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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JULY 31, 2001
Commission File Number 0-12730
BRADY CORPORATION
(Exact name of registrant as specified in charter)
WISCONSIN 39-0178960
(State of Incorporation) (IRS Employer Identification No.)
6555 WEST GOOD HOPE ROAD
MILWAUKEE, WI 53223
(Address of Principal Executive Offices and Zip Code)
(414) 358-6600
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Class A Nonvoting Common Stock, Par Value $.01 per share, New York Stock
Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No [ ]
The aggregate market value of the non-voting common stock held by
non-affiliates of the entity as of September 12, 2001 was approximately
$635,977,238 (based on closing sale price of $34.80 per share as reported for
the New York Stock Exchange). As of September 12, 2001, there were outstanding
21,165,284 shares of Class A Nonvoting Common Stock (the "Class A Common
Stock"), and 1,769,314 shares of Class B Common Stock. The Class B Common Stock,
all of which is held by affiliates of the Registrant, is the only voting stock.
DOCUMENTS INCORPORATED BY REFERENCE
Brady Corporation 2001 Annual Report, Incorporated into Part II & IV
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INDEX
PAGE
----
PART I
ITEM 1. BUSINESS
General Development of Business........................... I-1
Financial Information About Industry Segments............. I-1
Narrative Description of Business:
Overview............................................... I-1
Business Strategy...................................... I-1
Growth Strategy........................................ I-2
Products............................................... I-3
Marketing and Sales.................................... I-5
Manufacturing Process and Raw Materials................ I-5
Technology and Product Development..................... I-6
International Operations............................... I-6
Competition............................................ I-6
Backlog................................................ I-7
Environment............................................ I-7
Employees.............................................. I-7
Acquisitions........................................... I-7
Financial Information About Foreign and Domestic
Operations and Export Sales............................ I-7
ITEM 2. PROPERTIES.......................................... I-7
ITEM 3. LEGAL PROCEEDINGS................................... I-7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... I-7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... II-1
ITEM 6. SELECTED FINANCIAL DATA............................. II-1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... II-1
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................... II-5
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... II-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... II-28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT................................................ III-1
ITEM 11. EXECUTIVE COMPENSATION............................. III-3
Summary Compensation Table................................ III-3
Stock Options............................................. III-4
Common Stock Price Performance Graph...................... III-6
Compensation of Directors................................. III-6
Termination of Employment and Change in Control
Arrangements........................................... III-6
Restricted Stock.......................................... III-7
Compensation Committee Interlocks and Insider
Participation.......................................... III-7
Money Purchase and 401(k) Plan............................ III-7
Deferred Compensation Arrangements........................ III-8
Compensation Committee Report on Executive Compensation... III-9
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ III-11
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... III-13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS
ON FORM 8-K............................................... IV-1
SIGNATURES.................................................. IV-5
PART I
Brady Corporation and Subsidiaries are referred to herein as the "Company"
or "Brady".
ITEM 1 BUSINESS
(a) General Development of Business
The Company, a Wisconsin corporation, currently operates 27 manufacturing
facilities worldwide. Ten are located in the United States, three in France, two
each in Australia, Brazil and Germany and one each in Belgium, Canada, China,
England, Italy, Japan, Korea and Singapore. The Company sells through
subsidiaries or sales offices in Australia, Belgium, Brazil, Canada, China,
England, France, Germany, Hong Kong, Hungary, Italy, Japan, Korea, Malaysia,
Mexico, the Philippines, Poland, Singapore, Spain, Sweden, Taiwan and the United
States. The Company's corporate headquarters are located at 6555 West Good Hope
Road, Milwaukee, Wisconsin 53223, and the telephone number is (414) 358-6600.
The Company's Internet address is http://www.bradycorp.com.
(b) Financial Information About Industry Segments
The information required by this Item is provided in Item 8 -- Financial
Statements and Supplementary Data.
(c) Narrative Description of Business
OVERVIEW
Brady Corporation is a leading international manufacturer and marketer of
high-performance identification solutions and specialty coated materials. The
Company's products consist of over 50,000 stock and custom items as well as
complete identification systems that are used by the Company's customers to
create a safer work environment for employees, improve production and operating
efficiencies and increase the utilization of assets through tracking and
inventory process controls. Major product categories include: industrial
identification and data collection products; safety and facility identification
products; and precision materials.
The Company's products are sold in a variety of markets, including
electrical, electronic, telecommunication, governmental, public utility,
computer, construction, transportation equipment and education. The need for the
Company's products is driven by specification of customer engineering
departments, by regulatory compliance requirements imposed by agencies such as
OSHA and the EPA, or by the need to identify and track assets, or to direct,
warn, inform, train and protect people. The Company manufactures and sells
products domestically and internationally through multiple channels including
direct sales, distributor sales, mail-order catalog and telemarketing and
electronic access through the Internet. The Company has a broad customer base,
which in fiscal 2001 consisted of more than 300,000 companies, with the largest
customer representing less than 5% of net sales. Sales from international
operations represented 44.0% of net sales in fiscal 2001.
BUSINESS STRATEGY
Brady's mission is to be the world leader in identification and material
solutions that help companies improve productivity, performance, safety and
security. The Company expects to accomplish this objective by offering a broad
range of high-quality, innovative products to a widely diversified customer base
in a prompt and responsive manner. Underlying the Company's business strategy is
a Company-wide commitment to enhancing shareholder value. The Company's
long-term focus on activities that will create sustainable value for
shareholders drives decision making at all levels of the Company. The Company's
employees participate in an incentive plan that is focused upon the creation of
shareholder value. This incentive plan is designed to
I-1
motivate employees, foster a team-oriented work environment and maximize the
utilization of assets. Key elements of the Company's business strategy include:
Product innovation. The Company continually seeks to improve existing
products and to develop innovative products to satisfy customers' requirements
and expectations. Brady's commitment to product innovation is reflected in
research and development efforts that include approximately 200 employees
primarily dedicated to research and development activities in the United States,
Canada, Belgium, France and Singapore.
Breadth of product line. The Company's products include over 50,000 stock
as well as custom items. The number of products offered allows Brady to serve as
a one-stop shopping network for customers. Additionally, management believes
that the Company provides a broader range of identification solutions than any
of its competitors.
Focus on customers. The Company seeks to provide "seamless" customer
service and to offer rapid response to customer orders and inquiries. To meet
this goal, the Company has streamlined its manufacturing processes to shorten
lead-times and has increased investment in telecommunications and management
information systems worldwide.
Niche markets. The Company strives to be a major player in niche markets
that allow the Company to leverage its capabilities in specialty materials,
die-cut parts and printing systems. By focusing on specific markets and
value-added product applications, the Company has established leading positions
in the electrical and safety markets with certain products such as wire markers,
pipe markers, safety signs and printing systems. It also is a leader in
precision die-cut materials and bar-code label generation software.
GROWTH STRATEGY
The major elements of the Company's strategy for growth include:
New products and new markets. The Company, through strong product
innovation and development activities, seeks continually to introduce new
products and explore additional applications for products in existing and new
markets.
Increased market penetration. The Company seeks to increase market
penetration in existing domestic and international markets through existing
distribution channels and strong sales and marketing efforts. To achieve this
objective, the Company's goal is to align more closely with distributors, expand
its current sales force and pursue additional channels.
Geographic expansion. Sales from Brady's international operations have
increased from $50,707,000 or 26.5% of net sales in fiscal 1990 to $239,040,000,
or 44.0%, of net sales in fiscal 2001. The Company believes that international
markets continue to represent a significant growth opportunity. Accordingly, the
Company is actively seeking to increase penetration in established markets in
Europe, Asia/Pacific and Canada and to enter new emerging markets elsewhere in
Eastern Europe, the Pacific Rim and Latin America.
Strategic acquisitions and joint ventures. While the Company intends to
continue pursuing internal growth through the above strategies, the Company also
intends, where practical, to fill product lines or market sectors, open new
geographic markets and strengthen product offerings through the pursuit of
strategic acquisitions and joint ventures. Between 1999 and 2001, Brady's growth
has occurred through strategic acquisitions, innovative product development and
improvement, market expansion and increased market penetration.
E-business. E-Business will help support growth as the Company works to
make every Brady business an electronic or Internet-enabled business. Brady is
striving to transact 50 percent of the Company's business electronically within
the next three years. Investments in e-commerce and information technology have
been increased to help the Company achieve this goal.
I-2
PRODUCTS
The Company's products consist of over 50,000 stock and custom items as
well as complete identification systems that are used by the Company's customers
to create a safer work environment for employees, improve product and operating
efficiencies and increase the utilization of assets through tracking and
inventory process controls. Major product categories include: industrial
identification and data-collection products including wire and cable markers,
high-performance labels, stand-alone printing systems, barcode and other
software, radio frequency identification tags and readers and other automatic
identification and data collection systems; safety and facility identification
products including signs, pipe and valve markers, storage markers, asset
identification tags, lockout/tagout products, traffic-control products, printing
systems and software; and specialty tapes and die-cut materials.
Many of the Company's stock products were originally designed, developed
and manufactured as custom products for a specific purchaser. However, such
products have frequently developed wide industry acceptance and become stock
items offered by the Company through mail-order and distributor sales. The
Company's most significant types of products are described below.
INDUSTRIAL IDENTIFICATION AND DATA-COLLECTION PRODUCTS
Wire and Cable Markers
Brady manufactures a broad range of wire- and cable-marking products. These
products help mark and identify wires, cables and various hazards. Such products
may be used in virtually every industrial, electrical and telecommunications
market to specify the origination and/or destination of wiring and to facilitate
repair or maintenance of equipment and data communication and electrical wiring
systems.
High Performance Labels
Brady produces a complete line of label materials to meet customers' needs
for identification that performs under harsh or sensitive conditions. Brady
prints stock and custom labels and also sells unprinted materials to enable
customers to print their own labels on site, on demand, using thermal-transfer,
laser, dot-matrix and inkjet printers. Brady labels range from
static-dissipative labels for use on electronic components to labels that
withstand extreme conditions, such as 1,000 degrees Fahrenheit temperatures and
harsh chemicals.
Software and Printing Systems
The Company designs and produces various computer software, industrial
thermal-transfer and dot matrix printers and other electromechanical devices to
serve the growing and specialized needs of customers. Industrial labeling
systems, software, tapes, ribbons and label stocks provide customers with the
resources and flexibility to produce signs and labels on demand at their site.
Automatic Identification and Data-Collection Systems
Brady's automatic identification and data collection solutions include
bar-code-label-generating software, bar-code and radio frequency scanners, tags,
and labels to enable accurate tracking of manufacturing, warehousing, receiving
and shipping data. The Company's software applications, integration services,
fixed station terminals, high-speed printers and associated customized
consumable products allow its customers to have a higher degree of knowledge and
control over production, asset management and all phases of inventory control,
including receiving, warehousing, work-in-process, finished goods and shipping.
SAFETY AND FACILITY IDENTIFICATION PRODUCTS
Signs
The Company manufactures safety and informational signs for use in a broad
range of industrial, commercial, governmental and institutional applications.
These signs are either self-adhesive or mechanically mounted, are designed for
both indoor and outdoor use and are manufactured to meet standards issued by the
I-3
National Safety Council, OSHA and a variety of industry associations in the
United States and abroad. The Company's sign products are categorized by type of
message to be conveyed, including admittance, directional and exit signs;
electrical hazard warnings; energy conservation messages; fire protection and
fire equipment signs; hazardous waste labels; hazardous and toxic material
warning signs; personal hazard warnings; housekeeping and operational warnings;
pictograms; radiation and laser signs; safety practices signs and regulatory
markings.
Pipe and Valve Markers
The Company manufactures both self-adhesive and mechanically applied stock
and custom-designed pipe markers and plastic and metal valve tags for the
identification of pipes and control valves. These products are designed to help
identify and provide information as to the contents, direction of flow and
special hazardous properties of materials contained in piping systems, and to
facilitate repair or maintenance of the system.
Storage Markers
The Company produces signs; self-adhesive and self-aligning die-cut numbers
and letters used for the systematic identification of facilities, bins and
shelving. Storage marker products are primarily used by industrial companies in
factories, warehouses, stockrooms and other facilities.
Asset Identification Markers
Brady offers a wide range of asset-identification products. These include
self-adhesive or mechanically mounted labels or tags made of aluminum, brass,
stainless steel, polycarbonate, vinyl, polyester, mylar and paper. These
products are also offered in tamper-evident varieties.
Lockout/Tagout Products
Brady offers a wide variety of lockout/tagout products. Under OSHA
regulations, all energy sources must be "locked out" while machines are being
serviced or maintained to prevent accidental engagement and injury. The
Company's products allow its customers to comply with these regulations and to
ensure worker safety for a wide variety of energy- and fluid-transmission
systems and operating machinery.
Traffic Control Products
The Company offers a wide variety of traffic-control devices, including
directional and warning signs, barriers, cones and other devices.
Other
The Company also offers sign-making kits, stenciling materials, barricading
products, visual warning systems, floor-marking products, safety hard-hat
labels, safety badges, photo-identification kits, ergonomic products, first aid
cabinets/kits, body harnesses, anti-slip coatings and alarm security systems,
among others.
SPECIALTY MATERIALS
Specialty Tapes
Brady manufactures specialty tapes and related products that are used in a
variety of audio, video and computer applications. These specialty tape products
are characterized by high-performance adhesives, most of which are formulated by
the Company, to meet high-tolerance requirements of the industries in which they
are used. Its data-storage products include audio and videocassette splicing
tapes.
I-4
Die-Cut Materials
The Company's precision die-cut materials are used to seal, insulate,
protect, shield or provide other mechanical performance properties in the
assembly of electronic, telecommunications and other equipment, including
cellular phones, pagers, computer hard drives, two-way radios, and other
devices.
Graphics Products
Brady serves the identification and information needs of various
non-industrial markets with a variety of easy-to-use printing systems and
consumable supplies. It provides lettering and labeling systems, poster
printers, laminators and supplies to education and training markets.
OTHER PRODUCTS
The Company also sells a variety of other products, none of which
individually accounts for a material portion of its sales, including: hospital
and clinical labels, packing and shipping goods, name plates, and quality and
production control products, among others.
MARKETING AND SALES
The Company's products are sold in a wide variety of markets including
electrical, electronic, telecommunications, governmental, public utility,
computer, construction, transportation equipment and education. Brady has a
diverse customer base that consisted of over 300,000 customers in fiscal 2001.
No material part of the Company's business is dependent upon a single customer
or group of customers, and the loss of a particular customer would not have a
material adverse effect upon the Company's business. In fiscal 2001, no single
customer accounted for more than 5% of the Company's net sales.
The Company seeks to offer the right product with rapid response times and
superior service so that it can provide solutions to the customer that are
better, faster and more economical than those available from competitors. The
Company markets and sells its products domestically and internationally through
multiple channels including direct sales, distributor sales, mail-order-catalog
marketing and electronic access through the Internet. The Company currently has
over 4,000 established relationships with a broad range of electrical, safety,
industrial and other domestic and international distributors. To support its
distributor network, the Company employs a sales force of over 500 people. The
Company's sales force seeks to establish and foster ongoing relationships with
the end-users (and distributors) by providing technical support and product-
application advice.
The Company direct markets its products and those of other manufacturers by
catalog sales in both domestic and international markets. Such products include
industrial and facility identification products, safety and
regulatory-compliance products and OEM component products, among others. Catalog
operations are conducted through offices in the U.S., Australia, Brazil, Canada,
England, France, Germany, Italy and Japan, and include foreign-language
catalogs.
MANUFACTURING PROCESS AND RAW MATERIALS
The Company manufactures the majority of the products it sells, while
purchasing certain items from other manufacturers. Products manufactured by the
Company generally require a high degree of precision and the application of
adhesives with chemical and physical properties suited for specific uses. The
Company's manufacturing processes include compounding, coating, converting,
software publishing and printer engineering and assembly. The compounding
process involves the mixing of chemical batches for primers, top coatings and
adhesives, in solvent- or water-based materials. The coatings and adhesives are
applied to a wide variety of materials including polyester, polyimide, cloth,
paper, metal and metal foil. The converting process may include embossing,
perforating, laminating, die cutting or slitting, and printing or marking the
materials as required.
The Company seeks to optimize the performance, quality and durability of
their products, while continually improving manufacturing processes, shortening
lead times and lowering manufacturing costs. The
I-5
Company produces the majority of the adhesive stocks and top-coated materials
through an integrated manufacturing process. These integrated manufacturing
processes permit it to achieve greater flexibility in product design and
manufacture, and to improve its ability to provide specialized products designed
to meet the needs of specific applications. Brady's "cellular" manufacturing
processes and "just-in-time" inventory control allow it to attain profitability
in small orders by emphasizing flexibility and the maximization of assets
through quick turnaround and delivery. Most of the Company's manufacturing
facilities have received ISO 9001 or 9002 certification.
The materials used in the products manufactured by the Company consist
primarily of plastic sheets and films (primarily polyesters and polycarbonates),
paper, metal and metal foil, cloth, fiberglass, inks, dyes, adhesives, pigments,
natural and synthetic rubber, organic chemicals, polymers and solvents. The
Company purchases its raw materials from many suppliers and is not dependent
upon any single supplier for any of its base supply materials.
TECHNOLOGY AND PRODUCT DEVELOPMENT
The Company focuses its research and development efforts on applications in
the science of surface chemistry, such as coatings, adhesives and physical
bonding. This dedication to surface chemistry, in combination with a
manufacturing technology oriented to adhesives and graphics, has led to the
development of many proprietary release coatings, adhesives and products that
are adhesively fastened.
The Company possesses patents covering various aspects of adhesive
chemistry, electronic circuitry, computer-generated wire markers, and systems
for aligning letters and patterns. Although the Company believes that its
patents are a significant factor in maintaining market position as to certain
products, technology in the areas covered by many of the patents is evolving
rapidly and may limit the value of such patents. The Company's business is not
dependent on any single patent or group of patents.
The Company conducts much of its technology and development activities at
the Frederic S. Tobey Research and Innovation Center (approximately 39,600 sq.
ft.) in Milwaukee, Wisconsin. The Company spent approximately $20,300,000,
$20,600,000 and $17,100,000 in fiscal 2001, 2000 and 1999, respectively, on its
research and development activities. In fiscal 2001, approximately 200 employees
were engaged in research and development activities for the Company. Additional
research projects were conducted under contract with universities, other
institutions and consultants.
INTERNATIONAL OPERATIONS
In Fiscal 2001, 2000, and 1999, sales from international operations
accounted for 44.0%, 44.4%, and 44.6%, respectively, of the Company's net sales
The Company's global infrastructure includes subsidiaries in Australia, Belgium,
Brazil, Canada, China, England, France, Germany, Italy, Japan, Korea, Mexico,
Singapore, and Sweden and sales offices in Hong Kong, Malaysia, the Philippines,
Poland and Taiwan. Several of these locations manufacture or have the capability
to manufacture certain of the products they sell. The Company acquired or opened
new operations in Australia, Brazil, China, France, Germany and the Philippines
in the last three years. The Company expects to continue to expand its
international operations as appropriate.
COMPETITION
The markets for most of the Company's products are competitive. The Company
believes that it is the leading domestic producer of self-adhesive wire markers,
safety signs, pipe markers, audio and video splicing tapes, precision die-cut
materials and bar-code-label-generating software. The Company competes for
business principally on the basis of product quality, performance, range of
products offered and to a lesser extent, on price. Product quality is determined
by factors such as suitability of component materials for various applications,
adhesive properties, graphics quality, durability, product consistency and
workmanship. Competition in many of the Company's product markets is highly
fragmented, ranging from smaller companies offering only one or a few types of
products, to some of the world's major adhesive and electrical product companies
offering some competing products as part of their product line. A number of the
Company's competitors are
I-6
larger than the Company and have greater resources. Notwithstanding the
resources of these competitors, management believes that the Company provides a
broader range of identification solutions than any of its competitors.
BACKLOG
As of July 31, 2001, the amount of the Company's backlog orders believed to
be firm was approximately $22,100,000. This compares with approximately
$27,100,000 and $22,300,000 of backlog orders as of July 31, 2000 and 1999,
respectively. Average delivery time for the Company's orders varies from one day
to one month, depending on the type of product, and whether the product is stock
or custom designed and manufactured.
ENVIRONMENT
At present, the manufacturing processes for the Company's adhesive-based
products utilize certain evaporative solvents, which, unless controlled, would
be vented into the atmosphere. Emissions of these substances are regulated at
the federal, state and local levels. During the past several years, the Company
has implemented a number of procedures to reduce atmospheric emissions and/or to
recover solvents. Management believes the Company is substantially in compliance
with all environmental regulations.
EMPLOYEES
As of July 31, 2001, the Company employed approximately 3,200 individuals.
The Company has never experienced a material work stoppage due to a labor
dispute, is not a party to any labor contract and considers its relations with
employees to be excellent. To meet present and future labor requirements, the
Company maintains an active college-recruiting program for sales, technical and
administrative personnel.
ACQUISITIONS
Information about the Company's acquisitions is provided in Item
8 -- Financial Statements and Supplementary Data.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
The information required by this Item is provided in Item 8 -- Financial
Statements and Supplementary Data.
ITEM 2 PROPERTIES
The Company currently operates 27 manufacturing facilities. Ten are located
in the United States, three in France, two each in Australia, Brazil and Germany
and one each in Belgium, Canada, China, England, Italy, Japan, Korea and
Singapore. The Company's present operating facilities contain a total of
approximately 1,634,000 square feet of space, of which approximately 827,000
square feet is leased. The Company believes that its equipment and facilities
are modern, well maintained and adequate for present needs.
ITEM 3 LEGAL PROCEEDINGS
The Company is, and may in the future be, party to litigation arising in
the course of business. The Company is not currently a party to any material
pending legal proceedings.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
I-7
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Brady Corporation Class A Nonvoting Common Stock trades on the New York
Stock Exchange under the symbol BRC and on the Berlin Stock Exchange under the
number 900104. There is no trading market for the Company's Class B Voting
Common Stock.
Stock price disclosure required by this Item is incorporated by reference
to Page 10 of the Brady Corporation 2001 Annual Report.
(b) Holders
The number of holders of record of the Company's Class A and Class B Common
Stock as of September 17, 2001, was 362 and 3, respectively.
(c) Dividends
The Company has followed a practice of paying quarterly dividends on
outstanding common stock. Before any dividend may be paid on the Class B Common
Stock, holders of the Class A Common Stock are entitled to receive an annual,
noncumulative cash dividend of $.033 per share (subject to adjustment in the
event of future stock splits, stock dividends or similar events involving shares
of Class A Common Stock). Thereafter, any further dividend in that fiscal year
must be paid on all shares of Class A Common Stock and Class B Common Stock on
an equal basis.
During its two most recent fiscal years and for the first quarter of the
current year, the Company declared the following dividends per share on its
Class A and Class B Common Stock:
YEAR
ENDING
YEAR ENDED 7/31/2000 YEAR ENDED 7/31/2001 7/31/02
---------------------------------------- ---------------------------------------- -------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR
------- ------- ------- ------- ------- ------- ------- ------- -------
Class A................. $.17 $.17 $.17 $.17 $.18 $.18 $.18 $.18 $.19
Class B................. .14 .17 .17 .17 .15 .18 .18 .18 .16
ITEM 6 SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to Pages
8 and 9 of the Brady Corporation 2001 Annual Report.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Fiscal 2001 was demanding, difficult and disappointing. We faced weak
economies, a strong U.S. dollar, and business contraction in many markets. In
fact, U.S. industrial production in 2001 fell to levels not seen since the 1991
recession, and U.S. factories operated at their slowest pace in more than 17
years.
For Brady, that meant a swing from 15-percent sales growth in the first
quarter to a 15-percent decline in the fourth quarter. Our sales for the year
were $545.9 million, down 0.9 percent from fiscal 2000's record $550.7 million
in sales. In local currencies, sales rose 3.3 percent to $559.1 million.
As telecommunications, electronics and other Brady markets continued to
struggle with double-digit declines throughout the year, we focused on creative
and strategic cost-control initiatives to weather the storm. We aggressively
took steps to reduce spending, including instituting a summer hours program for
employees
II-1
aimed at trimming our expenses while retaining our workforce. Unfortunately our
efforts could not keep up with the dramatic business decline, and it was
necessary to take additional steps.
To better align our operations with market conditions, we undertook a
restructuring in the fourth quarter. It included consolidating manufacturing
operations and reducing our workforce by about 5 percent. One-time charges
totaling $5.9 million after tax for this restructuring were recorded in the
fourth quarter.
YEAR ENDED JULY 31, 2001, COMPARED TO YEAR ENDED JULY 31, 2000
Sales for fiscal 2001 decreased by $4,720,000 or 0.9% from fiscal 2000.
Sales of the Company's international operations decreased 2.7% in U.S. dollars.
The acquisition of Balkhausen GmbH in March 2001 increased international sales
by 1.7%. International base business increased by 5.1% in local currencies.
These increases were more than offset by the negative effect of fluctuations in
the exchange rates used to translate financial results into U.S. currency, which
reduced international sales by 9.5%. Sales of the Company's U.S. operations
increased 0.5%, with the acquisitions of Data Recognition, Inc. and Imtec, Inc.
in March 2000 adding 5.9%, which was offset by a decline in base business of
5.4%. The Company's sales are affected by general economic conditions in its key
markets. The economic downturn in these markets in fiscal 2001 had a negative
effect on the Company's sales, which could be expected to continue if such
conditions persist.
The cost of products sold as a percentage of sales increased from 44.6% to
47.1%. The increase was due to changes in product mix, fixed costs spread over a
lower sales volume and negative foreign exchange impact.
Selling, general and administrative expenses (including nonrecurring
charges) as a percentage of sales increased from 39.1% to 41.0% in fiscal 2001.
This year's expenses included a nonrecurring charge of $9,560,000, primarily
relating to facilities consolidation and a workforce reduction of approximately
5%. Fiscal 2000 expenses included $4,352,000 associated with the attempt to
acquire Critchley Group. Excluding these nonrecurring items in both years,
selling, general and administrative expenses as a percentage of sales increased
from 38.3% to 39.2%. The increase was due mainly to fixed administrative
expenses spread over a lower sales base.
Research and development investment as a percentage of sales remained
constant at 3.7%.
Operating income decreased $24,769,000 to $44,522,000 in fiscal 2001.
Excluding the nonrecurring items in both years (a nonrecurring charge in 2001
related to facilities consolidations and a workforce reduction and a charge in
2000 for expenses associated with the Critchley bid), operating income decreased
$19,561,000 or 26.6% from $73,643,000 to $54,082,000.
Investment and other income decreased $6,732,000 from the prior year.
Fiscal 2000 results included a $6,766,000 before-expenses gain from the
Critchley transaction. Excluding this one-time gain, investment and other income
increased $34,000.
Income before income taxes was $44,790,000, a decrease of 41.2% compared to
fiscal 2000's $76,131,000. Excluding the nonrecurring items in both years,
income before income taxes in 2001 decreased 26.3%.
The Company's effective tax rate increased from 38.0% for fiscal 2000 to
38.5% for fiscal 2001.
Net income was $27,546,000 for fiscal 2001, compared to $47,201,000 for
fiscal 2000 due to the factors discussed above. Excluding the nonrecurring
items, (a $5,879,000 nonrecurring charge after-tax in fiscal 2001 and a
$1,497,000 net gain on the Critchley bid in fiscal 2000), net income decreased
26.9% over the prior year.
YEAR ENDED JULY 31, 2000, COMPARED TO YEAR ENDED JULY 31, 1999
Sales for fiscal 2000 increased by $71,639,000 or 15.0% over fiscal 1999.
Sales of the Company's international operations increased 14.4% in U.S. dollars.
The acquisitions of SOFT S.A. and the Holman Groupe S.A. in July 1999 and Visi
Sign Pty. Ltd. in May 1999 increased international sales by 6.6%. These
increases were somewhat offset by the negative effect of fluctuations in the
exchange rates used to translate financial results into U.S. currency, which
reduced international sales by 5.9%. Sales of the Company's U.S. operations
increased 15.3%, with 6.2 percentage points due to core growth and 9.1
percentage points from
II-2
the acquisitions of Barcodes West Inc. in March 1999, the brand name Champion
America, Inc. in September 1999, and Data Recognition, Inc. and Imtec, Inc. in
March 2000.
The cost of products sold as a percentage of sales decreased from 45.1% to
44.6%. This improvement was due to changes in product mix, engineered product
cost reductions and manufacturing efficiencies from the Company's continuous
improvement efforts.
During fiscal 2000 Brady attempted to acquire Critchley Group plc in the
United Kingdom, but was outbid by another entity. While Brady did not acquire
the company, it made a net after-tax profit of $1,497,000 on an investment in
Critchley shares after $4,352,000 of expense and $917,000 of tax.
Selling, general and administrative expenses as a percentage of sales
increased from 38.0% to 39.1% in fiscal 2000. Fiscal 2000's expenses included
$4,352,000 of expenses associated with the attempt to acquire Critchley Group,
and 1999 included a credit for adjusting the severance liability associated with
the 1998 workforce reduction. Excluding these nonrecurring items in both years,
selling, general and administrative expenses as a percentage of sales increased
from 38.1% to 38.3%. Selling, general and administrative expenses as a
percentage of sales associated with Brady's base business dropped by 1.2
percentage points. This improvement was offset by incremental non-capitalizable
expenses of approximately $7,000,000 associated with process improvements and
e-business initiatives in 2000.
Research and development investment as a percentage of sales increased from
3.6% to 3.7%, while base-business investment in research and development
increased 14.6%.
Operating income increased $5,519,000 to $69,291,000 in fiscal 2000.
Excluding the nonrecurring items in both years (a charge in 2000 for expenses
associated with the Critchley bid and a credit in 1999 for adjusting the
severance costs associated with the workforce reduction of 1998), operating
income increased $10,482,000 or 16.6% from $63,161,000 to $73,643,000, with the
improvement primarily from increased sales.
Investment and other income increased $5,963,000 from the prior year.
Fiscal 2000 results included a $6,766,000 before-expenses gain from the
Critchley transaction. Excluding this one-time gain, investment and other income
decreased $803,000 as Brady experienced increased exchange losses, primarily
from the weak Euro.
Income before income taxes was $76,131,000, an increase of 17.5% compared
to fiscal 1999's $64,782,000. Excluding the nonrecurring items in both years,
income before income taxes in 2000 increased 14.9%.
The Company's effective tax rate decreased from 38.9% for fiscal 1999 to
38.0% for fiscal 2000.
Net income was $47,201,000 for fiscal 2000, compared to $39,584,000 for
fiscal 1999 due to the factors discussed above. Excluding the nonrecurring
items, (a $1,497,000 net gain on the Critchley bid in fiscal 2000 and a $376,000
nonrecurring credit in fiscal 1999), net income increased 16.6% over the prior
year.
BUSINESS SEGMENT OPERATING RESULTS
IDENTIFICATION SOLUTIONS & SPECIALTY TAPES (ISST) GROUP
ISST sales decreased 0.1% in fiscal 2001 (up 3.3% in local currencies) from
fiscal 2000, following an increase of 30.5% in fiscal 2000 versus 1999.
Base-business sales in fiscal 2001 were down 5.2% due to weakening in the global
electrical, electronic, telecommunication and automatic identification markets.
Acquisitions added 8.5% to the group's sales in fiscal 2001. Acquisitions
included Balkhausen GmbH in 2001 and Imtec, Inc. and Data Recognition, Inc. in
2000.
Segment profit as a percentage of sales decreased from 26.5% in 2000 to
19.9% in 2001 as a result of the sales decline in the group's higher margin
products, the negative effect of foreign currencies and increased utility costs.
Comparing fiscal 2000 to 1999, segment profit as a percentage of sales increased
from 24.5% to 26.5% as a result of improved operating leverage on the existing
assets, strong growth in base business, increased segment profits from prior
acquisitions and a continued focus on aggressive cost-savings initiatives.
II-3
GRAPHICS GROUP
Graphics sales decreased 1.7% in fiscal 2001 (1.0% growth in local
currencies) from fiscal 2000. Sales increased 3.8% in fiscal 2000 from fiscal
1999. In fiscal 2000, the acquisition of SOFT S.A. in France and Visi Sign Pty.
Ltd. in Australia accounted for a 6.4% increase in group sales while the base
business in Graphics declined by 2.6%. The decline was influenced by a negative
foreign-currency translation impact of 1.4%, primarily in reporting European
results, and also the discontinuation of certain non-strategic product lines.
Segment profit as a percentage of sales in the Graphics Group improved to
23.2% from 22.9% in fiscal 2001 as compared to fiscal 2000 due to cost-control
measures. Segment profit as a percentage of sales in the Graphics Group declined
from 23.1% in fiscal 1999 to 22.9% in fiscal 2000. In fiscal 2000, additional
volume improved total gross margins, but this improvement was offset by costs of
integrating SOFT S.A. into the European operations and increased new product
development.
DIRECT MARKETING GROUP
Direct Marketing Group sales decreased 1.4% in fiscal 2001 (up 5.1% in
local currencies) from fiscal 2000. The Group's sales increased 4.7% in fiscal
2000 (up 8.7% in local currencies) from fiscal 1999. The acquisition of Champion
America added 0.4% to the Group's sales in fiscal 2001. North American sales in
fiscal 2001 were up 1.7% in local currencies. In Europe, sales were down for
fiscal 2001 but showed single-digit growth in local currencies. Brazil continued
to grow at double-digit rates in fiscal 2001. The sales increase in Fiscal 2000
over 1999 was due to the acquisition of Champion America, Seton Canada realizing
strong organic growth in Canada and units in Australia and Brazil both
generating double-digit growth.
Segment profit as a percent of sales was 28.4% in fiscal 2001 versus 26.4%
in fiscal 2000 and 27.2% in fiscal 1999. The fiscal 2001 increase was due to
continued productivity improvement in selling and marketing expenses and
refinements in mail plan techniques. The group's profits were reduced by
expenditures to improve the information technology infrastructure in Europe,
startup costs for Seton Japan and higher marketing expenses in the United
States.
LIQUIDITY
The Company's liquidity remains strong. Cash and cash equivalents were
$62,811,000 at July 31, 2001, compared to $60,784,000 at July 31, 2000, and
$75,466,000 at July 31, 1999. The decrease in 2000 was primarily due to the
Company's acquisition for cash of Data Recognition, Inc., Imtec, Inc. and
Champion America, Inc. Working capital increased $7,746,000 during fiscal 2001
and equaled $123,830,000 at July 31, 2001.
The Company has maintained significant cash balances due in large part to
its strong operating cash flow, which totaled $53,228,000 for fiscal 2001,
$48,408,000 for fiscal 2000 and $61,357,000 for fiscal 1999.
Capital expenditures were $20,770,000 in fiscal 2001, $22,624,000 in fiscal
2000 and $9,889,000 in fiscal 1999. Fiscal 2001's capital expenditures included
a new manufacturing location in Brazil, new software and computers and
manufacturing equipment in Europe. Fiscal 2000 capital expenditures were
primarily from capital investments related to new software, a new facility in
the United States, a startup in China and a new global telecommunications
system.
In fiscal 2000, the Company made an unsuccessful bid for the purchase of
Critchley Group plc in the United Kingdom. Associated transactions included the
purchase of Critchley shares at a total cost of $22,931,000 in the third quarter
and the subsequent sale of the shares in the fourth quarter for $27,345,000,
before expenses.
Financing activities required $22,676,000 in fiscal 2001, $6,605,000 in
fiscal 2000 and $12,533,000 in fiscal 1999. Cash used for dividends to
shareholders was $16,229,000 in fiscal 2001, $15,260,000 in fiscal 2000 and
$14,317,000 in fiscal 1999. In fiscal 2000, net cash borrowed was $24,947,000,
primarily used to purchase the Critchley securities, which was subsequently
repaid in fiscal 2000 and 2001.
In fiscal 1999, the Company entered into a $150,000,000 revolving loan
agreement with six banks. In January 2000, the agreement was amended to increase
the available amount to $200,000,000, all of which was
II-4
available at July 31, 2001. The agreement requires the Company to maintain
certain financial covenants. The Company has obtained waivers for instances of
non-compliance through July 31, 2001. Future borrowings could be limited by the
Company's ability to maintain, waive or modify the financial covenants.
Long-term obligations as a percentage of long-term obligations plus
stockholders' investment were 1.4% at July 31, 2001 and 2000, and 0.5% at July
31, 1999.
The Company continues to seek opportunities to invest in new products, new
markets and in strategic acquisitions and joint ventures which fit its growth
strategy. Management believes the Company's cash and cash equivalents, available
line of credit, and the cash flow it generates from operating activities are
adequate to meet the Company's current investing and financing needs.
INFLATION
Essentially all of the Company's revenue is derived from the sale of its
products in competitive markets. Because prices are influenced by market
conditions, it is not always possible to fully recover cost increases through
pricing. Changes in product mix from year to year and timing differences in
instituting price changes make it virtually impossible to accurately define the
impact of inflation on profit margins.
EURO CONVERSION
On January 1, 1999, the Euro was adopted as the national currency of 11
European Union member nations. During a three-year transition period, the Euro
will be used as a non-cash transactional currency. The Company began conducting
business in Euros in January 1999, and will change its functional currencies
during the three-year transition period. The conversion to the Euro is not
expected to have a significant operational impact or a material impact on the
results of operations, cash flows or financial condition of the Company.
FORWARD-LOOKING STATEMENTS
Matters in this Annual Report may contain forward-looking information, as
defined in the Private Securities Litigation Reform Act of 1995. All such
forward-looking information in this report involves risks and uncertainties
including, but not limited to, domestic and international economic conditions
and growth rates; fluctuations in currency exchange rates for international
currencies versus the U.S. dollar; the successful implementation of a new
enterprise-resource-planning system; the ability of the Company to acquire,
integrate and achieve anticipated synergies from new businesses; the ability of
the Company to adjust its cost structure to changes in levels of sales and
product mix in a timely manner; variations in the economic or political
conditions in the countries in which the Company does business; technology
changes; the continued availability of sources of supply; and other risks
indicated in filings by the Company with the Securities and Exchange Commission.
The Company cautions that forward-looking statements are not guarantees, since
there are inherent difficulties in predicting future results, and that actual
results could differ materially from those expressed or implied in
forward-looking statements.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business operations give rise to market risk exposure due to
changes in foreign exchange rates. To manage that risk effectively, the Company
enters into hedging transactions, according to established guidelines and
policies, that enable it to mitigate the adverse effects of this financial
market risk.
The global nature of the Company's business requires active participation
in the foreign exchange markets. As a result of investments, production
facilities and other operations on a global scale, the Company has assets,
liabilities and cash flows in currencies other than the U.S. Dollar. The primary
objective of the Company's foreign-exchange risk management is to minimize the
impact of currency movements on intercompany transactions and foreign
raw-material imports. To achieve this objective, the Company hedges known
exposures using forward contracts. Main exposures are related to transactions
denominated in the British Pound, the Euro (primarily the Belgian Franc,
Deutsche Mark and French Franc), Canadian Dollar, Japanese Yen and Australian
Dollar. The risk of these hedging instruments is not material.
II-5
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BRADY CORPORATION
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT................................ II-7
FINANCIAL STATEMENTS:
Consolidated Balance Sheets -- July 31, 2001 and 2000..... II-8
Consolidated Statements of Income -- Years Ended July 31,
2001, 2000 and 1999.................................... II-9
Consolidated Statements of Stockholders'
Investment -- Years Ended July 31, 2001, 2000 and
1999................................................... II-10
Consolidated Statements of Cash Flows -- Years Ended July
31, 2001, 2000 and 1999................................ II-11
Notes to Consolidated Financial Statements................ II-12
II-6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Brady Corporation:
We have audited the accompanying consolidated balance sheets of Brady
Corporation and subsidiaries as of July 31, 2001 and 2000, and the related
consolidated statements of income, stockholders' investment and cash flows for
each of the three years in the period ended July 31, 2001. Our audits also
included the financial statement schedule listed in the Index at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the companies at July 31, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended July 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
October 9, 2001
Milwaukee, Wisconsin
II-7
BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2001 AND 2000
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1)........................ $ 62,811 $ 60,784
Accounts receivable, less allowance for losses ($2,297 and
2,919, respectively).................................... 71,684 82,656
Inventories (Note 1):
Finished products....................................... 19,288 22,094
Work-in-process......................................... 4,333 3,842
Raw materials and supplies.............................. 15,586 15,284
-------- --------
Total inventories.................................. 39,207 41,220
Prepaid expenses and other current assets (Notes 1, 3 and
4)...................................................... 21,291 18,523
-------- --------
Total current assets............................... 194,993 203,183
OTHER ASSETS:
Goodwill -- net (Note 1).................................. 96,041 99,954
Other (Note 4)............................................ 16,909 14,337
PROPERTY, PLANT AND EQUIPMENT (Notes 1 and 5):
Cost:
Land.................................................... 5,944 4,723
Buildings and improvements.............................. 47,611 43,006
Machinery and equipment................................. 132,272 113,319
Construction in progress................................ 6,474 15,955
-------- --------
192,301 177,003
Less accumulated depreciation............................. 107,768 96,343
-------- --------
Net property, plant and equipment.................. 84,533 80,660
-------- --------
TOTAL....................................................... $392,476 $398,134
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 20,666 $ 26,070
Wages and amounts withheld from employees................. 26,767 27,857
Taxes, other than income taxes............................ 1,496 2,585
Accrued income taxes...................................... 8,460 10,245
Other current liabilities (Note 3)........................ 12,364 12,212
Short-term borrowings and current maturities on long-term
obligations (Note 5).................................... 1,410 8,130
-------- --------
Total current liabilities.......................... 71,163 87,099
LONG-TERM OBLIGATIONS, less current maturities (Note 5)..... 4,144 4,157
OTHER LIABILITIES (Note 3).................................. 14,590 15,654
-------- --------
Total liabilities.................................. 89,897 106,910
-------- --------
STOCKHOLDERS' INVESTMENT (Notes 1 and 6):
Preferred Stock (aggregate liquidation preference of
$3,026 at July 31, 2001)................................ 2,855 2,855
Common Stock:
Class A Nonvoting -- Issued 21,149,551 and 20,966,315
shares, respectively (aggregate liquidation preference
of $35,320 at July 31, 2001)........................... 211 209
Class B Voting -- Issued and outstanding 1,769,314
shares................................................. 18 18
Additional paid-in capital................................ 35,806 31,586
Earnings retained in the business......................... 276,779 265,462
Treasury stock -- 4,548 shares of Class A nonvoting common
stock, at cost.......................................... (132) (132)
Cumulative other comprehensive income..................... (12,016) (7,137)
Other..................................................... (942) (1,637)
-------- --------
Total stockholders' investment..................... 302,579 291,224
-------- --------
TOTAL....................................................... $392,476 $398,134
======== ========
See notes to consolidated financial statements.
II-8
BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JULY 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
NET SALES (Note 1).......................................... $545,944 $550,664 $479,025
OPERATING EXPENSES:
Cost of products sold..................................... 257,313 245,587 216,060
Research and development.................................. 20,329 20,555 17,116
Selling, general and administrative....................... 214,220 215,231 182,688
Non-recurring charge (credit) (Note 10)................... 9,560 (611)
-------- -------- --------
Total operating expenses.......................... 501,422 481,373 415,253
-------- -------- --------
OPERATING INCOME............................................ 44,522 69,291 63,772
OTHER INCOME AND (EXPENSE):
Investment and other income -- net........................ 686 7,418 1,455
Interest expense.......................................... (418) (578) (445)
-------- -------- --------
Net other income.................................. 268 6,840 1,010
-------- -------- --------
INCOME BEFORE INCOME TAXES.................................. 44,790 76,131 64,782
INCOME TAXES (Notes 1 and 4)................................ 17,244 28,930 25,198
-------- -------- --------
NET INCOME.................................................. 27,546 $ 47,201 $ 39,584
======== ======== ========
NET INCOME PER COMMON SHARE (Notes 6 and 8):
Class A Nonvoting:
Basic.................................................. $ 1.20 $ 2.07 $ 1.74
======== ======== ========
Diluted................................................ $ 1.18 $ 2.05 $ 1.73
======== ======== ========
Class B Voting
Basic.................................................. $ 1.17 $ 2.04 $ 1.71
======== ======== ========
Diluted................................................ $ 1.15 $ 2.02 $ 1.70
======== ======== ========
See notes to consolidated financial statements.
II-9
BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
YEARS ENDED JULY 31, 2001, 2000 AND 1999
EARNINGS
ADDITIONAL RETAINED OTHER TOTAL
PREFERRED COMMON PAID-IN IN THE TREASURY COMPREHENSIVE COMPREHENSIVE
STOCK STOCK CAPITAL BUSINESS STOCK INCOME OTHER INCOME
--------- ------ ---------- -------- -------- ------------- ----- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Balances at July 31, 1998....... $2,855 $225 $26,131 $208,254 $ (1,068) $(3,024)
Net income.................... 39,584 $39,584
Net currency translation
adjustment.................. (890) (890)
-------
Total comprehensive
income............... $38,694
=======
Issuance of 112,978 shares of
Class A Common Stock under
stock option plan............. 1 1,880
Other........................... 693
Tax benefit from exercise of
stock options................. 372
Cash dividends on Preferred
Stock:
1979 series -- $10 a share.... (220)
6% and 1972 series -- $6 a
share....................... (39)
Acquisition of treasury stock,
4,548 shares, at cost......... $(132)
Cash dividends on Common Stock:
Class A -- $.64 a share....... (12,985)
Class B -- $.61 a share....... (1,073)
------ ---- ------- -------- ----- -------- -------
Balances at July 31, 1999....... 2,855 226 28,383 233,521 (132) (1,958) (2,331)
Net income.................... 47,201 $47,201
Net currency translation
adjustment.................. (5,179) (5,179)
-------
Total comprehensive
income............... $42,022
=======
Issuance of 126,474 shares of
Class A Common Stock under
stock option plan............. 1 2,423
Other........................... 694
Tax benefit from exercise of
stock options................. 780
Cash dividends on Preferred
Stock:
1979 series -- $10 a share.... (220)
6% and 1972 series -- $6 a
share....................... (39)
Cash dividends on Common Stock:
Class A -- $.68 a share....... (13,857)
Class B -- $.65 a share....... (1,144)
------ ---- ------- -------- ----- -------- -------
Balances at July 31, 2000....... 2,855 227 31,586 265,462 (132) (7,137) (1,637)
Net income.................... 27,546 $27,546
Net currency translation
adjustment.................. (4,879) (4,879)
-------
Total comprehensive
income............... $22,667
=======
Issuance of 183,236 shares of
Class A Common Stock under
stock option plan............. 2 3,578
Other........................... 695
Tax benefit from exercise of
stock options................. 642
Cash dividends on Preferred
Stock:
1979 series -- $10 a share.... (220)
6% and 1972 series -- $6 a
share....................... (39)
Cash dividends on Common Stock:
Class A -- $.72 a share....... (14,755)
Class B -- $.69 a share....... (1,215)
------ ---- ------- -------- ----- -------- -------
Balances at July 31, 2001....... $2,855 $229 $35,806 $276,779 $(132) $(12,016) $ (942)
====== ==== ======= ======== ===== ======== =======
See notes to consolidated financial statements.
II-10
BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income................................................ $ 27,546 $ 47,201 $ 39,584
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 16,007 12,157 11,263
Amortization............................................ 6,639 5,676 3,886
(Gain) loss on sale of property, plant and equipment.... (185) (54) 181
Gain on sale of securities.............................. (722) (4,414)
Provision for losses on accounts receivable............. 1,537 1,830 966
Other................................................... 695 694 693
Nonrecurring charge (credit)............................ 9,226 (611)
Changes in operating assets and liabilities (net of
effects of business acquisitions):
Accounts receivable................................... 8,299 (9,343) (4,899)
Inventory............................................. 2,252 (1,362) 5,547
Prepaid expenses and other assets..................... (1,749) (6,590) (1,643)
Accounts payable and accrued liabilities.............. (13,109) 4,608 4,330
Income taxes.......................................... (2,382) (1,115) 3,313
Deferred income taxes................................. (1,981) (763) (1,069)
Other liabilities..................................... 1,155 (117) (184)
-------- -------- --------
Net cash provided by operating activities.......... 53,228 48,408 61,357
-------- -------- --------
INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired.......... (6,699) (37,906) (31,107)
Purchases of securities................................... (22,931)
Purchases of property, plant and equipment................ (20,770) (22,624) (9,889)
Proceeds from sale of property, plant and equipment....... 525 1,053 232
Proceeds from sale of securities.......................... 825 27,345
Other..................................................... (356) 16 (176)
-------- -------- --------
Net cash (used in) investing activities............ (26,475) (55,047) (40,940)
-------- -------- --------
FINANCING ACTIVITIES:
Payment of dividends...................................... (16,229) (15,260) (14,317)
Proceeds from issuance of common stock.................... 4,222 3,204 2,252
Proceeds from borrowings.................................. 313 24,947 310
Principal payments on short-term borrowings and long-term
obligations............................................. (9,257) (19,496) (778)
Other..................................................... (1,725)
-------- -------- --------
Net cash (used in) financing activities............ (22,676) (6,605) (12,533)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (2,050) (1,438) 1,973
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ $ 2,027 $(14,682) $ 9,857
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 60,784 75,466 65,609
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 62,811 $ 60,784 $ 75,466
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 441 $ 555 $ 409
Income taxes, net of refunds............................ 21,613 29,370 22,107
Acquisitions:
Fair value of assets acquired, net of cash.............. $ 7,859 $ 15,751 $ 15,017
Liabilities assumed..................................... (4,736) (10,783) (6,291)
Goodwill................................................ 3,576 32,938 22,381
-------- -------- --------
Net cash paid for acquisitions..................... $ 6,699 $ 37,906 $ 31,107
======== ======== ========
Class A Common Stock issued to fund deferred compensation
plan...................................................... $ 11,555
========
See notes to consolidated financial statements.
II-11
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of Brady Corporation and its subsidiaries (the
"Company"), all of which are wholly-owned. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of 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 reporting period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments -- The Company believes the carrying
amount of its financial instruments (cash and cash equivalents, accounts
receivable, accounts payable and long-term debt) is a reasonable estimate of the
fair value of these instruments due to their short-term nature or variable
interest rate.
Cash Equivalents -- The Company considers all highly liquid investments
with maturities of three months or less when acquired to be cash equivalents.
Inventories -- Inventories are stated at the lower of cost or market. Cost
has been determined using the last-in, first-out ("LIFO") method for certain
inventories (approximately 55% and 61% of total inventories at July 31, 2001 and
2000, respectively) and the first-in, first-out ("FIFO") method for other
inventories. The difference between the carrying value of domestic inventories
stated at LIFO cost and the value of such inventories stated at FIFO cost was
$5,805,000 at July 31, 2001 and $5,595,000 at July 31, 2000.
Depreciation -- The cost of buildings and improvements and machinery and
equipment is being depreciated over their estimated useful lives using the
straight-line method for financial reporting purposes. The estimated useful
lives range from 3 to 33 years.
Goodwill -- Goodwill is amortized using the straight-line method over
various periods ranging from 10 to 40 years. The weighted average amortization
period is 21 and 22 years at July 31, 2001 and 2000, respectively. Goodwill is
net of accumulated amortization of approximately $20,600,000 and $12,500,000 at
July 31, 2001 and 2000, respectively.
Impairment of Long-Lived Assets -- The Company evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
long-lived assets may warrant revision or that the remaining balance of an asset
may not be recoverable. The measurement of possible impairment is based on the
ability to recover the balance of assets from expected future operating cash
flows on an undiscounted basis.
Catalog Costs -- Catalog costs are initially capitalized and amortized over
the estimated useful lives of the publications (generally eight months). At July
31, 2001 and 2000, $6,380,000 and $4,728,000 respectively, of prepaid catalog
costs were included in prepaid expenses and other current assets.
Revenue Recognition -- The Company recognizes revenue upon shipment of
goods to customers. In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). The Company adopted SAB 101 in the fourth quarter of
fiscal 2001. Adoption of this standard did not have a material impact on the
Company's financial statements.
Research and Development -- Amounts expended for research and development
are expensed as incurred.
II-12
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation -- Foreign currency assets and liabilities are
translated into United States dollars at end of period rates of exchange, and
income and expense accounts are translated at the weighted average rates of
exchange for the period. Resulting translation adjustments are included in other
comprehensive income.
Income Taxes -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes," which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
New Accounting Standards -- Effective August 1, 2000, the Company adopted
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, which requires that
all derivative instruments be reported on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging relationships.
The cumulative effect of adopting SFAS 133 was not material to the Company's
financial statements. The Company is exposed to market risk, such as changes in
interest rates and currency exchange rates. The Company does not hold or issue
derivative financial instruments for trading purposes.
Interest Rate Hedging -- The Company could be exposed to interest rate
risk through its corporate borrowing activities. The objective of the
Company's interest rate risk management activities is to manage the levels
of the Company's fixed and floating interest rate exposure to be consistent
with the Company's preferred mix. The interest rate risk management program
consists of entering into approved interest rate derivatives when there is
a desire to modify the Company's exposure to interest rates. As of July 31,
2001, the Company has not entered into any interest rate derivatives.
Currency Rate Hedging -- The primary objectives of the foreign
exchange risk management activities are to understand and mitigate the
impact of potential foreign exchange fluctuations on the Company's
financial results and its economic well-being. While the Company's risk
management objectives and strategies will be driven from an economic
perspective, the Company will attempt, where possible and practical, to
ensure that the hedging strategies it engages in can be treated as "hedges"
from an accounting perspective or otherwise result in accounting treatment
where the earnings effect of the hedging instrument provides substantial
offset (in the same period) to the earnings effect of the hedged item.
Generally, these risk management transactions will involve the use of
foreign currency derivatives to protect against exposure resulting from
intercompany sales and identified inventory or other asset purchases.
The Company primarily utilizes forward exchange contracts with
maturities of less than 12 months, which qualify as cash flow hedges. These
are intended to offset the effect of exchange rate fluctuations on
forecasted sales, inventory purchases and intercompany charges. The fair
value of these instruments at July 31, 2001 and 2000 was not material.
Hedge effectiveness is determined by how closely the changes in the
fair value of the hedging instrument offset the changes in the fair value
or cash flows of the hedged item. Hedge accounting is permitted only if the
hedging relationship is expected to be highly effective at the inception of
the hedge and on an on-going basis. Any ineffective portions are to be
recognized in earnings immediately. The Company's existing cash flow hedges
are considered to be 100% effective. As a result, there is no current
impact to earnings due to hedge ineffectiveness.
II-13
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No cash flow hedges were discontinued during the year ended July 31,
2001.
In May 2000, the Emerging Issues Task Force ("EITF") reached consensus on
Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF
00-10 provides guidance on the financial reporting of shipping and handling fees
and costs in the consolidated statements of income. During 2001, the Company
adopted EITF 00-10 and, as a result, amounts billed to a customer in a sale
transaction related to shipping costs are reported as net sales and the related
costs incurred for shipping are reported as cost of goods sold. The Company
previously reported shipping costs as a reduction of net sales. Prior period
consolidated financial statements have been reclassified to conform to the new
requirements.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 will require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 and that the use of the pooling-of-interest method is no
longer allowed. SFAS No. 142 requires that upon adoption, amortization of
goodwill will cease and instead, the carrying value of goodwill will be
evaluated for impairment on an annual basis. Identifiable intangible assets will
continue to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." The Company will adopt SFAS
No. 142 on August 1, 2001. At July 31, 2001, goodwill approximated $96,041,000.
The Company estimates that the adoption of SFAS No. 142 will add approximately
$0.26 annually to earnings per share.
Reclassifications -- Certain reclassifications have been made to the prior
years' financial statements to conform with the current year presentation.
2. ACQUISITIONS OF BUSINESSES
Effective August 11, 1998, the Company acquired the common stock of VEB
Sistemas de Etiquetas Ltda, in Sao Paulo, Brazil, an industrial label
manufacturer, for cash of approximately $4,400,000.
Effective March 25, 1999, the Company acquired the assets of Barcodes West
located in Seattle, Washington, a label manufacturer and software and service
provider for cash of approximately $5,757,000.
Effective May 7, 1999, the Company acquired the common stock of Visi Sign
Pty. Ltd. located in Victoria, Australia, a manufacturer of identification
products for cash of approximately $1,396,000.
Effective July 7, 1999, the Company acquired the common stock of Holman
Groupe S.A. located in Rungis, France, an automatic identification and
application specialist for cash of approximately $5,343,000 and a payable of
approximately $554,000.
Effective July 30, 1999, the Company acquired the common stock of the
graphics division of Soft S.A., located in Lyon, France, a developer and
distributor of printing systems, for cash of approximately $14,044,000.
Effective September 3, 1999, the Company acquired the brand name, customer
list and catalog artwork of Champion America, Inc., located in Chagrin Falls,
Ohio, a direct marketer of signs, labels and identification products for cash of
approximately $4,949,000 and a payable of approximately $561,000.
Effective March 3, 2000, the Company acquired Data Recognition, Inc.,
located in Austin, Texas, a systems integrator providing automatic
identification and data collection ("AIDC") solutions.
Effective March 22, 2000, the Company acquired Imtec, Inc., located in
Keene, New Hampshire, a manufacturer of high-performance bar-code labels and
labeling systems used in automatic identification applications.
II-14
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company acquired Data Recognition, Inc. and Imtec, Inc. for cash of
approximately $33,422,000 and a payable of approximately $1,490,000.
Effective March 31, 2001, the Company acquired the assets of Balkhausen
GmbH, located in Syke, Germany, a manufacturer of precision die-cut parts,
specialty materials and thermal-management products for cash of approximately
$6,600,000 and assumed liabilities of approximately $4,300,000. The purchase
price of the acquisition is subject to change based on post-closing adjustments.
Effective July 31, 2001, the Company acquired the assets of Eset, GmbH,
located in Munich, Germany, a developer of certain software printer drivers and
label design software.
These acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the results of operations have been included since
the dates of acquisition in the accompanying financial statements. The pro forma
results of operations of the above acquisitions are not significant to the
financial statements.
3. EMPLOYEE BENEFIT PLANS
The Company provides postretirement medical, dental and vision benefits for
all regular full and part-time domestic employees (including spouses) who retire
on or after attainment of age 55 with 15 years of credited service. Credited
service begins accruing at the later of age 40 or date of hire. All active
employees first eligible to retire after July 31, 1992, are covered by an
unfunded, contributory postretirement healthcare plan where employer
contributions will not exceed a Defined Dollar Benefit amount, regardless of the
cost of the program. Employer contributions to the plan are based on the
employee's age and service at retirement.
The Company accounts for postretirement benefits other than pensions in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions." The Company funds benefit costs on a pay-as-you-go basis.
The following table provides a reconciliation of the changes in the Plan's
benefit obligations at July 31, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Obligation at beginning of fiscal year...................... $ 8,857 $8,104 $6,802
Service cost................................................ 469 444 472
Interest cost............................................... 726 665 602
Plan amendments............................................. 307
Actuarial loss.............................................. 751 242
Benefit payments............................................ (365) (356) (321)
------- ------ ------
Obligation at end of fiscal year............................ $10,438 $8,857 $8,104
======= ====== ======
There are no plan assets due to the nature of the Plan. During fiscal 1999,
$307,000 of expense was recognized due to the addition of employees from prior
acquisitions.
II-15
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the unfunded status of the Plan as of July 31,
2001 and 2000:
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
Unfunded status at July 31.................................. $10,438 $ 8,857
Unrecognized net actuarial gain............................. 1,181 2,014
Unrecognized prior service cost............................. (241) (263)
------- -------
Accumulated postretirement benefit obligation liability..... $11,378 $10,608
======= =======
The following table provides the components of net periodic benefit cost
for the Plan for fiscal years 2001, 2000 and 1999:
YEAR ENDED JULY 31,
--------------------------
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Net periodic postretirement benefit cost included the
following components:
Service cost -- benefits attributed to service during the
period................................................. $ 469 $ 444 $ 472
Prior service cost........................................ 22 22 22
Interest cost on accumulated postretirement benefit
obligation............................................. 726 665 602
Amortization of unrecognized (gain)....................... (81) (93) (46)
------ ------ ------
Periodic postretirement benefit cost........................ $1,136 $1,038 $1,050
====== ====== ======
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation at July 31, 2001 were 10% grading down 0.5%
per year to 5.5% at July 31, 2010.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% in 2001 and 8% in 2000.
If the health care cost trend rate assumptions were increased by 1% or
decreased by 1%, the accumulated postretirement benefit obligation as of July
31, 2001 would be increased by $35,400 and decreased by $35,400, respectively.
The effect of this change on the sum of the service cost and interest cost would
not be material.
The Company has retirement and profit-sharing plans covering substantially
all full-time domestic employees and certain of its foreign subsidiaries.
Contributions to the plans are determined annually or quarterly, according to
the plan, based on earnings of the respective companies and employee
contributions. At July 31, 2001 and 2000, $2,040,000 and $2,196,000,
respectively, of accrued profit-sharing contributions were included in other
current liabilities.
The Company also has deferred compensation plans for directors, officers
and key executives utilizing the phantom stock plan concept. At July 31, 2001
and 2000, $5,878,000 and $5,569,000, respectively, of deferred compensation was
included in current and other long-term liabilities.
During fiscal 1998, the Company adopted a new deferred compensation plan
that invests solely in shares of the Company's Class A Nonvoting Common Stock.
Participants in the old phantom stock plan were allowed to convert their
balances in the old plan to this new plan. The new plan was funded initially by
the issuance of 372,728 shares of Class A Nonvoting Common Stock to a Rabbi
Trust. All deferrals into the new plan result in purchases of Class A Nonvoting
Common Stock by the Rabbi Trust. No deferrals are allowed into the old plan.
Shares held by the Rabbi Trust are distributed to participants upon separation
from the Company as defined in the plan agreement.
The amounts charged to income for the plans described above were $7,515,000
in 2001, $7,736,000 in 2000 and $7,589,000 in 1999.
II-16
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a voluntary employee benefit trust for the purpose of
funding employee medical benefits and certain other employee benefits. At July
31, 2001 and 2000, $2,378,000 and $2,793,000, respectively, of payments to the
trust to fund such benefits were included in prepaid expenses and other current
assets.
4. INCOME TAXES
Income taxes consist of the following:
YEAR ENDED JULY 31,
---------------------------------
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Currently payable:
Federal................................................... $ 4,977 $16,354 $17,668
Foreign................................................... 13,242 11,030 6,747
State..................................................... 1,006 2,309 1,852
------- ------- -------
19,225 29,693 26,267
------- ------- -------
Deferred (credit):
Federal................................................... (1,101) (210) (1,186)
Foreign................................................... (569) (486) 73
State..................................................... (311) (67) 44
------- ------- -------
(1,981) (763) (1,069)
------- ------- -------
Total....................................................... $17,244 $28,930 $25,198
======= ======= =======
Deferred income taxes result from temporary differences in the recognition
of revenues and expenses for financial statement and income tax purposes.
Pre-tax income consists of the following:
YEAR ENDED JULY 31,
---------------------------------
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
United States............................................... $17,957 $42,085 $42,180
Foreign..................................................... 26,833 34,046 22,602
------- ------- -------
Total............................................. $44,790 $76,131 $64,782
======= ======= =======
II-17
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The approximate tax effects of temporary differences are as follows:
JULY 31, 2001
---------------------------------
ASSETS LIABILITIES TOTAL
------ ----------- -----
(DOLLARS IN THOUSANDS)
Inventories................................................. $ 2,445 $ 2,445
Prepaid catalog costs....................................... $(1,709) (1,709)
Employee benefits........................................... 4,847 (411) 4,436
Allowance for doubtful accounts............................. 351 351
Other, net.................................................. 3,367 3,367
------- ------- -------
Current........................................... 11,010 (2,120) 8,890
Excess of tax over book depreciation........................ (2,416) (2,416)
Deferred compensation....................................... 6,530 6,530
Postretirement benefits..................................... 4,449 4,449
Currency translation adjustment............................. 7,517 7,517
Tax loss carryforwards...................................... 3,833 3,833
Less valuation allowance.................................... (3,717) (3,717)
Other, net.................................................. 1,881 (2,766) (885)
------- ------- -------
Noncurrent........................................ 20,493 (5,182) 15,311
------- ------- -------
Total............................................. $31,503 $(7,302) $24,201
======= ======= =======
JULY 31, 2000
---------------------------------
ASSETS LIABILITIES TOTAL
------ ----------- -----
(DOLLARS IN THOUSANDS)
Inventories................................................. $ 2,473 $ 2,473
Prepaid catalog costs....................................... $(1,018) (1,018)
Employee benefits........................................... 57 (219) (162)
Allowance for doubtful accounts............................. 498 498
Other, net.................................................. 4,573 95 4,668
------- ------- -------
Current........................................... 7,601 (1,142) 6,459
Excess of tax over book depreciation........................ (2,217) (2,217)
Deferred compensation....................................... 6,421 6,421
Postretirement benefits..................................... 4,137 4,137
Currency translation adjustment............................. 4,374 4,374
Tax loss carryforwards...................................... 3,049 3,049
Less valuation allowance.................................... (3,049) (3,049)
Other, net.................................................. 2,458 (2,837) (379)
------- ------- -------
Noncurrent........................................ 17,390 (5,054) 12,336
------- ------- -------
Total............................................. $24,991 $(6,196) $18,795
======= ======= =======
The net change in the valuation allowance was $663,000, $(229,000) and
$(1,371,000) in fiscal 2001, 2000 and 1999, respectively.
II-18
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the tax computed by applying the statutory U.S. Federal
income tax rate to income before income taxes to the total income tax provision
is as follows:
YEAR ENDED JULY 31,
---------------------------------
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Tax at statutory rate....................................... $15,676 $26,645 $22,674
State income taxes, net of federal tax benefit.............. 751 1,566 1,204
International losses with no related tax benefits........... 1,071 1,408 1,296
International rate differential............................. 2,127 271 986
Rate variances arising from foreign subsidiary
distributions............................................. (2,860) (1,525) (1,481)
Other, net.................................................. 479 565 516
------- ------- -------
Total income tax provision.................................. $17,244 $28,930 $25,195
======= ======= =======
Effective tax rate.......................................... 38.5% 38.0% 38.9%
======= ======= =======
The Company's policy is to remit earnings from foreign subsidiaries only to
the extent any resultant foreign income taxes are creditable in the United
States. Accordingly, the Company does not currently provide for the additional
United States and foreign income taxes which would become payable upon remission
of undistributed earnings of foreign subsidiaries.
The cumulative undistributed earnings of such companies at July 31, 2001
amounted to approximately $63,413,000. If all such undistributed earnings were
remitted, no additional provision for foreign income taxes would be required.
5. LONG-TERM OBLIGATIONS
On September 23, 1999, the Company entered into a $150,000,000
multicurrency revolving loan agreement with a group of six banks, which expires
on September 23, 2004. On January 31, 2000, the multicurrency revolving loan was
amended, increasing the amount available to $200,000,000. Under the agreement,
the Company has the option to elect to have interest rates determined based upon
the prime rate at PNC Bank N.A. plus margin or a LIBOR rate plus margin. A
commitment fee is payable on the unused amount of credit. The agreement requires
the Company to maintain certain financial covenants, the Company has obtained
waivers for instances of non-compliance through July 31, 2001. Future borrowings
could be limited by the Company's ability to maintain, waive or modify the
financial covenants.
Long-term obligations consists of the following:
JULY 31,
-------------------
2001 2000
---- ----
(DOLLARS IN
THOUSANDS)
Revolving loan agreement.................................... $ 8,000
Capital lease on building, term 7/1/00-6/30/10.............. $3,487 3,276
6.25% Industrial Development Revenue Bonds payable on
December 1, 2001.......................................... 1,000 1,000
Other....................................................... 1,067 11
------ -------
5,554 12,287
Less current maturities..................................... 1,410 8,130
------ -------
$4,144 $ 4,157
====== =======
II-19
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Industrial Development Revenue Bonds are collateralized by first
mortgages on certain property with a net carrying amount of approximately
$3,951,000 at July 31, 2001. The carrying value of the Company's long-term
obligations approximates fair value.
Maturities on long-term debt are as follows:
YEAR ENDING JULY 31,
-------------------- (DOLLARS IN THOUSANDS)
2002........................................................ $1,410
2003........................................................ 330
2004........................................................ 289
2005........................................................ 289
2006........................................................ 287
Thereafter.................................................. 2,949
6. STOCKHOLDERS' INVESTMENT
Information as to the Company's capital stock at July 31, 2001 is as
follows:
SHARES SHARES
AUTHORIZED ISSUED AMOUNT
---------- ------ ------
(DOLLARS IN THOUSANDS)
Preferred Stock, $.01 par value............................ 5,000,000
Cumulative Preferred Stock:
6% Cumulative............................................ 5,000 3,984 $ 399
1972 Series.............................................. 10,000 2,600 260
1979 Series.............................................. 30,000 21,693 2,196
------
$2,855
======
Common Stock, $.01 par value:
Class A Nonvoting........................................ 100,000,000 21,149,551 $ 211
Class B Voting........................................... 10,000,000 1,769,314 18
------
$ 229
======
Each share of $100 par value Cumulative Preferred Stock is entitled to
receive cumulative cash dividends of $6 a share, and may be redeemed, under
certain circumstances, by the Company at par value plus accrued dividends plus a
premium of 6% of the par value. Shares that are held by the initial holder
thereof, are subject to redemption only if the holder consents.
Before any dividend may be paid on the Class B Common Stock, holders of the
Class A Common Stock are entitled to receive an annual, noncumulative cash
dividend of $.0333 per share. Thereafter, any further dividend in that fiscal
year must be paid on each share of Class A Common Stock and Class B Common Stock
on an equal basis.
Holders of the Class A Common Stock are not entitled to any vote on
corporate matters, unless, in each of the three preceding fiscal years, the
$.0333 preferential dividend described above has not been paid in full. Holders
of the Class A Common Stock are entitled to one vote per share for the entire
fiscal year immediately following the third consecutive fiscal year in which the
preferential dividend is not paid in full. Holders of Class B Common Stock are
entitled to one vote per share for the election of directors and for all other
purposes.
Upon liquidation, dissolution or winding up of the Company, and after
distribution of any amounts due to holders of Cumulative Preferred Stock,
holders of the Class A Common Stock are entitled to receive the sum
II-20
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $1.67 per share before any payment or distribution to holders of the Class B
Common Stock. Thereafter, holders of the Class B Common Stock are entitled to
receive a payment or distribution of $1.67 per share. Thereafter, holders of the
Class A Common Stock and Class B Common Stock share equally in all payments or
distributions upon liquidation, dissolution or winding up of the Company.
The preferences in dividends and liquidation rights of the Class A Common
Stock over the Class B Common Stock will terminate at any time that the voting
rights of Class A Common Stock and Class B Common Stock become equal.
The following is a summary of other activity in stockholders' investment
for the years ended July 31, 1999, 2000 and 2001:
UNEARNED SHARES HELD
RESTRICTED DEFERRED IN RABBI
STOCK COMPENSATION TRUST, AT COST TOTAL
---------- ------------ -------------- -----
(DOLLARS IN THOUSANDS)
Balances July 31, 1998............................ $(3,024) $12,037 $(12,037) $(3,024)
Distribution of 59,953 shares of Class A Common
Stock purchased by the Rabbi Trust related to
deferred compensation plan...................... (1,814) 1,814
Purchase of 44,865 shares of Class A Common Stock
purchased by the Rabbi Trust related to deferred
compensation plan............................... 1,008 (1,008)
Amortization of restricted stock.................. 693 693
------- ------- -------- -------
Balances July 31, 1999............................ $(2,331) $11,231 $(11,231) $(2,331)
======= ======= ======== =======
Distribution of 10,682 shares of Class A Common
Stock purchased by the Rabbi Trust related to
deferred compensation plan...................... (296) 296
Purchase of 59,278 shares of Class A Common Stock
purchased by the Rabbi Trust related to deferred
compensation plan............................... 1,837 (1,837)
Amortization of restricted stock.................. 694 694
------- ------- -------- -------
Balances July 31, 2000............................ $(1,637) $12,772 $(12,772) $(1,637)
======= ======= ======== =======
Distribution of 13,608 shares of Class A Common
Stock purchased by the Rabbi Trust related to
deferred compensation plan...................... (407) 407
Purchase of 60,101 shares of Class A Common Stock
purchased by the Rabbi Trust related to deferred
compensation plan............................... 1,906 (1,906)
Amortization of restricted stock.................. 695 695
------- ------- -------- -------
Balances July 31, 2001............................ $ (942) $14,271 $(14,271) $ (942)
======= ======= ======== =======
The Company's Nonqualified Stock Option Plans allow the granting of stock
options to various officers, directors and other employees of the Company at
prices equal to fair market value at the date of grant. The Company has reserved
1,500,000 and 2,125,000 shares of Class A Nonvoting Common Stock for issuance
under the 1989 and 1997 Plans, respectively. Options granted prior to 1992
become exercisable once the employees have been continuously employed for six
months after the grant date. Generally, options granted in 1992 and thereafter
will not be exercisable until one year after the date of grant, will be
exercisable thereafter to the extent of one-third per year and have a maximum
term of ten years.
II-21
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the Options are as follows:
WEIGHTED
OPTIONS EXERCISE
OPTION PRICE OUTSTANDING AVERAGE
------------ ----------- --------
Balance, July 31, 1998................................... $ 6.83 - $34.00 1,640,021 $22.79
Options granted.......................................... 19.19 - 24.25 351,400 19.56
Options exercised........................................ 6.83 - 31.38 (117,526) 16.00
Options cancelled........................................ 12.17 - 34.00 (73,461) 26.63
---------
Balance, July 31, 1999................................... 6.83 - 34.00 1,800,434 22.45
---------
Options granted.......................................... 30.56 - 33.75 318,733 31.19
Options exercised........................................ 6.83 - 31.38 (126,474) 19.17
Options cancelled........................................ 19.19 - 34.00 (43,902) 26.17
---------
Balance, July 31, 2000................................... 6.83 - 34.00 1,948,791 24.01
---------
Options granted.......................................... 28.32 - 32.88 386,633 28.92
Options exercised........................................ 6.83 - 31.38 (185,336) 19.66
Options cancelled........................................ 19.19 - 34.00 (31,016) 26.76
---------
Balance, July 31, 2001................................... $ 6.83 - $34.00 2,119,072 $25.24
=========
Available for grant after July 31, 2001.................. 277,565
Options exercisable at July 31, 2001, 2000 and 1999 were 859,770, 809,575
and 721,187, respectively.
The following table summarizes information about stock options outstanding
at July 31, 2001:
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
SHARES AVERAGE WEIGHTED SHARES WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT JULY 31, CONTRACTUAL EXERCISE AT JULY 31, EXERCISE
EXERCISE PRICES 2001 LIFE-YEARS PRICE 2001 PRICE
--------------- ----------- ----------- -------- ----------- --------
$ 6.83 - $15.00 103,551 2.3 $13.75 103,551 $13.75
15.01 - 25.00 997,888 6.0 21.99 341,160 20.24
25.01 - 34.00 1,017,633 7.7 29.60 415,059 29.28
--------- -------
$ 6.83 - $34.00 2,119,072 6.6 $25.24 859,770 $23.82
========= =======
In October 1995, SFAS No. 123 "Accounting for Stock-Based Compensation" was
issued. SFAS No. 123 establishes a fair value based method of accounting for
stock-based compensation; however, it allows entities to continue accounting for
employee stock-based compensation under the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS No. 123 requires certain disclosures, including pro forma net
income and net income per share as if the fair value based accounting method had
been used for employee stock-based compensation cost. The Company has decided to
adopt SFAS No. 123 through disclosure with respect to employee stock-based
compensation.
If the Company had elected to recognize compensation cost for the Stock
Option Plans based on the fair value at the grant dates for awards under those
plans, consistent with the method prescribed by SFAS
II-22
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 123, net income and net income per common share would have been changed to
the pro forma amounts indicated below:
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Net Income:
As Reported............................................... $27,546 $47,201 $39,584
Pro Forma................................................. 25,393 45,289 37,972
Net Income per Class A Common Share -- Diluted:
As Reported............................................... $ 1.18 $ 2.05 $ 1.73
Pro Forma................................................. 1.09 1.96 1.66
The fair value of stock options used to compute pro forma net income and
net income per common share disclosure is the estimated present value at grant
date using the Black-Scholes option-pricing model with weighted average
assumptions for fiscal years 2001, 2000 and 1999 as follows:
2001 2000 1999
---- ---- ----
Risk-free interest rate..................................... 5.5% 5.9% 6.2%
Expected volatility......................................... 36.5% 39.6% 37.8%
Dividend yield.............................................. 2.1% 2.3% 2.4%
Expected option life........................................ 3.6 years 3.8 years 4.1 years
The weighted average fair value of stock options granted during fiscal 2001
was $8.69.
7. SEGMENT INFORMATION
Brady Corporation's reportable segments are business units that are each
managed separately because they manufacture and/or distribute distinct products
using different processes or channels to market.
Brady Corporation has three reportable segments: the Identification
Solutions & Specialty Tapes Group, the Graphics Group and the Direct Marketing
Group.
The Identification Solutions & Specialty Tape Group consists of
Identification Solutions, Brady AIDC Software & Services, and Precision Die-cut
Products and Custom Coated Products. Identification Solutions develops,
manufactures and sells wire and cable markings, high performance labels,
printing systems, and packaged software mainly to the electrical, electronic,
telecommunications, automotive and general industrial markets. Brady AIDC
Software & Services is focused on the Automatic Identification and Data
Collection market and its solutions consist of high performance labels and
labeling systems tied together with barcode design and print software, data
collection equipment, inventory services, application engineering and
integration services. Precision Die-cut Products manufactures custom die-cut
parts and specialty tapes. Die cut materials are engineered to provide improved
functionality and easier assembly of electronic products such as phones, pagers
and disk drives. Specialty tapes are used by audio and video tape duplicators.
Custom Coated Products develops and coats specialty material on a wide variety
of substrates such as polyester, polyimide, cloth, metal and paper. Coatings
include custom adhesive systems as well as high-performance topcoatings. These
materials are sold in bulk form or as converted products through other Brady
units.
The Graphics Group consists primarily of Signmark(R) and Varitronics.
Signmark(R) manufactures and sells signs, labels and devices to meet government
safety requirements; printers and accessories for do-it-yourself industrial
signage and labels; regulatory training programs and products; and barricade
tape, accident-prevention tags and other visual warning systems. Varitronics
produces and markets printing systems including lettering and labeling systems,
poster printers, and supplies and laminating equipment. Pulp and paper,
II-23
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
chemical, electrical, transportation and other manufacturing markets as well as
government, education and construction markets are some of those served by this
group.
The Direct Marketing Group engages in direct selling to end users via
direct-mail catalogs, telemarketing and the Internet. Its products include more
than 50,000 products including signs, property identification tags, hazardous
materials and regulatory training programs and products, and office accessories.
The Direct Marketing Group serves manufacturing markets as well as construction,
wholesale trade, finance, insurance, government, education and healthcare.
The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes, not including administrative costs,
interest, amortization of goodwill, exchange gain or loss and nonrecurring
items. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. The Company's
interior measure of profit or loss changed in fiscal 2001 to support the move to
a global process organization. This change excludes administrative expenses from
the segment's measure of profit or loss. The prior year has been reclassified to
reflect this change. Assets at corporate consist principally of cash, net
deferred income tax assets and property.
Intersegment sales and transfers are recorded at cost plus a standard
percentage markup. Intercompany profit is eliminated in consolidation.
IDENTIFICATION CORPORATE
SOLUTIONS & DIRECT AND
SPECIALTY TAPES GRAPHICS MARKETING ELIMINATIONS TOTALS
--------------- -------- --------- ------------ ------
(DOLLARS IN THOUSANDS)
Year ended July 31, 2001:
Revenues from external customers.... $253,651 $125,311 $166,982 $545,944
Intersegment revenues............... 2,674 4,327 2,004 $ (9,005)
Depreciation and amortization
expense.......................... 13,425 4,007 2,292 2,922 22,646
Profit (loss)....................... 50,398 29,055 47,413 (1,917) 124,949
Assets.............................. 161,638 70,230 52,918 107,690 392,476
Expenditures for property, plant and
equipment........................ 7,597 3,547 1,961 7,665 20,770
Year ended July 31, 2000:
Revenues from external customers.... $253,812 $127,438 $169,414 $550,664
Intersegment revenues............... 2,184 4,044 997 $ 7,225
Depreciation and amortization
expense.......................... 10,509 3,725 2,138 1,461 17,833
Profit (loss)....................... 67,209 29,207 44,716 (3,706) 137,426
Assets.............................. 165,127 73,271 52,155 107,581 398,134
Expenditures for property, plant and
equipment........................ 6,845 1,325 3,292 11,162 22,624
Year ended July 31, 1999:
Revenues from external customers.... $194,455 $122,775 $161,795 $479,025
Intersegment revenues............... 3,042 1,982 865 $ (5,889)
Depreciation and amortization
expense.......................... 8,942 3,019 1,896 1,292 15,149
Profit (loss)....................... 47,604 28,417 43,952 (3,470) 116,503
Assets.............................. 121,487 78,459 48,463 102,711 351,120
Expenditures for property, plant and
equipment........................ 5,575 2,017 1,462 835 9,889
II-24
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED JULY 31,
--------------------------------
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Profit reconciliation:
Total profit or loss for reportable segments.............. $126,866 $141,132 $119,973
Corporate and eliminations................................ (1,917) (3,706) (3,470)
Unallocated amounts:
Administrative costs................................... (59,794) (58,879) (44,543)
Goodwill amortization.................................. (6,119) (5,618) (3,416)
Interest-net........................................... 1,128 1,857 1,975
Foreign exchange....................................... (1,115) (1,779) (975)
Nonrecurring (charge) credit........................... (9,560) 611
Other.................................................. (4,699) 3,124 (5,373)
-------- -------- --------
Income before income taxes........................ $ 44,790 $ 76,131 $ 64,782
======== ======== ========
REVENUES* LONG-LIVED ASSETS**
YEAR ENDED JULY 31, YEAR ENDED JULY 31,
-------------------------------- --------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Geographic information:
United States................. $341,379 $343,596 $297,037 $127,632 $129,080 $ 85,650
Europe........................ 156,115 162,702 151,883 40,648 37,232 39,332
Other foreign................. 84,112 81,258 61,703 13,198 14,626 14,535
Eliminations.................. (35,662) (36,892) (31,598)
-------- -------- -------- -------- -------- --------
Consolidated total.... $545,944 $550,664 $479,025 $181,478 $180,938 $139,517
======== ======== ======== ======== ======== ========
-------------------------
* Revenues are attributed based on country of origin.
** Long-lived assets consist primarily of property, plant, and equipment and
goodwill.
8. NET INCOME PER COMMON SHARE
Net income per Common Share is computed by dividing net income (after
deducting the applicable Preferred Stock dividends and preferential Class A
Common Stock dividends) by the weighted average Common Shares outstanding of
22,824,398 for 2001, 22,669,854 for 2000 and 22,537,393 for 1999. The
preferential dividend on the Class A Common Stock of $.0333 per share has been
added to the net income per Class A Common Share for all years presented.
II-25
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations of the numerator and denominator of the basic and diluted
per share computations for the Company's Class A and Class B common stock are
summarized as follows:
FISCAL 2001 FISCAL 2000 FISCAL 1999
----------- ----------- -----------
Numerator:
Net income.......................................... $27,546,000 $47,201,000 $39,584,000
Less: Preferred stock dividends..................... (259,134) (259,134) (259,134)
----------- ----------- -----------
Numerator for basic and diluted Class A net income per
share............................................... 27,286,866 46,941,866 39,324,866
Less:
Preferential dividends.............................. (698,631) (694,492) (690,541)
Preferential dividends on dilutive stock options.... (8,555) (10,410) (2,739)
----------- ----------- -----------
Numerator for basic and diluted Class B net income per
share............................................... $26,579,680 $46,236,964 $38,631,586
=========== =========== ===========
Denominator:
Denominator for basic net income per share for both
Class A and B.................................... 22,824,398 22,669,854 22,537,393
Plus: Effect of dilutive stock options.............. 282,831 263,345 145,577
----------- ----------- -----------
Denominator for diluted net income per share for
both Class A and B............................... 23,107,229 22,933,199 22,682,970
=========== =========== ===========
Class A common stock net income per share calculation:
Basic............................................... $ 1.20 $ 2.07 $ 1.74
Diluted............................................. 1.18 2.05 1.73
Class B common stock net income per share calculation:
Basic............................................... $ 1.17 $ 2.04 $ 1.71
Diluted............................................. 1.15 2.02 1.70
Options to purchase 95,050, 264,167 and 446,168 shares of Class A common
stock were not included in the computations of diluted net income per share for
the fiscal years 2001, 2000 and 1999, respectively, because the option exercise
prices were greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
9. COMMITMENTS
The Company has entered into various noncancellable operating lease
agreements. Rental expense charged to operations was $8,822,000 for 2001;
$9,293,000 for 2000 and $8,884,000 for 1999. Future minimum lease payments
required under such leases in effect at July 31, 2001, are as follows (by fiscal
year, dollars in thousands):
2002........................................................ $ 8,934,000
2003........................................................ 5,780,000
2004........................................................ 3,446,000
2005........................................................ 1,168,000
2006........................................................ 1,029,000
Thereafter.................................................. 3,519,000
-----------
$23,876,000
===========
II-26
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. NONRECURRING AND ONE-TIME CHARGES
In July 2001, the Company recorded a nonrecurring charge of $9,560,000
($5,879,000 after tax, $0.26 per share) in fiscal 2001 related primarily to
facilities consolidation in the United States and Europe and workforce
reductions in its operations around the world. The $9,560,000 charge includes a
provision for severance of approximately $5,700,000, write-off or impairment of
assets (primarily buildings) of approximately $2,750,000 and $1,110,000 of other
costs associated with the restructuring efforts. Other costs primarily include
lease cancellation costs associated with the facilities consolidation. The
workforce reduction of approximately 175 people was essentially completed in
August 2001. Total cash expenditures in connection with these actions will
approximate $6,800,000, of which, approximately $350,000 was paid prior to July
31, 2001. The cost savings resulting from this plan are expected to be
recognized beginning in fiscal 2002. Fiscal 1999 included a $611,000 credit for
adjusting the severance costs associated with a workforce reduction in 1998.
11. UNAUDITED QUARTERLY FINANCIAL INFORMATION
QUARTERS
-----------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2001
Net Sales............................... $146,818 $135,965 $136,881 $126,280 $545,944
Gross Margin............................ 80,571 71,855 72,583 63,622 288,631
Operating Income........................ 18,412 14,056 16,493 (4,439) 44,522
Net Income.............................. 11,419 8,622 10,159 (2,654) 27,546
Net Income Per Class A Common Share:
Basic................................. $ 0.50 $ 0.38 $ 0.44 $ (0.12) $ 1.20
Diluted............................... 0.49 0.37 0.44 (0.12) 1.18
2000
Net Sales............................... $127,676 $131,387 $145,271 $146,330 $550,644
Gross Margin............................ 71,205 72,711 81,146 80,004 305,066
Operating Income........................ 19,778 15,379 19,102 15,032 69,291
Net Income.............................. 12,367 9,832 11,729 13,273 47,201
Net Income Per Class A Common Share:
Basic................................. $ 0.54 $ 0.43 $ 0.51 $ 0.59 $ 2.07
Diluted............................... 0.54 0.43 0.51 0.57 2.05
II-27
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
II-28
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE TITLE
---- --- -----
Katherine M. Hudson............... 54 President, CEO and Director
Richard L. Fisk................... 57 Vice President, Direct Marketing Group
David R. Hawke.................... 47 Vice President, Graphics Group
Frank M. Jaehnert................. 44 Vice President & Chief Financial Officer
Vice President, Identification Solutions & Specialty Tapes
David W. Schroeder................ 46 Group
Conrad G. Goodkind................ 57 Secretary
Peter J. Lettenberger............. 64 Director
Robert C. Buchanan................ 61 Director
Roger D. Peirce................... 64 Director
Richard A. Bemis.................. 60 Director
Dr. Frank W. Harris............... 59 Director
Gary E. Nei....................... 57 Director
Mary K. Bush...................... 53 Director
Frank R. Jarc..................... 59 Director
KATHERINE M. HUDSON -- Mrs. Hudson joined the Company in January 1994, as
President, Chief Executive Officer and Director. Before joining Brady
Corporation, she was a Vice President at Eastman Kodak Company and General
Manager of its Professional, Printing and Publishing Imaging Division. Her 24
years at Eastman Kodak Company included positions in finance, communication and
public affairs, information systems and the management of instant photography
and printing. She is a director of CNH Global N.V. and Charming Shoppes, Inc.,
and serves on the Alverno College Board of Trustees, the Advisory Board of the
University of Wisconsin School of Business, the Advisory Council for the Indiana
University School of Business, and the Medical College of Wisconsin Board of
Trustees.
RICHARD L. FISK -- Mr. Fisk joined the Company in 1979 and was appointed to
his present position in August 1987. He previously served as General Manager of
Seton Name Plate Co., a wholly owned subsidiary of the Company. Effective August
1, 2001, Mr. Fisk was appointed to Senior Vice President -- Strategic
Development. He serves as a Director of Demco, Inc., Madison, Wisconsin,
National Business Furniture, Milwaukee, Wisconsin and Medical Arts Press,
Minneapolis, Minnesota.
DAVID W. HAWKE -- Mr. Hawke joined the Company in 1979. He served as
General Manager of the Industrial Products Division from 1985 to 1991. From 1991
to February 1995, he served as Managing Director -- European Operations. In
March 1995, he was appointed to his present position.
FRANK M. JAEHNERT -- Mr. Jaehnert joined the Company in 1995 as Finance
Director of the Identification Solutions & Specialty Tapes Group. He was
appointed to his present position in November 1996. Before joining the Company,
he held various financial and management positions for Robert Bosch GmbH from
1983 to 1995.
DAVID W. SCHROEDER -- Mr. Schroeder joined the Company in June 1991 as
General Manager of the Industrial Products Division. He was appointed to his
present position in March 1995. Before joining the Company, he served as
President and Chief Executive Officer of Uniroyal Adhesives & Sealants Co., Inc.
from 1988 to May 1991.
CONRAD G. GOODKIND -- Mr. Goodkind was elected Secretary of the Company in
November 1999. He is a partner of Quarles & Brady, general counsel to the
Company, which he joined in 1979.
PETER J. LETTENBERGER -- Mr. Lettenberger has served as a Director of the
Company since January 1977. Mr. Lettenberger is a member of the Company's
Finance and Corporate Governance Committees. He is a partner of Quarles & Brady,
general counsel to the Company, which he joined in 1964. He is also a director
of Electronic Tele-Communications, Inc., Waukesha, Wisconsin.
III-1
ROBERT C. BUCHANAN -- Mr. Buchanan has been a Director of the Company since
November 1987. Mr. Buchanan is a member of the Company's Finance Committee and
chairs its Corporate Governance Committee. Mr. Buchanan is President of Fox
Valley Corporation, a manufacturer of specialty papers in Appleton, Wisconsin,
having assumed that position November 1980. He is also a trustee of The
Northwestern Mutual Life Insurance Company, Milwaukee.
ROGER D. PEIRCE -- Mr. Peirce has served as a Director of the Company since
September 1988. Mr. Peirce has been a member of the Compensation Committee of
the Company since September 1988, and its chairman since November 1996, and is a
member of its Corporate Governance and Finance Committees. Mr. Peirce is a
private investor and consultant and is a director and secretary/treasurer of The
Jor-Mac Company, Inc., a manufacturer of metal products in Grafton, Wisconsin.
He was President and CEO of Valuation Research Corporation from April 1995 to
May 1996. From September 1988 to December 1993, he was President of Super Steel
Products Corp. in Milwaukee, Wisconsin. Prior to that he was a managing partner
for Arthur Andersen LLP, independent certified public accountants.
RICHARD A. BEMIS -- Mr. Bemis has been a Director of the Company since
January 1990 and a member of its Compensation Committee since March 1990, and is
a member of its Technology Committee. Mr. Bemis is President and CEO of Bemis
Manufacturing Company, a manufacturer of molded plastic products in Sheboygan
Falls, Wisconsin. He is also a director of the Wisconsin Public Service
Corporation, Green Bay, Wisconsin.
FRANK W. HARRIS -- Dr. Harris has been a Director of the Company since
November 1991, a member of its Audit Committee since May 1999, and is chair of
its Technology Committee. Dr. Harris is a Distinguished Professor of Polymer
Science and Biomedical Engineering in the Institute of Polymer Science at the
University of Akron, and has been on its faculty since 1983.
GARY E. NEI -- Mr. Nei has been a Director of the Company since November
1992. Mr. Nei is a member of the Company's Technology Committee and chair of its
Finance Committee. Mr. Nei is Chairman of B&B Publishing, a publishing company
in Walworth, Wisconsin. He is also a director of Bone Care International, Inc.,
a pharmaceutical company in Madison, Wisconsin.
MARY K. BUSH -- Ms. Bush was elected to the Board of Directors on May 15,
2000. Ms. Bush is president of Bush & Company, Washington, D.C., an
international financial advisory firm. She serves on the Audit Committee. Ms.
Bush is also a director of Mortgage Guarantee Insurance Corp., R.J. Reynolds
Tobacco Holdings, Inc, MasTec Inc., Sallie Mae and the Board of Trustees of the
Pioneer Funds. Former Boards include Texaco, Inc. and Nations Bank Trust
Company.
FRANK R. JARC -- Mr. Jarc was elected to the Board of Directors on May 15,
2000. Mr. Jarc is a consultant specializing in corporate development and
international acquisitions, and the former senior vice president of corporate
development at Office Depot, an operator of office supply superstores. He is
chair of the Company's Audit Committee and serves on the Compensation Committee.
All directors serve until their respective successors are elected at the
next annual meeting of shareholders. Officers serve at the discretion of the
Board of Directors. None of the Company's directors or executive officers has
any family relationship with any other director or executive officer.
III-2
ITEM 11 EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by the
Company during the three fiscal years ended July 31, 2001, to those persons who,
as of the end of fiscal 2001, were the Named Executive Officers.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------- -------------
OTHER ANNUAL ALL OTHER
FISCAL SALARY BONUS COMPENSATION OPTIONS/SAR COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) (# OF SHARES) ($)(3)
--------------------------- ------ ------ ------ ------------ ------------- ------------
K. M. Hudson.................. 2001 497,231 0 3,238 35,000 95,063(4)
President & Chief 2000 470,308 535,963 6,913 82,000 58,059(4)
Executive Officer 1999 441,577 529,892 4,950 34,000 47,589(4)
R. L. Fisk.................... 2001 277,922 0 3,864 13,000 283,374(5)
Vice President, 2000 265,962 206,652 4,668 12,500 241,562(5)
Direct Marketing Group 1999 253,654 228,289 3,235 12,500 231,903(5)
D. W. Schroeder............... 2001 289,385 0 6,204 13,000 21,849
Vice President, 2000 255,962 238,659 5,631 12,500 6,699
ISST Group 1999 243,573 219,216 5,908 12,500 13,549
D.R. Hawke.................... 2001 258,384 0 6,644 13,000 18,450
Vice President, 2000 245,961 191,112 4,790 12,500 6,735
Graphics Group 1999 233,654 210,289 5,191 12,500 13,219
F.M. Jaehnert................. 2001 236,154 0 5,561 10,000 16,893
Vice President & 2000 213,269 165,710 5,558 8,600 8,931
Chief Financial Officer 1999 190,962 171,866 6,835 83,000 13,280
-------------------------
(1) Reflects bonus earned during the listed fiscal year, which was paid during
the next fiscal year.
(2) The amounts shown represent costs to the Company for expenses associated
with the use of a company car.
(3) All other compensation for fiscal 2001 for Mrs. Hudson, and Messrs. Fisk,
Schroeder, Hawke and Jaehnert, respectively, includes: (i) matching
contributions to the Company's Matched 401(k) Plan and the Company's
Restoration Plan for each named executive officer of $44,165, $19,411,
$21,063, $17,731, and $16,449, respectively and (ii) the cost of group term
life insurance for each named executive officer of $1,572, $2,180, $786,
$718 and $444, respectively.
All other compensation for fiscal 2000 for Mrs. Hudson, and Messrs. Fisk,
Schroeder, Hawke and Jaehnert, respectively, includes: (i) matching
contributions to the Company's Matched 401(k) Plan for each named executive
officer of $9,600, $5,915, $5,946, $5,977 and $8,580 respectively and (ii)
the cost of group term life insurance for each named executive officer of
$1,485, $2,286, $753, $758 and $351, respectively.
All other compensation for fiscal 1999 for Mrs. Hudson, and Messrs. Fisk,
Schroeder, Hawke and Jaehnert, respectively, includes: (i) matching
contributions to the Company's Matched 401(k) Plan for each named executive
officer of $12,800, $12,262, $12,800, $12,323 and $12,800 respectively and
(ii) the cost of group term life insurance for each named executive officer
of $3,434, $2,642, $749, $896 and $480, respectively.
(4) Fiscal 2001 includes $49,326 accrued, but not paid, for the current year's
portion of a Supplemental Executive Retirement Plan (SERP). Fiscal 2000
includes $46,974 accrued, but not paid, for the that year's portion of the
SERP. Fiscal 1999 includes $31,355 accrued, but not paid, for that year's
portion of the SERP.
III-3
(5) Fiscal 2001 includes $261,784 accrued, but not paid, for the current year's
portion of a Supplemental Executive Retirement Plan (SERP). Fiscal 2000
includes $233,360 accrued, but not paid, for the that year's portion of the
SERP. Fiscal 1999 includes $217,000 accrued, but not paid, for that year's
portion of a SERP.
STOCK OPTIONS
The following tables summarize option grants and exercises during fiscal
2001 to or by the executive officers named in the Summary Compensation Table
above, and the value of unexercised options held by such persons at July 31,
2001. Stock Appreciation Rights are not available under any of the Company's
plans.
OPTION GRANTS IN FISCAL 2001
INDIVIDUAL GRANTS
% OF TOTAL
OPTIONS
GRANTED TO
OPTIONS EMPLOYEES EXERCISE
GRANTED (#) IN FISCAL PRICE ($/SHARE)
NAME (1) 2001 (2) EXPIRATION DATE
---- ----------- ---------- --------------- ---------------
K.M. Hudson............................. 35,000 9.4% 28.3150 October 24, 2010
R.L. Fisk............................... 13,000 3.5% 28.3150 October 24, 2010
D.W. Schroeder.......................... 13,000 3.5% 28.3150 October 24, 2010
D.R. Hawke.............................. 13,000 3.5% 28.3150 October 24, 2010
F.M. Jaehnert........................... 10,000 2.7% 28.3150 October 24, 2010
POTENTIAL REALIZABLE VALUE AT ASSUMED RATES
OF STOCK PRICE APPRECIATION (3)
---------------------------------------------
$28.3150 $46.1200 $73.44
NAME 0%($) 5%($)(6) 10%($)(6)
---- -------- -------- ---------
K.M. Hudson.............................................. 0 623,175 1,579,375
R.L. Fisk................................................ 0 231,465 586,625
D.W. Schroeder........................................... 0 231,465 586,625
D.R. Hawke............................................... 0 231,465 586,625
F.M. Jaehnert............................................ 0 178,050 451,250
All Stockholders' Gains (increase in market value of Brady Corporation
Common Stock at assumed rates of stock price appreciation)(4)(6).... $373,536,401 $946,690,822
All Optionees' Gains (as a percent of all shareholders'
gains)(5)(6)........................................................ 1.82% 1.82%
-------------------------
(1) The options granted October 24, 2000, become exercisable as follows: 33 1/3%
of the shares on October 24, 2001; 33 1/3% of the shares on October 24,
2002; and 33 1/3% of the shares on October 24, 2003. These options have a
term of ten years.
(2) The exercise price is the average of the highest and lowest sale prices of
the Company's Class A Common Stock as reported by the New York Stock
Exchange on the date of the grant.
(3) Represents total potential appreciation of approximately 0%, 63% and 159%
for assumed annual rates of appreciation of 0%, 5% and 10%, respectively,
compounded annually for the ten-year option term.
(4) Calculated from the $28.3150 exercise price applicable to the options
granted on October 24, 2000 and based on the 20,979,298 shares of Class A
Common Stock outstanding on October 24, 2000.
(5) Represents potential realizable value for all options granted in fiscal 2001
compared to the increase in market value of Brady Corporation Class A Common
Stock at assumed rates of stock price appreciation.
(6) The Company disavows the ability of any valuation model to predict or
estimate the Company's future stock price or to place a reasonably accurate
present value on these options because any model depends on assumptions
about the stock's future price movement that the Company is unable to
predict.
III-4
AGGREGATED OPTION EXERCISES IN FISCAL 2001
AND VALUE OF OPTIONS AT END OF FISCAL 2001
NUMBER OF UNEXERCISED
OPTIONS AT
SHARES JULY 31, 2001
ACQUIRED ON VALUE ----------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#)
---- ----------- -------- ----------- -------------
K.M. Hudson....................................... 0 0 228,334 317,666
R.L. Fisk......................................... 26,000 214,342 20,500 125,500
D.W. Schroeder.................................... 6,000 136,660 59,000 125,500
D.R. Hawke........................................ 6,750 146,892 52,250 125,500
F.M. Jaehnert..................................... 0 0 24,700 93,400
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS AT
JULY 31, 2001(1)
----------------------------
EXERCISABLE UNEXERCISABLE
NAME ($) ($)
---- ----------- -------------
K.M. Hudson................................................. 3,216,798 2,620,627
R.L. Fisk................................................... 167,982 1,233,248
D.W. Schroeder.............................................. 741,337 1,233,248
D.R. Hawke.................................................. 592,018 1,233,248
F.M. Jaehnert............................................... 226,122 1,182,307
-------------------------
(1) Represents the closing price for the Company's Class A Common Stock on July
31, 2001, of $34.4500 less the exercise price for all outstanding
exercisable and unexercisable options for which the exercise price is less
than such closing price.
III-5
COMMON STOCK PRICE PERFORMANCE GRAPH
The graph below shows a comparison of the cumulative return over the last
five fiscal years had $100 been invested at the close of business on July 31,
1996, in each of Brady Corporation Class A Common Stock, the Standard & Poor's
(S&P) 500 Index, the Russell 2000 Index and the New York Stock Exchange (NYSE)
Composite Index.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
BRADY CORPORATION VERSUS PUBLISHED INDICES
(S&P 500, RUSSELL 2000 AND NYSE)
FISCAL YEAR ENDING JULY 31,
[PERFORMANCE GRAPH]
BRADY S&P 500 RUSSELL 2000 NYSE
----- ------- ------------ ----
F96 100.00 100.00 100.00 100.00
F97 139.00 149.00 131.00 144.00
F98 99.00 175.00 133.00 165.00
F99 169.00 208.00 141.00 183.00
F00 151.00 224.00 158.00 187.00
F01 173.00 189.00 153.00 180.00
--------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001
--------------------------------------------------------------------------------------------------------------
Brady $100 $139 $ 99 $169 $151 $173
--------------------------------------------------------------------------------------------------------------
S&P 500 $100 $149 $175 $208 $224 $189
--------------------------------------------------------------------------------------------------------------
RUSSELL 2000 $100 $131 $133 $141 $158 $153
--------------------------------------------------------------------------------------------------------------
NYSE Composite $100 $144 $165 $183 $187 $180
--------------------------------------------------------------------------------------------------------------
COMPENSATION OF DIRECTORS
Each director who is also an employee of the Company receives no additional
compensation for service on the Board or on any committee of the Board.
Directors who are not also employees of the Company receive an annual retainer
of $20,000 plus $1,500 for each committee they chair and $1,250 plus expenses
for each meeting of the Board or any committee thereof which they attend and are
a member. Directors receive $750 for each meeting they attend of any committee
for which they are not a member.
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
In January, 2001, the Board approved new Change in Control Agreements for
certain of its executive officers including Mrs. Hudson, Messrs. Fisk,
Schroeder, Hawke and Jaehnert. The agreements call for payment of an amount
equal to three times the annual salary and bonus for Mrs. Hudson and two times
the annual salary and bonus for Messrs. Fisk, Schroeder, Hawke, and Jaehnert in
the event of termination or resignation upon a change of control. The agreements
also call for reimbursement of any excise taxes imposed
III-6
and up to $25,000 of attorney fees to enforce the executive's rights under the
agreement. Payments under the agreements will be spread over three years for
Mrs. Hudson and two years for Messrs. Fisk, Schroeder, Hawke and Jaehnert.
In May 1997, the Company created a Supplemental Executive Retirement Plan
(SERP) for Mr. Fisk. The Plan calls for the Company to credit a deferred
compensation account with $200,000 on August 1 of each year beginning August 1,
1997, to and including August 1, 2001, provided Mr. Fisk is employed by the
Company as of each of those dates. Interest accrues on the balance in the
account at the prime rate in effect on August 1 of each year, but not less than
6% nor more than 10% per annum.
The Company is required to pay Mr. Fisk the balance in the account over a
ten-year period beginning on August 1 of the year following his termination of
employment with the Company. The first payment, and the nine succeeding
payments, will equal one-tenth of the balance in the account. Succeeding
payments will include interest credited to the account in the interim. The
Company may make payments in some other manner provided the payments are neither
smaller nor extend beyond such ten year period.
In fiscal 1994 the Company created a Supplemental Executive Retirement Plan
(SERP) for Mrs. Hudson. The stated amount of the Plan at January 1, 1999, was
$500,000. The Company credited a deferred compensation account with the net
present value of the stated amount in January 1994. The account is credited
annually with the current year's increase in the net present value calculation.
After January 1, 1999, interest accrues quarterly on the balance in the account
at the prime rate in effect at the end of each calendar quarter.
The Company is required to pay Mrs. Hudson the balance in the account over
a ten-year period beginning January 2009. The first payment will be one-tenth of
the balance in the account; the second one-ninth; and so on.
In the event of a change in control of the Company, Mrs. Hudson's SERP may
accelerate and become payable in 30 days.
RESTRICTED STOCK
In August 1997, the Company granted restricted stock awards to certain key
executives. Mrs. Hudson was awarded 50,000 shares of authorized, but unissued,
Class A Common Stock and Messrs. Fisk, Schroeder and Hawke were awarded 25,000
shares each of authorized, but unissued Class A Common Stock. The restricted
stock awards granted Mrs. Hudson and Mr. Fisk vest on August 1, 2002. The
restricted stock awards granted Mr. Schroeder and Mr. Hawke vest 75% on August
1, 2002, with the remaining 25% vesting on August 1, 2003. The executives have
the right to receive any cash dividends payable on these shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2001, the Board's Compensation Committee was composed of
Messrs. Bemis, Jarc and Peirce. Mr. Lettenberger serves as a nonvoting advisor
to the Committee. None of these persons has at any time been an employee of the
Company or any of its subsidiaries. There are no relationships among the
Company's executive officers, members of the Compensation Committee or entities
whose executives serve on the Board that require disclosure under applicable SEC
regulations.
MONEY PURCHASE AND 401(k) PLAN
Substantially all Brady employees in the United States and certain
expatriate employees working for its international subsidiaries are eligible to
participate in the Company's Money Purchase ("Brady Corporation Funded
Retirement Plan") and Employee 401K Plan (the "Brady Corporation Matched 401(k)
Plan"). Under this plan the Company agrees to contribute certain amounts to the
Brady Corporation Matched 401(k) Plan. Under the Funded Retirement Plan, the
Company contributes 4% of the eligible earnings of each person covered by the
Funded Retirement Plan. In addition, participants may elect to have their annual
pay reduced by up to 4% and have the amount of this reduction contributed to the
Brady Corporation Matched 401(k) Plan by the Company and matched by an
additional, equal contribution by the Company. Participants may
III-7
also elect to have up to another 8% of their eligible earnings contributed to
the Brady Corporation Matched 401(k) Plan (without an additional matching
contribution by the Company). The assets of the Brady Corporation Matched 401(k)
Plan and Brady Corporation Funded Retirement Plan credited to each participant
are invested by the trustee of the Plans as directed in several investment funds
as permitted by the Brady Corporation Matched 401(k) Plan and Brady Corporation
Funded Retirement Plan. The annual contributions and forfeitures allocated to
any participant under all defined contribution plans may not exceed the lesser
of $30,000 or 25% of the participant's base compensation and bonuses. Benefits
are generally payable upon the death, disability, or retirement of the
participant or upon termination of employment before retirement, although
benefits may also be withdrawn from the Brady Corporation Matched 401(k) Plan
and paid to the participant if required for certain emergencies. Under certain
specified circumstances, the Brady Corporation Matched 401(k) Plan allows loans
to be drawn on a participant's account. The participant is immediately fully
vested with respect to the contributions attributable to reductions in pay; all
other contributions become fully vested after three years of service.
DEFERRED COMPENSATION ARRANGEMENTS
During fiscal 1998, the Company adopted new deferred compensation plans
whereby directors, executive officers, corporate staff officers and certain key
management employees of the Company are permitted to defer portions of their
fees, salary and bonus into a plan account, the value which is measured by the
Company's Class A Common Stock. Participants in the old deferred compensation
plan were allowed to convert their balances in the old plan to this new plan.
The conversion to the new plan was funded by the issuance of 372,728 shares of
Class A Common Stock to a Rabbi Trust (the "Trust") in November 1997. All
deferrals into the new plan result in purchases of existing Class A Common Stock
by the Trust. No deferrals are allowed into the old plan.
Upon the retirement, disability, or death of participant, the Company is
required under the new plan to pay, each year for a period of ten years, a
portion of the shares held in the participant's name by the Trust. The first
payment must be one-tenth of the number of shares held; the second one-ninth;
and so on, with the number of shares held in the Trust reduced by each payment.
If the participant's employment ends for reasons other than retirement,
disability or death, the shares held by the Trust in the participant's name will
be distributed over a period of ten years. At the request of the participant and
for special situations at the sole discretion of the Compensation Committee, the
Company may make distributions in larger installments or in a lump sum or other
basis.
In the old deferred compensation plan, directors, executive officers,
corporate staff officers and certain key management employees of the Company
were permitted to defer portions of their fees, salary and bonus into a plan,
the value of which was measured in "phantom stock" of the Company. "Phantom
Stock" is not actual stock or rights to acquire stock in the Company, but it
gives participants the right to share in increases in book value (as defined) of
the common stock. At the end of each fiscal year, the deferred compensation
balance (with interest) is credited to the purchase of phantom common stock at
the then book value of the common stock of the Company, and is thereafter
adjusted to reflect stock dividends and other dividends or distributions on the
Company's Class A Common Stock. No new deferrals are allowed into this old
deferred compensation plan. Upon the retirement, disability, or death of
participant, the Company is required to pay, each year for a period of ten
years, a portion of the book value of the phantom stock determined by the book
value of the corresponding number of common shares as of the end of each fiscal
year. The first payment must be one-tenth of the book value; the second
one-ninth; and so on, with the number of phantom shares reduced by the
equivalent in book value of each payment. At the request of the participant, the
Company may make payments in larger installments or in a lump sum on a
discounted or other basis.
All current directors and executives converted their balances to the new
deferred compensation plan. Certain retired participants elected not to transfer
their balances into the new plan. They were allowed to remain in the old
deferred compensation plan until the end of fiscal 2002. At that point the old
plan will terminate and participant's balances will earn simple interest at a
rate equal to the yield on a 30-year U.S. Treasury Bond as of July 31 of each
year.
III-8
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's Compensation Committee (the "Committee") is composed entirely
of outside directors and is responsible for considering and approving
compensation arrangements for senior management of the Company, including the
Company's executive officers and the chief executive officer. It is the
philosophy of the Committee to establish a total executive compensation program,
which is competitive with a broad range of companies that it considers to be of
comparable size and complexity.
The primary components of the Company's executive compensation program are
(i) base salary, (ii) annual shareholder value enhancement plan cash bonuses and
(iii) long term incentive compensation in the form of stock options and/or
restricted stock. These are designed to align shareholder and management
interests, to balance the achievement of annual performance targets with actions
that focus on the long-term success of the Company, and to attract, motivate and
retain key executives who are important to the continued success of the Company.
Decisions made by the Committee relating to the base salary compensation of the
Chief Executive Officer are reviewed and approved by the full Board of
Directors.
THE COMMITTEE BELIEVES THAT:
-- The Company's pay levels are appropriately targeted to attract and
retain key executives;
-- The Company's incentive plan provides strong incentives for management
to increase shareholder value; and
-- The Company's total executive compensation program is a cost-effective
strategy to increase shareholder value.
Base Salary
Consistent with the Committee's philosophy, base salaries are generally
maintained at or modestly above competitive base salary levels. Competitive
salary level is defined as the average base salary for similar responsibilities
in a group of companies selected by the Committee that the Committee considers
to be of comparable size and complexity. In setting base salaries for fiscal
2001, the Committee reviewed compensation survey data and was satisfied that the
base salary levels set would achieve the Company's objectives. Specific
increases reflect the Committee's subjective evaluation of individual
performance.
Annual Shareholder Value Enhancement Plan
The shareholder value enhancement plan (the "Bonus Plan") provides for the
annual payment of cash bonuses. When viewed together with the Company's base
salary, the purpose of the Bonus Plan is to provide a balance between fixed
compensation and variable, results-oriented compensation. The Bonus Plan is 90%
objective. It stresses maximization of Company profitability and increasing
shareholder value.
Stock Options
In May 1997, the Company approved the Brady Corporation 1997 Omnibus
Incentive Stock Plan and the Brady Corporation 1997 Nonqualified Stock Option
Plan for Non-Employee Directors (the "Option Plans") under which 2,000,000
shares and 125,000 shares, respectively, of Class A Common Stock are available
for grant. In 1989 the Board approved the Brady Corporation 1989 Non-Qualified
Stock Option Plan (the "Option Plan") under which 1,500,000 shares of Class A
Common Stock were available for grant. The Option Plans assist directors,
executive officers, corporate staff officers and key management employees in
becoming shareholders with an important stake in the Company's future, aligning
their personal financial interest with that of all shareholders. Stock options
are typically granted annually and have a term of ten years. Generally, the
options become one-third exercisable one year after the date of the grant and
one-third additional in each of the succeeding two years so that at the end of
three years after the date of the grant they are fully exercisable. All grants
under the Option Plans are at market price on the date of the grant.
III-9
Compliance with Tax Regulations Regarding Executive Compensation
Section 162(m) of the Internal Revenue Code, added by the Omnibus Budget
Reconciliation Act of 1993, generally disallows a tax deduction to public
companies for compensation over $1 million paid to the corporation's chief
executive officer and the other named executive officers. Qualifying
performance-based compensation will not be subject to the deduction limit if
certain requirements are met. The Company's executive compensation program, as
currently constructed, is not likely to generate nondeductible compensation in
excess of these limits. The Compensation Committee will continue to review these
tax regulations as they apply to the Company's executive compensation program.
It is the Compensation Committee's intent to preserve the deductibility of
executive compensation to the extent reasonably practicable and to the extent
consistent with its other compensation objectives.
Compensation of the Chief Executive Officer
Mrs. Hudson received $497,231 in base salary in fiscal 2001, an increase of
5.7% from the prior year's base salary. She was not paid a bonus attributable to
fiscal 2001, a decrease of 100%, or $535,963, from the prior year's bonus. The
bonus was determined in accordance with the Company's objective Bonus Plan,
discussed above. Mrs. Hudson's compensation reflects:
(i) an increase of 13.2%, from $30.44 to $34.45, in the Company's stock
price, a decrease of 26.9%, or $12,279,000, in profits (after removing
the effects of the nonrecurring items) and a decrease 0.9% in sales over
similar amounts from the prior year
(ii) the successful acquisitions of Balkhausen GmbH and Eset, GmbH this year
and the integration of last year's acquisitions of certain assets of
Champion America, Inc., Data Recognition, Inc. and Imtec, Inc.
(iii) continued improvement in asset utilization (a 10.5% decrease in
inventory and accounts receivable)
(iv) continued efforts to focus the Company's resources on sustainable
value-enhancing long-term growth
(v) continued improvement in intercompany teamwork.
During fiscal 2001, Mrs. Hudson was awarded options to purchase 35,000
shares of Class A Common Stock.
The Committee believes these awards are consistent with the objectives of
the various plans and with the overall compensation policy of the Board of
Directors.
* * * * * * * * * * * * * * * * *
The Compensation Committee believes the executive compensation programs and
practices described above are competitive. They are designed to provide
increased compensation with improved financial results and provide additional
opportunity for capital accumulation, but only if shareholder value is
increased.
Roger D. Peirce, Chairman
Richard A. Bemis
Frank R. Jarc
III-10
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
The following table sets forth the current beneficial ownership of
shareholders who are known by the Company to own five percent (5%) of any class
of the Company's voting shares on September 12, 2001.
AMOUNT OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OWNERSHIP
-------------- ------------------- ---------- ----------
Class B Common Stock...................... William H. Brady, Jr. 884,652 50%
Trust f/b/o
Elizabeth B. Lurie(1)
c/o Quarles & Brady
Attn: Peter J. Lettenberger
411 East Wisconsin Avenue
Milwaukee, WI 53202
William H. Brady, Jr. III 884,652 50%
Revocable Trust 2001(1)
c/o Quarles & Brady
Attn: Peter J. Lettenberger
411 East Wisconsin Avenue
Milwaukee, WI 53202
-------------------------
(1) The trustees of both trusts are Richard A. Bemis, Robert C. Buchanan, Peter
J. Lettenberger, Roger D. Peirce and Gary E. Nei, each of whom shares voting
and dispositive power.
III-11
(b) Security Ownership of Management
The following table sets forth the current beneficial ownership of each
class of equity securities of the Company by each Director or Nominee and by all
Directors and Officers of the Company as a group as of September 12, 2001.
Except as otherwise indicated, all shares are owned directly.
NAME OF BENEFICIAL AMOUNT OF
OWNER & NATURE OF BENEFICIAL PERCENT OF
TITLE OF CLASS BENEFICIAL OWNERSHIP OWNERSHIP(10) OWNERSHIP
-------------- -------------------- ------------- ----------
Class A Common Stock........... Peter J. Lettenberger(1)(2)(3) 2,530,397 12.0%
Richard A. Bemis(1)(4) 2,160,897 10.2%
Gary E. Nei(1)(5) 2,156,397 10.2%
Roger D. Peirce(1)(6) 2,154,897 10.2%
Robert C. Buchanan(1)(7) 2,153,997 10.2%
Katherine M. Hudson(8) 319,351 1.5%
David W. Schroeder 100,200 0.5%
David R. Hawke 100,119 0.5%
Richard L. Fisk 58,166 0.3%
Frank M. Jaehnert 36,841 0.2%
Conrad G. Goodkind 17,847 0.1%
Frank W. Harris 8,533 * %
Mary K. Bush 1,500 * %
Frank R. Jarc 1,500 * %
All Officers and Directors as
a Group(16 persons)(9) 2,890,076 13.7%
Class B Common Stock........... Peter J. Lettenberger(1) 1,769,314 100%
Richard A. Bemis(1) 1,769,314 100%
Gary E. Nei(1) 1,769,314 100%
Roger D. Peirce(1) 1,769,314 100%
Robert C. Buchanan(1) 1,769,314 100%
All Officers and Directors as a Group 1,769,314 100%
6% Cumulative Preferred
Stock........................ Peter J. Lettenberger(1)(2) 3,303 82.9%
Richard A. Bemis(1) 1,743 43.8%
Gary E. Nei(1) 1,743 43.8%
Roger D. Peirce(1) 1,743 43.8%
Robert C. Buchanan(1) 1,743 43.8%
All Officers and Directors as a Group 3,303 82.9%
10% Cumulative 1979 Series
Preferred Stock.............. Peter J. Lettenberger(2) 16,879 77.8%
All Officers and Directors as a Group 16,879 77.8%
6% Cumulative 1972 Series
Preferred Stock.............. Peter J. Lettenberger(2) 2,600 100%
All Officers and Directors as a Group(2) 2,600 100%
-------------------------
* Indicates less than one-tenth of one percent
(1) The amount shown includes shares held directly by the William H. Brady, Jr.
Trust f/b/o Elizabeth B. Lurie (the "William H. Brady, Jr. Trust"), the
William H. Brady III Revocable Trust 2001 (the "Revocable Trust") and the
William H. Brady, Jr. Family Trust (the "Family Trust") (collectively, the
"Trusts"). The William H. Brady, Jr. Trust owns 885,769 shares of Class A
Common
III-12
Stock, 884,652 shares of Class B Common Stock, and 855 shares of 6%
Cumulative Preferred Stock. The Revocable Trust owns 1,260,128 shares of
Class A Common Stock, 884,652 shares of Class B Common Stock and 888 shares
of 6% Cumulative Preferred Stock. The Family Trust owns 10 shares of Class
B Common Stock. The Trustees of the Trusts are Richard A. Bemis, Robert C.
Buchanan, Peter J. Lettenberger, Gary E. Nei and Roger D. Peirce, each of
whom shares voting and dispositive power.
(2) Peter J. Lettenberger is a director of the W.H. Brady Foundation, Inc. (the
"Foundation") which owns 16,879 shares of the 1979 Series 10% Cumulative
Preferred Stock, 1,526 shares of the 6% Cumulative Preferred Stock and
2,600 shares of the 6% Cumulative Preferred Stock, 1972 Series. Mr.
Lettenberger is also a trustee of the Irene B. Brady Trust f/b/o Elizabeth
B. Lurie (the "Irene B. Brady Trust"), which owns 374,359 shares of Class A
Common Stock and 34 shares of 6% Cumulative Preferred Stock.
(3) In addition to shares beneficially owned as a trustee of the Trusts and the
Irene B. Brady Trust and as a director of the Foundation, Mr. Lettenberger
owns directly 3,875 shares of Class A Common Stock and holds vested options
to acquire an additional 6,000 shares of Class A Common Stock.
(4) In addition to shares beneficially owned as a trustee of the Trusts, Mr.
Bemis owns 9,000 shares of Class A Common Stock directly and holds vested
options to acquire an additional 6,000 shares of Class A Common Stock.
(5) In addition to shares beneficially owned as a trustee of the Trusts, Mr.
Nei owns 4,500 shares of Class A Common Stock directly and holds vested
options to acquire an additional 6,000 shares of Class A Common Stock.
(6) In addition to shares beneficially owned as a trustee of the Trusts, Mr.
Peirce owns 1,500 shares of Class A Common Stock directly, 1,500 shares
through his Keogh plan and holds vested options to acquire an additional
6,000 shares of Class A Common Stock.
(7) In addition to shares beneficially owned as a trustee of the Trusts, Mr.
Buchanan owns 600 shares of Class A Common Stock directly, 1,500 additional
shares through his Keogh plan and holds vested options to acquire an
additional 6,000 shares of Class A Common Stock.
(8) Mrs. Hudson owns 57,351 shares of Class A Common Stock directly and holds
vested options to acquire an additional 262,000 shares of Class A Common
Stock.
(9) The amount shown for all officers and directors as a group (17 persons)
includes options to acquire a total of 558,317 shares of Class A Common
Stock, which are currently exercisable or will be exercisable within 60
days of October 1, 2001. It does not include other options for Class A
Common Stock, which have been granted at later dates.
(10) In addition to the shares shown in this table, the officers and directors
as a group owned the equivalent of 350,669 shares of the Company's Class A
Common Stock in its deferred compensation plans, including 93,900 for Mrs.
Hudson, 7,817 for Mr. Jaehnert, 34,000 for Mr. Fisk, 35,171 for Mr. Hawke,
28.199 for Mr. Schroeder, 4,847 for Mr. Oliver and 5,329 for Mr. Rearic.
(c) Changes in Control
No arrangements are known to the Company, which may, at a subsequent date,
result in a change in control of the Company.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Peter J. Lettenberger serves as a Director of the Company; he is also a
partner of Quarles & Brady, general counsel to the Company.
III-13
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1) The selected financial data and stock price disclosure presented on
Pages 8 through 10 of the Company's 2001 Annual Report are incorporated
herein by reference.
2) Consolidated Financial Statement Schedule --
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted as they are not required, or the
required information is shown in the consolidated financial statements
or notes thereto.
3) Exhibits -- See Exhibit Index at page IV-2 of this Form 10-K.
(b) Reports on Form 8-K.
No report on form 8-K was filed by the Company during the fourth quarter of
fiscal 2001.
IV-1
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Articles of Incorporation of Brady Corporation(1)
3.2 By-laws of Brady Corporation, as amended(2)
10.2 Brady Corporation BradyGold Plan, as amended(2)
10.3 Executive Additional Compensation Plan, as amended(2)
10.4 Form of Executive's Deferred Compensation Agreement, as
amended(2)
10.5 Forms of Director's Deferred Compensation Agreement, as
amended(2)
10.6 Brady Corporation 1989 Non-Qualified Stock Option Plan(4)
10.7 Shareholder Value Enhancement (SVE) Plan(6)
10.9 Brady Corporation Automatic Dividend Reinvestment Plan(4)
10.10 Supplemental Executive Retirement Plan between Brady
Corporation and Katherine M. Hudson(5)
10.12 Brady Corporation 1997 Omnibus Incentive Stock Plan(7)
10.13 Brady Corporation 1997 Nonqualified Stock Option Plan for
Non-Employee Directors(7)
10.14 Change of Control Agreement dated January 5, 2001, between
Brady Corporation and Katherine M. Hudson
10.15 Change of Control Agreement dated January 5, 2001, between
Brady Corporation and David W. Schroeder
10.16 Change of Control Agreement dated January 5, 2001, between
Brady Corporation and Richard L. Fisk
10.17 Change of Control Agreement dated January 5, 2001, between
Brady Corporation and David R. Hawke
10.19 Supplemental Executive Retirement Plan dated May 14, 1997,
between Brady Corporation and Richard L. Fisk(7)
10.20 Restricted Stock Agreement dated August 1, 1997, between
Brady Corporation and Katherine M. Hudson(8)
10.21 Restricted Stock Agreement dated August 1, 1997, between
Brady Corporation and Richard L. Fisk(8)
10.22 Restricted Stock Agreement dated August 1, 1997, between
Brady Corporation and David W. Schroeder(8)
10.23 Restricted Stock Agreement dated August 1, 1997, between
Brady Corporation and David R. Hawke(8)
10.24 Change of Control Agreement dated January 5, 2001, between
Brady Corporation and Frank M. Jaehnert
10.25 Brady Corporation Restoration Plan dated January 1, 2000(9)
13.1 Annual Report to Shareholders for year ended July 31, 2001
18.1 Letter regarding change in accounting method(3)
21.1 Subsidiaries of Brady Corporation
23.1 Consent of Deloitte & Touche LLP, Independent Auditor
-------------------------
(1) Incorporated by reference to Registrant's Registration Statement No.
333-04155 on Form S-3
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1989
(3) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended January 31, 1989
(4) Incorporated by reference to Registrant's Annual Report on form 10-K for the
fiscal year ended July 31, 1992
(5) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1994
IV-2
(6) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1995
(7) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended April 30, 1997
(8) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1997
(9) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 2000
IV-3
BRADY CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JULY 31,
-----------------------------
DESCRIPTION 2001 2000 1999
----------- ---- ---- ----
(DOLLARS IN THOUSANDS)
Valuation accounts deducted in balance sheet from assets to
which they apply --
Accounts receivable -- allowance for losses:
Balances at beginning of period........................... $ 2,919 $ 2,339 $ 2,011
Additions -- Charged to expense........................... 1,537 1,830 966
Due to acquired businesses.................. 45 97
Deductions -- Bad debts written off, net of recoveries.... (2,159) (1,295) (735)
------- ------- -------
Balances at end of period................................. $ 2,297 $ 2,919 $ 2,339
======= ======= =======
Inventory -- reserve for slow-moving inventory:
Balances at beginning of period........................... $ 4,714 $ 5,506 $ 3,544
Additions -- Charged to expense........................... 1,962
Due to acquired businesses.................. 349
Deductions -- Inventory written off....................... (441) (1,141)
------- ------- -------
Balances at end of period................................. $ 4,273 $ 4,714 $ 5,506
======= ======= =======
IV-4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this twenty-third day
of October 2001.
BRADY CORPORATION
By /s/ F. M. JAEHNERT
------------------------------------
F. M. Jaehnert
Vice President & Chief Financial
Officer
(Principal Accounting Officer)
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
/s/ K. M. HUDSON President and Director October 23, 2001
----------------------------------------------------- (Principal Executive
K. M. Hudson Officer)
/s/ P. J. LETTENBERGER Director October 23, 2001
-----------------------------------------------------
P. J. Lettenberger
/s/ R. A. BEMIS Director October 23, 2001
-----------------------------------------------------
R. A. Bemis
/s/ F. W. HARRIS Director October 23, 2001
-----------------------------------------------------
F. W. Harris
/s/ R. C. BUCHANAN Director October 23, 2001
-----------------------------------------------------
R. C. Buchanan
/s/ R. D. PEIRCE Director October 23, 2001
-----------------------------------------------------
R. D. Peirce
/s/ G. E. NEI Director October 23, 2001
-----------------------------------------------------
G. E. Nei
/s/ M. K. BUSH Director October 23, 2001
-----------------------------------------------------
M. K. Bush
/s/ F. R. JARC Director October 23, 2001
-----------------------------------------------------
F. R. Jarc
IV-5