UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2003 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File No. 1-2299
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-0117420
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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Registrant's telephone number, including area code: (216) 426-4000.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered ------------------- ------------------------------------ Common Stock, without par value New York Stock Exchange Preferred Stock Purchase Rights |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No __
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 last business day of the registrant's most recently completed second quarter (December 31, 2002): $346,746,317.
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 25, 2003
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Common Stock, without par value 19,137,614
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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, 2003, 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, 2003, portions of which are incorporated by reference into Parts III and IV of this Form 10-K.
TABLE OF CONTENTS
Page
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CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES 3
LITIGATION REFORM ACT
PART I 4
Item 1. Business 4
Item 2. Properties 10
Item 3. Pending Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
EXECUTIVE OFFICERS OF THE REGISTRANT 11
PART II 13
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
Item 9A. Controls and Procedures 15
PART III 15
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 16
Item 13. Certain Relationships and Related Transactions 16
Item 14. Principal Accountant Fees and Services 16
PART IV 16
Item 15. Exhibits, Financial Statements, Financial Statement Schedules
and Reports on Form 8-K 16
INDEPENDENT AUDITORS' REPORT 22
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 23
SIGNATURES 24
EXHIBITS
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CAUTIONARY STATEMENT
UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
THIS REPORT, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE, CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING, BASED ON MANAGEMENT'S CURRENT EXPECTATIONS ABOUT THE FUTURE. FORWARD-LOOKING STATEMENTS ARE OFTEN IDENTIFIED BY QUALIFIERS SUCH AS "EXPECT," "BELIEVE," "INTEND," "WILL," AND SIMILAR EXPRESSIONS. APPLIED INTENDS THAT THE FORWARD-LOOKING STATEMENTS BE SUBJECT TO THE SAFE HARBORS ESTABLISHED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS, AND RELEASES.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS REGARDING IMPORTANT RISK FACTORS, MANY OF WHICH ARE OUTSIDE APPLIED'S CONTROL. ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS, AND THE MAKING OF THOSE STATEMENTS SHOULD NOT BE REGARDED AS A REPRESENTATION BY APPLIED OR ANY OTHER PERSON THAT THE RESULTS EXPRESSED IN THE STATEMENTS WILL BE ACHIEVED. IN ADDITION, APPLIED ASSUMES NO OBLIGATION PUBLICLY TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER BECAUSE OF NEW INFORMATION OR EVENTS, OR OTHERWISE.
APPLIED BELIEVES ITS PRIMARY RISK FACTORS INCLUDE, BUT ARE NOT LIMITED TO,
THOSE IDENTIFIED IN "NARRATIVE DESCRIPTION OF BUSINESS," IN PART I, ITEM 1,
SECTION (C), BELOW, AND THE FOLLOWING: CHANGES IN THE ECONOMY OR IN SPECIFIC
CUSTOMER INDUSTRY SECTORS; REDUCTION IN MANUFACTURING CAPACITY IN OUR TARGETED
GEOGRAPHIC MARKETS DUE TO CONSOLIDATION IN CUSTOMER INDUSTRIES AND THE TRANSFER
OF MANUFACTURING CAPACITY TO FOREIGN COUNTRIES; CHANGES IN INTEREST RATES;
CHANGES IN CUSTOMER PROCUREMENT POLICIES AND PRACTICES; CHANGES IN PRODUCT
MANUFACTURER SALES POLICIES AND PRACTICES; THE AVAILABILITY OF PRODUCTS AND
LABOR; CHANGES IN OPERATING EXPENSES; THE EFFECT OF PRICE INCREASES OR
DECREASES; THE VARIABILITY AND TIMING OF BUSINESS OPPORTUNITIES INCLUDING
ACQUISITIONS, ALLIANCES, CUSTOMER AGREEMENTS, AND SUPPLIER AUTHORIZATIONS; OUR
ABILITY TO REALIZE THE ANTICIPATED BENEFITS OF ACQUISITIONS AND OTHER BUSINESS
STRATEGIES; THE INCURRENCE OF DEBT AND CONTINGENT LIABILITIES IN CONNECTION WITH
ACQUISITIONS; CHANGES IN ACCOUNTING POLICIES AND PRACTICES; THE EFFECT OF
ORGANIZATIONAL CHANGES WITHIN THE COMPANY; THE EMERGENCE OF NEW COMPETITORS,
INCLUDING FIRMS WITH GREATER FINANCIAL RESOURCES; RISKS AND UNCERTAINTIES
ASSOCIATED WITH APPLIED'S EXPANSION INTO FOREIGN MARKETS, INCLUDING INFLATION
RATES, RECESSIONS, AND FOREIGN CURRENCY EXCHANGE RATES; ADVERSE RESULTS IN
SIGNIFICANT LITIGATION MATTERS; ADVERSE REGULATION AND LEGISLATION; AND THE
OCCURRENCE OF EXTRAORDINARY EVENTS (INCLUDING PROLONGED LABOR DISPUTES, NATURAL
EVENTS AND ACTS OF GOD, FIRES, FLOODS, AND ACCIDENTS).
PART I.
ITEM 1. BUSINESS.
In this Annual Report on Form 10-K, "Applied" refers to Applied Industrial Technologies, Inc. References to "we," "us," "our," and "the company" refer to Applied and its subsidiaries.
The company is one of North America's leading distributors of industrial products and fluid power products and systems. In addition, we provide fluid power, mechanical, electrical, and rubber shop services. 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 various 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 engaged in this business since 1923. Applied reincorporated in Ohio in 1988.
Applied's Internet address is www.applied.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, together with Section 16 insider beneficial stock ownership reports, are available free of charge at the investor relations area of our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. The information contained on our website is not intended to be incorporated into this annual report on Form 10-K.
(a) General Development of Business.
In furtherance of our strategy to expand our geographic presence in North America, we acquired the distribution business of Industrial Equipment Co. Ltd., operating in British Columbia and Alberta, Canada, in October 2002. The acquired operations have been integrated with those of our existing Canadian business.
Further information regarding developments in our business can be found in our 2003 Annual Report to shareholders under the caption "Management's Discussion and Analysis" on pages 10 through 15, 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 and safety products, and tools. We also offer technical product application support and provide creative solutions to help customers minimize downtime and reduce overall procurement costs.
In addition to service center-based distribution, we operate several specialized fluid power companies that primarily sell products and services directly to customers rather than through the service centers.
Segment financial information can be found in the 2003 Annual Report to shareholders in note 12 to the financial statements on pages 29 and 30, and that information is incorporated here by reference.
(c) Narrative Description of Business.
Overview. Our field operating structure is built on two primary platforms - industrial products, and fluid power products and systems:
- Industrial Products. Through our service centers, located in 47 states, four Canadian provinces, Puerto Rico, and Mexico, we distribute to customers industrial products, including bearings and seals, linear motion products, power transmission products, fluid power components, industrial rubber products, general maintenance and safety products, and tools, primarily for maintenance and repair applications. In addition, we operate regional fabricated rubber shops, which modify and repair conveyor belts and assemble hose apparatuses in accordance with customer requirements, and rubber service field crews, which install and repair belts and rubber linings at customer locations. The industrial products business accounts for a substantial majority of our field operations and sales dollars. While the industrial products business operates in the U.S. using the Applied Industrial Technologies trade name, we also are known as Bearing & Transmission and IECO in Canada, Applied Mexico in Mexico, and Rafael Benitez Carrillo in Puerto Rico.
- Fluid Power. Our specialized fluid power businesses primarily market their products and services directly to customers, but also through the service center network. In addition to distributing fluid power components, the businesses operate shops that assemble fluid power systems and components, perform equipment repair, and offer technical advice to customers. Customers include businesses purchasing for maintenance and repair applications, as well as for original equipment manufacturing applications. Our fluid power businesses operate in various geographic areas 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), HyPower (Western Canada), and Kent Fluid Power (West Coast).
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 and safety products, and tools. 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 product training, as well as sales and marketing support. We believe that these relationships are generally good. The loss of certain suppliers could adversely affect our business. Authorizations to represent particular suppliers and product lines may vary by geographic region.
Net sales by product category for the past three fiscal years can be found in the 2003 Annual Report to shareholders in note 12 to the financial statements on page 30, and that information is incorporated here by reference.
Services. Our service center associates advise and assist customers with respect to product selection and application, and industrial product inventory management. We consider this advice and assistance to be an integral part of our sales efforts. Beyond acting as a mere distributor, we offer product and process solutions involving multiple technologies. These solutions reduce production downtime, as well as overall procurement and maintenance costs for customers. By providing high levels of service, product and industry expertise, and technical support, while at the same time offering competitive pricing, we believe we develop closer, longer-lasting, and more profitable customer relationships.
Our sales associates include customer sales and service representatives and account managers, as well as product and industry specialists. Customer sales and service representatives receive, process, and expedite customer orders, provide product and pricing information, and assist account managers in serving customers. Account managers make on-site calls to current and potential customers to provide product and price information, identify customer requirements, provide recommendations, and assist in implementing equipment maintenance and storeroom management programs, including our automated storeroom replenishment system, AppliedSTORE Plus(SM). Account managers also measure and document the value to the customer of cost savings and increased productivity generated by our services and recommendations. Product and industry specialists assist with applications in their areas of technical expertise.
We maintain inventory levels at each service center tailored to the local market. These inventories consist of standard items as well as other items that are specific to local customers' immediate needs. We also maintain backup inventory in eight distribution centers. The inventory maintained at our facilities allows us to satisfy our customers' just-in-time product needs.
In addition to product distribution-related services, we offer shop services. Our fabricated rubber shops modify and repair conveyor belts and provide hose assemblies (also available at select service centers and distribution centers) in accordance with customer requirements, and field crews
install and repair belts and rubber lining onsite at customer locations in certain geographic areas. Other shop services include the rebuilding and assembly of speed reducers, pumps, valves, cylinders, and electric 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 transportation providers, as well as both surface and air common carrier and courier services. These transportation services and delivery vehicles also move products between suppliers, distribution centers, and service centers to assure availability of merchandise for customer needs.
Our inventory and sales information systems enhance our ability to serve customers. The point-of-sale OMNEX(R) computer system, on which U.S. service centers operate, gives each service center on-line access to inventory and sales history information. The system permits direct access for order entry, pricing, order expediting, and order review. We also engage in electronic data interchange (EDI) and electronic funds transfer (EFT) with participating customers and suppliers.
We support our service center network with websites and paper catalogs. AppliedACCESS(R), available at www.applied-access.com, is our broad line website, providing customers a convenient method to search for products in an electronic database, view prices, check inventory levels, place orders, and track order status. Our Maintenance America(R) product catalog and website, www.maintenanceamerica.com, facilitate the purchase of general maintenance and safety products, and tools. And our Fluid Power Connection(R) catalog of hydraulic and pneumatic components, along with a related website, www.fluidpowerconnection.com, facilitate buying these products from our service centers. All of the websites and catalogs are also accessible through www.applied.com.
The fluid power businesses generally 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, system fabrication, installation, and repair services. Each business has account managers with extensive technical knowledge, who handle sophisticated projects for customers primarily within the business' geographic region. The businesses also provide additional technical support to our service centers.
Our operations contrast with those of our product manufacturers because the manufacturers generally confine their direct sales activities to large-volume transactions, mainly 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 its discontinuance could adversely affect 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, with whom we may have multiple-location relationships, to the smallest. We are not significantly dependent on a single customer or group of customers, the loss of which would have a material adverse effect on our business as a whole, and no single customer accounts for more than 4% of our net sales.
We have witnessed continued consolidation in recent years in various customer industries. In addition, we continue to observe instances of manufacturing capacity being transferred to foreign countries. Each of these trends could result in reduced manufacturing capacity in our targeted geographic and customer industry markets and, consequently, reduced demand for our products and services in those markets.
In recent years, there has been a trend among large customers towards reducing the number of their suppliers of maintenance and replacement products. We have responded to this trend by expanding our geographic reach, broadening our product offering, and developing new methods for marketing our products. There can be no guarantee, however, that this trend will not have an adverse effect on our business.
Customers have also increasingly demonstrated a desire to order products through electronic catalogs and Internet-based procurement systems. We have responded to this trend by developing avenues, such as the websites described above, to provide customers the flexibility to order through their preferred electronic procurement method. There can be no guarantee, however, that we will recover our development costs.
Competition. We consider our business to be highly competitive. In addition, our markets present few economic or technological barriers to entry, contributing to a high fragmentation of market share in our industry. Longstanding supplier and customer relationships, geographic coverage, and our associates' experience do, however, support our competitive position. Competition is based generally on product and service offerings, product availability, price, catalogs, and having a local presence.
Our principal competitors are other bearing, power transmission, industrial rubber, fluid power, linear motion, and general maintenance and safety product distributors, and, to a lesser extent, mill supply and catalog companies. These competitors include local, regional, national, and international operations. We also compete with original equipment manufacturers and their distributors in the sale of maintenance and replacement components. Some competitors have greater financial resources than we do. The identity and number of our competitors vary throughout the geographic and product markets in which we compete.
Although we are one of the leading distributors in North America for the major product categories we carry, our market share for those products in any given geographic area may be
relatively small compared to the portion of the market served by original equipment manufacturers and other distributors.
Backlog and Seasonality. Because of our product resources and distribution network, we do not have a substantial backlog of orders, nor are backlog orders significant at any given time. We do not consider our overall business to be seasonal.
Patents, Trademarks, and Licenses. Customer recognition of our service marks and trade names, including Applied Industrial Technologies(R), Applied(R), and AIT(R), is an important contributing factor to our sales. Patents and licenses are not of material importance to our business.
Raw Materials and General Business Conditions. Our operations are dependent on general industrial and economic conditions and would be adversely affected by the unavailability of raw materials to our suppliers, prolonged labor disputes experienced by suppliers or customers, or by any recession or depression that has an adverse effect on industrial activity generally or on key customer industries served by us.
Number of Employees. On August 31, 2003, we had 4,355 employees.
Working Capital. Our working capital position is disclosed in the financial statements referred to at Item 15 on page 16 of this Report and is discussed in "Management's Discussion and Analysis" in the 2003 Annual Report to shareholders on page 12.
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 generally consistent among companies in our industry.
Environmental Laws. We believe that compliance with 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.
Net sales by our Canadian and Mexican operations represented 6.8% of our total net sales in fiscal 2003, 5.5% in 2002, and 4.7% in 2001. Long-lived assets located outside the United States are not and have not been material.
Our U.S. operations' export sales during the fiscal year ended June 30, 2003, 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 2003 Annual Report to shareholders in note 12 to the financial statements on page 29, and in "Quantitative and
Qualitative Disclosures About Market Risk" on page 15, and that information is incorporated here by reference.
ITEM 2. PROPERTIES.
We own or lease the properties in which our offices, service centers, distribution centers, and shops are located. At June 30, 2003, we owned real properties at 154 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, 2003 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 Carlisle, Pennsylvania
Our principal leased real properties (each of which has more than 20,000 square feet of floor space) at June 30, 2003 were:
- the corporate headquarters facility in Cleveland, Ohio
- the distribution center, rubber shop, and service center in Fontana, California
- the service center in Long Beach, California
- the service center in San Jose, California
- the rubber shop and fluid power shop in Tracy, California
- the distribution center and service center in Denver, Colorado
- the fluid power sales office and warehouse in Joppa, Maryland
- the service center in Grand Rapids, Michigan
- the service center and fluid power shop in Iron Mountain, Michigan
- the service center and offices in Romulus, Michigan
- the service center in Kansas City, Missouri
- the inventory return center in Elyria, Ohio
- the distribution center in Portland, Oregon
- the distribution center and rubber shop in Fort Worth, Texas
- the service center in Longview, Washington
- the rubber shop in Longview, Washington
- the offices, service center, and rubber shop in Appleton, Wisconsin
- the service center in Milwaukee, Wisconsin
- the service center in Delta, British Columbia
- the service center and distribution center in Winnipeg, Manitoba
- the offices and fluid power shop in Saskatoon, Saskatchewan
- the service center in Monterrey, Mexico
Except for the Joppa facility, all of the properties listed above are used in our service center-based distribution segment. The Tracy, Longview, Delta, Saskatoon, and Winnipeg facilities are used in operations both inside and outside the service center-based distribution segment.
We consider our properties generally sufficient to meet our requirements for office space and inventory stocking. A service center's size is primarily influenced by the amount of inventory the service center requires to meet customers' needs. We use all of our owned and leased properties except for certain properties which in the aggregate are not material and are either for sale, lease, or sublease to third parties due to a relocation or closing. We also may lease or sublease to others unused portions of buildings.
In recent years, when opening new locations, we have tended to lease rather than own 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 an operation, other suitable property could be found.
Additional information regarding our properties is included in the 2003 Annual Report to shareholders in note 11 to the financial statements on pages 28-29, and that information is incorporated here by reference.
ITEM 3. PENDING LEGAL PROCEEDINGS.
Applied and/or one of its subsidiaries is a party to various judicial and administrative proceedings. 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 consolidated financial position, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of Applied's security holders during the last quarter of fiscal 2003.
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 22, 2002:
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. He is 54 years of age.
Bill L. Purser. Mr. Purser is President & Chief Operating Officer (since October 2000). Prior to that he was Vice President-Chief Marketing Officer (from February 1999 to October 2000), and Vice President-Marketing & National Accounts (from 1996 to February 1999). He is 60 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 January 2000 to October 2000) and Vice President-National Accounts & Alliance Systems (from 1998 to January 2000). He is 48 years of age.
Fred D. Bauer. Mr. Bauer is Vice President-General Counsel (since April 2002) and Secretary (since October 2001). He had served as Vice President-Legal Services (from May 2000 to April 2002) and Assistant Secretary (from 1994 to October 2001), and had also been Assistant General Counsel (from 1994 to May 2000). He is 37 years of age.
Michael L. Coticchia. Mr. Coticchia is Vice President-Human Resources and Administration (since April 2002). Prior to that, he served as Vice President-Human Resources and Risk Management (from October 1998 to April 2002) and Assistant Secretary (from 1990 to January 2002), and had also been Director-Human Resources and Risk Management (from 1994 to October 1998). He is 41 years of age.
Mark O. Eisele. Mr. Eisele is Vice President & Controller (since 1997). He is 46 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 60 years of age.
Jeffrey A. Ramras. Mr. Ramras is Vice President-Marketing and Supply Chain Management (since September 2002). He had served as Vice President-Supply Chain Management (from January 2000 to September 2002) and as Vice President-Logistics (from 1995 to January 2000). He is 48 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 55 years of age.
John R. Whitten. Mr. Whitten is Vice President-Chief Financial Officer (since 1997) and Treasurer (since 1992). He is 57 years of age. Mr. Whitten has announced his retirement, effective at December 31, 2003.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Applied's common stock, without par value, is listed for trading on the New York Stock Exchange under the ticker symbol AIT. Information concerning the principal market for Applied's common stock, the quarterly stock prices and dividends for the fiscal years ended June 30, 2003, 2002, and 2001 and the number of shareholders of record as of August 25, 2003 is set forth in the 2003 Annual Report to shareholders on page 33, under the caption "Quarterly Operating Results and Market Data," and that information is incorporated here by reference.
Information concerning securities authorized for issuance under Applied's equity compensation plans is set forth in Applied's proxy statement dated September 12, 2003 under the caption, "Equity Compensation Plan Information" on page 13, 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 2003 Annual Report to shareholders in the table on pages 34 and 35 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 2003 Annual Report to shareholders on pages 10 through 15 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 2003 Annual Report to shareholders on page 15, which information is incorporated here by reference. For further information relating to borrowing and interest rates, see the Liquidity and Capital Resources section of "Management's Discussion and Analysis" and Notes 6 and 7 to the Consolidated Financial Statements in Applied's 2003 Annual Report to shareholders on pages 11-12, 24 and 25, respectively, which information is incorporated here by reference. In addition, please see "Cautionary Statement under Private Securities Litigation Reform Act" at page 3, above, for additional risk factors relating to our business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and supplementary data of Applied and its subsidiaries and the independent auditors' report listed below, which are included in the 2003 Annual Report to shareholders at the pages indicated, are incorporated here by reference and filed with this Report:
Caption Page No.
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Financial Statements:
Statements of Consolidated Income 16
for the Years Ended
June 30, 2003, 2002, and 2001
Consolidated Balance Sheets 17
June 30, 2003 and 2002
Statements of Consolidated Cash Flows 18
for the Years Ended
June 30, 2003, 2002, and 2001
Statements of Consolidated Shareholders' 19
Equity for the Years Ended
June 30, 2003, 2002, and 2001
Notes to Consolidated Financial Statements 20 - 30
for the Years Ended
June 30, 2003, 2002, and 2001
Independent Auditors' Report 31
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Supplementary Data:
Quarterly Operating Results and 33
Market Data
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Management, under the supervision and with the participation of the chief executive officer and the chief financial officer, has evaluated Applied's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the CEO and the CFO have concluded that the disclosure controls and procedures are effective in timely alerting them to material information about Applied required to be included in our Exchange Act reports.
Management has not identified any change in internal control over financial reporting occurring during the fourth quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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, 2003 on pages 4 through 7 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 21 under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated here by reference.
Applied has a code of ethics, entitled the Code of Business Ethics, that applies to our employees, including our chief executive officer, chief financial officer, and controller. The Code of Business Ethics is posted at the investor relations area of our website, www.applied.com.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth in Applied's Proxy Statement dated September 12, 2003, under the captions "Compensation of Directors" on page 8, "Deferred Compensation Plan for Non-Employee Directors" on page 9, "Summary Compensation" on page 11, "Option Grants in Last Fiscal Year" and "Aggregated Option Exercises and Fiscal Year-End Option Values" on page 12, "Long-Term Incentive Plans - Awards in Last Fiscal Year" on page 13, "Estimated Retirement Benefits Under Supplemental Executive Retirement Benefits Plan" and "Deferred Compensation Plan" on page 14, and "Change in Control Agreements and Other Related Arrangements" on page 15, and is incorporated here by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information concerning the security ownership of certain beneficial owners and management and related stockholder matters is set forth in Applied's proxy statement dated September 12, 2003, under the captions "Beneficial Ownership of Certain Applied Shareholders and Management" on page 10 and "Equity Compensation Plan Information" on page 13, and is incorporated here by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable for year ended June 30, 2003.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)1. Financial Statements.
The following consolidated financial statements, notes thereto, the independent auditors' report, and supplemental data are included in the 2003 Annual Report to shareholders on pages 16 through 31 and page 33, and are incorporated by reference in Item 8 of this Report.
Caption
Statements of Consolidated Income for the
Years Ended June 30, 2003, 2002, and 2001
Consolidated Balance Sheets at June 30, 2003 and 2002
Statements of Consolidated Cash Flows for the Years Ended June 30, 2003, 2002, and 2001
Statements of Consolidated Shareholders' Equity for the Years Ended June 30, 2003, 2002, and 2001
Notes to Consolidated Financial Statements for the Years Ended June 30, 2003, 2002, and 2001
Independent Auditors' Report
Supplementary Data:
Quarterly Operating Results and Market Data
(a)2. Financial Statement Schedule.
The following report and schedule are included in this Part IV, and are found in this Report at the pages indicated:
Caption Page No.
------- --------
Independent Auditors' Report 22
Schedule II - Valuation and 23
Qualifying Accounts
|
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are not required under the related instructions, are not applicable, or the required information is included in the consolidated financial statements and notes thereto.
(a)3. Exhibits.
* Asterisk indicates an executive compensation plan or arrangement.
Exhibit
No. Description
------- -----------
3(a) Amended and Restated Articles of Incorporation of
Applied Industrial Technologies, Inc., as amended on
October 8, 1998 (filed as Exhibit 3(a) to Applied's Form
10-Q for the quarter ended September 30, 1998, SEC File
No. 1-2299, and incorporated here by reference).
3(b) Code of Regulations of Applied Industrial Technologies,
Inc., as amended on October 19, 1999 (filed as Exhibit
3(b) to Applied's Form 10-Q for the quarter ended
September 30, 1999, SEC File No. 1-2299, and
incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and
Bearings, Inc. (Delaware) filed with the Ohio Secretary
of State on October 18, 1988, including an Agreement and
Plan of Reorganization dated September 6, 1988 (filed as
Exhibit 4(a) to Applied's Registration Statement on Form
S-4 filed May 23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(b) Private Shelf Agreement dated as of November 27, 1996,
as amended on January 30, 1998, between Applied and The
Prudential Insurance Company of America (filed as
Exhibit 4(f) to Applied's Form 10-Q for the quarter
ended March 31, 1998, SEC File No. 1-2299, and
incorporated here by reference).
4(c) Amendment dated October 24, 2000 to November 27, 1996
Private Shelf Agreement between Applied and The
Prudential Insurance Company of America (filed as
Exhibit 4(e) to Applied's Form 10-Q for the quarter
ended September 30, 2000, SEC File No. 1-2299, and
incorporated here by reference).
4(d) $150,000,000 Credit Agreement dated as of November 5,
1998 among Applied, KeyBank National Association as
Agent, and various financial institutions (filed as
Exhibit 4(e) to Applied's Form 10-Q for the quarter
ended September 30, 1998, SEC File No. 1-2299, and
incorporated here by reference).
|
4(e) Rights Agreement, dated as of February 2, 1998, between
Applied and Computershare Investor Services LLP
(successor to Harris Trust and Savings Bank), as Rights
Agent, which includes as Exhibit B thereto the Form of
Rights Certificate (filed as Exhibit No. 1 to Applied's
Registration Statement on Form 8-A filed July 20, 1998,
SEC File No. 1-2299, and incorporated here by
reference).
*10(a) Form of Change in Control Agreement (amended and
restated as of August 8, 2001) between Applied and each
of its executive officers (filed as Exhibit 10 to
Applied's Form 10-Q for the quarter ended December 31,
2001, SEC File No. 1-2299, and incorporated here by
reference).
*10(b) A written description of Applied's director compensation
program is found in Applied's Proxy Statement dated
September 12, 2003, SEC File No. 1-2299, on page 8,
under the caption "Compensation of Directors," and is
incorporated here by reference.
*10(c) Applied Deferred Compensation Plan for Non-Employee
Directors (September 1, 2003 Restatement).
*10(d) 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(e) 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(f) 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(g) Applied Supplemental Executive Retirement Benefits Plan
(January 1, 2002 Restatement) in which current and
certain former executive officers participate (filed as
Exhibit 10 to Applied's Form 10-Q for the quarter ended
March 31, 2002, SEC File No. 1-2299, and incorporated
here by reference).
|
*10(h) Applied Deferred Compensation Plan (September 1, 2003
Restatement).
*10(i) 1997 Long-Term Performance Plan re-adopted by
Shareholders on October 22, 2002 (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(j) Amendment No. 1 to 1997 Long-Term Performance Plan,
effective as of August 8, 2003.
*10(k) 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(l) 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(m) 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(n) Retention Program for James T. Hopper, Vice
President-Chief Information Officer, dated March 30,
2000 (filed as Exhibit 10(o) to Applied's Form 10-K for
the year ended June 30, 2000, SEC File No. 1-2299, and
incorporated here by reference).
10(o) 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(p) 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 2003 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, 2003.
23 Independent auditors' consent.
24 Powers of attorney.
31 Rule 13a-14(a)/15d-14(a) certifications.
32 Section 1350 certifications.
|
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.
Applied filed one report on Form 8-K with the Securities and Exchange Commission during the quarter ended June 30, 2003. In that report, filed on April 16, 2003, Applied furnished its press release of that date regarding financial results for the quarter ended March 31, 2003.
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Applied Industrial Technologies, Inc.
We have audited the consolidated financial statements of Applied Industrial Technologies, Inc. and its subsidiaries (the "Company") as of June 30, 2003 and 2002, and for each of the years in the three year period ended June 30, 2003, and have issued our report thereon dated August 8, 2003 (which report expresses an unqualified opinion and includes an explanatory paragraph concerning the adoption of a new accounting principle in fiscal 2002); such consolidated financial statements and report are included in your 2003 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 15(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, 2003 |
APPLIED INDUSTRIAL TECHNOLOGIES, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(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 2003:
Reserve deducted from assets to
which it applies - accounts receivable
allowances $ 5,600 $ 2,510 $ 500(B) $ 2,510(A) $ 6,100
YEAR ENDED JUNE 30 2002:
Reserve deducted from assets to
which it applies - accounts receivable
allowances $ 5,400 $ 4,488 $ 3,888(A) $ 5,600
400(B)
YEAR ENDED JUNE 30 2001:
Reserve deducted from assets to
which it applies - accounts receivable
allowances $ 3,800 $ 6,995 $ 700(B) $ 6,500(A) $ 5,400
405(C)
|
(A) Amounts represent uncollectible accounts charged off.
(B) Amounts represent reserves for the return of merchandise by customers.
(C) Represents reserves recorded through purchase accounting for acquisitions made during the year.
SCHEDULE II
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 17, 2003 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
* *
-------------------------------------- --------------------------------------
William G. Bares, Director Dr. Roger D. Blackwell, Director
* *
-------------------------------------- --------------------------------------
William E. Butler, Director Thomas A. Commes, Director
* *
-------------------------------------- --------------------------------------
Peter A. Dorsman, Director Russell R. Gifford, Director
* *
-------------------------------------- --------------------------------------
L. Thomas Hiltz, Director Edith Kelly-Green, Director
* /s/ David L. Pugh
-------------------------------------- --------------------------------------
J. Michael Moore, Director David L. Pugh, Chairman & Chief
Executive Officer and Director
* *
-------------------------------------- --------------------------------------
Dr. Jerry Sue Thornton, Director Stephen E. Yates, Director
/s/ Fred D. Bauer
--------------------------------------
Fred D. Bauer, as attorney in fact
for persons indicated by "*"
Date: September 17, 2003
|
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-K FOR THE YEAR ENDED JUNE 30, 2003
Exhibit
No. Description
------- -----------
3(a) Amended and Restated Articles of Incorporation of Applied Industrial
Technologies, Inc., as amended on October 8, 1998 (filed as Exhibit
3(a) to Applied's Form 10-Q for the quarter ended September 30,
1998, SEC File No. 1-2299, and incorporated here by reference).
3(b) Code of Regulations of Applied Industrial Technologies, Inc., as
amended on October 19, 1999 (filed as Exhibit 3(b) to Applied's Form
10-Q for the quarter ended September 30, 1999, SEC File No. 1-2299,
and incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc. (Ohio) and Bearings, Inc.
(Delaware) filed with the Ohio Secretary of State on October 18,
1988, including an Agreement and Plan of Reorganization dated
September 6, 1988 (filed as Exhibit 4(a) to Applied's Registration
Statement on Form S-4 filed May 23, 1997, Registration No.
333-27801, and incorporated here by reference).
4(b) Private Shelf Agreement dated as of November 27, 1996, as amended on
January 30, 1998, between Applied and The Prudential Insurance
Company of America (filed as Exhibit 4(f) to Applied's Form 10-Q for
the quarter ended March 31, 1998, SEC File No. 1-2299, and
incorporated here by reference).
4(c) Amendment dated October 24, 2000 to November 27, 1996 Private Shelf
Agreement between Applied and The Prudential Insurance Company of
America (filed as Exhibit 4(e) to Applied's Form 10-Q for the
quarter ended September 30, 2000, SEC File No. 1-2299, and
incorporated here by reference).
4(d) $150,000,000 Credit Agreement dated as of November 5, 1998 among
Applied, KeyBank National Association as Agent, and various
financial institutions (filed as Exhibit 4(e) to Applied's Form 10-Q
for the quarter ended September 30, 1998, SEC File No. 1-2299, and
incorporated here by reference).
|
4(e) Rights Agreement, dated as of February 2, 1998, between Applied and
Computershare Investor Services LLP (successor to Harris Trust and
Savings Bank), as Rights Agent, which includes as Exhibit B thereto
the Form of Rights Certificate (filed as Exhibit No. 1 to Applied's
Registration Statement on Form 8-A filed July 20, 1998, SEC File No.
1-2299, and incorporated here by reference).
*10(a) Form of Change in Control Agreement (amended and restated as of
August 8, 2001) between Applied and each of its executive officers
(filed as Exhibit 10 to Applied's Form 10-Q for the quarter ended
December 31, 2001, SEC File No. 1-2299, and incorporated here by
reference).
*10(b) A written description of Applied's director compensation program is
found in Applied's Proxy Statement dated September 12, 2003, SEC
File No. 1-2299, on page 8, under the caption "Compensation of
Directors," and is incorporated here by reference.
*10(c) Applied Deferred Compensation Plan for Non-Employee Directors
(September 1, 2003 Restatement). Attached
*10(d) 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(e) 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(f) 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(g) Applied Supplemental Executive Retirement Benefits Plan
(January 1, 2002 Restatement) in which current and certain former
executive officers currently participate (filed as Exhibit 10 to
Applied's Form 10-Q for the quarter ended March 31, 2002, SEC File
No. 1-2299, and incorporated here by reference).
*10(h) Applied Deferred Compensation Plan (September 1, 2003 Restatement).
Attached
|
*10(i) 1997 Long-Term Performance Plan re-adopted by Shareholders on
October 22, 2002 (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(j) Amendment No. 1 to 1997 Long-Term Performance Plan, effective as of
August 8, 2003. Attached
*10(k) 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(l) 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(m) 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(n) Retention Program for James T. Hopper, Vice President-Chief
Information Officer, dated March 30, 2000 (filed as Exhibit 10(o) to
Applied's Form 10-K for the year ended June 30, 2000, SEC File No.
1-2299, and incorporated here by reference).
10(o) 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(p) 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 2003 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, 2003. Attached
23 Independent Auditors' Consent. Attached
|
24 Powers of Attorney. Attached 31 Rule 13a-14(a)/15d-14(a) certifications. Attached 32 Section 1350 certifications. Attached |
Exhibit 10(c)
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
(SEPTEMBER 1, 2003 RESTATEMENT)
WHEREAS, the Applied Industrial Technologies, Inc. Deferred Compensation Plan for Non-Employee Directors, which originally was known as the Bearings, Inc. Deferred Compensation Plan for Non-Employee Directors, was established effective as of July 1, 1991, by Bearings, Inc., which later became known as Applied Industrial Technologies, Inc. (the "Company") to provide non-employee members of the Board of Directors of the Company the option to defer receipt of all or a portion of the compensation payable to them for services as Directors; and
WHEREAS, the Company desires to restate the Plan in order to reflect certain revisions to Section 303A(8) of the New York Stock Exchange Listed Company Manual;
NOW, THEREFORE, effective as of September 1, 2003, the Plan is hereby amended and restated as hereinafter set forth.
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS As used herein, the following words shall have the meanings hereinafter set forth unless otherwise specifically provided.
(1) The term "BENEFICIARY" shall mean the person or persons who, in accordance with the provisions of Article V, is entitled to receive a distribution hereunder in the event a Participant dies before his interest under the Plan has been distributed to him in full.
(2) The term "BOARD" shall mean the Board of Directors of the Company.
(3) The term "COMMITTEE" shall mean the Executive Organization and Compensation Committee of the Board, or such other
committee of the Board that is designated by the Board to administer the Plan. The Committee shall be constituted so as to satisfy any applicable legal requirements including the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934 or any similar rule which may subsequently be in effect. The members shall be appointed by, and serve at the pleasure of, the Board and any vacancy on the Committee shall be filled by the Board.
(4) The term "COMMON SHARES" shall mean the common stock of the Company.
(5) The term "COMPANY" shall mean Applied Industrial Technologies, Inc., its corporate successors, and any corporation into or with which it is merged or consolidated.
(6) The term "DEFERRAL" shall mean that portion of the compensation a Participant elects to defer pursuant to the terms of the Plan.
(7) The term "DEFERRAL ACCOUNT" shall mean the bookkeeping account established under the Plan in the name of each Participant to reflect the Deferrals of such Participant.
(8) The term "DIRECTOR" shall mean any non-employee director of the Company.
(9) The term "FAIR MARKET VALUE" shall mean the average of the high and low prices of a Common Share as reported on the composite tape for securities listed on the New York Stock Exchange for the date in question, provided that if no sales of Common Shares were made on said exchange on that date, the average of the high and low prices of a Common Share as reported on said composite tape for the preceding day on which sales of Common Shares were made on said Exchange.
(10) The term "FISCAL YEAR" shall mean the fiscal year of the Company, which begins on each July 1 and ends on the subsequent June 30.
(11) The term "FUND" shall mean any investment fund designated by the Committee in which Deferrals can be deemed to be invested; provided, however, that one such Fund shall be deemed to be invested in Common Shares.
(12) The term "PARTICIPANT" shall mean a Director who elects to defer all or any portion of his compensation under the Plan pursuant to the provisions of Article II.
(13) The term "PLAN" shall mean Applied Industrial Technologies, Inc. Deferred Compensation Plan For Non-Employee Directors (formerly known as the Bearings, Inc. Deferred Compensation Plan For Non-Employee Directors), as amended and restated herein, effective as of September 1, 2003, with all amendments, supplements, and modifications hereafter made.
(14) The term "TRUST" shall mean the trust maintained pursuant to the terms of the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Trust Agreement (formerly known as the Bearings, Inc. Supplemental Executive Retirement Benefits Trust Agreement).
(15) The term "VALUATION DATE" shall mean March 31, June 30, September 30, and December 31 of each Fiscal Year and any other date as may be designated as such by the Committee or the Board.
1.2 CONSTRUCTION. Where necessary or appropriate to the meaning herein, the singular shall be deemed to include the plural and the masculine pronoun to include the feminine.
ARTICLE II
ELECTIONS BY DIRECTORS
2.1 ELECTION TO DEFER. Prior to the first day of any Fiscal Year quarter (July 1, October 1, January 1, and April 1) a Director may elect to defer receipt of all or a portion of the compensation payable to him for future services as a Director as a Deferral under the Plan. If a Director becomes a Director after the beginning of any Fiscal Year quarter, the Director may elect to defer receipt of all or a portion of the compensation payable to him for future services as a Director as a Deferral under the Plan. Any election under this Section 2.1 shall be made on in the form (an "Election Form") and manner specified by the Committee and acceptable to the Company. In addition, such election shall indicate the allocation of the Deferral to be deemed invested in the Funds.
2.2 EFFECTIVENESS OF ELECTIONS. Elections to defer compensation for future services as a Director shall be effective upon the delivery of an Election Form to the Committee and, subject to the provisions of Section 2.3, shall be irrevocable upon the commencement of the next subsequent Fiscal Year quarter. Subject to the provisions of Article IV and Section 6.7, amounts deferred
pursuant to any election hereunder shall be invested and distributed in the manner and at the time set forth in such Election Form.
2.3 AMENDMENT AND TERMINATION OF ELECTIONS. A Director may terminate or
amend his election to defer receipt of compensation as a Deferral pursuant to
the provisions of Section 2.1 of the Plan with respect to subsequent Fiscal Year
quarters in a written notice delivered to the Committee prior to commencement of
the Fiscal Year quarter with respect to which such compensation will be earned
and such notice will be effective. Any amendment which serves only to change a
designation of a Beneficiary shall be permitted at any time and shall be
effective upon delivery to the Committee in such form, time, and manner as may
be required by the Committee. Any amendment which changes the time or manner for
payment of amounts credited to a Participant's Deferral Account pursuant to
Section 3.1 shall be made only pursuant to the provisions of Article IV.
ARTICLE III
ACCOUNTS AND INVESTMENTS
3.1 ESTABLISHMENT OF ACCOUNTS. The Deferral Account of each Participant shall have subaccounts which shall reflect the Funds into which Deferrals are deemed invested and credited pursuant to the applicable Election Form filed by the Participant with the Committee.
3.2 AMOUNT OF DEFERRALS. If a Participant elects to have compensation deferred under the Plan as a Deferral and invested in a Fund, other than a Fund comprised of Common Shares, 100% of the amount of such Deferral deemed so invested in such Fund shall be credited to his Deferral Account and subaccounts in accordance with his duly filed Election Form. If the Participant elects to have some or all of his compensation deferred under the Plan as a Deferral and invested in a Fund comprised of Common Shares, 125% of the amount of such Deferral deemed so invested in such Fund shall be credited to his Deferral Account and subaccounts in accordance with the terms of his duly filed Election Form. Any such Deferral shall be credited to the Deferral Account of a Participant as of the last day of the Fiscal Year quarter during which the Deferral would have otherwise been payable to such Participant.
3.3 ADJUSTMENT OF ACCOUNTS. As of each Valuation Date, the value of each Deferral Account shall be adjusted to reflect deemed earnings, losses, dividends, distributions, and credits in accordance with procedures adopted by the Committee or the Board. Common Shares of a Fund credited to any Deferral Account shall be valued at Fair Market Value.
ARTICLE IV
DISTRIBUTION OF ACCOUNTS
4.1 METHOD OF DISTRIBUTION. The value of a Participant's Deferral Account deemed invested in a fund comprised of Common Shares shall be distributed in Common Shares and the value of a Participant's Deferral Account deemed otherwise invested shall be distributed in cash. Such value shall be determined as of the most recent Valuation Date. Subject to the provisions of Section 4.2, a distribution from a Participant's Deferral Account shall be made either in a lump sum or in equal annual installments over a period of not more than ten years as specified in such Participant's Election Form.
4.2 TIME OF PAYMENTS. Except as otherwise provided in this Section 4.2 or
Section 4.3, distribution of the value of a Deferral from a Participant's
Deferral Account shall commence on the date specified in his applicable Election
Form. Notwithstanding any other provision of the Plan to the contrary, a
Participant may elect to change the manner and the time of the distribution of
the value of any Deferral no later than 30 days prior to his termination as a
Director or, if earlier, the date he had previously elected to receive
distribution of such Deferral; provided, however, that if such Participant is
terminated as a Director with less than 30 days notice, such Participant may
elect to change the manner and time of distribution of the value of any Deferral
during the period which commences as of the day he receives notice of his
termination as a Director and ends ten days thereafter. Notwithstanding the
foregoing, except in the case of the termination of a Participant as a Director,
in no event may a Participant change the time and manner of the distribution of
a Deferral which has been previously changed in the immediately preceding
three-year period.
4.3 HARDSHIP DISTRIBUTION. Prior to the time the Deferral Account of a Participant becomes payable under Section 4.2, the Committee, in its sole discretion, may elect to distribute all or a portion of the a Participant's Deferral Account on account of severe financial hardship of the Participant. For purposes of the Plan, severe financial hardship shall be deemed to exist in the event the Committee determines that the Participant requires a distribution to meet immediate and heavy financial needs resulting from a sudden or unexpected illness or accident of the Participant or a member of his or her family, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. A distribution based on financial hardship shall not exceed the amount required to meet the immediate financial need created by the hardship and the income taxes resulting from such distribution.
4.4 DISTRIBUTIONS UPON DEATH. Upon the death of a Participant, the balance of his or her Deferral Account shall be paid to his Beneficiary in a form and manner approved by the Committee.
4.5 TAXES. In the event any taxes are required by law to be withheld or paid from any payments made pursuant to the Plan, the Committee shall cause such amounts to be withheld from such payments and shall transmit the withheld amounts to the appropriate taxing authority.
ARTICLE V
BENEFICIARIES
In the event a Participant dies before his interest under the Plan in his or her Deferral Account has been distributed in full, any remaining interest shall be distributed pursuant to Article IV to his Beneficiary, who shall be the person designated as such in writing by the Participant in the form and manner specified by the Company. In the event a Participant does not designate a Beneficiary or his designated Beneficiary does not survive him, his beneficiary shall be his estate.
ARTICLE VI
MISCELLANEOUS
6.1 AMENDMENT AND TERMINATION OF THE PLAN. The Company reserves the right
to amend or terminate the Plan at any time; provided, however, that no amendment
or termination shall affect the rights of Participants to amounts previously
credited to their Deferral Accounts pursuant to Section 3.2; and provided
further, that, effective on and after October 21, 2003, the provisions of
Section 3.2 providing for the crediting of 125% of a Deferral deemed invested in
a Fund comprised of Common Shares shall continue in effect until the earlier of
(i) the tenth anniversary of the date that the Plan was last approved by the
holders of a majority of the Common Shares then outstanding, or, if later, the
date that the limited transition period under Section 303A(8) of the New York
Stock Exchange Listed Company Manual would end unless otherwise permitted to
continue under said Section; or (ii) the date that the Plan is terminated by the
Company.
6.2 NON-ALIENATION. No benefit under the Plan shall at any time be subject in any manner to alienation or encumbrance. If any Participant or Beneficiary shall attempt to, or shall, alienate or in any way encumber his rights or benefits under the Plan, or any part thereof, or if by reason of his bankruptcy or other event happening at any time any such benefits would otherwise be received by anyone else or would not be enjoyed by him, his interest in all such benefits shall automatically terminate and the same shall be held or applied to or for the benefit of such person, his spouse, children, or other dependents as the Committee may select.
6.3 PAYMENT OF BENEFITS TO OTHERS. If any Participant or Beneficiary to whom a benefit is payable under the Plan is unable to care for his affairs because of illness or accident, any payment due (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may be paid to the spouse, parent, brother, sister, adult child, or any other individual deemed by the Company to be maintaining or responsible for the maintenance of such person. Any payment made in accordance with the provisions of this Section 6.3 shall be a complete discharge of any liability of the Plan with respect to the benefit so paid.
6.4 PLAN NON-CONTRACTUAL. Nothing contained herein shall be construed as a commitment or agreement on the part of any person employed by the Company to continue his employment with the Company, and nothing herein contained shall be construed as a commitment on the part of the Company to continue the employment or the annual rate of compensation of any such person for any period, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been established.
6.5 TAXABILITY OF PLAN BENEFITS. This Plan is intended to be treated as an unfunded deferred compensation plan under the Internal Revenue Code of 1986, as amended. It is the intention of the Company that the amounts deferred pursuant to the Plan shall not be included in the gross income of the Participants or their Beneficiaries until such time as the deferred amounts are distributed from the Plan. If, at any time, it is determined that amounts deferred pursuant to the Plan are currently taxable to a Participant or his Beneficiary, the amounts credited to such Participant's Deferral Account which become so taxable shall be distributed immediately to him; provided, however, that in no event shall amounts so payable under the Plan to a Participant exceed the value of his Deferral Account.
6.6 FUNDING. The Company may cause Plan benefits to be paid from the Trust which is a grantor trust that provides full funding of the Plan benefits in the event of a potential change in control or change in control. Subject to the provisions of the Trust, the obligation of the Company under the Plan to provide a Participant or Beneficiary with a benefit constitutes the unsecured promise of the Company to make payments as provided herein, and no person shall have any interest in, or a lien or prior claim upon, any property of the Company.
6.7 SECTION 16B PROCEDURES. In conjunction with rules promulgated by the Securities and Exchange Commission under Section 16 of the Securities Exchange Act of 1934, as amended, the Company has established Section 16b Procedures which affect certain transactions under the Plan involving Employer Securities held for the benefit of a Director. Such Procedures, which are hereby incorporated into the Plan shall constitute for all purposes a part of the Plan. In the event that the Procedures conflict with any other provision of the Plan, the Procedures shall override such
other provision and shall be controlling. For purposes of this Section, the following terms shall have the meaning hereinafter set forth.
(a) The term "Employer Security" shall mean any qualifying employer security as defined in Section 407(d)(5) of ERISA which is also an equity security as defined under the Securities Exchange Act of 1934, as amended.
(b) The term "Officer" shall mean any person who is designated as an "Officer" of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended.
(c) The term "Section 16b Procedures" or "Procedures" shall mean the Administrative Procedures Applicable to Officers and Directors Under Employee Benefit Plans Maintained by Applied Industrial Technologies, Inc., effective as of January 1, 1997, with all amendments thereafter made.
6.8 SEVERABILITY. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom.
6.9 GOVERNING LAW. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio.
Executed at Cleveland, Ohio, this 12th day of August, 2003.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
By: /s/ D. L. Pugh
----------------------------
Title: Chairman & CEO
By: /s/ Fred Bauer
----------------------------
Title: Vice President
|
Exhibit 10(h)
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
DEFERRED COMPENSATION PLAN
(SEPTEMBER 1, 2003 RESTATEMENT)
WHEREAS, the Applied Industrial Technologies, Inc. Deferred Compensation Plan which was originally known as the Bearings, Inc. Deferred Compensation Plan, was established as of July 1, 1993, by Bearings, Inc., which later became known as Applied Industrial Technologies, Inc. (the "Company") to provide key employees of the Company and its affiliates with a means by which to defer receipt of all or a portion of their incentive compensation received from the Company; and
WHEREAS, the Company desires to restate the Plan in order to reflect certain revisions to Section 303A(8) of the New York Stock Exchange Listed Company Manual;
NOW, THEREFORE, effective as of September 1, 2003, the Plan is hereby amended and restated as hereinafter set forth.
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. As used herein, the following words shall have the meanings hereinafter set forth unless otherwise specifically provided.
(1) The term "AFFILIATE" shall mean any member of a controlled
group of corporations (as determined under Section 414(b) of the
Code) of which the Company is a member any member of a group of
trades or business under common control (as determined under Section
414(c) of the Code) with the Company any member of an affiliated
service group (as determined under Section 414(m) of the Code) of
which the Company is a member and any other entity which is required
to be aggregated with the Company pursuant to the provisions of
Section 414(o) of the Code.
(2) The term "AWARD" shall mean the aggregate benefit payable to a Plan Participant under an Incentive Plan or a Performance Plan for a Fiscal Year.
(3) The term "BENEFICIARY" shall mean the person or persons who, in accordance with the provisions of Article V, is entitled to distribution hereunder in the event a Participant dies before his interest under the Plan has been distributed to him in full.
(4) The term "BOARD" shall mean the Board of Directors of the Company.
(5) The term "COMMITTEE" shall mean the Executive Organization and Compensation Committee of the Board, or such other committee of the Board that is designated by the Board to administer the Plan. The Committee shall be constituted so as to satisfy any applicable legal requirements including the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934 or any similar rule which may subsequently be in effect. The members shall be appointed by, and serve at the pleasure of, the Board and any vacancy on the Committee shall be filled by the Board.
(6) The term "COMMON SHARES" shall mean the common stock of the Company.
(7) The term "COMPANY" shall mean Applied Industrial Technologies, Inc., its corporate successors, and any corporation into or with which it is merged or consolidated.
(8) The term "COMPREHENSIVE PLAN" shall mean the Applied Industrial Technologies, Inc. Comprehensive Deferred Compensation and Supplemental Benefit Plan (formerly known as the Bearings, Inc. Comprehensive Deferred Compensation and Supplemental Benefit Plan.)
(9) The term "DEFERRAL" shall mean that portion of an Award which a Participant elects to defer pursuant to the terms of the Plan.
(10) The term "DEFERRAL ACCOUNT" shall mean the bookkeeping account established under the Plan in the name of each Participant to reflect the Deferrals of such Participant.
(11) The term "ELIGIBLE EMPLOYEE" shall mean any highly compensated or select management employee of the Company or an Affiliate who is designated by the Committee to participate in an Incentive Plan with respect to a particular Fiscal Year.
(12) The term "FAIR MARKET VALUE" shall mean the average of the high and low prices of a Common Share as reported on the composite tape for securities listed on the New York Stock Exchange for the date in question, provided that if no sales of Common Shares were made on said exchange on that date, the average of the high and low prices of a Common Share as reported on said composite tape for the nearest preceding day on which sales of Common Shares were made on said Exchange.
(13) The term "FISCAL YEAR" shall mean the fiscal year of the Company, which begins on each July 1 and ends on the subsequent June 30.
(14) The term "FUND" shall mean any investment fund designated by the Committee in which Deferrals can be deemed to be invested; provided, however, that one such Fund shall be deemed to be invested in Common Shares.
(15) The term "INCENTIVE PLAN" shall mean any incentive plan adopted by the Board for key employees.
(16) The term "PARTICIPANT" shall mean an Eligible Employee who elects to defer all or any portion of an Award under the Plan pursuant to the provision of Article II.
(17) The term "PERFORMANCE PLAN" shall mean any long term performance plan approved by Company shareholders for key employees.
(18) The term "PLAN" shall mean Applied Industrial Technologies, Inc. Deferred Compensation Plan, as amended and restated herein, with all amendments, supplements, and modifications hereafter made. The Plan is part of the Comprehensive Plan and listed on Exhibit A attached thereto.
(19) The term "TRUST" shall mean the trust maintained pursuant to the terms of the Applied Industrial Technologies, Inc. Supplemental Executive Retirement Benefits Trust Agreement.
(20) The term "VALUATION DATE" shall mean the last day of each Fiscal Year quarter and any other date as may be designated as such by the Committee.
1.2 CONSTRUCTION. Where necessary or appropriate to the meaning herein, the singular shall be deemed to include the plural and the masculine pronoun to include the feminine.
ARTICLE II
ELECTIONS BY ELIGIBLE EMPLOYEES
2.1 ELECTION TO DEFER. Prior to the January 1 of a Fiscal Year in which an Award is payable, an Eligible Employee may elect to defer receipt of all or a portion of the Award that he may receive under an Incentive Plan or a Performance Plan as a Deferral under the Plan. Any election under this Section 2.1 shall be made in the form (an "Election Form"), time, and manner specified by the Committee and acceptable to the Company. In addition, such election shall indicate the allocation of the Deferral to be deemed invested in the Funds.
2.2 EFFECTIVENESS OF ELECTIONS. Elections to defer receipt of an Award shall be effective and irrevocable upon the delivery of an Election Form to the Committee. Subject to the provisions of Article IV and Section 6.7, amounts deferred pursuant to any election hereunder shall be invested and distributed in the manner and at the time set forth in such Election Form.
ARTICLE III
ACCOUNTS AND INVESTMENTS
3.1 ESTABLISHMENT OF ACCOUNTS. The Deferral Account of each Participant shall have subaccounts, which shall reflect the Funds into which Deferrals are deemed invested and credited pursuant to the applicable Election Form filed by the Participant with the Committee.
3.2 AMOUNT OF DEFERRALS. If a Participant (i) elects to have less than 50%
of any Award from an Incentive Plan deferred under the Plan as a Deferral or
(ii) elects to have any stock portion of an Award from a Performance Plan
deferred under the Plan as a Deferral, 100% of the amount of such Deferral shall
be credited to his Deferral Account and subaccounts in accordance with his duly
filed Election Form. If a Participant (i) elects to have at least 50% of an
Award from an Incentive Plan deferred under the Plan as a Deferral and further
elects to have at least 50% of such Award deemed to be invested in a Fund
comprised of Common Shares, or (ii) elects to have any cash portion of an Award
from a Performance Plan deferred under the Plan as a Deferral and further
elects to have any portion of such Award deemed to be invested in a Fund comprised of Common Shares, 110% of the amount of such Deferral deemed so invested in Common Shares shall be credited to his Deferral Account and subaccounts in accordance with the terms of his duly filed Election Form. In the event any Deferral or portion thereof is deemed to be invested in a Fund, such crediting shall be made within 30 days after the date on which the Deferral would otherwise have been payable to the Participant under the applicable Incentive Plan or Performance Plan and Common Shares of a Fund so credited to a Deferral Account shall be valued at Fair Market Value.
3.3 ADJUSTMENT OF ACCOUNTS. As of each Valuation Date, the value of each Deferral Account shall be adjusted to reflect deemed earnings, losses and dividends determined by the Committee. Common Shares of a Fund credited to any Deferral Account shall be valued at Fair Market Value.
ARTICLE IV
DISTRIBUTION OF ACCOUNTS
4.1 METHOD OF DISTRIBUTION. The value of a Participant's Deferral Account deemed invested in a fund comprised of Common Shares shall be distributed in Common Shares and the value of a Participant's Deferral Account deemed otherwise invested shall be distributed in cash. Such value shall be determined as of the most recent Valuation Date. Subject to the provisions of Section 4.2, a distribution from a Participant's Deferral Account shall be made either in a lump sum or in equal annual installments over a period of not more than ten years as specified in such Participant's Election Form.
4.2 TIME OF PAYMENTS. Except as otherwise provided in this Section 4.2 or
Section 4.3, distribution of the value of a Deferral from a Participant's
Deferral Account shall commence on the date specified in his applicable Election
Form. Notwithstanding any other provision of the Plan to the contrary, a
Participant may elect to change the manner and the time of the distribution of
the value of any Deferral no later than 30 days prior to his termination of his
employment or, if earlier, the date he had previously elected to receive
distribution of such Deferral; provided, however, that if
the employment of such Participant is terminated with less than 30 days notice, such Participant may elect to change the manner and time of distribution of the value of any Deferral during the period which commences as of the day he receives notice of his termination and ends ten days thereafter. Notwithstanding the foregoing, except in the case of the termination of his employment, in no event may a Participant change the time and manner of the distribution of a Deferral which has been previously changed in the immediately preceding three-year period.
4.3 HARDSHIP DISTRIBUTION. Prior to the time the Deferral Account of a Participant becomes payable under Section 4.2, the Committee, in its sole discretion, may elect to distribute all or a portion of the a Participant's Deferral Account on account of severe financial hardship of the Participant. For purposes of the Plan, severe financial hardship shall be deemed to exist in the event the Committee determines that the Participant requires a distribution to meet immediate and heavy financial needs resulting from a sudden or unexpected illness or accident of the Participant or a member of his or her family, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. A distribution based on financial hardship shall not exceed the amount required to meet the immediate financial need created by the hardship and the income taxes resulting from such distribution.
4.4 DISTRIBUTIONS UPON DEATH. Upon the death of a Participant, the balance of his or her Deferral Account shall be paid to his Beneficiary in a form and manner approved by the Committee.
4.5 TAXES. In the event any taxes are required by law to be withheld or paid from any payments made pursuant to the Plan, the Committee shall cause such amounts from such payments and shall transmit the withheld amounts to the appropriate taxing authority.
ARTICLE V
BENEFICIARIES
In the event a Participant dies before his interest under the Plan in his or her Deferral Account has been distributed in full, any remaining interest shall be distributed pursuant to Article IV to his Beneficiary, who shall be the person designated as such in writing by the Participant in the form and manner specified by the Company. In the event a Participant does not designate a Beneficiary or his designated Beneficiary does not survive him, his Beneficiary shall be his estate.
ARTICLE VI
MISCELLANEOUS
6.1 AMENDMENT AND TERMINATION OF THE PLAN. The Company reserves the right
to amend or terminate the Plan at any time; provided, however, that no amendment
or termination shall affect the rights of Participants to amounts previously
credited to their Deferral Accounts pursuant to Section 3.2; and provided
further, that, effective on and after October 21, 2003, the provisions of
Section 3.2 providing for the crediting of 110% of a Deferral deemed invested in
a Fund comprised of Common Shares shall continue in effect until the earlier of
(i) the tenth anniversary of the date as of which the Plan was last approved by
the holders of a majority of the Common Shares then outstanding, or, if later,
the date as of which the limited transition period under Section 303A(8) of the
New York Stock Exchange Listed Company Manual would end unless otherwise
permitted to continue under said Section; or (ii) the date as of which the Plan
is terminated by the Company.
6.2 NON-ALIENATION. No benefit under the Plan shall at any time be subject in any manner to alienation or encumbrance. If any Participant or Beneficiary shall attempt to, or shall, alienate or in any way encumber his rights or benefits under the Plan, or any part thereof, or if by reason of his bankruptcy or other event happening at any time any such benefits would otherwise be received by anyone else or would not be enjoyed by him, his interest in all such benefits shall
automatically terminate and the same shall be held or applied to or for the benefit of such person, his spouse, children, or other dependents as the Committee may select.
6.3 PAYMENT OF BENEFITS TO OTHERS. If any Participant or Beneficiary to whom a benefit is payable under the Plan is unable to care for his affairs because of illness or accident, any payment due (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may be paid to the spouse, parent, brother, sister, adult child, or any other individual deemed by the Company to be maintaining or responsible for the maintenance of such person. Any payment made in accordance with the provisions of this Section 5.3 shall be a complete discharge of any liability of the Plan with respect to the benefit so paid.
6.4 PLAN NON-CONTRACTUAL. Nothing contained herein shall be construed as a commitment or agreement on the part of any person employed by the Company to continue his employment with the Company, and nothing herein contained shall be construed as a commitment on the part of the Company to continue the employment or the annual rate of compensation of any such person for any period, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been established.
6.5 TAXABILITY OF PLAN BENEFITS. This Plan is intended to be treated as an unfunded deferred compensation plan under the Internal Revenue Code of 1986, as amended. It is the intention of the Company that the amounts deferred pursuant to the Plan shall not be included in the gross income of the Participants or their Beneficiaries until such time as the deferred amounts are distributed from the Plan. If, at any time, it is determined that amounts deferred pursuant to the Plan are currently taxable to a Participant or his Beneficiary, the amounts credited to such Participant's Deferral Account which become so taxable shall be distributed immediately to him; provided, however, that in no event shall amounts so payable under the Plan to a Participant exceed the value of his Deferral Account.
6.6 FUNDING. The Company may cause Plan benefits to be paid from the Trust which is a grantor trust that provides full funding of the Plan benefits in the event of a potential change in control or change in control. Subject to the provisions of the Trust, the obligation of the Company
under the Plan to provide a Participant or Beneficiary with a benefit constitutes the unsecured promise of the Company to make payments as provided herein, and no person shall have any interest in, or a lien or prior claim upon, any property of the Company.
6.7 SECTION 16B PROCEDURES. In conjunction with rules promulgated by the Securities and Exchange Commission under Section 16 of the Securities Exchange Act of 1934, as amended, the Company has established Section 16b Procedures which affect certain transactions under the Plan involving Employer Securities held for the benefit of an Officer. Such Procedures, which are hereby incorporated into the Plan shall constitute for all purposes a part of the Plan. In the event that the Procedures conflict with any other provision of the Plan, the Procedures shall override such other provision and shall be controlling. For purposes of this Section, the following terms shall have the meaning hereinafter set forth.
(a) The term "Employer Security" shall mean any qualifying employer security as defined in Section 407(d)(5) of ERISA which is also an equity security as defined under the Securities Exchange Act of 1934, as amended.
(b) The term "Officer" shall mean any person who is designated as an "Officer" of the Company for purposes of Section 16 of the Securities Exchange Act of 1934, as amended.
(c) The term "Section 16b Procedures" or "Procedures" shall mean the Administrative Procedures Applicable to Officers and Directors Under Employee Benefit Plans Maintained by Applied Industrial Technologies, Inc., effective as of January 1, 1997, with all amendments and thereafter made.
6.8 SEVERABILITY. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom.
6.9 GOVERNING LAW. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio.
Executed at Cleveland, Ohio, this 26th day of August, 2003.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
By: /s/ D. L. Pugh ---------------------------------------- Title: Chairman & Chief Executive Officer |
Exhibit 10(j)
AMENDMENT NO. 1 TO
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
1997 LONG-TERM PERFORMANCE PLAN
This Amendment No. 1 to Applied Industrial Technologies, Inc. 1997 Long-Term Performance Plan (the "Plan") shall be effective as of August 8, 2003.
Section 1. Section 22 of the Plan shall be amended such that that section provides, in its entirety:
"22. EFFECTIVE AND TERMINATION DATES
The Plan shall become effective on the date it is first approved by the holders of a majority of the Common Shares then outstanding. Unless subsequently approved by the holders of a majority of the Common Shares then outstanding, the Plan shall continue in effect until October 22, 2012 or until earlier terminated by the Board pursuant to Section 11. Notwithstanding the foregoing, any Awards granted under the Plan prior to its termination shall remain outstanding in accordance with the terms of such Awards."
Section 2. The officers of the Corporation are hereby severally authorized and directed to do all things necessary and appropriate to carry out the purposes of this amendment. All actions previously undertaken by the officers of the Corporation with respect to the subject matter of this amendment are hereby ratified, confirmed and approved.
Executed at Cleveland, Ohio, this 12th day of August, 2003.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
By: /s/ D. L. Pugh
-----------------------------------
Title: Chairman & CEO
By: /s/ Fred Bauer
-----------------------------------
Title: Vice President
|
Exhibit 13
Applied Industrial Technologies, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
YEAR ENDED JUNE 30, 2003 VS. 2002
Net sales in 2003 were $1.46 billion or slightly above (1%) the prior year's sales. This increase was primarily due to the acquisition of Industrial Equipment Co. Ltd. (IECO), and having one additional business day during the year. The sales product mix for the year was 84.8% industrial products and 15.1% fluid power products compared to 85.0% industrial and 14.8% fluid power in the prior year. Same store sales were slightly above (.4%) the prior year. While there was a reduction of 25 facilities in the U.S., Canada and Mexico, these were offset by the acquisition of 16 IECO facilities in Western Canada. At June 30, 2003, the Company had a total of 440 operating facilities versus 449 at June 30, 2002. Industrial production in the United States continues to be depressed. Our industry tends to lag slightly behind the manufacturing sector which continues to perform at or below the prior year levels reflected in the Manufacturing Capacity Utilization Index as published monthly by the Federal Reserve Board. The Company does not expect inflation or deflation to have a material impact on future revenues.
Despite relatively flat sales, the Company improved its gross profit margins (net sales less cost of sales) to 25.9% from 25.3% in 2002. Improved purchasing practices, improved pricing, training, systems and the growth of our catalog business contributed to this increase. The Company expects fiscal 2004 gross margin levels to be in the 25.5% to 26% range as anticipated improvements in pricing and shipping charges to customers are expected to offset a decline in supplier purchasing allowances and rebates.
Selling, distribution and administrative expense ("SD&A") consists of employee compensation, benefits and other expenses associated with purchasing, warehousing, supply chain management and providing marketing and distribution of the Company's products as well as costs associated with a variety of administrative functions, such as legal, treasury, accounting, tax and facility related expenses. SD&A increased 2.4% compared to the prior year, and increased slightly as a percent of sales to 23.4% from 23.1% in 2002. The increase was primarily due to the IECO acquisition, higher compensation and benefit costs and related payroll taxes based on improved profitability. These additional costs were partially offset by approximately $3.2 million of gains on sales of unneeded real estate and a decrease in bad debt expense due to fewer customer bankruptcies during fiscal 2003.
Operating income increased to $36.3 million in 2003 from $30.8 million in 2002. As a percent of sales, operating income increased to 2.5% in 2003 from 2.1% in 2002. The $5.4 million increase in operating income was due primarily to the improved gross profit margin factors noted above.
Interest expense - net for 2003 decreased $1.4 million, or 21.4%, compared with the prior year primarily from a decrease in average borrowings of $26.5 million related to strong cash flows from operations and lower interest rates.
Other, net represents certain non-operating items of income and expense. During the year, the Company recorded a charge of $2.1 million to provide for its share of net loss and other reserves associated with the Company's iSource Performance Materials LLC ("iSource") affiliate. The Company owns 49% of iSource, a certified minority-owned distributor of standard-use industrial specialty and general maintenance items requiring special shipping and handling. Offsetting the impact of this charge was the receipt of insurance proceeds of $2.1 million for the settlement of a fiscal 2000 property casualty claim.
Income tax expense as a percentage of income before taxes was 35.9% for the year ended June 30, 2003 and 37.9% for the year ended June 30, 2002. This decrease related to a change in the tax law that reduces the Company's taxable income beginning in fiscal 2003. Specifically, the Company can now take a tax deduction for cash dividends paid on Company stock to participant 401(k) plan accounts. Another factor that contributed to the rate decrease was a reduction in effective state, local and foreign tax rates, primarily due to the implementation of various tax planning initiatives. We expect our overall tax rate for fiscal 2004 to be slightly below the fiscal 2003 rate based on current tax laws and regulations.
Net income for the fiscal year ended June 30, 2003, increased $5.1 million or 34.4% from prior years' income before the cumulative effect of accounting change. Net income per share increased 35.5% to $1.03 in 2003 from $.76 in 2002 before the cumulative effect of the accounting change primarily due to the factors described above and a decrease in the average shares attributable to company repurchases.
The number of Company associates was 4,384 at June 30, 2003 and 4,508 at June 30, 2002.
YEAR ENDED JUNE 30, 2002 VS. 2001
Net sales in 2002 decreased to $1.45 billion or 11% below the $1.63 billion generated in 2001. This decrease was primarily due to the slowdown in U.S. industrial activity. Sectors hardest hit by the slowdown include the industrial machinery and equipment, durable goods and electronic equipment industries, all more than 20% below prior year sales levels. These sales decreases were partially offset by stronger sales in the food products and automotive sectors.
Gross margin for the year increased slightly from 25.2% in 2001 to 25.3% in 2002. The 2002 margin was higher than in the prior year due to improved buying practices and increased sales through catalog channels which improved the profitability of our product mix.
Selling, distribution and administrative expenses were approximately $19.4 million lower than in the prior year. The decreased amounts were due to lower incentive and employee benefit expenses attributable to the lower sales volumes, better overall expense management and additional operational efficiencies. SD&A as a percentage of sales was 23.1% in 2002 versus 21.8% in 2001. The increase in SD&A as a percent of sales was due to the lower overall sales noted above.
Operating income decreased to $30.8 million in 2002 from $55.0 million in 2001. As a percent of sales, operating income decreased to 2.1% in 2002 from 3.4% in 2001. The $24.2 million decline in operating income was due to the sales decrease noted above.
Interest expense, net for 2002, decreased $2.4 million or 26.0% compared with the prior year primarily as a result of a decrease in average borrowings related to strong cash flows from operations and lower interest rates.
Income tax expense as a percentage of income before income taxes decreased to 37.9% in 2002 from 38.1% in 2001. The decrease in the effective tax rate resulted from a reduction in the impact of non-deductible items offset somewhat by higher effective state and local income tax rates.
Net income before the cumulative effect of accounting change for the fiscal year ended June 30, 2002, decreased $13.3 million or 47.4% from the prior year. Net income per share before the cumulative effect of the accounting change decreased 46.1% to $.76 in 2002 from $1.41 in 2001 primarily due to the factors described above.
In connection with the adoption of Statement of Financial Accounting Standard ("SFAS") 142, "Goodwill and Other Intangible Assets," the Company recorded a non-cash impairment charge totaling $12.1 million, after tax, or $.63 per share as a change in accounting principle effective July 1, 2001. This charge wrote-off all of the remaining goodwill relating to the Company's fluid power business (see Notes 1 and 4 to the Consolidated Financial Statements).
The number of associates was 4,508 at June 30, 2002 and 4,789 at June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $67.3 million of cash from operating activities in 2003 and $68.9 million in 2002.
Cash flow from operations depends primarily upon generating operating income, controlling investment in inventories and receivables, and managing the timing of payments to suppliers. The Company has continued to monitor and control its investments in inventories by taking advantage of various vendor purchasing programs and through the use of system enhancements to improve inventory tracking. The Company has continued to improve its collection of accounts receivable through improved billing systems and collection efforts. During the year ended June 30, 2003, inventories decreased approximately $10.4 million, exclusive of the additional $4.2 million of inventory acquired as part of the acquisition of certain assets of IECO. Net of the IECO acquisition, accounts receivable decreased $8.0 million due to improved collections and systems. Accrued expenses increased $15.7 million due to increased personnel compensation and benefit costs.
Cash used by investing activities of $16.3 million for the year ended June 30, 2003 consisted primarily of property purchases of approximately $12.8 million, and the expenditure for the purchase of IECO. The major components of our property and equipment purchases related to our NetPC project which converted all service center order entry equipment from old "green screen" terminals to Internet capable workstations. Additional purchases were made to enhance our AppliedACCESS(R) Web site and expand our electronic catalog content. The Company also realized proceeds of approximately $7.5 million from property sales, which generated gains of $3.2 million, primarily related to the disposal of unneeded real estate.
For fiscal 2004, our property purchases are expected to be in the $14 million to $15 million range which includes a $7.5 million buy-out of properties currently being leased. These include our Ft. Worth distribution center and 3 service centers, all of which were originally constructed for the company under a lease facility 7 years ago (see discussion in Note 11). Depreciation for fiscal 2004 is expected to be in the range of $13 to $15 million.
Cash used in financing activities was approximately $19.0 million in fiscal 2003 and $51.1 million in fiscal 2002. During fiscal 2002, the Company had net repayments under revolving credit agreements of $21.4 million. Additionally, scheduled long-term debt repayments in fiscal 2002 were double the amounts paid in fiscal 2003. The next scheduled principal repayment on our long-term debt is in December 2007.
The following table shows the Company's approximate obligations and commitments to make future payments under contractual obligations as of June 30, 2003 (in thousands):
Period Less Period Period Period
Total Than 1 yr 2-3 yrs. 4-5 yrs. Over 5 yrs.
----- --------- -------- -------- -----------
Operating Leases $ 75,246 $ 17,496 $ 21,365 $ 12,542 $ 23,843
Long-term Debt 75,000 50,000 25,000
-------- -------- -------- -------- --------
Total Contractual
Cash Obligations $150,246 $ 17,496 $ 21,365 $ 62,542 $ 48,843
======== ======== ======== ======== ========
|
The Company also used approximately $9.9 million to repurchase 581 thousand shares during the year for an average price of $17 per share compared to $14.3 million for 817 thousand shares in fiscal 2002.
In July 2003, the Board of Directors increased the authorization to purchase shares of the Company's common stock to 1.0 million shares. These purchases are being made to fund employee benefit programs, equity award programs, and future business acquisitions. These purchases are made in open market and negotiated transactions, from time to time, depending upon market conditions.
In fiscal 2003, the Company continued its practice of paying cash dividends each quarter. As in the last four fiscal years, the Company's dividend was 12 cents per share per quarter. The amount of the dividend paid is recommended quarterly by management and approved by the Company's Board of Directors based on financial
Applied Industrial Technologies, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
performance, cash flow and payout guidelines consistent with other industrial companies.
Capital resources are obtained from income retained in the business, borrowings under the Company's lines of credit, revolving credit agreement and long-term debt facilities and from operating lease arrangements.
See Note 6 to the Consolidated Financial Statements for details regarding the outstanding debt amounts as of June 30, 2003. The Company had no short-term borrowings in fiscal 2003. The average long-term borrowings in fiscal 2003 were $76.4 million compared to the average combined short-term and long-term borrowings of $103.0 million in fiscal 2002. The weighted average interest rate on short-term borrowings in the prior year was 3.7%. The weighted average interest on borrowings under our long-term debt agreements, net of the benefits from interest rate swaps was 5.9% in 2003 and 5.5% in 2002, respectively. The increase in the weighted average interest rate was due to lower benefits from interest rate swap agreements in fiscal 2003 versus fiscal 2002. The effect of the swap agreements was to decrease interest expense by $880 thousand in 2003 and approximately $1.4 million in 2002. These settlement gains are being amortized as a reduction in interest expense of approximately $800 thousand per year over the remaining life of the notes through December 2007.
The Company manages interest rate risk through the use of a combination of fixed rate long-term debt, variable rate borrowings under its committed revolving credit agreement and interest rate swaps. At June 30, 2003, the Company has no variable rate debt or interest rate swaps outstanding. See Note 7 "Risk Management Activities" for additional discussion on the Company's derivative activities.
The Company's working capital at June 30, 2003 was $259.4 million compared to $250.6 million at June 30, 2002. The current ratio was 2.8 and 2.9 at June 30, 2003 and 2002, respectively. The increase in working capital is due to the increase of cash generated from our operating results and from the reduction of receivables and inventories.
The Company has a committed revolving credit agreement expiring in November 2003 with a group of banks. This agreement provides for unsecured borrowings of up to $150.0 million. The Company is currently exploring options to replace this facility and expects to have a replacement facility in place before the current facility expires. The Company had no borrowings outstanding under this facility at June 30, 2003. The Company also has a $10.0 million short-term uncommitted line of credit with a commercial bank that expires October 2003. The Company had no borrowings outstanding under this facility at June 30, 2003. Unused lines under these facilities, net of outstanding letters of credit, totaling $153.0 million are available to fund future acquisitions or other capital and operating requirements. An additional long-term financing shelf facility is in place enabling the Company to borrow up to $100.0 million at its discretion with terms up to twelve years. The Company has no outstanding borrowings under this facility at June 30, 2003.
The aggregate annual maturities of long-term debt are $50.0 million in fiscal 2008 and $25.0 million in fiscal 2011.
Management expects that cash provided from operations, available lines of credit, long-term debt and the use of operating leases will be sufficient to finance normal working capital needs, acquisitions, investments in properties, facilities and equipment and the purchase of additional Company common stock. Management also believes that additional long-term debt and line of credit financing could be obtained based on the Company's credit standing and financial strength.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates at a specific point in time that affect the amounts reported in the Consolidated Financial Statements and disclosed in the accompanying notes. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, determining the net carrying value of trade receivables, inventories, goodwill, other intangible assets and recording self-insurance liabilities. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements.
ALLOWANCES FOR SLOW-MOVING AND OBSOLETE INVENTORIES
The Company identifies slow moving or obsolete inventories and estimates appropriate loss provisions related thereto. Historically, these loss provisions have not been significant, as the majority of the Company's inventories are not highly susceptible to obsolescence and are eligible for credit under various supplier return programs. While the Company has no reason to believe its inventory return privileges and programs will be discontinued in the future, its risk of loss associated with obsolete or slow moving inventories would increase if such were to occur.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectibility of accounts receivable based on a combination of factors. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This initial estimate is periodically adjusted when the Company becomes aware of a specific customer's inability to meet its financial obligations (e.g., bankruptcy filing) or as a result of changes in the overall aging of accounts receivable. While the Company has a large customer base that is diverse as to
industry and geography, a general economic downturn in any of the industry segments in which the Company operates could result in higher than expected customer defaults, and, therefore, the need to revise estimates for bad debts.
GOODWILL ACCOUNTING
The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets," effective July 1, 2001. Goodwill is no longer amortized but rather is evaluated for impairment. The Company has elected to do annual tests for indications of goodwill impairment as of January 1 of each year. The Company utilizes discounted cash flow models and relevant market multiples for comparable businesses to determine fair value used in the goodwill impairment evaluation. Management's estimates of fair value are based upon factors such as projected future sales, price increases, and other uncertain elements requiring significant judgments. While the Company uses available information to prepare its estimates and to perform impairment evaluations, actual results could differ significantly, resulting in future impairment and losses related to recorded goodwill balances.
SUPPLIER PURCHASING PROGRAMS
The Company enters into agreements with certain suppliers providing for inventory purchase rebates. The Company's inventory purchase rebate arrangements are unique to each supplier and are generally annual programs ending at either the Company's June 30th year end or the supplier's year end. Rebates are received in the form of cash or credits against future purchases upon attainment of specified purchase volumes and are received monthly, quarterly or annually based upon actual purchases for such period. The supplier rebates are a specified percentage of the Company's net purchases based upon achieving specific purchasing volume levels. These percentages can increase or decrease based on changes in the volume of purchases.
The Company accrues for the receipt of these inventory purchase rebates based upon actual cumulative purchases of inventory. The percentage level utilized is based upon the estimated total volume of purchases we expect to achieve during the life of the program. Each supplier program is analyzed, reviewed and reconciled each quarter as information becomes available to determine the appropriateness of the amount estimated to be received. Differences between our estimates and actual rebates subsequently received have not been material.
All rebates under these supplier purchasing programs are recognized under the Company's LIFO inventory accounting method as a reduction of cost of sales when the inventories representing these purchases are sold and recorded as cost of sales. The Company's accounting for rebates is in accordance with guidance issued by the FASB in EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor." While management believes the Company will continue to receive inventory purchase rebates, there can be no assurance that suppliers will continue to provide comparable amounts of rebates in the future.
SELF-INSURANCE LIABILITIES
The Company has insurance programs to cover workers' compensation, business, automobile, general and product liability risks. The insurance programs have self-insured retention to $350 thousand per claim. On an annual basis, an independent actuarial firm is hired to determine the adequacy of estimated liabilities. The Company accrues estimated losses based on actuarial models and assumptions as well as the Company's historical loss experience. Although management believes that the estimated liabilities for self insurance are adequate, the estimates described above may not be indicative of current and future losses. In addition, the actuarial calculations used to estimate self insurance liabilities are based on numerous assumptions, some of which are subjective. The Company will continue to adjust its estimated liabilities for self insurance, as deemed necessary, in the event that future loss experience differs from historical loss patterns.
GUARANTEES AND OTHER OFF-BALANCE SHEET ARRANGEMENTS
In December 2002, the Financial Accounting Standards Board issued Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements". FIN 45 requires the disclosure of any guarantees in place at December 31, 2002 and the recognition of a liability for any guarantees entered into or modified after that date. The Company is a guarantor in three arrangements entered into prior to December 31, 2002 that require disclosure under FIN 45 as follows:
- The Company has a construction and lease facility under which a distribution center and several service centers were constructed by the lessor and leased to the Company under operating lease arrangements. These leases expire in September 2003 and permit the Company to purchase the facilities for $7.5 million. If the Company did not exercise this option, residual value guarantee provisions obligated the Company to compensate the lessor for up to $6.0 million at lease termination depending on the properties' market values at that time. Due to the nature of the guarantee, the Company has not recorded any liability on the financial statements. In July 2003, the Company exercised its option to purchase the facilities effective September 2003.
- In connection with the construction and lease of its corporate headquarters facility, the Company has guaranteed repayment of a total of approximately $5.7 million of taxable development revenue bonds issued by Cuyahoga County and the Cleveland-Cuyahoga County Port Authority. These bonds were issued with a 20-year term and are scheduled to mature in March 2016. Any
Applied Industrial Technologies, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
default, as defined in the guarantee agreements, would obligate Applied for the full amount of the outstanding bonds through maturity. Due to the nature of the guarantee, the Company has not recorded any liability on the financial statements.
- The Company also has guaranteed, under an agreement scheduled to expire in December 2003, a related entity's repayment of borrowings under a line of credit. This guarantee was entered into to induce a financial institution to provide a line of credit for a joint venture, iSource Performance Materials L.L.C. (iSource), of which the Company is a minority owner. iSource is a certified minority-owned distributor of standard-use industrial specialty and general maintenance items requiring special shipping and handling. Any default, as defined in the guarantee agreement, will obligate the Company for any unpaid balance under the line of credit up to a maximum of $3.0 million.
In the event of a default and subsequent payout under any or all of these guarantees, the Company maintains the right to pursue all legal options available to mitigate its exposure.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS 144 "Accounting for Impairment or Disposals of Long-Lived Assets" and SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" as of July 1, 2002. The adoption of these statements did not have a material impact on the consolidated statements.
In December 2002, the Financial Accounting Standards Board issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." The impact of this statement on the Company's current accounting policies was to amend the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation" and require additional disclosure in the Company's quarterly financial statements. The Company adopted SFAS 148 effective January 1, 2003 (see Note 1).
In January 2003, the Financial Accounting Standards Board issued FIN 46,
"Consolidation of Variable Interest Entities." As disclosed above, the Company
is a minority owner in iSource and has guaranteed iSource's line of credit debt
up to $3.0 million. iSource maintains assets of approximately $3.7 million. The
Company's purchases currently account for more than 90% of iSource's sales and
the Company is considered the primary beneficiary of iSource's operations.
Accordingly, iSource's financial statements will be consolidated with the
Company's beginning in July 2003 in accordance with the effective date of FIN
46. It is expected that the effect on the Company's consolidated financial
statements will be immaterial.
OTHER MATTERS
In October 2002, the Company acquired certain assets of Industrial Equipment Co., Ltd. (IECO), a Canadian distributor of industrial products, for approximately $11.5 million. This acquisition was paid for from existing cash balances. The results of the acquired business operations are not material for periods represented. The acquired operations are reported in our service center based distribution segment from the acquisition date. The business contributed $12.2 million in sales from the date of acquisition through June 30, 2003. Sales and operating results to date have met Company expectations.
CAUTIONARY STATEMENT
UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
This Annual Report to Shareholders, including Management's Discussion and Analysis, contains statements that are forward-looking, based on management's current expectations about the future. Forward-looking statements are often identified by qualifiers, such as "expect," "believe," "intend," "will," and similar expressions. The Company intends that the forward-looking statements be subject to the safe harbors established in the Private Securities Litigation Reform Act of 1995 and by the Securities and Exchange Commission in its rules, regulations and releases.
Readers are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. In addition, the Company undertakes no obligation publicly to update or revise any forward-looking statements, whether because of new information or events, or otherwise.
Important risk factors include, but are not limited to, the following:
changes in the economy or in specific customer industry sectors; reduction in
manufacturing capacity in our targeted geographic markets due to consolidation
in customer industries and the transfer of manufacturing capacity to foreign
countries; changes in interest rates; changes in customer procurement policies
and practices; changes in product manufacturer sales policies and practices; the
availability of products and labor; changes in operating expenses; the effect of
price increases or decreases; the variability and timing of business
opportunities including acquisitions, alliances, customer agreements and
supplier authorizations; the Company's ability to realize the anticipated
benefits of acquisitions and other business strategies; the incurrence of debt
and contingent liabilities in connection with acquisitions; changes in
accounting policies and practices; the effect of organizational changes within
the Company; the emergence of new competitors, including firms with greater
financial resources than the Company; risks and uncertainties associated with
the Company's expansion into foreign markets, including inflation rates,
recessions, and foreign currency exchange rates; adverse results in significant
litigation matters; adverse regulation and legislation; and the occurrence of
extraordinary events (including
prolonged labor disputes, natural events and acts of God, fires, floods and accidents).
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have evaluated the Company's exposure to various market risk factors, including but not limited to, interest rate, foreign currency exchange and commodity price risks. The Company is primarily affected by market risk exposure through the effect of changes in interest rates. The Company manages interest rate risk through the use of a combination of fixed rate long-term debt, variable rate borrowings under its committed revolving credit agreement and interest rate swaps. There were no variable rate borrowings under its committed revolving credit agreement and no interest rate swap agreements outstanding at June 30, 2003. All the Company's outstanding debt is currently at fixed interest rates at June 30, 2003.
The Company mitigates its foreign currency exposure from the Canadian dollar through the use of cross currency swap agreements as well as foreign-currency denominated debt. Hedging of the U.S. dollar denominated debt used to fund a substantial portion of the Company's net investment in its Canadian operations is accomplished through the use of cross currency swaps. Any gain or loss on the hedging instrument offsets the gain or loss on the underlying debt. Translation exposures with regard to our Mexican subsidiary are not hedged, as our Mexican activity is not material at this time. The impact on the Company's future earnings from exposure to changes in foreign currency exchange rates is expected to be immaterial.
Applied Industrial Technologies, Inc. and Subsidiaries
Statements of CONSOLIDATED INCOME
Year Ended June 30
---------------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands, except per share amounts)
Net Sales $ 1,464,367 $ 1,446,569 $ 1,625,755
Cost of sales 1,085,072 1,080,879 1,216,456
----------- ----------- -----------
379,295 365,690 409,299
Selling, distribution and administrative 343,041 334,856 354,298
----------- ----------- -----------
Operating Income 36,254 30,834 55,001
----------- ----------- -----------
Interest Expense 5,677 7,078 9,386
Interest Income (379) (340) (281)
Other, net 24 341 548
----------- ----------- -----------
5,322 7,079 9,653
----------- ----------- -----------
Income Before Income Taxes 30,932 23,755 45,348
----------- ----------- -----------
Income Tax Expense 11,100 9,000 17,300
----------- ----------- -----------
Income Before Cumulative Effect of Accounting Change 19,832 14,755 28,048
Cumulative effect of accounting change (12,100)
----------- ----------- -----------
Net Income $ 19,832 $ 2,655 $ 28,048
=========== =========== ===========
Net Income Per Share - Basic
Before cumulative effect of accounting change $ 1.05 $ 0.77 $ 1.43
Cumulative effect of accounting change (0.63)
----------- ----------- -----------
Net Income Per Share - Basic $ 1.05 $ 0.14 $ 1.43
=========== =========== ===========
Net Income Per Share - Diluted
Before cumulative effect of accounting change $ 1.03 $ 0.76 $ 1.41
Cumulative effect of accounting change (0.63)
----------- ----------- -----------
Net Income Per Share - Diluted $ 1.03 $ 0.13 $ 1.41
=========== =========== ===========
|
See notes to consolidated financial statements.
Applied Industrial Technologies, Inc. and Subsidiaries
Consolidated BALANCE SHEETS
June 30
------------------------
2003 2002
--------- ---------
(In thousands)
Assets
Current assets
Cash and temporary investments $ 55,079 $ 23,060
Accounts receivable, less allowances of $6,100 and $5,600 173,915 180,904
Inventories 159,798 166,083
Other current assets 11,702 11,011
--------- ---------
Total current assets 400,494 381,058
--------- ---------
Property - at cost
Land 10,632 11,779
Buildings 62,179 69,131
Equipment 90,967 83,414
--------- ---------
163,778 164,324
Less accumulated depreciation 85,836 81,229
--------- ---------
Property - net 77,942 83,095
--------- ---------
Goodwill - net of accumulated amortization of $13,069 49,687 46,410
Other assets 25,281 24,003
--------- ---------
Total Assets $ 553,404 $ 534,566
========= =========
Liabilities
Current liabilities
Accounts payable $ 75,411 $ 76,316
Compensation and related benefits 39,359 27,277
Other current liabilities 26,365 26,821
--------- ---------
Total current liabilities 141,135 130,414
Long-term debt 78,558 83,478
Other liabilities 25,855 22,527
--------- ---------
Total Liabilities 245,548 236,419
--------- ---------
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 84,898 84,517
Income retained for use in the business 289,724 279,046
Treasury shares - at cost (5,076 and 4,893 shares) (78,706) (74,900)
Unearned restricted common stock compensation (114) (832)
Accumulated other comprehensive income 2,054 316
--------- ---------
Total Shareholders' Equity 307,856 298,147
--------- ---------
Total Liabilities and Shareholders' Equity $ 553,404 $ 534,566
========= =========
|
See notes to consolidated financial statements.
Applied Industrial Technologies, Inc. and Subsidiaries
Statements of CONSOLIDATED CASH FLOWS
Year Ended June 30
------------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Cash Flows from Operating Activities
Net income $ 19,832 $ 2,655 $ 28,048
Adjustments to reconcile net income to cash provided
by operating activities:
Cumulative effect of accounting change 12,100
Depreciation 14,458 15,294 16,364
Deferred income taxes (2,700) (5,000) (1,800)
Amortization of restricted common stock compensation,
goodwill and other intangible assets 1,499 2,499 6,145
Provision for losses on accounts receivable 2,510 4,488 6,995
Gain on sale of property (3,249) (1,327) (1,080)
Amortization of gain on interest rate swap terminations (752) (245)
Treasury shares contributed to employee benefit and deferred
compensation plans 3,156 2,977 6,529
Changes in current assets and liabilities, net of acquisitions:
Accounts receivable 8,004 7,237 15,869
Inventories 10,436 27,020 (8,522)
Other current assets (659) (688) (1,908)
Accounts payable (905) 420 (17,691)
Accrued expenses 15,661 1,518 (11,732)
-------- -------- --------
Net Cash provided by Operating Activities 67,291 68,948 37,217
-------- -------- --------
Cash Flows from Investing Activities
Property purchases (12,794) (10,050) (11,731)
Proceeds from property sales 7,456 3,610 4,251
Net cash paid for acquisition of businesses, net of cash
acquired of $812 in 2001 (10,255) (2,574) (5,491)
Deposits and other (689) 274 (310)
-------- -------- --------
Net Cash used in Investing Activities (16,282) (8,740) (13,281)
-------- -------- --------
Cash Flows from Financing Activities
Repayments under revolving credit agreements - net (21,350) (12,246)
Long-term debt borrowings 25,000
Long-term debt repayments (5,714) (11,429) (11,428)
Proceeds from termination of swap 2,517 2,038
Purchases of treasury shares (9,946) (14,318) (15,501)
Dividends paid (9,154) (9,270) (9,532)
Exercise of stock options 3,307 3,200 1,403
-------- -------- --------
Net Cash used in Financing Activities (18,990) (51,129) (22,304)
-------- -------- --------
Increase in cash and temporary investments 32,019 9,079 1,632
Cash and temporary investments at beginning of year 23,060 13,981 12,349
-------- -------- --------
Cash and Temporary Investments at End of Year $ 55,079 $ 23,060 $ 13,981
======== ======== ========
Supplemental Cash Flow Information
Cash paid during the year for:
Income taxes $ 8,161 $ 8,182 $ 22,080
Interest $ 4,995 $ 6,205 $ 8,595
|
See notes to consolidated financial statements.
Applied Industrial Technologies, Inc. and Subsidiaries
Statements of CONSOLIDATED SHAREHOLDERS' EQUITY
For the Years Ended June 30, 2003, 2002 and 2001
-------------------------------------------------------------------
Income
Shares of Additional Retained for Treasury
Common Stock Common Paid-in Use in the Shares-at
Outstanding Stock Capital Business Cost
----------- ----- ------- -------- ----
(In thousands, except per share amounts)
Balance at July 1, 2000 20,078 $ 10,000 $ 83,312 $ 267,145 $ (57,419)
Net income 28,048
Minimum pension liability
Unrealized gain on cross currency swap
Foreign currency translation adjustment
Total comprehensive income
Cash dividends - $.48 per share (9,532)
Purchases of common stock for treasury (891) (15,501)
Treasury shares issued for:
Retirement Savings Plan contributions 309 882 4,516
Exercise of stock options 110 (201) 1,604
Deferred compensation plans 67 180 951
Forfeiture of restricted common stock
compensation (26) (286) (378)
Amortization of restricted
common stock compensation 58
Other 276
--------- --------- --------- --------- ---------
Balance at June 30, 2001 19,647 10,000 84,221 285,661 (66,227)
Net income 2,655
Minimum pension liability
Unrealized gain on cross currency swap
Foreign currency translation adjustment
Total comprehensive income
Cash dividends - $.48 per share (9,270)
Purchases of common stock for treasury (817) (14,318)
Treasury shares issued for:
Retirement Savings Plan contributions 148 434 2,243
Exercise of stock options 226 (183) 3,383
Deferred compensation plans 14 52 248
Forfeiture of restricted common stock
compensation (15) (76) (229)
Amortization of restricted
common stock compensation (169)
Other 238
--------- --------- --------- --------- ---------
Balance at June 30, 2002 19,203 10,000 84,517 279,046 (74,900)
Net income 19,832
Unrealized loss on cross currency swap
Foreign currency translation adjustment
Total comprehensive income
Cash dividends - $.48 per share (9,154)
Purchases of common stock for treasury (581) (9,946)
Treasury shares issued for:
Retirement Savings Plan contributions 164 348 2,505
Exercise of stock options 217 (63) 3,370
Deferred compensation plans 17 38 265
Amortization of restricted
common stock compensation 30
Other 28
--------- --------- --------- --------- ---------
Balance at June 30, 2003 19,020 $ 10,000 $ 84,898 $ 289,724 $ (78,706)
========= ========= ========= ========= =========
|
For the Years Ended June 30, 2003, 2002 and 2001
------------------------------------------------
Unearned
Restricted Accumulated
Common Other Total
Stock Comprehensive Shareholders'
Compensation Income (loss) Equity
------------ ------------- ------
(In thousands, except per share amounts)
Balance at July 1, 2000 $ (3,707) $ 299,331
Net income 28,048
Minimum pension liability $ (285) (285)
Unrealized gain on cross currency swap 173 173
Foreign currency translation adjustment (70) (70)
---------
Total comprehensive income 27,866
---------
Cash dividends - $.48 per share (9,532)
Purchases of common stock for treasury (15,501)
Treasury shares issued for:
Retirement Savings Plan contributions 5,398
Exercise of stock options 1,403
Deferred compensation plans 1,131
Forfeiture of restricted common stock
compensation 664
Amortization of restricted
common stock compensation 1,088 1,146
Other 276
--------- --------- ---------
Balance at June 30, 2001 (1,955) (182) 311,518
Net income 2,655
Minimum pension liability 285 285
Unrealized gain on cross currency swap 297 297
Foreign currency translation adjustment (84) (84)
---------
Total comprehensive income 3,153
---------
Cash dividends - $.48 per share (9,270)
Purchases of common stock for treasury (14,318)
Treasury shares issued for:
Retirement Savings Plan contributions 2,677
Exercise of stock options 3,200
Deferred compensation plans 300
Forfeiture of restricted common stock
compensation 305
Amortization of restricted
common stock compensation 818 649
Other 238
--------- --------- ---------
Balance at June 30, 2002 (832) 316 298,147
Net income 19,832
Unrealized loss on cross currency swap (1,019) (1,019)
Foreign currency translation adjustment 2,757 2,757
---------
Total comprehensive income 21,570
---------
Cash dividends - $.48 per share (9,154)
Purchases of common stock for treasury (9,946)
Treasury shares issued for:
Retirement Savings Plan contributions 2,853
Exercise of stock options 3,307
Deferred compensation plans 303
Amortization of restricted
common stock compensation 718 748
Other 28
--------- --------- ---------
Balance at June 30, 2003 $ (114) $ 2,054 $ 307,856
========= ========= =========
|
See notes to consolidated financial statements.
Applied Industrial Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2003, 2002 and 2001
(Dollar amounts in thousands, except per share amounts)
NOTE 1 BUSINESS AND ACCOUNTING POLICIES
Business
The Company is one of North America's leading distributors of industrial and fluid power products and systems. Industrial products include bearings and seals, linear motion products, power transmission products, industrial rubber products, general maintenance and safety products and tools. Fluid power includes hydraulic, pneumatic, lubrication and filtration components and systems. The Company also provides mechanical, electrical, rubber shop and fluid power services. 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. Outstanding checks of $10,627 at June 30, 2003 and $7,256 at June 30, 2002 are classified as a current liability in accounts payable.
Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets." Effective July 1, 2001, the Company adopted this standard. Under SFAS 142, goodwill is no longer amortized, but is tested for impairment upon adoption and at least annually thereafter. The Company has established January 1 as its annual impairment testing date. The results of the Company's January 1, 2003 testing indicated no impairment.
Inventories
U.S. inventories are valued at the lower of cost or market, using the last-in, first-out (LIFO) method, and foreign inventories are valued using the average cost method. See Note 3 for further information regarding inventories.
Property and Depreciation
Property and equipment are initially stated at cost. 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. The carrying values of long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the recorded value cannot be recovered from undiscounted future cash flows.
Self-Insurance Liabilities
The Company maintains business insurance programs with significant self-insured retention, relating to workers' compensation, business, automobile and general products liability claims. The Company accrues estimated losses using actuarial models and assumptions based on historical loss experience The actuarial calculations used to estimate business insurance reserves are based on numerous assumptions, some of which are subjective. The Company utilizes an independent actuarial firm to assist in determining the adequacy of our reserves.
The Company maintains a self-insured health benefits plan, which provides medical benefits employees electing coverage under the plan. The Company maintains a reserve for incurred but not reported medical claims. The reserve is
actuarially determined by an independent actuarial firm and is an estimate based on historical experience and other assumptions, some of which are subjective.
Revenue Recognition
Sales are recognized when products are shipped or delivered to a customer which is when title transferred to the customer. Products are billed at agreed upon prices. The Company's experience is that collection of receivables recorded for all sales is reasonably assured.
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 enacted tax laws.
Net Income Per Share
The following is a computation of the basic and diluted earnings per share:
Year Ended June 30
2003 2002 2001
---------- ---------- ----------
Net Income
Income before cumulative effect of accounting change $ 19,832 $ 14,755 $ 28,048
Cumulative effect of accounting change (12,100)
---------- ---------- ----------
Net Income $ 19,832 $ 2,655 $ 28,048
========== ========== ==========
Average Shares Outstanding
Weighted average common shares outstanding
for basic computation 18,908 19,079 19,589
Dilutive effect of stock based options and awards 314 338 335
---------- ---------- ----------
Weighted average common shares outstanding
for dilutive computation 19,222 19,417 19,924
========== ========== ==========
Net Income Per Share - Basic
Before cumulative effect of accounting change $ 1.05 $ 0.77 $ 1.43
Cumulative effect of accounting change (0.63)
---------- ---------- ----------
Net Income Per Share - Basic $ 1.05 $ 0.14 $ 1.43
========== ========== ==========
Net Income Per Share - Diluted
Before cumulative effect of accounting change $ 1.03 $ 0.76 $ 1.41
Cumulative effect of accounting change (0.63)
---------- ---------- ----------
Net Income Per Share - Diluted $ 1.03 $ 0.13 $ 1.41
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Stock Based Compensation
At June 30, 2003, the Company had outstanding stock options (see Note
9). The Company applies APB Opinion No. 25 "Accounting for Stock Issued
to Employees" and related interpretations in accounting for options
granted and applies SFAS 123 "Accounting for Stock Issued to Employees"
for disclosure purposes only.
In December 2002, the Financial Accounting Standards Board issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." The impact of this statement on the Company's current accounting policies was to amend the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation" and require additional disclosure in the Company's quarterly financial statements. The Company adopted SFAS 148 effective January 1, 2003. The following table discloses the compensation expense and net income had the Company adopted fair value accounting under SFAS 123:
Year Ended June 30
2003 2002 2001
---------- ---------- ----------
Net income, as reported $ 19,832 $ 2,655 $ 28,048
Less: Total stock-based employee compensation
expense determined under fair value based method,
net of tax 1,250 1,321 1,166
---------- ---------- ----------
Pro forma net income $ 18,582 $ 1,334 $ 26,882
========== ========== ==========
Earnings per share:
Basic - as reported $ 1.05 $ .14 $ 1.43
========== ========== ==========
Basic - pro forma $ .98 $ .07 $ 1.37
========== ========== ==========
Diluted - as reported $ 1.03 $ .13 $ 1.41
========== ========== ==========
Diluted - pro forma $ .97 $ .07 $ 1.35
========== ========== ==========
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Applied Industrial Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
Disclosures under the fair value method are estimated using the Black Scholes option pricing model. The assumptions used for grants issued in 2003, 2002 and 2001 are:
2003 2002 2001
------- ------- -------
Expected life 7 years 7 years 7 years
Risk free interest rate 3.9% 4.9% 5.0%
Dividend yield 3.0% 3.0% 3.0%
Volatility 30.9% 29.1% 28.9%
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New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued SFAS 144, "Accounting for Impairment or Disposals of Long-Lived Assets." The Company adopted SFAS 144 as of July 1, 2002. In June 2002, the Financial Accounting Standards Board issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." The Company adopted SFAS 146 effective July 1, 2002. The adoption of these statements did not have a material impact on the consolidated financial statements.
In January 2003, the Financial Accounting Standards Board issued FIN 46, "Consolidation of Variable Interest Entities." As discussed in Note 11, the Company is a minority owner in iSource Performance Materials L.L.C. (iSource), and has guaranteed iSource's line of credit debt up to $3,000. iSource maintains assets of approximately $3,700. The Company's purchases currently account for more than 90% of iSource's sales and the Company is considered the primary beneficiary of iSource's operations. Accordingly, iSource's financial statements will be consolidated with the Company's beginning in July 2003 in accordance with the effective date of FIN 46. It is expected that the effect on the Company's consolidated financial statements will be immaterial.
NOTE 2 BUSINESS COMBINATIONS
During the year ended June 30, 2003, the Company acquired assets from a Canadian distributor of industrial products for approximately $11,500. The results of the acquired business operations are included in our Service Center Based Distribution segment. Goodwill of $2,486 and other intangible assets of $1,977, consisting of customer relationships, trademark, exclusive supplier distribution agreements and a non-competition agreement, were recognized in connection with this combination.
For this acquisition, made during the year ended June 30, 2003, the fair values of the acquired assets and liabilities assumed at the date of acquisition are as follows:
Accounts receivable $ 2,600
Inventory 4,200
Property 700
Other assets 237
Goodwill 2,486
Other intangibles 1,977
--------
Total assets acquired 12,200
Current liabilities (700)
--------
Net assets acquired $ 11,500
========
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During the year ended June 30, 2002, the Company acquired the stock of a Mexican distributor of bearing and power transmission products for $3,200. Results of the business operations are included in our Service Center Based Distribution segment. Non-tax deductible goodwill of $1,989 and other intangible assets, primarily non-competition agreements of $350, were recognized in connection with this combination.
During the year ended June 30, 2001, the Company acquired the stock of Air Draulics Engineering Company, a U.S. based distributor of fluid power products for $7,300. Goodwill, based on allocations of fair values to assets and liabilities acquired, of $3,500 was recognized in connection with this combination.
Results of operations of all of the above acquisitions, which have all been accounted for as purchases, are included in the accompanying consolidated financial statements from their respective acquisition dates. The results of operations for these acquisitions are not material for all years presented.
NOTE 3 INVENTORIES
Inventories consist of the following:
June 30
2003 2002
-------- --------
U.S. inventories at current cost $248,147 $259,145
Foreign inventories at average cost 26,228 18,527
-------- --------
274,375 277,672
Less: Excess of current cost over LIFO cost for U.S. inventories 114,577 111,589
-------- -------
Inventories on consolidated balance sheet $159,798 $166,083
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Reductions in inventories during the fiscal years ended June 30, 2003 and 2002 resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect of these liquidations for the years ended June 30, 2003 and 2002 increased gross profit by $741 and $915, net income by $453 and $546 and diluted net income per share by $.02 and $.03 respectively.
NOTE 4 GOODWILL & OTHER INTANGIBLES
The changes in the carrying amount of goodwill for the years ended June 30, 2003 and 2002, are as follows:
Service Center Based Fluid Power
Distribution Segment Business Total
-------------------- ----------- --------
Balance at June 30, 2001 $44,421 $ 17,600 $ 62,021
Transitional impairment loss (17,600) (17,600)
Goodwill of acquired businesses 1,989 1,989
------- -------- --------
Balance at June 30, 2002 46,410 46,410
Goodwill of acquired businesses 2,486 2,486
Currency translation adjustment 791 791
------- -------- --------
Balance at June 30, 2003 $49,687 $ 0 $ 49,687
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In accordance with SFAS 142, the Company discontinued the amortization of goodwill effective July 1, 2001. Had goodwill amortization not been recorded in the year ended June 30, 2001, operating income would have been increased to $58,471; net income to $30,902; and net income per share to $1.55.
For purposes of completing impairment testing upon adoption of SFAS 142 at July 1, 2001, the Company determined the fair value of its reporting units utilizing discounted cash flows models and relative market multiples for comparable businesses. The Company compared the fair value of each of its reporting units to its carrying value. This evaluation indicated that goodwill associated with its fluid power business was impaired. This impairment was primarily attributed to a downturn in the industrial economy in the years following the Company's fluid power business acquisitions. A non-cash charge totaling $17,600, $12,100 after tax, was recorded as the cumulative effect of a change in accounting principle effective July 1, 2001 to write-off the remaining goodwill relating to the fluid power business.
The Company's intangible assets acquired from business combinations are amortized over their estimated useful lives and consist of the following:
June 30, 2003 June 30,2002
------------------------------------- -------------------------------------
Accumulated Net Accumulated Net
Amount(a) Amortization Book Value Amount Amortization Book Value
--------- ------------ ---------- --------- ------------ ----------
Non-competition agreements $ 9,124 $7,704 $1,420 $8,918 $7,044 $1,874
Customer relationships 1,534 68 1,466
Exclusive supplier distribution
agreements 548 24 524
Trademarks 73 49 24
------- ------ ------ ------ ------ ------
$11,279 $7,845 $3,434 $8,918 $7,044 $1,874
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(a) Amounts include the impact of foreign currency translation.
For the year ended June 30, 2003, the Company acquired the following intangible assets through a business combination (See Note 2):
Amount Amortization Period
------ -------------------
Non-competition agreements $ 125 5 years
Customer relationships 1,318 15 years
Exclusive supplier distribution agreements 471 15 years
Trademarks 63 1 year
------
$1,977
======
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Amortization expense for other intangible assets totaled $781 in 2003 and $1,651 in 2002. Estimated amortization expense is $663 for 2004; $512 for 2005; $338 for 2006; $213 for 2007 and $1,708 after 2007.
Applied Industrial Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
NOTE 5 OTHER BALANCE SHEET INFORMATION
Other assets consist of the following:
June 30
2003 2002
------- -------
Deferred tax assets - non-current $12,450 $13,032
Deposits and investments 4,459 3,634
Other intangibles 3,434 1,874
Other 4,938 5,463
------- -------
Total $25,281 $24,003
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Substantially all deposits and investments have fair values approximately equal to their carrying values.
Other current liabilities consist of the following:
June 30
2003 2002
------- -------
Accrued income and other taxes $10,349 $ 9,689
Accrued self insurance liabilities 4,760 5,008
Deferred tax liabilities - current 1,950
Deferred lease liabilities 4,222 4,453
Other 7,034 5,721
------- -------
Total $26,365 $26,821
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NOTE 6 DEBT
The Company has a committed revolving credit agreement expiring November 2003 with a group of banks. This agreement provides for unsecured borrowings of up to $150,000 at various interest rate options, none of which is in excess of the banks' prime rate at interest determination dates. The Company had no borrowings outstanding under this facility at June 30, 2003. Fees on this facility range from .12% to .40% per year on the average amount of the total revolving credit commitments during the year. Unused lines under this facility, net of outstanding letters of credit, totaling $142,964 are available to fund future acquisitions or other capital and operating requirements.
The Company also has a $10,000 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, 2003.
Long-term debt consists of:
June 30
2003 2002
------- -------
7.98% Private placement debt, due at maturity in November 2010 $25,000 25,000
7.82% Senior unsecured term notes, due in
semi-annual installments of $5,714 through December 2002 5,714(a)
6.6% Senior $50,000 unsecured term notes, due at maturity in
December 2007, including effects of interest rate swaps (See Note 7) 53,558 52,764
------- -------
Total $78,558 $83,478
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(a) This amount was included in long-term debt at June 30, 2002 due to the Company's ability to refinance the debt under the revolving credit facility.
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, 2003, the most restrictive of these covenants required that the Company maintain a minimum consolidated net worth of $270,455. Based upon current market rates for debt of similar maturities, the Company estimates that the fair value of its debt is greater than its carrying value at June 30, 2003 by approximately $5,051.
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, 2003, there were no borrowings under this agreement.
The aggregate annual maturities of long-term debt over the next five years include $50,000 in fiscal 2008 and $25,000 in fiscal 2011.
NOTE 7 RISK MANAGEMENT ACTIVITIES
The Company is exposed to market risks, primarily resulting from changes in interest rates and currency exchange rates. To manage these risks, the Company may enter into derivative transactions pursuant to the Company's written policy. These transactions are all accounted for in accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". The Company does not hold or issue derivative financial instruments for trading purposes.
During fiscal 2002, the Company entered into two interest rate swap agreements with two domestic banks which effectively converted the fixed interest rate on the 6.6% senior unsecured term notes to a floating variable rate based on LIBOR. The July 2001 swap agreement was for $47,000 of the $50,000 6.6% notes and the November 2001 swap agreement was for all $50,000 of the 6.6% notes. Terms and settlement dates for both swaps mirrored terms of the notes and the swaps were designated as fair value hedges. The effect of the swap agreements was to decrease interest expense by $880 in fiscal 2003 and $1,390 in fiscal 2002. In October 2001 and August 2002, the Company terminated the swap agreements for favorable settlements of $2,000 and $2,500, respectively. These settlement gains are being amortized as a reduction in interest expense of approximately $800 per year over the remaining life of the notes through December 2007.
In November 2000, the Company entered into two 10-year cross-currency swap agreements to manage its foreign currency risk exposure on private placement borrowings related to its wholly owned Canadian subsidiary. The cross currency swaps effectively convert $25,000 of debt, and the associated interest payments, from 7.98% fixed rate U.S. dollar denominated debt to 7.75% fixed rate Canadian dollar denominated debt. The terms of the two cross-currency swaps mirror the terms of the private placement borrowings.
The Company has designated one of the cross-currency swaps, with a $20,000 U.S. notional amount, as a foreign currency cash flow hedge. The fair value of the cross-currency swap was a liability of $999 at June 30, 2003 which is recorded in current liabilities and the related unrealized loss 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 a liability of $250 at June 30, 2003 and an asset of $214 at June 30, 2002. Changes in the fair value of this derivative instrument are recorded in earnings as a component of "other, net."
NOTE 8 INCOME TAXES
Provision
The provision (benefit) for income taxes consists of:
Year Ended June 30
2003 2002 2001
-------- -------- --------
Current
Federal $ 12,300 $ 12,350 $ 17,550
State 1,300 1,450 1,450
Foreign 200 200 100
-------- -------- --------
Total current 13,800 14,000 19,100
-------- -------- --------
Deferred
Federal (2,200) (4,500) (900)
State (500) (600) (200)
Foreign 100 (700)
-------- -------- --------
Total deferred (2,700) (5,000) (1,800)
-------- -------- --------
Total $ 11,100 $ 9,000 $ 17,300
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The exercise of non-qualified stock options during fiscal 2003, 2002 and 2001 resulted in $466, $605 and $374, respectively, of income tax benefits to the Company derived from the difference between the market price at the date of exercise and the option price. The accelerated vesting of Performance Accelerated Restricted Stock ("PARS") and other restricted stock awards in fiscal 2002 resulted in incremental tax expense of $169 over the amounts previously reported for financial reporting purposes. Accelerated vesting of PARS in fiscal 2003 and 2001 resulted in $30 and $57, respectively, of incremental income tax benefits over the amounts previously reported for financial reporting purposes. These tax benefits and expense were recorded in additional paid-in capital.
Effective Tax Rates
The following is a reconciliation between the federal statutory income tax rate and the Company's effective tax rate:
Year Ended June 30
2003 2002 2001
------ ------ ------
Statutory tax rate 35.0% 35.0% 35.0%
Effects of:
State and local income taxes 1.3 2.4 1.8
International income taxes (1.4) (.1) (.9)
Non-deductible expenses 1.4 1.4 2.6
Deductible dividend (2.2)
Income tax examinations 2.2 .8 .2
Other, net (.4) (1.6) (.6)
------ ------ ------
Effective tax rate 35.9% 37.9% 38.1%
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Applied Industrial Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
Balance Sheet
The significant components of the Company's deferred tax assets (liabilities) are as follows:
June 30
2003 2002
-------- --------
Inventories $ (8,972) $(10,491)
Depreciation and differences in property bases (6,240) (5,966)
Compensation liabilities not currently deductible 11,705 10,682
Estimated liabilities and allowances not currently deductible 8,254 7,723
Goodwill 6,366 7,051
Canadian net operating loss carry forwards,
expiring 2010, 2009 and 2008 1,476 1,092
State and other net operating loss carry forwards 796 335
Other 939 656
-------- --------
Net deferred tax asset $ 14,324 $ 11,082
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NOTE 9 SHAREHOLDERS' EQUITY
Stock Incentive Plans
The 1997 Long-Term Performance Plan (the "1997 Plan") provides for granting of stock options, stock awards, cash awards, and such other awards or combination thereof as the Executive Organization and Compensation Committee of the Board of Directors may determine. The number of shares of common stock which may be awarded in each fiscal year under the 1997 Plan is two percent (2%) of the total number of shares of common stock outstanding on the first day of each year for which the plan is in effect. Common stock available for distribution under the 1997 Plan, but not distributed, may be carried over to the following year. Shares available for future grants at June 30, 2003 and 2002 were 142,000 and 253,000, respectively.
Under the 1997 Plan, the Executive Organization and Compensation Committee 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.
At June 30, 2003, the Company had outstanding stock options granted under the 1997 Plan. In general, the stock options vest over a period of 4 years and expire after 10 years. The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for options granted under the 1997 Plan and applies SFAS 123 "Accounting for Stock Issued to Employees" for disclosure purposes only (see Note 1).
Information regarding these option plans is as follows:
2003 2002 2001
------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(Share amounts in thousands) Shares Price Shares Price Shares Price
------------------------------ ------ --------- ------ --------- ------ ---------
Outstanding, beginning of year 2,199 $ 16.80 2,124 $ 16.10 1,870 $ 15.03
Granted 522 15.67 401 17.86 457 18.96
Exercised (219) 13.01 (226) 11.57 (110) 9.33
Expired/canceled (28) 17.94 (100) 17.82 (93) 16.72
------ --------- ------ --------- ------ ---------
Outstanding June 30 2,474 $ 16.89 2,199 $ 16.80 2,124 $ 16.10
====== ========= ====== ========= ====== =========
Options exercisable June 30 1,460 $ 16.92 1,322 $ 16.25 1,178 $ 15.05
Weighted-average fair value
of options granted
during the year $ 4.26 $ 4.65 $ 5.41
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The following table summarizes information about stock options outstanding at June 30, 2003:
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 25 0.1 $ 9.75 25 $ 9.75
13 - 17 1,304 6.7 1.46 697 15.18
17 - 21 1,112 6.3 8.43 705 18.44
21 - 28 33 4.4 26.93 33 26.93
--------------- ----------- --------------- --------- ----------- ---------
Total 2,474 1,460
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At June 30, 2003, exercise prices for outstanding options ranged from $9.75 to $27.03 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, 2003, 596,000 shares of the Company's common stock held as treasury shares are restricted as collateral under escrow arrangements relating to certain change in control and director and officer indemnification agreements.
NOTE 10 BENEFIT PLANS
Retirement Savings Plan
Substantially all associates of the Company's U.S. subsidiaries 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 (5% for 2003, 2002, and 2001). The Company also partially matches 401(k) contributions by participants, who may elect to contribute up to 50 percent of their compensation. The matching contribution is made with the Company's common stock and is determined quarterly using rates based on achieving certain quarterly earnings per share levels (ranging from 25% to 100% of the first 6% of compensation contributed to the plan).
The Company's expense for contributions to the above plan was $3,990, $2,841, and $6,038 for the years ended June 30, 2003, 2002, and 2001, 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
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of the year $ 18,514 $ 19,218 $ 4,244 $ 4,508
Service cost 712 628 63 57
Interest cost 1,123 1,732 287 306
Benefits paid (1,996) (2,236) (228) (281)
Amendments 148 252 150
Actuarial (gain) loss during year 2,329 (1,080) 859 (496)
-------- -------- -------- --------
Benefit obligation at June 30 $ 20,830 $ 18,514 $ 5,225 $ 4,244
======== ======== ======== ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 3,261 $ 2,166
Actual return on plan assets 113 (140)
Employer contribution 2,607 3,471 $ 228 $ 281
Benefits paid (1,996) (2,236) (228) (281)
-------- -------- -------- --------
Fair value of plan assets at June 30 $ 3,985 $ 3,261 $ 0 $ 0
======== ======== ======== ========
RECONCILIATION OF FUNDED STATUS:
Funded status $(16,845) $(15,253) $ (5,225) $ (4,244)
Unrecognized net (gain) loss 4,669 2,269 676 (189)
Unrecognized prior service cost 3,519 3,846 244 293
-------- -------- -------- --------
Accrued benefit cost at year end $ (8,657) $ (9,138) $ (4,305) $ (4,140)
======== ======== ======== ========
AMOUNTS RECOGNIZED IN THE BALANCE SHEET AT JUNE 30 CONSIST OF:
Prepaid benefit cost $ 2,027 $ 1,408
Accrued benefit liability (13,327) $(12,511) $ (4,305) $ (4,140)
Intangible asset 2,643 1,965
-------- -------- -------- --------
Net amount recognized $ (8,657) $ (9,138) $ (4,305) $ (4,140)
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WEIGHTED-AVERAGE ASSUMPTIONS AS OF JUNE 30:
Discount rate 6.0% 6.5% 6.0% 7.0%
Expected return on plan assets 8.0% 8.0% N/A N/A
Rate of compensation increase 5.5% 5.5% N/A N/A
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Applied Industrial Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
Pension Benefits Other Benefits
----------------------------- -----------------------------
2003 2002 2001 2003 2002 2001
------- ------- ------- ------- ------- -------
Components of net periodic benefit cost:
Service cost $ 712 $ 628 $ 482 $ 63 $ 57 $ 52
Interest cost 1,123 1,732 1,235 287 306 239
Expected return on plan assets (258) (172) (196)
Recognized net actuarial (gain) loss 74 17 71 (6) 13 (42)
Amortization of prior service cost 475 458 373 49 29 29
------- ------- ------- ------- ------- -------
Net periodic pension cost $ 2,126 $ 2,803 $ 1,965 $ 393 $ 405 $ 278
======= ======= ======= ======= ======= =======
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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, 2003 and 2002 were 9.5% decreasing to 5.5% by 2010. A one-percentage point change in the assumed health care cost trend rates would have had the following effects as of June 30, 2003 and for the year then ended:
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total service and interest cost
components of periodic expense $ 48 $ (40)
Effect on post-retirement benefit obligation $ 613 $ (515)
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Supplemental Executive Retirement Benefits Plan
The Company has a non-qualified pension plan to provide supplemental retirement benefits to certain officers. Benefits are payable at retirement based upon a percentage of the participant's compensation. The plan specifies minimum annual retirement benefits for certain participants.
Qualified Retirement Plan
The Company has a qualified defined benefit plan that provides benefits to certain hourly employees at retirement. The benefits are based on length of service and date of retirement.
Salary Continuation Benefits
The Company has agreements with certain retirees to pay monthly retirement benefits for a period not in excess of 15 years. The discount rate used in determining the benefit obligation was 5.5% at June 30, 2003 and 2002.
Retiree Medical Benefits
The Company provides health care benefits to eligible retired associates who elect to pay the Company a specified monthly premium. Premium payments are based upon current insurance rates for the type of coverage provided and are adjusted annually. Certain monthly health care premium payments are partially subsidized by the Company. Additionally, in conjunction with a fiscal 1998 acquisition, the Company assumed the obligation for a post-retirement medical benefit plan which provides health care benefits to eligible retired associates at no cost to the individual.
NOTE 11 COMMITMENTS, GUARANTEES, 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 non-cancelable operating leases are $17,496 in 2004; $12,454 in 2005; $8,911 in 2006; $7,081 in 2007; $5,461 in 2008 and $23,843 after 2008.
Rental expenses incurred for operating leases, principally from leases for real property, vehicles and computer equipment were $30,067 in 2003, $27,922 in 2002, and $26,122 in 2001.
The Company had outstanding letters of credit of $7,036 at June 30, 2003. These letters of credit secure certain insurance obligations.
In December 2002, the Financial Accounting Standards Board issued Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements." FIN 45 requires the disclosure of any guarantees in place at December 31, 2002 and the recognition of a liability for any guarantees entered into or modified after that date. The Company is a guarantor in three arrangements entered into prior to December 31, 2002 that require disclosure under FIN 45 as follows:
- The Company has a construction and lease facility under which a distribution center and several service centers were constructed by the lessor and leased to the Company under operating lease arrangements. These leases expire in September 2003 and permit the Company to purchase the facilities for $7,500. If the Company does not exercise this option, residual value guarantee provisions obligate the Company to compensate the lessor for up to $6,000 at lease termination depending on the properties' market values at that time. Due to the nature of the guarantee, the Company has not recorded any liability on the financial statements. In July 2003 the Company exercised its option to purchase the facilities for $7,500 when the leases expire in September 2003.
- In connection with the construction and lease of its corporate headquarters facility, the Company has guaranteed repayment of a total of $5,678 of taxable development revenue bonds issued by Cuyahoga County and the Cleveland-Cuyahoga County Port Authority. These bonds were issued with a 20-year term and are scheduled to mature in March 2016. Any default, as defined in the guarantee agreements, would obligate Applied for the full amount of the outstanding bonds through maturity. Due to the nature of the guarantee, the Company has not recorded any liability on the financial statements.
- The Company also has guaranteed, under an agreement scheduled to expire in December 2003, a related entity's repayment of borrowings under a line of credit. This guarantee was entered into to induce a financial institution to provide a line of credit for a joint venture, iSource, of which the Company is a minority owner. iSource is a certified minority-owned distributor of standard-use industrial specialty and general maintenance items requiring special shipping and handling. Any default, as defined in the guarantee agreement, will obligate the Company for any unpaid balance under the line of credit up to a maximum of $3,000.
In the event of a default and subsequent payout under any or all of these guarantees, the Company maintains the right to pursue all legal options available to mitigate its exposure.
NOTE 12 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 maintenance, repair 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, and general maintenance items, safety products and tools. 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 Company's reportable segment and its other businesses are the same as those described in Note 1. Certain reclassifications have been made to prior year amounts to be consistent with the presentation in the current year. Sales between the service center based distribution segment and the other businesses are not significant. Operating results are in the United States, Canada, Mexico and Puerto Rico. Operations in Canada, Mexico and Puerto Rico represent 7.4% of the total net sales of Applied, and therefore, are not presented separately. In addition, approximately 30% of these operations' net sales are included in the "Other" column relating to the fluid power business. The long-lived assets located outside of the United States are not material.
Segment Financial Information:
Service
Center
Based
Distribution Other Total
------------ ---------- ----------
YEAR ENDED JUNE 30, 2003
Net sales $ 1,373,961 $ 90,406 $1,464,367
Operating income (loss) 43,358 (420) 42,938
Assets used in the business 530,540 22,864 553,404
Depreciation 13,693 765 14,458
Capital expenditures 12,273 521 12,794
------------ ---------- ----------
YEAR ENDED JUNE 30, 2002
Net sales $ 1,354,793 $ 91,776 $1,446,569
Operating income (loss) 29,015 (2,049) 26,966
Assets used in the business 507,467 27,099 534,566
Depreciation 14,749 545 15,294
Capital expenditures 9,773 277 10,050
------------ ---------- ----------
YEAR ENDED JUNE 30, 2001
Net sales $ 1,527,936 $ 97,819 $1,625,755
Operating income (loss) 45,425 (1,952) 43,473
Assets used in the business 531,959 46,895 578,854
Depreciation 15,460 904 16,364
Capital expenditures 9,213 2,518 11,731
------------ ---------- ----------
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Applied Industrial Technologies and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Concluded
A reconciliation from the segment operating profit to the consolidated balance is as follows:
Year Ended June 30
2003 2002 2001
-------- -------- --------
Operating income for reportable segment $ 43,358 $ 29,015 $ 45,425
Other operating income (loss) (420) (2,049) (1,952)
Adjustments for:
Goodwill and other intangibles amortization (781) (1,651) (5,057)
Corporate and other income (expense), net (a) (5,903) 5,519 16,585
-------- -------- --------
Total operating income 36,254 30,834 55,001
Interest expense, net 5,298 6,738 9,105
Other expense, net 24 341 548
-------- -------- --------
Income before income taxes $ 30,932 $ 23,755 $ 45,348
======== ======== ========
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(a) The change in corporate and other income (expense), net is due to various changes in the levels and amounts of expenses being allocated to the segments. The expenses being allocated include miscellaneous corporate charges for working capital, logistics support and other items.
Net sales by product category are as follows:
Year Ended June 30
2003 2002 2001
---------- ---------- ----------
Industrial $1,242,339 $1,223,931 $1,396,170
Fluid power (b) 220,629 218,778 226,535
Other 1,399 3,860 3,050
Net sales $1,464,367 $1,446,569 $1,625,755
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(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.
NOTE 13 LITIGATION
The Company is a party to various pending judicial and administrative proceedings. Based on circumstances currently known, the Company does not believe that any liabilities that may result from these proceedings are reasonably likely to have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows.
NOTE 14 OTHER EXPENSE
Other expense consists of the following:
Year Ended June 30
2003 2002 2001
------- ------- -------
Benefit from settlement of fiscal 2000 property
insurance claim $(2,133)
Loss on iSource 2,085
Unrealized (gain)/loss on deferred
compensation trusts (30) $ 417 $ 519
Unrealized (gain)/loss on cross currency swap 464 (88) (126)
Other (362) 12 155
------- ------- -------
Net sales $ 24 $ 341 $ 548
======= ======= =======
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The loss on iSource for the year ended June 30, 2003, consists of a $1,150 provision for potential losses on a guarantee of debt of iSource, $550 for allowances on advances to iSource and $385 for the Company's share of iSource's net losses.
INDEPENDENT AUDITORS'
Report
DELOITTE
& TOUCHE
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, 2003 and 2002, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Notes 1 and 4 to the consolidated financial statements, effective July 1, 2001, the Company changed its method of accounting for goodwill as a result of the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
Deloitte & Touche LLP
Cleveland, Ohio
August 8, 2003
Applied Industrial Technologies, Inc. and Subsidiaries
Quarterly Operating Results and Market Data (Unaudited)
Per Common Share (C)
-----------------------------------------------
Income Income
Before Net Before Net Price Range
Net Gross Operating Cumulative Income Cumulative Income - Cash --------------
Sales Profit Income Effect (loss) Effect Diluted Dividend High Low
(Dollars in thousands,
except per share amounts)
---------- -------- --------- ---------- -------- ---------- -------- -------- ------ ------
2003 (A)
First Quarter $ 368,019 $ 89,902 $ 7,844 $ 3,905 $ 3,905 $ 0.20 $ 0.20 $ 0.12 $19.75 $14.81
Second Quarter 355,707 91,191 7,320 3,860 3,860 0.20 0.20 0.12 19.23 14.70
Third Quarter 368,203 97,732 10,154 4,383 4,383 0.23 0.23 0.12 18.85 15.36
Fourth Quarter 372,438 100,470 10,936 7,684 7,684 0.40 0.40 0.12 21.10 16.60
---------- -------- --------- ---------- -------- ---------- -------- --------
$1,464,367 $379,295 $ 36,254 $ 19,832 $ 19,832 $ 1.03 $ 1.03 $ 0.48
========== ======== ========= ========== ======== ========== ======== ========
2002 (A)
First Quarter (B) $ 367,990 $ 92,431 $ 10,112 $ 4,889 $ (7,211) $ 0.25 $ (0.38) $ 0.12 $19.13 $16.50
Second Quarter 347,550 87,013 6,032 2,918 2,918 0.15 0.15 0.12 19.46 16.00
Third Quarter 361,542 91,870 5,833 2,707 2,707 0.14 0.14 0.12 20.91 17.28
Fourth Quarter 369,487 94,376 8,857 4,241 4,241 0.22 0.22 0.12 21.25 18.61
---------- -------- --------- ---------- -------- ---------- -------- --------
$1,446,569 $365,690 $ 30,834 $ 14,755 $ 2,655 $ 0.76 $ 0.13 $ 0.48
========== ======== ========= ========== ======== ========== ======== ========
2001 (A)
First Quarter $ 420,876 $104,454 $ 14,251 $ 7,231 $ 7,231 $ 0.36 $ 0.36 $ 0.12 $18.31 $15.69
Second Quarter 405,438 103,902 15,134 7,362 7,362 0.37 0.37 0.12 21.00 15.88
Third Quarter 408,839 102,037 13,236 6,956 6,956 0.35 0.35 0.12 20.69 16.25
Fourth Quarter 390,602 98,906 12,380 6,499 6,499 0.33 0.33 0.12 19.19 15.65
---------- -------- --------- ---------- -------- ---------- -------- --------
$1,625,755 $409,299 $ 55,001 $ 28,048 $ 28,048 $ 1.41 $ 1.41 $ 0.48
========== ======== ========= ========== ======== ========== ======== ========
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(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. Fourth quarter adjustments in 2003, 2002 and 2001 increased gross profit by $4,410, $3,171 and $2,850; net income by $2,682, $1,868 and $1,676 and diluted net income per share by $.14, $.10, and $.08 respectively. Reductions in year end inventories during the fiscal years ended June 30, 2003 and 2002 resulted in liquidations of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect of these liquidations for the years ended June 30, 2003 and 2002 increased gross profit by $741 and $915, net income by $453 and $546 and diluted net income per share by $.02 and $.03 respectively.
(B) Effective July 1, 2001, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets." Upon adoption the Company determined that goodwill associated with its fluid power business was impaired. A non-cash charge totaling $17,600, $12,100 after tax, has been recorded as a change in accounting principle effective July 1, 2001 to write-off the remaining goodwill relating to the fluid power business. See Notes 1 and 4 to the Consolidated Financial Statements for additional information.
(C) On August 25, 2003 there were 6,168 shareholders of record, including 3,554 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 25, 2003 was $22.15 per share.
Applied Industrial Technologies, Inc. and Subsidiaries
10 Year Summary
2003 2002 2001 2000
(Dollars in thousands, except per share amounts and statistical data)
---------- ---------- ---------- ----------
Consolidated Operations-
Year Ended June 30
Net sales $1,464,367 $1,446,569 $1,625,755 $1,601,084
Operating income 36,254 30,834 55,001 57,779
Income before cumulative effect
of accounting change 19,832 14,755 28,048 31,048
Net income 19,832 2,655 28,048 31,048
Per share data
Income before cumulative effect
of accounting change
Basic 1.05 .77 1.43 1.52
Diluted 1.03 .76 1.41 1.50
Net Income
Basic 1.05 .14 1.43 1.52
Diluted 1.03 .13 1.41 1.50
Cash dividend .48 .48 .48 .48
Year End Position - June 30
Working capital $ 259,359 $ 250,644 $ 279,001 $ 255,132
Long-term debt 78,558 83,478 113,494 112,168
Total assets 553,404 534,566 578,854 594,667
Shareholders' equity 307,856 298,147 311,518 299,331
Year End Statistics - June 30
Current ratio 2.8 2.9 3.2 2.6
Operating facilities 440 449 469 478
Shareholders of record (A) 6,157 6,455 6,697 6,548
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(A) Includes participant-shareholders in the Applied Industrial Technologies, Inc. Retirement Savings Plan, and since 1998, shareholders in the Automatic Dividend Reinvestment Plan.
1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
$1,555,424 $1,518,615 $1,182,152 $1,164,778 $1,073,875 $ 952,489
42,269 58,520 50,599 49,281 36,923 27,817
19,933 30,125 27,092 23,334 16,909 12,687
19,933 30,125 27,092 23,334 16,909 12,687
.93 1.40 1.47 1.26 .97 .75
.93 1.38 1.44 1.25 .96 .73
.93 1.40 1.47 1.26 .97 .75
.93 1.38 1.44 1.25 .96 .73
.48 .47 .41 .36 .31 .29
$ 258,730 $ 221,766 $ 164,723 $ 151,956 $ 153,555 $ 144,605
126,000 90,000 51,428 62,857 74,286 80,000
574,349 606,091 394,114 404,072 359,231 343,519
293,586 299,502 212,874 192,264 169,760 150,491
3.0 2.1 2.4 2.1 2.4 2.4
444 449 377 376 374 368
6,869 6,731 4,676 4,636 4,379 4,478
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EXHIBIT 21
APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 2003
SUBSIDIARIES
(as of June 30, 2003)
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 -- CA LLC Delaware
Applied Industrial Technologies -- CAPITAL LLC Delaware
Applied Industrial Technologies -- DBB, Inc. Ohio
Applied Industrial Technologies -- Dixie, Inc. Tennessee
Applied Industrial Technologies -- Indiana LLC Ohio
Applied Industrial Technologies -- Mainline, Inc. Wisconsin
Applied Industrial Technologies -- PA LLC Pennsylvania
Applied Industrial Technologies -- PACIFIC LLC Delaware
Applied Industrial Technologies -- TX LP Delaware
AppliedLink, Inc. Ohio
* Applied Mexico, S.A. de C.V. Mexico
(90%-owned by Applied Mexico Holdings, S.A. de C.V.)
Applied Mexico Holdings, S.A. de C.V. Mexico
Applied - Michigan, Ltd. Ohio
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Jurisdiction of
Incorporation
----------------
Applied Nova Scotia Company Nova Scotia, Canada
BER International, Inc. Barbados
Bearing Sales & Service, Inc. Washington
Bearings Pan American, Inc. Ohio
Dynavest Nova Scotia Company Nova Scotia, Canada
* ESI Acquisition Corporation Ohio
(d/b/a Engineered Sales, Inc.)
* International Supply Consortium, Inc. Delaware
(33-1/3% owned by Applied Industrial Technologies, Inc.)
* iSource Performance Materials LLC Ohio
(49% owned by Applied Industrial Technologies, Inc.)
*Rafael Benitez Carrillo Inc. Puerto Rico
The Ohio Ball Bearing Company Ohio
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* Operating companies that do not conduct business under Applied Industrial Technologies name
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, 2003, 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, 2003.
/s/ Deloitte & Touche LLP Cleveland, Ohio September 15, 2003 |
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2003 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.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2003 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.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2003 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.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2003 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.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2003 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.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2003 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.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2003 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.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2003 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.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2003 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.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2003 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.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer of Applied Industrial Technologies, Inc., an Ohio corporation, hereby constitutes and appoints Fred D. Bauer and John R. Whitten, and each of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in either or both of them, to sign for the undersigned and in his or her respective name as director and/or officer of the Corporation, the Corporation's Annual Report for the fiscal year ended June 30, 2003 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.
EXHIBIT 31
APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 2003
CERTIFICATIONS
I, David L. Pugh, Chairman & Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Applied Industrial Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a. All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: September 17, 2003
/s/ David L. Pugh
---------------------------------
David L. Pugh
Chairman & Chief Executive Officer
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I, John R. Whitten, Vice President-Chief Financial Officer & Treasurer, certify that:
1. I have reviewed this annual report on Form 10-K of Applied Industrial Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a. All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: September 17, 2003
/s/ John R. Whitten
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John R. Whitten
Vice President-Chief Financial Officer &
Treasurer
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EXHIBIT 32
APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-K FOR
FISCAL YEAR ENDED JUNE 30, 2003
[The following certification accompanies the Annual Report on Form 10-K for the year ended June 30, 2003, and is not filed, as provided in applicable SEC releases.]
CERTIFICATIONS PURSUANT TO 18 U.S.C. 1350
In connection with the Form 10-K (the "Report") of Applied Industrial Technologies, Inc. (the "Company") for the period ending June 30, 2003, we, David L. Pugh, Chairman & Chief Executive Officer, and John R. Whitten, Vice President-Chief Financial Officer & Treasurer of the Company, certify that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ David L. Pugh /s/ John R. Whitten ------------------------------- ----------------------------------- David L. Pugh John R. Whitten Chairman & Chief Executive Vice President-Chief Financial Officer Officer & Treasurer Dated: September 17, 2003 |
[A signed original of this written statement has been provided to Applied Industrial Technologies, Inc. and will be retained by Applied Industrial Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.]