EX-13.(A)(VI) 10 c59555ex13-avi.txt NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 EXHIBIT 13(a)(vi) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (Dollars in thousands except per share data) A. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all domestic and foreign subsidiaries that are more than 50% owned and controlled. CLARCOR Inc. and its subsidiaries are hereinafter collectively referred to as the "Company" or CLARCOR. Minority interests represent an outside shareholder's 10% ownership of the common stock of Filtros Baldwin de Mexico (FIBAMEX) and outside shareholders' 20% ownership of Baldwin-Unifil S.A. FOREIGN CURRENCY TRANSLATION Financial statements of foreign subsidiaries are translated into U.S. dollars at current rates, except that revenues, costs and expenses are translated at average current rates during each reporting period. Net exchange gains or losses resulting from the translation of foreign financial statements and the effect of exchange rate changes on intercompany transactions of a long-term investment nature are accumulated with other comprehensive earnings as a separate component of shareholders' equity and are presented, net of tax, in the Consolidated Statements of Shareholders' Equity. PLANT ASSETS Depreciation is provided by the straight-line and accelerated methods for financial statement purposes and by the accelerated method for tax purposes. The provision for depreciation is based on the estimated useful lives of the assets (15 to 40 years for buildings and improvements and 3 to 15 years for machinery and equipment). It is the policy of the Company to capitalize renewals and betterments and to charge to expense the cost of current maintenance and repairs. EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS The excess of cost over fair value of assets acquired is being amortized over a forty-year period using the straight-line method. Other acquired intangible assets are being amortized over the estimated periods to be benefited using the straight-line method. These intangibles include trademarks (40 year life), patents (average 14 year life), and other identifiable intangible assets with lives ranging from one to thirty years. In accordance with Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," the Company determines any impairment losses based on underlying cash flows related to specific groups of plant assets, identifiable intangibles and excess cost over fair value of assets acquired and would first apply such impairment losses to related goodwill. STATEMENTS OF CASH FLOWS All highly liquid investments that are readily saleable are considered to be short-term cash investments. The carrying amount approximates fair value. CONCENTRATIONS OF CREDIT AND FINANCIAL INSTRUMENTS Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of short-term cash investments and trade receivables. The Company places its short-term cash investments in high-grade municipal securities and classifies them as trading securities. At November 30, 2000 and 1999, the Company held short-term municipal securities with a total cost of $2,900 and $12,720, respectively. Cost approximates market for these securities. Concentrations of credit risk with respect to trade receivables are limited due to the Company's large number of customers and their dispersion across many different industries and locations. The Company makes limited use of derivative financial instruments and does not use them for trading or speculative purposes. Derivative financial instruments are used principally to manage certain interest rate and foreign currency risks. Interest rate swap agreements are utilized to convert certain floating rate debt into fixed rate debt. Cash flows related to interest rate swap agreements are included in interest expense over the terms of the agreements. INCOME TAXES The Company provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. REVENUE RECOGNITION Revenue is recognized upon shipment of goods to customers. COMPREHENSIVE EARNINGS Foreign currency translation adjustments are included in other comprehensive earnings in accordance with Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." USE OF MANAGEMENT'S ESTIMATES The preparation of the 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 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. ACCOUNTING PERIOD The Company's fiscal year ends on the Saturday closest to November 30. The fiscal year ended December 2, 2000 included fifty-three weeks. The fiscal years ended November 27, 1999 and November 28, 1998 were comprised of fifty-two weeks. In the consolidated financial statements, all fiscal years are shown to begin as of December 1 and end as of November 30 for clarity of presentation. 16 CLARCOR 2 -------------------------------------------------------------------------------- RECLASSIFICATIONS Certain reclassifications have been made to conform prior years' data to the current presentation. These reclassifications had no effect on reported earnings. B. BUSINESS COMBINATIONS AND INVESTMENTS IN AFFILIATES During 2000, the Company purchased Filter Products, Inc., a Sacramento, California liquid process filtration manufacturer, and two air filtration distributors. All three of these acquisitions were accounted for under the purchase method of accounting. Two of the acquisitions were paid for in cash. The purchase price of the other was paid in cash and stock. For these acquisitions, the Company paid $12,730 in cash, net of cash received, and issued 160,704 shares of its common stock (or $2,895). These acquisitions did not have a significant impact on the results of the Company. On September 10, 1999, the Company completed its acquisitions of Purolator Air Filtration (Purolator), Facet International (Facet), and Purolator Facet, Inc. (PFI), manufacturers of air and liquid filtration products, for approximately $140,985, net of cash received, including acquisition expenses. The purchase price was paid in cash with available funds and proceeds from long-term borrowings of approximately $115,000 from a revolving credit facility. (See Note G.) As a result of the acquisitions, Purolator, Facet, and PFI became subsidiaries of the Company and are included in the Company's Industrial/Environmental Filtration segment. The Company's non-cash investing and financing activities related to this acquisition included assumed liabilities of $25,910. The transaction was accounted for under the purchase method of accounting with the excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired recorded as goodwill and amortized over 40 years by the straight-line method. Other acquired intangible assets are being amortized as discussed in Note A. During fiscal year 2000, the Company finalized the purchase price according to the terms of the purchase agreement and completed the estimates of liabilities assumed, including those associated with exit and other costs of the acquisition. The finalized allocation to major categories of assets and liabilities resulted in a reduction to goodwill of $34. As part of the final allocation of purchase price, the Company accrued an additional $800 for severance and exit costs during 2000, resulting in a total accrual of $1,085 of which $329 was paid out as of November 30, 2000. The remaining cash payments for severance and exit costs are expected to be paid out by the end of 2001. The operating results are included in the Company's consolidated results of operations from September 1, 1999, the effective date of the acquisitions. The following unaudited pro forma information summarizes the results of operations for the periods indicated as if the acquisitions had been completed as of the beginning of the periods presented. The pro forma information gives effect to actual operating results prior to the acquisitions, adjusted to include the pro forma effect of interest expense, depreciation, amortization of intangibles and income taxes. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisitions had occurred as of the beginning of the periods presented or that may be obtained in the future. Years Ended November --------------------------- 1999 1998 --------------------------- Net sales ..................... $591,869 $576,973 Net earnings .................. 36,625 32,277 Basic earnings per share ...... 1.53 1.33 Diluted earnings per share .... 1.51 1.31 During 1998, the Company purchased Air Technologies, Inc. (ATI), an Ottawa, Kansas manufacturer of air filtration products, and a small filter distributor. Each acquisition was made for cash and accounted for under the purchase method of accounting. Also during 1998, the Company purchased the remaining 50% interest in Baldwin Australia and an additional 10% interest in Baldwin-Unifil S.A. These acquisitions did not have a significant impact on the results of the Company. C. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for approximately 43% and 42% of the Company's inventories at November 30, 2000 and 1999, respectively, and by the first-in, first-out (FIFO) method for all other inventories. The FIFO method approximates current cost. Inventories are summarized as follows: 2000 1999 ------------------- Raw materials ..................... $ 38,444 $ 33,274 Work-in-process ................... 14,253 15,203 Finished products ................. 48,316 42,978 ------------------- Total at FIFO ..................... 101,013 91,455 Less excess of FIFO over LIFO ..... 452 1,605 ------------------- $100,561 $ 89,850 =================== During 2000, certain LIFO inventory quantities were reduced resulting in a partial liquidation of the LIFO bases. The effect on net earnings was not material. 17 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (Dollars in thousands except per share data) D. PLANT ASSETS Plant assets at November 30, 2000 and 1999 were as follows: 2000 1999 ------------------- Land .............................. $ 3,911 $ 3,853 Buildings and building fixtures ... 67,986 65,845 Machinery and equipment ........... 182,689 163,481 Construction-in-process ........... 17,666 11,108 ------------------- 272,252 244,287 Less accumulated depreciation ..... 132,131 118,261 ------------------- $140,121 $126,026 =================== E. ACQUIRED INTANGIBLES Acquired intangibles, net of accumulated amortization at November 30, 2000 and 1999 consisted of the following: 2000 1999 ------------------- Excess of cost over fair value of assets acquired ..... $ 62,333 $ 49,784 Trademarks ............................................ 29,090 30,140 Other acquired intangibles ............................ 10,454 11,227 ------------------- $101,877 $ 91,151 =================== Accumulated amortization was $13,812 and $9,890 at November 30, 2000 and 1999, respectively. F. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities at November 30, 2000 and 1999 were as follows: 2000 1999 ----------------- Accounts payable ............................ $40,826 $42,477 Accrued salaries, wages and commissions ..... 12,678 10,875 Compensated absences ........................ 6,192 6,224 Accrued pension liabilities ................. 262 6,711 Other accrued liabilities ................... 24,229 21,306 ----------------- $84,187 $87,593 ================= G. LONG-TERM DEBT Long-term debt at November 30, 2000 and 1999 consisted of the following: 2000 1999 ------------------- Multicurrency revolving credit agreement, interest payable at the end of each funding period at an adjusted LIBOR ....... $116,000 $115,000 Promissory note, interest payable semi-annually at 6.69% .................... 20,000 25,000 Industrial Revenue Bonds, at 2.20% to 5.85% interest rates ...................... 10,063 10,438 Other obligations, at 7.75% to 10% interest rates ............................ 905 983 ------------------- 146,968 151,421 Less current portion ......................... 5,482 5,440 ------------------- $141,486 $145,981 =================== A fair value estimate of $147,419 and $143,867 for long-term debt in 2000 and 1999, respectively, is based on the current interest rates available to the Company for debt with similar remaining maturities. In September 1999, the Company entered into a three-year, multicurrency revolving credit agreement with a group of participating financial institutions under which it may borrow up to $185,000. The agreement, which was extended for one additional year in 2000, provides that loans may be made under a selection of currencies and rate formulas. The interest rate is based upon either a defined Base Rate or the London Interbank Offered Rate (LIBOR) plus a variable spread of .55% to 1.25%. The variable spread is based on the ratio of the Company's outstanding borrowings as compared with its shareholders' equity. The spread was .80% at November 30, 2000. Facility fees and other fees on the entire loan commitment are payable for the duration of this facility. At November 30, 2000 and 1999, $116,000 and $115,000 were outstanding under this agreement. Borrowings under the credit facility are unsecured but are guaranteed by certain of the Company's subsidiaries. The agreement related to this borrowing includes certain restrictive covenants that include maintaining minimum consolidated net worth of $160,000, limiting new borrowings, maintaining a minimum interest coverage, and restricting certain changes in ownership as stipulated in the agreement. The Company was in compliance with these covenants as of November 30, 2000 and 1999. This agreement also includes a letter of credit facility, against which $10,841 and $11,405 in letters of credit had been issued as of November 30, 2000 and 1999, respectively. During 2000, the Company entered into several interest rate agreements to manage its interest exposure related to the multicurrency credit revolver. Two agreements were in place at November 30, 2000 covering the outstanding amount on the multicurrency credit revolver. One agreement provides for the Company to pay a 7.12% fixed interest rate on a notional amount of $60,000 and matures in December 2000. The other agreement provides for the Company to pay a 7.34% fixed interest rate on a notional amount of $60,000 and is effective until September 11, 2002. Under both agreements the Company will receive interest at floating rates based on LIBOR. At November 30, 2000 and 1999, LIBOR was 7.46% and 6.51%, respectively. The fair market value of the agreements was a negative $1,183 at November 30, 2000. The 6.69% promissory note matures July 25, 2004, but the Company is required to prepay, without premium, certain principal amounts as stated in the agreement. Under the note agreement, the Company must meet certain restrictive covenants. The covenants were amended during 1999 to be similar to those contained in the multicurrency revolving credit facility. 18 CLARCOR 4 -------------------------------------------------------------------------------- On February 1, 1996, the Company, in cooperation with the South Dakota Economic Development Finance Authority, issued $8,410 of Industrial Revenue Bonds. The bonds are due February 1, 2016, with a variable rate of interest that is reset weekly. The Company has other outstanding Industrial Revenue Bonds of $1,653 and $2,028 as of November 30, 2000 and 1999, respectively. These mature in 2005 and are backed by a letter of credit that requires an annual fee of 0.925% of the outstanding balance. This letter of credit expires in May 2001. Exclusive of the multicurrency revolving credit facility, principal maturities of long-term debt for the next five fiscal years ending November 30 approximates: $5,482 in 2001, $5,500 in 2002, $5,531 in 2003, $5,581 in 2004, $305 in 2005 and $8,569 thereafter. The borrowings under the revolving credit facility that matures in 2003 have been classified as long-term as the Company has both the intent and ability to refinance this amount on a long-term basis. Interest paid totaled $10,714, $2,228 and $2,293 during 2000, 1999 and 1998, respectively. H. LEASES The Company has various lease agreements for offices, warehouses, manufacturing plants, and equipment that expire on various dates through June 2007 and contain renewal options. Some of these leases provide for payment of property taxes, utilities and certain other expenses. Commitments for minimum rentals under noncancellable leases at November 30, 2000 for the next five years are: $8,176 in 2001, $7,481 in 2002, $6,016 in 2003, $4,463 in 2004 and $2,385 in 2005. Rent expense totaled $8,367, $6,063 and $5,189 for the years ended November 30, 2000, 1999 and 1998, respectively. I. PENSION AND OTHER POSTRETIREMENT PLANS The Company has defined benefit pension plans and postretirement health care plans covering certain employees and retired employees. In addition to the plan assets related to qualified plans, the Company has funded approximately $2,580 and $8,550 at November 30, 2000 and 1999, respectively, in restricted trusts for its nonqualified plans. These trusts are included in other current and other noncurrent assets in the Company's Consolidated Balance Sheets. The following table shows reconciliations of the pension plans and other postretirement plan benefits as of November 30, 2000 and 1999. The accrued pension benefit liability includes an unfunded benefit obligation of $5,231 and $11,445 as of November 30, 2000 and 1999, respectively. The obligations have been determined with a weighted average discount rate of 7.75% and 7.50% in 2000 and 1999, respectively, and a rate of increase in future compensation of primarily 5.0% in both years. The expected weighted average long-term rate of return was 9.0% in both 2000 and 1999.
Pension Postretirement Benefits Benefits ---------------------------------------------- 2000 1999 2000 1999 ---------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year ........................... $ 73,356 $ 75,986 $ 3,866 $ 2,342 Service cost ......................... 3,122 2,364 92 13 Interest cost ........................ 5,021 5,251 280 149 Actuarial (gains) / losses ........... (2,038) (6,378) (6) 18 Acquisitions ......................... -- -- -- 1,606 Benefits paid ........................ (10,481) (3,867) (150) (262) -------------------------------------------- Benefit obligation at end of year .... 68,980 73,356 4,082 3,866 -------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year ................. 87,214 79,828 -- -- Actual return on plan assets ......... 3,012 11,076 -- -- Benefits paid ........................ (3,540) (3,690) -- -- -------------------------------------------- Fair value of plan assets at end of year ........................... 86,686 87,214 -- -- -------------------------------------------- Funded status ........................ 17,706 13,858 (4,082) (3,866) Unrecognized net transition asset .... -- (1,056) -- -- Unrecognized prior service cost ...... 188 210 -- -- Unrecognized net actuarial (gain) / loss ..................... (3,011) (5,421) 238 244 -------------------------------------------- Net amount recognized ................ $ 14,883 $ 7,591 $ (3,844) $ (3,622) ============================================ Amounts recognized in the Consolidated Balance Sheets include: Prepaid benefit cost ........... $ 19,519 $ 17,879 $ -- $ -- Accrued benefit liability ...... (4,636) (10,288) (3,844) (3,622) -------------------------------------------- Net amount recognized ................ $ 14,883 $ 7,591 $ (3,844) $ (3,622) ============================================
The components of net periodic benefit cost for the pensions are shown below. Pension Benefits -------------------------------- 2000 1999 1998 -------------------------------- Components of net periodic benefit cost: Service cost ............................. $ 3,122 $ 2,364 $ 2,248 Interest cost ............................ 5,021 5,251 4,882 Expected return on plan assets ........... (7,695) (7,041) (6,883) Additional recognition amount ............ -- 196 196 Amortization of unrecognized: Net transition asset .................. (1,056) (1,056) (1,056) Prior service cost .................... 21 62 63 Net actuarial loss .................... 7 54 64 ------- ------- ------- Net periodic benefit (income) / cost ....................... $ (580) $ (170) $ (486) ======= ======= ======= The postretirement obligations represent a fixed dollar amount per retiree. The Company has the right to modify or terminate these benefits. The participants will assume substantially all 19 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (Dollars in thousands except per share data) future health care benefit cost increases, and therefore, future increases in health care costs will not increase the postretirement benefit obligation or cost to the Company. Therefore, the Company has not assumed any annual rate of increase in the per capita cost of covered health care benefits for future years. The components of net periodic benefit cost for postretirement health care benefits are shown below. Postretirement Benefits ----------------------- 2000 1999 1998 ----------------------- Components of net periodic benefit cost: Service cost ................................ $ 92 $ 13 $ 13 Interest cost ............................... 280 149 166 ----------------------- Net periodic benefit cost ................... $372 $162 $179 ======================= The Company also sponsors various defined contribution plans that provide employees with an opportunity to accumulate funds for their retirement. The Company matches the contributions of participating employees based on the percentages specified in the respective plans. The Company recognized expense related to these plans of $1,408, $1,211 and $1,037 in 2000, 1999 and 1998, respectively. J. INCOME TAXES The provision for income taxes consisted of: 2000 1999 1998 ------------------------------- Current: Federal .... $ 17,693 $ 18,398 $ 16,976 State ...... 2,574 2,177 2,784 Foreign .... 1,063 547 585 Deferred ...... 1,871 (985) (1,083) ------------------------------- $ 23,201 $ 20,137 $ 19,262 =============================== Income taxes paid, net of refunds, totaled $16,458, $22,234 and $16,199 during 2000, 1999 and 1998, respectively. Earnings before income taxes and minority interests included the following components: 2000 1999 1998 --------------------------- Domestic income .... $60,471 $53,467 $49,762 Foreign income ..... 3,016 2,148 1,585 --------------------------- Total ........... $63,487 $55,615 $51,347 =========================== The provision for income taxes resulted in effective tax rates that differ from the statutory federal income tax rates. The reasons for these differences are as follows: Percent of Pretax Earnings --------------------------- 2000 1999 1998 --------------------------- Statutory U.S. tax rates .... 35.0% 35.0% 35.0% State income taxes, net of federal benefit .......... 2.6 2.6 3.4 Foreign sales ............... (0.8) (0.8) (0.7) Other, net .................. (0.3) (0.6) (0.2) --------------------------- Consolidated effective income tax rate .......... 36.5% 36.2% 37.5% =========================== The components of the net deferred tax liability as of November 30, 2000 and 1999 were as follows: 2000 1999 -------------------- Deferred tax assets: Deferred compensation ........................ $ 3,930 $ 2,792 Other postretirement benefits ................. 783 719 Foreign net operating loss carryforwards ..... 475 203 Accounts receivable .......................... 2,177 1,538 Inventories .................................. 1,774 1,975 Accrued liabilities and other ................ 2,009 751 -------------------- Total gross deferred tax assets ................. 11,148 7,978 -------------------- Deferred tax liabilities: Pensions ..................................... (5,209) (2,656) Plant assets ................................. (11,189) (7,911) Other ........................................ (82) (390) -------------------- Total gross deferred tax liabilities ............ (16,480) (10,957) -------------------- Net deferred tax liability ...................... $ (5,332) $ (2,979) ==================== The Company expects to realize the deferred tax assets, including foreign net operating loss carryforwards, through the reversal of taxable temporary differences and future earnings. As of November 30, 2000, the Company has not provided taxes on unremitted foreign earnings of approximately $3,000 that are intended to be indefinitely reinvested to finance operations and expansion outside the United States. If such earnings were distributed beyond the amount for which taxes have been provided, foreign tax credits would substantially offset any incremental U.S. tax liability. K. CONTINGENCIES The Company is involved in legal actions arising in the normal course of business. Additionally, the Company is party to various proceedings relating to environmental issues. The U.S. Environmental Protection Agency (EPA) and/or other responsible state agencies have designated the Company as a potentially responsible party (PRP), along with other companies, in remedial activities for the cleanup of waste sites under the federal Superfund statute. Environmental and related remediation costs are difficult to quantify for a number of reasons, including the number of parties involved, the difficulty in determining the extent of the contamination, the length of time remediation may require, the 20 CLARCOR 6 -------------------------------------------------------------------------------- complexity of the environmental regulation and the continuing advancement of remediation technology. Applicable federal law may impose joint and several liability on each PRP for the cleanup. It is the opinion of management, after consultation with legal counsel, that additional liabilities, if any, resulting from these legal or environmental issues, are not expected to have a material adverse effect on the Company's financial condition or consolidated results of operations. L. PREFERRED STOCK PURCHASE RIGHTS In March 1996, the Board of Directors of CLARCOR adopted a Shareholder Rights Plan to replace an existing plan that expired on April 25, 1996. Under the terms of the Plan, each shareholder received rights to purchase shares of CLARCOR Series B Junior Participating Preferred Stock. The rights become exercisable only after the earlier to occur of (i) 10 business days after the first public announcement that a person or group (other than a CLARCOR related entity) has become the beneficial owner of 15% or more of the outstanding shares of CLARCOR Common Stock; or (ii) 10 business days (unless extended by the CLARCOR Board in accordance with the Rights Agreement) after the commencement of, or the intention to make, a tender or exchange offer, the consummation of which would result in any person or group (other than a CLARCOR related entity) becoming such a 15% beneficial owner. Each right entitles the holder to buy one-hundredth of a share of such preferred stock at an exercise price of $80 subject to certain adjustments. Once the rights become exercisable, each right will entitle the holder, other than the acquiring individual or group, to purchase a number of CLARCOR common shares at a 50% discount to the then-market price of CLARCOR Common Stock. In addition, under certain circumstances, if the rights become exercisable, the holder will be entitled to purchase the stock of the acquiring individual or group at a 50% discount. The Board may also elect to redeem the rights at $.01 per right. The rights expire on April 25, 2006. The authorized preferred stock includes 300,000 shares designated as Series B Junior Participating Preferred Stock. M. INCENTIVE PLAN In 1994, the shareholders of CLARCOR adopted the 1994 Incentive Plan, which allows the Company to grant stock options, restricted stock and performance awards to officers, directors and key employees. The 1994 Incentive Plan incorporates the various incentive plans in existence prior to March 1994. In addition, the Company has, in connection with the 1997 acquisition of United Air Specialists, Inc. (UAS), assumed the stock option plans of UAS and has reserved 20,669 shares of the Company's common stock for issuance under the assumed UAS stock option plans. The amended 1994 Incentive Plan allows grants and awards of up to 1.5% of the outstanding common stock as of January 1 of each calendar year. In addition, the Compensation and Stock Option Committee of the Company's Board of Directors may approve an additional 1% of outstanding common stock to be awarded during any calendar year. Any portion that is not granted in a given year is available for future grants. After the close of fiscal year 2000, 368,153 shares were granted, including the restricted stock units discussed hereafter. The following is a description and a summary of key provisions related to this plan. STOCK OPTIONS In accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," the Company accounts for stock-based compensation using the intrinsic value method as prescribed under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related Interpretations and provides the disclosure-only provisions of SFAS 123. Nonqualified stock options may, at the discretion of the Board of Directors, be granted at the fair market value at the date of grant or at an exercise price less than the fair market value at the date of grant. All options granted in 2000, 1999 and 1998 were at the fair market value at the dates of the grants. Options granted to key employees prior to the end of fiscal year 2000 vest 25% per year beginning at the end of the third year; therefore, they become fully exercisable at the end of six years. Options granted to key employees after the close of fiscal year 2000 vest 25% per year beginning at the end of the first year; therefore, they become fully exercisable at the end of four years. Options granted to non-employee directors vest immediately. All options expire ten years from the date of grant unless otherwise terminated. The following table summarizes the activity under the nonqualified stock option plans.
2000 1999 1998 ------------------------------------------------------------------------- WEIGHTED Weighted Weighted AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price ------------------------------------------------------------------------- Outstanding at beginning of year ..... 2,239,162 $ 14.83 2,116,182 $ 14.18 1,895,086 $ 12.15 Granted ................. 412,404 17.80 287,982 18.00 518,239 19.86 Exercised/ surrendered ........... (365,540) 12.75 (165,002) 12.93 (297,143) 11.10 ------------------------------------------------------------------------- Outstanding at end of year ........... 2,286,026 $ 14.53 2,239,162 $ 14.83 2,116,182 $ 14.18 ======================================================================= Options exercisable at end of year ........ 1,508,859 $ 14.68 1,159,462 $ 12.62 1,110,433 $ 12.12 =======================================================================
21 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (Dollars in thousands except per share data) The following table summarizes information about the options at November 30, 2000: Options Outstanding Options Exercisable ---------------------------------------------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Exercise Remaining Exercise Prices Number Price Life in Years Number Price ----------------------------------------------------------------------------- $11.55 - $15.83 1,225,885 $13.06 3.94 1,100,261 $12.92 $17.00 - $21.67 1,060,141 $18.85 7.99 408,598 $19.35 In addition, stock options outstanding and exercisable at November 30, 2000 and 1999 assumed as part of the UAS acquisition were 20,669 and 29,005, respectively, and no further grants were made. These substitute options have an exercisable price range per share of $2.40 to $5.94 at November 30, 2000 and expire between 2002 and 2005. LONG RANGE PERFORMANCE AWARDS Officers and key employees may be granted target awards of Company shares of common stock and performance units, which represent the right to a cash payment. The awards are earned and shares are issued only to the extent that the Company achieves performance goals determined by the Board of Directors during a three-year performance period. The Company granted 28,383 and 26,656 performance shares on December 1, 1999 and 1998, respectively. As of November 30, 2000, the Company has cancelled 2,496, 4,860 and 802 shares of the 2000, 1999 and 1998 grants, respectively. The shares vest at the end of three years. During the performance period, officers and key employees are permitted to vote the restricted stock and receive compensation equal to dividends declared on common shares. The Company accrues compensation expense assuming attainment of the performance goals ratably during the performance cycle. Compensation expense for the plan totaled $901, $534 and $435 in 2000, 1999 and 1998, respectively. Distribution of Company common stock and cash for the performance periods ended November 30, 2000, 1999 and 1998 were $488, $485 and $537, respectively. Subsequent to the end of the fiscal year 2000, the Company granted 35,222 restricted units of Company common stock. In connection therewith, the Company cancelled 12,113 performance shares and 8,074 performance units from the December 1, 1999 grant and replaced them with 9,182 units of restricted stock and with additional stock option awards. The restricted shares vest over four years. No future awards of long range performance shares or units are expected to be granted. DIRECTORS' RESTRICTED STOCK COMPENSATION The 1994 Incentive Plan provided for grants of shares of common stock equal to five years of directors' annual retainers to all non-employee directors, in lieu of cash. The directors' rights to the shares vest 20% on date of grant and 20% annually during the next four years. The directors are entitled to receive dividends and exercise voting rights with respect to all shares prior to vesting. Any unvested shares are forfeited if the director ceases to be a non-employee director for any reason. Effective March 25, 2000, this plan was amended to grant all non-employee directors shares of common stock equal to a one-year annual retainer. The directors' rights to the shares vest immediately on the date of grant. In 2000, 7,076 shares of Company common stock were issued under the amended plan. Subsequent to the end of fiscal year 2000, 452 shares were granted. Compensation expense for the plan totaled $184, $191 and $149 in 2000, 1999 and 1998, respectively. During 1999, 16,002 shares of Company common stock were issued under the plan of which 15,488 were cancelled in 2000 due to the plan amendment. During 1999, 1,321 shares from a prior year grant were forfeited. FAIR VALUE ACCOUNTING (SFAS 123) Had compensation expense for the Company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method of SFAS 123, the Company's pro forma net earnings and diluted earnings per share would have been $39,520, $34,848 and $31,520 and $1.61, $1.43 and $1.28 for 2000, 1999 and 1998, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 2000, 1999 and 1998. Adjustments for forfeitures are made as they occur. 2000 1999 1998 ---------------------------- Risk-free interest rate ............. 6.34% 4.87% 5.90% Expected dividend yield ............. 2.47% 2.35% 2.60% Expected volatility factor .......... 25.00% 24.50% 25.80% Expected option term (in years) ..... 7.0 7.0 7.0 The weighted average fair value per option at the date of grant for options granted in 2000, 1999 and 1998 was $5.28, $4.88 and $5.63, respectively. The above pro forma disclosures may not be representative of the effects on reported net income and earnings per share for future years because compensation cost under SFAS 123 is amortized over the options' vesting period and compensation cost for options granted prior to fiscal year 1996 is not considered. N. STOCK SPLIT, TREASURY STOCK TRANSACTIONS AND EARNINGS PER SHARE On March 24, 1998, the Company declared a three-for-two stock split in the form of a 50% stock dividend distributable April 24, 1998 to shareholders of record April 10, 1998. In connection therewith, the Company transferred $8,145 from retained 22 CLARCOR 8 -------------------------------------------------------------------------------- earnings to common stock, representing the par value of additional shares issued. All share and per share amounts for all periods presented have been adjusted to reflect the stock split. During 1999 and 1998, the Company purchased and retired 50,000 and 528,691 shares of common stock, respectively. The number of issued shares was reduced as a result of the retirement of these shares. The Company calculates and presents basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." Diluted earnings per share reflects the impact of outstanding stock options if exercised during the periods presented using the treasury stock method. The following table provides a reconciliation of the numerators and denominators utilized in the calculation of basic and diluted earnings per share.
2000 1999 1998 --------------------------------------- Net Earnings (numerator) ............... $ 40,237 $ 35,412 $ 32,079 Basic EPS: Weighted average number of common shares outstanding (denominator) .................... 24,269,675 23,970,011 24,268,250 Basic per share amount ........... $ 1.66 $ 1.48 $ 1.32 ======================================= Diluted EPS: Weighted average number of common shares outstanding ...................... 24,269,675 23,970,011 24,268,250 Dilutive effect of stock options .... 236,496 343,596 380,373 --------------------------------------- Diluted weighted average number of common shares outstanding (denominator) ................. 24,506,171 24,313,607 24,648,623 Diluted per share amount ......... $ 1.64 $ 1.46 $ 1.30 =======================================
For fiscal years ended November 30, 2000, 1999 and 1998, respectively, 682,866, 525,156 and 508,864 options with a weighted average exercise price of $19.34, $19.81 and $19.86 were not included in the computation of diluted earnings per share as the options' exercise prices were greater than the average market price of the common shares during the respective periods. O. UNAUDITED QUARTERLY FINANCIAL DATA The unaudited quarterly data for 2000 and 1999 were as follows: First Second Third Fourth Quarter Quarter Quarter Quarter Total ---------------------------------------------------- 2000: NET SALES ............ $150,697 $162,205 $160,830 $178,416 $652,148 GROSS PROFIT ......... 44,283 49,985 47,778 56,299 198,345 NET EARNINGS ......... 7,063 10,090 10,078 13,006 40,237 NET EARNINGS PER COMMON SHARE: BASIC .............. $ 0.29 $ 0.42 $ 0.41 $ 0.53 $ 1.66 DILUTED ............ $ 0.29 $ 0.41 $ 0.41 $ 0.53 $ 1.64 1999: Net sales ............ $ 99,166 $110,483 $112,090 $156,130 $477,869 Gross profit ......... 31,379 34,983 34,190 48,035 148,587 Net earnings ......... 6,210 8,650 9,736 10,816 35,412 Net earnings per common share: Basic ............. $ 0.26 $ 0.36 $ 0.41 $ 0.45 $ 1.48 Diluted ........... $ 0.25 $ 0.36 $ 0.40 $ 0.45 $ 1.46 Fiscal year 2000 was a fifty-three week year, whereas fiscal year 1999 was a fifty-two week year. Likewise, fourth quarter 2000 was a fourteen week quarter while fourth quarter 1999 was a thirteen week quarter. In addition, fourth quarter 1999 includes the acquisition of three industrial filtration businesses as discussed in Note B. P. SEGMENT INFORMATION The Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related Information" effective with year-end 1999. This standard requires that companies disclose selected information by operating segment. SFAS 131 defines an operating segment as a component of a company which engages in business activities from which it may earn revenues and incur expenses; has its operating results regularly reviewed by the entity's chief operating decision makers to make decisions about the allocation of resources and the assessment of performance; and has discrete financial information available. Based on the economic characteristics of the Company's business activities, the nature of products, customers and markets served, and the performance evaluation by management and the Company's Board of Directors, the Company has identified three reportable segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. The Engine/Mobile Filtration segment manufactures and markets a complete line of filters used in the filtration of oils, air, fuel, coolant, hydraulic and transmission fluids in both domestic and international markets. The Engine/Mobile Filtration segment provides filters for certain types of transportation equipment including automobiles, heavy-duty and light trucks, buses and 23 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (Dollars in thousands except per share data) locomotives, marine and mining equipment, industrial equipment and heavy-duty construction and agricultural equipment. The products are sold to aftermarket distributors, original equipment manufacturers and dealer networks, private label accounts and directly to truck service centers and large national accounts. The Industrial/Environmental Filtration segment manufactures and markets a complete line of filters, cartridges, dust collectors and filtration systems used in the filtration of air and industrial fluid processes in both domestic and international markets. The filters and filter systems are used in commercial and industrial buildings, hospitals, manufacturing processes, pharmaceutical processes, clean rooms, airports, shipyards, refineries, power generation plants and residences. The products are sold to commercial and industrial distributors, original equipment manufacturers and dealer networks, private label accounts, retailers and directly to large national accounts. The Packaging segment manufactures and markets consumer and industrial packaging products including custom-designed plastic and metal containers and closures and lithographed metal sheets in both domestic and international markets. The products are sold directly to consumer and industrial packaging customers. Subsequent to year-end 2000, the Company reached an agreement with a customer of its Packaging segment that will result in the early termination of a supply and license agreement. As a result of a settlement payment made by that customer in the first quarter 2001, the Packaging segment is expected to record increased revenue and operating profit in fiscal 2001. The segment's sales of plastic closures will be reduced beginning in 2001 as a result of the agreement. Net sales represent sales to unaffiliated customers. No single customer or class of product accounted for 10% or more of the Company's consolidated 2000 sales. Intersegment sales are not material. Assets are those assets used in each business segment. Corporate assets consist of cash and short-term cash investments, deferred income taxes, headquarters facility and equipment, pension assets and various other assets that are not specific to an operating segment. Unallocated amounts include interest income and expense and other non-operating income and expense items. The segment data for the years ended November 30, 2000, 1999 and 1998 were as follows: 2000 1999 1998 -------------------------------- Net sales: Engine/Mobile Filtration ............... $259,791 $238,680 $223,761 Industrial/Environmental Filtration .... 319,746 174,889 135,828 Packaging .............................. 72,611 64,300 67,184 -------------------------------- $652,148 $477,869 $426,773 ================================ Operating profit: Engine/Mobile Filtration ............... $ 49,162 $ 43,591 $ 38,983 Industrial/Environmental Filtration .... 18,433 5,120 6,966 Packaging .............................. 8,392 7,366 5,714 -------------------------------- 75,987 56,077 51,663 Other income (expense).................. (12,500) (462) (316) -------------------------------- Earnings before income taxes and minority interests .................. $ 63,487 $ 55,615 $ 51,347 ================================ Identifiable assets: Engine/Mobile Filtration ............... $144,563 $137,351 $128,618 Industrial/Environmental Filtration .... 271,669 241,471 72,289 Packaging .............................. 41,891 36,173 30,500 Corporate .............................. 43,807 57,996 74,359 -------------------------------- $501,930 $472,991 $305,766 ================================ Additions to plant assets: Engine/Mobile Filtration ............... $ 7,588 $ 13,115 $ 10,479 Industrial/Environmental Filtration .... 10,842 4,824 3,743 Packaging .............................. 8,045 3,217 1,258 Corporate .............................. 2,530 666 345 -------------------------------- $ 29,005 $ 21,822 $ 15,825 ================================ Depreciation and amortization: Engine/Mobile Filtration ............... $ 7,475 $ 6,944 $ 6,320 Industrial/Environmental Filtration .... 10,145 5,132 2,803 Packaging .............................. 2,832 2,742 2,749 Corporate .............................. 627 554 508 -------------------------------- $ 21,079 $ 15,372 $ 12,380 ================================ Financial data relating to the geographic areas in which the Company operates are shown for the years ended November 30, 2000, 1999 and 1998. Net sales by geographic area are based on sales to final customers within that region. 2000 1999 1998 -------------------------------- Net Sales: United States .......................... $532,210 $399,717 $355,522 Europe ................................. 60,250 35,984 29,505 Other international .................... 59,688 42,168 41,746 -------------------------------- $652,148 $477,869 $426,773 ================================ Plant assets, at cost less accumulated depreciation: United States .......................... $133,323 $119,196 $ 83,621 Europe ................................. 5,695 5,650 1,704 Other international .................... 1,103 1,180 1,064 -------------------------------- $140,121 $126,026 $ 86,389 ================================ 24 CLARCOR