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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1999
Commission File Number 0-12730
BRADY CORPORATION
(Exact name of registrant as specified in charter)
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WISCONSIN 39-0178960
(State of Incorporation) (IRS Employer Identification No.)
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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
Securities Registered Pursuant to Section 12(g) of the Act:
None
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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 [ ] No [X]
As of September 30, 1999, there were outstanding 20,855,091 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 1999 Annual Report, Incorporated into Part II & IV
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INDEX
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PAGE
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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-2
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-8
ITEM 2. PROPERTIES.......................................... I-8
ITEM 3. LEGAL PROCEEDINGS................................... I-8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... I-8
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ II-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... II-1
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
Profit Sharing and Employee Thrift 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
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PART I
Brady Corporation and Subsidiaries is referred to herein as the "Company"
or "Brady".
ITEM 1 BUSINESS
(a) General Development of Business
The Company, a Wisconsin corporation, currently operates 25 manufacturing
facilities worldwide. Nine are located in the United States, four in France, two
each in Australia and Canada and one each in Belgium, Brazil, England, Germany,
Italy, Japan, Korea and Singapore. The Company sells through subsidiaries or
sales offices in Australia, Belgium, Brazil, Canada, China, England, France,
Germany, Hong Kong, Italy, Japan, Korea, Malaysia, Mexico, the Philippines,
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 its 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 incorporated by reference to Note
7 to Notes to Consolidated Financial Statements on Pages 46 through 48 of the
Brady Corporation 1999 Annual Report.
(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 30,000 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 OEM components.
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 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 has a broad customer base, which in
fiscal 1999 consisted of more than 300,000 companies, with the largest customer
representing less than 6% of net sales. Sales from international operations
represented 44.6%, 43.5% and 42.5% of net sales in fiscal 1999, 1998 and 1997,
respectively.
BUSINESS STRATEGY
Brady's objective is to be the leading source of high-performance
identification products and specialty coated materials to niche markets
worldwide. 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 its
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 serves to
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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 its customers'
requirements and expectations. Brady's commitment to product innovation is
reflected in research and development efforts that include approximately 150
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 30,000 stock
and thousands of custom items. The number of products offered allows Brady to
serve as a one-stop shopping network for its 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 its 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 of its products such as wire
markers, pipe markers and safety signs.
GROWTH STRATEGY
The major elements of the Company's strategy for growth include:
New products and new markets. The Company, through its strong product
innovation and development activities, seeks continually to introduce new
products and explore additional applications for its 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 is expanding its current sales force and is pursuing
additional niche distribution 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 $209,863,000,
or 44.6%, of net sales in fiscal 1999. The Company believes that international
markets continue to represent a significant growth opportunity. Accordingly, the
Company is actively seeking to increase its penetration in established markets
in Europe, Asia/Pacific and Canada and to enter new emerging markets elsewhere
in the Pacific Rim and in 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 systems offerings through the pursuit of
strategic acquisitions and joint ventures. During the last three years, Brady's
growth has occurred through strategic acquisitions, innovative product
development and improvement, market expansion and increased market penetration.
PRODUCTS
The Company's products consist of over 30,000 stock and thousands of 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
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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 other potential 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 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 1000 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, 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
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.
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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 video cassette splicing
tapes.
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, global
positioning systems, household appliances and medical devices.
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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, government, training and legal
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 1999.
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 have not have
a material adverse effect upon the Company's business. In fiscal 1999, no single
customer accounted for more than 6% 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 300 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 and Italy 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. The Company also utilizes
various graphic techniques to print or mark the materials as required.
The Company seeks to optimize the performance, quality and durability of
its products, while continually improving manufacturing processes, shortening
lead times and lowering manufacturing costs. The Company produces the majority
of its own 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
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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 its 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 research and development activities at its
approximately 39,600 sq. ft. Frederic S. Tobey Research and Innovation Center in
Milwaukee, Wisconsin. The Company spent approximately $17,700,000, $20,300,000,
and $16,300,000 in fiscal 1999, 1998, and 1997, respectively, on its research
and development activities, all of which were Company sponsored. In fiscal 1999,
approximately 150 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 1999, 1998, and 1997, sales from international operations
accounted for 44.6%, 43.5%, and 42.5%, respectively, of the Company's net sales.
The Company's global infrastructure now supports sales and operations through
subsidiaries in Australia, Belgium, Brazil, Canada, England, France, Germany,
Italy, Japan, Korea, Mexico, Singapore, Spain and Sweden and sales offices in
China, Hong Kong, Malaysia, the Philippines 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, Canada, China, England, France, Korea, Malaysia, Mexico, the Philippines
and Taiwan 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 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.
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BACKLOG
As of July 31, 1999, the amount of the Company's backlog orders believed to
be firm was $22.3 million. This compares with approximately $20.4 million and
$19.9 million of backlog orders as of July 31, 1998 and 1997, respectively.
Average delivery time for the Company's orders varies from one day to 12 weeks,
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, 1999, the Company employed approximately 2,700 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
Effective August 29, 1996, the Company entered into a joint venture, W.H.
Brady Korea Co. Ltd., in Okcheon, Korea. Brady gained 100 percent ownership of
the company, now named Brady Korea, Ltd., in September 1998. The company
produces labels and markets printers and other Brady products.
Effective April 30, 1997, the Company acquired the common stock of Signals
S.A. located in La Rochelle, France, a marketer of safety and facility
identification products, for cash of approximately $9,600,000.
Effective March 9, 1998, the Company acquired the common stock of
Techniques Avancees located in Auch, France, a bar-code-labeling-software
developer, for cash of $10,735,000 and a payable of $1,030,000.
Effective April 30, 1998, the Company acquired the common stock of GrafTek
Inc. located in Toronto, Ontario, Canada, a bar-code-labeling-software
developer, for cash of $8,528,000 and a payable of $933,000.
Effective August 11, 1998, the Company acquired the common stock of VEB
Sistemas de Etiquetas Ltda. located 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
Inc. located in Seattle, Washington, a label manufacturer and software and
service provider, for cash of $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. The purchase price of this
acquisition is subject to change based on postclosing adjustments.
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. The purchase price of this acquisition is subject to
change based on postclosing adjustments.
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. The
purchase price of this acquisition is subject to change based on postclosing
adjustments.
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Effective September 3, 1999, the Company acquired certain assets of a
direct marketer of signs, labels and identification products, for cash of
approximately $5,600,000. The purchase price of this acquisition is subject to
change based on postclosing adjustments.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
See Note 7 to Notes to Consolidated Financial Statements on Pages 46
through 48 of the Brady Corporation 1999 Annual Report.
ITEM 2 PROPERTIES
The Company currently operates 25 manufacturing facilities. Nine are
located in the United States, four in France, two each in Australia and Canada
and one each in Belgium, Brazil, England, Germany, Italy, Japan, Korea and
Singapore. The Company's primary research facility of approximately 39,600
square feet is located in Milwaukee, Wisconsin. The Company's present operating
facilities contain a total of approximately 1,308,000 square feet of space, of
which approximately 551,000 square feet is leased. The Company believes that its
equipment and facilities are modern, well-maintained and adequate for its
present needs.
ITEM 3 LEGAL PROCEEDINGS
The Company is, and may in the future be, party to litigation arising in
the course of its 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.
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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. There are no established public trading
markets for the Company's Class B Voting Common Stock.
Stock price disclosure required by this Item is incorporated by reference
to Page 50 of the Brady Corporation 1999 Annual Report.
(b) Holders
The number of holders of record of the Company's Class A and Class B Common
Stock as of September 24, 1998, was 411 and 2, respectively.
(c) Dividends
The Company has followed a practice of paying quarterly dividends on its
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:
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YEAR
ENDING
YEAR ENDED 7/31/98 YEAR ENDED 7/31/99 7/31/00
------------------------------------- ------------------------------------- -------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR
------- ------- ------- ------- ------- ------- ------- ------- -------
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Class A................. $.15 $.15 $.15 $.15 $.16 $.16 $.16 $.16 $.17
Class B................. .12 .15 .15 .15 .13 .16 .16 .16 .14
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ITEM 6 SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to Pages
28 and 29 of the Brady Corporation 1999 Annual Report.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to Pages
30 through 34 of the Brady Corporation 1999 Annual Report.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to Pages
35 through 50 of the Brady Corporation 1999 Annual Report and the table on page
II-2.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
II-1
<PAGE> 12
BRADY CORPORATION AND SUBSIDIARIES
UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTERS
--------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1999
Net Sales................................ $116,802 $112,309 $121,455 $120,296 $470,862
Gross Margin............................. 65,524 62,308 70,954 69,873 268,659
Operating Income......................... 14,529 13,110 20,728 15,405 63,772
Net Income............................... 8,711 7,974 12,937 9,962 39,584
Net Income Per Class A Common Share:
Basic.................................. 0.38 0.35 0.57 0.44 1.74
Diluted................................ 0.38 0.35 0.57 0.43 1.73
1998
Net Sales................................ $115,302 $107,150 $118,784 $113,914 $455,150
Gross Margin............................. 62,717 59,511 67,111 60,916 250,255
Operating Income......................... 13,133 11,201 16,612 4,984 45,930
Net Income............................... 8,210 7,169 10,027 2,630 28,036
Net Income Per Class A Common Share:
Basic.................................. 0.37 0.32 0.44 0.11 1.24
Diluted................................ 0.36 0.31 0.44 0.11 1.23
</TABLE>
II-2
<PAGE> 13
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Katherine M. Hudson............... 52 President, CEO and Director
Richard L. Fisk................... 55 Vice President, Direct Marketing Group
David R. Hawke.................... 45 Vice President, Graphics Group
Frank M. Jaehnert................. 42 Vice President & Chief Financial Officer
David W. Schroeder................ 44 Vice President, Identification Solutions & Specialty Tapes
Group
Peter J. Lettenberger............. 62 Secretary and Director
Robert C. Buchanan................ 59 Director
Roger D. Peirce................... 62 Director
Richard A. Bemis.................. 58 Director
Frank W. Harris................... 57 Director
Gary E. Nei....................... 55 Director
Irwin Helford..................... 65 Director
</TABLE>
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 Case Corporation and Honeywell, 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.
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.
PETER J. LETTENBERGER -- Mr. Lettenberger has served as a Director and
Secretary of the Company since January 1977. Mr. Lettenberger was a member of
the Company's audit committee from October 1978 to April 1999. He is a partner
of Quarles & Brady, general counsel to the Company, which firm he joined in
1964. He is also a director of Electronic Tele-Communications, Inc., Waukesha,
Wisconsin.
ROBERT C. BUCHANAN -- Mr. Buchanan has been a Director of the Company since
November 1987. Mr. Buchanan was a member of the Company's audit committee from
June 1988 to April 1999, chairing that committee since June 1990. Mr. Buchanan
is President and Chairman of the Board of the Fox Valley Corporation in
Appleton, Wisconsin, having assumed that position November 1980. He is also a
trustee of The Northwestern Mutual Life Insurance Company, Milwaukee.
III-1
<PAGE> 14
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. Mr.
Peirce is a private investor and consultant. He is a director and
secretary/treasurer of The Jor-Mac Company, Inc. 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. 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 and a member of its audit committee since May 1999. 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 was a member of the Company's audit committee from November 1994
to April 1999. Mr. Nei is Chairman of B&B Publishing, a publishing company in
Walworth, Wisconsin. He is also a director of Uroquest, Inc., Menlo Park,
California.
IRWIN HELFORD -- Mr. Helford has been a Director of the Company since
November 1998 and chairman of its audit committee since April 1999. Mr. Helford
is Chairman of Viking Office Products and Vice Chairman, Office Depot Inc., a
seller of office products in Torrance, California. He is also a director of
Office Depot, Inc., Torrance, California.
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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During fiscal year 1999, Richard A. Bemis, a director of the Company,
purchased 4,000 shares of the Company's Class A Common Stock on October 1, 1998,
and reported such transaction on Form 5 amendment dated September 16, 1999.
III-2
<PAGE> 15
ITEM 11 EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by the
Company during the three fiscal years ended July 31, 1999, to those persons who,
as of the end of fiscal 1999, were the Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------------- -----------------------------------
OTHER ANNUAL ALL OTHER
FISCAL SALARY BONUS COMPENSATION RESTRICTED STOCK OPTIONS/SAR COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($)(3) AWARDS($)(4) (# OF SHARES) ($)(5)
- --------------------------- ------ ------ ------ ------------ ---------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
K.M. Hudson.............. 1999 441,577 529,892 4,950 -- 34,000 47,589(6)
President & Chief 1998 449,516 190,145 4,829 1,487,500 24,000 107,066(6)
Executive Officer 1997 390,149 305,447 4,648 -- 230,000 40,744(6)
R.L. Fisk................ 1999 253,654 228,289 3,235 -- 12,500 231,903(7)
Vice President, Direct 1998 259,615 82,363 3,560 743,750 8,000 215,180(7)
Marketing Group 1997 228,750 134,333 3,904 -- 110,000 14,199
D.W. Schroeder........... 1999 243,573 219,216 5,908 -- 12,500 13,549
Vice President, 1998 247,889 78,643 4,271 743,750 8,000 13,612
ISST Group 1997 226,385 132,944 5,431 -- 110,000 12,728
D.R. Hawke............... 1999 233,654 210,289 5,191 -- 12,500 13,219
Vice President, 1998 238,836 75,774 2,813 743,750 8,000 13,527
Graphics Group 1997 210,828 123,809 5,583 -- 110,000 144,849(8)
F.M. Jaehnert............ 1999 190,962 171,866 6,835 -- 83,000 13,280
Vice President & 1998 185,309 54,870 5,685 -- 6,000 13,225
Chief Financial Officer 1997 135,659 70,495 -- -- 7,500 17,938(9)
</TABLE>
- -------------------------
(1) The decreases in salary in fiscal 1999 are the result of having 26 pay
periods in fiscal 1999 versus 27 pay periods in fiscal 1998.
(2) Reflects bonus earned during the listed fiscal year which was paid during
the next fiscal year.
(3) The amounts shown represent costs to the Company for expenses associated
with the use of a company car.
(4) In August 1997, the Company granted restricted stock awards of 50,000 shares
to Mrs. Hudson and 25,000 shares each to Messrs. Fisk, Schroeder and Hawke.
These awards are valued at $29.7500/share, the closing price for the
Company's Class A Common Stock on the date of issue, in this table. As of
July 31, 1999 and 1998, Mrs. Hudson held 50,000 shares and Messrs. Fisk,
Schroeder and Hawke held 25,000 shares each of restricted stock. Using the
closing price for the Company's Class A Common Stock on July 31, 1999, of
$35.0000/share, Mrs. Hudson's holdings were valued at $1,750,000 and the
holdings of Messrs. Fisk, Schroeder and Hawke were valued at $875,000 each.
The restricted stock awards granted to Mrs. Hudson and Mr. Fisk vest on
August 1, 2002. The restricted stock awards granted to 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.
(5) 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 Profit Sharing and Employee Thrift 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.
All other compensation for fiscal 1998 for Mrs. Hudson, and Messrs. Fisk,
Schroeder, Hawke and Jaehnert, respectively, includes: (i) matching
contributions to the Company's Profit Sharing and Employee Thrift Plan for
each named executive officer of $12,800 each and (ii) the cost of group term
life insurance for each named executive officer of $4,669, $2,380, $812,
$727 and $425, respectively.
III-3
<PAGE> 16
All other compensation for fiscal 1997 for Mrs. Hudson, and Messrs. Fisk,
Schroeder, Hawke and Jaehnert, respectively, includes: (i) matching
contributions to the Company's Profit Sharing and Employee Thrift Plan for
each named executive officer of $12,000, $12,000, $12,000, $12,000 and
$11,946, respectively and (ii) the cost of group term life insurance for
each named executive officer of $2,674, $2,199, $728, $647 and $324,
respectively.
(6) Fiscal 1999 includes $31,355 accrued, but not paid, for the current year's
portion of a Supplemental Executive Retirement Plan (SERP). Fiscal 1998
includes club dues and estate planning fees of $61,963 and $27,634 accrued,
but not paid, for the current year's portion of the SERP. Fiscal 1997
includes $26,070 accrued, but not paid, for that year's portion of the SERP.
(7) Fiscal 1999 includes $217,000 accrued, but not paid, for the current year's
portion of a Supplemental Executive Retirement Plan (SERP). Fiscal 1998
includes $200,000 accrued, but not paid, for the current year's portion of
the SERP.
(8) Fiscal 1997 includes $132,202 expatriation expenses related to Mr. Hawke's
Belgium assignment.
(9) Fiscal 1997 includes relocation expenses of $5,669.
STOCK OPTIONS
The following tables summarize option grants and exercises during fiscal
1999 to or by the executive officers named in the Summary Compensation Table
above, and the value of unexercised options held by such persons at July 31,
1999. Stock Appreciation Rights are not available under any of the Company's
plans.
OPTION GRANTS IN FISCAL 1999
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS
GRANTED TO
OPTIONS EMPLOYEES EXERCISE
GRANTED (#) IN FISCAL PRICE ($/SHARE)
NAME (1) 1999 (2) EXPIRATION DATE
---- ----------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
K.M. Hudson.............................. 34,000 9.9% 19.1875 October 9, 2008
R.L. Fisk................................ 12,500 3.6% 19.1875 October 9, 2008
D.W. Schroeder........................... 12,500 3.6% 19.1875 October 9, 2008
D.R. Hawke............................... 12,500 3.6% 19.1875 October 9, 2008
F.M. Jaehnert............................ 75,000 21.9% 20.3738 August 3, 2008
8,000 2.3% 19.1875 October 9, 2008
</TABLE>
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED RATES
OF STOCK PRICE APPRECIATION(3)
-----------------------------------------------
0% 5% 10%
NAME $19.1875($) $31.2500($)(6) $49.7500($)(6)
---- ----------- -------------- --------------
<S> <C> <C> <C>
K.M. Hudson........................................... 0 410,125 1,039,125
R.L. Fisk............................................. 0 150,781 382,031
D.W. Schroeder........................................ 0 150,781 382,031
D.R. Hawke............................................ 0 150,781 382,031
F.M. Jaehnert......................................... 0 1,057,531 2,677,406
All Stockholders' Gains (increase in market value of Brady
corporation Common Stock at assumed rates of stock price
appreciation)(4)(6)................................................ $250,072,066 $633,602,282
All Optionees' Gains (as a percent of all shareholders'
gains)(5)(6)....................................................... 1.68% 1.68%
</TABLE>
- -------------------------
(1) The options granted October 9, 1998, become exercisable as follows: 33 1/3%
of the shares on October 9, 1999; 33 1/3% of the shares on October 9, 2000;
and 33 1/3% of the shares on October 9, 2001. These options have a term of
ten years.
III-4
<PAGE> 17
The options granted to Mr. Jaehnert on August 3, 1998, become
exercisable August 3, 2003, and 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 NASDAQ 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 $20.3738 exercise price applicable to the options
granted on August 3, 1998 and the $19.1875 exercise price applicable to
the options granted on October 9, 1998 based on the 20,731,363 shares
of Class A Common Stock outstanding on October 9, 1998.
(5) Represents potential realizable value for all options granted in fiscal
1999 compared to the increase in market value of Brady Corporation
Class A Common Stock at assumed rates of stock price appreciation.
(6) The Company disavows the ability of any valuation model to predict or
estimate the Company's future stock price or to place a reasonably
accurate present value on these options because any model depends on
assumptions about the stock's future price movement that the Company is
unable to predict.
AGGREGATED OPTION EXERCISES IN FISCAL 1999
AND VALUE OF OPTIONS AT END OF FISCAL 1999
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS AT
SHARES JULY 31, 1999
ACQUIRED ON VALUE ----------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#)
---- ----------- -------- ----------- -------------
<S> <C> <C> <C> <C>
K.M. Hudson....................................... 0 0 169,000 260,000
R.L. Fisk......................................... 10,500 157,156 60,334 121,166
D.W. Schroeder.................................... 0 0 43,834 121,166
D.R. Hawke........................................ 8,000 158,000 40,834 121,166
F.M. Jaehnert..................................... 0 0 10,000 89,500
</TABLE>
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
AT JULY 31, 1999(1)
----------------------------
EXERCISABLE UNEXERCISABLE
NAME ($) ($)
---- ----------- -------------
<S> <C> <C>
K.M. Hudson................................................. 2,756,750 2,942,500
R.L. Fisk................................................... 891,359 1,370,109
D.W. Schroeder.............................................. 713,952 1,370,109
D.R. Hawke.................................................. 655,078 1,370,109
F.M. Jaehnert............................................... 97,687 1,270,684
</TABLE>
- -------------------------
(1) Represents the closing price for the Company's Class A Common Stock on July
31, 1999, of $35.0000 less the exercise price for all outstanding
exercisable and unexercisable options for which the exercise price is less
than such closing price.
III-5
<PAGE> 18
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,
1994, in each of Brady Corporation Class A Common Stock, the Standard & Poor's
(S&P) 500 Index and the Russell 2000 Index. Prior year graphs compared Brady's
performance to the S&P 500 and the National Association of Securities Dealers'
Automated Quotation System (NASDAQ) United States Index. In May 1999, Brady
listed on the New York Stock Exchange making the comparison to a NASDAQ index
obsolete.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL
RETURN BRADY CORPORATION VERSUS PUBLISHED INDICES
(S&P 500 AND RUSSELL 2000)
FISCAL YEAR ENDING JULY 31,
<TABLE>
<CAPTION>
BRADY S&P 500 RUSSELL 2000 NASDAQ-US
----- ------- ------------ ---------
<S> <C> <C> <C> <C>
F94 100.00 100.00 100.00 100.00
F95 152.00 123.00 123.00 140.00
F96 142.00 140.00 129.00 153.00
F97 195.00 208.00 170.00 226.00
F98 141.00 245.00 172.00 266.00
F99 236.00 290.00 182.00 380.00
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brady $100 $152 $142 $195 $141 $236
- --------------------------------------------------------------------------------------------------------
S&P 500 $100 $123 $140 $208 $245 $290
- --------------------------------------------------------------------------------------------------------
RUSSELL 2000 $100 $123 $129 $170 $172 $182
- --------------------------------------------------------------------------------------------------------
NASDAQ -- US $100 $140 $153 $226 $266 $380
- --------------------------------------------------------------------------------------------------------
</TABLE>
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 $15,000 in addition to $1,250 plus expenses for each meeting of the Board or
any committee thereof which they attend.
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
In May 1997, the Board approved 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 two times the
annual salary for Mrs. Hudson and Messrs. Fisk, Schroeder and Hawke, and payment
of one time his annual salary for Mr. Jaehnert in the event of termination or
resignation upon a change of control. The agreements also call for reimbursement
of any excise taxes imposed and up to $25,000 of attorney fees to enforce the
executive's rights under the agreement. Payments under the agreements will be
III-6
<PAGE> 19
spread over two years for Mrs. Hudson and Messrs. Fisk, Schroeder and Hawke, and
over one year for Mr. Jaehnert. In August 1998, the Board amended the Change in
Control Agreement for Mr. Jaehnert to call for payment of an amount equal to two
times his annual salary in the event of termination or resignation upon a change
in control with payments spread over two years.
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 1999, the Board's Compensation Committee was composed of
Messrs. Bemis 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, although Mr. Lettenberger has been and remains
Secretary of the Company. Mr. Lettenberger is a partner of Quarles & Brady,
which is general counsel to the Company. There are no other 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.
PROFIT SHARING AND EMPLOYEE THRIFT 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 and Employee Thrift Plan (the
"BradyGold Plan"). Under this plan the Company agrees to contribute certain
amounts to the BradyGold Plan to the extent of current earnings and profits, or,
under certain circumstances, accumulated earnings of the Company. Under the
BradyGold Plan, the Company first contributes 4% of the eligible
III-7
<PAGE> 20
earnings of each person covered by the BradyGold 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 BradyGold Plan by the Company and matched by
an additional, equal contribution by the Company. Participants may also elect to
have up to another 4% of their eligible earnings contributed to the BradyGold
Plan (without an additional matching contribution by the Company). The assets of
the BradyGold Plan credited to each participant are invested by the BradyGold
Plan trustee as directed in several investment funds as permitted by the
BradyGold 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 BradyGold Plan and paid to the participant if required for
certain emergencies. Under certain specified circumstances, the BradyGold 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 five years
of service.
DEFERRED COMPENSATION ARRANGEMENTS
During fiscal 1998, the Company adopted a new deferred compensation plan
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 and to invest the deferred amounts in shares of 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,
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 and to invest
the deferred amounts 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.
III-8
<PAGE> 21
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 and the
annual cash incentive compensation plan 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
1999, 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
<PAGE> 22
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 $441,577 in base salary in fiscal 1999, a decrease of
2% from the prior year's base salary (the result of 26 pay periods in fiscal
1999 versus 27 in fiscal 1998). She was paid a bonus attributable to fiscal 1999
of $529,892, a increase of 179%, or $339,747, 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 20%, or $6,415,000, in profits (after removing the
effects of the nonrecurring items) and 3.5% in sales over similar
amounts from the prior year; an increase of 71%, from $20.50 to
$35.00, in the Company's stock price
(ii) the successful acquisitions of VEB Sistemas de Etiquetas Ltda.,
Barcodes West Inc., Visi Sign Pty. Ltd., Holman Groupe S.A. and the
graphics division of SOFT S.A. this year and the integration of last
year's acquisitions Techniques Avancees and GrafTek
(iii) continued improvement in asset utilization (a 2% reduction in
inventory despite the 4% increase in sales)
(iv) continued efforts to focus the Company's resources on sustainable
value-enhancing long-term growth
(v) continued improvement in intercompany teamwork.
During fiscal 1999, Mrs. Hudson was awarded options to purchase 34,000
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
III-10
<PAGE> 23
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 30, 1999.
<TABLE>
<CAPTION>
AMOUNT OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OWNERSHIP
-------------- ------------------- ---------- ----------
<S> <C> <C> <C>
Class B Common Stock...................... William H. Brady, Jr.(1) 1,574,866 89%
Marital Trust
c/o Quarles & Brady
Attn: Peter J. Lettenberger
411 East Wisconsin Avenue
Milwaukee, WI 53202
William H. Brady, Jr.(1)
194,448 11%
Non-QTIP Marital Trust
c/o Quarles & Brady
Attn: Peter J. Lettenberger
411 East Wisconsin Avenue
Milwaukee, WI 53202
</TABLE>
- -------------------------
(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. The vested beneficiary was Irene B. Brady, who died
March 26, 1998. The contingent remainder beneficiaries are William H. Brady,
III and Elizabeth B. Lurie.
III-11
<PAGE> 24
(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 30, 1999.
Except as otherwise indicated, all shares are owned directly.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL AMOUNT OF
OWNER & NATURE OF BENEFICIAL PERCENT OF
TITLE OF CLASS BENEFICIAL OWNERSHIP OWNERSHIP OWNERSHIP
-------------- -------------------- ---------- ----------
<S> <C> <C> <C>
Class A Common Stock................. Peter J. Lettenberger(1)(2)(3) 2,527,779 12.1%
Richard A. Bemis(1)(4) 1,782,872 8.5%
Gary E. Nei(1)(5) 1,778,372 8.5%
Roger D. Peirce(1)(6) 1,776,872 8.5%
Robert C. Buchanan(1)(7) 1,775,972 8.5%
Katherine M. Hudson(8) 255,684 1.2%
Frank W. Harris 4,867 * %
Irwin Helford 833 * %
All Officers and Directors as a Group
(15 persons)(9) 3,186,789 15.3%
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) 2,751 69.1%
Richard A. Bemis(1) 1,920 48.2%
Gary E. Nei(1) 1,920 48.2%
Roger D. Peirce(1) 1,920 48.2%
Robert C. Buchanan(1) 1,920 48.2%
All Officers and Directors as a Group 2,751 69.1%
10% Cumulative 1979 Series Preferred
Stock.............................. Peter J. Lettenberger(2) 5,529 25.2%
All Officers and Directors as a Group 5,529 25.2%
6% Cumulative 1972 Series Preferred
Stock.............................. Peter J. Lettenberger(2) 2,600 100%
All Officers and Directors as a
Group(2) 2,600 100%
</TABLE>
- -------------------------
* Indicates less than one-tenth of one percent
(1) The amount shown includes shares held directly by the William H. Brady, Jr.
Marital Trust (the "Marital Trust") and the William H. Brady Jr. Non-QTIP
Marital Trust (the "Non-Q-TIP Trust") (collectively, the "Trusts"). The
Marital Trust owns 1,771,538 shares of Class A Common Stock, 1,574,866
shares of Class B Common Stock, and 1,709 shares of 6% Cumulative Preferred
Stock. The Non-QTIP Trust owns 194,448 shares of Class B Common Stock and
211 shares of 6% Cumulative Preferred Stock. The Trustees of both 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 5,529 shares of the 1979 Series 10% Cumulative
Preferred Stock, 763 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 Revocable Trust of 1986 (the "1986
Trust"), which owns 748,718 shares of Class A Common Stock and 68 shares of
6% Cumulative Preferred Stock. He disclaims beneficial ownership of shares
held by the Foundation and the 1986 Trust.
III-12
<PAGE> 25
(3) In addition to shares beneficially owned as a trustee of the Trusts and the
1986 Trust and as a director of the Foundation, Mr. Lettenberger owns
directly 5,189 shares of Class A Common Stock and holds vested options to
acquire an additional 2,334 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 2,334 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 2,334 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
2,334 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 2,334 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 198,333 shares of Class A Common
Stock.
(9) The amount shown for all officers and directors as a group (15 persons)
includes options to acquire a total of 467,255 shares of Class A Common
Stock which are currently exercisable or will be exercisable within 60 days
of September 30, 1999. It does not include other options for Class A Common
Stock which have been granted at later dates.
(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
None.
III-13
<PAGE> 26
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 consolidated financial statements, together with the Independent
Auditors' Report thereon of Deloitte & Touche LLP, presented on Pages 35
through 50 of the Company's 1999 Annual Report is incorporated herein by
reference.
2) Consolidated Financial Statement Schedule --
Schedule II Valuation and Qualifying Accounts
Independent Auditors' Report on Financial Statement Schedule
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.
None
IV-1
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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 May 13, 1997 between Brady
Corporation and Katherine M. Hudson(7)
10.15 Change of Control Agreement dated May 13, 1997 between Brady
Corporation and David W. Schroeder(7)
10.16 Change of Control Agreement dated May 13, 1997 between Brady
Corporation and Richard L. Fisk(7)
10.17 Change of Control Agreement dated May 13, 1997 between Brady
Corporation and David R. Hawke(7)
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 Amendment to Change of Control Agreement dated August 1,
1998 between Brady Corporation and Frank M. Jaehnert
13.1 Annual Report to Shareholders for year ended July 31, 1999
18.1 Letter regarding change in accounting method(3)
21.1 Subsidiaries of Brady Corporation
23.1 Consent of Deloitte & Touche LLP, Independent Auditor
27.1 Financial Data Schedule
</TABLE>
- -------------------------
(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
(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
IV-2
<PAGE> 28
BRADY CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
DESCRIPTION
Valuation accounts deducted in balance sheet from assets to
which they apply --
Accounts receivable -- allowance for losses:
Balances at beginning of period............................. $2,011 $ 2,241 $1,992
Additions -- Charged to expense............................. 966 970 663
Due to acquired businesses............................. 97 64 87
Deductions -- Bad debts written off, net of recoveries...... (735) (1,264) (501)
------ ------- ------
Balances at end of period................................... $2,339 $ 2,011 $2,241
====== ======= ======
</TABLE>
IV-3
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Brady Corporation:
We have audited the consolidated financial statements of Brady Corporation
and subsidiaries as of July 31, 1999 and 1998 and for each of the three years in
the period ended July 31, 1999, and have issued our report thereon dated
September 23, 1999; such consolidated financial statements and report are
included in your 1999 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the consolidated financial statement
schedule of Brady Corporation and subsidiaries, listed in Item 14. The
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
September 23, 1999
IV-4
<PAGE> 30
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-second day
of October, 1999.
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.
<TABLE>
<C> <S> <C>
/s/ K. M. HUDSON President and Director
- ----------------------------------------------------- (Principal Executive
K. M. Hudson Officer) October 22, 1999
/s/ P. J. LETTENBERGER Director
- -----------------------------------------------------
P. J. Lettenberger October 22, 1999
/s/ R. A. BEMIS Director
- -----------------------------------------------------
R. A. Bemis October 22, 1999
Director
- -----------------------------------------------------
F. W. Harris
/s/ R. C. BUCHANAN Director
- -----------------------------------------------------
R. C. Buchanan October 22, 1999
/s/ R. D. PEIRCE Director
- -----------------------------------------------------
R. D. Peirce October 22, 1999
/s/ G. E. NEI Director
- -----------------------------------------------------
G. E. Nei October 22, 1999
/s/ I. HELFORD Director
- -----------------------------------------------------
I. Helford October 22, 1999
</TABLE>
IV-5
<PAGE> 1
Brady Corporation 1999 Annual Report
[2 BAR CHARTS]
<TABLE>
<CAPTION>
Net Sales
In millions
<S> <C>
94 256
95 314
96 360
97 426
98 455
99 471
</TABLE>
Sales increased at a compound annual growth rate of 13 percent.
<TABLE>
<CAPTION>
Net Income
In millions
<S> <C>
94 19
95 28
96 28
97 32
98 33*
99 39*
</TABLE>
Net income increased at a compound annual growth rate of 16 percent *excluding
nonrecurring items
15-Year Cumulative Return
at July 31 with dividends reinvested
in dollars
[LINE GRAPH]
Since going public in 1984, Brady has averaged 18-percent per year growth in
total return to shareholders, often outperforming market indices including the
S&P 500.
1999 Highlights
Fiscal year ended July 31, 1999
Net income increased 41 percent over reported 1998 net income and 20 percent
over 1998 net income, excluding nonrecurring items.
Net sales increased 4 percent over 1998 sales and showed improved momentum in
the fourth quarter.
Brady stock ended the year at $35, representing a market capitalization of $791
million.
Total shareholder return over the last five years increased at a compound annual
growth rate of 19 percent.
Brady ended the year with cash reserves of nearly $76 million and virtually no
debt, even after making several acquisitions.
<PAGE> 2
Financial Highlights
<TABLE>
<CAPTION>
Percent
July 31, July 31, Increase
(Dollars in Thousands, Except Per Share Amounts) 1999 1998 (Decrease)
<S> <C> <C> <C>
Net sales $470,862 $455,150 3.5
Income before income taxes $64,782 $46,165 40.3
Pre-tax profit margin 13.8% 10.1%
Net income $39,584 $28,036 41.2
After-tax profit margin 8.4% 6.2%
Return on average stockholders' investment 16.0% 12.7%
Net income per Common Share (diluted)
Class A Nonvoting $1.73 $1.23
Class B Voting $1.70 $1.20
Working capital $129,884 $125,386 3.6
Stockholders' investment $260,564 $233,373 11.7
Research and development $17,724 $20,287 (12.6)
Capital expenditures $9,889 $17,189 (42.5)
Depreciation and amortization $15,149 $13,288 14.0
Key Data
Dividend yield 1.8% 2.9%
Trailing P/E ratio 20.2 16.7
Current ratio 2.8 3.1
Book value/share $11.52 $10.37
Weighted average shares outstanding (diluted) 22,682,970 22,601,925
</TABLE>
President's Letter to Shareholders
[PHOTO]
Katherine M. Hudson
President and
Chief Executive Officer
Dear Fellow Shareholder:
"Brady achieved record sales and earnings in fiscal 1999. Net income grew at a
strong double-digit rate to $39.6 million or $1.73 per share."
Fiscal 1999 was a challenging but good year for our Company. Despite facing
economic weakness in Asia and industrial markets in the United States, and our
discontinuance of some product lines, Brady Corporation achieved record sales
and earnings in our fiscal year ended July 31, 1999.
Sales for fiscal 1999 were $470.9 million, up 3.5 percent from fiscal 1998 sales
of $455.2 million. Sales from U.S. operations rose 1.6 percent in the year,
while sales from international operations increased 5.9 percent.
<PAGE> 3
We were pleased to see improved growth momentum in the fourth quarter, with
sales up 5.6 percent over sales in the fourth quarter of 1998. Electronics as
well as telecommunications markets were stronger in the quarter, while
industrial market segments continued to be sluggish. We also benefited from
acquisitions we made in the year as well as double-digit sales growth in the
Asia-Pacific region.
We are especially pleased with the strong profitability we achieved in fiscal
1999. The cost controls we initiated early in the year, which included the
elimination of 200 positions at Brady, realigned our cost structure and
refocused us on the most value-adding activities. Brady people around the world
work to control costs and improve efficiency while providing the highest quality
and service to our customers. As a result, our operating margin exceeded 13
percent and we achieved net income of more than 8 percent of sales in 1999, up
solidly from traditional Brady margins.
Net income in fiscal 1999 was $39.6 million or $1.73 per diluted Class A Common
Share, an increase of 41.2 percent from the $28.0 million or $1.23 per share we
reported in fiscal 1998. Excluding the $4.8 million in one-time charges we took
in fiscal 1998 for our cost-control program, and a one-time credit of $0.6
million in fiscal 1999, net income rose 19.6 percent in fiscal 1999 over the
$32.8 million of fiscal 1998. A favorable product mix in 1999 included strong
sales of proprietary Brady printing systems, software and high-performance
materials.
Our 1999 financial results translate into double-digit compound annual growth
rates for sales and net income. For the 1994 to 1999 period, Brady sales have
compounded at 13.0 percent a year and net income compounded at 16.4 percent a
year.
[2 BAR CHARTS]
Operating Margin
<TABLE>
<CAPTION>
Operating income, excluding nonrecurring items, as % of sales
<S> <C>
94 11.5
95 12.9
96 11.4
97 12.2
98 11.7
99 13.4
</TABLE>
Net Margin
<TABLE>
<CAPTION>
Net income, excluding nonrecurring items, as % of sales
<S> <C>
94 7.2
95 8.6
96 7.5
97 7.7
98 7.2
99 8.3
</TABLE>
Fiscal 1999 marked another consecutive year of positive shareholder value
enhancement (SVE) or economic value added, where we have achieved a return
higher than our cost of capital of 12.5 percent. And, based on Brady's stock
price at year end (July 31, 1999), the cumulative total return to shareholders
<PAGE> 4
compounded at 19 percent a year for the 1994 to 1999 period, with dividends
reinvested.
With the high quality of Brady's earnings and strong cash flow, we have the
financial strength to continue to invest in areas driving long-term growth and
shareholder value enhancement. As of July 31, Brady had $75.5 million in cash on
the balance sheet and long-term debt of $1.4 million.
In addition to the strong financial performance this year, we made solid
progress in our growth strategies of new products, acquisitions, geographic
expansion, and increased market penetration.
New Products.
We continued to emphasize new products, investing $17.7 million or 3.8 percent
of sales in research and development. Brady engineers, chemists and material
scientists worked to develop new printing and data-collection systems, software,
and high-performance materials to meet the evolving needs of customers around
the world.
During the year we launched some exciting new products, including three
hand-held printers. The Identification Solutions & Specialty Tapes Group
introduced the TLS2200(tm) Thermal Labeling System, a hand-held,
thermal-transfer printer for making bar-code and human-readable labels for
telecommunications, electrical and electronics markets. The Graphics Group
introduced the HandiMark(tm) Portable Label Maker for do-it-yourself warning
labels, pipe markers and other facility-identification uses and the Merlin(r)II
Portable Labeling System for architectural, engineering and office use. Designed
for different applications, the three printers have a common platform designed
by shared research and development resources, saving the Company more than $2
million in development costs. In addition to having preprogrammed symbols, a
wide choice of language options, and the versatility to use a broad variety of
proprietary Brady materials, the systems incorporate Brady's "smart cell"
technology. Located on the inside core of Brady consumables for these printers,
a smart-cell computer chip tells the printer everything it needs to know about
the label material, and it automatically sets all printer parameters including
text size, margins and burn temperature for the highest quality in printing.
We expanded our printer portfolio with the Bradyprinter(tm) Model 600 X-Plus
Labeling System, a thermal-transfer printer offering the highest print
resolution available in the industry for increased legibility of even the
smallest type sizes. The system helps companies place more data onto smaller
surface areas in their labeling.
We also launched the PAM 6000, the newest addition to our series of printer
applicator machines for the electronics manufacturing industry. The system
provides companies increased speed and flexibility as it prints, applies and
scans two labels of different sizes and materials simultaneously. Brady's PAM
systems are used in applications such as printed circuit board manufacturing
lines.
Software development remains an area of growth for Brady. This year we
introduced new software packages including MarkWare(tm) Facility Identification
Software, a comprehensive package with ready-to-go label, sign and tag templates
that allow for fast customization of visual warning and identification signage.
MarkWare(tm) software is compatible with Brady thermal-transfer printers, as
well as ink-jet and laser-jet printers connected to a personal computer.
<PAGE> 5
We also launched several new Brady materials including Brady Clean ID(tm) Labels
manufactured in a Class-100 clean environment from a unique Brady material
providing low residue and particulate-free labels for the computer disk drive,
semiconductor and medical industries; heavy-duty tire identification labels
which retain bar-code readability even after exposure to the extreme heat and
vulcanization process used in tire manufacturing; Mondo Bondo(tm) high-adhesion
labels designed to adhere to a wide range of industrial surfaces from textured
metal to ultra-smooth plastics; a new line of solder-resistant labels for the
printed circuit board industry; new Duraguard(r) property identification labels
including bar codes, and/or sequential or non-sequential numbering; special
die-cut adhesive materials for new super-capacity computer disks used for
storing data and images from digital cameras and other devices; and new safety
labels and signs to comply with the American National Standards Institute (ANSI)
recommended standards.
Other new identification solutions introduced in 1999 included WavePoint(tm)
Read/Write Radio Frequency Identification tags and readers designed to meet a
variety of industrial applications in harsh and volatile environments.
Acquisitions.
We acquired several companies during the year, with annual revenues ranging from
$1.5 million to $10 million. We acquired Brazil's leading manufacturer of
industrial labels and supplier of identification systems, VEB Sistemas de
Etiquetas Ltda. in Sao Paulo, Brazil. We acquired label manufacturer and
software and service provider Barcodes West Inc. of Seattle, Washington, to
strengthen our position as a leading provider of identification solutions in the
automatic identification and data collection (AIDC) market. We acquired Visi
Sign Pty. Ltd. of Victoria, Australia, a maker of signs and other identification
products; Holman Groupe S.A., of Rungis, France, a leading European provider of
AIDC products and services; and the graphics division of SOFT S.A. in Lyon,
France, which develops and distributes printing systems throughout Europe.
Geographic expansion.
We opened an operation in Mexico City, Mexico, as well as a Seton-U.S.
California distribution center to improve service to the western United States.
With our acquisition of VEB in August 1998, we added a manufacturing base in
Latin America - one that we are now in the process of expanding.
Doing more where we are.
Brady teams around the world worked hard in 1999 to improve operational
capabilities in support of long-term growth and shareholder-value-enhancement
objectives. We expanded our international manufacturing capabilities with the
installation of new equipment in Belgium and other countries for increased
capacity and shorter lead times.
Around the world, we also continue to do more via the Internet. A new corporate
Web site at www.bradycorp.com was launched using categorically arranged links to
provide easy access to information about Brady's products, people, news and
investor information. Seton-U.K. and Seton-U.S. unveiled dynamic new Web sites
that offers customers full on-line ordering of health, safety and facility
identification products.
Another highlight of 1999 was the listing of Brady stock on the New York Stock
Exchange on May 18, 1999. Brady stock had been trading on the Nasdaq Stock
Market since our initial public offering in 1984. We moved to the NYSE to
<PAGE> 6
increase liquidity and reduce trading volatility of Brady stock, and to help
ensure that investors buying or selling Brady stock receive the best price and
execution possible. Being listed on the world's premier exchange also improves
Brady's visibility both on Wall Street and in international markets. We're
pleased to report that we've seen benefits on all these fronts.
Going forward.
Our major initiatives as we look to a new century are productivity, growth and
innovation.
In the area of productivity, we are working on major process improvements to
enhance our customer service and our competitive position. These projects will
reduce cycle time, lower inventory and enhance our ability to provide friendly
and flawless service to customers around the world. Some of the tools we will be
implementing include Six Sigma process-improvement programs and the Visually
Instructive Plant(tm) (VIP). VIP is also a service that Brady's Signmark(r)
Division is offering our customers. VIP helps organize a facility for improved
performance with the extensive use of signs and labeling. With VIP, employees
can see at a glance where things are, how machines should be operated and when
hazardous conditions may be present.
We are continuing our strategies for growth with increased emphasis on being
market driven. Our focus will be to increase our own business by improving the
value that we add to our customers' businesses. That means complete solutions,
customized for customers' unique requirements and delivered rapidly anywhere in
the world.
Our quest for appropriate, value-adding acquisitions will continue, as will our
geographic expansion in areas including Asia and Latin America. In fact, we are
adding a manufacturing operation in Wuxi, China, in 2000 to grow the business
and better serve customers in the region.
We'll continue to invest approximately 4 percent of revenues in research and
development. In addition to proprietary new materials, we expect to add to our
family of printing systems and to develop exciting new software and services
that will keep Brady as the partner of choice for our customers for increasing
safety, security, productivity and performance.
Fiscal 1999 was a very challenging year. We began the year in the throes of the
Asian economic crisis and the slowdown of industrial sectors. However, we ended
the year with increasing momentum in sales growth and strong performance in
profitability. These results are a tribute to Brady people around the world who
pulled together to continue improving service and quality while controlling
costs with a high degree of discipline and energy. It was a year of hard work in
challenging times by a very dedicated Brady team.
The same team will be diligent in fiscal 2000 and beyond in working for revenue
growth, cost control and resource utilization to deliver value to customers and
to you our shareholder.
Thank you for your support.
Katherine M. Hudson
President & Chief Executive Officer
<PAGE> 7
1999 Highlights
August 1998
Brady acquires industrial label manufacturer and supplier of identification
systems VEB Sistemas de Etiquetas Ltda., Sao Paulo, Brazil.
September 1998
Brady introduces the "next generation" in thermal-transfer printers - the
TLS2200(tm)and the HandiMark(tm) printing systems.
September 1998
Brady establishes operations in Mexico City, Mexico.
December 1998
Brady sells its nameplate manufacturing operation in Canada.
January 1999
Seton opens a distribution center in California to provide rapid service to
companies in the western United States.
January 1999
Brady's business in Canada joins other Brady operations in being certified to
the ISO 9000 series.
March 1999
Brady acquires label manufacturer and software and service provider Barcodes
West Inc., Seattle, Washington.
May 1999 Brady expands its presence in Australia with the acquisition of sign
and identification products manufacturer Visi Sign Pty. Ltd., Victoria,
Australia.
May 1999
Brady moves trading of its stock to the New York Stock Exchange under the symbol
BRC.
July 1999
Brady acquires the graphics division of SOFT S.A., Lyon, France, a
printing-system developer and distributor with sales offices in France, Germany
and Spain.
July 1999
Brady acquires Holman Groupe S.A., Rungis, France, a leading European provider
of automatic identification and data collection products and services.
July 1999
Brady stock ends the fiscal year at a price of $35 per share.
Business Profiles
Brady has operations in 20 countries and reaches more than 70 countries through
distribution and direct-marketing efforts. The Company's businesses are
organized in three global groups.
[3 PIE CHARTS]
<PAGE> 8
1999 Sales by Region
United States 55%
Europe 32%
Asia Pacific 7%
Canada & Latin America 6%
1999 Sales by Business Segments
Identification Solutions & Specialty Tapes 40%
Direct Marketing 34%
Graphics 26%
Markets Brady Serves
Manufacturing
Electrical
Chemical, Pharmaceutical,Pulp & Paper
Transportation Equipment
Other Manufacturing
Telecommunication
Electronic & Computer
Construction
Healthcare & Other Services
Retail & Wholesale Trade
Government & Education
Other
Brady's identification and materials solutions are used in a variety of markets.
Identification Solutions & Specialty Tapes
The world's leading manufacturers use Brady identification solutions to increase
efficiency, productivity and quality.
Operations and Products:
Identification Solutions: products for wire and cable marking; custom preprinted
and blank labels; portable printing systems, software and accessories for
on-site identification solutions; and label-printing and application equipment.
Software Solutions: automatic identification and data-collection systems;
radio-frequency tags and scanners; and custom-designed information- and
asset-management software and services.
Specialty Tapes: custom die-cut or slit materials for use in a wide range of
devices such as computer disk drives, pagers, cellular phones, radios and
audio/video cassettes.
Coated Products: high-performance materials using vinyl, polyester, aluminum,
copper, tissue and cloth substrates coated with adhesives and/or topcoats.
Key Markets:
electrical, electronic, telecommunication, computer, warehousing, automotive,
aerospace, and other manufacturing industries.
<PAGE> 9
1999 Highlights:
- - Introduced the TLS2200(tm) Thermal Labeling System, heralded as the "next
generation" in portable label-printing technology; new high-performance label
solutions for clean electronic assembly environments; tire-identification
labels; high-adhesion labels for rough surface applications; award-winning
automatic identification and data-collection software; and the PAM 6000
dual-head printer applicator machine.
- - Engineered a new process for making precision die-cut adhesives for the
cellular phone industry.
- - Acquired VEB Sistemas de Etiquetas Ltda. in Sao Paulo, Brazil; Barcodes West
Inc., Seattle, Washington; and Holman Groupe S.A., Rungis, France.
- - Expanded manufacturing capabilities in Europe and sales presence in
Asia/Pacific markets and expanded Internet presence with European Web sites.
- - Exited non-core businesses.
2000 Strategic Initiatives:
Expand global manufacturing and sales support infrastructure; develop innovative
new materials, printing systems and integrated automatic identification and
data-collection systems; use e-business technology to add even more value to
distributors and customers.
Graphics
Brady products and services provide visual solutions to make the workplace safer
and more productive.
Operations and Products:
Signmark(r): a broad range of visually instructive products including signs,
tags, labels, tapes, safety devices, software, and sign- and label-printing
systems; as well as consulting and other services to help companies comply with
regulations and increase productivity.
Varitronic Systems: labeling and lettering systems; poster printers and
laminating equipment to aid in training, education and communication in the
classroom and business environments.
Key Markets:
chemical, pulp and paper, automotive and other manufacturing industries,
warehousing, construction, training, government, education and legal.
1999 Highlights:
- - Introduced HandiMark(tm) Portable Label Maker and Merlin(r)II Portable
Labeling System; MarkWare(tm) Facility Identification Software; and redesigned
safety labels and signs for new ANSI standards.
- - Launched Visually Instructive Plant(tm) program to help organize facilities
for improved productivity.
- - Acquired Visi Sign Pty. Ltd. of Victoria, Australia, and the graphics division
of SOFT S.A., Lyon, France.
- - Received awards including the Customer Focused Quality Award (CFQ1) from W.W.
Grainger Inc. for the fifth consecutive year.
2000 Strategic Initiatives:
<PAGE> 10
Develop and introduce innovative solutions to meet customers' needs for
productivity as well as safety and security; fully exploit all channels in
Europe; expand marketing presence in Asia; capitalize on trends in education in
the United States; create closer relationships with customers and distributors
through the power of e-business.
Direct Marketing
Offering more than 20,000 products in 15 countries and through the Internet,
Brady's Direct Marketing Group is the world's leading provider of safety and
facility identification products via direct mail catalogs, telemarketing and
interactive Internet sites.
Operations and Products:
Seton, Signals, Raydek and other brands: signs, labels, nameplates, tags,
lockout devices, traffic-control products, tapes, pipe and valve markers,
letters and numbers, label-printing systems, safety training and awareness
products, first-aid products, and general safety products.
Key Markets:
manufacturing, construction, property management, healthcare, education,
wholesale trade, finance, insurance, real estate, general maintenance and
safety.
1999 Highlights:
- - Introduced new Duraguard(r) Property Identification Tags, manufactured using
proprietary equipment and materials to offer custom bar code, sequential or
non-sequential numbering and lettering.
- - Established a distribution and manufacturing center in California to serve the
western United States.
- - Acquired the name brand Raydek Safety Products in the United Kingdom.
- - Revamped Seton-U.S. and Seton-U.K. Web sites offering full on-line ordering of
more than 46,000 products.
- - Expanded sign-manufacturing operations in the United Kingdom to provide
24-hour turnaround of custom signs.
2000 Strategic Initiatives:
Expand geographically, particularly in Asia, by acquiring or establishing
additional brands and manufacturing sites; continue emphasis on vertical
integration to improve delivery times, reduce freight and duty expenses, improve
quality and offset currency fluctuations; introduce proprietary, highly
differentiated products globally; build on Internet presence and international
infrastructure to provide rapid delivery of short-run customized products.
A Discussion with Hatherine Hudson
Q&A
Brady is Moving Forward
<PAGE> 11
Q: Describe Brady's customer base and channels to market.
Our customer base includes more than 300,000 different companies - Airbus
Industrie, Boeing, Ericsson, General Motors, Johnson & Johnson, Lucent,
Motorola, Rockwell Automation, Seagate and Siemens, to name a few.
We have multiple channels to market. More than 4,000 distributors - such as W.W.
Grainger - sell a wide range of Brady products. Seton, our direct-marketing arm,
sells safety and facility identification products to end users via catalogs,
telemarketing and the Internet (www.seton.com). We also have a field sales force
serving large multinational companies.
Q: What are the Company's competitive advantages?
Our significant expertise in chemistry, materials science, printing systems and
software has translated into thousands of high-performance products, including
printed circuit board labels and signs in petrochemical plants, where Brady
materials withstand chemicals, temperatures above 1,000 degrees Fahrenheit, wave
solder baths, vulcanization processes and other harsh conditions.
And with research and development, manufacturing, warehousing, and sales and
service operations around the world, we are uniquely positioned to serve the
needs of multinational companies with our more than 30,000 stock products or
custom solutions delivered fast nearly anywhere in the world.
Q: What is Brady's market position?
Brady is a world leader in safety and facility identification, wire
identification, die-cut materials for telecommunication and computer
applications, and software for generating bar-code labels, among others. We see
significant opportunity for further market penetration and growth for Brady, as
markets where we operate are quite fragmented. There is also strong long-term
potential for us internationally, especially as developing nations begin to
focus more on safety and productivity.
Q: What is your expectation for international growth?
Currently we have operations in 20 countries and about 45 percent of Brady's
sales are from international operations. Our international business should grow
at a faster rate than our U.S. business as we continue to increase our market
penetration in countries where we currently operate and also start up in other
countries with greenfield operations, acquisitions or alliances.
Q: What are Brady's goals for the future?
We are focused on value creation for the long term and therefore typically look
at things on a rolling five-year basis rather than having a short-term,
year-to-year orientation. Our goals are to grow sales at a compound annual
growth rate of 15 percent, grow net income at a faster rate than sales, and
achieve positive shareholder value enhancement (SVE).
Q: What is SVE?
Shareholder value enhancement is Brady's version of economic value added or EVA.
It is a financial measure defined as net operating profit after tax minus (net
assets times the cost of capital). SVE helps us measure whether we are providing
a sufficient return on our assets - a return that exceeds what investors require
<PAGE> 12
for a company with similar investment characteristics. We've been using this
measure since 1993 and have consistently achieved a positive return, even at our
high cost of capital of 12.5 percent. Throughout the world, Brady managers and
employees know that revenue growth, cost control and resource utilization drive
SVE, and they have bonus compensation tied to SVE performance.
Q: How have you done in achieving your goals in the last five years?
We have done quite well. We have been successful in creating value for
shareholders, with positive SVE every year. And we achieved a compound annual
growth rate in net income of 16 percent.
We fell short on our sales-growth goal of 15 percent, achieving a compound
annual growth rate of 13 percent in sales for the last five years. While 13
percent is a solid annual growth rate, the miss on the top line was due
primarily to the effects of the Asian economic crisis and a slowdown in U.S.
industrial markets in 1998 and 1999. We believe that through acquisitions, new
product development, geographic expansion and market penetration, Brady has the
potential to achieve 15 percent or higher compound annual sales growth over the
long term.
Q: What trends will support Brady's drive for double-digit growth?
There are several trends that favor Brady. One is that companies are
increasingly striving to improve their quality and efficiency. That bodes well
for Brady as a supplier of products and services that help companies increase
productivity, performance, safety and security.
As multinational companies seek to trim their number of suppliers, Brady is
uniquely positioned to meet companies' identification needs on a global scale.
We also expect that governments in developing countries will increasingly
recognize the value of safety devices, warning and instructional signs and
labels in helping to improve employee safety and productivity. Brady will be
there with the right products, services and solutions.
Through a steady stream of innovative, value-adding products and services, we've
typically been able to achieve growth rates above and beyond what the normal
industry growth rates are in our markets.
And, finally, the Internet is an exciting avenue for growth. It makes Brady
products accessible to many more markets and geographies.
Q: What are you doing in the area of new product development?
We strive to have 25 percent of our sales come from products and services
introduced within the last three years. To support this, we invest about 4
percent of our sales in research and development every year. Also we have major
initiatives underway to speed our new-product-development process through
teamwork across divisions and geographies, use of common platforms in our
systems development, and robust project management.
Q: What types of companies do you seek to acquire?
Acquisition candidates include companies that would increase our penetration in
current markets and geographies or enable us to take our current product lines
into markets that we haven't yet entered. We also look for companies that will
bring us new technologies or capabilities, as was the case when we acquired
<PAGE> 13
software companies in 1998 and 1999. We look to acquire strong companies, in our
current or target markets, that range in size from $10 million to $100 million
in annual revenues.
Q: What are you doing in the area of managing and enhancing intellectual assets
at your Company?
We ensure we bring in, develop and retain talent to enable us to add value and
succeed in a fast-changing marketplace. Brady is most successful when leveraging
the creativity and diversity of empowered people across functional, divisional
and geographic boundaries. That's why we have built a strong culture at Brady
based on teamwork, customer focus, growth, value and honesty. Teams and tools
such as collaborative groupware and workflow software enable us to manage and
continually build upon the knowledge, best practices and ideas we currently
have. And on-site training programs and seminars as well as tuition
reimbursement for advanced education help employees continually grow and advance
their skills.
As a Company that has a high level of innovation, we protect our intellectual
property by patenting some of our developments while holding others as trade
secrets.
Q: What do the Internet and electronic commerce mean for Brady?
The Internet opens up four major opportunities for Brady. The first is to
improve our connection and responsiveness to our current customers. Brady
distributors can now receive information and place orders directly over the
Internet. Seton customers can do the same. Basically, we are now "open for
business" 24 hours a day, seven days a week via the World Wide Web.
Second, electronic commerce will reduce our cost structure. As companies do more
business electronically, we can reduce our paper, printing and postage expense
by guiding people to fully browsable catalogs on our Web sites.
Third, we can establish communities of interest that deal directly with customer
problems and solutions. Safety engineers, facility maintenance managers, people
who track corporate assets and other groups will be able to find and share
meaningful information through Brady over the Internet.
Finally, the Internet offers the opportunity for us to efficiently create
targeted market probes to develop new business.
Q: Where do you see Brady five years from now?
Over the next few years, we want to see Brady really make its mark as an
industrial company that has embraced, driven and profited from the world's move
from the Industrial Age to the Information Age.
Our electronic-commerce efforts are much more than building pretty Web sites. We
are using intranets to connect ourselves to our business partners. We're
designing manufacturing processes that can be driven over the Internet. We're
providing goods, software and services via the World Wide Web. And we're
creating new businesses that will be totally Internet based.
The Brady of the future will be much more global and electronic.
This is an exciting time for Brady. We have strong financial resources and
dedicated, creative people who can really make it happen.
<PAGE> 14
Financial Review
Table of Contents
Selected Financial Data 28
Management's Discussion and Analysis of
Results of Operations and Financial Condition 30
Consolidated Financial Statements & Notes 35
Independent Auditors' Report 50
Shareholder Services 50
Directors, Corporate Officers & Executives 51
Locations Back Cover
[6 BAR CHARTS]
<TABLE>
<CAPTION>
Diluted Earnings Per Share and Dividends
in dollars
<S> <C>
94 1.07
95 1.53
96 1.66
97 1.95
98 2.04*
99 2.36*
</TABLE>
In September 1999, Brady increased its dividend payout for the 14th consecutive
year. It is now $0.68 per share.
*excluding nonrecurring items
<TABLE>
<CAPTION>
Earnings Before Interest, Taxes, Depreciation and Amortization
Excluding nonrecurring items, as % of sales
<S> <C>
94 15.5
95 17.0
96 15.4
97 15.6
98 14.2
99 17.0
</TABLE>
Earnings before interest, taxes, depreciation and amortization rose 24 percent
to $80 million in 1999.
<TABLE>
<CAPTION>
Stockholders' Investment
in millions
<S> <C>
94 145
95 171
96 189
97 207
98 233
99 261
</TABLE>
<PAGE> 15
Stockholders' investment continues to grow, reflecting Brady's increased
profits.
<TABLE>
<CAPTION>
Cash Flow From Operations
in millions
<S> <C>
94 33
95 22
96 35
97 40
98 47
99 61
</TABLE>
Cash provided by operating activities increased 30 percent in 1999, reflecting
growth and efficiency at Brady.
1999 Cash Generation and Deployment
in $ millions
Operations 61
Proceeds from Issuance of Common Stock 2
Acquisitions -31
Capital Expenditures -10
Dividends -14
With strong cash flow, Brady has the resources to accelerate growth.
<TABLE>
<CAPTION>
Sales From International Operations
in millions
<S> <C>
94 95
95 129
96 157
97 181
98 198
99 210
</TABLE>
With operations in 20 countries and counting, Brady has significant
opportunities for continued growth internationally.
Selected Financial Information
<TABLE>
<CAPTION>
Years Ended July 31, 1989 through 1999
(Dollars in Thousands, Except Per Share Amounts) 1999 1998 1997 1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Data
Net sales $470,862 $455,150 $426,081 $359,542 $314,362 $255,841
Operating expenses:
Cost of products sold 202,203 204,895 194,096 166,426 143,634 118,116
Research and development 17,724 20,287 16,300 11,309 10,426 10,318
Selling, general and administrative 187,774 178,648 165,317 140,642 119,717 97,932
Nonrecurring (credit) charge (611) 5,390 - - - -
<CAPTION>
Years Ended July 31, 1989 through 1999
(Dollars in Thousands, Except Per Share Amounts) 1993 1992 1991 1990 1989
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data
Net sales $242,970 $235,965 $211,063 $191,161 $174,174
Operating expenses:
Cost of products sold 114,301 110,130 96,797 84,952 75,620
Research and development 12,132 10,001 9,176 7,355 6,168
Selling, general and administrative 92,449 93,931 84,936 76,596 71,292
Nonrecurring (credit) charge (1,236) 6,562 - - 6,465
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
Years Ended July 31, 1989 through 1999
(Dollars in Thousands, Except Per Share Amounts) 1999 1998 1997 1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total operating expenses 407,090 409,220 375,713 318,377 273,777 226,366
Operating income 63,772 45,930 50,368 41,165 40,585 29,475
Other income and (expense):
Investment and other income - net 1,455 638 1,159 4,570 4,609 837
Interest expense (445) (403) (256) (302) (555) (410)
Net other income 1,010 235 903 4,268 4,054 427
Income before income taxes, extraordinary
item and cumulative effect of changes
in accounting principles 64,782 46,165 51,271 45,433 44,639 29,902
Income taxes 25,198 18,129 19,564 17,406 16,728 11,362
Income before extraordinary item and
cumulative effect of changes in
accounting principles 39,584 28,036 31,707 28,027 27,911 18,540
Extraordinary item:
Gain on proceeds of officer's life
insurance policies, net - - - - - -
Income before cumulative effect of changes
in accounting principles 39,584 28,036 31,707 28,027 27,911 18,540
Cumulative effect of changes in accounting
principles for:
Postretirement benefits
(net of income taxes of $2,663) - - - - - -
Income taxes - - - - - -
Catalog costs - - - - - -
Net income $ 39,584 $ 28,036 $ 31,707 $ 28,027 $ 27,911 $ 18,540
Net income per Common Share (Diluted):
Class A Nonvoting $ 1.73 $ 1.23 $ 1.43 $ 1.26 $ 1.26 $ .84
Class B Voting $ 1.70 $ 1.20 $ 1.40 $ 1.23 $ 1.23 $ .81
Cash dividends on:
Class A Common Stock $ .64 $ .60 $ .52 $ .40 $ .27 $ .23
Class B Common Stock $ .61 $ .57 $ .49 $ .37 $ .23 $ .19
Balance Sheet (at year end)
Working capital $129,884 $125,386 $130,724 $109,688 $129,938 $ 100,023
Total assets 351,120 311,824 291,662 261,835 230,005 202,509
Long-term debt, less current maturities 1,402 3,716 3,890 1,809 1,903 1,855
Stockholders' investment 260,564 233,373 206,547 189,263 170,823 145,129
<CAPTION>
Years Ended July 31, 1989 through 1999
(Dollars in Thousands, Except Per Share Amounts) 1993 1992 1991 1990 1989
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total operating expenses 217,646 220,624 190,909 168,903 159,545
Operating income 25,324 15,341 20,154 22,258 14,629
Other income and (expense):
Investment and other income - net 559 239 2,845 4,004 2,380
Interest expense (54) (219) (548) (646) (356)
Net other income 505 20 2,297 3,358 2,024
Income before income taxes, extraordinary
item and cumulative effect of changes
in accounting principles 25,829 15,361 22,451 25,616 16,653
Income taxes 8,973 6,972 7,054 10,606 6,778
Income before extraordinary item and
cumulative effect of changes in
accounting principles 16,856 8,389 15,397 15,010 9,875
Extraordinary item:
Gain on proceeds of officer's life
insurance policies, net - - - - 4,625
Income before cumulative effect of changes
in accounting principles 16,856 8,389 15,397 15,010 14,500
Cumulative effect of changes in accounting
principles for:
Postretirement benefits
(net of income taxes of $2,663) - (3,995) - - -
Income taxes - 661 - - -
Catalog costs - - - - 1,233
Net income $ 16,856 $ 5,055 $ 15,397 $ 15,010 $ 15,733
Net income per Common Share (Diluted):
Class A Nonvoting $ .77 $ .22 $ .70 $ .69 $ .70
Class B Voting $ .74 $ .19 $ .67 .66 $ .67
Cash dividends on:
Class A Common Stock $ .20 $ .19 $ .16 $ .13 $ .09
Class B Common Stock $ .17 $ .15 $ .13 $ .10 $ .06
Balance Sheet (at year end)
Working capital $ 77,943 $ 66,093 $ 70,883 $ 67,797 $ 53,056
Total assets 179,901 173,054 156,812 147,197 129,890
Long-term debt, less current maturities 1,978 2,524 1,982 3,298 3,637
Stockholders' investment 128,068 119,771 115,260 103,784 89,443
</TABLE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes appearing in this annual
report.
Overview
Between fiscal 1996 and 1999, the Company experienced sales growth while
reducing cost of products sold as a percentage of net sales. It made significant
improvements in productivity and asset utilization through the successful
implementation of a team-oriented approach to quality, growth and cost
reduction. To further enhance teamwork, in February 1995, the Company's
operations were realigned into three global groups, each headed by a group vice
president. The groups are (i) the Identification Solutions & Specialty Tapes
Group, (ii) the Graphics Group, and (iii) the Direct Marketing Group.
During fiscal 1996, to implement the Company's growth strategy discussed below,
the Company increased expenditures related to new products, geographic expansion
and acquisitions. This included investments in global information systems and
increased sales and marketing activities. Investments in these key areas
<PAGE> 17
resulted in selling, general and administrative expenses as a percentage of
sales of 39.1% for fiscal 1996, 38.8% for fiscal 1997, 39.3% for fiscal 1998 and
39.9% for fiscal 1999. Management believes these investments will solidify the
Company's competitive position and assist the Company in building a base for
sustainable long-term growth.
The Company's growth strategy is focused on four key elements: introducing new
products for current and new markets and applications; geographic expansion in
selected markets worldwide; strategic acquisitions and joint ventures; and
increasing market penetration in existing markets.
The Company introduced several new products in fiscal 1999, including the
TLS2200(tm) Thermal Labeling System, the HandiMark(tm) Portable Label Maker, the
Merlin(r)II Portable Labeling System, Bradyprinter(tm) Model 600 X-Plus Labeling
System, PAM 6000 printer applicator machine, Markware(tm) Facility
Identification Software, Brady Clean ID(tm) labels, heavy-duty tire
identification labels, Mondo Bondo(tm) high-adhesion labels and WavePoint(tm)
Read/Write Radio Frequency Identification tags and readers.
During fiscal 1999, the Company opened a distribution center in California
serving the western United States.
The Company completed the acquisitions of SOFT S.A. (France) and the Holman
Groupe S.A. (France) in July 1999, Visi Sign Pty. Ltd (Australia) in May 1999,
Barcodes West Inc. (United States) in March 1999, VEB Sistemas de Etiquetas
Ltda. (Brazil) in August 1998, GrafTek Inc. (Canada) in April 1998, Techniques
Avancees (France) in March 1998, Signals S.A. (France) in April 1997, Varitronic
Systems, Inc. (United States) in April 1996, The Hirol Company (United States)
in January 1996 and TechPress II Limited (England) in November 1995.
To increase market penetration in fiscal 1999, the Company continued its
investment in sales, marketing and catalog efforts worldwide. Access to
information about Brady products was made easier through the launch of an
improved Internet site. The trading market and profile of Brady stock was also
improved when the Company listed on the New York Stock Exchange in May 1999.
Year Ended July 31, 1999, Compared to Year Ended July 31, 1998
Sales for fiscal 1999 increased by $15,712,000 or 3.5% over fiscal 1998. Sales
of the Company's international operations increased 5.9%. In local currencies,
continued market penetration in Brady's operations outside the United States
increased international sales by 3.4%. The acquisitions of Techniques Avancees,
GrafTek Inc., VEB Sistemas de Etiquetas Ltda. and Visi Sign Pty. Ltd increased
international sales in local currencies by another 3.4%. 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 growth by 0.9 percentage points. Sales of the Company's U.S.
operations increased 1.6%, due primarily to the acquisition of Barcodes West
Inc.
The cost of products sold as a percentage of sales decreased from 45.0% to
42.9%. Last year's cost of products sold included a charge of $1,515,000
($920,000 after tax) for the write-down of certain inventories. Excluding this
charge, cost of products sold as a percentage of sales decreased from 44.7% to
42.9%. This improvement was primarily caused by changes in product mix towards
products with higher margins, reduced expenses as a result of the workforce
reduction in August 1998 and manufacturing efficiencies from the Company's
continuous improvement efforts.
<PAGE> 18
Selling, general and administrative expenses as a percentage of sales increased
from 39.3% to 39.9%. Last year's expenses included a charge of $540,000
($328,000 after tax) for the write-down of certain assets. Excluding this
charge, selling, general and administrative expenses as a percentage of sales
increased from 39.1% to 39.9%. The increase was primarily caused by a higher
bonus accrual as a result of the Company's significant improvement in
profitability and higher amortization expense from the goodwill generated by the
Company's acquisitions. The completion of certain product development projects
as well as restructuring of the research and development effort to increase
teamwork and focus on key product segments caused research and development
expenses to decrease 12.6% from the prior year. As a percentage of sales,
research and development expenses decreased from 4.5% to 3.8%.
The Company recorded a $611,000 ($366,000 after tax) nonrecurring credit this
year for adjusting the severance costs associated with the workforce reduction.
Last year the Company recorded a nonrecurring charge of $5,390,000 ($3,272,000
after tax) related primarily to a provision for severance costs associated with
a 7.5% reduction in its workforce.
Operating income increased $17,842,000 to $63,772,000 in fiscal 1999 as the
improved gross margin more than offset the higher selling, general and
administrative expenses. Excluding the nonrecurring items in both years (a
charge in 1998 and a credit in 1999), operating income increased 18.3%, from
$53,375,000 to $63,161,000.
Investment and other income increased $817,000 from the prior year. Last year
included losses of $406,000 ($246,000 after tax) on the disposal of certain
assets.
Income before income taxes was $64,782,000, an increase of 40.3% compared to
fiscal 1998's $46,165,000. Excluding the nonrecurring items in both years,
income before income taxes increased 18.8% compared to the prior year.
The Company's effective tax rate decreased slightly from 39.3% for fiscal 1998
to 38.9% for fiscal 1999.
Net income was $39,584,000 for fiscal 1999, compared to $28,036,000 for fiscal
1998 because of the factors cited above. Excluding the $366,000 nonrecurring
credit in fiscal 1999 and the $4,766,000 one-time charges in fiscal 1998, net
income increased 19.6% over the prior year.
Business Segment Operating Results
Identification Solutions & Specialty Tapes (ISST) Group
ISST sales increased 5.6% in fiscal 1999 (up about 6% in constant currency) from
fiscal 1998, following an increase of 5.6% in fiscal 1998 versus 1997. The
increase in 1999 was primarily the result of the acquisitions of GrafTek and
Techniques Avancees late last year and this year's acquisitions of VEB and
Barcodes West. Sales were up in the Americas and Europe and down in Asia. The
increase in 1998 versus 1997 was primarily a result of the growth in base
business, solid new product sales and the two software acquisitions late in
fiscal 1998.
Excluding the effect of one-time items, profit as a percentage of sales
increased slightly from 14.9% last year to 15.1% this year. Cost savings from
the workforce reduction early in the fiscal year offset increased expenses from
<PAGE> 19
the new coating line and acquisitions. Comparing fiscal 1998 to 1997, profit as
a percentage of sales declined from 15.3% to 14.9% primarily as a result of a
planned scaling back of external coating to focus on upcoming new material
product developments.
Graphics Group
Graphics sales decreased 1.9% in fiscal 1999 (down about 2% in constant
currency) from fiscal 1998, following an increase of 2.1% from 1997. The
decrease in sales of Colorpix wide-format color inkjet printers and related
materials was the primary reason for this change in 1999. This product line was
de-emphasized in the face of industry stagnation and thinning margins. Sales
were down slightly in the Americas and Europe and up in Asia. The 1998 increase
from 1997 was a result of higher sales of the Colorpix product line.
Excluding the effect of one-time items, profit as a percentage of sales
increased significantly from 8.9% last year to 14.8% this year. This profit
improvement was generated despite the drop in sales as a result of a reduced
expense structure after the workforce reduction and the group's refocusing of
resources on the most value-adding growth and profit opportunities. Profit as a
percentage of sales decreased from 11.6% in fiscal 1997 to 8.9% in fiscal 1998
due primarily to technical and developmental expenses associated with the
Colorpix product line.
Direct Marketing Group
Direct Marketing sales increased 5.4% in fiscal 1999 (up about 6% in constant
currency) from fiscal 1998 and 12.7% in fiscal 1998 over 1997. Sales growth
continued to be stronger in Europe than in the United States. In general, sales
in Europe were strong in the first six months of fiscal 1999, but growth slowed
in the second half of the fiscal year. For the year, sales were up in Europe and
flat in the Americas. The sales increase in 1998 compared to 1997 was helped by
the acquisition of Signals in April 1997.
Excluding the effect of one-time items, profit as a percentage of sales
increased from 13.1% in fiscal 1997 to 14.9% last year and 18.0% this year. The
primary reasons for this improvement are higher gross margins as a result of
vertical integration and better return on advertising investments due to
detailed profit analysis by product and improved mailing effectiveness.
Year Ended July 31, 1998, Compared to Year Ended July 31, 1997
Sales for fiscal 1998 increased by $29,069,000 or 6.8% over fiscal 1997. Sales
of the Company's international operations increased 9.5%. In local currencies,
continued market penetration in Brady's operations outside the United States
increased international sales by 13.2%. The acquisitions of Signals S.A.,
Techniques Avancees and GrafTek Inc. increased international sales in local
currencies by 4.4%. 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 growth by 8.1 percentage
points. Sales of the Company's U.S. operations increased 4.9%, due primarily to
increases in the sales of the Company's core products.
The cost of products sold as a percentage of sales decreased from 45.6% to
45.0%. Reduced costs due to changes in product mix and manufacturing
efficiencies from the Company's continuous improvement efforts were partially
offset by increased depreciation and amortization expenses from the
acquisitions. Cost of products sold for fiscal 1998 included a charge of
<PAGE> 20
$1,515,000 ($920,000 after tax) for the write-down of certain inventories. Cost
of products sold for fiscal 1997 included a charge of $1,200,000 ($715,000 after
tax) for restructuring the Company's European operations and consolidating the
Hirol Division's production operations into the Company's existing operations in
the United States and in the United Kingdom. Excluding these charges, the cost
of products sold as a percentage of sales decreased from 45.3% to 44.7%.
Selling, general and administrative expenses as a percentage of sales increased
from 38.8% to 39.3%. The increase reflects the expenses related to the Company's
ongoing investment in sales and marketing activities and building its global
information technology infrastructure. The 1998 expenses included a charge of
$540,000 ($328,000 after tax) for the write-down of certain assets. The 1997
expenses included a charge of $300,000 ($180,000 after tax) for the
restructuring mentioned above. Excluding these charges, selling, general and
administrative expenses as a percentage of sales increased from 38.7% to 39.1%.
Research and development expenses increased 24.5% over the prior year,
reflecting the Company's continued commitment to process improvement and new
product development. As a percentage of sales, research and development expenses
increased from 3.8% to 4.5%.
During fiscal 1998, the Company recorded a nonrecurring charge of $5,390,000
($3,272,000 after tax) related primarily to a provision for severance costs
associated with a 7.5% reduction in its workforce at its operations around the
world. Severance payments for approximately 200 people totaled $5,024,000. The
remainder of the charge related to the write-off of assets associated with
discontinuing the Company's contract taping service and cover tape product line.
Operating income decreased $4,438,000 to $45,930,000 in fiscal 1998 as the
one-time charges and the increase in research and development expenses more than
offset the improvement in gross margin. Excluding the one-time charges in both
years, operating income increased 2.9% from $51,868,000 to $53,375,000.
Investment and other income decreased $521,000 from 1997. The 1998 results
include $406,000 ($246,000 after tax) of losses on the disposal of certain
assets.
Income before income taxes was $46,165,000, a decrease of 10.0% compared to
fiscal 1997's $51,271,000. Excluding the one-time charges in both years, income
before income taxes increased 2.4% compared to the prior year.
The Company's effective tax rate increased from 38.2% for fiscal 1997 to 39.3%
for fiscal 1998 due to higher tax rates for the Company's international
operations.
Net income was $28,036,000 for fiscal 1998, compared to $31,707,000 for fiscal
1997 because of the factors cited above. Excluding the $4,766,000 one-time
charges in fiscal 1998 and the $895,000 restructuring charge in fiscal 1997, net
income increased 0.6% over the prior year.
Year Ended July 31, 1997, Compared to Year Ended July 31, 1996
Sales for fiscal 1997 increased by $66,539,000 or 18.5% over fiscal 1996. Sales
of the Company's international operations increased by 15.5%. Real growth
through continued market penetration in Europe and the Far East increased
international sales 12.7%. The acquisitions of TechPress II Limited and Signals
S.A. and the startup of the Company's Korean joint venture increased
international sales 5.7%. These increases were offset by the negative effect of
fluctuations in the exchange rates used to translate financial results into U.S.
<PAGE> 21
currency which reduced international sales by 2.9%. Sales of the Company's U.S.
operations increased 20.8% for the year ended July 31, 1997. The acquisitions of
Varitronic Systems, Inc. and The Hirol Company contributed 11.8% of this
increase, with growth in the sales of the Company's core products making up the
balance.
The cost of products sold as a percentage of sales decreased from 46.3% to 45.6%
due to changes in product mix and manufacturing efficiencies from the Company's
continuous improvement efforts, offsetting increased depreciation expenses from
the acquisitions. Cost of products sold for fiscal 1997 included a charge in the
second quarter of $1,200,000 ($715,000 after tax) for restructuring the
Company's European operations and consolidating The Hirol Company's production
operations into the Company's existing operations in the United States and in
the United Kingdom. Selling, general and administrative expenses as a percentage
of sales decreased slightly from 39.1% to 38.8%, as the Company's continuing
cost control efforts more than offset the Company's ongoing investment in
building its global information technology infrastructure. Selling, general and
administrative expenses for fiscal 1997 included a charge of $300,000 ($180,000
after tax) for the restructuring mentioned above. The acquisitions and the
Company's commitment to process improvements and new product development
resulted in research and development expenses increasing by 44.1% over fiscal
1996. As a percentage of sales, research and development expenses increased from
3.2% to 3.8%.
Operating income increased by $9,203,000 or 22.4% over fiscal 1996, as the
increase in research and development expenses was offset by improved gross
margins and the spreading of fixed costs over a larger sales base.
Investment and other income decreased $3,411,000 from the prior year as a result
of lower investment income because of lower cash balances as a result of the
acquisitions in the prior year and foreign exchange losses. In addition,
investment and other income for fiscal 1996 included $1,750,000 ($950,000 after
tax) from the gain on the sale of a building in Germany.
Income before income taxes increased to $51,271,000, an increase of 12.9%
compared to fiscal 1996's $45,433,000. Excluding the 1997 restructuring charges
and the 1996 gain on the sale of the German building, income before income taxes
increased 20.8% compared to the prior year.
The Company's effective tax rate decreased slightly from 38.3% for fiscal 1996
to 38.2% for fiscal 1997.
Net income was $31,707,000 for fiscal 1997, compared to $28,027,000 for fiscal
1996 because of the factors cited above. Excluding the $895,000 restructuring
charge in 1997 and the $950,000 gain on the sale of the building in Germany in
1996, fiscal 1997 net income increased 20.4% compared to the prior year.
Liquidity
The Company's liquidity remains strong. Cash and cash equivalents were
$75,466,000 at July 31, 1999, compared to $65,609,000 at July 31, 1998, and
$65,329,000 at July 31, 1997. Working capital increased $4,498,000 during fiscal
1999 and equaled $129,884,000 at July 31, 1999.
The Company has maintained significant cash balances due in large part to its
strong operating cash flow, which totaled $61,357,000 for fiscal 1999,
$47,207,000 for fiscal 1998, and $39,911,000 for fiscal 1997. Capital
expenditures were $9,889,000 in fiscal 1999, $17,189,000 in fiscal 1998, and
<PAGE> 22
$8,777,000 in fiscal 1997. The increase in fiscal 1998 was primarily from
progress payments made on the Company's new coating line. Financing activities,
primarily the payment of dividends to the Company's stockholders, consumed
$12,533,000 of cash in fiscal 1999, $12,147,000 in fiscal 1998, and $9,166,000
in fiscal 1997.
In September 1999, the Company entered into a $150,000,000 revolving loan
agreement with six banks.
Long-term debt as a percentage of long-term debt plus stockholders' investment
was 0.5% at July 31, 1999, compared to 1.6% at July 31, 1998, and 1.8% at July
31, 1997.
The Company continues to seek opportunities to invest in new products and 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.
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.
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.
<PAGE> 23
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to process certain date-based
information. This could result in a system failure or miscalculations causing
disruptions of operations and the inability to engage in normal business
activities. Many of the Company's systems, including information and computer
systems and automated equipment, will be affected by this issue.
The Company has a comprehensive plan to address potential Year 2000 issues. The
plan includes (i) the complete inventory of all in-house computers, software and
other equipment utilizing microprocessors and the identification of all hardware
and software; (ii) modification of the affected systems; and (iii) testing the
modified systems and auditing the system for final compliance. The Company is
using both internal and external resources to implement its plan. The Company
has generally completed the inventory and modification phases of the plan and is
at various stages of testing and auditing these systems. The Company feels it
has adequate time to assess and correct any significant issues that materialize.
The Company estimates that at the conclusion of its various Year 2000 efforts,
including conversion, testing and contingency planning, it will have spent
approximately $2,500,000 over a multi-year period. Costs associated with this
issue have been and will continue to be expensed as incurred and are not
expected to have a material effect on the results of operations, cash flows or
financial condition of the Company. Although the Company believes its efforts
will be successful, any failure or delay could result in the disruption of
business and in the Company incurring substantial expense. To minimize any such
potential impact, the Company initiated a global contingency planning effort
designed to support critical business operations.
As a third-party supplier of software and printing systems to other companies,
the Company has posted its own product compliance status on its Internet site
(www.bradycorp.com).
The Company has completed the process of formally communicating with all of its
significant suppliers and customers to determine the extent to which the Company
is vulnerable to those third parties' failure to remediate their own Year 2000
Compliance issues. A failure of the Company's suppliers, customers and other
third parties to address adequately their Year 2000 readiness could
significantly affect the Company's business. As part of its contingency planning
efforts, the Company identified alternate sources or strategies where
significant exposures were identified.
Finally, the Year 2000 presents a number of other risks and uncertainties that
could affect the Company, including utilities and telecommunications failures,
competition for personnel skilled in the resolution of Year 2000 issues, and the
nature of government responses to Year 2000 issues, among others. While the
Company continues to believe that the Year 2000 matters discussed above will not
have a material impact on its results of operations, cash flows or financial
condition, it remains uncertain whether or to what extent the Company may be
affected.
The Year 2000 statements set forth above are designated as "Year 2000 Readiness
Disclosures" pursuant to the Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271).
Forward-Looking Statements
<PAGE> 24
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, variations in the economic or political
conditions in the countries with which the Company does business; fluctuations
in currency exchange rates for international currencies versus the U.S. dollar;
technology changes; the continued availability of sources of supply; domestic
and international economic conditions and growth rates; the ability of the
Company to timely adjust its cost structure to changes in levels of sales,
product mix and low levels of order backlog; the ability of the Company to make
sufficient strategic acquisitions at reasonable prices; the ability of the
Company to integrate the acquired businesses within a reasonable period of time;
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.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Dollars in Thousands) July 31, 1999 and 1998 1999 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 1) $ 75,466 $ 65,609
Accounts receivable, less allowance for losses ($2,339
and $2,011, respectively) 73,290 63,365
Inventories (Note 1):
Finished products 23,368 22,836
Work-in-process 2,878 3,967
Raw materials and supplies 11,281 11,641
Total inventories 37,527 38,444
Prepaid expenses and other current assets (Notes 1, 3 and 4) 16,886 16,635
Total current assets 203,169 184,053
Other assets:
Intangibles - net (Note 1) 72,941 53,528
Other (Note 4) 8,026 7,078
Property, plant and equipment (Notes 1 and 5):
Cost:
Land 5,008 4,988
Buildings and improvements 41,417 39,595
Machinery and equipment 101,324 83,146
Construction in progress 2,229 11,705
149,978 139,434
Less accumulated depreciation 82,994 72,269
Net property, plant and equipment 66,984 67,165
Total $351,120 $311,824
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable $ 19,378 $ 15,761
Wages and amounts withheld from employees 23,186 19,542
Taxes, other than income taxes 2,290 2,033
Accrued income taxes 12,516 9,276
Other current liabilities (Note 3) 13,289 11,647
Current maturities on long-term debt (Note 5) 2,626 408
Total current liabilities 73,285 58,667
Long-term debt, less current maturities (Note 5) 1,402 3,716
Other liabilities (Note 3) 15,869 16,068
Total liabilities 90,556 78,451
Stockholders' investment (Notes 1 and 6):
Preferred Stock (aggregate liquidation preference of $3,026
at July 31, 1999) 2,855 2,855
</TABLE>
<PAGE> 25
<TABLE>
<S> <C> <C>
Common Stock:
Class A Nonvoting - issued and outstanding 20,839,841 and 20,726,863 shares,
respectively, (aggregate liquidation
preference of $34,803 at July 31, 1999) 208 207
Class B Voting - issued and outstanding 1,769,314 shares 18 18
Additional paid-in capital 28,383 26,131
Earnings retained in the business 233,521 208,254
Treasury stock - 4,548 shares of Class A Nonvoting Common Stock, at cost (132) -
Cumulative other comprehensive income (1,958) (1,068)
Other (2,331) (3,024)
Total stockholders' investment 260,564 233,373
Total $351,120 $311,824
</TABLE>
See Notes to Consolidated Financial Statements.
Consolidated Statements of Income
Years Ended July 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Amounts) 1999 1998 1997
<S> <C> <C> <C>
Net sales $470,862 $455,150 $426,081
Operating expenses:
Cost of products sold 202,203 204,895 194,096
Research and development 17,724 20,287 16,300
Selling, general and administrative 187,774 178,648 165,317
Nonrecurring (credit) charge (Note 10) (611) 5,390 -
Total operating expenses 407,090 409,220 375,713
Operating income 63,772 45,930 50,368
Other income and (expense):
Investment and other income - net 1,455 638 1,159
Interest expense (445) (403) (256)
Net other income 1,010 235 903
Income before income taxes 64,782 46,165 51,271
Income taxes (Notes 1 and 4) 25,198 18,129 19,564
Net income $ 39,584 $ 28,036 $ 31,707
Net income per Common Share (Notes 6 and 8):
Class A Nonvoting:
Basic $ 1.74 $ 1.24 $ 1.44
Diluted $ 1.73 $ 1.23 $ 1.43
Class B Voting:
Basic $ 1.71 $ 1.21 $ 1.41
Diluted $ 1.70 $ 1.20 $ 1.40
</TABLE>
See Notes to Consolidated Financial Statements.
Consolidated Statements of Stockholders' Investment
Years Ended July 31, 1999, 1998 and 1997
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Additional Earnings Other Total
Preferred Common Paid-in Retained in Treasury Comprehensive Comprehensive
Stock Stock Capital the Business Stock Income Other Income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at July 31, 1996 $ 2,855 $ 219 $ 8,415 $ 173,491 $ - $ 4,283 $ - -
</TABLE>
<PAGE> 26
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income - - - 31,707 - - - $31,707
Net currency translation adjustment - - - - - (3,986) - (3,986)
Total comprehensive income - - - - - - - 27,721
Issuance of 77,753 shares of Class A Common Stock
under stock option plan - 1 835 - - - - -
Tax benefit from exercise of stock options - - 323 - - - -
- -
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 - $.52 a share - - - (10,476) - - - -
Class B - $.49 a share - - - (861) - - - -
Balances at July 31, 1997 2,855 220 9,573 193,602 - 297 - -
Net income - - - 28,036 - - - 28,036
Net currency translation adjustment - - - - - (1,365) - (1,365)
Total comprehensive income - - - - - - - 26,671
Issuance of 57,282 shares of Class A Common Stock
under stock option plan - - 941 - - - -
Other - 5 15,268 - - - (3,024)
Tax benefit from exercise of stock options - - 349 - - - -
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 - $.60 a share - - - (12,122) - - -
Class B - $.57 a share - - - (1,003) - - -
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)
</TABLE>
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollars in Thousands)
Years Ended July 31, 1999, 1998 and 1997 1999 1998 1997
<S> <C> <C> <C>
Operating activities:
Net income $39,584 $28,036 $31,707
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 11,263 11,047 12,183
Amortization 3,886 2,241 1,968
Loss on sale of property, plant
and equipment 181 349 139
Provision for losses on accounts receivable 966 970 663
Other 693 212 -
Nonrecurring (credit) charge (611) 5,390 -
Changes in operating assets and liabilities
(net of effects of business acquisitions):
Accounts receivable (4,899) 1,066 (12,796)
Inventory 5,547 5,705 (4,818)
</TABLE>
<PAGE> 27
<TABLE>
<S> <C> <C> <C>
Prepaid expenses and other assets (1,643) (3,159) 2,342
Accounts payable and accrued liabilities 4,330 (4,285) 6,147
Income taxes 3,313 (36) 3,334
Deferred income taxes (1,069) (4,508) (1,118)
Other liabilities (184) 4,179 160
Net cash provided by operating activities 61,357 47,207 39,911
Investing activities:
Acquisitions of businesses, net of
cash acquired (31,107) (19,306) (6,724)
Purchases of property, plant and equipment (9,889) (17,189) (8,777)
Proceeds from sale of property, plant
and equipment 232 500 908
Other (176) 169 292
Net cash (used in) investing activities (40,940) (35,826) (14,301)
Financing activities:
Payment of dividends (14,317) (13,384) (11,596)
Proceeds from issuance of Common Stock 2,252 941 835
Proceeds from long-term borrowings 310 829 2,236
Principal payments on long-term debt (778) (533) (641)
Net cash (used in) financing activities (12,533) (12,147) (9,166)
Effect of exchange rate changes on cash 1,973 1,046 (396)
Net increase in cash and cash equivalents 9,857 280 16,048
Cash and cash equivalents, beginning of year 65,609 65,329 49,281
Cash and cash equivalents, end of year $75,466 $65,609 $65,329
Supplemental disclosure of cash flow information: Cash paid during the
year for:
Interest $ 409 $ 277 $ 258
Income taxes, net of refunds 22,107 22,580 18,987
Acquisitions:
Fair value of assets acquired, net of cash 15,017 2,619 3,058
Liabilities assumed (6,291) (1,471) (1,375)
Goodwill 22,381 18,158 5,041
Net cash paid for acquisitions $31,107 $19,306 $ 6,724
Class A Common Stock issued to fund
deferred compensation plan - $11,555 -
</TABLE>
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Years Ended July 31, 1999, 1998 and 1997
Note 1
Summary of Significant Accounting Policies
Principles of Consolidation The accompanying consolidated financial statements
include the accounts of Brady Corporation and its subsidiaries, 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
generally accepted accounting principles 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.
<PAGE> 28
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.
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 domestic
inventories (approximately 39% and 48% of total inventories at July 31, 1999 and
1998, respectively) and the first-in, first-out 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 replacement cost was $4,988,000
at July 31, 1999, and $5,319,000 at July 31, 1998.
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.
Intangible Assets The excess of cost over fair value of the net assets of
businesses acquired is amortized using the straight-line method over various
periods ranging from 10 to 40 years. The weighted average amortization period is
23 years at July 31, 1999.
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. In the opinion of management, no such impairment
existed as of July 31, 1999.
Catalog Costs Catalog costs are initially capitalized and amortized over the
estimated useful lives of the publications (generally eight months). At July 31,
1999 and 1998, $4,600,000 and $5,220,000, respectively, of prepaid catalog costs
were included in prepaid expenses and other current assets.
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 as a
separate component of stockholders' investment.
Hedging The Company enters into forward foreign exchange contracts to hedge
committed intercompany foreign currency transactions. Such exchange contracts
generally have maturities of one year. At July 31, 1999 and 1998, exchange
contracts aggregating approximately $19,830,000 and $21,425,000, respectively,
were outstanding.
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
<PAGE> 29
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.
Accounting Standards Adopted Effective August 1, 1998, the Company adopted the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (Statement 131). Statement 131 superseded FASB Statement No. 14,
Financial Reporting for Segments of a Business Enterprise. Statement 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of Statement 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See footnote 7.
Accounting Standards to Be Adopted In 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
currently evaluating the impact of this statement on the consolidated financial
statements. This statement is required to be adopted in fiscal 2001.
Note 2
Acquisitions of Businesses
Effective August 29, 1996, the Company entered into a joint venture, W. H. Brady
Korea Co. Ltd., in Okcheon, Korea. Brady gained 100 percent ownership of the
company, now named Brady Korea Ltd., in September 1998. The company produces
labels and markets printers and other Brady products.
Effective April 30, 1997, the Company acquired the common stock of Signals S.A.
located in LaRochelle, France, a marketer of safety and facility identification
products, for cash of approximately $9,600,000.
Effective March 9, 1998, the Company acquired the common stock of Techniques
Avancees located in Auch, France, a bar-code labeling software developer, for
cash of $10,735,000 and a payable of $1,030,000.
Effective April 30, 1998, the Company acquired the common stock of GrafTek Inc.
located in Toronto, Ontario, Canada, a bar-code labeling software developer, for
cash of $8,528,000 and a payable of $933,000.
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 Inc.
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. The purchase price of this acquisition is
subject to change based on post-closing adjustments.
Effective July 7, 1999, the Company acquired the common stock of Holman Groupe
S.A. located in Rungis, France, an automatic identification and application
<PAGE> 30
specialist, for cash of approximately $5,343,000 and a payable of approximately
$554,000. The purchase price of this acquisition is subject to change based on
post-closing adjustments.
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. The purchase price of
this acquisition is subject to change based on post-closing adjustments.
Effective September 3, 1999, the Company acquired certain assets of a direct
marketer of signs, labels and identification products for cash of approximately
$5,600,000. The purchase price of this acquisition is subject to change based on
post-closing adjustments.
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.
Note 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 attaining 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, will be 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 will be 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1999 1998 1997
<S> <C> <C> <C>
Obligation at beginning of fiscal year $6,802 $6,142 $5,476
Service cost 472 328 260
Interest cost 602 473 447
Plan amendments 307 - -
Actuarial loss 242 158 241
Benefit payments (321) (299) (282)
Obligation at end of fiscal year $8,104 $6,802 $6,142
</TABLE>
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.
The following table shows the unfunded status of the Plan as of July 31, 1999
and 1998:
<TABLE>
<S> <C> <C>
(Dollars in Thousands) 1999 1998
</TABLE>
<PAGE> 31
<TABLE>
<S> <C> <C>
Unfunded status at July 31 $8,104 $6,802
Unrecognized net actuarial gain 2,107 2,333
Unrecognized prior service cost (285) -
Accumulated postretirement benefit obligation liability $9,926 $9,135
</TABLE>
The following table provides the components of net periodic benefit cost for the
Plan for fiscal years 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended July 31, 1999 1998 1997
<S> <C> <C> <C>
Net periodic postretirement benefit cost included the following components:
Service cost-benefits attributed to service during
the period $ 472 $328 $260
Prior service cost 22 - -
Interest cost on accumulated postretirement
benefit obligation 602 473 447
Amortization of (gain) (46) (150) (187)
Periodic postretirement benefit cost 1,050 651 520
Net periodic postretirement benefit cost $1,050 $651 $520
</TABLE>
The assumed healthcare cost trend rates used in measuring the accumulated
postretirement benefit obligation were 6.0% in 1999 and gradually declining to
5.5% by the year 2000.
The weighted average discount rates used in determining the accumulated
postretirement benefit obligation was 8% in 1999 and 7.3% in 1998.
If the healthcare cost trend rate assumptions were increased by 1% or decreased
by 1%, the accumulated postretirement benefit obligation as of July 31, 1999,
would be increased by $51,000 and decreased by $109,000, 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 based on earnings of the
respective companies and employee contributions. At July 31, 1999 and 1998,
$4,761,000 and $4,898,000, 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, 1999 and 1998,
$5,838,000 and $6,349,000, 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 on the open market. 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.
<PAGE> 32
The amounts charged to income for the plans described above were $7,589,000 in
1999, $8,038,000 in 1998 and $7,092,000 in 1997.
The Company has a voluntary employee benefit trust for the purpose of funding
employee medical benefits and certain other employee benefits. At July 31, 1999
and 1998, $2,204,000 and $2,344,000, respectively, of payments to the trust to
fund such benefits were included in prepaid expenses and other current assets.
Note 4
Income Taxes
Income taxes consist of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended July 31, 1999 1998 1997
<S> <C> <C> <C>
Currently payable:
Federal $17,668 $14,570 $13,875
Foreign 6,747 5,883 3,812
State 1,852 1,803 2,995
26,267 22,256 20,682
Deferred (credit):
Federal (1,186) (3,373) (1,832)
Foreign 73 (181) 1,188
State 44 (573) (474)
(1,069) (4,127) (1,118)
Total $25,198 $18,129 $19,564
</TABLE>
Deferred income taxes result from timing differences in the recognition of
revenues and expenses for financial statement and income tax purposes. These
differences relate principally to depreciation and certain expenses not
deductible for tax reporting until paid.
Pre-tax income consists of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended July 31, 1999 1998 1997
<S> <C> <C> <C>
United States $42,180 $32,743 $38,493
Foreign 22,602 13,422 12,778
Total $64,782 $46,165 $51,271
</TABLE>
The approximate tax effects of temporary differences are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) July 31, 1999 Assets Liabilities Total
<S> <C> <C> <C>
Inventories $ 2,788 $ - $ 2,788
Prepaid catalog costs - (1,048) (1,048)
Employee benefits - (304) (304)
Allowance for doubtful accounts 419 - 419
Other, net 4,614 (29) 4,585
Current 7,821 (1,381) 6,440
Excess of tax over book depreciation - (1,611) (1,611)
Deferred compensation 6,420 - 6,420
Postretirement benefits 3,871 - 3,871
Tax loss carryforwards 4,059 - 4,059
Less valuation allowance (3,278) - (3,278)
Other, net 320 (2,654) (2,334)
Noncurrent 11,392 (4,265) 7,127
Total $19,213 $ (5,646) $13,567
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
(Dollars in Thousands) July 31, 1998 Assets Liabilities Total
<S> <C> <C> <C>
Inventories $ 2,236 $ - $ 2,236
Prepaid catalog costs - (968) (968)
Employee benefits 480 - 480
Allowance for doubtful accounts 354 - 354
Other, net 4,518 (270) 4,248
Current 7,588 (1,238) 6,350
Excess of tax over book depreciation - (2,034) (2,034)
Deferred compensation 6,572 - 6,572
Postretirement benefits 3,634 - 3,634
Tax loss carryforwards 4,649 - 4,649
Less valuation allowance (4,649) - (4,649)
Other, net 992 (2,720) (1,728)
Noncurrent 11,198 (4,754) 6,444
Total $18,786 $ (5,992) $12,794
</TABLE>
At July 31, 1999 and 1998, $6,440,000 and $6,350,000, respectively, of net
deferred tax assets were included in prepaid expenses and other current assets.
At July 31, 1999 and 1998, $7,127,000 and $6,444,000, respectively, of net
deferred tax assets were included in other assets.
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:
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended July 31, 1999 1998 1997
<S> <C> <C> <C>
Tax at statutory rate $22,674 $16,157 $17,945
State income taxes, net of Federal tax benefits 1,204 1,517 2,248
International losses with no related tax benefits 1,296 1,350 1,196
International rate differential 986 (345) (668)
Rate variances arising from foreign subsidiary
distributions (1,481) (391) (155)
Other, net 516 (159) (1,002)
Total income tax provision $25,195 $18,129 $19,564
Effective tax rate 38.9% 39.3% 38.2%
</TABLE>
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, 1999,
amounted to approximately $42,840,000. If all such undistributed earnings were
remitted, the additional provision for foreign income taxes that would be
required would not have a material impact on the Company.
Note 5
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) July 31, 1999 1998
<S> <C> <C>
6.25% Industrial Development Revenue Bonds payable on
</TABLE>
<PAGE> 34
<TABLE>
<S> <C> <C>
December 1, 2001 $1,000 $1,000
Korean bank debt 2,497 2,485
Other 531 639
4,028 4,124
Less current maturities 2,626 408
$1,402 $3,716
</TABLE>
The Industrial Development Revenue Bonds are collateralized by first mortgages
on certain property with a net carrying amount of approximately $4,278,000 at
July 31, 1999. The Company's long-term debt approximates fair value.
Maturities on long-term debt are as follows:
(Dollars in Thousands) Year Ending July 31,
2000 $2,626
2001 117
2002 1,084
2003 74
2004 74
Thereafter 53
On September 23, 1999, the Company entered into a $150,000,000 multicurrency
revolving loan agreement with a group of six banks. 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.
Note 6
Stockholders' Investment
Information as to the Company's capital stock at July 31, 1999 is as follows:
<TABLE>
<CAPTION>
Shares Shares
(Dollars in Thousands) Authorized Issued Amount
<S> <C> <C> <C>
Preferred Stock, $.01 par value 5,000,000 0 $ -
Cumulative Preferred Stock:
6% Cumulative 5,000 3,984 399
1972 Series 10,000 2,600 260
1979 Series 30,000 21,963 2,196
$2,855
Common Stock, $.01 par value:
Class A Nonvoting 100,000,000 20,839,841 $ 208
Class B Voting 10,000,000 1,769,314 18
$ 226
</TABLE>
Each share of $100 par value Cumulative Preferred Stock is entitled to receive
cumulative cash dividends 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. Such shares, which are held by the initial holder thereof, are subject to
redemption only if the holder consents thereto.
Before any dividend may be paid on the Class B Common Stock, holders of 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.
<PAGE> 35
Holders of Class A Common Stock are not entitled to 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 Class A Common Stock are entitled to receive the sum of $1.67 per
share before any payment or distribution to holders of Class B Common Stock.
Thereafter, holders of Class B Common Stock are entitled to receive a payment or
distribution of $1.67 per share. Thereafter, holders of 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 Class A Common Stock over
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, 1998 and 1999:
<TABLE>
<CAPTION>
Shares Held
Unearned Deferred in Rabbi
Restricted Comp- Trust,
(Dollars in Thousands) Stock ensation at Cost Total
<S> <C> <C> <C> <C>
Issuance of 125,000 shares of Class A
Common Stock $ (3,718) $ - $ - $ (3,718)
Issuance of 372,728 shares of Class A
Common Stock to Rabbi Trust to
fund deferred compensation plan - 11,555 (11,555) -
Purchase of 11,900 shares of Class A
Common Stock purchased by the
Rabbi Trust related to deferred
compensation plan - 482 (482) -
Amortization of restricted stock 694 - - 694
Balances July 31, 1998 $ (3,024) $ 12,037 $ (12,037) $ (3,024)
Sale 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)
</TABLE>
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
<PAGE> 36
months after the grant date. Generally, options granted in 1992 and thereafter
will not be exercisable until one year after the date of grant, to the extent of
one-third per year.
Changes in the Options are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Option Options Exercise
Price Outstanding Price
<S> <C> <C> <C>
Balance, July 31, 1996 $6.83-$25.17 808,108 $17.46
Options granted 21.75-23.88 777,700 23.51
Options exercised 6.83-25.17 (77,753) 10.75
Options cancelled 6.83-25.17 (46,302) 18.15
Balance, July 31, 1997 $6.83-$25.17 1,461,753 $21.01
Options granted 30.66-34.00 260,150 31.49
Options exercised 6.83-25.17 (57,282) 16.44
Options cancelled 21.75-31.38 (24,600) 23.74
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
(721,187 options exercisable) $6.83-$34.00 1,800,434 $22.45
Available for grant after July 31, 1999 1,162,419
</TABLE>
The following table summarizes information about stock options outstanding at
July 31, 1999:
<TABLE>
<CAPTION>
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 1999 Life-Years Price 1999 Price
<S> <C> <C> <C> <C> <C>
$ 6.83-$15.00 196,201 3.8 years $12.47 196,201 $12.47
$15.01-$25.00 1,158,065 7.9 years 21.82 232,818 20.50
$25.01-$34.00 446,168 7.3 years 28.45 292,168 26.85
$ 6.83-$34.00 1,800,434 7.3 years $22.45 721,187 $20.89
</TABLE>
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 earnings 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 No. 123, net income and net income
per common share would have been changed to the pro forma amounts indicated
below:
<PAGE> 37
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income:
As reported $39,584 $28,036 $31,707
Pro forma 37,972 26,816 30,939
Net income per Class A Common Share - Diluted:
As reported $ 1.73 $ 1.23 $ 1.44
Pro forma 1.66 1.17 1.39
</TABLE>
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 1999, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rate 6.2% 5.7% 6.3%
Expected volatility 37.8% 30.5% 27.1%
Dividend yield 2.4% 2.2% 2.1%
Expected option life 4.1 years 4.4 years 4.1 years
</TABLE>
Note 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.
Brady Corporation has three reportable segments: the Identification Solutions &
Specialty Tapes Group, the Graphics Group and the Direct Marketing Group.
The Identification Solutions & Specialty Tapes Group consists of Identification
Solutions; Brady Software Solutions; Specialty Tapes; and 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 Software Solutions is focused on the Automatic
Identification and Data Collection market and its solutions consist of
high-performance labels and labeling systems tied together with bar-code design
and print software, data-collection equipment, inventory services, application
engineering and integration services. Specialty Tapes manufactures custom
die-cut parts and slit-to-width specialty tapes. Die-cut parts 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. Coated Products develops and coats specialty materials using a
wide variety of substrates such as polyester, polyimide, cloth, metal and paper.
Coatings include custom adhesive systems as well as high-performance topcoats.
These materials are sold in bulk roll form, or as converted products through
other Brady units.
The Graphics Group consists primarily of Signmark(r), and Varitronic Systems.
Signmark manufactures and sells signs, labels, tags and safety devices; printers
and accessories for do-it-yourself industrial signage and labels; regulatory
training programs and products; and accident-prevention tags and other visual
warning systems. These products enable customers to comply with government
regulations and other standards to make their workplace safe, instructive and
productive. Varitronic Systems produces and markets printing systems including
lettering and labeling systems, poster printers, supplies and laminating
<PAGE> 38
equipment. Markets served by this group include pulp and paper, chemical,
electrical, transportation and other manufacturing, as well as construction,
government and education.
The Direct Marketing Group sells a variety of products to end users via
direct-mail catalogs, telemarketing and the Internet. Its products include more
than 20,000 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, healthcare and other
service industries.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, not including interest, goodwill and
exchange gain or loss. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus a standard percentage
markup. Intercompany profit is eliminated in consolidation.
<TABLE>
<CAPTION>
Identification
Solutions & Direct Corporate and
Specialty Tapes Graphics Marketing Eliminations Totals
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1999:
Revenues from external customers $190,189 $122,856 $157,817 $ - $470,862
Intersegment revenues 3,042 1,982 865 (5,889) -
Nonrecurring (credit) charge (104) 21 (25) (503) (611)
Depreciation and amortization expense 8,942 3,019 1,896 1,292 15,149
Profit (loss) 28,908 18,207 28,371 (7,456) 68,030
Assets 121,487 78,459 48,463 102,711 351,120
Expenditures for long-lived assets 5,575 2,017 1,462 835 9,889
Year ended July 31, 1998:
Revenues from external customers $180,159 $125,283 $149,708 $ - $455,150
Intersegment revenues 2,970 1,512 790 (5,272) -
Nonrecurring charge 1,098 1,640 779 1,873 5,390
Depreciation and amortization expense 5,928 4,156 1,893 1,311 13,288
Profit (loss) 25,715 9,493 21,565 (8,375) 48,398
Assets 106,012 66,257 47,626 91,929 311,824
Expenditures for long-lived assets 4,683 10,374 1,410 722 17,189
Year ended July 31, 1997:
Revenues from external customers $170,546 $122,673 $132,862 $ - $426,081
Intersegment revenues 3,218 1,338 134 (4,690) -
Depreciation and amortization expense 5,609 5,146 1,742 1,654 14,151
Profit (loss) 26,054 14,210 17,405 (5,927) 51,742
Assets 86,209 71,414 44,491 89,548 291,662
Expenditures for long-lived assets 4,125 1,685 982 1,985 8,777
</TABLE>
<TABLE>
<CAPTION>
Year Ended July 31, 1999 1998 1997
<S> <C> <C> <C>
Profit reconciliation:
Total profit or loss for reportable segments $75,486 $56,773 $57,669
Corporate and eliminations (7,456) (8,375) (5,927)
Unallocated amounts:
Goodwill (3,416) (1,793) (1,014)
Interest-net 1,975 2,259 1,735
Foreign exchange (975) (1,863) (1,112)
Other (832) (836) (80)
Income before income taxes $64,782 $46,165 $51,271
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
Revenues* Total Assets**
Year Ended July 31, Year Ended July 31,
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Geographic information:
United States $292,341 $286,813 $276,965 $170,021 $160,408 $168,600
Europe 149,522 139,061 123,529 84,234 66,885 52,242
Other foreign countries 60,597 59,948 58,034 34,298 26,910 24,667
Corporate assets and eliminations (31,598) (30,672) (32,447) 62,567 57,621 46,153
Consolidated total $470,862 $455,150 $426,081 $351,120 $311,824 $291,662
</TABLE>
**Revenues are attributed based on country of origin.
**Corporate assets consist primarily of cash and cash equivalents. Eliminations
consist of intercompany receivables between regions.
Note 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 22,537,393 for
1999, 22,357,686 for 1998 and 21,908,318 for 1997. 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.
For the year ended July 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which established new
standards for the calculation of net income per share effective for interim and
annual periods ending after December 15, 1997. 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:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
<S> <C> <C> <C>
Numerator:
Net income $39,584,000 $28,036,000 $31,707,000
Less: Preferred stock dividends (259,134) (259,134) (259,134)
Numerator for basic and diluted Class A
earnings per share 39,324,866 27,776,866 31,447,866
Less:
Preferential dividends (690,541) (676,298) (670,454)
Preferential dividends on dilutive stock options (2,739) (9,140) (3,843)
Numerator for basic and diluted Class B
earnings per share $38,631,586 $27,091,428 $30,773,569
Denominator:
Denominator for basic earnings per share for
both Class A and B 22,537,393 22,357,686 21,908,318
Plus: Effects of dilutive stock options 145,577 244,239 144,100
Denominator for diluted earnings per share for
both Class A and B 22,682,970 22,601,925 22,052,418
Fiscal 1999 Fiscal 1998 Fiscal 1997
Class A Common Stock earnings per share calculation:
Basic $1.74 $1.24 $1.44
Diluted 1.73 1.23 1.43
Class B Common Stock earnings per share calculation:
Basic $1.71 $1.21 $1.41
Diluted 1.70 1.20 1.40
</TABLE>
Options to purchase 446,168, 258,850 and 269,401 shares of Class A Common Stock
were not included in the computations of diluted earnings per share for fiscal
years 1999, 1998 and 1997, respectively, because the option exercise prices were
greater than the average market price of the common shares and, therefore, the
effect would be antidilutive.
<PAGE> 40
Note 9
Commitments
The Company has entered into various noncancellable operating lease agreements.
Rental expense charged to operations was $8,884,000 for 1999; $9,015,000 for
1998; and $7,357,000 for 1997. Future minimum lease payments required under such
leases in effect at July 31, 1999, are as follows (by fiscal year):
2000 $ 7,739,000
2001 7,344,000
2002 2,289,000
2003 1,161,000
2004 902,000
Thereafter 1,843,000
$21,278,000
Note 10
Nonrecurring and One-Time Charges
During the fourth quarter of fiscal 1998, the Company recorded a nonrecurring
charge of $5,390,000 related primarily to a provision for severance costs
associated with a reduction in workforce at its operations around the world. In
response to a softening of sales that began in April 1998, the Company announced
in July 1998 that it would be reducing its workforce. A workforce reduction of
7.5%, approximately 200 people, was essentially completed in August 1998.
Severance costs associated with this reduction totaled $5,024,000. The remainder
of the nonrecurring charge represents a write-off of assets associated with
exiting two small product lines. The Company discontinued its contract taping
service and cover tape product line resulting in asset write-offs of $188,000
and $178,000, respectively. These were noncash charges.
A reconciliation of activity with respect to the Company's restructuring is as
follows:
Provision, July 31, 1998 $ 5,390,000
Noncash asset write-offs (366,000)
Cash payments associated with severance (4,150,000)
Amounts taken to income (611,000)
Ending balance, July 31, 1999 $ 263,000
In addition to the nonrecurring charge above, the Company recorded $2,461,000 in
one-time charges in the fourth quarter of fiscal 1998 for the write-down of
certain inventories and other assets. Substantially all this amount is noncash
and was charged to cost of sales.
These nonrecurring and one-time charges total $7,851,000 ($4,766,000 after tax)
or approximately $0.21 per diluted share, in 1998.
Independent Auditors' Report
To the Board of Directors and Stockholders
of Brady Corporation
<PAGE> 41
We have audited the accompanying consolidated balance sheets of Brady
Corporation and subsidiaries as of July 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' investment and cash flows for
each of the three years in the period ended July 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended July 31, 1999, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Milwaukee, Wisconsin
September 23, 1999
Shareholder Services
Common Shares
Brady Corporation Class A Common Stock trades on the
New York Stock Exchange under the symbol BRC. As of September 24, 1999, there
were 411 Class A Common Stock shareholders of record and about 5,000 beneficial
shareholders. There are two Class B Common Stock shareholders.
Quarterly Stock Data
<TABLE>
<CAPTION>
1999 1998 1997
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
4th Quarter $35.00 $24.13 $32.75 $19.63 $30.50 $22.00
3rd Quarter $27.50 $19.50 $35.75 $29.31 $27.75 $22.50
2nd Quarter $29.38 $22.50 $33.00 $29.00 $24.75 $20.50
1st Quarter $23.13 $16.25 $35.00 $27.38 $25.25 $21.50
</TABLE>
Dividends
Brady has paid dividends on its Common Stock every quarter since going public in
June 1984, and the Company has increased the dividend every year for each of the
past 14 years. At its September 1999 meeting, the Board of Directors increased
the quarterly dividend on Class A Common Stock to 17 cents per share per
quarter, or $0.68 per year. Dividends are normally paid on the last day of
October, January, April and July.
<PAGE> 42
Dividend Reinvestment
Shareholders of record may have their dividends automatically reinvested in
Brady stock through a Dividend Reinvestment Program. For more information on
this program, see the description on the Internet at www.bradycorp.com or call
Brady's investor line at 414-438-6918.
Stock Transfer Agent
Firstar Trust Company, 1555 North RiverCenter Drive,
Suite 301, Milwaukee, WI 53212; phone: 1-800-637-7549.
Brady Information
Brady's Internet site at www.bradycorp.com contains investor presentations, 10-K
and 10-Q filings, annual reports, news releases, frequently asked investor
questions, stock prices, product information and a variety of other information
about Brady.
Information Requests and Investor News Line
A phone system at 414-438-6918 enables you to listen to financial news
highlights, request printed 10-K and other financial information, request
dividend reinvestment information, or be transferred to an investor relations
representative. Or you may send your information requests to Investor Relations,
Brady Corporation, P.O. Box 571, Milwaukee, WI 53201-0571, or e-mail
[email protected].
Analyst, Investor and Media Contact
Laurie Bernardy, vice-president of corporate communications, 414-438-6880.
Annual Meeting
The Brady Corporation Annual Meeting will be at 9 a.m., Wednesday, November 17,
1999, at the Milwaukee Athletic Club, 758 N. Broadway, Milwaukee, Wisconsin.
Highlights will be posted on the Internet at www.bradycorp.com.
Our 1999 Annual Report represents a consolidation of projects meant to control
costs while advancing Brady's Internet-based communications. The "Safety,
Security, Productivity, Performance" section will be used by Brady operations as
a stand-alone brochure in nine languages in the years ahead. Also, the report's
horizontal layout reflects our focus on Internet-based communications. Check out
www.bradycorp.com for an interactive version of the annual report as well as
other investment information.
Directors
Richard A. Bemis, 58, has been a director of Brady since January 1990. He is
president and CEO of Bemis Manufacturing Company, a manufacturer of molded
plastic products in Sheboygan Falls, Wisconsin.
Robert C. Buchanan, 59, has been a director of Brady since November 1987. He is
president and CEO of the Fox Valley Corporation, a specialty paper manufacturer
in Appleton, Wisconsin.
<PAGE> 43
Dr. Frank W. Harris, 57, has been a director of Brady since November 1991. He is
a distinguished professor of polymer science and bio-medical engineering at the
Institute of Polymer Science, University of Akron, in Akron, Ohio.
Irwin Helford, 65, has been a director of Brady since November 1998. He is
former chairman of Viking Office Products, Inc., Torrance, California, and vice
chairman of Office Depot, Inc.
*Katherine M. Hudson, 52, joined Brady in January 1994 as president, chief
executive officer and director. Before joining Brady, she was a vice president
at Eastman Kodak Company and general manager of Kodak's Professional, Printing
and Publishing Imaging Division. She is also a director of Case Corporation and
Honeywell, Inc.
*Peter J. Lettenberger, 62, has served as a director and secretary of Brady
since January 1977. He is a partner in the law firm of Quarles & Brady,
Milwaukee, Wisconsin, and serves as general counsel to Brady.
Gary E. Nei, 55, has been a director of Brady since November 1992. He is
chairman of B&B Publishing, a publishing company in Walworth, Wisconsin.
Roger D. Peirce, 62, has served as a Brady director since September 1988. He is
secretary and treasurer of Jor-Mac Company, Inc, a manufacturer of metal
products in Grafton, Wisconsin.
Corporate Officers and Executives
*Katherine M. Hudson
president and chief executive officer
*Frank M. Jaehnert
vice president and chief financial officer
Laurie A. Bernardy
vice president - corporate communications
*Richard L. Fisk
vice president - Direct Marketing Group
*David R. Hawke
vice president - Graphics Group
Gary L. Johnson
vice president - corporate development
*Michael O. Oliver
vice president - human resources
*Donald E. Rearic
vice president, treasurer and assistant secretary
*Thomas E. Scherer
vice president, controller and assistant secretary
*David W. Schroeder
<PAGE> 44
vice president - Identification Solutions & Specialty Tapes Group
David B. Winter
vice president and chief information officer
Brady Locations
United States
Brady Corporation
P.O. Box 571
Milwaukee, WI 53201
Brady Worldwide, Inc. - Identification Solutions
6555 W. Good Hope Rd.
Milwaukee, WI 53223
Brady Worldwide, Inc. - Specialty Tapes
N144 W5690 Pioneer Road
Cedarburg, WI 53012
Brady Worldwide, Inc. -
Coated Products
P.O. Box 298
2230 W. Florist Ave.
Milwaukee, WI 53201-0298
Brady Worldwide, Inc. - Signmark(r)
2221 W. Camden Rd.
Milwaukee, WI 53209
Brady Software Solutions
727 W. Glendale Ave.
Glendale, WI 53209
Seton Identification Products
20 Thompson Rd.
Branford, CT 06405
Seton Identification Products
4451 Eucalyptus Ave.
Suite 330
Chino, CA 91710
Varitronic Systems, Inc.
6835 Winnetka Circle
Brooklyn Park, MN 55428
Barcodes West Inc.
1560 First Avenue South
Seattle, WA 98134
BCW Inventory Services
1766 S. Naperville Rd.
Wheaton, IL 60187
Australia
<PAGE> 45
Brady Australia Pty. Ltd.
Seton Australia Pty. Ltd.
2 Pat Devlin Close
Chipping Norton NSW 2170
Australia
Visi Sign Pty. Ltd.
10 Reid Street
Bayswater, Victoria 3153
Australia
Belgium
W.H. Brady, N.V.
Industrie Park C/3
Lindestraat 20
B-9240 Zele, Belgium
Brazil
W.H.B. do Brasil Ltda.
Rua Rosangela Donata
De Oliveira 30
06236-110 Osasco
Sao Paulo, Brazil
Seton do Brasil
Centro Empresarial Alphaville
Av. Jurua, 105 - Modulo 4
06455-908 Barueri
Sao Paulo, Brazil
Canada
W.H.B. Identification
Solutions, Inc.
Seton-Canada
56 Leek Crescent
Richmond Hill
Ontario, Canada
China
Brady Corporation S.E.A. Pte. Ltd.
Room 806, Bright China
Chang An Building
7 Jian Guo Men Nei Da Jie
Dong Cheng District
Beijing, PRC
Brady (Wuxi) Co. Ltd.
No. 229
Xingchuang Ba Lu
Wuxi-Singapore Industrial Park
Wuxi, Jinagsu, PRC 214028
France
<PAGE> 46
Brady France
2 Place Marcel Rebuffat
BP 362 - Parc de Villejust
91959 Les Ulis Cedex, France
Seton S.A.
113 Rue Horace Vernet - BP 181
59054 Roubaix Cedex 1, France
Signals S.A.
Rond Point de la Republique
Z.I. de la Rochelle
17187 Perigny Cedex, France
Holman Groupe
Periprint, MII, TFF
112/116 Rue des Solets
Silic 515
94623 Rungis Cedex, France
Brady LettraSoft S.A.
50 Rue des Rancy
69003 Lyons, France
Brady Software Group Europe
Z.I. Est
2, rue Van Gogh
32000 Auch, France
Germany
W.H. Brady GmbH
Lagerstrasse 13
64807 Dieburg
Germany
Seton GmbH
Otto-Hahn-Str. 5-7
63222 Langen, Germany
SOFT GmbH
Felix Klein Strasse 2
40474 Duesseldorf, Germany
Hong Kong
Brady Corporation S.E.A. Pte. Ltd.
Unit 03/04, 18th Floor
CRE Centre
889 Cheung Sha Wan
Kowloon, Hong Kong
Italy
Brady Italia
Seton Italia
Via Luigi Lazzaroni 7
<PAGE> 47
21047 Saronno (VA), Italy
Japan
Nippon Brady K.K.
TVP Building 3F
3-9-13 Moriya-cho, Kanagawa-ku
Yokohama, Kanagawa 221-0022
Japan
Korea
Brady Korea Ltd.
5F Hyo-Won Bld.
99-5 GaRak-Dong, SongPa-Ku
Seoul, 138-720
Republic of Korea
Brady Korea Ltd.
130-8 Dong An-Ri, Okcheon-EUP
Okcheon-Gun, Chung Buk,
373-800
Republic of Korea
Malaysia
Brady Corporation S.E.A. Pte. Ltd.
15, 1st Floor
Lorong Mayang Pasir 5
Bayan Baru, 11950
Penang, Malaysia
Mexico
W.H. Brady S. de R.L. de C.V.
Avda. Ejercito Nacional
No. 718, 1 er Piso
Colonia Chapultepec Morales
11590 Mexico D.F., Mexico
Philippines
Brady Corporation S.E.A. Pte. Ltd.
9 Narra Drive
Palmera Heights III
Valley Golf, Cainta Rizal
Philippines 1900
Singapore
Brady Corporation S.E.A. Pte. Ltd.
Brady Corporation Asia Pte. Ltd.
55 Ayer Rajah Crescent #03-25
Ayer Rajah Industrial Estate
Singapore 139949
Spain
<PAGE> 48
SOFT Iberica, S.L.
Hospitalet de Llobregat 08903
Spain
Sweden
Brady AB
Karins vag 5
194 54 Upplands Vasby
Sweden
Taiwan
Brady Corporation
S.E.A. Pte. Ltd.
6F-2, 412, Chung Hsiao E. Rd.
SEC 5
Taipei 110, Taiwan
United Kingdom
W.H. Brady Co. Ltd.
Wildmere Industrial Estate
Banbury, Oxfordshire
OX16 7JU
United Kingdom
Seton Limited
Canada Close
Banbury, Oxon 0X16 7RT
United Kingdom
<PAGE> 1
EXHIBIT 21.1
Page 1 of 2
SCHEDULE OF SUBSIDIARIES OF BRADY CORPORATION
<TABLE>
<CAPTION>
Percentage
of Voting
State (Country) Securities
Name of Company of Incorporation Owned
- --------------- ---------------- ----------
<S> <C> <C>
Brady Corporation Wisconsin Parent
Brady Financial Co. Delaware 100%
Braton Holding Co. Delaware 100%
Tricor Direct Inc.- Delaware 100%
Doing Business As:
Seton
Seton Name Plate Company
D&G Sign and Label Co.
Seton Identification Products
The Hirol Company
Worldmark of Wisconsin Inc. Delaware 100%
Varitronic Systems, Inc. Minnesota 100%
Brady Investment Co. Nevada 100%
Brady International Sales, Inc. U.S. Virgin Islands 100%
Brady International Co. Wisconsin 100%
Brady Service Co. Wisconsin 100%
Brady Worldwide, Inc. Wisconsin 100%
Teklynx International Co. Wisconsin 100%
Brady Australia Pty. Ltd. Australia 100%
Seton Australia Pty. Ltd. Australia 100%
Visi Sign Pty. Ltd. Australia 100%
W.H. Brady, N.V. Belgium 100%
W.H.B. do Brasil Ltda. Brazil 100%
B.I. Canada Incorporated Canada 100%
W.H.B. Identification Solutions, Inc.- Canada 100%
Doing Business As:
Brady
GrafTek
Revere-Seton
Seton
1167232 Ontario, Inc. Canada 100%
Brady (Wuxi) Co. Ltd. China 100%
</TABLE>
<PAGE> 2
EXHIBIT 21.1
Page 2 of 2
SCHEDULE OF SUBSIDIARIES OF BRADY CORPORATION (Continued)
<TABLE>
<CAPTION>
Percentage
of Voting
State (Country) Securities
Name of Company of Incorporation Owned
- --------------- ---------------- ----------
<S> <C> <C>
B.I. Financial Limited England 100%
B.I. U.K. Limited England 100%
W.H. Brady Co. Ltd. England 100%
Cigarette Litter Bin Co. Ltd. England 100%
Seton Limited England 100%
Brady Graphic Solutions Limited England 100%
Brady Letterasoft S.A. France 100%
Braton Europe Eurl France 100%
Braton Groupe S.A.R.L.- France 100%
Doing Business As:
Brady
Techniques Avancees
Holman
Periprint
Tricor Group, S.A. - France 100%
Doing Business As:
Seton
Signals
W.H. Brady GmbH Germany 100%
Seton GmbH Germany 100%
Seton Italia, SRL Italy 100%
Nippon Brady K.K. Japan 100%
Brady Korea Co., Ltd. Korea 100%
W. H. Brady S. de R.L. de C.V. Mexico 100%
Hirol UK Ltd. Scotland 100%
Brady Corporation S.E.A. Pte. Ltd. Singapore 100%
Brady Corporation Asia Pte. Ltd. Singapore 100%
SOFT Iberica S.L. Spain 100%
Brady AB Sweden 100%
Seton Scandinavia AB Sweden 100%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of Brady Corporation:
We consent to the incorporation by reference in Registration Statements No.
333-38857, 333-38859 and 333-44505 of Brady Corporation (formerly W. H. Brady
Co.) on Forms S-8 of our reports dated September 23, 1999, appearing in and
incorporated by reference in the Annual Report on Form 10-K of Brady Corporation
for the year ended July 31, 1999.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
October 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 75,466
<SECURITIES> 0
<RECEIVABLES> 75,629
<ALLOWANCES> 2,339
<INVENTORY> 37,527
<CURRENT-ASSETS> 203,169
<PP&E> 149,978
<DEPRECIATION> 82,994
<TOTAL-ASSETS> 351,120
<CURRENT-LIABILITIES> 73,285
<BONDS> 1,402
2,855
0
<COMMON> 226
<OTHER-SE> 257,615
<TOTAL-LIABILITY-AND-EQUITY> 351,120
<SALES> 470,862
<TOTAL-REVENUES> 470,862
<CGS> 202,203
<TOTAL-COSTS> 202,203
<OTHER-EXPENSES> 204,887
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 445
<INCOME-PRETAX> 64,782
<INCOME-TAX> 25,198
<INCOME-CONTINUING> 39,584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,584
<EPS-BASIC> 1.74
<EPS-DILUTED> 1.73
</TABLE>
