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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
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<DESCRIPTION>APPLIED INDUSTRIAL TECHNOLOGIES, INC. 10-K
<TEXT>
<PAGE>
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]
<PAGE>
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
- 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
*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
<PAGE>
*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
<PAGE>
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
<PAGE>
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
<PAGE>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
----------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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).
<PAGE>
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).
<PAGE>
*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).
<PAGE>
*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
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>3
<FILENAME>l96320aexv13.txt
<DESCRIPTION>EXHIBIT 13
<TEXT>
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Applied Industrial Technologies, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Year Ended June 30
2002 2001 2000
----------------------------------------------------
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
Applied Industrial Technologies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30
2002 2001
------------------------------------
(In thousands)
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
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
=======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
Applied Industrial Technologies, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30
2002 2001 2000
----------------------------------------------------
(In thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
Applied Industrial Technologies, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
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)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
===========================================================================================================================
<CAPTION>
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)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=============================================================================================
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
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
<PAGE>
The changes in the carrying amount of goodwill for the years ended June 30, 2002
and 2001, are as follows:
<TABLE>
<CAPTION>
Service Center Based Fluid Power
Distribution Segment Business Total
---------------------------------------------
<S> <C> <C> <C>
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
================================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended June 30
2002 2001 2000
------------------------------------------
<S> <C> <C> <C>
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
================================================================================================
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
June 30
2002 2001
-------------------------
-----------------------------------------------------------------------------------------------
<S> <C> <C>
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
===============================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
June 30
2002 2001
-------------------------
-----------------------------------------------------------------------------------------------
<S> <C> <C>
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
===============================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
June 30
2002 2001
-------------------------
-----------------------------------------------------------------------------------------------
<S> <C> <C>
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
===============================================================================================
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
June 30
2002 2001
-------------------------
--------------------------------------------------------------------------------------------------
<S> <C> <C>
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
==================================================================================================
</TABLE>
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
<PAGE>
NOTE 7
INCOME TAXES
Provision
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
Year Ended June 30
2002 2001 2000
------------------------------------------
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===============================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended June 30
2002 2001 2000
---------------------------------------
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
===============================================================================================
</TABLE>
Balance Sheet
The significant components of the Company's deferred tax assets (liabilities)
are as follows:
<TABLE>
<CAPTION>
June 30
2002 2001
-------------------------
-----------------------------------------------------------------------------------------------
<S> <C> <C>
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
===============================================================================================
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
2002 2001 2000
------------------------------------------
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
Information regarding these option plans is as follows:
<TABLE>
<CAPTION>
2002 2001 2000
-------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(Share amounts in thousands) Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
The following table summarizes information about stock options outstanding at
June 30, 2002:
<TABLE>
<CAPTION>
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
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 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
==========================================================================================================
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ ----------------
2002 2001 2002 2001
------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
<S> <C> <C> <C> <C>
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
<CAPTION>
Pension Benefits Other Benefits
----------------------------- ---------------------------
2002 2001 2000 2002 2001 2000
----------------------------------------------------------------------------------------------------
COMPONENTS OF
NET PERIODIC BENEFIT COST:
<S> <C> <C> <C> <C> <C> <C>
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
====================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
<S> <C> <C>
Effect on total service and interest cost
components of periodic expense $ 48 $ (40)
Effect on post-retirement benefit obligation $ 411 $ (322)
</TABLE>
24
<PAGE>
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
<PAGE>
Segment Financial Information:
<TABLE>
<CAPTION>
Service Center
Based Distribution Other Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
---------------------------------------------------
</TABLE>
A reconciliation from the segment operating profit to the consolidated balance
is as follows:
<TABLE>
<CAPTION>
Year Ended June 30
2002 2001 2000
-----------------------------------------
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
==========================================================================================
</TABLE>
(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:
<TABLE>
<CAPTION>
Year Ended June 30
2002 2001 2000
---------------------------------------
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=========================================================================================
</TABLE>
(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
<PAGE>
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
<PAGE>
Applied Industrial Technologies, Inc. and Subsidiaries
QUARTERLY OPERATING RESULTS AND MARKET DATA (UNAUDITED)
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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
===================================================================================================
<CAPTION>
Per Common Share (C)
---------------------------------------------------
Net Price Range
Income - Cash
Diluted Dividend High Low
(Dollars in thousands,
except per share amounts)
- --------------------------------------------------------------------------------
2002 (A)
<S> <C> <C> <C> <C>
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
==============================================
</TABLE>
(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
<Table>
<Caption>
2002 2001 2000 1999 1998
(Dollars in thousands, except per share amounts
and statistical data)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(A) Includes participant-shareholders in the Applied Industrial Technologies,
Inc. Retirement Savings Plan, and since 1998, shareholders in the Automatic
Dividend Reinvestment Plan.
29
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>l96320aexv21.txt
<DESCRIPTION>EXHIBIT 21
<TEXT>
<PAGE>
EXHIBIT 21
APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 2002
SUBSIDIARIES
(as of June 30, 2002)
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation or Organization
---- -----------------------------
<S> <C>
* 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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
* 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
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>l96320aexv23.txt
<DESCRIPTION>EXHIBIT 23
<TEXT>
<PAGE>
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
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>6
<FILENAME>l96320aexv24.txt
<DESCRIPTION>EXHIBIT 24
<TEXT>
<PAGE>
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
------------------ ----------------------------------------
<PAGE>
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
------------------------------- ------------------------------------
<PAGE>
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
------------------------------- --------------------------------
<PAGE>
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
--------------------------- --------------------------------------
<PAGE>
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
------------------------------ -----------------------------------
<PAGE>
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
-------------------------- ---------------------------------------
<PAGE>
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
------------------------- -------------------------------------
<PAGE>
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
--------------------------- -----------------------------------
<PAGE>
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
-------------------------- -------------------------------------
<PAGE>
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
----------------------------- -------------------------------------
<PAGE>
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
----------------------------- -----------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>7
<FILENAME>l96320aexv99w1.txt
<DESCRIPTION>EXHIBIT 99.1
<TEXT>
<PAGE>
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.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>8
<FILENAME>l96320aexv99w2.txt
<DESCRIPTION>EXHIBIT 99.2
<TEXT>
<PAGE>
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.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.3
<SEQUENCE>9
<FILENAME>l96320aexv99w3.txt
<DESCRIPTION>EXHIBIT 99.3
<TEXT>
<PAGE>
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
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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