0000950152-01-504565.txt : 20011008 0000950152-01-504565.hdr.sgml : 20011008 ACCESSION NUMBER: 0000950152-01-504565 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010919 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: 1740377 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: BEARINGS INC /OH/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BROWN JIM STORES INC DATE OF NAME CHANGE: 19600201 10-K 1 l90392ae10-k.txt APPLIED INDUSTRIAL TECHNOLOGIES, INC. 10-K 1 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, 2001 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. [ ] 2 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 28, 2001: $320,445,961. 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 28, 2001 ----- ------------------------------ Common Stock, without par value 19,641,952 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, 2001, 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 12, 2001, portions of which are incorporated by reference into Parts III and IV of this Form 10-K. 1 3 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; 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 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 WE HAVE; 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 4 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, 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. Formerly known as Bearings, Inc., Applied adopted its current name as of January 1, 1997. (a) General Development of Business. -------------------------------- The company made its initial entry into Canada in June 2000 by acquiring Dynavest Corporation's industrial products and fluid power distribution businesses, serving customers throughout western Canada. These businesses, now operating as Applied Industrial Technologies Ltd., were successfully integrated into Applied's family of companies in fiscal 2001. In January 2001 we launched a joint venture to distribute bearing and power transmission products in Mexico by forming Applied Mexico, S.A. de C.V. We also continued our expansion in the U.S. by acquiring Air Draulics Engineering Co., a fluid power distributor with operations in Tennessee and Arkansas, in September 2000. In fiscal 2001 we also formed a joint venture to distribute specialty chemical products requiring special shipping, handling, and documentation, including adhesives, lubricants, greases, and cleaning solvents. The new venture, iSource Performance Materials LLC, is a certified minority-owned business. John C. Dannemiller, Applied's Chairman since 1992 and Chief Executive Officer from 1992 to January 2000, retired as an executive officer and director in October 2000. He had served on the Board since 1985. David L. Pugh was promoted to Chairman & Chief Executive Officer and Bill L. Purser was elected President & Chief Operating Officer. 3 5 Further information regarding developments in our business can be found in our 2001 Annual Report to shareholders under the caption "Management's Discussion and Analysis" on pages 12 through 14, 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. In addition to the service center-based distribution business, we operate several smaller businesses that primarily sell their products and services directly to customers rather than through the service centers. These businesses include our specialized fluid power businesses and the Engineered Systems and Automation Division. Financial information on the service center-based distribution segment and our other businesses can be found in the 2001 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 the company's primary business channel. As noted in "Financial Information about Segments," above, we also operate other businesses that sell products and services directly to customers rather than through the service centers. Our U.S. operating structure is built around two major platforms - industrial products, and fluid power products and systems. The structure divides our domestic 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. This business unit accounts for the bulk of our field operations and sales dollars. 4 6 - 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 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). 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, All Agro Parts, and B&T Rubber. - 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. - Our majority-owned Mexican subsidiary, Applied Mexico, S.A. de C.V., with a service center in Mexico City. 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, particularly fluid power product manufacturers, may vary by geographic region. Net sales by product category for the past three fiscal years can be found in the 2001 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 5 7 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 can develop closer, longer-lasting, and more profitable customer relationships. Our sales associates include customer service representatives and field 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 field account managers in serving customers. Field 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 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 technologies, 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 stocked at most service centers as well as other items that are specific to 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 customers to minimize their own inventories of industrial products. 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 the 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 domestic service centers operate, gives each service center on-line access to inventory and sales history information. The system permits direct 6 8 access for order entry, pricing, order expediting, and back 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 newly launched website (www.maintenanceamerica.com) facilitate the ordering of more than 18,000 products used by maintenance professionals. 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 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 sharply with those of our product manufacturers as 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 3% of our net sales. 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 product catalogs and Internet-based procurement systems. We have responded to this trend by 7 9 developing avenues, such as the AppliedAccess(R) and Maintenance America(R) websites, described above, to provide current and new customers the flexibility to order through their preferred procurement method. Certain 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 advice, and to narrow product sales margins. Accordingly, there is no assurance that increased procurement through multi-supplier electronic systems will not adversely affect our business. Competition. We consider our business to be highly competitive. In addition, our markets present few economic or technological barriers to entry, although longstanding supplier and customer relationships and the expertise of our associates may operate as barriers. 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 houses. 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. Certain competitors have greater financial resources than we do. The identity and number of 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 extensive 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 8 10 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, 2001, we had 4,789 employees. Working Capital. Our working capital position is disclosed in the financial statements referred to at Item 14 on page 16 of this Report and is discussed in "Management's Discussion and Analysis" in the 2001 Annual Report to shareholders on page 13. 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 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 4.7% of our total net sales in fiscal 2001. The operating results from our Canadian businesses (acquired in June 2000) have been included in our consolidated financial statements only since July 1, 2000. Long-lived assets located outside the United States are not material. Our U.S. operations' export sales during the fiscal year ended June 30, 2001, 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 2001 Annual Report to shareholders in note 11 to the financial statements on pages 25 and 26, and that information is incorporated here by reference. 9 11 ITEM 2. PROPERTIES. ----------- We own or lease the properties in which our offices, service centers, distribution centers, and shops are located. At June 30, 2001, we owned real properties at 175 locations and leased 265 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, 2001 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 - 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, 2001 were: - the corporate headquarters facility in Cleveland, Ohio - the distribution center, offices, 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 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 centers 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. 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 10 12 service center requires to meet its customers' needs. We use all of our owned and leased properties except for certain properties (one of which has floor space exceeding 20,000 square feet), 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 arising in the ordinary course of business. Based on circumstances currently known, we do not believe that any liabilities that may result from these proceedings are reasonably likely to have a material adverse effect on our financial position or results of operations. 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 2001. 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 17, 2000: 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 52 years of age. 11 13 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 58 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 46 years of age. Donald L. Chargin. Mr. Chargin is Vice President-Unit President, Industrial Products (since January 2000). He had served as Vice President-Sales and Field Operations (from August 1998 to January 2000) and Vice President-Western Area (from 1995 to August 1998). He is 46 years of age. 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 60 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 44 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 58 years of age. Jeffrey A. Ramras. Mr. Ramras is Vice President-Supply Chain Management (since January 2000). He had served as Vice President-Logistics (from 1995 to January 2000). He is 46 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 52 years of age. Robert C. Stinson. Mr. Stinson is Vice President-Chief Administrative Officer, General Counsel & Secretary (since October 1997). He was Vice President-Administration, Human Resources, General Counsel & Secretary (from 1994 to October 1997). He is 55 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 55 years of age. 12 14 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATE ------------------------------------------------- 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, 2001, 2000, and 1999 and the number of shareholders of record as of August 17, 2001 is set forth in the 2001 Annual Report to shareholders on page 29, under the caption "Quarterly Operating Results and Market Data," 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 2001 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 2001 Annual Report to shareholders on pages 12 through 14 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 2001 Annual Report to shareholders on page 14, which information is incorporated here by reference. For further information relating to borrowing and interest rates, see the Capital Resources section of "Management's Discussion and Analysis" and Notes 5 and 6 to the Consolidated Financial Statements in Applied's 2001 Annual Report to shareholders on pages 21 and 22, 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. 13 15 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 2001 Annual Report to shareholders at the pages indicated, are incorporated here by reference and filed with this Report: Caption Page No. ------- -------- Financial Statements: Statements of Consolidated 15 Income for the Years Ended June 30, 2001, 2000, and 1999 Consolidated Balance Sheets 16 June 30, 2001 and 2000 Statements of Consolidated 17 Cash Flows for the Years Ended June 30, 2001, 2000, and 1999 Statements of Consolidated 18 Shareholders' Equity for the Years Ended June 30, 2001, 2000, and 1999 Notes to Consolidated 19 - 26 Financial Statements for the Years Ended June 30, 2001, 2000, and 1999 Independent Auditors' Report 27 Supplementary Data: Quarterly Operating Results and 29 Market Data 14 16 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 12, 2001 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 Applied's executive officers has been furnished in this Report on pages 11 through 13 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 18 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 12, 2001, under the captions "Summary Compensation" on page 8, "Option Grants in Last Fiscal Year" and "Aggregated Option Exercises and Fiscal Year-End Option Value Table" on page 9, "Estimated Retirement Benefits Under Supplemental Executive Retirement Benefits Plan" on page 10, "Compensation of Directors," "Deferred Compensation Plan for Non-employee Directors," "Deferred Compensation Plan," and "Change in Control Agreements and Other Related Arrangements" on pages 14 through 16, and is incorporated here by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL ---------------------------------------- OWNERS AND MANAGEMENT. ---------------------- Information concerning the security ownership of certain beneficial owners and management is set forth under the caption "Beneficial Ownership of Certain Applied Shareholders and Management" on page 7 of Applied's Proxy Statement dated September 12, 2001, and is incorporated here by reference. 15 17 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 14 of Applied's Proxy Statement dated September 12, 2001 and is incorporated here by reference. PART IV. ITEM 14. 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 2001 Annual Report to shareholders on pages 15 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, 2001, 2000, and 1999 Consolidated Balance Sheets at June 30, 2001 and 2000 Statements of Consolidated Cash Flows for the Years Ended June 30, 2001, 2000, and 1999 Statements of Consolidated Shareholders' Equity for the Years Ended June 30, 2001, 2000, and 1999 Notes to Consolidated Financial Statements for the Years Ended June 30, 2001, 2000, and 1999 Independent Auditors' Report Supplementary Data: Quarterly Operating Results and Market Data 16 18 (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: Caption Page No. ------- -------- Independent Auditors' Report 23 Schedule II - Valuation and 24 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) $80,000,000 Maximum Aggregate Principal Amount Note Purchase Agreement and Private Shelf Facility dated October 31, 1992 17 19 between Applied and The Prudential Insurance Company of America (as amended and restated) (filed as Exhibit 4(b) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 4(c) Amendment to $80,000,000 Maximum Aggregate Principal Amount Note Purchase Agreement and Private Shelf Facility dated October 31, 1992 between Applied and The Prudential Insurance Company of America (filed as Exhibit 4(g) to Applied's Form 10-Q for the quarter ended March 31, 1996, SEC File No. 1-2299, and incorporated here by reference). 4(d) 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(e) 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(f) $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(g) Rights Agreement, dated as of February 2, 1998, between Applied and Harris Trust and Savings Bank, as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (filed as Exhibit No. 1 to 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 Amended and Restated Change in Control Agreement between Applied and each of its executive officers (filed as Exhibit 10(b) to Applied's Form 10-Q for the quarter ended March 31, 1998, 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 12, 2001, SEC 18 20 File No. 1-2299, on page 14, under the caption "Compensation of Directors," and is incorporated here by reference. *10(c) Applied Deferred Compensation Plan for Non-employee Directors (January 1, 1997 Restatement) (filed as Exhibit 10(d) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(d) First Amendment to Deferred Compensation Plan for Non-employee Directors (January 1, 1997 Restatement) dated May 1, 1998 (filed as Exhibit 10(d) to Applied's Form 10-K for the year ended June 30, 1998, SEC File No. 1-2299, and incorporated here by reference). *10(e) A written description of Applied's Life and Accidental Death and Dismemberment Insurance for executive officers (filed as Exhibit 10(b) to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated here by reference). *10(f) A written description of Applied's Long-Term Disability Insurance for executive officers (filed as Exhibit 10(c) to Applied's Form 10-Q for the quarter ended December 31, 1997, SEC File No. 1-2299, and incorporated here by reference). *10(g) Form of Director and Officer Indemnification Agreement entered into between Applied and each of its directors and executive officers (filed as Exhibit 10(g) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). *10(h) Applied Supplemental Executive Retirement Benefits Plan (July 1, 1997 Restatement) in which 9 executive officers (as well as certain former executive officers) currently participate (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended September 30, 1997, SEC File No. 1-2299, and incorporated here by reference). *10(i) First Amendment to Supplemental Executive Retirement Benefits Plan effective as of August 5, 1998 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended December 31, 1998, SEC File No. 1-2299, and incorporated here by reference). *10(j) Second Amendment to Supplemental Executive Retirement Benefits Plan effective as of October 1, 2000 (filed as Exhibit 10(c) to Applied's Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference). 19 21 *10(k) Third Amendment to Supplemental Executive Retirement Benefits Plan effective as of October 1, 2000 (filed as Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31, 2000, SEC File No. 1-2299, and incorporated here by reference). *10(l) 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(m) 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(n) 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(o) 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(p) 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(q) A written description of Applied's Management Incentive Plan applicable to executive officers, including the five most highly compensated executive officers, is found in Applied's Proxy Statement dated September 12, 2001, SEC File No. 1-2299, on page 11, in the Report of the Executive Organization & Compensation Committee of the Board of Directors on Executive Compensation, under the subcaption "Management Incentive Plan," and is incorporated here by reference. *10(r) 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). 20 22 *10(s) 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(t) 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(u) 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(v) 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(w) 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(x) 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 2001 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, 2001. 23 Independent Auditors' Consent. 24 Powers of attorney. 21 23 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, 2001. 22 24 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, 2001 and 2000, 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, 2001 and have issued our report thereon dated August 8, 2001; such consolidated financial statements and report are included in your 2001 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 8, 2001 23 25
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES ---------------------------------------------------- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (in thousands) ----------------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- ------------------------------- -------- -------- ADDITIONS ADDITIONS BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE BEGINNING COSTS AND OTHER FROM AT END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD ----------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED JUNE 30 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 YEAR ENDED JUNE 30 1999: Reserve deducted from assets to which it applies - accounts receivable allowances $3,500 $3,014 $100 (C) $3,099 (A) $3,515 (A) Amounts represent uncollectible accounts charged off. (B) Amounts represent reserves for the return of merchandise. (C) Represents reserves recorded through purchase accounting for acquisitions made during the year.
-------------------------------------------------------------------------------- SCHEDULE II 26 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 19, 2001 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. /s/ William G. Bares /s/ Dr. Roger D. Blackwell -------------------------------------- ------------------------------------- William G. Bares, Director Dr. Roger D. Blackwell, Director /s/ William E. Butler * -------------------------------------- ------------------------------------- William E. Butler, Director Thomas A. Commes, Director /s/ Russel B. Every /s/ Russell R. Gifford -------------------------------------- ------------------------------------- Russel B. Every, Director Russell R. Gifford, Director * /s/ J. Michael Moore -------------------------------------- ------------------------------------- L. Thomas Hiltz, Director J. Michael Moore, Director /s/ David L. Pugh /s/ Dr. Jerry Sue Thornton -------------------------------------- ------------------------------------- David L. Pugh, Chairman & Chief Dr. Jerry Sue Thornton, Director Executive Officer and Director * -------------------------------------- Stephen E. Yates, Director /s/ Robert C. Stinson -------------------------------------- Robert C. Stinson, as attorney in fact for persons indicated by "*" Date: September 19, 2001 27 APPLIED INDUSTRIAL TECHNOLOGIES, INC. EXHIBIT INDEX TO FORM 10-K FOR THE YEAR ENDED JUNE 30, 2001 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) $80,000,000 Maximum Aggregate Principal Amount Note Purchase Agreement and Private Shelf Facility dated October 31, 1992 between Applied and The Prudential Insurance Company of America (as amended and restated) (filed as Exhibit 4(b) to Applied's Registration Statement on Form S-4 filed May 23, 1997, Registration No. 333-27801, and incorporated here by reference). 4(c) Amendment to $80,000,000 Maximum Aggregate Principal Amount Note Purchase Agreement and Private Shelf Facility dated October 31, 1992 between Applied and The Prudential Insurance Company of America (filed as Exhibit 4(g) to Applied's Form 10-Q for the quarter ended March 31, 1996, SEC File No. 1-2299, and incorporated here by reference). 4(d) 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). 28 4(e) 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(f) $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(g) Rights Agreement, dated as of February 2, 1998, between Applied and Harris Trust and Savings Bank, as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (filed as Exhibit No. 1 to 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 Amended and Restated Change in Control Agreement between Applied and each of its executive officers (filed as Exhibit 10(b) to Applied's Form 10-Q for the quarter ended March 31, 1998, 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 12, 2001, SEC File No. 1-2299, on page 14, 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). 29 *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 (July 1, 1997 Restatement) in which 9 executive officers (as well as certain former executive officers) currently participate (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended September 30, 1997, SEC File No. 1-2299, and incorporated here by reference). *10(i) First Amendment to Supplemental Executive Retirement Benefits Plan effective as of August 5, 1998 (filed as Exhibit 10(a) to Applied's Form 10-Q for the quarter ended December 31, 1998, SEC File No. 1-2299, and incorporated here by reference). *10(j) Second Amendment to Supplemental Executive Retirement Benefits Plan effective as of October 1, 2000 (filed as Exhibit 10(c) to Applied's Form 10-Q for the quarter ended September 30, 2000, SEC File No. 1-2299, and incorporated here by reference). *10(k) Third Amendment to Supplemental Executive Retirement Benefits Plan effective as of October 1, 2000 (filed as Exhibit 10 to Applied's Form 10-Q for the quarter ended December 31, 2000, SEC File No. 1-2299, and incorporated here by reference). *10(l) 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(m) 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). 30 *10(n) 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(o) 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(p) 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(q) A written description of Applied's Management Incentive Plan applicable to executive officers, including the five most highly compensated executive officers, is found in Applied's Proxy Statement dated September 12, 2001, SEC File No. 1-2299, on page 11, in the Report of the Executive Organization & Compensation Committee of the Board of Directors on Executive Compensation, under the subcaption "Management Incentive Plan," and is incorporated here by reference. *10(r) 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(s) 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(t) 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(u) 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). 31 10(v) 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(w) 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(x) 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 2001 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, 2001. Attached 23 Independent Auditors' Consent. Attached 24 Powers of Attorney. Attached EX-13 3 l90392aex13.txt EXHIBIT 13 1 EXHIBIT 13 Applied Industrial Technologies, Inc. and Subsidiaries Statements of CONSOLIDATED INCOME
Year Ended June 30 2001 2000 1999 ------------------------------------------------------ (In thousands, except per share amounts) ------------------------------------------------------------------------------------------------------------ NET SALES $ 1,625,755 $ 1,601,084 $ 1,555,424 Cost of sales 1,216,456 1,209,494 1,187,245 ------------------------------------------------------------------------------------------------------------ 409,299 391,590 368,179 Selling, distribution and administrative 354,298 333,811 325,910 ------------------------------------------------------------------------------------------------------------ OPERATING INCOME 55,001 57,779 42,269 ------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE 9,386 7,774 10,063 INTEREST INCOME (281) (262) (193) Other, net 548 (281) (234) ------------------------------------------------------------------------------------------------------------ 9,653 7,231 9,636 ------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 45,348 50,548 32,633 ------------------------------------------------------------------------------------------------------------ INCOME TAX EXPENSE 17,300 19,500 12,700 ------------------------------------------------------------------------------------------------------------ NET INCOME $ 28,048 $ 31,048 $ 19,933 ============================================================================================================ NET INCOME PER SHARE - BASIC $ 1.43 $ 1.52 $ 0.93 ============================================================================================================ NET INCOME PER SHARE - DILUTED $ 1.41 $ 1.50 $ 0.93 ============================================================================================================
See notes to consolidated financial statements. 2 Applied Industrial Technologies, Inc. and Subsidiaries Consolidated BALANCE SHEETS
June 30 2001 2000 ---------------------------- (In thousands) ------------------------------------------------------------------------------------------------------------ ASSETS Current assets Cash and temporary investments $ 13,981 $ 12,349 Accounts receivable, less allowances of $5,400 and $3,800 190,935 212,254 Inventories 191,570 182,102 Other current assets 9,974 8,286 ------------------------------------------------------------------------------------------------------------ Total current assets 406,460 414,991 ------------------------------------------------------------------------------------------------------------ Property - at cost Land 12,121 12,214 Buildings 68,840 67,630 Equipment 84,478 92,656 ------------------------------------------------------------------------------------------------------------ 165,439 172,500 Less accumulated depreciation 75,176 75,300 ------------------------------------------------------------------------------------------------------------ Property - net 90,263 97,200 ------------------------------------------------------------------------------------------------------------ Goodwill and other intangible assets - net 65,113 67,089 Other assets 17,018 15,387 ------------------------------------------------------------------------------------------------------------ Total Assets $ 578,854 $ 594,667 ============================================================================================================ LIABILITIES Current liabilities Accounts payable $ 75,896 $ 93,587 Compensation and related benefits 23,749 32,476 Other current liabilities 27,814 33,796 ------------------------------------------------------------------------------------------------------------ Total current liabilities 127,459 159,859 Long-term debt 113,494 112,168 Other liabilities 26,383 23,309 ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 267,336 295,336 ------------------------------------------------------------------------------------------------------------ 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 84,221 83,312 Income retained for use in the business 285,661 267,145 Treasury shares - at cost (4,449 and 4,017 shares) (66,227) (57,419) Unearned restricted common stock compensation (1,955) (3,707) Accumulated other comprehensive income (182) ------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 311,518 299,331 ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 578,854 $ 594,667 ============================================================================================================
See notes to consolidated financial statements. 16 3 Applied Industrial Technologies, Inc. and Subsidiaries Statements of CONSOLIDATED CASH FLOWS
Year Ended June 30 2001 2000 1999 --------------------------------------------------- (In thousands) ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 28,048 $ 31,048 $ 19,933 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 16,364 17,500 17,325 Deferred income taxes (1,800) (2,886) (2,936) Amortization of restricted common stock compensation, goodwill and other intangible assets 6,145 5,488 5,331 Provision for losses on accounts receivable 6,995 3,058 3,014 (Gain) loss on sale of property (1,080) (460) 187 Treasury shares contributed to employee benefit and deferred compensation plans 6,529 3,819 3,681 Changes in current assets and liabilities, net of acquisitions: Accounts receivable 15,869 (7,606) 9,348 Inventories (8,522) 1,138 25,367 Other current assets (1,908) (944) 2,717 Accounts payable (17,691) 14,751 (255) Accrued expenses (11,732) 11,538 (582) ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 37,217 76,444 83,130 ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Property purchases (11,731) (9,510) (13,527) Proceeds from property sales 4,251 5,338 4,123 Net cash paid for acquisition of businesses, net of cash acquired of $812 in 2001 and $597 in 1999 (5,491) (34,522) (12,533) Deposits and other (310) (294) 6,033 ------------------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (13,281) (38,988) (15,904) ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Repayments under line of credit agreements - net (42,973) Borrowings (repayments) under revolving credit agreements - net (12,246) (2,403) 36,000 Long-term debt borrowings 25,000 Long-term debt repayments (11,428) (11,429) (19,429) Exercise of stock options 1,403 301 1,161 Dividends paid (9,532) (9,929) (10,397) Purchases of treasury shares (15,501) (20,833) (21,746) ------------------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN FINANCING ACTIVITIES (22,304) (44,293) (57,384) ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and temporary investments 1,632 (6,837) 9,842 Cash and temporary investments at beginning of year 12,349 19,186 9,344 ------------------------------------------------------------------------------------------------------------------------------------ CASH AND TEMPORARY INVESTMENTS AT END OF YEAR $ 13,981 $ 12,349 $ 19,186 ==================================================================================================================================== Supplemental Cash Flow Information Cash paid during the year for: Income taxes $ 22,080 $ 21,359 $ 11,176 Interest $ 8,595 $ 7,247 $ 10,401
See notes to consolidated financial statements. 17 4 Applied Industrial Technologies, Inc. and Subsidiaries Statements of CONSOLIDATED SHAREHOLDERS' EQUITY
For the Years Ended June 30, 2001, 2000 and 1999 ---------------------------------------------------------------------- Unearned Income Restricted Shares of Additional Retained for Treasury Common Common Stock Common Paid-in Use in the Shares-at Stock Outstanding Stock Capital Business Cost Compensation (In thousands, except per share amounts) ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT JULY 1, 1998 22,102 $10,000 $82,713 $236,109 $(24,391) $(4,929) Net income 19,933 Cash dividends - $.48 per share (10,397) Purchases of common stock for treasury (1,450) (21,746) Treasury shares issued for: Retirement Savings Plan contributions 220 337 2,980 Exercise of stock options 109 (281) 1,442 Restricted common stock awards 96 (86) 1,266 (1,180) Deferred compensation plans 24 55 309 Amortization of restricted common stock compensation 28 1,210 Other (167) 381 ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1999 21,101 10,000 82,599 246,026 (40,140) (4,899) 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 1,192 Other 85 ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2000 20,078 10,000 83,312 267,145 (57,419) (3,707) 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) 664 Amortization of restricted common stock compensation 58 1,088 Other 276 ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2001 19,647 $10,000 $84,221 $285,661 $(66,227) $(1,955) ============================================================================================================================ For the Years Ended June 30, 2001, 2000 and 1999 ------------------------------------------------ Accumulated Other Total Comprehensive Shareholders' Income Equity (In thousands, except per share amounts) ----------------------------------------------------------------------- BALANCE AT JULY 1, 1998 $299,502 Net income 19,933 Cash dividends - $.48 per share (10,397) Purchases of common stock for treasury (21,746) Treasury shares issued for: Retirement Savings Plan contributions 3,317 Exercise of stock options 1,161 Restricted common stock awards Deferred compensation plans 364 Amortization of restricted common stock compensation 1,238 Other 214 ----------------------------------------------------------------------- BALANCE AT JUNE 30, 1999 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 1,254 Other 85 ----------------------------------------------------------------------- BALANCE AT JUNE 30, 2000 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 Amortization of restricted common stock compensation 1,146 Other 276 ----------------------------------------------------------------------- BALANCE AT JUNE 30, 2001 $(182) $311,518 =======================================================================
See notes to consolidated financial statements. 18 5 Applied Industrial Technologies, Inc. and Subsidiaries Notes to CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share amounts) -------------------------------------------------------------------------------- 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 Goodwill is recorded for the purchase price of acquired operations in excess of the fair value of identifiable net assets. Goodwill has been amortized on a straight-line basis over 15 to 30 years. Other intangible assets primarily relate to non-competition agreements and are amortized over the lives of the agreements which primarily are 5 years. Goodwill and other intangible assets consist of the following:
June 30 2001 2000 ---- ---- Goodwill, net of accumulated amortization of $13,069 and $9,412 $62,021 $62,709 Other intangibles, net of accumulated amortization of $5,393 and $3,805 3,092 4,380 ------------------------------------------------------------------------------------------------------ Total $65,113 $67,089 ======================================================================================================
During July 2001, Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets" was issued by the Financial Accounting Standards Board. Under SFAS 142, goodwill amortization ceases when the new standard is adopted. The new rules also require an initial goodwill impairment assessment in the year of adoption and annual impairment tests thereafter. The Company is permitted to adopt SFAS 142 effective July 1, 2001 or defer adoption until July 1, 2002. Once adopted, goodwill amortization of approximately $3,500 on an annualized basis will cease. The Company has not yet determined if any impairment charges will result from the adoption of SFAS 142. The Company expects to adopt this standard effective as of July 1, 2001. Inventories Domestic inventories are valued at the lower of cost or market, using the last-in, first-out (LIFO) method, and foreign inventories utilize 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. 19 6 Revenue Recognition Sales are recognized when products are shipped 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. Reclassifications The Company made minor reclassifications of selling, distribution and administrative expenses and interest expense in the prior year consolidated financial statements in order to conform to the current year presentation. Certain other reclassifications have also been made to prior year amounts in order to be consistent with the presentation for the current year. Net Income Per Share The following is a computation of the basic and diluted earnings per share:
Year Ended June 30 2001 2000 1999 ---------------------------------- ------------------------------------------------------------------------------------------------- NET INCOME $28,048 $31,048 $19,933 ================================================================================================= AVERAGE SHARES OUTSTANDING Weighted average common shares outstanding for basic computation 19,589 20,439 21,386 Dilutive effect of stock based options and awards 335 248 160 ------------------------------------------------------------------------------------------------- Weighted average common shares outstanding for diluted computation 19,924 20,687 21,546 ================================================================================================= NET INCOME PER SHARE Net income per share - basic $ 1.43 $ 1.52 $ .93 ------------------------------------------------------------------------------------------------- Net income per share - diluted $ 1.41 $ 1.50 $ .93 =================================================================================================
New Accounting Standard Effective July 1, 2000, the Company adopted Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Accordingly, freight charged to customers is now recorded in net sales, whereas previously it was classified as an offset to cost of sales. All prior amounts have been restated to conform to the current presentation. 2. BUSINESS COMBINATIONS During the year ended June 30, 2001, the Company acquired the stock of a distributor of fluid power products for $7,300. Results of operations for this acquisition are immaterial for all periods presented. 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 assets of a 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 Company financed the cash portion of the purchase price with its existing revolving credit facility. The Canadian acquisition was first included in the June 30, 2000 consolidated balance sheet of the Company and the business' operating results have been included in the Company's consolidated income statement from the beginning of fiscal 2001. Results of operations for these acquisitions are not material for all years presented. The Company recorded goodwill totaling $6,800 from these acquisitions, representing the excess of the purchase price over assets acquired. During the year ended June 30, 1999, the Company acquired five distributors for a total purchase price of $14,800 financed through available credit facilities. Three of the companies are distributors of bearings, mechanical and electrical drive systems and industrial products. Two of the companies are distributors of fluid power products. Results of operations for these acquisitions are not material for all periods presented. Goodwill of $10,953 was recognized in connection with these combinations. All of the above acquisitions were accounted for as purchases, and results of operations are included in the accompanying consolidated financial statements from their respective acquisition dates. 3. INVENTORIES Inventories consist of the following:
June 30 2001 2000 -------------------- ------------------------------------------------------------------------------------------------- U.S. inventories at current cost $283,215 $272,847 Foreign inventories at average cost 17,250 13,115 ------------------------------------------------------------------------------------------------- 300,465 285,962 Less: Excess of current cost over LIFO cost for U.S. inventories 108,895 103,860 ------------------------------------------------------------------------------------------------- Inventories on consolidated balance sheet $191,570 $182,102 =================================================================================================
20 7 4. OTHER BALANCE SHEET INFORMATION Other assets consist of the following:
June 30 2001 2000 ------------------------- ---------------------------------------------------------------------------------------------------------- Deposits and investments $ 3,624 $ 4,404 Deferred tax assets - non-current 6,789 6,949 Other 6,605 4,034 ---------------------------------------------------------------------------------------------------------- Total $17,018 $15,387 ==========================================================================================================
Substantially all investments have fair values approximately equal to their carrying values. Other current liabilities consist of the following:
June 30 2001 2000 ------------------------- ---------------------------------------------------------------------------------------------------------- Deferred tax liabilities - current $ 5,573 $ 8,063 Accrued income and other taxes 4,610 8,668 Accrued self insurance liabilities 4,907 5,285 Other 12,724 11,780 ---------------------------------------------------------------------------------------------------------- Total $27,814 $33,796 ==========================================================================================================
5. DEBT 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. 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. Borrowings under this agreement totaled $21,351 at June 30, 2001. 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 $118,403 are available to fund future acquisitions or other capital and operating requirements. 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, 2001. Long-term debt consists of:
June 30 2001 2000 ------------------- ----------------------------------------------------------------------------------------------------- Revolving credit facility, effective rate 4.3% and 6.1% $ 21,351 $ 33,596 7.98% Private placement debt, due at maturity in November 2010 25,000 7.82% Senior unsecured term notes, due in semi-annual installments of $5,714 through December 2002 17,143 28,572 6.6% Senior unsecured term notes, due at maturity in December 2007 50,000 50,000 ----------------------------------------------------------------------------------------------------- Total $ 113,494 $112,168 =====================================================================================================
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, 2001, the most restrictive of these covenants required that the Company maintain a minimum consolidated net worth of $263,708. Based upon current market rates for debt of similar maturities, the Company estimates that the fair value of its debt is less than its carrying value at June 30, 2001 by approximately $2,178. 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, 2001, there were no borrowings under this agreement. 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 policy. The Company does not hold or issue derivative financial instruments for trading purposes. 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. 21 8 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. In accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", 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 $504 at June 30, 2001 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 $126 at June 30, 2001, and changes in the fair value of this derivative instrument were recorded currently in earnings as a component of other income, net. The Company entered into the above cross-currency swaps during 2001 and no other derivative instruments were identified at July 1, 2000. As a result, no transition adjustment was required under SFAS 133. 7. INCOME TAXES Provision The provision (benefit) for income taxes consists of: Year Ended June 30 2001 2000 1999 ---------------------------------- ---------------------------------------------------------- Current Federal $ 17,550 $ 20,206 $ 14,405 State 1,450 2,180 1,231 Foreign 100 ---------------------------------------------------------- Total current 19,100 22,386 15,636 ========================================================== Deferred Federal (900) (2,706) (2,505) State (200) (180) (431) Foreign (700) ---------------------------------------------------------- Total deferred (1,800) (2,886) (2,936) ---------------------------------------------------------- Total $ 17,300 $ 19,500 $ 12,700 ========================================================== The exercise of non-qualified stock options during fiscal 2001, 2000 and 1999 resulted in $374, $33 and $199, 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. Also, the accelerated vesting of Performance Accelerated Restricted Stock (PARS) and other restricted stock awards in fiscal 2001, 2000 and 1999 resulted in $57, $62 and $28, respectively, of incremental income tax benefits over the amounts previously reported for financial reporting purposes. These tax benefits were credited to additional paid-in capital. Effective Tax Rates The following is a reconciliation between the federal statutory income tax rate and the Company's effective tax rate: Year Ended June 30 2001 2000 1999 -------------------------------- ------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Effects of: State and local income taxes 1.8 2.6 1.6 Non-deductible expenses 2.6 1.8 2.6 Canadian income taxes (.9) Other, net (.4) (.8) (.3) ------------------------------------------------------------------- Effective tax rate 38.1% 38.6% 38.9% =================================================================== Balance Sheet The significant components of the Company's deferred tax assets (liabilities) are as follows:
June 30 2001 2000 ------------------- ------------------------------------------------------------------------------- Inventories $(13,200) $(13,934) Depreciation and differences in property bases (5,625) (5,015) Compensation liabilities not currently deductible 10,960 10,594 Reserves not currently deductible 5,668 4,444 Goodwill 706 908 Net operating loss carryforward, expiring 2008 821 Other 1,885 1,889 ------------------------------------------------------------------------------- Net deferred tax asset (liability) $ 1,215 $ (1,114) ===============================================================================
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 22 9 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, 2001 and 2000 were 159,000 and 25,000, 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. In fiscal 1999 the Company recognized accelerated vesting of 17,000 shares of previously awarded PARS. At June 30, 2001, the Company had granted stock options 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 $26,882 and $1.35 in 2001, $30,003 and $1.45 in 2000 and $19,118 and $.89 in 1999. Disclosures under the fair value method are estimated using the Black Scholes option pricing model. The assumptions used for grants issued in 2001, 2000 and 1999 are: 2001 2000 1999 ------------------------------ ----------------------------------------------------------------- Expected life 7 years 7 years 7 years Risk free interest rate 5.0% 6.6% 5.2% Dividend yield 3.0% 3.0% 3.0% Volatility 28.9% 28.8% 28.0% Information regarding these option plans is as follows:
2001 2000 1999 -------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise (Share amounts in thousands) Shares Price Shares Price Shares Price ------------------------------------------------------------------------------------------------------ Outstanding July 1 1,870 $15.03 1,464 $14.67 1,019 $14.01 Granted 457 18.96 476 16.27 608 14.94 Exercised (110) 9.33 (21) 12.79 (109) 8.86 Expired/canceled (93) 16.72 (49) 17.27 (54) 17.48 ------------------------------------------------------------------------------------------------------ Outstanding June 30 2,124 $16.10 1,870 $15.03 1,464 $14.67 ====================================================================================================== Options exercisable June 30 1,178 $15.05 928 $14.01 663 $13.05 Weighted-average fair value of options granted during the year $ 5.41 $ 5.15 $ 4.13
The following table summarizes information about stock options outstanding at June 30, 2001:
Options Outstanding Options Exercisable --------------------------------------- -------------------------- Weighted- Weighted- Weighted- Average Average Average Ranges of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Life (in years) Price Exercisable Price ------------------------------------------------------------------------------------------------ $9 - $ 13 213 1.1 $ 9.42 213 $ 9.42 13 - 17 1,058 6.6 15.04 581 14.42 17 - 21 815 7.6 18.70 355 18.48 21 - 28 38 6.2 26.97 29 26.98 ------------------------------------------------------------------------------------------------ Total 2,124 1,178 ================================================================================================
At June 30, 2001, exercise prices for outstanding options ranged from $9.14 to $27.50 per share. Shareholders 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, 2001, 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. 23 10 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 15 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 $6,038, $4,837, and $3,417 for the years ended June 30, 2001, 2000, and 1999, respectively. Deferred Compensation Plans The Company has deferred compensation plans that enable certain associates of the Company to defer receipt of a portion of their compensation and non-employee directors to defer receipt of director fees. The Company funds these deferred compensation liabilities by making contributions to rabbi trusts. Contributions consist of Company common stock and investments in money market and mutual funds. Postemployment Benefit Plans The following table provides summary disclosure of the Company's Supplemental Executive Retirement Benefits Plan, qualified retirement plan, salary continuation benefits and retiree medical benefits:
Pension Benefits Other Benefits ------------------------ ------------------------- 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------ CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of the year $ 14,645 $ 15,050 $ 3,297 $ 3,410 Service cost 482 454 52 71 Interest cost 1,235 1,096 239 254 Benefits paid (1,996) (968) (196) (168) Amendments 2,262 Actuarial (gain) loss during year 2,590 (987) 1,116 (270) ------------------------------------------------------------------------------------------------------------ Benefit obligation at June 30 $ 19,218 $ 14,645 $ 4,508 $ 3,297 ============================================================================================================ CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 1,943 $ 1,883 Actual return on plan assets 4 33 Employer contribution 2,215 995 $ 196 $ 168 Benefits paid (1,996) (968) (196) (168) ------------------------------------------------------------------------------------------------------------ Fair value of plan assets at June 30 $ 2,166 $ 1,943 $ 0 $ 0 ============================================================================================================ RECONCILIATION OF FUNDED STATUS: Funded status $(17,051) $(12,701) $ (4,508) $ (3,297) Unrecognized net (gain) loss 3,194 483 322 (836) Unrecognized prior service cost 4,051 2,162 171 200 ------------------------------------------------------------------------------------------------------------ Accrued pension cost at year end $ (9,806) $(10,056) $ (4,015) $ (3,933) ============================================================================================================ AMOUNTS RECOGNIZED IN THE BALANCE SHEET AT JUNE 30 CONSIST OF: Accrued benefit liability $(13,708) $(11,411) $ (4,015) $ (3,933) Intangible asset 3,437 1,355 Minimum pension liability 465 ------------------------------------------------------------------------------------------------------------ Net amount recognized $ (9,806) $(10,056) $ (4,015) $ (3,933) ============================================================================================================ WEIGHTED-AVERAGE ASSUMPTIONS AS OF JUNE 30: Discount rate 7.0% 7.5% 7.0% 7.5% Expected return on plan assets 9.0% 9.0% N/A N/A Rate of compensation increase 5.5% 5.5% N/A N/A ============================================================================================================
Pension Benefits Other Benefits -------------------------------- ----------------------------------- 2001 2000 1999 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 482 $ 454 $ 465 $ 52 $ 71 $ 41 Interest cost 1,235 1,096 997 239 254 216 Expected return on plan assets (196) (166) (163) Recognized net actuarial (gain) loss 71 77 86 (42) (15) (15) Amortization of prior service cost 373 236 260 29 26 (3) ----------------------------------------------------------------------------------------------------------------------- Net periodic pension cost $ 1,965 $ 1,697 $ 1,645 $ 278 $ 336 $ 239 ========================================================================================================================
24 11 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, 2001 was 9.5% decreasing to 5.5% by 2010. At June 30, 2000, these trend rates were 7.5% decreasing to 5.0% by 2006. A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 2001 and for the year then ended:
One-Percentage One-Percentage Point Increase Point Decrease -------------- -------------- Effect on total service and interest cost components of periodic expense $ 44 $ (36) Effect on post-retirement benefit obligation $510 $(431)
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. 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. 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 $16,554 in 2002; $13,150 in 2003; $10,209 in 2004; $7,815 in 2005; $5,427 in 2006 and $28,593 after 2006. 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. Rental expenses incurred for operating leases, principally from leases for real property, vehicles and computer equipment were $26,122 in 2001, $20,327 in 2000, and $19,365 in 1999. The Company had outstanding letters of credit of $10,246 at June 30, 2001. These letters of credit secure certain employee benefit and insurance obligations. 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. The segment operations in Canada, Mexico and Puerto Rico represent approximately 5.5% of the total net sales of Applied, and therefore, are not presented separately. In addition, approximately 38% of the Canadian 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 12 Segment Financial Information:
Service Center Based Distribution Other Total ------------------------------------------------- YEAR ENDED JUNE 30, 2001 Net sales $1,527,612 $ 98,143 $1,625,755 Operating income (loss) 45,890 (2,417) 43,473 Assets used in the business 526,750 52,104 578,854 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) 68,177 (919) 67,258 Assets used in the business 542,125 52,542 594,667 Depreciation 16,989 511 17,500 Capital expenditures 6,970 2,540 9,510 ------------------------------------------------- YEAR ENDED JUNE 30, 1999 Net sales $1,503,439 $ 51,985 $1,555,424 Operating income 67,335 2,395 69,730 Assets used in the business 538,723 35,626 574,349 Depreciation 16,822 503 17,325 Capital expenditures 12,317 1,210 13,527 -------------------------------------------------
A reconciliation from the segment operating profit to the consolidated balance is as follows:
Year Ended June 30 2001 2000 1999 -------------------------------------- ------------------------------------------------------------------------------------------- Operating income for reportable segment $ 45,890 $ 68,177 $ 67,335 Other operating income (loss) (2,417) (919) 2,395 Adjustments for: Goodwill and other intangibles amortization (5,057) (4,296) (4,122) Corporate and other income (expense), net (a) 16,585 (5,183) (23,339) ------------------------------------------------------------------------------------------- Total operating income 55,001 57,779 42,269 Interest expense, net 9,105 7,512 9,870 Other income (expense) (548) 281 234 ------------------------------------------------------------------------------------------- Income before income taxes $ 45,348 $ 50,548 $ 32,633 ===========================================================================================
(a) The change in corporate and other income (expense), net of allocations, is due to various changes in the levels and amounts of expenses being allocated to the segments and an increase in the Company's other income categories related to an increase in discounts and allowances from suppliers. The expenses being allocated include miscellaneous corporate charges for working capital, logistics support and other items. Net sales by product category are as follows: Year Ended June 30 2001 2000 1999 ------------------------------------------ --------------------------------------------------------------- Industrial $1,416,474 $1,435,286 $1,406,806 Fluid power (b) 206,231 163,911 148,618 Other 3,050 1,887 --------------------------------------------------------------- Net sales $1,625,755 $1,601,084 $1,555,424 (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. 12. LITIGATION The Company is a defendant in various lawsuits incidental to its business. The Company is vigorously defending these lawsuits. Although management cannot predict the outcomes of these lawsuits, they are not expected to have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. 13. SUBSEQUENT EVENT In July 2001, the Company entered into an interest rate swap agreement with a domestic bank. This agreement effectively converts 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 mirror terms of the 6.6% senior unsecured term notes and the swap has been designated as a cash flow hedge. 26 13 INDEPENDENT AUDITORS' Report [DELOITTE & TOUCHE LOGO] 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, 2001 and 2000, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2001. 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 finan- cial 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, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Cleveland, Ohio August 8, 2001 27 14 Applied Industrial Technologies, Inc. and Subsidiaries QUARTERLY OPERATING Results and Market Data (Unaudited)
Per Common Share (C) -------------------- (Dollars in thousands, Net except per Net Gross Operating Net Income - share amounts) Sales (D) Profit Income (E) Income Diluted --------------------------------------------------------------------------------------------------- 2001 (A) First Quarter $ 420,876 $ 104,454 $ 14,251 $ 7,231 $ 0.36 Second Quarter 405,438 103,902 15,134 7,362 0.37 Third Quarter 408,839 102,037 13,236 6,956 0.35 Fourth Quarter 390,602 98,906 12,380 6,499 0.33 ------------------------------------------------------------------------------------------------- $1,625,755 $ 409,299 $ 55,001 $ 28,048 $ 1.41 ================================================================================================= 2000 (A) First Quarter $ 387,904 $ 93,765 $ 12,138 $ 5,862 $ 0.28 Second Quarter 379,670 92,687 12,060 6,233 0.30 Third Quarter 420,897 103,022 15,531 8,304 0.40 Fourth Quarter 412,613 102,116 18,050 10,649 0.53 ------------------------------------------------------------------------------------------------- $1,601,084 $ 391,590 $ 57,779 $ 31,048 $ 1.50 ================================================================================================= 1999 (A) First Quarter (B) $ 386,056 $ 90,636 $ 4,981 $ 1,358 $ 0.06 Second Quarter 377,938 88,743 10,006 4,388 0.20 Third Quarter 393,594 94,081 12,865 6,372 0.30 Fourth Quarter 397,836 94,719 14,417 7,815 0.37 ------------------------------------------------------------------------------------------------- $1,555,424 $ 368,179 $ 42,269 $ 19,933 $ 0.93 ================================================================================================= Per Common Share (C) ------------------------------------------ Price Range Cash --------------------------- Dividend High Low ------------------------------------------ 2001 (A) First Quarter $ 0.12 $ 18.31 $ 15.69 Second Quarter 0.12 21.00 15.88 Third Quarter 0.12 20.69 16.25 Fourth Quarter 0.12 19.19 15.65 ------------------------------------------- $ 0.48 ========== 2000 (A) First Quarter $ 0.12 $ 19.06 $ 14.38 Second Quarter 0.12 17.88 15.06 Third Quarter 0.12 18.19 15.00 Fourth Quarter 0.12 18.13 14.31 ------------------------------------------- $ 0.48 ========== 1999 (A) First Quarter (B) $ 0.12 $ 20.81 $ 15.75 Second Quarter 0.12 16.50 12.00 Third Quarter 0.12 14.50 11.13 Fourth Quarter 0.12 19.00 11.31 $ 0.48 ==========
(A) Cost of sales for interim financial statements are computed using estimated gross profit percentages which are adjusted throughout the year based upon available information. Adjustments to actual cost are primarily made based upon the annual physical inventory and the effect of year-end inventory quantities on LIFO costs. These cost adjustments were immaterial in 1999. Adjustments in 2001 and 2000 increased gross profit by $2,850 and $2,924; net income by $1,676 and $1,708 and net income diluted per share by $.08 and $.08, respectively. (B) During the first quarter of fiscal 1999, the Company recorded pretax restructuring and other special charges of $5,400 to cover certain costs of consolidation and workforce reductions. Net of income taxes, this charge decreased net income by $3,186, or $.14 per share. (C) On August 17, 2001, there were 6,603 shareholders of record including 3,791 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 17, 2001 was $17.88 per share. (D) Effective July 1, 2000, the Company adopted Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Accordingly, freight charged to customers is now classified as net sales, whereas previously it was classified as an offset to cost of sales. All prior amounts have been restated to conform to current presentation. (E) The Company made certain minor reclassifications of selling, distribution and administrative expenses and interest expense in fiscal 2001. Prior year amounts have been reclassified to conform to the current presentation. 29 15 Applied Industrial Technologies, Inc. and Subsidiaries 10 Year SUMMARY
2001 2000 1999 1998 -------------------------------------------------------------- (Dollars in thousands, except per share amounts and statistical data) Consolidated Operations- Year Ended June 30 Net sales (A) $1,625,755 $1,601,084 $1,555,424 $1,518,615 Operating income 55,001 57,779 42,269 58,520 Net income 28,048 31,048 19,933 30,125 Per share data Net income - basic 1.43 1.52 .93 1.40 Net income - diluted 1.41 1.50 .93 1.38 Cash dividend .48 .48 .48 .47 Year-End Position - June 30 Working capital $ 279,001 $ 255,132 $ 258,730 $ 221,766 Long-term debt 113,494 112,168 126,000 90,000 Total assets 578,854 594,667 574,349 606,091 Shareholders' equity 311,518 299,331 293,586 299,502 Year-End Statistics - June 30 Current ratio 3.2 2.6 3.0 2.1 Operating facilities 469 478 444 449 Shareholders of record (B) 6,697 6,548 6,869 6,731
(A) Certain reclassifications have been made to the prior years' consolidated financial information in order to be consistent with the presentation for the current year. (B) Includes participant-shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan, and since 1998, shareholders in the Automatic Dividend Reinvestment Plan. 30 16
1997 1996 1995 1994 1993 1992 -------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts and statistical data) Consolidated Operations- Year Ended June 30 Net sales (A) $1,182,152 $1,164,778 $1,073,875 $ 952,489 $ 845,125 $ 830,591 Operating income 50,599 49,281 36,923 27,817 20,521 4,703 Net income 27,092 23,334 16,909 12,687 8,927 (1,666) Per share data Net income - basic 1.47 1.26 .97 .75 .55 (.11) Net income - diluted 1.44 1.25 .96 .73 .54 (.11) Cash dividend .41 .36 .31 .29 .29 .29 Year-End Position - June 30 Working capital $ 164,723 $ 151,956 $ 153,555 $ 144,605 $ 130,860 $ 41,967 Long-term debt 51,428 62,857 74,286 80,000 80,000 Total assets 394,114 404,072 359,231 343,519 315,935 330,619 Shareholders' equity 212,874 192,264 169,760 150,491 134,940 128,830 Year-End Statistics - June 30 Current ratio 2.4 2.1 2.4 2.4 2.4 1.2 Operating facilities 377 376 374 368 346 362 Shareholders of record (B) 4,676 4,636 4,379 4,478 4,449 4,354
31 EX-21 4 l90392aex21.txt EXHIBIT 21 1 EXHIBIT 21 APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR FISCAL YEAR ENDED JUNE 30, 2001 SUBSIDIARIES
Jurisdiction of Name Incorporation or Organization ---- ----------------------------- * Air and Hydraulics Engineering, Incorporated Alabama * Air Draulics Engineering Co. Tennessee AIT Limited Partnership Ontario, Canada Applied Industrial Technologies Ltd. Canada (Federal) Applied Industrial Technologies -- ABC, Inc. Ohio Applied Industrial Technologies -- DBB, Inc. Ohio Applied Industrial Technologies -- Dixie, Inc. Tennessee Applied Industrial Technologies -- GA LP Delaware Applied Industrial Technologies -- Indiana LLC Ohio Applied Industrial Technologies -- Mainline, Inc. Wisconsin Applied Industrial Technologies -- PA LLC Pennsylvania Applied Industrial Technologies -- TX LP Delaware AppliedLink, Inc. Ohio *# Applied Mexico, S.A. de C.V. Mexico Applied - Michigan, Ltd. Ohio Applied Nova Scotia Company Nova Scotia, Canada BER Capital, Inc. Delaware BER International, Inc. Barbados Bearing Sales & Service, Inc. Washington Bearings Pan American, Inc. Ohio
2 Dynavest Nova Scotia Company Nova Scotia, Canada * ESI Acquisition Corporation Ohio (d/b/a Engineered Sales, Inc.) * Farm Warehouse, Inc. Missouri *# International Supply Consortium, Inc. Delaware *# iSource Performance Materials LLC Ohio *Rafael Benitez Carrillo Inc. Puerto Rico The Ohio Ball Bearing Company Ohio
* Operating companies that do not conduct business under Applied Industrial Technologies name # Companies that are not wholly owned by Applied Industrial Technologies, Inc. directly or indirectly through its subsidiaries EX-23 5 l90392aex23.txt EXHIBIT 23 1 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 8, 2001 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, 2001. /s/ Deloitte & Touche LLP Cleveland, Ohio September 17, 2001 EX-24 6 l90392aex24.txt EXHIBIT 24 1 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 Robert C. Stinson 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, 2001 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: 8/28/01 /s/ Thomas A. Commes --------------------------- ------------------------------------- 2 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 Robert C. Stinson 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, 2001 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: 8/27/01 /s/ L. Thomas Hiltz --------------------------- ------------------------------------- 3 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 Robert C. Stinson 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, 2001 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: 8/23/01 /s/ Stephen E. Yates --------------------------- -------------------------------------