.7 million of long-term debt and repurchased 0.8 million shares of its common stock for $14.3 million. The Company is obligated for rental payments for operating leases on 261 of its facilities. See Note 10 to the Consolidated Financial Statements for annual rental commitments. Working capital at June 30, 2002 was $250.6 million compared to $279.0 million at June 30, 2001. The current ratio was 2.9 and 3.2 at June 30, 2002 and 2001, respectively. These decreases are primarily due to reduction in year-end inventory and accounts receivable balances. Capital resources are obtained from income retained in the business, borrowings under the Company's lines of credit, revolving credit agreement and long-term debt facilities and from operating lease arrangements. See Note 5 to the Consolidated Financial Statements for details regarding the outstanding debt amounts as of June 30, 2002. Average combined short-term and long-term borrowing was $103.0 million in 2002 and $117.5 million in 2001. The weighted average interest rate on borrowings under revolving credit facilities decreased to 3.7% in 2002 from an average rate of 6.2% in 2001. The weighted average interest on borrowings under other long-term debt agreements, net of the benefits received from interest rate swap agreements, was 5.5% in 2002 and 7.1% in 2001, respectively. The Company has a committed revolving credit agreement expiring November 2003 with a group of lending institutions. This agreement provides for unsecured borrowings of up to $150.0 million. The Company has no outstanding borrowings under this facility at June 30, 2002. Unused capacity under this facility of $144.8 million is available to fund future acquisitions or other capital and operating requirements. The Company also has an agreement with a commercial bank for an unsecured $15.0 million uncommitted line of credit. The Company had no outstanding borrowings under this facility at June 30, 2002. In October 2000, the Company entered into an agreement with the Prudential Insurance Company of America for an uncommitted shelf facility to borrow up to $100.0 million in additional long-term financing, at the Company's sole discretion, with terms of up to twelve years. The Company had no outstanding borrowings under this facility at June 30, 2002. The Board of Directors has authorized the repurchase of shares of the Company's common stock to fund employee benefit programs, stock option and award programs and for other corporate purposes. These purchases can be made in open market or negotiated transactions. The Company acquired approximately 0.8 million shares of its common stock for $14.3 million during the year ended June 30, 2002. The Company has remaining authorization to repurchase 0.5 million shares as of June 30, 2002. Management expects that capital resources provided from operations, available lines of credit, long-term debt and operating leases will be sufficient to finance normal working capital needs, acquisitions, enhancement of facilities and equipment and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained if desired. CRITICAL ACCOUNTING POLICIES ALLOWANCES FOR SLOW-MOVING AND OBSOLETE INVENTORIES The Company identifies slow moving or obsolete inventories and estimates appropriate loss provisions related thereto. Historically, these loss provisions have not been significant, as the vast majority of the Company's inventories are eligible for credit under various supplier return programs. While the Company has no reason to believe its inventory return privileges and programs will be discontinued in the future, its risk of loss associated with obsolete or slow moving inventories would increase if such were to occur. ALLOWANCES FOR DOUBTFUL ACCOUNTS The Company evaluates the collectibility of accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is periodically adjusted when the Company becomes aware of a customer's inability to meet its financial obligations (e.g., 11 bankruptcy filing) or as a result of changes in the overall aging of accounts receivable. While the Company has a large customer base that is geographically dispersed, a general economic downturn in any of the industry segments that the Company serves could result in higher than expected defaults, and, therefore, the need to increase estimates for bad debts. GOODWILL ACCOUNTING The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets", effective July 1, 2001. Goodwill is no longer amortized but rather is evaluated at least annually for impairment. The Company utilizes discounted cash flow models and relevant market multiples for comparable businesses to determine fair value used in the goodwill impairment evaluation. Management's estimates of fair value are based upon factors such as projected future sales, price increases, and other uncertain elements requiring significant judgments. While the Company uses the best available information to prepare its estimates and perform impairment evaluations, actual results could differ significantly, resulting in the future impairment of recorded goodwill balances. SUPPLIER PURCHASING PROGRAMS The Company earns inventory purchase rebates under arrangements with certain suppliers. The Company accrues for the receipt of inventory purchase rebates based on cumulative purchases of inventory. While management believes the Company will continue to receive such amounts, there can be no assurance that suppliers will continue to provide comparable amounts of rebates in the future. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements. OTHER MATTERS In August 2001, the Financial Accounting Standards Board issued SFAS 144, "Accounting for Impairment or Disposals of Long-Lived Assets". The Company will adopt SFAS 144 as of July 1, 2002, but does not believe the statement will have a material impact on the consolidated financial statements. CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT This Annual Report to Shareholders, including Management's Discussion and Analysis, contains statements that are forward-looking, based on management's current expectations about the future. Forward-looking statements are often identified by qualifiers such as "expect", "believe", "intend", "will", and similar expressions. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases. Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company undertakes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise. Important risk factors include, but are not limited to, the following: changes in the economy or in specific customer industry sectors; reduction in manufacturing capacity in the Company's targeted geographic markets due to consolidation in customer industries or the transfer of manufacturing capacity to foreign countries; changes in interest rates; changes in customer procurement policies and practices; changes in product manufacturer sales policies and practices; the availability of products and labor; changes in operating expenses; the effect of price increases or decreases; the variability and timing of business opportunities including acquisitions, alliances, customer agreements and supplier authorizations; the Company's ability to realize the anticipated benefits of acquisitions and marketing and other business strategies, including electronic commerce and catalog initiatives; the incurrence of additional debt and contingent liabilities in connection with acquisitions; changes in accounting policies and practices; the effect of organizational changes within the Company; the emergence of new competitors, including firms with greater financial resources than the Company; risks and uncertainties associated with the 12 Company's expansion into foreign markets, including inflation rates, recessions, and foreign currency exchange rates; adverse results in significant litigation matters; adverse regulation and legislation; and the occurrence of extraordinary events (including prolonged labor disputes, natural events and acts of God, fires, floods and accidents). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have evaluated the Company's exposure to various market risk factors, including but not limited to, interest rate, foreign currency exchange and commodity price risks. The Company is primarily affected by market risk exposure through the effect of changes in interest rates. The Company manages interest rate risk through the use of a combination of fixed rate long-term debt, variable rate borrowings under its committed revolving credit agreement and interest rate swaps. While there were no variable rate borrowings under its committed revolving credit agreement at June 30, 2002, the Company effectively converted its $50.0 million of 6.6% fixed rate debt to a variable rate based on LIBOR through the use of an interest rate swap with a high credit quality major commercial bank. Terms and settlement dates of the swap mirrored terms of the 6.6% senior unsecured term notes and the swap was designated as a fair value hedge. The fair value changes in the swap were fully offset in interest expense by the corresponding change in the notes. In August 2002, the Company terminated this swap agreement for a favorable settlement of $2.8 million. This gain will be amortized as a reduction in interest expense, over the remaining life of the notes which mature in December 2007. The Company mitigates its foreign currency exposure from the Canadian dollar through the use of cross currency swap agreements as well as of foreign-currency denominated debt. Hedging of the U.S. dollar denominated debt used to fund a substantial portion of the Company's net investment in its Canadian operations is accomplished through the use of cross currency swaps. Any gain or loss on the hedging instrument offsets the gain or loss on the underlying debt. Translation exposures with regard to our Mexican business are not hedged, because our Mexican activity is not material at this time. The impact on the Company's future earnings from exposure to changes in foreign currency exchange rates is expected to be immaterial. 13 Applied Industrial Technologies, Inc. and Subsidiaries STATEMENTS OF CONSOLIDATED INCOME
Year Ended June 30 2002 2001 2000 ---------------------------------------------------- (In thousands, except per share amounts) - ----------------------------------------------------------------------------------------------------------------------------------- NET SALES $ 1,446,569 $ 1,625,755 $ 1,601,084 Cost of sales 1,080,879 1,216,456 1,209,494 - ----------------------------------------------------------------------------------------------------------------------------------- 365,690 409,299 391,590 Selling, distribution and administrative 334,856 354,298 333,811 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Income 30,834 55,001 57,779 - ----------------------------------------------------------------------------------------------------------------------------------- Interest Expense 7,078 9,386 7,774 Interest Income (340) (281) (262) Other, net 341 548 (281) - ----------------------------------------------------------------------------------------------------------------------------------- 7,079 9,653 7,231 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 23,755 45,348 50,548 - ----------------------------------------------------------------------------------------------------------------------------------- Income Tax Expense 9,000 17,300 19,500 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Cumulative Effect of Accounting Change 14,755 28,048 31,048 Cumulative effect of accounting change (12,100) - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 2,655 $ 28,048 $ 31,048 =================================================================================================================================== NET INCOME PER SHARE - BASIC Before cumulative effect of accounting change $ 0.77 $ 1.43 $ 1.52 Cumulative effect of accounting change (0.63) - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE - BASIC $ 0.14 $ 1.43 $ 1.52 =================================================================================================================================== NET INCOME PER SHARE - DILUTED Before cumulative effect of accounting change $ 0.76 $ 1.41 $ 1.50 Cumulative effect of accounting change (0.63) - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE - DILUTED $ 0.13 $ 1.41 $ 1.50 ===================================================================================================================================
See notes to consolidated financial statements. 14 Applied Industrial Technologies, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
June 30 2002 2001 ------------------------------------ (In thousands) - ------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and temporary investments $ 23,060 $ 13,981 Accounts receivable, less allowances of $5,600 and $5,400 180,904 190,935 Inventories 166,083 191,570 Other current assets 11,011 9,974 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 381,058 406,460 - ------------------------------------------------------------------------------------------------------------------------- Property - at cost Land 11,779 12,121 Buildings 69,131 68,840 Equipment 83,414 84,478 - ------------------------------------------------------------------------------------------------------------------------- 164,324 165,439 Less accumulated depreciation 81,229 75,176 - ------------------------------------------------------------------------------------------------------------------------- Property - net 83,095 90,263 - ------------------------------------------------------------------------------------------------------------------------- Goodwill 46,410 62,021 Other assets 24,003 20,110 - ------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 534,566 $ 578,854 ======================================================================================================================= LIABILITIES Current liabilities Accounts payable $ 76,316 $ 75,896 Compensation and related benefits 27,277 23,749 Other current liabilities 26,821 27,814 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 130,414 127,459 Long-term debt 83,478 113,494 Other liabilities 22,527 26,383 - ------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 236,419 267,336 - ------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock - no par value; 2,500 shares authorized; none issued or outstanding Common stock - no par value; 50,000 shares authorized; 24,096 shares issued 10,000 10,000 Additional paid-in capital 84,517 84,221 Income retained for use in the business 279,046 285,661 Treasury shares - at cost (4,893 and 4,449 shares) (74,900) (66,227) Unearned restricted common stock compensation (832) (1,955) Accumulated other comprehensive income (loss) 316 (182) - ------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 298,147 311,518 - ------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 534,566 $ 578,854 =======================================================================================================================
See notes to consolidated financial statements. 15 Applied Industrial Technologies, Inc. and Subsidiaries STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended June 30 2002 2001 2000 ---------------------------------------------------- (In thousands) - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,655 $ 28,048 $ 31,048 Adjustments to reconcile net income to cash provided by operating activities: Cumulative effect of accounting change 12,100 Depreciation 15,294 16,364 17,500 Deferred income taxes (5,000) (1,800) (2,886) Amortization of restricted common stock compensation, goodwill and other intangible assets 2,254 6,145 5,488 Provision for losses on accounts receivable 4,488 6,995 3,058 Gain on sale of property (1,327) (1,080) (460) Treasury shares contributed to employee benefit and deferred compensation plans 2,977 6,529 3,819 Changes in current assets and liabilities, net of acquisitions: Accounts receivable 7,237 15,869 (7,606) Inventories 27,020 (8,522) 1,138 Other current assets (688) (1,908) (944) Accounts payable 420 (17,691) 14,751 Accrued expenses 1,518 (11,732) 11,538 - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 68,948 37,217 76,444 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Property purchases (10,050) (11,731) (9,510) Proceeds from property sales 3,610 4,251 5,338 Net cash paid for acquisition of businesses, net of cash acquired of $812 in 2001 (2,574) (5,491) (34,522) Deposits and other 274 (310) (294) - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (8,740) (13,281) (38,988) - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Repayments under revolving credit agreements - net (19,312) (12,246) (2,403) Long-term debt borrowings 25,000 Long-term debt repayments (11,429) (11,428) (11,429) Purchases of treasury shares (14,318) (15,501) (20,833) Dividends paid (9,270) (9,532) (9,929) Exercise of stock options 3,200 1,403 301 - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (51,129) (22,304) (44,293) - ----------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and temporary investments 9,079 1,632 (6,837) Cash and temporary investments at beginning of year 13,981 12,349 19,186 - ----------------------------------------------------------------------------------------------------------------------------------- CASH AND TEMPORARY INVESTMENTS AT END OF YEAR $ 23,060 $ 13,981 $ 12,349 =================================================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ 8,182 $ 22,080 $ 21,359 Interest $ 6,205 $ 8,595 $ 7,247
See notes to consolidated financial statements. 16 Applied Industrial Technologies, Inc. and Subsidiaries STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
For the Years Ended June 30, 2002, 2001 and 2000 ----------------------------------------------------------------------------- Income Shares of Additional Retained for Treasury Common Stock Common Paid-in Use in the Shares-at Outstanding Stock Capital Business Cost (In thousands, except per share amounts) - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT JULY 1, 1999 21,101 $ 10,000 $ 82,599 $ 246,026 $ (40,140) Net income 31,048 Cash dividends - $.48 per share (9,929) Purchases of common stock for treasury (1,280) (20,833) Treasury shares issued for: Retirement Savings Plan contributions 210 493 2,921 Exercise of stock options 22 7 294 Deferred compensation plans 25 66 339 Amortization of restricted common stock compensation 62 Other 85 - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2000 20,078 10,000 83,312 267,145 (57,419) Net income 28,048 Minimum pension liability Cash flow hedge and other TOTAL COMPREHENSIVE INCOME Cash dividends - $.48 per share (9,532) Purchases of common stock for treasury (891) (15,501) Treasury shares issued for: Retirement Savings Plan contributions 309 882 4,516 Exercise of stock options 110 (201) 1,604 Deferred compensation plans 67 180 951 Forfeiture of restricted common stock compensation (26) (286) (378) Amortization of restricted common stock compensation 58 Other 276 - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2001 19,647 10,000 84,221 285,661 (66,227) Net income 2,655 Minimum pension liability Cash flow hedge and other TOTAL COMPREHENSIVE INCOME Cash dividends - $.48 per share (9,270) Purchases of common stock for treasury (817) (14,318) Treasury shares issued for: Retirement Savings Plan contributions 148 434 2,243 Exercise of stock options 226 (183) 3,383 Deferred compensation plans 14 52 248 Forfeiture of restricted common stock compensation (15) (76) (229) Amortization of restricted common stock compensation (169) Other 238 - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2002 19,203 $ 10,000 $ 84,517 $ 279,046 $ (74,900) =========================================================================================================================== For the Years Ended June 30, 2002, 2001 and 2000 --------------------------------------------------- Unearned Restricted Accumulated Common Other Total Stock Comprehensive Shareholders' Compensation Income (loss) Equity (In thousands, except per share amounts) - ------------------------------------------------------------------------------------------------ BALANCE AT JULY 1, 1999 $ (4,899) $ 293,586 Net income 31,048 Cash dividends - $.48 per share (9,929) Purchases of common stock for treasury (20,833) Treasury shares issued for: Retirement Savings Plan contributions 3,414 Exercise of stock options 301 Deferred compensation plans 405 Amortization of restricted common stock compensation 1,192 1,254 Other 85 - --------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2000 (3,707) 299,331 Net income 28,048 Minimum pension liability $ (285) (285) Cash flow hedge and other 103 103 ------------ TOTAL COMPREHENSIVE INCOME 27,866 ------------ Cash dividends - $.48 per share (9,532) Purchases of common stock for treasury (15,501) Treasury shares issued for: Retirement Savings Plan contributions 5,398 Exercise of stock options 1,403 Deferred compensation plans 1,131 Forfeiture of restricted common stock compensation 664 Amortization of restricted common stock compensation 1,088 1,146 Other 276 - --------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2001 (1,955) (182) 311,518 Net income 2,655 Minimum pension liability 285 285 Cash flow hedge and other 213 213 ------------ TOTAL COMPREHENSIVE INCOME 3,153 ------------ Cash dividends - $.48 per share (9,270) Purchases of common stock for treasury (14,318) Treasury shares issued for: Retirement Savings Plan contributions 2,677 Exercise of stock options 3,200 Deferred compensation plans 300 Forfeiture of restricted common stock compensation 305 Amortization of restricted common stock compensation 818 649 Other 238 - --------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2002 $ (832) $ 316 $ 298,147 =============================================================================================
See notes to consolidated financial statements. 17 Applied Industrial Technologies, Inc. and Subsidiaries Notes to CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2002, 2001 and 2000 (Dollar amounts in thousands, except per share amounts) - -------------------------------------------------------------------------------- NOTE 1 BUSINESS AND ACCOUNTING POLICIES Business The Company is one of North America's leading distributors of industrial and fluid power products and systems. Industrial products include bearings and seals, linear motion products, power transmission products, industrial rubber products, general maintenance products and related specialty items. Fluid power includes hydraulic, pneumatic, lubrication and filtration components and systems. The Company also provides mechanical, electrical, rubber shop and fluid power services as well as material handling components and systems. The Company offers technical application support for these products and provides creative solutions to help customers minimize downtime and reduce overall procurement costs. Although the Company does not generally manufacture the products it sells, it does assemble and repair certain products and systems. Most of the Company's sales are in the maintenance and replacement markets to customers in a wide range of industries, principally in North America. Consolidation The consolidated financial statements include the accounts of Applied Industrial Technologies, Inc. and its majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Investments in businesses in which the Company does not have control, but has the ability to exercise significant influence over the operating and financial policies, are accounted for using the equity method of accounting. The financial statements of the Company's Canadian subsidiaries are included in the consolidated financial statements based upon their fiscal year ended May 31. Foreign Currency The financial statements of the Company's Canadian and Mexican subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at the exchange rates as of year-end, while income statement amounts are translated at average monthly exchange rates. Translation gains and losses are included as components of accumulated other comprehensive income in shareholders' equity. Transaction gains and losses are included in the statements of consolidated income and were not material. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements. Cash and Temporary Investments The Company considers all temporary investments with maturities of three months or less to be cash equivalents. Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets." Effective July 1, 2001, the Company adopted this standard. Under SFAS 142, goodwill is no longer amortized, but is tested for impairment upon adoption and at least annually thereafter. The Company's other intangible assets relate to non-competition agreements and continue to be amortized over the lives of the agreements which primarily are five years. The non-competition agreements are included in other assets. In accordance with SFAS 142, the Company discontinued the amortization of goodwill effective July 1, 2001. Had goodwill amortization not been recorded in the years ended June 30, 2001 and 2000, operating income would have increased to $58,471 and $60,683; net income to $30,902 and $33,474; and net income per share to $1.55 and $1.62, respectively. For purposes of completing impairment testing upon adoption of SFAS 142, the Company determined the fair value of its reporting units utilizing discounted cash flows models and relative market multiples for comparable businesses. The Company compared the fair value of each of its reporting units to its carrying value. This evaluation indicated that goodwill associated with its fluid power business was impaired. This impairment is primarily attributed to a downturn in the industrial economy in the years following the Company's fluid power business acquisitions. A non-cash charge totaling $17,600, $12,100 after tax, was recorded as the cumulative effect of a change in accounting principle effective July 1, 2001 to write-off the remaining goodwill relating to the fluid power business. 18 The changes in the carrying amount of goodwill for the years ended June 30, 2002 and 2001, are as follows:
Service Center Based Fluid Power Distribution Segment Business Total --------------------------------------------- Balance at July 1, 2000 $ 47,552 $ 15,157 $ 62,709 Goodwill of acquired businesses 3,500 3,500 Adjustments of preliminary goodwill of prior year acquisition (524) (524) Amortization (2,413) (1,057) (3,470) Currency translation adjustment (194) (194) ---------------------------------------------------------------------------------------------------------------- Balance at June 30, 2001 44,421 17,600 62,021 Transitional impairment loss (17,600) (17,600) Goodwill of acquired businesses 1,989 1,989 ---------------------------------------------------------------------------------------------------------------- Balance at June 30, 2002 $ 46,410 $ 0 $ 46,410 ================================================================================================================
As of June 30, 2001, prior to adoption of SFAS 142, accumulated goodwill amortization totaled $13,069. Inventories Domestic inventories are valued at the lower of cost or market, using the last-in, first-out (LIFO) method, and foreign inventories are valued using the average cost method. See Note 3 for further information regarding inventories. Depreciation Depreciation of buildings and equipment is computed using the straight-line method over the estimated useful lives of the assets. Buildings and related improvements are depreciated over 10 to 30 years and equipment over 3 to 8 years. Revenue Recognition Sales are recognized when products are shipped or delivered to the customer. Income Taxes Income taxes are determined based upon income and expenses recorded for financial reporting purposes. Deferred income taxes are recorded for estimated future tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes giving consideration to enacted tax laws. Net Income Per Share The following is a computation of the basic and diluted earnings per share:
Year Ended June 30 2002 2001 2000 ------------------------------------------ NET INCOME Income Before Cumulative Effect of Accounting Change $ 14,755 $ 28,048 $31,048 Cumulative effect of accounting change (12,100) ------------------------------------------------------------------------------------------------ Net Income $ 2,655 $ 28,048 $31,048 ================================================================================================ AVERAGE SHARES OUTSTANDING Weighted average common shares outstanding for basic computation 19,079 19,589 20,439 Dilutive effect of stock based options and awards 338 335 248 ------------------------------------------------------------------------------------------------ Weighted average common shares outstanding for dilutive computation 19,417 19,924 20,687 ================================================================================================ NET INCOME PER SHARE - BASIC Before cumulative effect of accounting change $ 0.77 $ 1.43 $1.52 Cumulative effect of accounting change (0.63) ------------------------------------------------------------------------------------------------ Net Income Per Share - Basic $ 0.14 $ 1.43 $1.52 ================================================================================================ Net Income Per Share - Diluted Before cumulative effect of accounting change $ 0.76 $ 1.41 $1.50 Cumulative effect of accounting change (0.63) ------------------------------------------------------------------------------------------------ Net Income Per Share - Diluted $ 0.13 $ 1.41 $1.50 ================================================================================================
New Accounting Standard In August 2001, the Financial Accounting Standards Board issued SFAS 144, "Accounting for Impairment or Disposals of Long-Lived Assets". The Company will adopt SFAS 144 as of July 1, 2002, but does not believe the statement will have a material impact on the consolidated financial statements. NOTE 2 BUSINESS COMBINATIONS During the year ended June 30, 2002, the Company acquired the stock of a Mexican distributor of bearing and power transmission products for $3,200. Results of the business operations are included in our Service Center Based Distribution segment. Non-tax deductible goodwill of $1,989 and other intangible assets, primarily non-competition agreements of $350, were recognized in connection with this combination. During the year ended June 30, 2001, the Company acquired the stock of Air Draulics Engineering Company, a U.S. based distributor of fluid power products, for $7,300. Goodwill, based on allocations of fair values to assets and liabilities acquired, of $3,500 was recognized in connection with this combination. Effective June 1, 2000, the Company acquired certain assets of Dynavest Corporation, a Canadian distributor of bearings, power transmission, fluid power and industrial rubber products. In December 1999, the Company acquired certain 19 assets of a U.S. based distributor of bearings and power transmission components. The total purchase price of these acquisitions was $37,803, including notes payable to the sellers totaling $3,282. The Canadian acquisition's operating results have been included in the Company's consolidated income statement from the beginning of fiscal 2001. The Company recorded goodwill totaling $6,800 from these acquisitions, representing the excess of the purchase price over assets acquired. Results of operations of all of the above acquisitions, which have all been accounted for as purchases, are included in the accompanying consolidated financial statements from their respective acquisition dates. The results of operations for these acquisitions are not material for all years presented. NOTE 3 INVENTORIES Inventories consist of the following:
June 30 2002 2001 ------------------------- ----------------------------------------------------------------------------------------------- U.S. inventories at current cost $259,145 $283,215 Foreign inventories at average cost 18,527 17,250 ----------------------------------------------------------------------------------------------- 277,672 300,465 Less: Excess of current cost over LIFO cost for U.S. inventories 111,589 108,895 ----------------------------------------------------------------------------------------------- Inventories on consolidated balance sheet $166,083 $191,570 ===============================================================================================
Reductions in inventories during the fiscal year ended June 30, 2002 resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect of these liquidations for the year ended June 30, 2002 increased gross profit by $915, net income by $546 and diluted net income per share by $.03. NOTE 4 OTHER BALANCE SHEET INFORMATION Other assets consist of the following:
June 30 2002 2001 ------------------------- ----------------------------------------------------------------------------------------------- Deferred tax assets - non-current $ 13,032 $ 6,789 Deposits and investments 3,634 3,624 Non-competition agreements, net of accumulated amortization of $7,044 and $5,393 1,874 3,092 Other 5,463 6,605 ----------------------------------------------------------------------------------------------- Total $ 24,003 $20,110 ===============================================================================================
Substantially all investments have fair values approximately equal to their carrying values. Amortization expense for the non-competition agreements totaled $1,651 in 2002 and $1,587 in 2001. Estimated amortization expense is $640 for 2003; $480 for 2004; $370 for 2005 and $384 after 2005. Other current liabilities consist of the following:
June 30 2002 2001 ------------------------- ----------------------------------------------------------------------------------------------- Accrued income and other taxes $ 9,689 $ 4,610 Accrued self insurance liabilities 5,008 4,907 Deferred tax liabilities - current 1,950 5,573 Other 10,174 12,724 ----------------------------------------------------------------------------------------------- Total $ 26,821 $27,814 ===============================================================================================
NOTE 5 DEBT The Company has a committed revolving credit agreement expiring November 2003 with a group of banks. This agreement provides for unsecured borrowings of up to $150,000 at various interest rate options, none of which is in excess of the banks' prime rate at interest determination dates. The Company had no borrowings outstanding under this facility at June 30, 2002. Fees on this facility range from .12% to .40% per year on the average amount of the total revolving credit commitments during the year. This facility enables the Company to refinance short-term debt on a long-term basis. Accordingly, the current portion of long-term borrowings intended to be refinanced are classified as long-term debt. Unused lines under this facility totaling $144,805 are available to fund future acquisitions or other capital and operating requirements. 20 The Company also has a $15,000 short-term uncommitted line of credit with a commercial bank. This agreement provides for payment of interest at various interest rate options, none of which is in excess of the bank's prime rate at interest determination dates. The Company had no borrowings outstanding under this facility at June 30, 2002. Long-term debt consists of:
June 30 2002 2001 ------------------------- -------------------------------------------------------------------------------------------------- Revolving credit facility, effective rate 4.3% $ 21,351 7.98% Private placement debt, due at maturity in November 2010 $ 25,000 25,000 7.82% Senior unsecured term notes, due in semi-annual installments of $5,714 through December 2002 5,714 17,143 6.6% Senior $50,000 unsecured term notes, due at maturity in December 2007, including effects of interest rate swaps (See Note 6) 52,764 50,000 -------------------------------------------------------------------------------------------------- Total $ 83,478 $113,494 ==================================================================================================
The revolving credit facility, private placement debt and senior unsecured term notes contain restrictive covenants regarding liquidity, tangible net worth, financial ratios and other covenants. At June 30, 2002, the most restrictive of these covenants required that the Company maintain a minimum consolidated net worth of $264,505. Based upon current market rates for debt of similar maturities, the Company estimates that the fair value of its debt is greater than its carrying value at June 30, 2002 by approximately $1,510. In November 2000, the Company refinanced $25,000 of its debt incurred in connection with its Canadian acquisition, which debt was previously financed under its revolving credit facility, through a private issuance of senior notes. Fixed annual interest of 7.98% is paid quarterly and principal is due at maturity in November 2010. In October 2000, the Company entered into an agreement with the Prudential Insurance Company of America for an uncommitted shelf facility to borrow up to $100,000 in additional long-term financing, at the Company's sole discretion, with terms of up to twelve years. At June 30, 2002, there were no borrowings under this agreement. NOTE 6 RISK MANAGEMENT ACTIVITIES The Company is exposed to market risks, primarily resulting from changes in interest rates and currency exchange rates. To manage these risks, the Company may enter into derivative transactions pursuant to the Company's written policy. These transactions are all accounted for in accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". The Company does not hold or issue derivative financial instruments for trading purposes. In November 2001, the Company entered into an interest rate swap agreement with a domestic bank. This agreement effectively converted the fixed interest rate on the $50,000, 6.6% senior unsecured term notes to a floating variable rate based on LIBOR. Terms and settlement dates mirrored terms of the 6.6% senior unsecured term notes and the swap was designated as a fair value hedge. The fair value changes in the notes were fully offset in interest expense by the fair value changes in the swap. At June 30, 2002, the fair value of the interest rate swap was recorded as an other current asset of $970 and the change in fair value of the related underlying debt obligation was recorded as an increase in long-term debt. In August 2002, the Company terminated its November 2001 interest rate swap agreement for a favorable settlement of $2,800. This gain will be amortized as a reduction in interest expense over the remaining life of the notes which mature in December 2007. In July 2001, the Company entered into an interest rate swap agreement with a domestic bank. This agreement effectively converted the fixed interest rate on $47,000 of the $50,000, 6.6% senior unsecured term notes to a floating variable rate based on LIBOR. Terms and settlement dates mirrored terms of the 6.6% senior unsecured term note and the swap was designated as a fair value hedge. On October 1, 2001, the Company terminated the swap agreement for a favorable settlement of $2,100. This gain is being amortized as a reduction of interest expense over the remaining life of the notes which mature in December 2007. In November 2000, the Company entered into two 10 year cross-currency swap agreements to manage its foreign currency risk exposure on private placement borrowings related to its wholly owned Canadian subsidiary. The cross currency swaps effectively convert $25,000 of debt, and the associated interest payments, from 7.98% fixed rate U.S. dollar denominated debt to 7.75% fixed rate Canadian dollar denominated debt. The terms of the two cross-currency swaps mirror the terms of the private placement borrowings. The Company has designated one of the cross-currency swaps, with a $20,000 U.S. notional amount, as a foreign currency cash flow hedge. The fair value of the cross-currency swap was $854 at June 30, 2002 which is recorded in other current assets and the related unrealized gain is recorded in accumulated other comprehensive income (net of tax). The second cross-currency swap, however, has not been designated as a hedging instrument under the hedge accounting provisions of SFAS 133. The fair value of this cross-currency swap was $214 at June 30, 2002 and $126 at June 30, 2001. Changes in the fair value of this derivative instrument are recorded in earnings as a component of other income, net. 21 NOTE 7 INCOME TAXES Provision The provision (benefit) for income taxes consists of:
Year Ended June 30 2002 2001 2000 ------------------------------------------ ----------------------------------------------------------------------------------------------- Current Federal $12,350 $ 17,550 $20,206 State 1,450 1,450 2,180 Foreign 200 100 ----------------------------------------------------------------------------------------------- Total current 14,000 19,100 22,386 =============================================================================================== Deferred Federal (4,500) (900) (2,706) State (600) (200) (180) Foreign 100 (700) ----------------------------------------------------------------------------------------------- Total deferred (5,000) (1,800) (2,886) ----------------------------------------------------------------------------------------------- Total $ 9,000 $ 17,300 $19,500 ===============================================================================================
The exercise of non-qualified stock options during fiscal 2002, 2001 and 2000 resulted in $605, $374 and $33, respectively, of income tax benefits to the Company derived from the difference between the market price at the date of exercise and the option price. The accelerated vesting of Performance Accelerated Restricted Stock ("PARS") and other restricted stock awards in fiscal 2002 resulted in incremental tax expense of $169 over the amounts previously reported for financial reporting purposes. Accelerated vesting of PARS in fiscal 2001 and 2000 resulted in $57 and $62, respectively, of incremental income tax benefits over the amounts previously reported for financial reporting purposes. These tax benefits and expense were recorded in additional paid-in capital. Effective Tax Rates The following is a reconciliation between the federal statutory income tax rate and the Company's effective tax rate:
Year Ended June 30 2002 2001 2000 --------------------------------------- ----------------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Effects of: State and local income taxes 2.4 1.8 2.6 Non-deductible expenses 1.4 2.6 1.8 International income taxes (.1) (.9) Other, net (.8) (.4) (.8) ----------------------------------------------------------------------------------------------- Effective tax rate 37.9% 38.1% 38.6% ===============================================================================================
Balance Sheet The significant components of the Company's deferred tax assets (liabilities) are as follows:
June 30 2002 2001 ------------------------- ----------------------------------------------------------------------------------------------- Inventories $(10,491) $(13,200) Depreciation and differences in property bases (5,966) (5,625) Compensation liabilities not currently deductible 10,682 10,960 Reserves not currently deductible 7,723 5,668 Goodwill 7,051 1,982 Net operating loss carry forward, expiring 2009 and 2008 1,427 821 Other 656 609 ----------------------------------------------------------------------------------------------- Net deferred tax asset $ 11,082 $ 1,215 ===============================================================================================
NOTE 8 SHAREHOLDERS' EQUITY Stock Incentive Plans The 1997 Long-Term Performance Plan (the "1997 Plan") provides for granting of stock options, stock awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee of the Board of Directors may determine. The number of shares of common stock which may be awarded in each fiscal year under the 1997 Plan is two percent (2%) of the total number of shares of common stock outstanding on the first day of each year for which the plan is in effect. Common stock available for distribution under the 1997 Plan, but not distributed, may be carried over to the following year. Shares available for future grants at June 30, 2002 and 2001 were 253,000 and 159,000, respectively. Under the 1997 Plan, the Company has awarded PARS, restricted stock and/or stock options to officers, other key associates and members of the Board of Directors. PARS and restricted stock award recipients are entitled to receive dividends on, and have voting rights with respect to their respective shares, but are restricted from selling or transferring the shares prior to vesting. The PARS vest after a period of six years, with accelerated vesting based upon achievement of certain return on asset objectives or minimum stock price levels. Restricted stock awards vest 25% each year. The aggregate fair market value of the PARS and restricted stock is considered unearned compensation at the time of grant and is amortized over the vesting period or until such time as acceleration of vesting takes place. 22 At June 30, 2002, the Company had outstanding stock options granted under the 1997 Plan. In general, the stock options vest over a period of 4 years and expire after 10 years. The Company applies APB Opinion No. 25 and related interpretations in accounting for options granted under the 1997 Plan. Had the Company accounted for options granted based on fair value at the grant dates for awards under the 1997 Plan consistent with the method of SFAS 123, the Company's net income and net income per share would have been reduced to $1,334 and $.07 in 2002, $26,882 and $1.35 in 2001 and $30,003 and $1.45 in 2000. Disclosures under the fair value method are estimated using the Black Scholes option pricing model. The assumptions used for grants issued in 2002, 2001 and 2000 are:
2002 2001 2000 ------------------------------------------ ----------------------------------------------------------------------------------------------- Expected life 7 YEARS 7 years 7 years Risk free interest rate 4.9% 5.0% 6.6% Dividend yield 3.0% 3.0% 3.0% Volatility 29.1% 28.9% 28.8%
Information regarding these option plans is as follows:
2002 2001 2000 ------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise (Share amounts in thousands) Shares Price Shares Price Shares Price ----------------------------------------------------------------------------------------------- Outstanding, beginning of year 2,124 $16.10 1,870 $15.03 1,464 $14.67 Granted 401 17.86 457 18.96 476 16.27 Exercised (226) 11.57 (110) 9.33 (21) 12.79 Expired/canceled (100) 17.82 (93) 16.72 (49) 17.27 ----------------------------------------------------------------------------------------------- Outstanding June 30 2,199 $16.80 2,124 $16.10 1,870 $15.03 =============================================================================================== Options exercisable June 30 1,322 $16.25 1,178 $15.05 928 $14.01 Weighted-average fair value of options granted during the year $ 4.65 $ 5.41 $ 5.15
The following table summarizes information about stock options outstanding at June 30, 2002:
Options Outstanding Options Exercisable ------------------------------------------ ---------------------- Weighted- Weighted- Weighted- Average Average Average Ranges of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Life (in years) Price Exercisable Price ---------------------------------------------------------------------------------------------------------- $ 9 - $13 69 1.1 $ 9.75 69 $ 9.75 13 - 17 955 5.4 15.02 695 14.67 17 - 21 1,141 7.2 18.42 524 18.50 21 - 28 34 5.5 26.94 34 26.94 ---------------------------------------------------------------------------------------------------------- Total 2,199 1,322 ==========================================================================================================
At June 30, 2002, exercise prices for outstanding options ranged from $9.75 to $27.50 per share. Shareholder Rights In 1998 the Company's Board of Directors adopted a Shareholder Rights Plan and declared a dividend distribution of one preferred share purchase right for each outstanding share of Company common stock. The rights become exercisable only if a person or group acquires beneficial ownership or commences a tender or exchange offer for 20% or more of the Company's common stock, unless the tender or exchange offer is for all outstanding shares of the Company upon terms determined by the Company's continuing directors to be in the best interests of the Company and its shareholders. When exercisable, the rights would entitle the holders (other than the acquirer) to buy shares of the Company's common stock having a market value equal to two times the right's exercise price or, in certain circumstances, to buy shares of the acquiring company having a market value equal to two times the right's exercise price. Treasury Shares At June 30, 2002, 756,000 shares of the Company's common stock held as treasury shares are restricted as collateral under escrow arrangements relating to certain change in control and director and officer indemnification agreements. NOTE 9 BENEFIT PLANS Retirement Savings Plan Substantially all associates of the Company's U.S. subsidiaries can participate in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The Company makes a discretionary profit-sharing contribution to the Retirement Savings Plan generally based upon a percentage of the Company's income before income taxes and before the amount of the contribution. The Company also partially matches 401(k) contributions by participants, who may elect to contribute up to 50 percent of their compensation. The matching contribution is made with the Company's common stock and is determined quarterly using rates based on achieving certain quarterly earnings per share levels. The Company's expense for contributions to the above plan was $2,841, $6,038, and $4,837 for the years ended June 30, 2002, 2001, and 2000, respectively. 23 Deferred Compensation Plans The Company has deferred compensation plans that enable certain associates of the Company to defer receipt of a portion of their compensation and non-employee directors to defer receipt of director fees. The Company funds these deferred compensation liabilities by making contributions to rabbi trusts. Contributions consist of Company common stock and investments in money market and mutual funds. Postemployment Benefit Plans The following table provides summary disclosure of the Company's Supplemental Executive Retirement Benefits Plan, qualified retirement plan, salary continuation benefits and retiree medical benefits:
Pension Benefits Other Benefits ------------------ ---------------- 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------ CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of the year $ 19,218 $ 14,645 $ 4,508 $ 3,297 Service cost 628 482 57 52 Interest cost 1,732 1,235 306 239 Benefits paid (2,236) (1,996) (281) (196) Amendments 252 2,262 150 Actuarial (gain) loss during year (1,080) 2,590 (496) 1,116 ----------------------------------------------------------------------------------------------- Benefit obligation at June 30 $ 18,514 $ 19,218 $ 4,244 $ 4,508 =============================================================================================== CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 2,166 $ 1,943 Actual return on plan assets (140) 4 Employer contribution 3,471 2,215 $ 281 $ 196 Benefits paid (2,236) (1,996) (281) (196) ----------------------------------------------------------------------------------------------- Fair value of plan assets at June 30 $ 3,261 $ 2,166 0 $ 0 =============================================================================================== RECONCILIATION OF FUNDED STATUS: Funded status $(15,253) $(17,051) $(4,244) $(4,508) Unrecognized net (gain) loss 2,269 3,194 (189) 322 Unrecognized prior service cost 3,846 4,051 293 171 ----------------------------------------------------------------------------------------------- Accrued pension cost at year end $ (9,138) $ (9,806) $(4,140) $(4,015) =============================================================================================== AMOUNTS RECOGNIZED IN THE BALANCE SHEET AT JUNE 30 CONSIST OF: Prepaid benefit cost $ 1,408 Accrued benefit liability (12,511) $(13,708) $(4,140) $(4,015) Intangible asset 1,965 3,437 Minimum pension liability 465 ----------------------------------------------------------------------------------------------- Net amount recognized $ (9,138) $ (9,806) $(4,140) $(4,015) =============================================================================================== WEIGHTED-AVERAGE ASSUMPTIONS AS OF JUNE 30: Discount rate 6.5% 7.0% 7.0% 7.0% Expected return on plan assets 8.0% 9.0% N/A N/A Rate of compensation increase 5.5% 5.5% N/A N/A Pension Benefits Other Benefits ----------------------------- --------------------------- 2002 2001 2000 2002 2001 2000 ---------------------------------------------------------------------------------------------------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 628 $ 482 $ 454 $ 57 $ 52 $ 71 Interest cost 1,732 1,235 1,096 306 239 254 Expected return on plan assets (172) (196) (166) Recognized net actuarial (gain) loss 157 71 77 13 (42) (15) Amortization of prior service cost 458 373 236 29 29 26 ---------------------------------------------------------------------------------------------------- Net periodic pension cost $ 2,803 $ 1,965 $ 1,697 $ 405 $ 278 $ 336 ====================================================================================================
The assumed health care cost trend rates used in measuring the accumulated benefit obligation for post-retirement benefits other than pensions as of June 30, 2002 and 2001 were 9.5% decreasing to 5.5% by 2010. A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 2002 and for the year then ended:
One-Percentage One-Percentage Point Increase Point Decrease -------------- -------------- Effect on total service and interest cost components of periodic expense $ 48 $ (40) Effect on post-retirement benefit obligation $ 411 $ (322)
24 Supplemental Executive Retirement Benefits Plan The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable at retirement based upon a percentage of the participant's compensation. The plan specifies minimum annual retirement benefits for certain participants. Qualified Retirement Plan The Company has a qualified defined benefit plan that provides benefits to certain hourly employees at retirement. The benefits are based on length of service and date of retirement. Salary Continuation Benefits The Company has agreements with certain retirees to pay monthly retirement benefits for a period not in excess of 15 years. The discount rate used in determining the benefit obligation was decreased to 5.5% at June 30, 2002 from 7.0% at June 30, 2001 to reflect current market rates. Retiree Medical Benefits The Company provides health care benefits to eligible retired associates who elect to pay the Company a specified monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired associates at no cost to the individual. NOTE 10 COMMITMENTS, LEASE OBLIGATIONS AND RENT EXPENSES The Company leases its corporate headquarters facility along with certain service center and distribution center facilities, vehicles and equipment under non-cancelable lease agreements accounted for as operating leases. The minimum annual rental commitments under operating leases are $18,036 in 2003; $12,888 in 2004; $9,794 in 2005; $6,848 in 2006; $5,168 in 2007 and $26,113 after 2007. The Company also has a construction and lease facility where properties were constructed by the lessor and leased to the Company under operating lease arrangements. Since the resulting leases are operating leases, no debt obligation is recorded on the Company's balance sheet. These leases expire in September 2003 and permit the Company to purchase the facilities for $7,500. If the Company does not exercise this option, the leases contain residual value guarantee provisions obligating the Company for up to $6,000 at lease termination. In connection with the construction and lease of the corporate headquarters facility, the Company has guaranteed repayment of $5,678 of bonds issued by Cuyahoga County and the Cleveland-Cuyahoga County Port Authority as lessor. The Company also guarantees up to $3,000 of long-term debt related to a joint venture. Rental expenses incurred for operating leases, principally from leases for real property, vehicles and computer equipment was $27,922 in 2002, $26,122 in 2001, and $20,327 in 2000. The Company had outstanding letters of credit of $5,195 at June 30, 2002. These letters of credit secure certain insurance obligations. NOTE 11 SEGMENT INFORMATION The Company has identified one reportable segment: Service Center Based Distribution. The Service Center Based Distribution segment provides customers with solutions to their immediate maintenance, repairs and original equipment manufacturing needs through the distribution of industrial products including bearings, power transmission components, fluid power components, industrial rubber products, linear motion products, general maintenance and specialty items. The "Other" column consists of the aggregation of all other non-service center based distribution operations that sell directly to customers, including fluid power and electrical shop businesses. The accounting policies of the segments are the same as those described in Note 1. Certain reclassifications have been made to prior year amounts to be consistent with the current year presentation. Intersegment sales are not significant. All current segment operating results are in the United States, Canada, Mexico and Puerto Rico. Operations in Canada, Mexico and Puerto Rico represent approximately 5.9% of the total net sales of Applied, and therefore, are not presented separately. In addition, approximately 34% of these operations' net sales are included in the "Other" segment related to the fluid power business. The long-lived assets located outside of the United States are not material. 25 Segment Financial Information:
Service Center Based Distribution Other Total ----------------------------------------------------------------------------------------- YEAR ENDED JUNE 30, 2002 Net sales $1,354,793 $91,776 $1,446,569 Operating income (loss) 29,015 (2,049) 26,966 Assets used in the business 508,283 26,283 534,566 Depreciation 14,749 545 15,294 Capital expenditures 9,773 277 10,050 --------------------------------------------------- YEAR ENDED JUNE 30, 2001 Net sales $1,527,936 $97,819 $1,625,755 Operating income (loss) 45,425 (1,952) 43,473 Assets used in the business 534,817 44,037 578,854 Depreciation 15,460 904 16,364 Capital expenditures 9,213 2,518 11,731 --------------------------------------------------- YEAR ENDED JUNE 30, 2000 Net sales $1,541,257 $59,827 $1,601,084 Operating income (loss) 68,116 (858) 67,258 Assets used in the business 552,954 41,713 594,667 Depreciation 16,989 511 17,500 Capital expenditures 6,970 2,540 9,510 ---------------------------------------------------
A reconciliation from the segment operating profit to the consolidated balance is as follows:
Year Ended June 30 2002 2001 2000 ----------------------------------------- ------------------------------------------------------------------------------------------ Operating income for reportable segment $29,015 $45,425 $68,116 Other operating income (loss) (2,049) (1,952) (858) Adjustments for: Goodwill and other intangibles amortization (1,651) (5,057) (4,296) Corporate and other income (expense), net (a) 5,519 16,585 (5,183) ------------------------------------------------------------------------------------------ Total operating income 30,834 55,001 57,779 Interest expense, net 6,738 9,105 7,512 Other income (expense) (341) (548) 281 ----------------------------------------------------------------------------------------- Income before income taxes $23,755 $45,348 $50,548 ==========================================================================================
(a) The change in corporate and other income (expense), net is due to various changes in the levels and amounts of expenses being allocated to the segments. The expenses being allocated include miscellaneous corporate charges for working capital, logistics support and other items. Net sales by product category are as follows:
Year Ended June 30 2002 2001 2000 --------------------------------------- ----------------------------------------------------------------------------------------- Industrial $1,223,931 $1,396,170 $1,412,006 Fluid power (b) 218,778 226,535 187,191 Other 3,860 3,050 1,887 ----------------------------------------------------------------------------------------- Net sales $1,446,569 $1,625,755 $1,601,084 =========================================================================================
(b) The fluid power product category includes sales of hydraulic, pneumatic, lubrication and filtration components and systems and repair services through the Company's service centers as well as the fluid power businesses. Beginning in 2002, the net sales of hydraulic hose and fittings were reclassed from the industrial product category to the fluid power product category. Prior year amounts have been restated to reflect the reclass. NOTE 12 LITIGATION The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company does not believe that any liabilities that may result from these proceedings are reasonably likely to have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. 26 DELOITTE & TOUCHE INDEPENDENT AUDITORS' REPORT Shareholders and Board of Directors Applied Industrial Technologies, Inc. We have audited the accompanying consolidated balance sheets of Applied Industrial Technologies, Inc. and its subsidiaries (the "Company") as of June 30, 2002 and 2001, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective July 1, 2001, the Company changed its method of accounting for goodwill as a result of the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ Deloitte & Touche LLP Cleveland, Ohio August 6, 2002 27 Applied Industrial Technologies, Inc. and Subsidiaries QUARTERLY OPERATING RESULTS AND MARKET DATA (UNAUDITED)
Per Common Share (C) ----------- Income Income Before Net Before Net Gross Operating Cumulative Income Cumulative Sales Profit Income Effect (loss) Effect (Dollars in thousands, except per share amounts) - --------------------------------------------------------------------------------------------------- 2002 (A) First Quarter (B) $ 367,990 $ 92,431 $ 10,112 $ 4,889 $ (7,211) $ 0.25 Second Quarter 347,550 87,013 6,032 2,918 2,918 0.15 Third Quarter 361,542 91,870 5,833 2,707 2,707 0.14 Fourth Quarter 369,487 94,376 8,857 4,241 4,241 0.22 - --------------------------------------------------------------------------------------------------- $1,446,569 $ 365,690 $ 30,834 $ 14,755 $ 2,655 $ 0.76 =================================================================================================== 2001 (A) First Quarter $ 420,876 $ 104,454 $ 14,251 $ 7,231 $ 7,231 $ 0.36 Second Quarter 405,438 103,902 15,134 7,362 7,362 0.37 Third Quarter 408,839 102,037 13,236 6,956 6,956 0.35 Fourth Quarter 390,602 98,906 12,380 6,499 6,499 0.33 - --------------------------------------------------------------------------------------------------- $1,625,755 $ 409,299 $ 55,001 $ 28,048 $ 28,048 $ 1.41 =================================================================================================== 2000 (A) First Quarter $ 387,904 $ 93,765 $ 12,138 $ 5,862 $ 5,862 $ 0.28 Second Quarter 379,670 92,687 12,060 6,233 6,233 0.30 Third Quarter 420,897 103,022 15,531 8,304 8,304 0.40 Fourth Quarter 412,613 102,116 18,050 10,649 10,649 0.53 - --------------------------------------------------------------------------------------------------- $1,601,084 $ 391,590 $ 57,779 $ 31,048 $ 31,048 $ 1.50 =================================================================================================== Per Common Share (C) --------------------------------------------------- Net Price Range Income - Cash Diluted Dividend High Low (Dollars in thousands, except per share amounts) - -------------------------------------------------------------------------------- 2002 (A) First Quarter (B) $ (0.38) $ 0.12 $ 19.13 $ 16.50 Second Quarter 0.15 0.12 19.46 16.00 Third Quarter 0.14 0.12 20.91 17.28 Fourth Quarter 0.22 0.12 21.25 18.61 - ---------------------------------------------- $ 0.13 $ 0.48 ============================================== 2001 (A) First Quarter $ 0.36 $ 0.12 $ 18.31 $ 15.69 Second Quarter 0.37 0.12 21.00 15.88 Third Quarter 0.35 0.12 20.69 16.25 Fourth Quarter 0.33 0.12 19.19 15.65 - ---------------------------------------------- $ 1.41 $ 0.48 ============================================== 2000 (A) First Quarter $ 0.28 $ 0.12 $ 19.06 $ 14.38 Second Quarter 0.30 0.12 17.88 15.06 Third Quarter 0.40 0.12 18.19 15.00 Fourth Quarter 0.53 0.12 18.13 14.31 - ---------------------------------------------- $ 1.50 $ 0.48 ==============================================
(A) Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are primarily made based upon the annual physical inventory and the effect of year-end inventory quantities on LIFO costs. Adjustments in 2002, 2001 and 2000 increased gross profit by $3,171, $2,850 and $2,924; net income by $1,868, $1,676 and $1,708 and diluted net income per share by $.10, $.08 and $.08, respectively. Reductions in inventories during the fiscal year ended June 30, 2002 resulted in liquidations of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect of these liquidations for the year ended June 30, 2002 increased gross profit by $915, net income by $546 and diluted net income per share by $.03. (B) Effective July 2001, the Company adopted SFAS142, "Goodwill and Other Intangible Assets." Upon adoption, the Company determined that goodwill associated with its fluid power business was impaired. A non-cash charge totaling $17,600, $12,100 after tax, has been recorded as a change in accounting principle effective July 1, 2001 to write-off the remaining goodwill relating to the fluid power business. See Note 1 to the Consolidated Financial Statements for additional information. (C) On August 16, 2002, there were 6,489 shareholders of record, including 3,760 shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan. The Company's common stock is listed on the New York Stock Exchange. The closing price on August 16, 2002 was $16.49 per share. Applied Industrial Technologies, Inc. and Subsidiaries 10 Year SUMMARY
2002 2001 2000 1999 1998 (Dollars in thousands, except per share amounts and statistical data) - ---------------------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS- YEAR ENDED JUNE 30 Net Sales $1,446,569 $1,625,755 $1,601,084 $1,555,424 $1,518,615 Operating Income 30,834 55,001 57,779 42,269 58,520 Income before cumulative effect of accounting change 14,755 28,048 31,048 19,933 30,125 Net income 2,655 28,048 31,048 19,933 30,125 Per share data Income before cumulative effect of accounting change Basic 0.77 1.43 1.52 0.93 1.40 Diluted 0.76 1.41 1.50 0.93 1.38 Net Income Basic 0.14 1.43 1.52 0.93 1.40 Diluted 0.13 1.41 1.50 0.93 1.38 Cash dividend 0.48 0.48 0.48 0.48 0.47 YEAR-END POSITION - JUNE 30 Working capital $250,644 $279,001 $255,132 $258,730 $221,766 Long-term debt 83,478 113,494 112,168 126,000 90,000 Total assets 534,566 578,854 594,667 574,349 606,091 Shareholders' equity 298,147 311,518 299,331 293,586 299,502 YEAR-END STATISTICS - JUNE 30 Current ratio 2.9 3.2 2.6 3.0 2.1 Operating facilities 449 469 478 444 449 Shareholders of record (A) 6,455 6,697 6,548 6,869 6,731
(A) Includes participant-shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan, and since 1998, shareholders in the Automatic Dividend Reinvestment Plan. 29 EX-21 4 l96320aexv21.txt EXHIBIT 21 EXHIBIT 21 APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR FISCAL YEAR ENDED JUNE 30, 2002 SUBSIDIARIES (as of June 30, 2002)
Jurisdiction of Name Incorporation or Organization ---- ----------------------------- * Air and Hydraulics Engineering, Incorporated Alabama * Air Draulics Engineering Co. Tennessee AIT Limited Partnership Ontario, Canada Applied Industrial Technologies Ltd. Canada (Federal) Applied Industrial Technologies -- ABC, Inc. Ohio Applied Industrial Technologies -- DBB, Inc. Ohio Applied Industrial Technologies -- Dixie, Inc. Tennessee Applied Industrial Technologies -- GA LP Delaware Applied Industrial Technologies -- Indiana LLC Ohio Applied Industrial Technologies -- Mainline, Inc. Wisconsin Applied Industrial Technologies -- PA LLC Pennsylvania Applied Industrial Technologies -- TX LP Delaware AppliedLink, Inc. Ohio *# Applied Mexico, S.A. de C.V. Mexico (d/b/a Baleros Industriales) Applied Mexico Holdings, S.A. de C.V. Mexico Applied - Michigan, Ltd. Ohio Applied Nova Scotia Company Nova Scotia, Canada BER Capital, Inc. Delaware BER International, Inc. Barbados
Bearing Sales & Service, Inc. Washington Bearings Pan American, Inc. Ohio Dynavest Nova Scotia Company Nova Scotia, Canada * ESI Acquisition Corporation Ohio (d/b/a Engineered Sales, Inc.) *# International Supply Consortium, Inc. Delaware *# iSource Performance Materials LLC Ohio *Rafael Benitez Carrillo Inc. Puerto Rico The Ohio Ball Bearing Company Ohio
* Operating companies that do not conduct business under Applied Industrial Technologies name # Companies that are not wholly owned by Applied Industrial Technologies, Inc. directly or indirectly through its subsidiaries EX-23 5 l96320aexv23.txt EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT Applied Industrial Technologies, Inc. We consent to the incorporation by reference in Registration Statement Nos. 33-42623, 33-43506, 33-53401, 33-60687, 33-65509, 33-65513, 333-83809, and 333-69002 of Applied Industrial Technologies, Inc. on Forms S-8 of our reports dated August 6, 2002, appearing in and incorporated by reference in this Annual Report on Form 10-K of Applied Industrial Technologies, Inc. for the year ended June 30, 2002. /s/ Deloitte & Touche LLP Cleveland, Ohio September 18, 2002 EX-24 6 l96320aexv24.txt EXHIBIT 24 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in his respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2002 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized. Date: 9/04/02 /s/ William G. Bares ------------------ ---------------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in his respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2002 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized. Date: 9/5/02 /s/ Roger D. Blackwell ------------------------------- ------------------------------------ POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in his respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2002 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized. Date: 9/4/02 /s/ William E. Butler ------------------------------- -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in his respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2002 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized. Date: 9/4/02 /s/ Thomas A. Commes --------------------------- -------------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in his respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2002 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized. Date: 9/4/02 /s/ Peter A. Dorsman ------------------------------ ----------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in his respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2002 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized. Date: 9/3/02 /s/ Russell R. Gifford -------------------------- --------------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in his respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2002 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized. Date: 9/4/02 /s/ L. Thomas Hiltz ------------------------- ------------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in his respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2002 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized. Date: 9/9/02 /s/ Edith Kelly-Green --------------------------- ----------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in his respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2002 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized. Date: 9/4/02 /s/ J. Michael Moore -------------------------- ------------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in his respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2002 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized. Date: 9/3/02 /s/ Jerry Sue Thornton ----------------------------- ------------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in his respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2002 on Form 10-K to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, and the rules and regulations issued thereunder, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, or any one of them, as herein authorized. Date: 9/10/02 /s/ Stephen E. Yates ----------------------------- ----------------------------------- EX-99.1 7 l96320aexv99w1.txt EXHIBIT 99.1 Exhibit 99(a) STATEMENT UNDER OATH OF PRINCIPAL EXECUTIVE OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS I, David L. Pugh, state and attest that: (1) To the best of my knowledge, based upon a review of the covered reports of Applied Industrial Technologies, Inc., and, except as corrected or supplemented in a subsequent covered report: - no covered report contained an untrue statement of a material fact as of the end of the period covered by such report (or in the case of a report on Form 8-K or definitive proxy materials, as of the date on which it was filed); and - no covered report omitted to state a material fact necessary to make the statements in the covered report, in light of the circumstances under which they were made, not misleading as of the end of the period covered by such report (or in the case of a report on Form 8-K or definitive proxy materials, as of the date on which it was filed). (2) I have reviewed the contents of this statement with the Company's audit committee. (3) In this statement under oath, each of the following, if filed on or before the date of this statement, is a "covered report": - 2002 Annual Report on Form 10-K of Applied Industrial Technologies, Inc.; - all reports on Form 10-Q, all reports on Form 8-K and all definitive proxy materials of Applied Industrial Technologies, Inc. filed with the Commission subsequent to the filing of the Form 10-K identified above; and - any amendments to any of the foregoing. /s/ David L. Pugh Subscribed and sworn to before me this - -------------------------------- 23rd day of September, 2002. David L. Pugh -- Date: September 23, 2002 /s/ Fred D. Bauer ----------------------------------------- Notary Public My Commission Expires: Fred D. Bauer, Attorney at Law Notary Public - State of Ohio My commission has no expiration date Section 147.03 R.C. EX-99.2 8 l96320aexv99w2.txt EXHIBIT 99.2 Exhibit 99(b) STATEMENT UNDER OATH OF PRINCIPAL FINANCIAL OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS I, John R. Whitten, state and attest that: (1) To the best of my knowledge, based upon a review of the covered reports of Applied Industrial Technologies, Inc., and, except as corrected or supplemented in a subsequent covered report: - no covered report contained an untrue statement of a material fact as of the end of the period covered by such report (or in the case of a report on Form 8-K or definitive proxy materials, as of the date on which it was filed); and - no covered report omitted to state a material fact necessary to make the statements in the covered report, in light of the circumstances under which they were made, not misleading as of the end of the period covered by such report (or in the case of a report on Form 8-K or definitive proxy materials, as of the date on which it was filed). (2) I have reviewed the contents of this statement with the Company's audit committee. (3) In this statement under oath, each of the following, if filed on or before the date of this statement, is a "covered report": - 2002 Annual Report on Form 10-K of Applied Industrial Technologies, Inc.; - all reports on Form 10-Q, all reports on Form 8-K and all definitive proxy materials of Applied Industrial Technologies, Inc. filed with the Commission subsequent to the filing of the Form 10-K identified above; and - any amendments to any of the foregoing. /s/ John R. Whitten Subscribed and sworn to before me this - -------------------------------- 23rd day of September, 2002. John R. Whitten -- Date: September 23, 2002 /s/ Fred D. Bauer ---------------------------------------- Notary Public My Commission Expires: Fred D. Bauer, Attorney at Law Notary Public - State of Ohio My commission has no expiration date. Section 147.03 R.C. EX-99.3 9 l96320aexv99w3.txt EXHIBIT 99.3 EXHIBIT 99(c) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350 In connection with the Form 10-K (the "Report") of Applied Industrial Technologies, Inc. (the "Company") for the period ending June 30, 2002, we, David L. Pugh, Chairman & Chief Executive Officer, and John R. Whitten, Vice President-Chief Financial Officer & Treasurer of the Company, certify that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David L. Pugh /s/ John R. Whitten - ------------------------------------ -------------------------------------- David L. Pugh John R. Whitten Chairman & Chief Executive Vice President-Chief Financial Officer Officer & Treasurer Dated: September 23, 2002 -----END PRIVACY-ENHANCED MESSAGE-----