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2004-066
FILE REFERENCE FORM 2004-066 X Additional File Exists Additional File Contains Records Not Public, According to the Public Records Act Other FILES Date Initials Amended b Ordinance No. 2007-289 12/11/07 JR &\Our Documents\Ordin ances'~4~Fas ten al Abatement Ordinance.doc AN ORDINANCE AUTHORIZING THE MAYOR TO EXECUTE A TAX ABATEMENT AGREEMENT WITH FASTENAL COMPANY; SETTING FORTH ALL THE REQUIRED TERMS OF THE TAX ABATEMENT AGREEMENT IN ACCORDANCE WITH THE TERMS OF CHAPTER 312 OF THE TEXAS TAX CODE; SETTING FORTH THE VARI- OUS CONDITIONS PRECEDENT TO FASTENAL COMPANY RECEIVING THE TAX ABATEMENT; PROVIDING FOR A SEVERABILITY CLAUSE; AND PROVIDING AN EFFECTIVE DATE. WHEREAS, on the 2"d day of March, 2004, after a public hearing duly held in accor- dance with Tex. Tax Code §312.201 (the "Act"), the City Council passed Ordinance No. 2004- 0~D-"' (the "Ordinance") establishing Reinvestment Zone No. VII, City of Denton, Texas as a commercial/industrial reinvestment zone for tax abatement (the "Zone"), as authorized by Title 3, Chapter 312, Subchapter B of the Act; and WHEREAS, on the 2nd day of January, 2004 Fastenal Company submitted an application for tax abatement with various attachments to the City concerning the contemplated use of cer- tain property located within the Zone; and WHEREAS, the City Council finds that the contemplated use of the premises and the contemplated improvements to the premises, as indicated by Fastenal Company are consistent with encouraging the development of the Zone in accordance with the purposes for its creation and are in compliance with the Denton Tax Abatement Policy; and WHEREAS, the City Council deems it in the public interest to enter into a Tax Abate- merit Agreement with Fastenal Company; NOW, THEREFORE, THE COUNCIL OF THE CITY OF DENTON HEREBY ORDAINS: SECTION 1. That the findings contained in the preamble to this ordinance are true and correct and are adopted as a part of the whole ordinance. SECTION 2. That the City Council finds and determines the following: That the contemplated use of the premises and the contemplated improvements of the prem- ises, as indicated by Fastenal Company are consistent with encouraging the development of the Zone in accordance with the purposes of its creation and are in compliance with the Denton Tax Abatement Policy. That the City Council finds that the improvements sought by Fastenal Company within the Zone are feasible and practical and would be a benefit to the land to be included in the Zone and to the City after the expiration of the Tax Abatement Agreement to be entered into with Fastenal Company. 3. That the City Council finds that the Tax Abatement Agreement contains all the terms which are mandatorily required to be included in any tax abatement agreement under §312.205 of the Act. 4. That, in accordance with §312.2041 of the Act, the City Council f'mds that not later than the date on which the City Council considered this ordinance, and not later than the seventh day before the date the City enters into a Tax Abatement Agreement with Fastenal Company, that the City Manager, through the Director of Economic Development, who are hereby desig- nated and authorized by the City Council to give such notice, delivered to the presiding offi- cer of the Denton Independent School District and Denton County a written notice that the City intends to enter into this Tax Abatement Agreement with Fastenal Company, and that this notice included a copy of the proposed Tax Abatement Agreement in substantiaily the form of the Tax Abatement Agreement attached to this ordinance. 5. That before the passage of this ordinance, the City Council held a public hearing in accor- dance with §312.201 of the Act and created Reinvestment Zone No. VII. The City Council finds that the project within Reinvestment Zone No. VII is a redevelopment of an existing business as defined in the Tax Abatement Policy and requires additional incen- tives to promote economic development that generally satisfies the requirements of the policy and the City Council hereby waives the minimum threshold requirement within the policy for tax abatement and authorizes a tax abatement of a maximum of 35% on the increased valua- tion of the Taxable Real Property improvements and tangible personal property as more par- ticularly described in the Tax Abatement Agreement attached hereto and made a part hereof by reference as Exhibit "A" (the "Tax Abatement Agreement"). .SECTION 3. That the Mayor, or in her absence, the Mayor Pro Tem, is hereby author- ized to execute the Tax Abatement Agreement with Flowers Baking Co. of Denton LLC. in sub- stantiaily the same form as the Tax Abatement Agreement attached as Exhibit "A"~ .SECTION 4. That the City Council hereby instructs and authorizes the City Manager to inspect, audit, and evaluate the progress of Fastenal Company to determine if it has met all of the conditions of the attached Tax Abatement Agreement prior to the tax abatement going into ef- fect. SECTION 5. That if any section, subsection, paragraph, sentence, clause, phrase, or word in this ordinance, or application thereof to any person or circumstance is held invalid by any court of competent jurisdiction, such holding shall not affect the validity of the remaining portions of this ordinance, the City Council of the City of Denton hereby declares that they would have enacted such remaining portions despite any such validity. SECTION 6. That this ordinance shall become effective immediately upon its passage and approval. Page 2 of 3 PASSED AND APPROVED this the C~ dayof ~'~/4~ ,2004. EULINE BROCK, MAYOR AT TE S T: JENNIFER WALTERS, CITY SECRETARY APPROVED AS TO LEGAL FORM: HERBERT ~,~)UTY,/~TY ATTORNEY BY: ~~~ Page 3 of 3 TAX ABATEMENT AGREEMENT This Tax Abatement Agreement (the "Agreement") is entered into by and between the City of Denton, Texas (the "City"), duly acting herein by and through its Mayor, and Fastenal Company, a Minnesota Corporation (the "Owner"), duly authorized to do business and in good standing in the State of Texas, duly acting herein by and through its authorized officer. WHEREAS, the City has adopted a resolution which provides that it elects to be eligible to participate in tax abatement and has adopted guidelines and criteria governing tax abatement agreements known as the Denton Tax Abatement Policy; WHEREAS, on the 19th day of August, 2003, the City Council of Denton, Texas (the "City Council") adopted the Denton Tax Abatement Policy (the "Policy"), a copy of which is on file in the City of Denton Economic Development Office and which is incorporated herein by reference; WHEREAS, the Policy constitutes appropriate "guidelines and criteria" governing tax abatement agreements to be entered into by the City as contemplated by Section 312.002 of the Texas Tax Code, as amended (the "Code"); WHEREAS, on the 2na day of March 2004, the City Council passed Ordinance No. ~t~7~)¢-- 0&0--'(the "Ordinance") establishing Reinvestment Zone No. VII, City of Denton, Texas, as a commercial/industrial reinvestment zone for tax abatement (the "Zone"), as authorized by Title 3, Chapter 312, Subchapter B of the Code (the "Act"); WHEREAS, Owner will be the owner, as of the Effective Date (as hereinafter defined), which ownership is a condition precedent, of certain real property, more particularly described in Exhibit "A" attached hereto and incorporated herein by reference and made a part of this Agree- ment for all purposes (the "Premises") located entirely within the Zone as of the Effective Date; WHEREAS, on the 2nd day of January 2004, Owner submitted an application for tax abatement with various attachments to the City concerning the contemplated use of the Premises (the "Application for Tax Abatement"), which is attached hereto and incorporated herein by ref- erence as Exhibit "B"; WHEREAS, the City Council finds that the contemplated use of the Premises, the Con- templated Improvements (as hereinafter defined) to the Premises as set forth in this Agreement, and the other terms hereof are consistent with encouraging development of the Zone in accor- dance with the purposes for its creation and are in compliance with the Ordinance and Policy and similar guidelines and criteria adopted by the City and all applicable law; and WHEREAS, notice has been published in accordance with Chapter 312 of the Tax Code and written notice that the City intends to enter into this Agreement, along with a copy of this Agreement, has been furnished by the City, in the manner and by the time prescribed by the Code, to the presiding officers of the governing bodies of each of the taxing units in which the Premises is located; NOW, THEREFORE, the City and Owner for and in consideration of the premises and the promises contained herein do hereby contract, covenant, and agree as follows: I. TERMS AND CONDITIONS OF ABATEMENT A. In consideration of and subject to the Owner meeting all the terms and conditions of abatement set forth herein, the City hereby grants the following tax abatement ("Abatement"): 1. An abatement equal to 35% of City ad valorem taxes attributable to new capital in- vestments resulting in an increase of assessed value of real property improvements to and tangible personal property (excluding inventory and supplies) located on the Page 2 Premises but only if such increase is at least $5,000,000 over the assessed value of the Premises and tangible personal property (excluding inventory and supplies) located on the Premises as of January 1, 2003, for a period of five years commencing on January 1 of the year following the Owner's issuance of a certificate of occupancy (the "CO") for the Premises. If such increase in assessed value is less than $5,000,000 there will be no Abatement. B. A condition of the Abatement is that, by December 31, 2006 (subject to force ma- jeure delays not to exceed 180 days), a capital investment which results in an increase in the as- sessed values contemplated by Section I.A. 1 be made to the Premises. For the purposes of this paragraph, the term "force majeure" shall mean any circumstance or any condition beyond the control of Owner, as set forth in Section XXI "Force Majeure" which makes it impossible to meet the above-mentioned thresholds. C. The term "capital investment" is defined as the construction, renovation and equipping of the Improvements on the Premises (the "Contemplated Improvements" or "Im- provements'') to include (1) costs related to the development and improvement of the real estate, inchid'mg, without limitation, construction costs and design and engineering costs; (2) tangible personal property located on or at the Contemplated Improvements by Owner, excluding inven- tory and supplies. The kind and location of the Contemplated Improvements is more particularly described in the Application for Tax Abatement. D. A condition of the Abatement is that the Contemplated Improvements be con- structed and the Premises be used substantially in accordance with the description of the project set forth in the Application for Tax Abatement. E. A condition of the Abatement is that throughout the Term of the Abatement, the Contemplated Improvements shall be operated and maintained for the purposes set forth herein Page 3 so that the uses of the Premises shall be consistent with the general purpose of encouraging de- velopment or redevelopment of the Zone, except as otherwise authorized or modified by this Agreement. F. The City shall have the fight to terminate the Abatement if the Owner does not occupy the Contemplated Improvements continuously for the term of the Abatement for the pur- poses set forth in the Tax Abatement Application. In the event of such termination the Owner shall refund to the City all previous tax abatements and all tax abatements for future years shall be terminated. G. Owner agrees to comply with all the terms and conditions set forth in this Agree- ment. II. FAILURE TO MEET CONDITIONS A. In the event that (i) the conditions in paragraphs I(B) through I(G) are not met; or (ii) Owner allows its ad valorem real property taxes with respect to the Premises or Improve- ments, or its ad valorem taxes with respect to any tangible personal property, if any, owned by the Owner which is located in the Improvements, owed the City to become delinquent and fails to timely and properly follow the legal procedures for protest and/or contest of any such ad valorem real property or tangible personal property taxes; or (iii) any other conditions of this Agreement are not met, then a "Condition Failure" shall be deemed to have occurred (it being understood that a Condition Failure relating to any condition set forth in paragraphs I(B) through I(H) shall not be deemed to occur merely because at a particular time it cannot be determined whether such condition will be met, but shall occur only if at a particular time it can be defini- tively determined that such condition will not be me0. In the event that a Condition Failure oc- curs, the City shall give Owner written notice of such Condition Failure and if the Condition Failure has not been cured or satisfied within ninety (90) days of said written notice, the Abate- Page 4 ment shall be terminated with respect to the year in which notice of the Condition Failure is given and all future years; provided, however, that if such Condition Failure is not reasonably susceptible of cure or satisfaction within such ninety (90) day period and Owner has commenced and is pursuing the cure or satisfaction of same, then after first advising City Council of efforts to cure or satisfy same, Owner may utilize an additional ninety (90) days. Time in addition to the foregoing 180 days may be authorized by the City Council. It is understood that the Abatement with respect to any year prior to the year in which notice of the Condition Failure is given shall not be forfeited or recaptured except as indicated under Section II.B hereofi Notwithstanding any provision in this Agreement to the contrary, Owner shall refund to the City all tax abate- ments previously received with interest for the year in which the notice of Condition Failure is given. B. If, however, the Owner fails to construct any structures or other improvements, or fails to install any equipment or other tangible personal property within the Premises by Decem- ber B1, 2006 or if the value of thc Improvements falls below the minimum $5,000,000 threshold during the term of the Abatement, then this Agreement may be terminated by the City. In such event, Owner shall retired to the City all tax abatements previously granted and received under this Agreement with interest on the amount to be refunded at six percent (6%) per mmum. C. In the event of a Condition Failure by Owner which is not cured or satisfied as set forth herein, in addition to a partial or total recapture of the tax abatement, the City may cancel or modify this Agreement. III. RECORDS AND EVALUATION OF PROJECT A. The Owner shall provide access and authorize inspection of the Premises by City employees and allow sufficient inspection of financial information to insure that the Improve- ments are made and the thresholds are met according to the specifications and conditions of this Page 5 Agreement. Such inspections shall be done in a way that will not interfere with Owner's busi- ness operations. City shall annually (or such other times deemed appropriate by the City) evalu- ate the Project to ensure compliance with this Agreement. Owner shall provide information to the City on a form provided by the City for the evaluation. The information shall include inven- tory listing the kind, number, and location of and the total value of all Improvements to the Premises, including, without limitation, the value of all structures and all tangible personal prop- erty installed or located in the Premises. B. The City Manager shall make a decision and role on the eligibility of the Project for tax abatement based on the information furnished each year by the Owner on or before Au- gust 1 of the taxable year and shall so notify Owner and the City Council. C. During normal office hours throughout the Term of this Agreement, providing reasonable notice is given to Owner, the City shall have access to the Premises by City employ- ees for the purpose of inspecting the Premises and the Improvements to ensure that the Im- provements are being made in accordance with the specifications and conditions of this Agree- ment and to verify that the conditions of this Agreement are being complied with, provided that such inspection shall not interfere with Owner's normal business operations. D. The Owner shall annually make a certification in writing to the City Council, on or before June 1st of each year this Agreement is in effect that certifies that the Owner is in com- pliance with each applicable term of this Agreement. IV. GENERAL PROVISIONS A. The City has determined that it has adopted guidelines and criteria governing tax abatement agreements for the City to allow it to enter into this Agreement containing the terms set forth herein. Page 6 B. The City has determined that procedures followed by the City conform to the re- quirements of the Code and the Policy, and have been and will be undertaken in coordination with Owner's corporate, public employee, and business relations requirements. C. The Premises are not in an improvement project financed by tax increment bonds. D. Neither the Premises nor any of the Improvements covered by this Agreement are owned or leased by any member of the City Council, any member of the City Planning and Zon- ing Commission of the City, or any member of the governing body of any taxing units joining in or adopting this Agreement. E. In the event of any conflict between the City zoning ordinances, or other City or- dinances or regulations, and this Agreement, such ordinances or regulations shall conlxol. V. EFFECT OF SALE, ASSIGNMENT, OR LEASE OF PROPERTY A. The Abatement with respect to the Premises, including any tangible personal property located on the Premises owned by Owner, shall vest in Owner and shall be assignable, with City approval, which shall not be unreasonably withheld, to any individual, partnership, joint venture, corporation, trust or other entity (irrespective of whether or not such assignee is related to or affiliated with Owner) which acquires title to the Premises. Any assignee of Owner or any assignee of a direct or indirect assignee of Owner shall be treated as "Owner" under this Agreement. No assignment shall require the consent of City if the assignment is to a wholly- owned subsidiary of the Owner or if, following such assilgtment, the Owner continues to occupy and operate the Contemplated Improvements for the full term of this Agreement. Nor shall the consent of the City be necessary if the assignee agrees to fully comply with the terms and condi- tions of this Agreement. Page 7 VI. NOTICE All notices called for or required by this Agreement shall be addressed to the following, or such other party or address as either party designated in writing, by certified mail postage pre- pare, by hand delivery or via facsmile: OWNER: Dana Johnson Property Administration P.O. Box 978 Winona, MN 55987 Fax No. 507.453.8257 CITY: Michael A. Conduff, City Manager City of Denton 215 East McKinney Denton, Texas 76201 Fax No. 940.349.8596 VII. CITY COUNCIL AUTHORIZATION This Agreement was authorized by the City Council by passage of an enabling ordinance at its meeting on the 2nd day of March, 2004, authorizing the Mayor to execute this Agreement on behalf of the City, a copy of which is attached hereto and incorporated herein by reference as Exhibit "C". VIII. BOARD OF DIRECTORS AUTHORIZATION This Agreement was entered into by Owner, pursuant to authority granted by the Board of Directors of its ultimate parent, Fastenal Company, a Minnesota corporation, as authorized by corporate resolution to execute this Agreement on behalf of Owner; a certificate evidencing such resolution and consent is attached hereto and incorporated herein as Exhibit "D" as if written word for word herein. SEVERABIILTY In the event any section, subsection, paragraph, sentence, phrase or word is held invalid, illegal or unconstitutional, the balance of this Agreement shall stand, shall be enfomeable and Page 8 shall be read as if the parties intended at all times to delete said invalid section, subsection, para- graph, sentence, phrase, or word. In the event that (i) the term of the Abatement with respect to any property is longer than allowed by law, or (ii) the Abatement applies to a broader classifica- tion of property than is allowed by law, then the Abatement shall be valid with respect to the classification of property abated hereunder, and the portion of the term, that is allowed by law. X. ESTOPPEL CERTIFICATE Any party hereto may request an estoppel certificate fi.om the other party hereto so long as the certificate is requested in connection with a bona fide business purpose. The certificate, which if requested will be addressed to the Owner, shall include, but not necessarily be limited to, statements that this Agreement is in full force and effect without default (or if default exists the nature of default and curative action, which should be undertaken to cure same), the remain- ing term of this Agreement, the levels and remaining term of the Abatement in effect, and such other matters reasonably requested by the party(ies) to receive the certificates. XI. OWNER STANDING Owner, as a party to this Agreement, shall be deemed a proper and necessary party in any litigation questioning or challenging the validity of this Agreement or any of the underlying or- dinances, resolutions, or City Council actions authorizing same and Owner shall be entitled to intervene in said litigation. XII. APPLICABLE LAW This Agreement shall be construed under the laws of the State of Texas and is fully per- formable in Denton County, Texas. Venue for any action under this Agreement shall be in Denton County, Texas. Page 9 XIII. RECORDATION OF AGREEMENT A certified copy of this Agreement in recordable form shall be recorded in the Deed Re- cords of Denton County, Texas. XIV. MUTUAL ASSISTANCE City and Owner agree to do all things reasonably necessary or appropriate to carry out the terms and provisions of this Agreement and to aid and assist each other in carrying out such terms and provisions. Owner and City agree at any time, and from time to time, to execute any and all documents reasonably requested by the other party to carry out the intent of this Agree- ment. ENTIRE AGREEMENT This instrument with the attached exhibits contains the entire agreement between the par- ties with respect to the transaction contemplated in this Agreement. XVI. BINDING This Agreement shall be binding on the parties and the respective successors, assigns, heirs, and legal representatives. XVII. COUNTERPARTS This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Page 10 XVIII. SECTION AND OTHER HEADINGS Section or other headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. XIX. NO JOINT VENTURE Nothing contained in this Agreement is intended by the parties to create a partnership or joint venture between the parties, and any implication to the contrary is hereby disavowed. XX. AMENDMENT This Agreement may be modified by the par~ies hereto to include other provisions which could have originally been included in this Agreement or to delete provisions that were not originally necessary to this Agreement pursuant to the procedures set forth in Title 3, Chapter 312 of the Code. XXI. FORCE MAJEURE If, because of flood, fire, explosions, civil disturbances, strikes, war, acts of God, or other causes beyond the control of either Party, either Party is not able to perform any or all of its obli- gations under this Agreement, then the respective Party's obligations hereunder shall be sus- pended during such period but for no longer than such period of time when the party is unable to perform. Page 11 This Agreement is executed to be effective 30 days after the executed date of the 2nd day of March, 2004, (the "Effective Date") by duly authorized officials of the City and Owner. CITY OF DENTON, TEXAS BY: EULINE BROCK, MAYOR ATTEST: JENNIFER WALTERS, CITY SECRETARY r FASTENAL COMPANY, DANA JOHNSO~ ATTEST: BY: ~ Page 12 STATE OF TEXAS § COUNTY OF DENTON § Before me, the undersigned authority, a Notary Public in and for said State of Texas, on this day personally appeared Euline Brock, Mayor for the City of Denton, known to me to be the person who signed and executed the foregoing instrument, and acknowledged to me that this in- strument was executed for the purposes and consideration ~rein expressed. Given under my hand and seal of office this the~,~ day of March, 2004. JANE E, RICHARDSON Nota~/ Public ~; ....,~.~ My Commission Exp res · ;rt ~,,,, June 27, 2005 lq/~tary Public in and for the State of Texas My Commission Expires: ~/c7~//~ Page 13 STATE OF IvlN {} COUNTY OF WINONA {} Before me, the undersigned, Dana Johnson, on behalf of Fastenal Company, known to me to be Property Administrator, and to be the person who signed and executed the foregoing in- strument, and acknowledged to me that this instrument was executed for the purposes and eon- siderafion therein expressed. Given under my hand and seal of office this the ~ day of February, 2004. State of U M My Commission Expires: Exhibit A Tract A Property Description Being a tract of land situated in the WILLIAM NEILL, SURVEY ABSTRACT No. 970, Denton County, Texas and being a portion of that certain tract of land described in deed to John Dee Appleby, Trustee, as recorded in Volume 2549, Page 277 of the Real Property Records of Denton County, Texas, being more particularly described by metes and bounds as follows: BEGINNING at a 3/8 inch iron rod found at the Southeast comer of said Appleby Tract, being the Northeast comer of the J. W. HARDING SURVEY, ABSTRACT No. 1658, and the Northerly most Southeast comer of said WILLIAM NEILL SURVEY, lying in the approximate cemerline of Corbin Road; THENCE N 89 degrees 16 minutes 51 seconds W, along the South boundary line of said Appleby Tract at 25.94 feet passing a 8 inch creosote post, and continuing generally with a barbed wire fence in all a total distance of 1462.22 feet to a ½ inch iron rod set; THENCE N 00 degrees 24 minutes 11 seconds W, 750.57 feet departing said boundary line to a 6" wood post found at the Southwest comer of a tract of land described in deed to J. Newton Rayzor, as recorded in Volume 1796, Page 601 of the Real Property Records of Demon County, Texas lying in North boundary line of said Appleby Tract; THENCE S 89 degrees 17 minutes 48 seconds E, along the common boundary line between said Appleby Tract and said Rayzor Tract at 1426.49 feet passing a 5/8 inch capped iron rod found, and continuing in all a total distance of 1456.55 feet to a lA inch iron rod found at the Northeast comer of said Appleby Tract being the Southeast comer of said Rayzor Tract, and lying in the approximate centefline of aforesaid Corbin Road; THENCE S 00 degrees 01 minutes 56 seconds E, 751.02 feet along the East boundary line of said Appleby Tract with the approximate centerline of said Corbin Road to the PLACE OF BEGINNING, containing 25.153 acres (1,095,649 square feet) of land, more or less. and Tract B Property Description Being a part of the William Neill Survey, Abstract No. 970 and a part of said 20 acre tract and more particularly described as follows: BEGINNING at a point in the south line of the Farm to Market Highway No. 1515, said point being 1886 feet South 89 degrees 20 minutes East and 90 feet South of the Southwest Comer of FIRST TRACT above described, and being 45 feet South of the Northwest comer of said 20 acre tract; THENCE East along the South line of said Highway, 1457.2 feet to point in the East line of said Neill Survey 45 feet South of the Northeast comer of said 20 acre tract; THENCE South along the East line of said tract and survey 552.83 feet to the Southeast comer of said 20 acre tract; THENCE West 1457.2 feet to the Southwest comer of said 20 acre tract; THENCE North 552.83 feet to the place of beginning, and containing 18.5 acres of land, more or less. Being the same property as set out in Warranty Deed dated November 4, 1955, executed by Jimmie Underwood, a feme sole, et al to J. Newton Rayzor, recorded in Volume 417, Page 399, Deed Records, Denton County, Texas. Total of both tracts containing 43.653 acres, more or less. N Proposed Fastenal Site APPLICATION FOR TAX ABATEMENT CITY OF DENTON, TEXAS Property Owner Company or Project Name Mailing Address Telephone Fastenal Fastenal 1432 MacArthur Drive Carrollton TX 75067 972-245-8171 Fax No. 972-242-1586 Contact Name Title Mailing Address Kevin Freeze Regional Finance Manager 1432 MacArthur Drive Carrollton, TX 75067 Telephone 972-245-8171 ext. 119 Fax No. 507-494-6604 2. Provide a chronology of plant openings, closings and relocations over the past 15 years. Fastenal was founded in 1967 in Winona, MN by company Chairman and CEO, Bob Kierlin. Fastenal has expanded to become the fastest growing full-line industrial dis~ibutor, and is the largest fastener distributor in the nation. Our service-oriented business network currently includes an in-house Manufacturing Division, a product Quality Assurance and Engineering Department, a strategic system of Distribution Centers in the U.S., a fleet of over 100 company-owned semi-trucks and trailers and over 1100 branch sites with locations in all 50 states, Canada, Mexico, Puerto Rico and Singapore. Plans for expansion at Fastenal are as aggressive as our commitment to customer satisfaction. Chief among our main goals are "growth through customer service." Major fmancial publications such as Forbes, Financial World, 1NC. Magazine, Worth, and Business Week have all recognized Fastenal's phenomenal growth. To establish a strong presence in the North American continent, Fastenal has strategically set up hub and branch locations close to our customers-~a unique marketing and sales strategy that proves to work. Each hub services branch stores in an approximate 500-mile radius. Though a single hub generally services branches located within that radius, our 150+ million dollars worth of inventory is available for transfer from any hub nationwide. Fastenal local distribution operations in Texas began in 1991 with a lease of a 16,000 sq. ft. facility in Dallas, Texas. This facility remained in our public filings until 1995. In 1995 Fastenal purchased the current distribution center located at 1432 Mac Arthur Drive, Carrolton Texas. This facility was purchased as a 50,000 sq. ft. facility. In order to meet the demands of our growing distribution and sales this facility was expanded to 95,000 sq. ft. in 1999. 3. Provide a record of mergers and financial restructuring during the past 15 years. Fastenal Company is a public company traded on NASDAQ under the symbol FAST. Fastenal Company has been public since I987. Fastenal Company has had two small acquisitions in this time frame (all less then 5% of Fastenal Company's sales). None of these acquired entities had operations in Texas. Fastenal Company has several operating subsidiaries, none of which operate in Texas. See attached 2001 and 2002 financial reports. 4. Will the occupants of the project be owner or lessee? If lessee are occupancy commitments already existing? Fastenal will be the owner of the Properly Is the project a relocation of existing facility or a new facility to expand operations? If relocation, give current location. The current project is to relocate existing facility located at 1432 MacArthur Drive Carrollton, Texas EXHIBIT B APPLICATION FOR TAX ABATEMENT CITY OF DENTON, TEXAS Property Owner Company or Project Name Mailing Address Telephone FastenaI Fastenal 1432 MacArthur Drive Carrollton TX 75067 972-245-8171 Fax No. 972-242-1586 Contact Name Title Mailing Address Kevin Freeze Regional Finance Manager 1432MacArthurDrive Carrollton, TX75067 Telephone 972-245-8171 ext. 119 Fax No. 507-494-6604 2. Provide a chronology of plant openings, closings and relocations over the past 15 years. Fastenal was founded in 1967 in Winona, MN by company Chairman and CEO, Bob Kierlin. Fastenal has expanded to become the fastest growing full-line industrial distributor, and is the largest fastener distributor in the nation. Our service-oriented business network currently includes an in-house Manufacturing Division, a product Quality Assurance and Engineering Department, a strategic system of Distribution Centers in the U.S., a fleet of over 100 company-owned semi-tracks and trailers and over 1100 branch sites with locations in all 50 states, Canada, Mexico, Puerto Rico and Singapore. Plans for expansion at Fastenal are as aggressive as our commitment to customer satisfaction. Chief among our main goals are "growth through customer service." Major financial publications such as Forbes, Financial World, INC. Magazine, Worth, and Business Week have all recognized Fastenal's phenomenal growth. To establish a strong presence in the North American continent, Fastenal has strategically set up hub and branch locations close to our customers--a unique marketing and sales strategy that proves to work. Each hub services branch stores in an approximate 500-mile radius. Though a single hub generally services branches located within that radius, our 150+ million dollars worth of inventory is available for transfer from any hub nationwide. Fastenal local distribution operations in Texas began in 1991 with a lease ofa 16,000 sq. ff. facility in Dallas, Texas. This facility remained in our public filings until 1995. In 1995 Fastenal purchased the current distribution center located at 1432 Mac Arthur Drive, Carrolton Texas. This facility was purchased as a 50,000 sq. fi:. facility. In order to meet the demands of our growing distribution and sales this facility was expanded to 95,000 sq. f~. in 1999. Provide a record of mergers and financial restructuring dubing.the past 15 years. Fastenal Company is a public company traded on NASDAQ under the symbol FAST. Fastenal Company has been public since 1987. Fastenal Company has had two smalI acquisitions in th!s time frame (all less then 5% of Fastenal Company's sales). None of these acquired entities had operations in Texas. Fastenal Company has several operating subsidiaries, none of which operate in Texas. See attached 2001 and 2002 financial reports. 4. Will the occupants of the project be owner or lessee? If lessee are occupancy commitments already existing? Fastenal will be the owner of the Property Is the project a relocation of existlng facility or a new facility to expand operations? If relocation, give current location. The current project is to relocate existing facility located at I432 MacArthur Drive Carrollton, Texas If an existing Denton business, will project result in abandonment of existing facility? If so, the value of the existing facility will be subtracted from the value of the new facility to arrive at total project value. This is not a relocation of an existing Denton Business 7. Property Description -Attached is a copy of the property legal description detailing property's metes and bounds. -Attach map of project including all roadways, land use and zoning within 500 feet of site. 8. Current Value. Attach copy of latest property tax statement from the Denton County Central Appraisal District (include both real and personal property). Approximately $1,600,000.00 9. Increased Value/Estimated Total Cost of Project Structures $4,500,000.00 Site Development $500,000.00 Personal Property $2,000,000.00 Other Improvements $0 10. Indicate amount of tax abatement and number of years requested for each taxing entity CityofDenton .54815 35 % 5 Years Denton County .24897 35 % 5 Years List any other f'mancial incentives this project will request/receive Estimated Freeport Exemption Estimated Electric Utility Industrial Development Rider Estimated Water/Wastawater Infi'astructure Assistance $2,085,541.00 / year Anticipated $140,000 11. Give a brief description of the activities to be performed at this location, including a description of products to be produced and/or services to be provided. Facility will be the regional office and distribution center servicing; Texas, Arkansas, Louisiana, Oklahoma, New Mexico, and Mexico. This facility will also provide regional offices for this area. The facility will include a distribution center, regional Paining facility, light manufacturing facility, tool repair center, and sales office. Facilities primary function is to distribute and warehouse product to regional branch locations. 12. Project Construction Phase A. Estimated pereentage of project development and construction dollars to be spent with Denton based contractors or sub-contractors. Construction Costs: Under Negotiation Pementage Local Contractors: N/A Construction Employment Estimates Start Date (Mo/Yr) 4-1-2006 No. of Constructinn Jobs N/A Phase I Completion Date (Mo/Yr) 12-31-06 Estimated Total Construction Payroll $ N/A C. Describe any off-site infrastructure requirements: Water N/A · Wastawater N/A · Streets N/A Drainage N/A Other N/A 13 Project Operation Phase. Provide employment information for the number of years tax abatement is requested. Employment Information A. Total number of permanent, full time jobs B. Employees transferred fi.om outside Denton C. Net permanetu full-time jobs (A. minus B.) D. Total annual payroll for all permanent Full time jobs Total annual payroll is Existing At Project At 10 Year Operation Start Date Phase Ill 12-30-03 4-1-06 Completion 86 113 245 52 68 147 34 45 98 $4,743,000 $5,728,140 $13,506,654 Types of jobs created. List the job titles and number of positions in each category that will be employed at the facility. Provide average wage for each category Regional Vice President Regional Finance Manager Regional Developmental Manager Hub Manager 2 Assistant Hub Managers 2 District Managers 2 Regional Sales Consultants 2 National Accounts Sales Consultants 10 Office Staff Purchasing Manager 5 Purchasing Staff l0 Tool Repair 5 Light Manufacturing 5 Branch Employees 25 Track Drivers 3 Logistics Managers 10 FulI Time Warehouse 77 Part Time Warehouse N/A N/A N/A N/A N/A N/A N/A N/A 11.53 / Hour $35k-$55k 11.53 / Hour 11.53 / Hour 11.53 / Hour $25k-$40k $35-$55k $30k-$45k 11.53 / Hour 9.53 / Hour Estimate annual utility usage for project Electric $179,006.00 Wastewater $1,122.72 Irrigations $1,272.00 Water $1,238.16 Gas $24,000.00 Fire line $1,200.00 14. Describe any other direct benefits to the City of Denton as a result of this project (e.g., sales tax revenue or project elements identified in Tax Abatement Policy, Section Ill). 1. Relocation of our current distribution center to Denton will further develop our relationship of recruiting with the University of North Texas and future recruiting with Texas Women's University. 2. Over 50% of all new jobs for this facility and will be filled by Denton residents. 3. The relocation of this facility will provide know]edge based jobs specifically related to the field of managemant and business requiring a minimum ora bachelor's degree. 4. The new regional facility will serve as a regional training and development center. 15. Is property zoned appropriate? Current zoning: Zoning required for proposed project. Anticipated variances: 16. Is property platted? No Will replatting be necessary? Yes No Agricultural Industrial None 17. Discuss any environmental impacts created by the project. A. List any permits for which applicant must apply. Applicant will be required to provide City with copies of all applications for environmental permits upon completion of application (s). None B. Provide record of compliance to all enviromnental regulations for the past five years. None 18. Provide specific detail of any business/residents that will be displaced and assistance that will be available from the requesting company. There will be no business or resident that will be displaced by the construction of this facility. 19. Provide description of any historically significant area included within the project's area as determined by the Historic preservation Officer. If any, give detail of how the historically significant area will be preserved. None 20. Justification for Tax Abatement Request: Substantiate and more fully describe the justification for this request. Include the amount of the abatement requested and show how it will contribute to the financial viability of the project. Submit attachments if necessary. See 14. 21. List additional abatement factors to be considered for this project as outlined on pages 3 and 4 of the tax abatement policy. See I4. 22. Financial Information: See Attached 2001 and 2002 Annual Financial Report This tax abatement application is submitted with the acknowledgement that additional certified financial information may be required. Authorized Signature Kevin Freeze Regional Finance Manager Fastenal Date 01- PROp E~q~Y DE~O~t~TION 8elna a f, maf. of land el~a~ed In ,~e ~ ~. 5 ~ ~ Nc. m~ded Jn Volume ~, Page 2~ ~ ~ ,~el P~ ~ R~o~8 of ~t~ ~n~y, Te~g~, bein~ more::pa~oul~ ~cHb~ by m~ and ~n~ a* ~l~H~' at ,a 3/8 ;neb iron ~ found ~ ~ ~1 ~aet co.er ~ ~aid ~p~by Tract, being the go~ner of ~aid WILL~M NEI~ ~, ~JHg i~ ~e apl ~xlma~e ~nte~ne of ~E N. 89' .16' 5~" W, at~g ~he ~un~;~ ~ne of ~aid ~pleby T~ct at 26.94 f~ packing a 8 ~e~:c~o.a~e po~t, and conflnu[ne gently wi~h~a barbed ~ire fence n a a t~a 1462.22 feet to a ~/2 inch iran md ~e~; ~ENCE N OB' 24' 1~" W, 7~,~7 f~ ~ ~ld}~bound~ line to' a 6' ~ pa~t found at the ~uth~t comer of a ~ct or,land ~fl~ m d~¢~ d. Ne~to~ Rayzor, as meo~eg in Volume 1796, Page 501 ~f the ~1 P~pe~y Rec~ of ~n~n County Tex~ lying in No~h boundo~ I~fle of said ~pleby Trac[;= ~ENCE S a~ 17' ~8' E =long the ~m~n ~un~a~ line between ~id ~pleby Treat and said Rayzor Tract at 1~26.~9 fee~ ~ing a 5~ ~n~ ca~ i~n r~ found, and ca~n~n~ in arl a total distance of 145B.55 feet t= a !I/2 i~h I~n r~ feu~ at ~he No,beast comer of sot~ ~pleby Tract approximate canton,ne at ~rd ~o~n ~a~ ~ ~e P~CE OF BEGINNING, oentaining (1,OgSjB4g equate feet) of lan~; ~ ~ COMM~M~NT FOR TrTLE INSURANCE GFNo. 147294 Commitm~atNo. 147294 EXHIRIT ' ~ ' Beiri8 a p~ of ~e Wfll~ ~1 S~y, A~ No. 970 ~d a p~ ofs~d 20 a~ ~t ~d m~ p~l~ly de,~3~ ~ follows: B~.~G at a po/al in the south 1/nc of the Farm to M~rk~t Hig~may No. 1515, said point bein~ 1886 feet South 89 degre~ 20 m/nu~es F.~t sad 90 feet South of the Southwest come~ of FIRST TRACT above &s~ribad, anti being 45 feet $o~th of the Northwest come~ of said 20 act= Irsct; THI~CB F~t along the South tine of sa/d Highway, 1457.2 fogt to point in the East line of said ~qefll Survey 45 feet South of the Nor~haast com~ of said 20 acre traot; TtiliNCE South along the East ]iue of said tra~t mol survey 552.83 f=et to the SoutheaSt corner of said 20 sere iract; West 1457,2 feet to the Southwest corncr of said 20 lga'e ~zact; THt~CE North 552.83 fe~t to the place of begirming, and contaitting 18.50 acres of ls~ad, rao~ or less. Being the same prop~aj aS sot out in Warnmty Deed dated November 4 1955, ~xe. cuted by $immie Undoin~od, a fen~ sole~ et al to S. Nevaon P. ayzor~ recorded in Volume 417, page 399, Deed Records, D~tori Cotalty, Teocas. NOTE: Tt~ COMPANY DON. S NOT REPRESENT THAT .THE ALCOVE ACREAGE AND/OR SQUARE FOOTAGE CALCULATIONS ARE COKR.ECT. FOttM T-7! C.v,,,mltro~n/q~r Tii]'a'InSUm%a &~agu]© A of,~m C~,,,,,dm~.nt euusis~ of 2 9t~a(a) Seeurlt~ Union Title Jrflsurauce C0mpany. Airport Shaded A,'en ;,~lic.~l~ ?roprrl~ Annual Report Page 2 of 38 Profile of Fastenal Company Fastenal Company was founded in 1967. As of December 31, 2002, the Company operated 1,169 store sites located in 50 states, PuertoRico, Canada, Mexico and Singapore and employed 4,743 people at these sites. In addition, there were 2,365 people employed in various support positions. The Company sells approximately 356,000 different types of industrial and construction supplies in ten product categories. These include approximately 169,000 different types of threaded fasteners and miscellaneous supplies; approximately 67,000 different types of tools; approximately 29,000 different types of metal cutting tool blades; approximately 34,000 different types of fluid transfer components and accessories for hydraulic and pneumatic power; approximately 10,000 different types of material handling and storage products; approximately 5,000 different types ofjaniturial and paper products; approximately 10,000 different types of electrical supplies; approximately 17,000 different types of welding supplies (excluding gas & welding machines); approximately 9,000 different types of safety supplies; and approximately 6,000 different types of raw materials (metals). As of December 3 l, 2002, the Company operated eleven distribution centers located in Minnesota, Indiana, Ohio, Pennsylvania, Texas, Georgia, Washington, California, Utah, North Carolina, and Kansas and also a facility located in Tennessee which is used to distribute "Customer Service Project" inventory and supplies to new stores and to existing stores for their conversion. (See additional discussion below.) Approximately 95.7% of the Company's 2002 sales were attributable to products manufactured by others, and approximately 4.3% related to items manufactured, modified or repaired by either the Company's Manufacturing Division or its Support Services. Since December 31, 2002, the Company has opened additional store sites. [] LOGO This Annual Report, including the sections captioned "President's Letter to Shareholders," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Stock and Financial Data," contains statements that are not historical in nature and that are intended to be, and are hereby identified as, "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), including statements regarding the expected non- recurrence of a large increase late last year in expenses for general self-insured claims, the implementation of the Company's Customer Service Project (CSP), the expansion of the course offerings at the Fastenal School of Business, opening of new distribution centers, the leveling off of sales growth and the variability of sales at older stores, expansion of foreign operations, capital expenditures, funding of expansion plans, expected increased leasing of vehicles, and dividends. A discussion of certain risks and uncertainties that could cause actual results to differ materially fi.om those predicted in such forward-looking statements is included in the section of this Annual Report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company assumes no obligation to update either such forward-looking statements or the discussion of such risks and uncertainties. fi~e://C:~D~cuments%2~and%2~Settings~LBRATL~F\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 AnnuflRepo~ Page 3 of 38 Table of Contents r~LOGO pages 2-3 PRESIDENT'S LE~I~ER TO SHAREHOLDERS page 4 SIX-YEAR SELECTED FINANCIAL DATA pages 5-8 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS page 9 STOCK AND FINANCIAL DATA page 10 CONSOLIDATED BALANCE SHEETS page 11 CONSOLIDATED STATEMENTS OF EARNINGS page 12 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY & COMPREHENSIVE INCOME page 13 CONSOLIDATED STATEMENTS OF CASH FLOWS pages 14-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS page 20 REPORT OF MANAGEMENT 8~ INDEPENDENT AUDITORS' REPORT Inside Back Cover OFFICERS ~; DIRECTORS CORPORATE INFORMATION IlSL°G°] 2002 Annual Report 1 o o o o file://C:XDocuments ~20and ¥o20SettingsXLBRATLIF~Local ~20Settings\Temp\2002 Vo20An... 1/2/2004 Annual Report Page 4 of 38 President's Letter to Shareholders For Fastenal, 2002 was a better year than 2001 but not a great one. We were able to grow both our sales and our earnings in 2002. Sales in 2002 were $905.4 million, a 10.7% increase over sales of $818.3 million in 2001. We continued to see improvement in our sales growth throughout much of the year. The industrial economy was difficult to read in 2002. We saw a slow but continual improvement in our business for the first six months of the year, then saw a weakening in July. After July, sales slowly gained momentum through November, again slowing down around the holidays. Despite the uncertain economy, we opened 144 stores increasing our total to 1,169 at year-end. Our net earnings in 2002 were $75.5 million, an increase of 7.7% over $70.1 million in 2001. This was made possible by the increase in sales and the gain we had on the sale of our DIY Business (see description on page 5). Our people did a good job of expense control in 2002, but we had some large unexpected increases in our expenses for general self-insured claims late in the year. These expenses were to cover changes in claim estimates from 2002 and earlier years and should not be reoccurring. in October, we completed the sale of our DIY Business to The Hillman Group. We learned a lot about retail sales and customer service in the 13 months we owned this business. Based on this, we felt Fastenal could best service its industrial and construction customers by applying what we learned to our Fastenal stores. We wanted to focus all of our energy and resources on improving our stores. ARer purchasing the DIY Business, we put a team of experienced Fastenal employees in place to lead the business. These individuals spent a great deal of time in hardware and lumber stores, setting displays and merchandising product. They soon came to us with many ideas that they believed could improve our stores. These ideas centered on stocking a broader inventory in our stores and displaying it so our customers can service themselves. The team believed this would improve the efficiency for both our people and our customers. Our sales rome, marketing department, and finance people researched this further and concluded it was worth the investment to assemble a team and develop this concept. Internally, the concept is known as the Customer Service Project, or CSP. Our product development and marketing people, along with the help of our suppliers, spent months determining which products should be represented and how they should be memhandised. In the next 12 months you should see significant changes taking place at our Fastenal stores. We are re-merchandising them with an open floor design, a broader product selection, improved signage and improved store fixtures, and we are making system changes that will speed up the invoicing process. Since June 2002, we converted approximately 75 of our existing stores to and opened approximately 80 stores with this new format; each time getting a little better at the process and achieving better results. The early returns on our investments look favorable. Based on these results, and our continued commitment to improve our customer service, we intend to continue to move forward on this project. Our plan is to convert approximately 80 stores per month and to open all new stores with the CSP format in 2003. Our goal is simple: to position our stores to be the best industrial products distributor in each of the markets we are in. The Fastenal School of Brininess experienced continued success and growth in 2002, both in the number of people served and also in the programs offered. The number of employees attending Fastenal School of Business courses in 2002 increased approximately 50% from 900 in 2001. An accelerated training program for high potential employees seeking store manager positions started mid year and continued to expand. The school will continue to expand its course offerings in alignment with our business and employee needs. For our National Accounts group, 2002 was a good year. We added 65 new accounts, bringing our total number of national account customers to 211. We continued to see improvement in our sales growth throughout much of the year. In the first quarter, our national account sales grew 20.4% over the previous year, and in the fourth quarter such sales grew 30.9%. In 2002, national account sales represented 20.7% of our overall sales. Our efforts to sell to government accounts were also very successful. Sales to the government grew 53.1% over 2001. In 2002, govemment sales represented 1.7% of our overall sales. 2 2002 Annual Report file://C:~,Documents% 20and%20Settings\LBRATLIF\Local%20Settings\Temp\2002%20An... 1/2/2004 Annual Report Page 5 of 38 President's Letter to Shareholders In the third quarter, we started a new specialty sales group focused on the largest construction companies in North America. This is a small group of expetienced employees who focus their efforts on developing national sales agreements with large construction companies. Our marketing department continued to work on product development in 2002; adding more than 63,000 new parts to existing product lines. Late in 2001, we added raw materials (or metals) to our product offering, and in the second half of 2002 we added a selection of metals to 25 stores. This selection consists of over 300 items in different materials, shapes, and sizes. This product offering is focused on selling smaller quantities to the maintenance market. Although the Internet is not changing our business like some thought it would, we continue to use it to improve our business. In 2002 we introduced our new electronic billing software. This project was developed internally and allows our customers to access their account information 24 hours a day. This program has received great reviews fi.om our customers. In December we introduced a new website designed for recruiting and screening prospective employees. The initial results have been very promising. Take a look at www.fastenal.com. During 2002 we purchased two new distribution centers. The first is a 198,000 square foot facility in Atlanta, Georgia that will open in the f'n'st quarter of 2003. This facility will replace our existing distribution center in Atlanta, which is 54,000 square feet. The second is a 62,000 square foot facility in Kitchener, Ontario. This facility will be our first distribution center in Canada and is expected to open in the second quarter of 2003. Although the results we reported for 2002 were less than great, I believe the efforts put forth by the Fastenal team were, indeed, great. I want to thank every one of them. We are better positioned than we have ever been to grow our business, to grow the opportunities for our employees, and to create better returns for our shareholders. Thank you for your support and your belief in the Fastenal Team. [] LOGO 2002 Annual Report 3 fi~e://C:~D~cuments%2~and%2~Settings~LBRATLIF\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 6 of 38 Six -Year Selected Financial Data (AMOUNTS 1N THOUSANDS EXCEPT EARNINGS AND DIVIDENDS PER SHARE INFORMATION.) Operating Results Percent Years EndedDe~ 31 2002 Change 2001 2000 1999 1998 1997 Netsales $905,438 10.7% $818,283 755,618 618,191 511,233 404,248 Gross profit 448,476 8.7% 412,427 388,118 319,460 265,179 209,143 Earnings before income taxes 121,207~ 6.7% 113,634 131,430 106,479 86,123 67,336 Net earnings 75,5422 7.7% 70,112 80,730 65,455 52,953 40,834 Basic and diluted earnings per share 1.002 8.7% .92 1.06 .86 .70 .54 Dividends per share $ .05 11.1% $ .045 .04 .02 .01 .01 Weighted average shares outstanding 75,877 -- 75,877 75,877 75,877 75,877 75,877 Financial Position December 31 Net working capital $349,422 16.2% $300,680 247,876 193,744 142,459 106,555 Totalassets 559,008 17.6% 475,244 402,464 318,621 251,234 205,137 Totalstockholders' equity $499,871 17.6% $424,888 359,258 281,960 217,646 165,872 All information contained in this Annual Report reflects the 2-for-I stock split effected in the form of a stock dividend in 2002. Amount includes a gain on the sale of the DIY Business of $5,934. Amount includes an exlraordinary gain, net of tax, of $716, or $.01 per basic and diluted share. 4 2002 Annual Report fl~e://C:~D~cuments%2~and%2~Settings\LBRATL~F\L~al%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 7 of 38 Management's Discussion & Analysis of Financial Condition & Results of Operations (AMOUNTS IN THOUSANDS EXCEPT PERSONNEL COUNTS AND DIVIDENDS PER SHARE.) Results of Operations During August 2001, the Company acquired a business which sold packaged fasteners to the retail market (Do-It-Yourself or DIY Business). During October 2002 this business was sold. The DP/Business had sales of $16,974 and $8,526 (or approximately 1.9% and 1.0% of the consolidated sales of the Company) during 2002 and 2001, respectively. Net sales for 2002 exceeded net sales for 2001 by 10.7%. This compares with an 8.3% net sales growth rote experienced from 2000 to 2001. The increase in net sales in 2002 came primarily fi.om new site openings, unit sales growth in existing sites less than 5 years old, growth in'the newer product lines, and the acquisition. The growth in 2002 was tempered by a slight deflationary impact to pricing. The increase in net sales in 2001 came primarily from new site openings, unit sales growth in existing sites less than 5 years old, growth in the newer product lines, and the acquisition. This 2001 growth was tempered by a contraction of 3.0% in the sales of sites open more than 5 years and by a deflationary impact to pricing during the year. The following table indicates: (1) percentage of net sales fi.om the Fastenal product lme and from the newer product lines and (2) product lines added to the original fastener product line and the year of introduction. Introduced 2002 2001 Fastenal Product Line 1967 55.6% 58.8% Tools 1993 11.1% 11.6% Cutting Tools 1996 5.4% 5.5% Hydraulics & Pneumatics 1996 6.0% 5.2% Material Handling 1996 6.7% 6.7% Janitorial Supplies 1996 3.2% 2.5% Electrical Supplies 1997 2.6% 2.4% Welding Supplies 1997 2.8% 2.3% Safety Supplies 1999 4.1% 3.3% Raw Materials 2001 0.1% 0.2% Retail Packaged Products* 2001 1.9% 1.0% Other - 0.5% 0.5% *The Retail Packaged Product line was added as a result of the DIY Business acquisition. This business was sold in October 2002. This product line has been merged into the Company's other product lines. Threaded fasteners accounted for approximately 46%, 49%, and 51% of the Company's consolidated sales in 2002, 2001, and 2000, respectively. Sites opened in 2002 contributed approximately $18,600 (or 2.1%) to 2002 net sales. Sites opened in 2001 contributed approximately $56,370 (or 6.2%) to 2002 net sales and approximately $21,620 (or 2.6%) to 2001 net sales. The rate of growth in sales of sites generally levels off at, er sites have been open for five years, and the sales of older sites typically vary mom with the economy than do the sales of younger sites. The twelve months of 2002 and 2001 had daily sales growth rates of(compared to the comparable month in the preceding year, and excluding the impact of the DIY Business): fi~e://C:~D~cuments%2~and%2~Settings~LBRATL~F~L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 8 of 38 Month 2002 2001 January 2.7% 20.0% February 4.8% 16.2% March 6.0% 11.4% April 9.3% 9.0% May 9.4O/o 9.4% June 11.0% 7.6% July 8.7% 7.4% August 10.4% 5.9% September 12.5% 4.8% October 13.3% 1.0% November 17.9% -0.5% December 11.6% 1.4% Note: Daily sales are defined as the sales for a period divided by the number of business days in a period. The daily sales growth rates above represent several trends. The first being a downward trend in the first eleven months of 2001, which reflected the overall weakening of the industrial economy we service in North America. This trend reversed itself from December 2001 to June 2002; this was partly due to changing comparisons in the prior year and partly due to · stronger month-to-month (i.e. 'April to May and May to June) growth rates compared to 2001. During July 2002, the daily sales growth rate decreased and began to improve again in August 2002 and September 2002. Dur'mg the fourth quarter, the daily sales growth rate continued to grow through November, and slipped in December, the final month of the year. Gross profit as a percent of net sales was 49.5% in 2002, 50.4% in 2001, and 51.4% in 2000. The fluctuations resulted primarily from changes in the mix of products being sold. Absent the DIY Business acquisition, the gross profit percent would have been 0.4% and 0.2% higher in 2002 and 2001, respectively. The DIY Business operated at 30% to 32% gross margin. 2002 Annual Report 5 fi~e://C:~D~uments%2~and%2~SettingsxLBRATL~L~cal%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 9 of 38 Management's Discussion & Analysis of Financial Condition & Results of Operations (AMOUNTS 1N THOUSANDS EXCEPT PERSONNEL COUNTS AND DIVIDENDS PER SHARE.) Operating and administrative expenses were 37.0% of net sales in 2002, compared to 36.7% of net sales in 2001, and 34.2% of net sales in 2000. These increases were primarily due to changes in payroll and related costs, changes in occupancy costs, flat or lower net sales in stores greater than five years old, and, with respect to 2002, changes in the estimate of general self- insured clams, pins the impact of the August 2001 acquisition. In 2002 and 2001, payroll and related costs, increased at a rate which was greater than the rate of increase in net sales. The increases in payroll and related costs were due to the following increases in the average number of employees: 2002 2001 Sales Personnel 6.1% 7.4% Support Personnel 11.4% 8.3% During the fourth quarter of 2002, we completed the preparation for our January 2003 change in our general insurance provider. During this process, our first change in over 20 years, we experienced some difficulties. As is common in the industry, we have a self-insurance program that is administered by our insurance provider. On a periodic basis, we are updated as to the status of our claims. This update includes an estimate by our insurance provider regarding the reserves needed for open claims. During the transition process, we were advised by our old insurance provider of reserve levels which were inconsistent with earlier information and with estimates previously provided. The estimation process conducted by our outside insurance provider indicated a reserve adjustment of approximately $4 million was necessary. This change was recorded during the fourth quarter and increased our operating and administrative expenses in 2002. In 2002 and 2001, the rate of increase in occupancy costs was greater than the rate of increase in net sales. Occupancy costs increased due to a 14.0% and a 14.3% increase in the number of sites in 2002 and 2001, respectively. Interest income, net of interest expense, in 2002 decreased $266 from 2001. Interest income, net of interest expense, in 2001 increased $207 over 2000. Changes were due to the fluctuations in the weighted average amount of outstanding Company investments combined with the impact of lower interest rates in 2002 and 2001. The loss on sale of property and equipment in all years came primarily from the sale of used vehicles. The gain on sale of the DIY Business in 2002 was from the sale of the business acquired in 2001. The extraordinary gain of $716, net of tax, in 2002 resulted from the negative goodwill recognized on the DIY Business acquisition. Net earnings grew 7.7% from 2001 to 2002 and contracted 13.2% from 2000 to 2001. During 2002 and 2001, the net earnings growth rote was lower than that of net sales because of the earlier mentioned impact of operating and administrative costs. The growth in net earnings in 2002 resulted primarily from increased net sales and from the gain on the sale of the DIY Business. The contraction in net earnings in 2001 resulted primarily from ( I ) lower net sales growth, (2) the decrease in gross margin percentage, caused primarily by changes in product mix, (3) the decrease in the gross margin dollars generated in older stores due to decreases in net sales, (4) the additional expenses of store site openings (see comments earlier), (5) the added impact of increases in utility and health care costs when compared to the same period in 2000, and (6) the increase in depreciation expense associated with additions of proper~y and equipment, most notably sot~vare and hardware for the Company's management information system. Effects of Inflation Price deflation related to certain products negatively impacted net sales in 2002, 2001, and 2000. Critical Accounting Policies The Company's estimates related to certain assets and liabilities are an integral part of the consolidated financial statements. These estimates are considered critical to the consolidated financial statements because they require subjective and complex judgments. fi~e://C:~)~cuments%2~and%2~Settings~LBRATL~F~L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 10 of 38 Allowance for doubtful accounts - This reserve is for accounts receivable balances that are potentially uncollectible. The reserve is based on (1) an analysis of customer accounts and (2) the Company's historical experience with accounts receivable write-offs. The analysis includes the aging of accounts receivable, the financial condition of a customer or industry, and general economic conditions. Management believes the results could be materially different if historical trends do not reflect actual results or if economic conditions worsened for the Company's customers. Inventory reserves - This reserve is for shrinkage, slow moving, and obsolete inventory. The reserve is based on an analysis of inventory trends. The analysis includes inventory levels, physical inventory counts, cycle count adjustments, the nature of the products and their inherent risk of obsolescence, the gross margin of the product, and the on-hand quantities relative to the sales history for the product. Management believes the results could be materially different if historical 6 2002 Annual Report fi~e://C:\D~cuments%2~and%2~Settings\LBRATL~F\L~ca~%2~Settings\Temp\2~~2%2~An... 1/2/2004 Annual Report Page 11 of 38 Management's Discussion & Analysis of Financial Condition & Results of Operations (AMOUNTS IN THOUSANDS EXCEPT PERSONNEL COUNTS AND DIVIDENDS PER SHARE.) trends do not reflect actual results or if demand for the Company's products decreases because of economic or competitive conditions. Health insurance reserves - This reserve is for incurred but not reported health claims. The reserve is based on an external analysis of the Company's historical claim reporting trends. Management believes the results could be materially different if historical trends do not reflect actual results. General insurance reserves - This reserve is for general claims related to worker's compensation, property and casualty losses, and other self-insured losses. The reserve is based on an external analysis of the Company's historical general claim trends. Management believes the results could be materially different if histurical trends do not reflect actual results. (See comments earlier.) LiquidiO~ and Capital Resources Net cash provided by operating activities was: 2002 $17,819 2001 $91,727 2000 $38,253 The 2002 decrease in net cash provided by operating activities was primarily due to the increases in inventory for the continued implementation of the Company's "CSP" Project (discussed below). The 2001 increase in net cash provided by operating activities was primarily due to the decrease in cash needed to fund trade accounts receivable and inventory due to lower sales growth in 2001. During 2002, the Company's inventory level increased by $64,556 (or 42.3%) fi.om December 31, 2001. The increase in 2002 was the result off (1) growth in sales and in the number of store locations over the last two years, (2) the Company's "CSP" implementation, and (3) higher stocking levels in the Company's distribution centers. During 2001, the Company's inventory level increased $9,638 (or 6.7%) from December 31, 2000. During 2002, the Company began its Customer Service Project (CSP). This project centers on stocking a broader inventory in each of our stores and displaying it so our customers can service themselves. The impact of this project on our inventory will vary from store to store. The inventory stocked under a C SP format consists of a corn stocking level of approximately $55,000 per location. Existing stores stock some, but not all, of the inventory stocked under the CSP format. The existing stores converted have experienced increases in their inventory levels as they fill out the product selection. New stores, prior to the CSP, opened with approximately $25,000 of inventory per location, and would grow this amount to approximately $50,000 aRer operating for twelve months. On December 31, 2002, the Company had 155 stores operating under the CSP format. This number consisted of 75 existing stores and 80 new stores. The Company currently intends to convert approximately 80 stores per month and to open all new stores with the CSP format beginning in 2003. Net cash used in investing activities was: 2002 $47,007 2001 $60,648 2000 $43,300 The 2002 decrease in net cash used in investing activities resulted primarily from the sale of the D1Y Business. The 2001 fi~e://C:\D~cuments%2~and%2~Set~ingsxLBRATLIF\L~~a~%2~Setfings\TempL2~~2%2~An... 1/2/2004 Annual Report Page 12 of 38 increase in net cash used in investing activities resulted primarily from the purchase of the DIY Business and from the increase in marketable securities. The Company had future commitments for leased facilities and for leased vehicles at December 31, 2002. The Company had $6,533 of long-term debt related to an Industrial Revenue Bond (IRB) at December 31, 2002 and 2001, and had no long-term debt at December 31, 2000. The future contractual cash obligations related to the commitments are as follows: Total 2005 and After 2003 2004 2006 2006 Facilities $33,951 18,269 9,534 5,702 446 Vehicles 12,597 8,182 4,199 216 -- IRB 6,533 -- 6,533 Total $53,081 26,451 13,733 5,918 6,979 The Company has a letter of credit issued on its behalf to its insurance carrier. The future commercial commitment related to the letter of credit is $3,969. See notes 8 and 9 of the Notes to Consolidated Financial Statements for additional information related to these obligations and to our current line of credit. The Company paid an annual dividend of $.05 per share in 2002, $.045 per share in 2001, and $.04 per share in 2000. As of December 31, 2002, the Company had no material outstanding commitments for capital expenditures. The Company expects to incur approximately $38,000 in total capital expenditures in 2003, consisting of approximately $7,000 for manufacturing, warehouse and 2002AnnualRepo~ 7 fi~e://C:xD~cuments%2~and%2~Settings\LBRATL~F\L~ca~%2~Settings\Temp~2~~2%2~An... 1/2/2004 Annual Repo~ Page l3 of 38 Management's Discussion & Analysis of Financial Condition & Results of Operations (AMOUNTS IN THOUSANDS EXCEPT PERSONNEL COUNTS AND DIVIDENDS PER SHARE.) packaging equipment and facilities, approximately $7,000 for shelving and related supplies for the Company's "CSP" implementation, approximately $6,000 for data processing equipment, approximately $10,000 for store buildings, and approximately $8,000 for vehicles. The capital expenditures for vehicles, which represented a substantial portion of the total amount in prior years, represented a smaller portion in both 2002 and 2001. This decrease fi.om earlier years is a direct result of increases in the number of vehicles leased as opposed to owned. We expect this to recur in 2003. Management anticipates funding its current expansion plans with cash generated fi.om operations, fi.om available cash and cash equivalents, and, to a'lesser degree, from its borrowing capacity. In addition to opening new sites in the United States, the Company plans to continue opening additional sites in Canada, Puerto Rico, Mexico, and Singapore. Market Risk Management The Company is exposed to certain market risks fi.om changes in interest rates and foreign currency exchange rates. Changes in these factors cause fluctuations in the Company's earnings and cash flows. The Company evaluates and manages exposure to these market risks as follows: Interest Rates - The Company has a $15,000 line of credit of which $0 was outstanding at December 31, 2002. The line bears interest at .9% over the LIBOR rate. Foreign Currency Exchange Rates - Foreign currency fluctuations can affect the Company's net investments and earnings denominated in foreign currencies. The Company's primary exchange rate exposure is with the Canadian dollar against the U.S. dollar. The Company's estimated net earnings exposure for foreign currency exchange rates was not material at December 31, 2002. Certain Risks and Uncertainties Certain statements in this Annual Report, in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made by or with approval of the Company's executive officers constitute or will constitute "forward- looking statements" under the Reform Act. The following factors are among those that could cause the Company's actual results to differ materially fi.om those predicted in such forward-looking statements: (i) an upturn or downturn in the economy could impact sales at existing stores and the rates of new store openings and additions of new employees, (ii) an upturn or downturn in the economy, or a change in product mix, could impact gross margins, (iii) a change, fi.om that projected, in the number of markets able to support future store sites could impact the rates of new store openings and additions of new employees, (iv) the ability of the Company to develop product expertise at the store level, to identify future product lines that complement existing product lines, to transport and store certain hazardous products and to otherwise integrate new product lines into the Company's existing stores and distribution network could impact sales and margins, (v) increases or decreases in fuel and utility costs could impact distribution and occupancy expenses of the Company, (vi) the ability of the Company to successfully at~'act and retain qualified personnel to staffthe Company's stores could impact sales at existing stores and the rate of new store openings, (vii) changes in governmental regulations related to product quality or product source traceability could impact the cost to the Company of regulatory compliance, (viii) inclement weather could impact the Company's distribution network, (ix) foreign currency fluctuations, changes in trade relations, or fluctuations in the relative strength of foreign economies could impact the ability of the Company to procure products overseas at competitive prices and the Company's sales, (x) disruptions caused by the implementation of the Company's new management information systems infi.astructure could impact sales, (xi) changes in the rate of new store openings could impact expenditures for computers and other capital equipment, (xii) disruption related to the "CSP" implementation could cause expenses and inventory investments to increase, which in turn could cause the Company to reevaluate implementation of the project, and (xiii) changes in the availability of suitable land and buildings could impact expenditures for additional owned locations which house our stores. New Accounting Pronouncements During 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Account Standards (SFAS) No. 146, Accounting for Costs Associated with Exit and Disposal Activities, and Interpretation (FIN) No. 45, Guarantor's .recounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. SFAS file://C:~Documents%20and% 20Settings~LBRATLIF~Local%20Setfings\Temp\2002%20An... 1/2/2004 Annual Report Page 14 of 38 No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also establishes that fair value is the objective for initial measurement of the liability. FIN No. 45 requires companies to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Guarantees in existence at December 15, 2002 are grandfathered for the purposes of recognition and would only need to be disclosed. The adoption of both SFAS No.146 and FIN No. 45 in 2003 is not expected to have a significant impact on the Company's financial condition or results of operatiuns. 8 2002 Annual Report file ://C :~Documents%20and%20Settings~LB1L4,TLIF\Local%20Sett'mgs\Temp~2002%20An... 1/2/2004 Annual Report Page 15 of 38 Stock & Financial Data Common Stoclt Data The Company's shares are traded on The Nasdaq Stock Market under the symbol "FAST". The following table sets forth, by quarter, the high and low closing sale price of the Company's shares on The Nasdaq Stock Market for 2002 and 2001. 2002: High Low 2001: High Low First quarter $38.84 31.63 First quarter $32.03 24.19 Second quarter 43.35 36.15 Second quarter 36.50 24.50 Third quarter 41.80 29.49 Third quarter 33.95 25.24 Fourth quarter 39.39 26.61 Fourth quarter 33.73 27.32 As of February 3, 2003, there were approximately 1,800 recordholders of the Company's Common Stock. A $.05 annual dividend per share was paid in 2002 and a $.045 annual dividend per share was paid in 2001. On January 21, 2003, the Company announced a $.06 annual dividend per share to be paid on March 7, 2003 to shareholders of record at the close of business on February 21, 2003. The Company expects that it will continue to pay comparable cash dividends in the foreseeable future, provided that any future determination as to payment of dividends will depend upon the financial condition and results of operations of the Company and such other factors as are deemed relevant by the board of directors. Selected Quarterly Financial Data (Unaudited) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 2002: Net sales Gross profit Net earnings Earnings per share~ First quarter $214,582 106,577 17,705 .23 Second quarter 233,484 115,485 21,831 ~ .29 Third quarter 238,086 117,069 19,117 .25 Fourth quarter 219,286 109,345 16,889 .22 Total $905,438 448,476 75,542 1.00 2001: Net sales Gross profit Net earnings Earnings per share First quarter $203,374 104,555 20,739 .27 Second quarter 207,442 104,631 19,018 .25 Third quarter 209,397 104,774 17,001 .22 Fourth quarter 198,070 98,467 13,354 .18 Total $818,283 412,427 70,112 .92 Includes an extraordinary gain, net of tax, of $716. EarnIngs per share mounts do not equal the total annual earnings per share due to rounding differences. fi~e://C:~D~cuments%2~and%2~Settings~LBRATLIF~L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annu~Repoa Page 16 of 38 2002 Annual Report 9 file://C:~D~cuments%2~and%2~Settings~LBRATLIF~L~a~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 17 of 38 Consolidated Balance Sheets (AMOUNTS IN THOUSANDS EXCEPT SHARE INFORMATION.) DECEMBER 31, 2002 & 2001 Current assets: Cash and cash equivalents Marketable securities Trade accounts receivable, net of allowance for doubtful accounts of $3,543 and $3,474, respectively Inventories Deferred income tax asset Other current assets Refundable income taxes Total current assets Marketable securities Property and equipment, less accumulated depreciation 2002 2001 $ 14,296 47,264 37,062 21,258 105,553 101,356 217,262 152,706 5,868 4,696 14,607 13,961 1,838 -- 396,486 341,241 15,340 9,374 144,252 121,607 2,930 3,022 Total assets $ 559,008 475,244 Liabilities and Stockholders' Equity Current liabilities: Accounts payable Accrued expenses Income tax payable Total current liabilities Deferred income tax liability Stockholders' equity: Preferred stock Common stock, 100,000,000 shares authorized 75,877,376 shares issued Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total stockholders' equity Commitments (notes 4, 8, and 9) $ 25,783 20,100 21,281 17,973 -- 2,488 47,064 40,561 12,073 9,795 759 759 7,472 4,044 493,693 421,945 (2,053) (1,860) 499,871 424,888 Total liabilities and stockholders' equity $ 559,008 475,244 T~E ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. fi~e:~/~:~D~cuments%2~and%2~Settings~LBRATLIF\L~a~%2~Settings\Temp~2~2%2~An... 1/2/2004 Annual Report Page 18 of 38 10 2002AnnualRepo~ fi~e://C:~D~uments%2~and%2~Settings~LBRATL~F\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annu~Repoa Page 19 of 38 Consolidated Statements of Earnings (AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SHARE.) Net sales Cost of sales Gross profit Operating and administrative expenses Loss on sale of property and equipment Gain on sale of DIY Business Operating income Interest income YEARS ENDED DECEMBER 31, 2002, 2001, & 2000 2002 2001 2000 $905,438 818,283 755,618 456,962 405,856 367,500 448,476 412,427 388,118 334,875 300,696 258,561 304 339 162 (5,934) -- -- 119,231 111,392 129,395 1,976 2,242 2,035 Earnings before income taxes and extraordinary gain 121,207 113,634 131,430 46,381 43,522 50,700 Net earnings before extraordinary gain Extraordinary gain on DIY Business acquisition, net of tax Net earnings $ 74,826 70,112 80,730 716 -- -- $ 75,542 70,112 80,730 Basic and diluted earnings per share before extraordinary gain Basic and diluted extraordinary gain per share, net of tax Basic and diluted earnings per share $ .99 .92 1.06 .01 -- -- $ 1.00 .92 1.06 Weighted average shares outstanding 75,877 75,877 75,877 TI~ ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 2002 Annual Report 11 fi~e://C:~D~uments%2~and%2~Settings\LBRATL~F~L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 20 of 38 Consolidated Statements of Stockholders' Equity & Comprehensive Income (AMOUNTS 1N THOUSANDS.) Balances as of December 31, 1999 Dividends paid in cash YEARS ENDED DECEMBER 31, 2002, 2001, & 2000 Common Stock Accumulated Additional Other Total Paid-in Retained Comprehensive Stockholders' Shares Amount Capital Earnings Income (Loss) Equity 75,877 $ 759 4,044 277,553 (396) 281,960 -- -- -- (3,035) -- (3,035) Net earnings for the year Translation adjustment Total comprehensive income Balances as of December 3 l, 2000 Dividends paid in cash -- 80,730 -- 80,730 -- -- (397) (397) 80,333 75,877 759 4,044 355,248 (793) 359,258 -- -- -- (3,415) -- (3,415) Net earnings for the year Translation adjustment Total comprehensive income Balances as of December 31,2001 Dividends paid in cash Tax benefit from exercise of stock options 70,112 -- 70,112 -- (1,067) (1,067) 69,045 75,877 759 4,044 421,945 (1,860) 424,888 -- -- -- (3,794) -- (3,794) 3,428 3,428 Net earnings for the year Translation adjustment Total comprehensive income Balances as of December 31, 2002 75,542 75,542 -- (193) (193) 75,349 75,877 $ 759 7,472 493,693 (2,053) 499,871 fi~e://C:~D~cuments%2~and%2~Settings~LBRATL~F\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Repo~ Page 21 of 38 12 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 2002 Annual Report fi~e://C:~D~cuments%2~and%2~Settings\LBRATLIF~L~a~%2~Settings\Temp\2~2%2~An... 1/2/2004 AnnuflRepoa Page 22 of 38 Consolidated Statements of Cash Flows (AMOUNTS IN THOUSANDS) Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of property and equipment Loss on sale of property and equipment Gain on sale of DIY Business Bad debt expense Deferred income taxes Tax benefit from exercise of stock options Amortization of goodwill and non-compete agreement Changes in operating assets and liabilities, net of acquisition and sale of the DIY Business: Trade accounts receivable Inventories Other current assets Accounts payable Accrued expenses Income taxes, net Net cash provided by operating activities YEARS ENDED DECEMBER 31, 2002, 2001, & 2000 2002 2001 2000 $ 75,542 70,112 80,730 16,945 14,747 11,757 304 339 162 (5,934) - - 5,189 5,453 4,496 1,106 2,532 2,453 3,428 - - 67 220 220 (13,025) 6,232 (26,053) (71,738) (2,605) (36,471) (1,893) (4,407) (1,959) 6,949 (1,835) 573 5,205 1,630 1,717 (4,326) (691) 628 17,819 91,727 38,253 Cash flows fi.om investing activities: Purchases of business and property and equipment Proceeds from sale of property and equipment Proceeds from sale of DIY business Translation adjustment Net increase in marketable securities Decrease (increase) in other assets Net cash used in Investing activities (42,683) (45,342) (36,729) 2,693 3,295 6,633 14,935 - (207) (957) (340) (21,770) (17,635) (12,782) 25 (9) (82) (47,007) (60,648) (43,300) Cash flows from financing activities: Payment of dividends Net cash used in financing activities Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year (3,794) (3,415) (3,035) (3,794) (3,415) (3,035) 14 (110) (57) (32,968) 27,554 (8,139) 47,264 19,710 27,849 O 0 0 0 file://C:\Docmnents ~A20and ¼20Settings~LBRATLIF\Local ~20Settings\Temp\2002 ~20An... 1/2/2004 Annual Report Page 23 of 38 Cash and cash equivalents at end of year $14,296. 47,264 19,710 Supplemental disclosure of cash flow information: Cash paid during each year for: Income taxes $ 46,573 41,682 50,072 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 2002AnnualRepo~ 13 fi~e://C:~D~cuments%2~and%2~Settings~LBRATL~F\L~a~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 24 of 38 Notes to Consolidated Financial Statements (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA.) YEARS ENDED DECEMBER 31, 2002, 2001, & 2000 Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Fastenal Company and its wholly-owned subsidiaries, Fastenal Company Services, Fastenal Company Purchasing, Fastanal Company Leasing, Fastenal Canada Company, Fastanal Mexico, S. de R.L. de C.V., Fastenal Mexico Services, S. de R.L. de NE C.V., and Fastenal Singapore P.T.E., Ltd. (collectively referred to as the Company). All material intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition and Accounts Receivable The Company recognizes sales and the related cost of sales on the accrual basis of accounting at the time products are shipped to or picked up by customers. Accounts receivable are stated at their estimated net realizable value. Financial Instruments All financial instruments are carried at amounts that approximate estimated fair value. Cash Equivalents For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly-liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. Inventories Inventories, consisting of merchandise held for resale, are stated at the lower of cost (first in, first out method) or market. Marketable Securities Marketable securities as of December 31, 2002 and 2001 consist of debt securities. The Company classifies its debt securities as available-for-sale. Available-for-sale securities are recorded at fair value based on current market value. Unrealized holding gains and losses on available-fur-sale securities are excluded fi.om earnings, but are included in comprehensive income, and are reported as a separate component of stockholders' equity until realized, provided that a decline in the market value of any available-for-sale security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. The amortized cost approximated the fair value of available-for-sale debt securities as of December 31, 2002 and 2001. Property and Equipment Property and equipment are stated at cost. Depreciation on buildings and equipment is provided for using the straight line method over the anticipated economic useful lives of the related property. 14 2002 Annual Report 0 0 0 0 file://C:XDocuments ~20and ~20Settings~LBRATLIF\Local ~20Settings\Temp~002 ~A20An... 1/2/2004 Annual Report Page 25 of 3 8 Notes to Consolidated Financial Statements (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA.) YEARS ENDED DECEMBER 31, 2002, 2001, & 2000 Summary of Significant Accounting Policies continued Other Assets and Long-Lived Assets Other assets consists of prepaid security deposits, goodwill and a non-compete agreement. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Beginning in 2002, goodwill amortization was discontinued in accordance with SFAS No. 142, Goodwill, and Other Intangible ,~ssets. Total goodwill amortization costs were $153 per year in 2001 and 2000. The non-compete is amortized on a straight-line basis over 15 years. Total non-compete amortization costs were $67 per year in 2002, 2001, and 2000. Goodwill and other tangible and identifiable intangible long-lived assets are reviewed whenever events or changes in cimumstances indicate that the carrying amount of an asset may not be recoverable, or on an annual basis if no event or change occurs, to determine that the unamortized balances are recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset, or, in the case of goodwill, by also looking at an adverse change in legal factors or the business climate, a transition to a new product or services strategy, a significant change in the customer base, and/or a realization of failed marketing efforts. If the asset is deemed to be impaired, the mount of impairment is charged to earnings as a part of operating and administrative expenses in the current period. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Accounting 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 amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the f'mancial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Insurance Reserves The Company is self-insured for certain losses relating to medical, worker's compensation, and other casualty losses. Specific stop loss coverage is provided for catastrophic claims in order to limit exposure to significant claims. Losses and claims are charged to operations when it is probable a loss has been incurred and the amount can be reasonably estimated. Accrued insurance liabilities are based on claims filed and estimates of cinims incurred but not reported. Stock-Based Compensation The Company has not granted any stock options. However, certain employees participate in a stock option plan sponsored by the Company's founder, Robert A. Kierlin. This is a shareholder sponsored plan, and does not directly involve the Company. The Company continues to apply the provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, however, a proforma fair value disclosure is contained in Note 4. During 2000, the Company established a stock appreciation rights (SAR) plan. During 2002, 2001, and 2000, the Company granted 8,000, 8,000, and 20,000 SAR units, respectively, under this plan. The SAR units granted in 2000 vested in July 2002 with a six month exercise period before expiration. The SAR units granted in 2001 and 2002 also vest approximately 2.5 years after grant and also have a six month exercise period. The Company recognized $80, $154, and $0 compensation expense during 2002, 2001, and 2000, respectively, related to the SAR plan. 2002 Annual Report 15 fi~e://C:~D~cuments%2~and%2~SettingsLLBRATL~F\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 26 of 38 Notes to Consolidated Financial Statements (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA.) YEARS ENDED DECEMBER 31, 2002, 2001, & 2000 Summary of Significant Accounting Policies continued Income Taxes The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences atlributable to differences between the financial statement _ carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities ora change in tax rates is recognized in income in the period that includes the enactment date. Earnings Per Share Basic and diluted earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding. All common shares and per share amounts have been adjusted to reflect the 2-for-1 stock split effected in the form ora stock dividend in May 2002. As of December 31, 2002 and 2001, the Company did not have any contingently issuable shares. Segment Reporting The Company has reviewed SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, and determined the Company meets the aggregation criteria outlined as the various operations of the Company have similar (1) economic characteristics, (2) products and services, (3) customers, (4) distribution channels, and (5) regulatory environments. Therefore the Company reports as a single business segment. 2 ProperO, and Equipment Property and equipment as of December 31 consists of the following: Depreciable life in years 2002 2001 Land Buildings and improvements Equipment and shelving Transportation equipment Construction in progress -- $ 9,246 7,029 31 to 39 56,093 37,572 3 to 10 129,306 111,079 3 to 5 17,162 17,413 -- 12,145 13,349 Less accumulated depreciation 223,952 186,442 (79,700) (64,835) Net property and equipment $144,252 121,607 3 Accrued Expenses Accrued expenses as of December 31 consist of the following: Payroll and related taxes Bonuses and commissions Sales and real estate taxes 2002 2001 $ 7,545 7,273 3,724 3,449 5,963 2,371 1,566 1,062 0 0 0 0 ~e://C:~D~cuments~2~andV~2~Settings~LBRATL~F\L~a~2~Settings\Tem~\2~2¼2~An... 1/2/2004 Annual Report Other 16 2002AnnualRepoa Page 27 of 38 2,483 3,818 $21,281 17,973 file ://C :'xDocuments%20and%20 SettingsLLBRATLIF\Local%20 Settings\Temp~2002%20An... 1/2/2004 Annual Report Page 28 of 38 Notes to Consolidated Financial Statements (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA.) YEARS ENDED DECEMBER 3 l, 2002, 2001, & 2000 4 Stocl~holders' Equity Preferred stock has a par value of $.01 per share. There were 5,000,000 shares authorized and no shares issued as of December 31, 2002 and 2001. Common Stock has a par value of $.01 per share. There were 100,000,000 shares authorized and 75,877,376 shares issued and outstanding as of Decembar 31, 2002 and 2001. Dividends On January 21, 2003, the Company's board of directors declared a dividend of $.06 per share of Common Stock to be paid in cash on March 7, 2003 to shareholders of record at the close of business on February 21, 2003. Stock Options In 2002, 2001, and 2000, options were granted, under the Robert A. Kierlin Stock Option Plan, to purchase shares of common stock owned by the Company's founder Robert A. Kierlin. The individuals eligible to receive options included those employees with three or more years of service, or employed as a district manager or a store manager, on the last business day of December in the previous year. The options were granted with an exercise price equal to or greater than fair market value on the date of grant. The stock options vest approximately 2.5 years aftar grant and expire approximately 3 years after grant. The stock option plan was sponsored by the Company's founder and does not involve a commitment by the Company. The Company's net earnings and net earnings per share would have been as follows if the Company had elected to recognize compensation expense consistent with the methodology prescribed in SFAS No. 123, Accounting for St~ck-Based Compensation: 2002 2001 2000 Net earnings, as reported Pro fonna net earnings $75,542 70,112 80,730 $72,868 67,603 79,215 Basic and diluted earnings per share Pro fonna basic and diluted earnings per share $ 1.00 .92 1.06 $ 0.96 .89 1.04 The fair value of stock options is estimated as of the grant date using the Black-Scholes option-pricing model with the following assumptions: 2002 2001 2000 Risk-free interest rate Expected life of option in years Expected dividend yield Expected stock volatility 4.5% 5.0% 6.0% 2.66 2.75 2.75 0.2% 0.2% 0.2% 27.03% 37.66% 42.29% The fair market value of options granted in 2002, 2001, and 2000 was estimated to be $6.65, $8.07, and $5.77 per share, respectively. A summary of stock option activity under the plan described above, by grant year, is: 2002 2001 2000 Exercise price of options issued during the year Options granted during the year Options canceled since grant Options exercised in 2002 $35.00 27.50 27.50 820 700 1,451 192 199 388 -- -- 1,063 5 Retirement Plan In 1998 the Company established the Fastenal Company and Subsidiaries 401(k) Plan. This plan covers all employees of fi~e://C:~D~cuments%2~and%2~Settings~LBRATL~F\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 29 of 38 the Company in the United States. The Company made no contributions to the plan in 2002, 2001, or 2000. 2002 Annual Report 17 ~e://C:~tD~cuments%2~and%2~Settings~LBRATL~F\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 30 of 38 Notes to Consolidated Financial Statements (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA.) 6 Income Taxes Components of income tax expense are as follows: 2002: Current Federal $39,346 State 5,929 $45,275 YEARS ENDED DECEMBER 31, 2002, 2001, & 2000 Deferred Total 960 40,306 146 6,075 1,106 46,381 2001: Current Deferred Total Federal $35,623 2,199 37,822 State 5,367 333 5,700 $40,990 2,532 43,522 2000: Current Deferred Total Federal $4-1,472 2,110 43,582 State 6,775 343 7,118 $48,247 2,453 50,700 Income tax expense in the accompanying consolidated financial statements differs from the "expected" tax expense as follows: 2002 2001 2000 Federal income tax expense at the "expected" rote of 35% $42,422 39,772 46,000 Increase attributed to: State income taxes, net of federal benefit Other, net 3,949 3,705 4,627 10 45 73 Total income tax expense $46,381 43,522 50,700 The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31 are as follows: 2002 2001 Deferred tax asset (liability): Inventory costing and valuation methods Allowance for doubtful accounts receivable Insurance claims payable $ 2,425 2,020 1,357 1,188 2,112 965 fi~e://C:xD~cuments%2~and%2~Settings~LBRATL~F\L~ca~%2~Settings\Temp~2~2%2~An... 1/2/2004 Annual Report Page 31 of 38 Fixed assets (12,016) (9,795) Other, net (83) 523 Net deferred tax liability $ (6,205) (5,099) No valuation allowance for deferred tax assets was necessary as of December 31, 2002 and 2001. The character of the deferred tax assets is such that they can be realized through canyback to prior tax periods or offset against future taxable income. During 2002, $3,428 was added to additional paid-in capital reflecting the permanent book to tax difference in accounting for tax benefits related to employee stock option transactions. 18 2002 Annual Report fi~e://C:~D~cuments%2~and%2~Settings~LBRATLIF\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 32 of 38 Notes to Consolidated Financial Statements (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA.) YEARS ENDED DECEMBER 31, 2002, 2001, & 2000 7 Acquisition of Business On August 31,2001, the Company acquired certain assets of two subsidiaries of Textron, Inc. These assets were used in their business of selling packaged fasteners to the retail market (Do-lt-Yourself or DIY Business). The purchase price consisted of a cash payment and the assumption of certain liabilities at closing. The acquisition was not material to the financial statements of the Company. The DIY Business was sold to Thc Hillman Group, Inc. on October 3, 2002. On July 1, 2001, the Company adopted SFAS No. 141, Business Combinations. SFAS No. 141 requires the use of the purchase method of accounting and, accordingly, the operating results of the DIY Business were included in the Company's consolidated financial statements from the date of acquisition through the date of sale. The total purchase price was allocated to tangible assets and liabilities based upon the estimate of their fair value on the acquisition date. The purchase price was finalized during the second quarter of 2002. The final purchase price resuhed in tangible assets in excess of the cash paid and liabilities assumed, or negative goodwill. The negative goodwill, net of tax, of $716 was recognized in earnings during the second quarter of 2002 as an extraordinary gain. The DIY Business was purchased after a prolonged period of contraction; therefore, the historical sales and earnings were not reflective of the DIY Business's operations at the time it was acquired. If the business combination had occurred at the beginning of the respective years, net income would not have been materially different from the amounts reported. The net sales from the DIY Business totaled $8,526 from August 31, 2001 through December 31, 2001. The net sales from the DIY Business totaled $16,974 from January 1, 2002 through October 3, 2002. The Company recognized a gain, before tax, of $5,934 from the sale of the DIY Business during the fourth quarter of 2002. 8 Operating Leases The Company leases space under non-cancelable operating leases for its Califomia, North Carolina, Utah, and Washington distribution centers, its Tennessee convemion center, and certain store sites with initial terms of one to 48 months. The Company leases certain semi-tractors and pick-ups under operating leases. The semi-tractor leases typically have a 36 month term. The pick-up leases typically have a 72 month term and include an early buy out clause the Company generally exemisas, thereby giving the leases an effective term of 12-15 months. Future minimum annual rentals for the leased facilities and the leased vehicles are as follows: Leased Leased Facilities Vehicles Total 2003 $18,269 8,182 26,451 2004 9,534 4,199 13,733 2005 4,387 216 4,603 2006 1,315 -- 1,315 2007andthereafter 446 -- 446 Rent expense under all operating leases is as follows: Leased Leased Facilities Vehicles Total 2002 $22,127 10,770 32,879 2001 19,826 10,660 30,486 2000 16,899 8,328 25,227 9 Lines of Credit and Commitments fi~e:~C:~D~cuments%2~and%2~Settings~LBRATL~F\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Repoa Page33 of 38 The Company has a line of credit arrangement with a bank which expires June 30, 2003. The line allows for borrowings of up to $15,000 at .9% over the LIBOR rate. On December 31, 2002 there was $0 outstanding on the line. The Company currently has a letter of credit issued on its behalf to its insurance carrier. As of December 31, 2002, the total undrawn balance of this letter of credit was $3,969. During 2001, the Company completed the construction of a new building for its Kansas City warehouse. The Company was required to obtain financing for this facility under an Industrial Revenue Bond ORB). The Company subsequently purchased 100% of the outstanding bonds under the IRB at par. In addition to purchasing the outstanding obligations, the Company has a right of offset included in the IRB debt agreement. Accordingly, the Company has netted the impact of the IRB in the accompanying consolidated financial statements. The outstanding balance of the IRB at December 31, 2002 and 2001 was $6,533. 2002 Annual Report 19 fi~e://C:~D~cuments%2~and%2~Settings~LBRATL~F\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 34 of 38 Report of Management & Independent.4 uditors' Report The Board of Directors and StocMtolders Fastenal Company: Management is responsible for the integrity and accuracy of the consolidated financial information included in this report. Management believes these consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Sates of America. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revanues and expenses during the periods reported. In meeting its responsibility, for the reliability of the f'mancial statements, management relies on a system of Internal accounting control. This system is designed to provide reasonable assurance assets are safeguarded and transactions are appropriately authorized and included In the financial records in all material aspects. The design of this system recognizes errors or irregularities may occur and estimates and judgments are required to assess the relative cost and expected benefits of the controls. Management believes the Company's accounting controls provide reasonable assurance errors or irregularities material to the consolidated financial statements are prevented or would be detected in a reasonable time period. The Audit Committee, comprised of members of the Board of Directors who are not employees of the Company, meets periodically with the independent auditors and management of the Company to discuss internal accounting control, auditing and financial reporting matters. In 2002, the Audit Committee recommended the selection of the independent auditors, who were then appoInted by the Board of Directors, subject to ratification by the shareholders. The Independent auditors, KPMG LLP, conduct an independent audit of the consolidated f'mancial statements. [] LOGO Willard D. Oberton Chief Executive Officer and President [] LOGO I Daniel L. Florness Executive Vice-President, Chief Financial Officer, and Treasurer The Board of Directors and Stockholders Fastenal Company: We have audited the accompanying consolidated balance sheets of Fastanal Company and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated f'mancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fastenal Company and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accountIng principles generally accepted In the United States of America. fl~e://C:~D~cuments%2~and%2~Settings~LBRATL~F\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report [] LOGO Minneapolis, Minnesota January 17, 2003 20 2002 Annual Report Page 35 of 38 ~~e://C:\D~~uments%2~and%2~SettingsxLBRATL~F``L~ca~%2~Settings\Temp\2~~2%2~An... 1/2/2004 Annual Report Page 36 ot'38 Officers Robert A. Kierlin Chairman of the Board Willard D. Oberton Chief Executive Officer and President Nicholas J. Lundquist Executive Vice-President and Chief Operating Officer Daniel L. Florness Executive Vice-President, Chief Financial Officer, and Treasurer Steven L. Appelwicl~ Vice-President-Product Procurement, Marketing, and Logistics Stephen M. Slaggie Secretary Directors Robert A. Kierlin Mtchael M. Gostomski Presidem Winona Heating & Ventilating Company (sheet metal and roofing contractor) Michael J. Dolan Self Employed Business Consultant Robert A. Hansen Associate Professor of Marketing and Logistics Management, Carlson School of Management, University of Minnesota Henry K. McConnon President Wise Eyes, Inc. (eyeglass retailer and wholesaler) Willard D. Oberton JMm D. Remick President and Chief Execntive Officer Rochester Athletic Club, Inc. (health club) Stephen M. Slaggie Reyne K. Wisecup Human Resource Manager Fastenal Company Services Corporate Information Annum Meeting fi~e://C:~D~cuments%2~and%2~Settings~LBRATL~F\L~ca~%2~Settings\Temp\2~2%2~An... 1/2/2004 Annual Report Page 37 of 38 The annual meeting of shareholders will be held at 10:00 a.m., Tuesday, April 15, 2003, at Corporate Headquarters, 2001 Theurer Boulevard, Winona, Minnesota Corporate Headquarters Fastenal Company 2001 Theurer Boulevard Winnna, Minnesota 55987-0978 Phone: (507) 454-5374 Fax: (507) 453-8049 Legal Counsel Faegre & Benson LLP Minneapolis, Minnesota Streater & Murphy, PA Winona, Minnesota Form IO-K A copy of the Company's 2002 AnnualReport on Form IO-K to the Securities and Exchange Commission is available without charge to shareholders upon written request to the Secretary of the Company at the address listed on this page for the Company's corporate headquarters. Copies of our latest press release, unaudited supplemental Company information and monthly sales information (beginning with October 2000 sales) are available at the Fastenal Company World Wide Web site at: www.fastenal.com Auditors KPMG LLP Minneapolis, Minnesota TransferAgent Wells Fargo BankMinnesota, NationalAssociation Minneapolis, Minnesota [] LOGO 0 0 0 0 ~e://C:~D~cuments~2~and~2~Settings~LBRATL~F\L~a~¼2~Settings\Temp\2~2~2~An... 1/2/2004 Annu~Repo~ Page 38 of 38 [~LOGO fi~e://~:~D~cuments%2~and%2~Settings~LBRATL~F\L~a~%2~Settings\Temp\2~2%2~An... 1/2/2004 2OO11 Profile of Fastenal Company Fastenal Company was founded in 1967. As of December 31, 2001, the Company operated 1,025 store sites located in 50 states, Puerto Rico, Canada, Mexico and Singapore and employed 4,263 people at these sites. In addifon, there were 2,273 people employed in various support positions. The Company sells approximately 280,000 different types of industrial and construction supplies in eleven product categories. These ineluda approximately 78,000 different types of threaded fasteners and miscullaneous supplies; approximately 58,000 differem types of tools; approximately 25,000 different types of metal cutting tool blades; approximately 24,000 different types of fluid transfer components and accessories for hydranlie and pneumatic power; approximately 9,000 different types of material han- dling and storage products; approximately 5,000 different types of janitorial and paper products; approximately 8,000 different types of electrical supplies; approximately 12,000 different types of welding supplies (excluding gas & welding machines); approximately 29,000 different types of safety supplies; approximately 6,000 different types of raw materials; and approximately 26,000 different types of retail packaged products. As of December 31, 2001, the Company also operated eleven distribution centers located in Minnesota, Indiana, Ohio, Pennsylvania, Texas, Georgia, Washington, California, Utah, North Carolina and Kansas, a packaging facility located in Tennessee, and a packaging/processing center located in both Tennessee and Illinois. The retail packaged product line and the packaging/processing centers were from a 2001 acquisition. Approximately 95.7% of the Company's 2001 sales were attributable to products manufactured by others, and approximately 4.3% related to items manufactured, modified or repaired by either the Company's Manufacturing Division or its Support Services. Since December 31, 2001, the Company has opened additional store sites. This Annual Report, including the sections captioned "President's Letter to Shareholders;' "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Stock and Financial Data;' contains statements that are not historical in nature and that are intended to be, and are hereby identified as, "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), including statements regarding improved results in 2002, opening of new stores, additions of new employees, expansion of foreign operations, capital expenditures, funding of expansion plans, and dividends. A discussion of certain risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements is included in the section of this Annual Report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company assumes no obligation to update either such forward-looking statements or the discussion of such risks and uncertainties. 2OO1 i Cable of Contents pa~, 2-3 '~PRESIDENT'S LETTER TO SIIAREIIOLDERS page 4 SIx-YEAR SELECTED FINANCIAl. DATA 20O2 page 12] CONSOEIDATED STATEMENTS OF STOCKHOLDERS' EQUITY & COMPREHENSIVE INCOME page 13i CONSOLIDATED STATEMENTS OF CAfiEI FLOWSi page~ 14-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS page 20 ~EPORT O~ ~ ~NAGE~r ~ ~ INDEPENDENT AUDITORS' REPORT Inside 8ack Cover OEFICERS &DIP, ECTORS:~ CORPORATE ]NFORMATION~ ipage, 5-8 iMANAGEMENTS DISCUSSION & ANALYSIS OF ;;FINANCIAL CONDITION ~ RESLILTfi OF OPERATIONS STOCK AND FINANCIAl. DATA page 10 CONSOL[DATED BALANCE SIIEETS CONSOLIDATED STATEMENTS OE EARNINGS 2001 ANNIIAL REPOR'F I 20011 President's Letter to Shareholders The year 2001 started out well for Fastenal with a 20.3% daily sales growth tutu in January; this was a nice recovery from the 17.8% daily sales growth rata in December 2000. As it tomed out, January was our best month of the year; the remainder of the year would have to be described as challenging. As the industrial economy in North America continued to slow, so did our year over year growth rates. Absent the impact of our August 2001 acquisition, our daily sales growth rate bottomed in November at negative 0.3%. We closed the year with a slight rebound in sales growth during December. Our 2001 net sales of $818.3 million, including the acquisition, represents an 8.3% increase over the $755.6 million net sales for 2000. The slowdown in our business was most noticeable in our large manufacturing customers. Sales to some of our top customers were down more than 30% from the previous year. In spite of this, our branch people worked hard and continued to add new accounts and to increase our number of active accounts every month. Our net earnings for 2001 of $70.1 million were impacted by the slower sales growth during the year. This was a decline of 13.2% from our 2000 earnings of $80.7 million. Early in 2001 we decided to continue opening new stores even as the economy slowed. We believe this was the right decision and it should help us going forward, but these openings added to our total expenses. Fastenal had an exciting year for new store openings, passing several milestones. In February we opened our first store in Mexico, locating it in the industrial city of Monterrey. Then in July we opened our first stores in Alaska and Hawaii. This gave us locations in all 50 states. The opening in Hawaii also happened to be our 1,000th store. In August, with the business support of a large customer, we opened our first branch in Asia, locating it in Singapore. Throughout the year we opened 128 stores in four countries. We ended the year with 1,025 stores. During 2001 The Fastonal School of Business continued to create new programs to help develop our employees. In April we completed a market based planning course. This is a one-week program designed for our store managers. The course was designed to help them better understand the potential in their mar- kets. During the year, 397 managers completed the course. We have also increased the number of product (raining classes given by our regional development In August we completed the acquisition of a business operated by two subsidiaries of Textron, Inc. The acquired business packages and sells fasteners to the retail market. The target markets for the acquired business are hardware cooperatives such as Ace, lumberyards and farm & fleet stores. This market is estimated to generate net sales of over $1 billion annually in the United States. The acquired business fits well with our existing distribution stmctore. In 2001 we opened a satellite manufacturing facility in our Indianapolis distribution center. Our satellite manufacturing facilities in Fresno, California, and Indianapolis, Indiana concentrate most of their efforts on machining parts that require rapid delivery. These parts are often produced and shipped the same day we receive the order. Our operations people continued to develop systems to handle products more accurately and efficiently. In December we moved our Kansas City distribution center into a new facility designed by our employees. The material handling system installed in this facility uses the latest technology in scanning and sortation. We also completed an 80,000 sq. ft. expansion to our disthbution center in Scranton, Pennsylvania. 2 2001 ANNUAl RFPORT 2001 President's Letter to Shareholders Product development continued m move at a steady pace in 2001 as we completed the introduction of our safe'ry products line. We sold some of these products in the past, but we now have a more complete line. A section of our new catalog is dedicated to these safety products. We are also working on several other new product introductions. Our 2002 catalog has 32 pages of metal products, including rods, sheets, and angles. This new product line is targeted at the maintenance and small contractor markets. During 2001 we made great strides in our marketing initiatives. We started a direct mail program in 2000 with the support of our suppliers. In 2001 we more than doubled the size of this program, mailing over 5 million 32-page product catalogs to over 700,000 industrial and construction companies in the U.S. and Canada. We also printed 207,000 copies of our 1,500 page (big blue) catalog and distributed them to our customers. As I said in the opening paragraph, 2001 was a challenging year for Fastanal, but I am very proud of everything the dedicated employees in our company accomplished in a difficult economic environment. I believe 2002 will be a much better year for our company. Our plans are to continue opening new stores, hiring additional personnel, and creating more opportunities for all of the great people that have chosen to build a career at Fastenal. Thank you for your continued support and believing in our company and our people. Distribution Nefwork 2001 ANNUAl. REPORT 3 2001 Six .l/ear Selected Financial Data (AMOUNTS IN THOLISANDS EXCEPT EARNINGS AND DIVIDENDS PER SHARE INFORMATION.) Opera esults ~ ......... Pement Years Ended Dec. 3f [?f. 200~/~,~1 Change 2000 1999 1998 1997 1996 Net sales rS. 8~8,~8~ j 8.3% $755,618 618,191 511,233 404,248 292,311 Gross profitI i ['~12,~7! 6.3% 388,118 319,460 265,179 209,143 152,677 ~ ;-~arn,n~sbefore ~ , .~ income taxes~ ! ;:,ii3,634 (13.5%) 131,430 106,479 86,123 67,336 54,432 Net earnings !i ' 70;b,12~i (13.2%) 80,730 65,455 52,953 40,834 32,539 eamlngs per share ~'i: : 1'i85 ii (13.1%) 2.13 1.73 1.40 1.08 .86 Dividends per share ,$~:::. , :..09:~ 12.5% $ .08 .04 .02 .02 .02 Weighted average u shares outstanding : ~: 37,939~ -- 37,939 37,939 37,939 37,939 37,939 Financial Position December 31 Net working capital i~ :300 686i 21.3% $ 247 8762 193 744 142 459 106 555 78 417 Total assets i?;~475 244~ 18.1% 402464 318621 251 234 205 137 151 545 Total stockholders' equity $:424 888 18.3% $ 359,258 281,960 217,646 165,872 125,967 l The net sales and gross profit dollar amounts for 1996 to 2000 have been restated to reflect the reclassification of shipping and handling costs billed to customers and sales incentives paid to customers. The gross profit dollar amounts for 1996 to 2000 have also been restated to reflect outbound shipping costs as a cost of saie. These amounts were previously included in operating and administrative expenses. This reclassification was in accordance with Emerging Issues Task Force (E1TF) 00-10, ~Iccountingfor Shipping and Handling Fees and Costs, and EITF 00-22, Accounting for "Points "and Certain Other 7~tme-Based or Yohtme-Based Sales Incentive Offers, and O~ff'ers for Free Products or Services to Be Delivered in the Future. 2 The 2000 net working capital was reclassified to conform to the 2001 presentation. This reclassification did not impact 1999 and earlier years. 4 2001 ANNIIAL REPORT I Management's Discussion & Analysis of 2001 I Financial Condition & Results of Operations (AMOUNTS IN THOUSANDS EXCEPT PERSONNEL COUNTS AND DIVIDENDS PER SHARE) Results of Operations Net sales for 2001 exceeded net sales for 2000 by 8.3%. This compares with a 22.2% net sales growth rate experienced from 1999 to 2000. The increase in net sales in 2001 came primarily from new site openings, unit sales growth in existing sites less than 5 years old, growth in the newer product lines, and an acquisition completed on August 31,2001. This growth was tempered by a contraction of 3.0% in the sales of sites open more than 5 years and by a defiationary impact to pricing during the year. The increase in net sales in 2000 came primarily fi'om new site openings, unit sales growth in existing sites, and growth in the newer product lines. The growth in 2000 was also tempered by a slight deflationary impact to pricing in the first half of the year. The following table indicates: (1) percentage of net sales from the Fastenal® product line and from the newer product lines, and (2) product lines added to the original fastener product line and the year of introduction. Introduced 2001 2000 Fastanal Product Line 1967 58.8% 64.5% Tools 1993 11.6% 12.5% Cutting Tools 1996 5.5% Hydraulics & Pneumatics 1996 5.2% Gross profit as a percent of net sales was 50.4% in 2001, 51.4% in 2000 and 51.7% in 1999. The fluctuations resulted primarily from changes in the mix of products being sold. Absent the August 2001 acqui- sition, the 2001 gross profit percent would have been approximately 0.3% higher. Operating and administrative expenses were 36.7% of net sales in 2001 compared to 34.2% of net sales in 2000 and 34.6% of net sales in 1999. The fluctuations in operating and administrative costa were primarily due to changes in payroll and related costa, changes in occupancy costa, and, with respect to 2001, reductions in net sales in stoma greater than five years old and the impact of the August 2001 acquisition. In 2001, payroll and related costs increased at a rate which was greater than the rote of increase in net sales. In 2000, payroll and related costs increased at a rote which was less than the rata of increase in net sales. The increases in payroll and related costs were due to the following increases in the average number of employees: 2001 2000 5.3% ........... Sales Personnel 4.8% Support Personnel Material Handling 1996 6.7% 6.4% Janitorial Supplies 1996 2.5% 2.0% Electrical Supplies 1997 2.4% 1.5% Welding Supplies 1997 2.3% 0.6% Safety Supplies Raw Materials 7.4% 22.0% 8.3% 20.0% In 2001, the rote of increase in occupancy costs was greater than the rate of increase in net sales. In 2000, the rata of increase in occupancy costs was less than the rate of increase in net sales. Occupancy costs increased 1999 3.3% 2.2% .......................... in both years due to a 14.3% and an 11.1% increase ill 2001 0.2% -- the number of sites in 2001 and 2000, respectively, and, 1.0% - in 2000, due to the relocation of existing stores to larg- O.5% 0.2% er sites to accommodate their growth in activity and the introduction of new product lines. Distribution costs benefited from productivity gains in 2000. Retail Packaged Products* 2001 Other - *The Retail Packaged Product line was added as a result of the August 2001 acquisition. This acquired business produced $8,526 of net sa es in 2001. Threaded fasteners accounted for approximately 49%, 51% and 51% of the Company's consolidated sales in 2001, 2000 and 1999, respectively. Sites opened in 2001 contributed approximately $21,620 (or 2.6%) to 2001 net sales. Sites opened in 2000 contributed approximately $35,900 (or 4.4%) to 2001 net sales and approximately $7,940 (or 1.1%) to 2000 net sales. The rote of growth in sales of sitas generally levels off after sites have been open for five years, and the sales of older sites typically vary mom with the economy than the sales of younger sites. Net interest income/expense in 2001 increased $207 over 2000. Net interest income/expense in 2000 increased $1,458 over 1999. Changes were due to the fluctuations in the weighted average amount of outstanding Company borrowings and investmenta less the impact of lower interest rates in 2001. The loss/gains on disposal of property and equipment in 2001, 2000 and 1999 came primarily fi'om the disposal of used vehicles. 2001 ANNUAl REPORT 5 2ooll Management's Discussion & Analysis of Financial Condition & Results of Operations (AMOUNTS IN THOUSANDS EXCEPT PERSONNEL COUNTS AND DIVIDENDS PER SI IARE.) Net earnings contracted 13.2% from 2000 to 2001 and grew 23.3% from 1999 to 2000. The contraction in net earnings in 2001 resulted primarily from (1) lower net sales growth, (2) the decrease in gross margin percentage, caused primarily by changes in product mix, (3) the decrease in the gross margin dollars generated in older stores due to decreases in net sales, (4) the additional expenses of store site openings (see cummeats earlier), (5) the added impact of increases in utility and health care costs when compared to the same period in 2000, and (6) the increase in depreciation expense associated with additions of property and equipment, most notably software and hardware for the Company's management information system. The growth in net earnings in 2000 resulted primarily from increased net sales. In 2000 the net earnings growth rate was higher than that of net sales because of the earlier mentioned impact of opemting and administrative costs. The Asian economic turmoil impacted the Company in several ways during 2000. During 1999, the Company experienced lower prices on low-carbon and stainless steel fasteners imported from the Far East when compared to most of 1998. To the extent the Company was able to retain the cost advantage, gross margins improved. However, these lower costs also affected net sales because some of the lower costs were passed on to customers in the competitive marketplace. During the winter of 1999/2000 this trend began to reverse itself and prices began to increase. To the extent the Company was able to pass on these increases, gross margins were not impacted. However, during the second quarter of 2000 the Company did experience a reduction in the gross margin percentage. This trend was reversed in the third and fourth quarters of 2000. In 2000 the Company also experienced lower net sales of products to customers who export to the Far East when compared to sales levels to these customers in most of 1999. In addition to the impacts of the Far East situation, 2001 and 2000 showed a continuation of the slowdown in the manufacturing activity of customers we sell to in the U.S. and Canada. Effects of Inflation Price deflation related to certain products negatively impacted net sales in 2001,2000 and 1999. Critical Accounting Policies The Company's estimates related to certain assets and lia- bilities are an integral part of the consolidated financial statements. These estimates am considered critical to the consolidated financial statements because they require sub- jective and complex judgments. Allowance for doubtful accounts - This reserve is for accounts receivable balances that are potentially uncol- lectible. The reserve is based on (1) an analysis of customer accounts and (2) the Company's historical experience with accounts receivable write-offs. The analysis would include the age of the receivable, the financial condition of a cus- tomer or industry, and general economic conditions. Management believes the results could be materially differ- ent if historical trends do not reflect actual results or if eco- nomic conditions worsened for the Company's customers. Inventory reserves - This reserve is for shrinkage, slow moving, and obsolete inventory. The reserve is based on an analysis of inventory trends. The analysis would include inventory levels, physical inventory counts, cycle count adjustments, the nature of the product and its inherent risk of obsolescence, the gross margin of the product, and the on-hand quantities relative to the sales history for the prod- uct. Management believes the results could be materially different if historical trends do not reflect actual results or if demand for the Company's products decreased because of economic or competitive conditions. Health insurance reserves - This reserve is for incurred but not reported health claims. The reserve is based on an exter- nal analysis of the Company's historical claim reporting trends. Management believes the results could be material- ly different if historical aends do not reflect actual results. General insurance reserves -This reserve for general insur- ance claims. The reserve is based on an external analysis of the Company's historical general insurance trends. Management believes the results could be materially differ- ent if historical trends do not reflect actual results. 6 2001 ANNUAl REPORT 2001[ Management's Discussion & Analysts of I Financial Condition & Results of Operations (AMOUNTS IN THOUSANDS EXCEPT PERSONNEL COUNTS AND DIVIDENDS PER SHARE) Liquidity and Capital Resources Net cash provided by operating activities was: 2001 $ 91,727 2000 $ 38,253 1999 $ 55,989 The 2001 increase in net cash provided by operating activities was primarily due to the decrease in cash needed to fund trade accounts receivable and inventory due to lower sales bn'owth in 2001. In 2000, these two assets consumed $62,524 of cash, while in 2001 these two assets generated $3,627 of cash. The 2000 decrease in net cash provided by operating activities was prima- rily due to the 34.2% increase in inventory levels. Net cash used in investing activities was: 2001 $ 60,648 2000 $ 43,300 1999 $ 24,654 The 2001 increase in net cash used in investing activi- ties resulted primarily from the purchase of a business and from the increase in marketable securities. The 2000 increase in net cash used in investing activities resulted primarily from an increase in marketable secu- rities and from a decrease in the proceeds from sale of property and equipment. This decrease is directly relat- ed to the migration of our vehicles from owned to leased in 2000. The Company has future commitments for leased facil- ities and for leased vehicles at December 31, 2001. The Company has $6,533 of long-term debt related to an Industrial Revenue Bond (IRB) at December 31, 2001, and had no long-term debt at December 31, 2000 and 1999. The Company has a letter of credit issued on its behalf to its insurance carder. See notes 8 and 9 of the Notes to Consolidated Financial Statements for addi- tional information related to these obligations and to our current line of aredit. The future contractual cash obligations related to these commitments are as follows: 2004 and After Total 2002 2003 2005 2005 Facilities $ 23,795 13,698 7,114 2,407 576 Vehicles 11,106 7,099 2,406 1,601 - IRB ~,~ .3fi_._. 6~3 6~.~.....). ~... ~?~2~ ! Total $ 41,434 21,450 10,173 5,314 4,497 The future commercial commitment related to the letter of credit is $3,969. The Compar.y paid an annual dividend of $.09 per share in 2001, $.08 per share in 2000 and $.04 per share in 1999. As of December 31, 2001, the Company had no mate- rial outstanding commitments for capital expenditures. The Company expects to make approximately $30,000 in total capital expenditures in 2002, consisting of approximately $14,000 for manufacturing, warehouse and packaging equipment and facilities, approximately $8,000 for data processing equipment, and approximately $8,000 for vehicles. The capital expenditures for vehicles, which represented a substantial portion of the total amount in prior years, represented a smaller portion in both 2001 and 2000. This decrease, from earlier years, is a direct result of increases in the number of vehicles leased as opposed to owned. We expect this to recur in 2002. Management anticipates funding its current expansion plans with cash generated from operations, from available cash and cash equivalents, and, to a lesser degree, from its borrowing capacity. In addition to opening new sites in the United States, the Company plans to continue opening additional sites in Canada, Puerto Rico, Mexico and Singapore. 2001 ANNIIA[. REPORT 7 I Management's Discussion & Analysis of 200:1 I Financial Condition & Results of Operations (AMOUNTS IN THOUSANDS EXCEPT PERSONNEL COUNTS AND DIVIDENDS PER SHARE} Market Risk Management The Company is exposed to certain market risks from changes in interest rates and foreign currency exchange rates. Changes in these factors cause fluctuations inthe Company's earnings and cash flows. The Company evaluates and manages exposure to these market risks as follows: Interest Rates - The Company has a $15,000 line of credit of which $0 was outstanding at December 31, 2001. The line bears interest at .9% over the LIBOR rate. Foreign Cnrreney Exchange Rates - Foreign currency fluctuations can affect the Company's net investments and earnings denominated in foreign currencies. The Company's primary exchange rate exposure is with the Canadian dollar against the U.S. dollar. The Company's estimated net earnings exposure for foreign currency exchange rotes was not material at December 31,2001. Certain Risks and Uncertainties Certain statements in this Annual Report, in thc Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made by or with approval of the Company's executive offieem constitute or will constitute "forward-looking statements" under the Reform Act. The following factors are among those that could cause the Company's actual results to differ materially from those predicted in such forward- looking statements: (il an upturn or downtem in the economy could impact sales at existing stores and the rotes of new stem openings and additions of new employees, (ii) a change, from that projected, in the number of markets able to support future store sites could impact the rotes of new store openings and addi- tions of new employees, (iii) the ability of the Company to develop product expertise at the store level, to identi- fy future product lines that complement existing prod- uct lines, to transport and store certain hazardous products and to otherwise integrate new product lines into the Company's existing stores and distribution network could impact sales and margins, (iv) the ability of the Company to successfully attract and retain qualified personnel to staff the Company's stores could impact sales at existing stores and the rate of new store openings, (v) changes in governmental reg- ulations related to product quality or product source traceability could impact the cost to the Company of regulatory compliance, (vi) inclement weather could impact the Company's distribution network, (vii) foreign currency fluctuations, changes in trade relations, or fluctuations in the relative strength of foreign economies could impact the ability of the Company to procure products overseas at competitive prices and the Company's sales, (viii) disruptions caused by the implementation of the Company's new management information systems infrastructure could impact sales, and (ix) changes in the rote of new store openings could impact expenditures for computers and other capital equipment. New Accounting Pronouncements During 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Account Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for tbe Impairment or Disposal of Long-Lived Assets. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with SFAS No. 142. The company's net goodwill at December 3I, 2001 was $1,405. The related goodwill amortization was $152 in 2001. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated resid- ual values, and reviewed for impairment in accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144, which will supersede SFAS No. 121, retains many of the fundamental provisions of that Statement. The adoption of both SFAS 142 and 144 is not expected to have a significant impact on the Company's financial condition or results of operations. 8 2001 ANNUAL REPORT 2001 [ Stock & Financial Data Common Stock Data The Company's shares are traded on The Nasdaq Stock Market under the symbol "FAST". The following table sets forth, by quarter, the high and low closing sale price of the Company's shares on The Nasdaq Stock Market for 2001 and 2000. Third,quarter: ::£567:90: .5 5047~ Fourth quarter: :::!·:: :67:45 ;¥::P! ;;Seebnd quarter: ~' i ~:~.:~: .73.3 E ~[~ ~: ':45:25 , l~ourth quarter. '~ ' 62 75~':~:~? ,45 3 ~ As of February 16, 2002, there were approximately 2,400 mcordholders of the Company's Common Stock· A $.09 annual dividend per share was paid in 2001 and an $.08 annual dividend per share was paid in 2000. On January 18, 2002, the Company announced a $. 10 annual dividend per share to be paid on March 8, 2002 to shareholders of record at the close of business on February 22, 2002. The Company expects that it will continue to pay comparable cash dividends in the foreseeable futura, provided that any furore determination as to payment of dividends will depend upon the financial condition and results of operations of the Company and such other factors as are deemed relevant by the board of directors. Selected Quarterly Financial Data (Unaudited)~ (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Ftrstquarter ~: , $ 203,374::xi 104,555 ~ :~[ ~ 207391;: : : ~;,: :.55 r ,Second quarter ..... 207,4~2, ~ ...... 104~631 .................. 19,018 50 ..... Fotti'th quarter 198070 ;~ ~ 98~467: .... 13,354~.<, ~ ...... l[~: a~2=:35 ........ 2000.- ....... ; :;, :: ::~Net sales ,, ~ ~: ~Gross~ptofit.. r.,. ~ .~= Net earnings ~, , Eammgs per. share Ftrstqnarter $178,687 . ,~ ,..~91,924 ,. : 20,046 53 Seeond qu~ : ?,191;177 : 97,305~ ~r~,, . .., A 20;975: Tkirdquarter ..... :: !95~407.. r: :,.=: 100~631., ,~ ........ ......20,802 ............ Fomth.quartar .. : !190;347 ~i !:;?;98;258~ ~ ~ :7 , 18;907 ] The net sales and gross profit dollar mounts for all periods presented have been restated to reflect the reclassifi- cation of shipping and handling costs billed to customers and sales incentives paid to customers. The gross profit dollar mounts for all periods presented have also been restated to reflect outbound shipping costs as a cost of sale. These amounts were previously included in operating and administrative expenses. This reclassification was in accordance with Emerging Issues Task Force (EITF) 00-10, Accotmth~gfor Shipping and Handling Fees and Costs, and EITF 00-22, ~ccounting for "Points' and Certain Other I~tne-Based or Volume-Based Sales Incentive Offers, and Offers for Free Prochtcts o1' Services to Be Delivered in the Future. 2001 ANNIIAI. REI)C)RT 9 200;1 ] Consolidated Balance Sheets DECEMBER 31, 2001 & 2000 (AMOUNTS IN THOUSANDS EXCEPT SHARE INFORMATION.) Cash and cash equivalents _ i $ ,:47;264 { 19 710 accounts of $3,474 and $2,238, respectively i'*:7:5~i-~1 356{!"?-~ 106 12~ Inventories i ';: 152,706, * :~ 143,068 Deferred income tax asset 4,696 4,060 Other current assets 1:~,961' 7,469 Total current assets 341,241 ~ 284,455 Marketable securities 9.374 8.969 Property and equipment less accumulated depreciation ' ~ 121,607' ' i 105,807 Other assets, net 3.022 ~ 3,233 Total assets $, 475,244 402,464 Liabilities and Stockholders' Equity Current liabilities: Accounts payable Accrued expenses [.~.973 · Income tax payable ~ . - 2;488 Total current liabilities - 40;561 Deferred !n~0me tax liability · 9~795 .$. 20,100 19,898 13,502 3,179 36,579 · ' 6,627 Stockholders' equity: Preferred stock -- Common stock, 50,000,000 shares authorized 37,938,688 shares issued ~ 379 Additional paid-in capital ~ ' ,:4 424 Retained eamings /421,945 Accumulated other comprehensive loss (1,860) - Total stockholders' equity 424,888 Commi~anenta (notes 5, 8, and 9) Total liabilities and stockholders' equity I $'475,244 379 4,424 355,248 (793) 359,258 402,464 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. ~0 2001 ANNHAI. REPORT 2OO1 Consolidated Statements of Earnings (AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SEIARD YESES ENDED DECEMBER 3L 2001. 2000 & 1999 Net sales Cost ofsales Gross profit Operating and administxative expenses Operating income i '-*'~7"~01:'-T! 2000 1999 I. $818,283! ,: i 755,618 618,191 !* '~i~405;85i5 c ~ i 367,500 298,731 i ~'~1i:2 427,~;. I 388,118 319,460 i;;:'51)6!696; 258,561 213,774 ~1 ~ iil}73,1:, 129,557 105,686 Other income (expense): Interest income * '' 2~242 :' 2,035 634 Interest expense :'i . ~ O. =~" 0 (57) Tcta!~h~' !ncome ~ , .:1;903! . 1,873 793 Earnings before income taxes ~ :- 1,13;634 , ,i 131,430 106,479 Net earnings Ba~!c ~ ~lj!gted ~am!~g~ per share ' 4~ 522 'I 50,700 41,024 , $ 70;,1112 ~ ' 80,730 65,455 i,$ :~ ' 1';85: ~ i 2.13 1.73 Weighted average shares outstanding · 37;939' ~'f 37,939 37,939 THE ACCOMEANY1NG NOTES ARE AN INTEGRAl. PART OF THE FINANCIAl. STATEMENW5. 2001 ANNtlAI REPORT 11 t Consolidated Statements of Stockholders' 2OO1 [ EquiCv & Comprehensive Income tAMOUNTS IN THOUSANDS.) 'Fr~AP, S ENDED DECEMBER 31. 200[ 2000 & 1999 Accumulated Additional Other Total Common Stock Paid-in Retained Comprehensive Stockholden --~'~=res Amoun~ I Capital Earnings Income (Loss) Equity Balances as of December31, 1998 37,939 $ 379 I 4,424 213,615 (772) 217,646 Dividends paid in cash -- -- I -- ( 1,517) -- ( 1,517) Net earnings for the year -- -- i -- 65,455 -- 65,455 Translation adjustment I -- i -- t -- -- 376 376 Total comprehensive income [ i 65,83 l Balances as of December31, 1999 37,939 $379 i 4,424 277,553 (396) 281,960 Dividends paid in cash -- -- (3,035) -- (3,035) Net earnings for the year -- -- ] -- -- 80,730 80,730 Translation adjustment ~ ~ [ -- -- (397) (397) Total comprehensive income [ 80,333 Balances as of December 31, 2000 37,939 $ 379 i 4,424 355,248 (793) 359 258 Dividends paid in cash -- i [ (3,415) -- (3,415) Net earnings for the year .... 70 l 12 -- 70 112 Franslation adjustment -- (1,067) (1,067) Fotal comprehensive income [ 69,045 balances as of December31,2001 ~ 379397. ,-. .$379 ~.;: 44~24:: 421 945~ ' ~1',8~0) 424,888 THE ACCOMPANYING Nows ARE AN INTEGRAl. PART OF THE FINANCIAl. STATE~rlENT~ 12 2001 ANNLIAL REPORT 2OO1 Consolidated Statements of Cash Flows (AMOUNTS IN THOUSANDS.) Y~R5 ENDED DECEMBER 31, 20Ok 2000 & 1999 200t ..! 2000 1999 Cash flows from operating activities: Net earnings ~-" ' '$.' :7~6~]'i~-.:, ~ 80,730 65,455 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of property and equipment : 14,747, i 11,757 11,777 Loss (gain) on disposal of properW and equipment !':" :339 i 162 (2 6) Bad debt expense i' :' 5 453'~ ~ 4,496 3,566 Deferred income taxes , 2~532 'i 2,453 (354) Amortization of goodwill and non-compete agreement :: : 220 i 220 220 Changes in operating assets and habtht~es, net of acquisition Trade ~c~u~t;'r~ivable [' 6;2~;~ :: i (~0~) (19,631) Inventories i~ (2,605). ! (36,471) (12,863) Other current assets ';' i (4,407) (1,959) 1,127 Accounts payable ::i. '::(:liS:tS). ii 573 1,914 Accrued expenses i ': ,1 630 1,717 2 786 Income taxes pa3?l~!? ;' ':'"'"'1(691~) i 628 2,208 Net cash provided 17 operating activities i ~9i;727 ' ! 38,253 55,989 Cash flows from investing activities: Purchases of business and property and equipment (45,342)' (36 729) (39 176) P[f?9~d,5.f~m.~!~ of..pr0per~ ~.~(tgip~nEp~ · _ 3}_2.9_52~_1 6 633 14 197 Trans at'on adjustment ' (957)) (340) 376 Net (increase) decrease in marketable securities ~ (17 635);' (12 782) 50 N~t.cash used in investing a~iYitie~ !' (60;64g~ ~ (43,300) (24,654) Cash flows from financing aetivifies: Net decrease in line of credit Payment of dividends Net cash used in financing activities Effect of CXEhang~ rate 9~hanges on c~h Net increase (decrease) in cash and cash equivalents -- (4,055) (3,035) (1,517) (3,415j i (3,035) (5,572) (110) f (57) -- 27;554 i (8,139) 25,763 C~sh aj~t[9~3.~qu!valents at beginning 9fygar i 49i7~10 .. ) 27,849 2,086 Cash and cash equivalents at end ofyear $ ;47,264 ~ 19,710 27,849 Supplemental disclosure of cash flow information: Cash paid during each year for: ; ' Interest $ ~- , -- 87 THE ACCOMPANYING NOTES ,ARE AN [NTEGRAI. PART OF THE FINANCIAL gTATEMENTFK 2001 ANNIIAI. REPORT 13 2001 Notes to Consolidated Financial Statements (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA.) YEARS ENDED DECEMBER 31. 200£ 2000 & 1999 Summary of Significant Accounting Policies Principles of Consolidation Thc consolidated financial statements include thc accounts of Fastenal Company and its wholly-owned subsidiaries, Fastenal Company Services, Fastenal Company Purchasing, Fastenal Company Leasing, Fastenal Canada Company, Fastenal Mexico, S. de R.L. de C.V., Fastenal Mexico Services, S. de R.L de C.V., and Fastenal Singapore P.T.E., Ltd. (collectively referred to as the Company). All material intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition The Company mcognizas sales and the related cost of sales on the accrual basis of accounting at the time products are shipped to or picked up by customers. Reclassifications Certain amounts in the consolidated balance sheets and consolidated statements of cash flows were restated to conform to the current presentation. During 2001, the Company adopted the provisions of Emerging Issues Task Force (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs. and EITF O0-22, /tccounting for "Points" and Certain Other 7~me- Based or Vohtme-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered h7 the Future. As required by EITF 00-10 and EITF 00-22, the Company has reclassified shipping and handling costs billed to customers as an increase of net sales and incentives paid to customers as a reduction of net sales. The Company has also reclassified outbound shipping costs to cost of sales. These amounts were previously included in operating and administrative expenses. The reclassification resulted in a net increase in net sales of $9,878 and $9,005 in 2000 and 1999, respectively. The reclassification resulted in an increase in cost of sales of $10,320 and $8,811 in 2000 and 1999, respectively. Certain delivery costs such ~s labor and transp- ortation can not be readilly allocated between selling and delivery activities and continue m be included in operating and administration costs. Financial Instruments All financial instruments are carried at amounts that approximate estimated fair value. Cash Equivalents For pm-poses of the Consolidated Statements of Cash Flows, the Company considers all highly-liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. Inventories Inventories, consisting of memhandise held for resale, are stated at the lower of cost (first in, first out method) or market. Marketable Securities Marketable securities as of December 31, 2001 and 2000 consist of debt securities. The Company classifies its debt securities as available-for-sale. Available-for-sale securities are recorded at fair value based on current market value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings, but are included in comprehensive income, and are reported as a separate component of stockholdem' equity until realized, provided that a decline in the market value of any available-for-sale security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. The amortized cost approximated the fair value of available-for-sale debt securities as of December 31, 2001 and 2000. 14 2OOI ANNUAl REPORT 20011 Notes to Consolidated Financial Statements (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA.) '~TAP, S ENrDED DECFA4BER 31. 20OL 2000 & 1999 Summary of Significant Accounting Policies continued Properb/ and Equipment ~,=,~I Property and equipment are stated at cost. Depreciation on buildings and equipment is provided for using '7 the straight line method over the anticipated economic useful lives of the related propeaW. ~ -~*'--~Other Assets /~ Other assets consists of prepaid security deposits, goodwill and a non-compete agreement. Goodwill '~,~-~'~ represents the excess of the purchase price over the fair value of net assets acquired and is amortized on a straight-line basis over 15 years. The non-compete agreement is amortized on a stralghtqine basis over 15 years. Goodwill and other long-term asset balances are reviewed periodically to determine that the unamortized balances are recoverable. In evaluating the recoverability of these assets, the following factors, among others, are considered: a significant change in the factors used to determine the amortization period, an adverse change in legal factors or in the business climate, a transition to a new product or services strategy, a significant change in the customer base, and/or a realization of failed marketing efforts. If the unamortized balance is believed to be unrecoverable, the Company recognizes an impairment charge necessary to reduce the unamortized balance to the amount of undiscounted cash flows expected to be generated over the remaining life. If the acquired entity has been integrated into other operations and cash flows cannot be separately measured, the Company recognizes an impairment charge necessary to reduce the unamortized balance to its estimated fair value. The amount of impairment is charged to earnings as a part of operating and administrative expenses in the current period. Long-Lived Assets The Company reviews tangible and certain identifiable intangible assets for impairment whenever events or changes in'circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Accounting 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 amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ fi*om those estimates. Stock-Based Compensation The Company has not granted any stock options. During 2000, the Company established a stock appreciation rights (SAR) plan. During 2001 and 2000, the Company granted 4,000 and 10,000 SAR units, respectively, under this plan. The SAR units are exerciseable in 2002 and 2003. The Company recognized $154 and $0 compensation expense during 2001 and 2000, respectively, related to the SAR plan. 2001 ANNIIAI REPORT 15 Notes to Consolidated Financial Statements (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA.) Summary of Significant Accounting Policies continued Income Taxes YEA~ ENDED DECEMBER 31. 2001, 2000 & 1999 The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rotes expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or seillcd. The effect on deferred tax assets and liabilities of a change in tax rotes is recognized in income in the period that includes the enactment date. Earnings Per Share Earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding. Segment Reporting The Company has reviewed SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, and determined the Company meets the aggregation criteria outlined as the various operations of the Company have similar (1) economic characteristics, (2) products mad services, (3) customers, (4) disffibution channels, and (5) regulatory environments. Therefore the Company reports as a single business segment. Property and Equipment Properly and equipment as of December 31 consists of the following: Depreciable Buildings and improvements 31 to 39 i* 37;572 t 34,123 Equipment and shelving 3 to 10 i '1,11,079 82,180 Transp°rtat!°n E[IuiPmEE[ 3~?5 [. _._~.!.f~,413 i 18,362 Construction in progress -- ! ; 13,349' "? iSi~i ~ ] 86,:44'2: :~ 158,829 Less accumulated depreciation I.~ (64,83~) i (53,022) Net property and equipment [:~$121,607 . ,[ 105,807 16 2001 ANNUAl. REPORT 2001 [ Notes to Consolidated Financial Statements (AMOUNTS IN TI IOUSANDS EXCEPT SHARE AND PER SHARE DATA.) 3 Accrued Expenses Accrued expenses as of December 31 consist of the following: YEARS ENDED DECEvlBER 3[ 2001, 2000 & 1999 J~2~l~i 20~ Payroll and related taxes i. ~ ~''7':~'~3 ! [ 6,359 Bonuses and comm ssions ~- 3,449. ~c ~!~ 3,480 In?Jr~nc~ {:'~ 2,37ii -{ 1,577 Sales and real estate taxe~ ~:1. 7 i.i~)~6-2 ~82 Other I' ' 3,818 ', 1,104 Acquisition of Business On Augast 3 ], 200], the Company acquired certain assets of two subsidiaries oF Textron, Inc. These assets wcrc used in their business of selling packaged fasteners to the retail market (Do4t-¥oursclf or DI¥ Business). Thc asset were purchased for a cash paymant at closing. The acquisition was not mataria] to the financial statcmcnts of the Company. ~ ) On July 1, 200l, the Company adopted SFAS No. 141,BusinessCombinations. SFAS 141 requires the use of the purchase method of acanunting and, accordingly, the operating results of the DIY Business have been included in the Company's consolidated financial statements since the date of acquisition. The total ~ purchase price was allocated to tangible assets and liabilities based the estimate of their fair value on upon the acquisition date. The final purchase price remains contingent on resolution of the closing balance sheet. The final purchase price could result in tangible assets in excess of the cash paid and liabilities assumed, or negative goodwill. The negative goodwill realized, if any, will be recognized in income when the purchase price is finalized. The DIY Business was pumhased after a prolonged period of contraction; therefore, the historical sales and earnings are not reflective of the DIY Business's current operations. If the business combination had occurred at the beginning of the respective years, net income would not have been materially different from the mounts reported. The nei sales from the DIY Business totaled $8,526 from August 31,2001 through December 31, 2001. The DIY Business has operated at approximately a break even level from August 31, 2001 through December 31,2001. Stockholders' Equity Preferred stock has a par value of $.01 per share. There were 5,000,000 shares authorized and no shares issued as of December 31, 2001 and 2000. Common Stock has a par value of $.01 per share. There were 50,000,000 shares authorized and 37,938,688 shares issued and outstanding as of Decernber 31, 2001 and 2000. pividends On January 18, 2002, the Company's board of directms declared a dividend of $.10 per share of Common Stock to be paid in cash on March 8, 2002 to shareholders of record at the close of business on February 22, 2002. 6KRetirement Plan In 1998 the Company established the Fastenal Company and Subsidiaries 401(k) Plan. This plan covers '~,~ all employees of the Company in the United States. The Company made no contributions to the plan ~ in 2001, 2000 or 1999. 200[ ANNHAI. REPORT 17 2001 Notes to Consolidated Financial Statements ENDED DECFMBER 3[ 2001, 2000 & 1999 Total 37,822 (AMOUNTS IN THOUSANDS EXCEPT SI tARE AND PER SHARE DATA.) Income Taxes Components of income tax expense (benefit) are as follows: }Federal . : $ 35,623 .i :" ' :~' .{5 2,199,1'{ !State = 5,36T :." ":'?~ :~i ;: ~ ': 333; i 5,700 [ ..... ' d-- ....... 7 $40990, ' :-. 72,532 I 43,522 2000: Current Deferred Total Federal $ 41,472 2,110 43,582 State 6,775 343 7,118 $ 48,247 2,453 50,700 1999: Current Deferred Total Federal $ 35,618 (305) 35,313 State 5,760 (49) 5,711 $ 41,378 (354) 41,024 Income tax expense in the accompanying consolidated financial statements differs from the "expected" tax expense as follows: ['"7'5:200'.'1~} 2000 ?1999 Federal income tax expense at ~ "': '; the "expected" rate iS ~3~,77~ t 46,000 37,268 Increase to: State income taxes net 9r. federal benefit [.: .3;7~05__ ~ 4 627 3 Other, net } . 45 ' ~ 73 44 T~!.in.c~r~ ~tx eXp?~ !$ 43;522..': 50,700 41,024 The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of December 31 are as follows: :,, - 2000 Deferred tax asset (liability): . . Inventory costing and valuation methods } $ ::.2~020', ' ~ 2,597 Allowance for doubtful accounts receivable ~ ~ '1 ~188 . 862 Insurance claims payable · 965 628 Fixed assets i (9;795) (6,627) Other, net ! 523, ! (27) Net deferred tax liability I $~ i(5,099) (2,567) No valuation allowance for deferred tax assets was necessary as of December 31, 2001 and 2000. The character of the deferred tax assets is such that they can be realized through carrybeck to prior tax periods or offset against future laxable income. 2001 ANNtlAI REPORT 2001 Notes to Consolidated Financial Statements (AMOUNTS 1N THOLISANDS EXCEPT SI IARE AND PER SHARE DATA.) YEARS ENDED DECBMBER 31. 200~ 2000 & 1999 Operating Leases The Company leases space under non-cancelable operating leases for its California, North Carolina, Utah and Washington distribution canters, its Tennessee packaging center, and certain store sites ~ terms one to 48 months. The Company leases its Illinois packaging/processing center under with initial of an assumed lease with five years remaining on the lease. ' ~' The Company leases certain semi-tractors and pick-ups under operating leases. The semi-tractor leases ~ typically have a 36 month term. The pick-up leases typically have a 72 month term and include an ~=~--J early buy out clause the Company intends to exercise, thereby giving the leases an effective term of ? · '! 12-15 months. Future minimttm annual rentals for the leased facilities and the leased vehicles are as follows: Leased Leased Facilities Vehicles Total 2002 ..... $13 698 7 099 20 797 ~00~ 7 114 2,406 9 520 2004 1,910 1,601 3,511 2005 497 497 2006 andthereaffer 576 576 Rent expense under all operating leases is as follows: Leased Facilities Leased Vehicles Total 2000 16,899 8,328 25,227 ~999 14 86~ 4 282 19,149 Lines of Credit and Commitments l~ne Company has a line of credit arrangement with a bank which expires June 30, 2002. The line allows for borrowings of up to $15,000 at .9% over the LIBOR rate. On December 31, 2001 there is $0 outstanding on the line. The Company currently has a letter of credit issued on its behalf to its insurance carrier. As of December 31, 2001, the total undrawn balance of this letter of credit is $3,969. During 2001, the Company completed the constxucfion of a new building for its Kansas City warehouse. This Company was required to obtain financing for this facility under an Industrial Revenue Bond ([RB). The Company subsequently purchased 100% of the outstanding bonds under the IRB at par. In addition to purchasing the outstanding obligations, the Company has a right of offset included in the 1RB debt agreement. Accordingly, the Company has netted the impact of the IRB in the accompanying consolidated financial statements. The total IRB at December 31, 2001 is $6,533. 2001 ANNIlAI. REPORT 19 rt of Manage..rnent & ud tors' Report 'The Board of Directors and Stockholders Fastenal company: and acco- Management is rasponSthlc for the integrity - ,eiat information mcinded rat2/of the consolidated Bnan-- . ' Management believes these consolidated financial statements have been prepared m accordance in this report, accepted in the acCOUnting principles generally with · The preparation of the con- United Sates of America. . . solidated financial statements reqmras management to make estimates and assumpuonS that affect the repOt~ ed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the con- solidated financial statements and the reported amoUnts of revenues and expenSeS during the periods reported. In meeting its responsibility for the reliability of the This system is designed to internal accounting control safeguarded appropriately authorized and and transactions are in all material aspects· included in the financial records and }udgments are The design of this system recognizes errorS or irregu- larities may occur and estimates end expected bene- required to assess the relative cost Management believes the ,fits of the controlS, reasonable , accounting controls provide 'al to the consol- Company s rS or irregularities match idated financial ststemen~s · . detected in a reasonable nme pC-nod Commit'~ee, comprised of members of the employees of the The Audit who are not independent Board of DirectorS the companY, meets periodically with . internal accounting . · ' repOrting matters- The Audit Commit~e recommends the who are then selection of the independent auditors, appointed by the Board of DirectorS, subject to rat~ficatton by the shareholders. The independent auditors, KPMG LLP, conduct an independent audit of the consolidated financial statements The Board of Di~ctorS and StockholderS Fastenal company: . consolidated bat- We have audited the eccompanymg ance sheets of Fastenal Company and subsidiaries as of December 31, 2001 end 2000, and the related conSoli- stockholders' equi~ and dated statements of earnings, each of the comprehensive income, and cash flows for three-year period ended December 31, yeatS in the ,.~,~a financial statements are the 2001. These conSottu~,~- - · management. Our responsibility of the Company.~ion on these conSOl- responsibility is to expreSS an opt' . . idated financial statements based on our au~tls auditing We condUCted oUr audits in accordance wtth standards generally accepted in the United States of America· Those standards reqmm that we plan and par' form the audit to obtain reasonable assurance about 'al statements are free of material whether the finanCV examining, on a test misstatement' An audit includes . basiS, evidence supporting the amounts and dtscinsuras in the financial statements' An audit also.in?udes accounting principles used and s~gmficant assessing the as well as evaluating estimates made by management, · the overall financial statement presentation. We believe that oUr audits provide a reasonable basis for our oPun°n conSOlidated financial statements In our opinion, the t fairly, in all material respects, above preSen referred to ilion of Fastenal Company and sub financial pos t~iaries as of December 31, 2001 and 2000, and the reSUlts of their operation and their cash floWS for each of the years in th~ three-year period ended December 31, 2001, in conformity with eccountmg principles generally accepted in tbe United States of Amedt-~ca. · state- iscUssed in Note 4 to consohdated finanmal As adopted the provisions of merits, thc Company . · Statement of Financial Accounting standards No 14 Business CombinationS, on 3uly 1,2001. Minneapolis, MinneSOta January 18, 2002 Officers Robert A. Kierlin Chairman of the Board and Chief Executive Officer Willard D, Oberton President and Chief Operating Officer Nicholas J. Lundquist Vice-President of Sales Daniel L. Florness Chief Financial Officer and Treasurer Stephen M. Slaggie Secretarys Directors Michael M. Gostomski President and Chief Executive Officer Winona Heating & Ventilating Company (sheet metal and roofing contractor) Michael d. Dolan Self Employed Business Consultant Robert A. Hanson Associate Professor of Marketing and Logistics Management, Carlson School of Management, University of Minnesota Robert A. Kierlin Henry K. McConnon President Wise Eyes, Inc. (eyeglass retailer and wholesaler) Willard D. Oberton John D. Remick President and Chief Executive Officer Rochester Athletic Club, Inc. (health club) Stephen M. Slaggie Reyne t~ tnftsecup Human Resource Manager Fastenal Company Services Corporate Information Annual Meeting The annual meeting of shareholders will be held at I0:00 a.m., Tuesday, April 16, 2002, at Corporate Headquarters, 2001 Theurer Boulevard, Winona, Minnesota Corporate Headquarters Fastcnal Company 2001 Theurcr Boulevard Winona, Minnesota 55987-1500 Phone: (507) 454-5374 Fax: (507) 453-8049 Legal Counsel Faegre & Benson LLP Minneapolis, Minnesota Streater & Murphy, PA Winona, Minnesota Form fO-K A copy of the Company ~ 2001 ~4nnual Report on Form IO-K to the Securities and Exchange Commission is available without charge to shareholders upon written request to the Secretary of the Company at the address listed on this page for the Company's corporate headquarters. Copies of our latest press release, unaudited supplemental Company information and monthly sales information (beginning with October 2000 sales) are available at the Fastenal Company World Wide Web site at: w~w.fastenal.¢om Auditors KPMG LLP Minneapolis, Minnesota Transfer Agent Wells Fargo Bank Minnesota, National Association Minneapolis, Minnesota INDUSTRIAL & COIVSTR~ON SUPPLIES S:\Our Documc~ts\Ordlna~ces\04~F~stcflal Abatement Ord~nmlcc.doc Exhibit C O ANCENO. AN ORDINANCE AUTHORIZING THE MAYOR TO EXECUTE A TAX ABATEMENT AGREEMENT WITH FASTENAL COMPANY; SETTING FORTH ALL THE REQLKRED TERMS OF THE TAX ABATEMENT AGREEMENT IN ACCORDANCE WITH THE TERMS OF CHAPTER 312 OF THE TEXAS TAX CODE; SETTING FORTH THE VARI- OUS CONDITIONS PRECEDENT TO FASTENAL COMPANY RECEIVING THE TAX ABATEMENT; PROVIDING FOR A SEVERABILITY CLAUSE; AND PROVIDING AN EFFECTIVE DATE. WHEREAS, on the 2nd day of March, 2004, after a public hearing duly held in accor- dance with Tex. Tax Code §312.201 (the "Act"), the City Council passed Ordinance No. 2004- ~9~D"' (the "Ordinance") establishing Reinvestment Zone No. VII, City of Denton, Texas as a commercial/industrial reinvestment zone for tax abatement (the "Zone"), as authorized by Title 3, Chapter 312, Subchapter B of the Act; and WHEREAS, on the 2nd day of January, 2004 Fastenal Company submitted an application for tax abatement with various attachments to the City concerning the contemplated use of cer- tain property located within the Zone; and WHEREAS, the City Council finds that the contemplated use of the premises and the contemplated improvements to the premises, as indicated by Fastenal Company are consistent with encouraging the development of the Zone in accordance with the purposes for its creation and are in compliance with the Denton Tax Abatement Policy; and WHEREAS, the City Council deems it in the public interest to enter into a Tax Abate- ment Agreement with Fastenal Company; NOW, THEREFORE, THE COUNCIL OF THE CITY OF DENTON HEREBY ORDAINS: SECTION 1. That the findings contained in the preamble to this ordinance are true and correct and are adopted as a part of the whole ordinance. SECTION 2. That the City Council finds and determines thc following: 1. That thc contemplated use of the premises and the contemplated improvements of thc prem- ises, as indicated by Fastenal Company are consistent with encouraging the development of the Zone in accordance with the purposes of its creation and arc in compliance with the Denton Tax Abatement Policy. 2. That the City Council finds that the improvements sought by Fastenal Company within the Zone are feasible and practical and would be a benefit to the land to be included in the Zone and to the City after the expiration of the Tax Abatement Agreement to be entered into with Fastenal Company. 3. That the City Council finds that the Tax Abatement Agreement contains all the terms which are mandatorily required to be included in any tax abatement agreement under {}312.205 of the Act. 4. That, in accordance with {}312.2041 of the Act, the City Council finds that not later than the date on which the City Council considered this ordinance, and not later than the seventh day before the date the City enters into a Tax Abatement Agreement with Fastenal Company, that the City Manager, through the Director of Economic Development, who are hereby desig- nated and authorized by the City Council to give such notice, delivered to the presiding offi- cer of the Denton Independent School District and Denton County a written notice that the City intends to enter into this Tax Abatement Agreement with Fastenal Company, and that this notice included a copy of the proposed Tax Abatement Agreement in substantially the form of the Tax Abatement Agreement attached to this ordinance. 5. That before the passage of this ordinance, the City Council held a public hearing in accor- dance with {}312.201 of the Act and created Reinvestment Zone No. VII. The City Council finds that the project within Reinvestment Zone No. VH is a redevelopment of an existing business as defined in the Tax Abatement Policy and requires additional incen- tives to promote economic development that generally satisfies the requirements of the policy and the City Council hereby waives the minimum threshold requirement within the policy for tax abatement and authorizes a tax abatement of a maximum of 35% on the increased valua- tion of the Taxable Real Property improvements and tangible personal property as more par- ticularly described in the Tax Abatement Agreement attached hereto and made a part hereof by reference as Exhibit "A" (the "Tax Abatement Agreement"). SECTION 3. That the Mayor, or in her absence, the Mayor Pro Tem, is hereby author- ized to execute the Tax Abatement Agreement with Flowers Baking Co. of Denton LLC. in sub- stantially the same form as the Tax Abatement Agreement attached as Exhibit "A". SECTION 4. That the City Council hereby instructs and authorizes the City Manager to inspect, audit, and evaluate the progress of Fastenal Company to determine if it has met all of the conditions of the attached Tax Abatement Agreement prior to the tax abatement going into cf~ feet. SECTION 5. That if any section, subsection, paragraph, sentence, clause, phrase, or word in this ordinance, or application thereof to any person or circumstance is held invalid by any court of competent jurisdiction, such holding shall not affect the validity of the remaining portions of this ordinance, the City Council of the City of Denton hereby declares that they would have enacted such remaining portions despite any such validity. SECTION 6. That this ordinance shall become effective immediately upon its passage and approval. Page 2 of 3 PASSED AND APPROVED this the ~tg~ day of ~ff_~ ,2004. EULIN BROCK, MAYOR ATTEST: JENNIFER WALTERS, CITY SECRETARY APPROVED AS TO LEGAL FORM: Page 3 of 3 EXHIBIT D 2001 Them'er Boulevard Winona, MN 55987 Buy It Online! www.fastenal.com CORPORATE RESOLUTION The undersigned Secretary o:fFastenal Company, a co~oration duly organized and existing under the laws of the State of Minnesota, hereby certifies that at a meeting of the Board of Directors held April 16, 2002 a quorum of which was present, the following resolution was adopted and entered into the minute books: RESOLVED: That the resolution adopted at the Sanuary 26, 1996 Board of Directors meeting, providing authority to ce~ain people to sign and execute leases on behalf of Fastenal Company, is hereby amended to include all of the following personnel: Randall K. Miller Leland $. Hein Jr, Steven A. Rucinski Kenneth R. Nance Sloven L. Appelv~iek Terry M. Hanley Robert A. Small Patrick C. Reseh NJek J. Lundquist Stevan 21. Roernbke Willarcl D. Oberton Dana J. $olmson James C. Jansen Joseph A. Stephens RESOLVED: That the following persorme] are also authorized to enter in to Purchase Agreements for the purchase or sale of real property on behalf of Fastenal Company: Dana I. Johnson Willard D. Oberton Daniel Flomess Steven L. Appelwiek Dated 'this 16t~ Day of April 2002 No corporate seal Fastenal Company Product Offering: FastenerS · Tools & Accessories · Safety Supplies * Cutting Tads Hydraulics & Pneumatics · Material Handling · Janitorial Supplies · Electrical Supplies · Welding Supplies Value Added Services: Tool Repair · Tool & Cutter Orindin$ · Custom Packaging · Special Manufacturing · Hose Crimping · Welded Band Sew Blade~. CAD Storeroom Layout · Inventory Management Sy~l;t"ms