Annual Report on Form 10-K
THE VALSPAR CORPORATION
October 30, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended October 30, 1998 Commission file number 1-3011
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THE VALSPAR CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-2443580
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(State of incorporation) (I.R.S. Employer
Identification No.)
1101 Third Street South
Minneapolis, Minnesota 55415
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 332-7371
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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Common Stock, $.50 Par Value New York Stock Exchange
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 twelve months, and (2) has been subject to the filing requirements
for the past 90 days.
Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by persons other than
officers, directors and more than 5% stockholders of the registrant as of
December 31, 1998 was $850 million based on the closing sales price of $37.3125
per share as reported on the New York Stock Exchange. As of such date,
43,428,113 shares of Common Stock, $.50 par value per share (net of 9,893,199
shares in treasury) were outstanding.
DOCUMENTS INCORPORATED IN PART BY REFERENCE
Incorporated Documents Location in Form 10-K
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1. The Valspar Corporation Annual Report to Parts II and IV
Stockholders for fiscal year ended
October 30, 1998
2. The Valspar Corporation Notice of 1999 Part III
Annual Meeting of Stockholders and Proxy
Statement to be filed with the
Securities and Exchange Commission
within 120 days of fiscal year ended
October 30, 1998
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2
PART I
ITEM 1. BUSINESS
DESCRIPTION
The Valspar Corporation (the "Company") is a paint and coatings manufacturer and
has one reportable industry segment. Operating groups of the Company are
organized so as to reflect classes of similar products, and the following table
shows the percentage of net sales for these groups for the past three fiscal
years.
Class of Products 1998 1997 1996
----------------- ---- ---- ----
Consumer Coatings 34% 34% 34%
Packaging Coatings 28 29 27
Industrial Coatings 24 23 24
Special Products 14 14 15
PRODUCTS AND DISTRIBUTION METHODS
The Company is engaged in the manufacture and distribution of paint and coatings
through its Consumer Coatings, Industrial Coatings, Packaging Coatings and
Special Products groups.
The CONSUMER COATINGS group manufactures and distributes a full line of latex
and oil-based paints, stains and varnishes serving primarily the do-it-yourself
market. Its products are marketed under proprietary brands (Colony, Valspar,
Enterprise, Magicolor, McCloskey, BPS and Masury) and under private labels.
Colony, Valspar, Enterprise and McCloskey paint sales are directed primarily to
home improvement centers. Magicolor's marketing focus is mass merchants and the
branded products of Masury and Valspar are sold directly to paint specialty
stores and independent building material outlets. Private label and BPS consumer
products are primarily sold to hardware wholesalers, home center chains, farm
store chains and farm cooperatives. A group of specialty products, which
includes Valspar and McCloskey varnishes, clear polyurethanes, interior stains
and marine paints, is sold nationally through all of these channels.
Merchandising assistance is provided to consumer customers in the form of
seasonal promotion programs, cooperative advertising on a local basis,
informational literature and self-merchandised displays. Consumer products are
distributed throughout the United States, primarily from factory warehouses and
warehouse distribution centers.
In 1998, the Company acquired Plasti-Kote Co., Inc., a manufacturer and
distributor of aerosol spray paint with production facilities located in Medina,
Ohio. Plasti-Kote's broad range of branded and private label products are
marketed to the same channels as the Consumer Group's other products.
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3
PART I (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
The primary manufacturing plants for the CONSUMER COATINGS group are located in
Azusa, California; Garland, Texas; Rockford, Illinois; Tampa, Florida; Wheeling,
Illinois; Statesville, North Carolina; and Medina, Ohio. The latex manufacturing
plants in Wheeling, Statesville and Garland are three of the most efficient
facilities in the consumer paint industry.
The PACKAGING COATINGS group is the largest global coatings supplier to the
rigid packaging industry. Packaging coatings for application to food and
beverage can bodies and ends comprise the largest volume of sales by this group.
Great care is taken to ensure that these coatings meet F.D.A., U.S.D.A. and
other country specific regulations. Also produced are coatings for aerosol cans,
bottle crowns, closures for glass bottles, and coatings for flexible packaging -
paper, film and foil substrates. In 1996, the Company opened a plant for the
manufacture of packaging coatings in the Peoples Republic of China with the
Company's Chinese joint venture partner. In 1996, the Company acquired the can
coatings and metal decorating inks business of Coates Coatings. The first phase
of the acquisition, completed in May 1996, included businesses in the UK,
France, Norway, Spain, Germany, Australia and the U.S.A. The second phase,
completed January 1997, included businesses in Hong Kong and China. The Company
completed the South Africa portion of the third phase in December 1997 by
purchasing a 49% interest in a joint venture with Coates in South Africa. The
Company will acquire the remaining 51% interest from Coates within the next
three years. The Packaging Coatings Group expanded its operations to South
America through the formation of a joint venture in June 1997 with Renner
Herrmann, S.A., a leading Brazilian coatings manufacturer. In July 1998, the
Company increased its ownership position from 49% to 51% of its Valspar Marlux
joint venture in Mexico. In April 1998, the Company acquired Anzol Pty. Ltd., an
Australian industrial and packaging coatings company based in Sydney, Australia.
In August 1998, the Company entered into an agreement to purchase the worldwide
packaging coatings business of Dexter Corporation, which is subject to customary
closing conditions.
The primary manufacturing plants for the PACKAGING COATINGS group are located in
Azusa, California; Carol Stream, Illinois; Covington, Georgia; Garland, Texas;
Pittsburgh, Pennsylvania; Rochester, Pennsylvania; West Hill, Ontario, Canada;
Machen, England; Nantes, France; Mjondalen, Norway; XiXiang, China; Melbourne,
Australia; Sydney, Australia; Durban, South Africa; Sao Paulo, Brazil; and
Monterrey, Mexico.
The INDUSTRIAL COATINGS group manufactures and distributes, primarily in the
United States and Canada, decorative and protective coatings for application to
metal, wood and plastic substrates. The Industrial Group is a supplier of
finishes to the kitchen cabinet, furniture and wood paneling industry. Products
include fillers, primers, stains and topcoats which are sold for such
diversified end uses as exterior siding, prefinished flooring, interior wall
paneling, kitchen cabinets and furniture. For metal and plastic substrates, a
large variety of coatings are formulated to meet customers' needs and, when
required, to meet EPA requirements through the use of such technologies as
electrodeposition, powder, high solids, water-borne and UV light cured coatings.
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4
PART I (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
During 1997, the Company acquired additional powder and general industrial
business through a business exchange with Ameron International Corporation and
entered into the mirror backing metals and coatings market by acquiring
Sureguard, Incorporated and Hilemn Laboratories, Inc. The Industrial Coatings
group products are used by a wide range of industries including the automotive
parts, building products, railcar, appliance, office furniture, agricultural
equipment, construction equipment and metal fabrication industries. The
Industrial Group also supplies coating systems to the coil coatings industry
which are used to coat coils of metal prior to fabrication into products for
such markets as pre-engineered buildings, doors, lighting fixtures and
appliances. Through the acquisition of Anzol Pty. Ltd. in Australia, the
Industrial Group entered the Australian industrial market, specifically coil
coatings and general industrial products, with full manufacturing capabilities.
The primary manufacturing plants for the INDUSTRIAL COATINGS group are located
in Fort Wayne, Indiana; Garland, Texas; High Point, North Carolina; Jackson,
Tennessee; Kankakee, Illinois; West Hill, Ontario, Canada; Singapore; Melbourne,
Australia; and Sydney, Australia.
The SPECIAL PRODUCTS group is engaged in the production and marketing, primarily
in the United States, of resins and emulsions for coatings, automotive and fleet
refinish coatings, heavy duty marine coatings, high performance floor coatings
for industrial and commercial use, colorants and colorant systems. Emulsions and
resins are produced at the Company's facilities in Los Angeles, California;
Garland, Texas; Kankakee, Marengo and Rockford, Illinois; and Hagerstown,
Maryland (the Hagerstown facility was acquired in May 1997 from Rust-Oleum
Corporation, a subsidiary of RPM, Inc.) for use by the Company and for sale to
other coatings manufacturers. In December 1998, the Company's resin subsidiary
acquired a majority interest in Dyflex Polymers, a Netherlands producer of
specialty water-based polymers. The automotive and fleet refinish coatings are
produced at the Company's facilities in Picayune, Mississippi and Grand Prairie,
Texas (the Grand Prairie facility was acquired in January 1997 from Sureguard,
Incorporated). The Company is focusing on strengthening its presence in the
fleet refinish coatings sector and the production shop/light industrial refinish
sector. The Company is also a supplier of coatings for auto under-body,
under-hood, exterior and interior trim parts. In November 1996, the Company
acquired House of Kolor, Inc., a high-end custom refinish coatings manufacturer.
As mentioned above in the discussion of the Consumer Coatings Group, the Company
acquired Plasti-Kote Co., Inc. in 1998. Plasti-Kote also sells aerosol spray
paints to automotive distributors as well as mass automotive retailers. These
products are used by body shops, fleet, aircraft shops and general consumers.
Products range from primers to automotive colors and are sold under various name
brands including TEMPO, PLASTI-KOTE and MR. SPRAY. Heavy duty marine coatings
are formulated for industrial marine applications with highly corrosive and
other harsh environmental exposures requiring specialized coatings technology.
Major markets are marine vessels and off-shore oil and gas drilling rigs. Heavy
duty marine coatings are manufactured primarily in Garland, Texas or are toll
manufactured by third parties. In February 1997, the Company's maintenance
coatings business was sold and marine coatings production at Beaumont, Texas was
moved to Garland, Texas. In September 1998, the
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PART I (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
Company sold its functional powder business. Functional powder coatings are
applied primarily to pipes. The Federal Flooring Division manufactures and
markets specialty coatings and resurfacers for concrete and wood floors. Major
markets are commercial and industrial buildings. These products are produced at
Federal's plant in Chicago, Illinois. Paint colorants, manufactured at the
Company's facility in Rockford, Illinois, are used by retail paint dealers and
paint manufacturers to color paint to customer specifications. These colorants
are used to support the Company's consumer, industrial and packaging businesses
and are also sold to external customers.
The Company has formed various international joint ventures over the past
several years. In the Mexican and Central American markets, the Company formed a
joint venture in 1993 called Valspar-Marlux with Regio Empresas, a Mexican
corporation. While the initial focus of the joint venture was to engage in the
marketing, sales, distribution and technical service of packaging, coil, wood
and general metals coatings, during fiscal year 1996, the joint venture started
producing coatings products at its plant in Monterrey, Mexico. During 1998, the
Company obtained a majority position of 51% in the joint venture. Polycoat
Powders Limited, a joint venture of the Company and The Goodlass Nerolac Paint
Co., Ltd. in India, manufactures decorative powder coatings for the industrial
coatings market in India. Another joint venture company was formed in Hong Kong
in 1995 between the Company and China Merchants Hai Hong Holdings Co., Ltd. for
the purpose of constructing a packaging coatings plant in the Shenzhen Economic
Development Zone in the Guangdong Province of China. This plant became
operational at the beginning of the 1997 fiscal year and currently provides the
Company's packaging coatings products to China and Hong Kong, and may provide
packaging coatings products to other Southeast Asian markets in the future. The
Company formed a joint venture, called Valspar Renner, in 1997 in Brazil with
Renner Herrmann S.A., a Brazilian company. Valspar Renner will focus its efforts
on supplying packaging coatings to the South American market. As part of the
Coates acquisition, the Company acquired from Coates in December 1997, a 49%
interest in a joint venture in South Africa. The Company's joint venture with
Smiland Paint Company, called Conco Paint Company, continues to market and sell
coatings to the professional paint market served by home centers primarily in
the United States. In 1998, the Company acquired Plasti-Kote Co., Inc., a
manufacturer and distributor of aerosol spray cans with operations in Canada,
Denmark and United Kingdom. Plasti-Kote exports aerosol cans to over 40
countries in the world. The products are sold to mass merchants, do-it-yourself
outlets and professional painters.
RAW MATERIALS
Materials are procured from a number of suppliers. Many of these raw materials
are petroleum based derivatives, including olefin and natural gas derivatives,
as well as mined products. Under normal conditions all of these materials are
generally available on the open market, although prices and availability are
subject to fluctuation from time to time.
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6
PART I (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
PATENTS
Although the Company licenses some technology, the Company's business is not
materially dependent upon franchises, licenses or similar rights, or on any
single patent or trademark or group of related patents or trademarks.
SEASONALITY AND WORKING CAPITAL ITEMS
The Company's sales volume is traditionally highest during the third quarter of
the fiscal year. This seasonality is primarily due to the buying cycle of the
consumer paint business. During the first quarter, when sales are generally
lowest, the Company builds inventory, the financing for which is provided
primarily by internally generated funds and short-term credit lines discussed in
Note 5 of the Notes to Consolidated Financial Statements on page 16 and 17 of
Valspar's 1998 Annual Report to Stockholders incorporated by reference into this
Form 10-K.
SIGNIFICANT CUSTOMERS
In 1998, the Company's sales to Lowe's Companies, Inc. exceeded 10% of
consolidated net sales.
BACKLOG AND GOVERNMENT CONTRACTS
The Company has no significant backlog of orders and generally is able to fill
orders on a current basis.
No material portion of the business of the Company is subject to renegotiation
of profit or termination of contracts or subcontracts at the election of the
government.
COMPETITION
All aspects of the paint and coatings business are highly competitive. The
Company has many competitors in all areas of its business, some of which are
larger and more well-capitalized than the Company.
Principal methods of competition for consumer coatings and specialty paint
products include price, consumer recognition, product innovation, product
quality and rapid response to customer orders. The Company offers merchandising
and promotion programs to its consumer customers to counter the extensive
advertising programs of some of its competitors, and has maintained product
recognition through high quality, well-designed products.
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PART I (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
Principal methods of competition for industrial and packaging coatings are
technical capabilities for specific product formulation, ability to meet
customer delivery requirements, technical assistance to the customer in product
application, price and new product concepts. The Company believes that its
industrial and packaging coatings are competitive in these respects in the
industries it serves. The markets for these coatings are increasingly global and
the Company is well positioned to serve the global markets.
Principal methods of competition for resins and emulsions, automotive and fleet
refinish coatings, heavy duty marine coatings and high performance floor
coatings are product quality, rapid response to customer orders, technical
assistance to the customer in product application, price and new product
development. The Company believes it is competitive in these respects in the
Special Products business discussed previously.
Competitive factors in the colorant and color systems business include color
design and range, product quality, compatibility with various types of paint
bases, dealer merchandising assistance and price. The Company believes that it
is competitive in these respects.
RESEARCH AND DEVELOPMENT
Research and development costs for fiscal 1998 were $39,555,000, representing a
1.2% increase over fiscal 1997 ($39,099,000). Fiscal 1997 costs increased 19.9%
over those of fiscal 1996 ($32,616,000). Primary emphasis has been on emerging
technologies in the industrial and packaging coatings markets.
ENVIRONMENTAL COMPLIANCE
The Company undertakes to comply with applicable regulations relating to
protection of the environment and workers' safety. Capital expenditures for this
purpose were not material in fiscal 1998, and capital expenditures for 1999 to
comply with existing laws and regulations are also not expected to be material.
EMPLOYEES
The Company employs approximately 3,800 persons, approximately 500 of whom are
members of unions.
FOREIGN OPERATIONS AND EXPORT SALES
The Company's foreign operations consist of a mixture of wholly-owned subsidiary
companies, joint ventures, and licensing arrangements. The market for packaging
coatings has become an increasingly global market, and during 1996 the Company
acquired the metal decorating and
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8
PART I (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
packaging coatings business of Coates Coatings to provide global support to the
Company's customers. The Company's plant in West Hill, Ontario, Canada
manufactures and distributes packaging, coil and general industrial coatings for
the Canadian market. In addition to its wholly-owned subsidiary in Canada, the
Company has formed subsidiary companies in Australia, France, Germany, Hong
Kong, Norway, Singapore, Spain and the United Kingdom. Joint venture companies
are now established in Brazil, India, Mexico and South Africa. Greater emphasis
is being placed on wholly-owned subsidiaries and joint majority-owned ventures
to permit the Company to retain greater control over its technology. Licensing
arrangements for the utilization of the Company's technologies in the fields of
packaging coatings, marine coatings, colorants, powder coatings, coil coatings,
and general industrial coatings continue in over thirty foreign countries.
Export sales are increasing as the Company's products are being recognized in
the global markets. During 1998, export sales represented approximately 5% of
the Company's business.
ITEM 2. PROPERTIES
The Company's principal offices in Minneapolis, Minnesota are owned. Operations
in North America are conducted at twenty-four locations, primarily in Illinois,
California, Texas and Pennsylvania with one plant in West Hill, Ontario, Canada.
Twenty-one plants with square footage of 2,800,000 are owned and three of the
plants with square footage of 285,000 are leased. Manufacturing operations in
Europe are conducted at three locations with plants in the United Kingdom,
France and Norway. The three plants are owned with a combined square footage of
220,000. The Company owns two plants in Australia with a combined square footage
of 150,000. The Company leases plants in Singapore, China and Mexico with a
combined square footage of 70,000.
The Company considers that the principal properties and facilities owned or
leased by it are adequately maintained, in good operating condition and are
adequate for the purposes for which they are being used. Operating capacity
varies by division, but for most of the Company's businesses, additional
productive capacity is available by increasing the number of shifts worked.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims relating to environmental and waste
disposal matters at the sites of a number of current and former plants. The
Company participates in remedial and other environmental compliance activities
at certain of these sites. At other sites, the Company has been named as a
potentially responsible party (PRP) under federal and state environmental laws
for the remediation of hazardous waste. While uncertainties exist with respect
to the amounts and timing of the Company's ultimate environmental liabilities,
the Company believes that such liabilities, individually and in the aggregate,
will not have a material adverse effect on the Company's financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 8 through 10 of the Company's 1998
Annual Report to Stockholders incorporated by reference into this Form 10-K.
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9
PART I (CONTINUED)
The Company is a defendant in a number of other legal proceedings which it
believes are not out of the ordinary in a business of the type and size in which
it is engaged. The Company believes that these legal proceedings, individually
and in the aggregate, will not have a material adverse effect on its business or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted during the fourth quarter of fiscal year 1998 to a
vote of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of all of the registrant's executive officers, all of whose
terms expire in December 1999, and the positions held by them are as listed
below. There are no family relationships between any of the officers or between
any officer and director.
Name Age Position
---- --- --------
Richard M. Rompala 52 Chairman since February 1998, Chief
Executive Officer since October 1995 and
President since March 1994
Larry B. Brandenburger 51 Vice President, Technology since October
1989
Stephen M. Briggs 42 Senior Vice President, Architectural,
Automotive and Specialty Coatings
Products since November 1998
Rolf Engh 45 Senior Vice President since November
1998 and Secretary since April 1993
Steven L. Erdahl 46 Senior Vice President, Operations since
November 1998
Joel C. Hart 51 Group Vice President, Automotive and
International since November 1998
William L. Mansfield 50 Senior Vice President, Packaging and
Industrial Coatings since November 1998
Paul C. Reyelts 52 Senior Vice President, Finance and Chief
Financial Officer since November 1998
Robert T. Smith 52 Group Vice President, Industrial since
November 1998
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10
PART I (CONTINUED)
Name Age Position
---- --- --------
Thomas A. White 56 Vice President, Manufacturing since July
1995
The foregoing executive officers have served in the stated capacity for the
registrant during the past five years, except for the following:
Prior to March 1994, Mr. Rompala was Group Vice President - Coatings and Resins
since January 1992 at PPG Industries, Inc.
Prior to November 1998, Mr. Briggs was Vice President, Consumer Coatings Group
since August 1993.
Prior to November 1998, Mr. Engh was Vice President, International since
September 1993.
Prior to November 1998, Mr. Erdahl was Vice President, Industrial Coatings Group
since June 1991.
Prior to November 1998, Mr. Hart was Vice President, Automotive Refinish since
May 1995. Prior to 1995, Mr. Hart was the Managing Director of Automotive
Refinish International for PPG Industries, Inc. since January 1993.
Prior to November 1998, Mr. Mansfield was Vice President, Packaging Coatings
Group since February 1991.
Prior to November 1998, Mr. Reyelts was Vice President, Finance since April
1982.
Prior to November 1998, Mr. Smith was Vice President, Marine and Federal since
May 1995. Prior to 1995, Mr. Smith was Director, Machinery Europe for FMC
Corporation since 1992.
Prior to July 1995, Mr. White was Vice President, Manufacturing for Corimon
Corporation since June 1994. Prior to 1994, Mr. White was Director of
Manufacturing-Europe for PPG Industries, Inc. since 1987.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information in the section titled "Stock Information and Dividends" on page
7 of Valspar's 1998 Annual Report to Stockholders is incorporated herein by
reference. All market prices indicated in this section represent transactions on
the New York Stock Exchange. The number of record holders of the Company's
Common Stock at December 31, 1998 was 1,847.
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11
PART II (CONTINUED)
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(CONTINUED)
The quarterly dividend declared December 16, 1998, which was paid January 15,
1999 to Common Stockholders of record December 31, 1998, was increased to
11.5(cent) per share.
ITEM 6. SELECTED FINANCIAL DATA
The information in the section titled "Eleven Year Financial Summary" for the
years 1994 through 1998 on pages 6 and 7 of Valspar's 1998 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in the section titled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 8 through 10 of
Valspar's 1998 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes thereto on pages 11 through 19
of Valspar's 1998 Annual Report to Stockholders are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors set forth on pages 2 and 3 of Valspar's
Proxy Statement dated January 22, 1999 is incorporated herein by reference. The
information in the section titled "Section 16(a) Beneficial Ownership Reporting
Compliance" on page 6 of Valspar's Proxy Statement dated January 22, 1999 is
incorporated herein by reference. The information regarding executive officers
is set forth in Part I of this report.
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12
PART III (CONTINUED)
ITEM 11. EXECUTIVE COMPENSATION
The information in the section titled "Executive Compensation" on pages 7
through 9 and the section titled "Director Compensation" on page 5 of Valspar's
Proxy Statement dated January 22, 1999 is incorporated herein by reference. The
information on pages 9 through 12 of Valspar's Proxy Statement dated January 22,
1999 is not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the section titled "Share Ownership of Certain Beneficial
Owners" and "Share Ownership of Management" on pages 19 and 20 of Valspar's
Proxy Statement dated January 22, 1999 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section titled "Certain Transactions" on page 6 of
Valspar's Proxy Statement dated January 22, 1999 is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) For financial statements and the financial statement schedule filed as a
part of this report, reference is made to "Index to Financial Statements
and Financial Statement Schedule" on page F-2 of this report. For a list of
exhibits filed as a part of this report, see Item 14(c) below. Compensatory
Plans listed in Item 14(c) are denoted by a double asterisk.
(b) No reports on Form 8-K were filed during the fourth quarter of the year
ended October 30, 1998.
(c) The following exhibits are filed as part of this report.
Exhibit
No. Description
----------------------------------------------------------------------
3(a)(7) CERTIFICATE OF INCORPORATION--as amended to and including
June 30, 1970, with further amendments to Article Four dated
February 29, 1984, February 25, 1986, February 26, 1992 and
February 26, 1997, and to Article Eleven dated February 25,
1987
3(b)(7) BY-LAWS--as amended to and including October 15, 1997
10(a)(l) THE VALSPAR CORPORATION SUPPLEMENTAL STOCK OWNERSHIP PLAN**
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13
PART IV (CONTINUED)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(CONTINUED)
(c) Index of Exhibits (continued)
Exhibit
No. Description
----------------------------------------------------------------------
10(b)(l) THE VALSPAR CORPORATION KEY EMPLOYEES' SUPPLEMENTARY
RETIREMENT PLAN**
10(c)(2) THE VALSPAR CORPORATION SUPPLEMENTAL BONUS PLAN**
10(d)* THE VALSPAR CORPORATION 1991 STOCK OPTION PLAN-- as amended
December 11, 1996 and December 16, 1998**
10(e)(3) THE VALSPAR CORPORATION LEVERAGED EQUITY PURCHASE PLAN**
10(f)* THE VALSPAR CORPORATION KEY EMPLOYEE ANNUAL BONUS PLAN--as
amended to and including December 16, 1998**
10(g)(7) THE VALSPAR CORPORATION STOCK OPTION PLAN FOR NON-EMPLOYEE
DIRECTORS**
10(h)(7) THE VALSPAR CORPORATION ANNUAL BONUS PLAN--as amended August
19, 1997**
10(i)(4) THE VALSPAR CORPORATION INCENTIVE BONUS PLAN**
10(j)+ DISTRIBUTION AGREEMENT REGARDING McWHORTER SPIN-OFF
10(k)+ ENVIRONMENTAL MATTERS AGREEMENT
10(l)+ TECHNOLOGY LICENSE AGREEMENT
10(m)+ TAX SHARING AGREEMENT
10(n)+ MASTER TOLLING AGREEMENT
10(o)+ SALE AND PURCHASE OF ASSETS AGREEMENT BETWEEN CARGILL,
INCORPORATED AND McWHORTER, INC. DATED AS OF MAY 19, 1993,
AS SUBSEQUENTLY MODIFIED AND AMENDED
10(p)+ AGREEMENT CONTAINING CONSENT ORDER EXECUTED AS OF SEPTEMBER
30, 1993 BY THE FEDERAL TRADE COMMISSION, THE VALSPAR
CORPORATION AND McWHORTER, INC.
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14
PART IV (CONTINUED)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(CONTINUED)
(c) Index of Exhibits (continued)
Exhibit
No. Description
----------------------------------------------------------------------
10(q)(5) CREDIT AGREEMENT DATED AS OF APRIL 20, 1995 AMONG THE
REGISTRANT, CERTAIN BANKS, WACHOVIA BANK OF GEORGIA, N.A.,
AS AGENT, AND CHEMICAL BANK AS CO-AGENT, AND RELATED
SYNDICATED LOAN NOTE, MONEY MARKET LOAN NOTE AND SWING LOAN
NOTE
10(r)(6) ACQUISITION AGREEMENT BETWEEN COATES BROTHERS PLC AND THE
REGISTRANT MADE AND ENTERED INTO AS OF FEBRUARY 26, 1996, AS
AMENDED BY AMENDMENT NO. 1 TO THE ACQUISITION AGREEMENT
DATED MAY 2, 1996 (PURSUANT TO RULE 24b-2, CERTAIN
INFORMATION HAS BEEN DELETED AND FILED SEPARATELY WITH THE
COMMISSION)
10(s)* CREDIT AGREEMENT DATED AS OF MARCH 16, 1998 AMONG THE
REGISTRANT AND WACHOVIA BANK N.A.
13* 1998 Annual Report to Stockholders (only those portions
expressly incorporated by reference herein shall be deemed
filed with the Commission)
21* Subsidiaries of the Registrant
23(a)* Consent of Independent Auditors--Ernst & Young LLP
23(b)* Consent of Independent Auditors--Deloitte & Touche LLP
99(a)* Financial Statements for the Years Ended October 30, 1998
and October 31, 1997 and Independent Auditors'
Report--Valspar Stock Ownership Trust for Salaried Employees
99(b)* Financial Statements for the Years Ended October 30, 1998
and October 31, 1997 and Independent Auditors'
Report--Valspar Stock Ownership Trust for Hourly Employees
99(c)* Financial Statements for the Years Ended October 30, 1998
and October 31, 1997 and Independent Auditors'
Report--Valspar Profit Sharing Retirement Plan
27 Financial Data Schedule (submitted in electronic format for
use of Commission only)
27.1 Restated Financial Data Schedule for the period ended
October 31, 1997 (submitted in electronic format for use of
Commission only)
---------------------
<PAGE>
15
PART IV (CONTINUED)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(CONTINUED)
(c) Index of Exhibits (continued)
Exhibit
No. Description
----------------------------------------------------------------------
(1) As filed with Form 10-K for the period ended October 31,
1981.
(2) As filed with Form 10-K for the period ended October 31,
1983.
(3) As filed with Form 10-K for the period ended October 25,
1991; amendment filed with Form 10-K for the period ended
October 31, 1997.
(4) As filed with Form 10-K for the period ended October 30,
1992.
(5) Incorporated by reference to Exhibit 10(a) to Form 10-Q for
the quarter ended April 28, 1995.
(6) Incorporated by reference to Exhibit 2.1 to Form 8-K filed
on May 17, 1996 and with Form 8-K/A filed on July 16, 1996.
(7) As filed with Form 10-K for the period ended October 31,
1997.
* As filed with this Form 10-K.
** Compensatory Plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
+ Incorporated by reference to Exhibits 10.1, 10.2, 10.3,
10.4, 10.5, 10.11, 10.12, 10.13, 10.14 and 10.15,
respectively, to Form S-1 Registration Statement of
McWhorter (Commission File No. 33-75726), as declared
effective on April 4, 1994.
Portions of the 1999 Proxy Statement are incorporated herein by
reference as set forth in Items 10, 11, 12 and 13 of this report. Only
those portions expressly incorporated by reference herein shall be
deemed filed with the Commission.
(d) See page F-2 of this report.
<PAGE>
16
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.
THE VALSPAR CORPORATION
/s/ Rolf Engh 1/20/99
-----------------------------------
Rolf Engh, Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Richard M. Rompala 1/20/99 /s/ Susan S. Boren 1/20/99
- ----------------------------------------- -----------------------------------
Richard M. Rompala, Director Susan S. Boren, Director
Chairman, President and Chief Executive
Officer (principal executive officer)
-----------------------------------
Jeffrey H. Curler, Director
/s/ Paul C. Reyelts 1/20/99
- -----------------------------------------
Paul C. Reyelts, Senior Vice President, /s/ Thomas R. McBurney 1/20/99
Finance and Chief Financial Officer -----------------------------------
(principal financial officer) Thomas R. McBurney, Director
/s/ Kendrick B. Melrose 1/20/99
/s/ Kathleen P. Pepski 1/20/99 -----------------------------------
- ----------------------------------------- Kendrick B. Melrose, Director
Kathleen P. Pepski, Vice President and
Controller (principal accounting officer)
/s/ Gregory R. Palen 1/20/99
-----------------------------------
Gregory R. Palen, Director
-----------------------------------
Lawrence Perlman, Director
-----------------------------------
Edward B. Pollak, Director
/s/ Michael P. Sullivan 1/20/99
-----------------------------------
Michael P. Sullivan, Director
/s/ C. Angus Wurtele 1/20/99
-----------------------------------
C. Angus Wurtele, Director
<PAGE>
F-1
Annual Report on Form 10-K
Item 14(a)(1) and (2), (c) and (d)
Financial Statements and
Financial Statement Schedule
Certain Exhibits
Year ended October 30, 1998
THE VALSPAR CORPORATION
Minneapolis, Minnesota
<PAGE>
F-2
The Valspar Corporation
Form 10-K--Item 14(a)(1) and (2) and Item 14(d)
Index to Financial Statements and Financial Statement Schedule
The following consolidated financial statements of The Valspar Corporation and
subsidiaries are incorporated in Part II, Item 8, and Part IV, Item 14(a) of
this report by reference to the Registrant's Annual Report to Stockholders for
the year ended October 30, 1998:
Pages in
Annual Report
-------------
Report of Independent Auditors............................................ 20
Financial Statements:
Consolidated Balance Sheets--October 30, 1998 and October 31, 1997...... 11
Consolidated Statements of Income--Years ended October 30, 1998,
October 31, 1997 and October 25, 1996............................... 12
Consolidated Statements of Changes in Stockholders' Equity--Years
ended October 30, 1998, October 31, 1997 and October 25, 1996....... 13
Consolidated Statements of Cash Flows--Years ended October 30, 1998,
October 31, 1997 and October 25, 1996............................... 14
Notes to Consolidated Financial Statements.............................. 15-19
Selected Quarterly Financial Data (Unaudited)............................. 19
The following consolidated financial statement schedule should be read in
conjunction with the consolidated financial statements referred to above:
Financial Statement Schedule:
Years ended October 30, 1998, October 31, 1997 and October 25, 1996
Schedule Page
- -------- ----
II Valuation and Qualifying Accounts and Reserves.................... F-3
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
<PAGE>
F-3
The Valspar Corporation
Schedule II--Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
- ------------------------------------- -------------- -------------- ---------------- -------------- ----------------
COL. A COL. B COL. C COL. C COL. D COL. E
- ------------------------------------- -------------- -------------- ---------------- -------------- ---------------
Additions
--------------------------------
(1) (2)
Balance at Charged to Charged to
Beginning Expense or Other Deductions Balance at
Description of Period (Income) Accounts --Describe End of Period
--Describe
- ------------------------------------- -------------- -------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts:
Year ended October 30, 1998 $1,364,000 $2,099,000 $2,436,000 (1) $1,464,000
(437,000)(2)
Year ended October 31, 1997 1,260,000 1,101,000 1,130,000 (1) 1,364,000
(133,000)(2)
Year ended October 25, 1996 911,000 771,000 $721,000 (3) 1,254,000 (1) 1,260,000
(111,000)(2)
</TABLE>
(1) Uncollectible accounts written off.
(2) Recoveries on accounts previously written off.
(3) Consists principally of amounts relating to businesses acquired and
foreign currency translation adjustments.
<PAGE>
INDEX TO EXHIBITS FILED WITH THIS REPORT
THE VALSPAR CORPORATION
Exhibit
No. Description
----------------------------------------------------------------------
3(a)(7) CERTIFICATE OF INCORPORATION--as amended to and including
June 30, 1970, with further amendments to Article Four dated
February 29, 1984, February 25, 1986, February 26, 1992 and
February 26, 1997, and to Article Eleven dated February 25,
1987
3(b)(7) BY-LAWS--as amended to and including October 15, 1997
10(a)(l) THE VALSPAR CORPORATION SUPPLEMENTAL STOCK OWNERSHIP PLAN**
10(b)(l) THE VALSPAR CORPORATION KEY EMPLOYEES' SUPPLEMENTARY
RETIREMENT PLAN**
10(c)(2) THE VALSPAR CORPORATION SUPPLEMENTAL BONUS PLAN**
10(d)* THE VALSPAR CORPORATION 1991 STOCK OPTION PLAN-- as amended
December 11, 1996 and December 16, 1998**
10(e)(3) THE VALSPAR CORPORATION LEVERAGED EQUITY PURCHASE PLAN**
10(f)* THE VALSPAR CORPORATION KEY EMPLOYEE ANNUAL BONUS PLAN--as
amended to and including December 16, 1998**
10(g)(7) THE VALSPAR CORPORATION STOCK OPTION PLAN FOR NON-EMPLOYEE
DIRECTORS**
10(h)(7) THE VALSPAR CORPORATION ANNUAL BONUS PLAN--as amended August
19, 1997**
10(i)(4) THE VALSPAR CORPORATION INCENTIVE BONUS PLAN**
10(j)+ DISTRIBUTION AGREEMENT REGARDING McWHORTER SPIN-OFF
10(k)+ ENVIRONMENTAL MATTERS AGREEMENT
10(l)+ TECHNOLOGY LICENSE AGREEMENT
10(m)+ TAX SHARING AGREEMENT
<PAGE>
INDEX TO EXHIBITS FILED WITH THIS REPORT
THE VALSPAR CORPORATION
Exhibit
No. Description
----------------------------------------------------------------------
10(n)+ MASTER TOLLING AGREEMENT
10(o)+ SALE AND PURCHASE OF ASSETS AGREEMENT BETWEEN CARGILL,
INCORPORATED AND McWHORTER, INC. DATED AS OF MAY 19, 1993,
AS SUBSEQUENTLY MODIFIED AND AMENDED
10(p)+ AGREEMENT CONTAINING CONSENT ORDER EXECUTED AS OF SEPTEMBER
30, 1993 BY THE FEDERAL TRADE COMMISSION, THE VALSPAR
CORPORATION AND McWHORTER, INC.
10(q)(5) CREDIT AGREEMENT DATED AS OF APRIL 20, 1995 AMONG THE
REGISTRANT, CERTAIN BANKS, WACHOVIA BANK OF GEORGIA, N.A.,
AS AGENT, AND CHEMICAL BANK, AS CO-AGENT, AND RELATED
SYNDICATED LOAN NOTE, MONEY MARKET LOAN NOTE AND SWING LOAN
NOTE
10(r)(6) ACQUISITION AGREEMENT BETWEEN COATES BROTHERS PLC AND THE
REGISTRANT MADE AND ENTERED INTO AS OF FEBRUARY 26, 1996, AS
AMENDED BY AMENDMENT NO. 1 TO THE ACQUISITION AGREEMENT
DATED MAY 2, 1996 (PURSUANT TO RULE 24b-2, CERTAIN
INFORMATION HAS BEEN DELETED AND FILED SEPARATELY WITH THE
COMMISSION)
10(s)* CREDIT AGREEMENT DATED AS OF MARCH 16, 1998 AMONG THE
REGISTRANT AND WACHOVIA BANK N.A.
13* 1998 Annual Report to Stockholders (only those portions
expressly incorporated by reference herein shall be deemed
filed with the Commission)
21* Subsidiaries of the Registrant
23(a)* Consent of Independent Auditors--Ernst & Young LLP
23(b)* Consent of Independent Auditors--Deloitte & Touche LLP
99(a)* Financial Statements for the Years Ended October 30, 1998
and October 31, 1997 and Independent Auditors'
Report--Valspar Stock Ownership Trust for Salaried Employees
<PAGE>
INDEX TO EXHIBITS FILED WITH THIS REPORT
THE VALSPAR CORPORATION
Exhibit
No. Description
----------------------------------------------------------------------
99(b)* Financial Statements for the Years Ended October 30, 1998
and October 31, 1997 and Independent Auditors'
Report--Valspar Stock Ownership Trust for Hourly Employees
99(c)* Financial Statements for the Years Ended October 30, 1998
and October 31, 1997 and Independent Auditors'
Report--Valspar Profit Sharing Retirement Plan
27 Financial Data Schedule (submitted in electronic format for
use of Commission only)
27.1 Restated Financial Data Schedule for the period ended
October 31, 1997 (submitted in electronic format for use of
Commission only)
----------------------
(1) As filed with Form 10-K for the period ended October 31,
1981.
(2) As filed with Form 10-K for the period ended October 31,
1983.
(3) As filed with Form 10-K for the period ended October 25,
1991; amendment filed with Form 10-K for the period ended
October 31, 1997.
(4) As filed with Form 10-K for the period ended October 30,
1992.
(5) Incorporated by reference to Exhibit 10(a) to Form 10-Q for
the quarter ended April 28, 1995.
(6) Incorporated by reference to Exhibit 2.1 to Form 8-K filed
on May 17, 1996 and with Form 8-K/A filed on July 16, 1996.
(7) As filed with Form 10-K for the period ended October 31,
1997.
* As filed with this Form 10-K.
** Compensatory Plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
+ Incorporated by reference to Exhibits 10.1, 10.2, 10.3,
10.4, 10.5, 10.11, 10.12, 10.13, 10.14 and 10.15,
respectively, to Form S-1 Registration Statement of
McWhorter (Commission File No. 33-75726), as declared
effective on April 4, 1994.
Exhibit 10(d)
THE VALSPAR CORPORATION
1991 STOCK OPTION PLAN
as amended 12/16/98
1. PURPOSES OF THE PLAN
The purposes of the 1991 Stock Option Plan (the "Plan") are (i) to
enhance the ability of The Valspar Corporation (the "Company") and its
subsidiary companies to attract and retain superior personnel and (ii) to
stimulate and reward their interest and initiative. The Plan is designed to
enable key officers and employees, and certain other key individuals who perform
services for the Company, to contribute to the Company's strategic performance
objectives by making such individuals eligible to receive options to purchase
common stock of the Company as provided herein. Subject to the provisions of the
Plan, options may contain such terms and conditions as shall be required so as
to be either nonqualified stock options or incentive stock options as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
Subject to such limits as may be imposed by existing or future laws or by the
Plan, nonqualified stock options or incentive stock options or both may be
granted to eligible individuals.
2. STOCK SUBJECT TO THE PLAN
Shares to be issued under the Plan shall be common stock of the Company
(par value $.50 per share) ("common stock"), not to exceed a maximum of
4,000,000 shares, and may be unissued shares or reacquired shares. If any
options granted under the Plan expire or terminate without having been exercised
in full, such unpurchased shares shall be available for other option grants. If
shares of common stock are delivered as full or partial payment upon exercise of
an option, the number of shares so delivered shall again be available for other
option grants.
3. ADMINISTRATION
The Plan shall be administered by a committee (the "Committee"),
appointed from time to time by the Company's Board of Directors (the "Board"),
consisting of not less than two members of the Board. Each Committee member
shall be (a) a non-employee director within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934 (the "Exchange Act") or any successor Rule and
(b) an outside director within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended, and the rules and regulations thereunder.
Except as provided below, the Committee shall determine from time to time (i)
the individuals to whom grants will be made; (ii) the number of shares to be
granted; and (iii) the terms and provisions of each option (which need not be
identical). Except as provided below, each grant shall be in such form and
content as the Committee shall determine.
The Committee may from time to time adopt rules for carrying out the
Plan and for its interpretation and construction which rules shall be final,
conclusive and binding on all parties. All determinations of the Committee shall
be made by a majority of the
<PAGE>
Committee. Any determination reduced to writing and signed by all members shall
be as effective as if it had been made by a majority vote at a duly constituted
meeting.
The Company's Chief Executive Officer may, on a discretionary basis and
without Committee review or approval, grant options to purchase up to 5,000
shares each to new employees of the Company who are not officers of the Company.
Such discretionary option grants shall not exceed 25,000 shares in total in any
fiscal year. Subject to the foregoing limitations, the Chief Executive Officer
shall determine from time to time (i) the new employees to whom grants will be
made, (ii) the number of shares to be granted, and (iii) the terms and
provisions of each option (which need not be identical).
4. ELIGIBILITY
Options will be granted only to salaried officers and employees of the
Company or of a subsidiary (as defined in Section 425 of the Code) and to any
other individual who performs services for the Company and contributes to its
strategic performance objectives, including, without limitation, members of the
Board of Directors, consultants and advisors ("Optionee"); provided, however,
that a consultant or advisor shall not be eligible to receive stock options
hereunder unless such consultant or advisor renders bona fide services to the
Company or a subsidiary and such services are not in connection with the offer
or sale of securities in a capital-raising transaction.
Notwithstanding any other provisions of the Plan, the maximum number of
shares of Common Stock that may be covered by option grants to a person covered
by Section 162(m) of the Code during any fiscal year shall be 500,000 shares.
5. OPTION PRICE
The exercise price of each option shall be not less than 100% of the
fair market value of the common stock at the closing price on the day preceding
the date that such option is granted.
6. EXERCISE OF OPTION
The Committee may prescribe at the time of grant that the option will be
exercisable in full or in installments at any time or from time to time.
Optionee is not required to exercise options in the sequential order that the
options were granted. An option shall be exercised by written notice in a form
designated by the Company accompanied by full payment of the purchase price. All
or part of the purchase price may be paid by surrender (or deemed surrender
through attestation) of previously acquired shares of common stock which has
been owned for more than six months on the date of surrender valued at the fair
market value at the closing price on the day preceding the date of exercise.
Until an option is exercised and the stock certificate issued, the Optionee
shall have no rights as a stockholder with respect to such option.
<PAGE>
7. WITHHOLDING OF TAXES
Upon exercise of an option, the Optionee shall (i) pay cash, (ii)
surrender previously acquired shares of common stock or (iii) authorize the
withholding of shares from the shares issued upon exercise of an option for all
taxes required to be withheld.
8. NON-TRANSFERABILITY
Options shall not be transferable, voluntarily or involuntarily, except
by will or applicable laws of descent and distribution. Only the Optionee or
Optionee's legal representative or guardian may exercise the option.
9. DILUTION OR OTHER ADJUSTMENTS
The number of shares subject to the Plan, the outstanding options and
the exercise price may be adjusted by the Committee as it deems equitable in the
event of stock split, stock dividend, recapitalization, reclassification or
similar event to prevent dilution or enhancement of option rights.
10. MERGERS, ACQUISITION OR OTHER REORGANIZATION
The Committee may make provision, as it deems equitable, for the
protection of Optionees with grants of outstanding options in the event of (a)
merger of the Company into, or the acquisition of substantially all of the stock
or assets of the Company by, another entity; or (b) liquidation; or (c) other
reorganization of the Company.
11. AMENDMENT OF THE PLAN
The Plan may be amended, suspended or discontinued in whole or in part
at any time and from time to time by the Board, provided, however, that no
amendment to increase the number of shares with respect to which options may be
granted, or to increase materially the benefits accruing to Optionees, or to
materially modify the requirements as to eligibility, shall be effective without
stockholder approval where the failure to obtain such approval would adversely
affect the compliance of the Plan with Rule 16b-3 under the Exchange Act or
successor rule and with other applicable law, including the Code. No amendment
of the Plan shall adversely affect in a material manner any right of any
Optionee with respect to a prior grant without such Optionee's written consent.
12. DURATION OF THE PLAN
The Amended Plan shall become effective as of December 16, 1998, subject
to stockholder approval of the limitation on options granted to a person covered
by Section 162(m) of the Code pursuant to Section 4. Incentive Stock Options may
be granted from time to time during a period of ten (10) years from the
effective date of the Amended Plan. Nonqualified stock options may be granted
from time to time from the effective date until the Plan is discontinued or
terminated by the Board.
Exhibit 10(f)
THE VALSPAR CORPORATION
KEY EMPLOYEE ANNUAL BONUS PLAN
PURPOSE:
The purpose of The Valspar Corporation Key Employee Annual Bonus Plan is to more
closely align the goals and motivation of management with those of other Valspar
shareholders and to provide key personnel with a long-term capital appreciation
opportunity. This purpose is accomplished by granting options to acquire Valspar
stock based on the performance of the Participant and Valspar and by encouraging
the conversion of performance based cash bonuses to grants of restricted Valspar
stock.
DEFINITIONS:
"Bonus and Election Form" shall mean the form used from time to time by Valspar
for Participants to make elections under the Plan for each Fiscal Year.
"Cash Bonus Amount" shall mean the amount determined for a Participant for a
particular Fiscal Year as set forth in Section 2 below. The amount of the Cash
Bonus Amount will not change if all or part is converted into a restricted stock
grant pursuant to the terms of this Plan.
"Change of Control" shall be deemed to have occurred if (i) any person increases
or decreases its percentage equity ownership in Valspar by more than twenty
percentage points from that person's percentage equity ownership in Valspar on
the date hereof or (ii) a majority of the members of the board of directors of
Valspar were not nominated and approved by the board of directors as it existed
prior to the election of such directors. For the purposes of this definition, a
"person" shall include an individual, corporation, partnership, trust or other
legal entity or any group of such persons acting in concert. In calculating the
ownership interest of any person, all securities for which such person is a
beneficial owner as that term is used in Rule 13d-3, as then in effect, under
the Securities Exchange Act of 1934 shall be included.
"Committee" shall mean the Compensation Committee of the Board of Directors of
Valspar as constituted from time to time; provided, however, each member of the
Committee shall be an outside director within the meaning of Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code") and the rules and
regulations thereunder.
"Disability" shall mean permanent disability as that term is defined under the
long-term disability insurance coverage offered by Valspar to its employees at
the time the determination is to be made.
"Eligible Employee" shall mean an Employee that the Committee has determined to
permit to become a Participant.
<PAGE>
"Employee" shall mean each person who is an employee of Valspar which term shall
include both full and part-time employees but shall not include independent
contractors providing services to Valspar.
"Fiscal Year" shall mean the period corresponding with each of the fiscal years
of Valspar.
"Option Plan" shall mean The Valspar Corporation 1991 Stock Option Plan, or any
other stock option plan of Valspar designated by the Committee.
"Participant" shall mean an Eligible Employee that has executed a Bonus and
Election Form and who remains a Participant pursuant to the provisions of
Section 1 of the Plan.
"Plan" shall mean The Valspar Corporation Key Employee Annual Bonus Plan, as set
forth herein and as amended from time to time.
"Plan Administrator" shall mean the person or persons designated as such from
time to time by the Committee. If no person is designated as the Plan
Administrator, the Plan Administrator shall be the Secretary of Valspar.
"Retirement" shall mean the termination of employment with Valspar at any time
after the Employee has attained the age of sixty years (or age fifty-five with
an executed non-compete agreement) for any reason other than Termination for
Cause.
"Stock" shall mean the common stock of Valspar, par value $.50 per share.
"Termination for Cause" shall mean the termination of employment with Valspar as
a result of an illegal act, gross insubordination or willful violation of a
Valspar policy by an Employee.
"Valspar" shall mean The Valspar Corporation, a Delaware corporation, with its
principal offices in Minneapolis, Minnesota.
PLAN:
1. PARTICIPANTS: From time to time, the Committee shall determine the
Employees who will be Eligible Employees under the Plan. As soon as possible
after the Committee has made its determination, the Plan Administrator will
notify each Eligible Employee of his/her eligibility. An Eligible Employee shall
become a participant by executing a Bonus and Election Form and filing it with
the Plan Administrator. A Participant will cease being a Participant upon the
earlier of (i) his/her termination of employment with Valspar for any reason or
(ii) a determination by the Committee that he/she shall no longer be an Eligible
Employee.
2. CASH BONUS DETERMINATION AND AMOUNT:
(a) Each Participant will be eligible to earn a Cash Bonus Amount
calculated as a percentage of that Participant's base salary for the Fiscal Year
based on the performance of the Participant and/or Valspar for such Fiscal Year
as determined pursuant to The Valspar Corporation Incentive Bonus Plan for Key
Employees (the "Incentive Plan").
<PAGE>
(b) With respect to any executive officers designated by the Committee
(the "Designated Executive Officers"), who shall always include the Chief
Executive Officer, the Chief Operating Officer and the President, (i) the
Committee will identify specific performance targets and maximum bonus levels,
as a percentage of base salary, for each Designated Executive Officer under the
Incentive Plan within the first 90 days of each Fiscal Year and record these
targets and bonus levels in writing; (ii) the performance targets for Designated
Executive Officers shall be limited to one or more of the following categories
for the Fiscal Year, either on an absolute basis or a comparative basis with
other Fiscal Years: gross or net sales, expenses as a percentage of net sales,
inventory turns, earnings per share, return on average equity, cash flow, and
gallon sales; (iii) the Committee will certify in writing following the end of
the Fiscal Year whether the performance targets have been met and the level of
the Cash Bonus Amount earned under the Incentive Plan; and (iv) the maximum Cash
Bonus Amount for any Designated Executive Officer under the Incentive Plan for
any Fiscal Year shall be $1,000,000.00.
3. RESTRICTED STOCK GRANT:
(a) A Participant may elect prior to the beginning of each Fiscal Year
to convert all or any portion of his/her Cash Bonus Amount for that Fiscal Year
into a grant of restricted Stock. The number of shares of Stock contained in the
grant of restricted Stock for each Fiscal Year shall be determined by dividing
twice the Cash Bonus Amount for that Fiscal Year that is converted into a grant
of restricted Stock by the average closing price of one share of Stock on the
New York Stock Exchange for the ten business days immediately prior to the date
on which the Cash Bonus Amount for such Fiscal Year was to be paid. The maximum
number of shares that may be granted to any Designated Executive Officer under
this Section 3(a) for any Fiscal year shall be 250,000 shares.
(b) Notwithstanding the fact that the number of shares of Stock
contained in the grant of restricted Stock is not determined until after the end
of each Fiscal Year, a Participant who is a Participant on the last day of a
Fiscal Year shall be entitled to his/her Cash Bonus Amount and/or grant of
restricted Stock for such Fiscal Year even if such Participant is not a
Participant on the date the Cash Bonus Amount is determined or paid or when the
number of shares of Stock to be contained in the grant of restricted Stock is
determined or the certificate representing those shares is issued.
(c) Immediately upon determination of the number of shares of Stock
contained in the grant of restricted Stock, Valspar shall cause to be issued a
stock certificate representing such shares of Stock in the name of the
Participant. All certificates representing shares of Stock that are subject to
the risk of forfeiture set forth in Section 3(d) below shall be held for Valspar
by the Plan Administrator; provided, however, the person in whose name the
certificate is issued shall be entitled to vote the shares represented by such
certificate and receive dividends attributable thereto until such time, if ever,
the shares are forfeited pursuant to Section 3(d) below.
<PAGE>
(d) The shares of Stock contained in each grant of restricted Stock are
forfeitable for three years from the date of the grant if the Participant's
employment with Valspar terminates for any reason other than death, Disability,
Retirement or Change of Control. Such shares of Stock shall not be forfeitable
if the Participant's employment with Valspar terminates during such three year
period as a result of the Participant's death, Disability or Retirement or a
Change of Control of Valspar or if the Participant's employment with Valspar
terminates after the end of such three year period. At such time as the
foregoing risk of forfeiture lapses, the certificate representing the shares of
Stock shall be distributed to the person in whose name it was issued, or if
appropriate that person's estate. If the shares of Stock are forfeited, the
certificate representing those shares shall be canceled.
(e) A maximum of 1,400,000 shares of Stock may be issued as restricted
Stock under the Plan.
4. NONSTATUTORY STOCK OPTIONS:
(a) For each Fiscal Year, each Participant will be granted a
nonstatutory stock option under the Option Plan. The number of shares of Stock
included in the nonstatutory stock option will be determined by dividing a
percentage of the participant's base salary by the average closing price of one
share of Stock on the New York Stock Exchange for the ten business days prior to
the date on which the Cash Bonus Amount for such Fiscal Year was to be paid.
(b) Each such option shall be evidenced by an option agreement between
the Participant and Valspar which shall be prepared and executed as soon as
possible after the determination of the number of shares of Stock to be covered
by the option. The option agreement shall provide for an exercise price per
share equal to the closing price of one share of Stock on the New York Stock
Exchange on the day prior to the date on which the number of shares of Stock
included in the nonstatutory stock option is determined, a term of ten years,
vesting at the rate of 33 1/3% per year so that the option will be fully
exercisable three years after the date of grant and will permit the option to be
exercised by surrendering other shares of Stock owned by the Participant.
5. MISCELLANEOUS:
(a) The Board of Directors of Valspar or the Committee may, at any time
and without further action on the part of the shareholders of Valspar, terminate
this Plan or make such amendments as it deems advisable and in the best
interests of Valspar; provided, however, that no such termination or amendment
shall, without the consent of the Participant, materially adversely affect or
impair the right of the Participant with respect to a Cash Bonus Amount that the
Participant has already earned or a grant of restricted Stock or a nonstatutory
stock option that the Participant has already received; and provided, further,
that unless the shareholders of Valspar shall have approved the same, no
amendment shall, either directly or indirectly:
<PAGE>
(1) Materially increase the total number of shares of Stock that may be
awarded under this Plan to all Participants;
(2) Materially increase the benefits accruing to Participants under the
Plan; or
(3) Materially modify the requirements as to eligibility for
participation in the Plan.
(b) Valspar shall be entitled to withhold and deduct from future wages
of a Participant or from the Cash Bonus Amount, or make other arrangements for
the collection of, all legally required amounts necessary to satisfy any and all
federal, state and local withholding and employment-related tax requirements
attributable to the lapse of restrictions applicable to the grant of restricted
Stock pursuant to the Plan, or shall require the Participant promptly to remit
the amount of such withholding tax obligations to Valspar before issuing any
certificate for shares of Stock awarded under a grant of restricted Stock.
Subject to such rules as the Committee may adopt, the Committee may, in its sole
discretion, permit a Participant to satisfy such withholding tax obligations, in
whole or in part, with shares of Stock having an equivalent fair market value or
by electing to have Valspar withhold shares of Stock having an equivalent fair
market value from the shares that may be issued pursuant to a grant of
restricted Stock; provided, however, that the Participant must comply with any
applicable provisions of Rule 16b-3 or its successor, as then in effect, of the
General Rules and Regulations under the Securities and Exchange Act of 1934, as
amended.
(c) The categories of performance criteria for Designated Executive
Officers under Section 2(b) shall be subject to shareholder approval at the
first shareholders meeting following the Fiscal Year ending October 30, 1998.
These categories, or new categories of performance criteria for the Designated
Executive Officers, shall be subject to shareholder approval at the first
shareholders meeting following the end of each fifth Fiscal Year after 1998.
Exhibit 10(s)
March 16, 1998
The Valspar Corporation
1101 South Third Street
Minneapolis, MN 55415
Attn: Mr. Timothy M. Wesolowski
Gentlemen:
Wachovia Bank, N.A. (the "Bank") is pleased to make available to The Valspar
Corporation (the "Borrower") a line of credit of Fifty Million Dollars
($50,000,000; the "Commitment"). This Commitment is subject to the maintenance
by the Borrower of a condition satisfactory to the Bank and the execution of a
Note in form and substance satisfactory to the Bank.
This Commitment is subject to a fee of 0.08% per annum on the total Commitment
payable quarterly in arrears. Fees shall be calculated on the basis of a 360 day
year for the actual number of days in each quarterly interest period.
This Commitment shall expire on the later of March 23, 1999, or 364 days from
the date of the Borrower's execution of this Commitment as indicated above its
signature line at the bottom of this letter (the "Expiration Date"). The entire
unpaid principal amount of advance, together with interest accrued thereon,
shall be due and payable on the Expiration Date. The Borrower may, upon at least
three business days' notice to the Bank, terminate at any time, or
proportionately reduce from time to time by an aggregate amount of at least
$500,000, the unused portion of this Commitment. If the Commitment is terminated
in its entirety, all accrued interest and fees shall be payable on the effective
date of such termination.
The rate of interest for each borrowing under the Commitment shall be the one,
two, three or six month LIBOR Rate (as determined by the Bank) plus 0.26% per
annum, or such other rate as may be offered by the Bank and accepted by the
Borrower, each at its sole discretion. Interest shall be due and payable at the
end of each Interest Period (i.e., the period of 1, 2, 3 or six month
corresponding to the LIBOR rate option selected by the Borrower and applicable
to such borrowings) but not later than quarterly. In no event shall the Borrower
select an Interest Period that extends beyond the Expiration Date, and all
principal and accrued interest and fees shall be payable on the Expiration Date.
The rate of interest shall be calculated on the basis of a 360 day year for the
actual number of days in each period. Minimum advances under this commitment
shall be $500,000.
<PAGE>
Should the Bank determine, in its sole discretion, that deposits at the LIBOR
rate are unavailable or should the Borrower request an Interest Period other
than one, two, three, or six months, then interest shall be calculated at the
Prime Rate. As used herein, the Prime Rate refers to that rate so denominated
and set by the Bank from time to time as an interest rate basis for borrowings.
The Prime Rate is one of several interest bases used by the Bank. The Bank lends
at interest rates above and below the Prime Rate.
The Borrower shall provide the Bank at all times hereunder with the same
covenant protection as the Bank requires of the Borrower under Financial
Agreements. Notwithstanding the satisfaction of any obligation or promise to pay
money to the Bank under any Financial Agreement, or the termination or
cancellation of any Financial Agreement, the Borrower hereby agrees to perform,
comply with and observe for the benefit of the Bank hereunder all covenants
contained in each Financial Agreement applicable to the Borrower (excluding any
obligation or promise to pay money under any Financial Agreement) at any time
the Borrower has any obligation (whether absolute or contingent) under this
Agreement.
For purposes hereof: (A) the covenants of each Financial Agreement applicable to
the Borrower (together with related definitions and ancillary provisions, but in
any event excluding any obligation or promise to pay money under any Financial
Agreement) are incorporated (and upon execution of any future Financial
Agreement, shall automatically be incorporated) by reference herein (mutatis
mutandis); (B) if other lenders or creditors are parties to any Financial
Agreement, then references therein to the lenders or creditors shall be deemed
references to the Bank; and (C) for any such covenant applying only when any
loan, other extension of credit, obligation or commitment under the Financial
Agreement is outstanding, that covenant shall be deemed to apply hereunder at
any time the Borrower has any obligation (whether absolute or contingent) under
this Agreement.
"Financial Agreement" means each existing or future agreement or instrument
relating to any loan or extension of credit from the Bank to the Borrower
(whether or not anyone else is a party thereto), as the same exists when
executed and without regard to any termination or cancellation thereof, or
unless consented to in writing by the Bank, any amendment, modification,
addition, waiver or consent thereto or thereof.
As an inducement to the Bank to establish the Commitment and to make advances
thereunder, the Borrower hereby represents and warrants to the Bank (which
representation and warranty will be deemed repeated on the date of each advance
under the Commitment) that the representations and warranties set forth in
Article 4 of that certain Credit Agreement dated as of April 20, 1995 among the
Borrower, Wachovia Bank of Georgia, N. A., as Agent, and the Banks identified
therein are true and correct as if made on and as of the date hereof (with
references in such representations and warranties to "this Agreement," "the
Notes" and "the Banks" being deemed to be references to this letter, the Note
and the Bank, respectively).
<PAGE>
Upon (i) any failure by the Borrower to pay any amount under this letter or the
Note when due, (ii) any representation or warranty made or deemed made in this
letter being untrue or incorrect in any material respect, (iii) any covenant
made or incorporated herein being breached (and if a cure period or notice
requirement is associated with such covenant prior to it becoming an Event of
Default under any Financial Agreement, such cure period shall have expired
and/or such notice requirement shall have been met), or (iv) the occurrence of
any Event of Default under any Financial Agreement, then the Bank shall have the
immediate right (without demand, protest or any notice of any kind, all of which
are hereby waived by the Borrower) to terminate the Commitment and declare the
principal amount of all advances made under the Commitment, together with
interest thereon and any other amounts payable under this letter or the Note, to
be immediately due and payable, whereupon the same shall become immediately due
and payable.
No condition or other term of this commitment may be waived or modified except
by written notification signed by the Borrower and the Bank. If an executed copy
of this letter is not received by March 31, 1998, then this Commitment shall be
null and void.
This Commitment is not assignable by the Borrower and no party other than the
Borrower is entitled to rely on this Commitment.
In no event shall the Bank be liable to the Borrower for indirect, special, or
consequential damages, including the loss of anticipated profits that may arise
out of or are in any way connected with the Commitment.
This letter shall be interpreted, construed, enforced, and governed by the laws
of the State of Georgia.
Sincerely,
WACHOVIA BANK, N.A.
/s/ Walter R. Gillikin
By: Walter R. Gillikin
Senior Vice President
<PAGE>
NOTE
Date: 3/17/98
For Value Received, The Valspar Corporation (hereinafter called the "Borrower"),
hereby promises to pay on the maturity date or dates referenced below to the
order of WACHOVIA BANK, N.A. (hereinafter called the "Lender"), at its office
where borrowed, the principal sum of Fifty Million Dollars or the aggregate
unpaid principal sum of all advances which the Lender actually makes hereunder
to the Borrower, whichever amount is less, together with interest in arrears
payable as hereafter provided at a rate computed on the basis of a 360-day year
for the actual number of days in each interest period, determined as herein set
forth.
Lender shall make advances under this Note upon telephonic or written
communication of a borrowing request from any person representing himself or
herself to be the Borrower or, in the event Borrower is a partnership or
corporation, a duly authorized officer or representative of Borrower. The Lender
or other holder shall be and is hereby authorized by the Borrower to set forth
on the reverse side of this Note, or on an attachment hereto: (1) the amount and
date of each advance made hereunder; (2) the interest rate for each such
advance; (3) the Interest Period for each such advance; and (4) each payment of
principal received thereon and the date of such payment; provided, however, any
such notation or the failure to make any such notation shall not limit or
otherwise affect the obligation of the Borrower with respect to the repayment of
all advances actually made hereunder. In the event of a good faith dispute among
the parties to this Note as to rate, the rate shall be the Prime Rate.
After this Note or any advance of this Note shall become due, whether on demand
or otherwise, the unpaid principal of this Note shall bear interest at a rate
per annum equal to 150% of the Prime Rate not to exceed the maximum rate
permitted by applicable law.
All payments of any advance hereunder shall be applied first to accrued interest
and then to principal.
The Borrower may prepay any advance hereunder prior to the maturity date for
such advance only upon 1 business day prior written notice to the Lender.
This Note is being executed and delivered to evidence advances made by the
Lender to the Borrower pursuant to a Commitment established under a letter
agreement dated March 16, 1998 (the "Letter Agreement") between the Lender and
the Borrower. Reference is hereby made to the terms and conditions of the Letter
Agreement (which terms are hereby incorporated in this Note by reference)
relating to, among other things, the maturity date of the advances and the
interest rate or rates applicable to the advances. Capitalized terms used but
not defined in this Note have the respective meanings indicted in the Letter
Agreement.
<PAGE>
No waiver by the Lender of any provision of this Note of the Letter Agreement
shall be effective unless in writing. All parties to this Note, including
makers, endorsers, sureties and guarantors, whether bound by this or by separate
instrument or agreement, shall be jointly and severally liable for the
indebtedness evidenced by this Note and hereby (1) waive presentment for
payment, demand, protest, notice of nonpayment or dishonor and of protest and
any and all other notices and demands whatsoever; (2) consent that at any time,
or from time to time, payment of any sum payable under this Note may be extended
without notice, whether for a definite or indefinite time; and (3) agree to
remain liable until the indebtedness evidenced hereby is paid in full
irrespective of any extension, modification or renewal. No conduct of the holder
shall be deemed a waiver or release of such liability, unless the holder
expressly releases such party in writing. In the event the indebtedness
evidenced hereby is collected by or through an attorney, the holder shall be
entitled to recover reasonable attorneys' fees and all other costs and expenses
of collection. Time is of the essence.
This Note shall evidence all advances and payments of principle made hereunder
until it is surrendered to the Borrower by the Lender, and it shall continue to
be used even though there may be periods prior to such surrender when no amount
of principal or interest is owing hereunder.
This Note, and the rights and obligations of the parties hereunder, shall be
governed by and construed in accordance with the laws of the State of Georgia.
IN WITNESS WHEREOF, the Borrower has executed this Note under seal the day and
year set forth above.
Exhibit 13
ELEVEN-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------------------------
FISCAL YEARS 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS Net Sales $ 1,155,134 $ 1,017,271 $ 859,799
Cost and Expenses
Cost of Sales 803,240 698,474 594,935
Operating Expense 230,152 206,834 169,873
- ---------------------------------------------------------------------------------------------------------------------------
Income from Operations 121,742 111,963 94,991
Other (Income) Expense - Net (7,753) (2,508) (1,081)
Interest Expense 10,707 5,294 3,029
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 118,788 109,177 93,043
Net Income 72,130 65,877 55,893
Net Income as a Percent of Sales 6.2% 6.5% 6.5%
Return on Average Equity 22.7% 24.0% 24.0%
Per Common Share:
Net Income - Basic $ 1.66 $ 1.51 $ 1.28
Net Income - Diluted $ 1.63 $ 1.49 $ 1.26
Dividends Paid .42 .36 .33
Stockholders' Equity 7.84 6.76 5.78
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION Total Assets $ 801,680 $ 615,470 $ 480,440
Current Assets Less Current Liabilities 158,085 97,427 96,130
Property, Plant and Equipment - Net 233,482 185,748 153,819
Long-Term Debt, Excluding Current Portion 164,768 35,844 31,948
Stockholders' Equity 340,188 295,065 253,703
- ---------------------------------------------------------------------------------------------------------------------------
OTHER STATISTICS Property, Plant and Equipment Expenditures $ 43,268 $ 48,131 $ 25,376
Depreciation and Amortization Expense 30,742 25,771 22,262
Research and Development Expense 39,555 39,099 32,616
Total Cash Dividends $ 18,575 $ 15,741 $ 14,575
Average Common Shares Outstanding - Diluted (000s) 44,320 44,233 44,403
Number of Stockholders 1,815 1,830 1,783
Number of Employees at Year-End 3,833 3,205 2,855
Market Price Range -
Common Stock: High $ 42.13 $ 32.94 $ 25.50
Low 25.75 24.00 19.13
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Reference is made to the Notes to Consolidated Financial Statements for a
summary of accounting policies and additional information. Per share data has
been adjusted to reflect 2-for-1 stock splits effective in March 1987, March
1992 and March 1997. The number of stockholders is based on recordholders at
year-end. Results for 1994 include six months of operations for Mcwhorter
Technologies, Inc. prior to the spin-off to shareholders.
- --------------------------------------------------------------------------------
GROUP SALES
- --------------------------------------------------------------------------------
The operating divisions of the Company are organized to reflect classes of
similar products. The table below shows the percentage of net sales for these
groups for the past five years.
<TABLE>
<CAPTION>
(PERCENT OF NET SALES)
- -------------------------------------------------------------------------------------------------------------------
FISCAL YEARS 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer Coatings 34 34 34 34 31
Packaging Coatings 28 29 27 27 25
Industrial Coatings 24 23 24 25 23
Special Products 14 14 15 14 21
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
THE VALSPAR CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 790,175 $ 795,275 $ 700,897 $ 683,485 $ 632,562 $ 571,445 $ 526,892 $ 479,617
561,170 569,063 501,135 492,092 458,953 410,094 385,459 356,690
146,344 146,683 129,997 131,232 120,643 109,206 98,725 89,906
- ---------------------------------------------------------------------------------------------------------------------------
82,661 79,529 69,765 60,161 52,966 52,145 42,708 33,021
(763) 631 2,036 360 1,504 3,337 (1,555) (2,733)
4,216 2,504 1,645 2,932 5,686 4,704 5,838 6,370
- ---------------------------------------------------------------------------------------------------------------------------
79,208 76,394 66,084 56,869 45,776 44,104 38,425 29,384
47,520 45,799 40,156 34,418 27,676 26,731 23,234 18,295
6.0% 5.8% 5.7% 5.0% 4.4% 4.7% 4.4% 3.8%
24.4% 24.4% 21.8% 21.7% 20.0% 22.1% 21.9% 19.7%
$ 1.09 $ 1.04 $ 0.92 $ 0.79 $ 0.64 $ 0.61 $ 0.52 $ 0.41
$ 1.08 $ 1.04 $ 0.91 $ 0.79 $ 0.64 $ 0.61 $ 0.52 $ 0.41
.30 .26 .22 .18 .15 .13 .11 .10
4.83 3.99 4.51 3.92 3.40 2.96 2.56 2.23
- ---------------------------------------------------------------------------------------------------------------------------
$ 398,199 $ 367,608 $ 340,479 $ 321,618 $ 319,367 $ 302,806 $ 261,103 $ 232,974
90,995 87,887 85,741 57,500 58,066 56,199 63,519 60,694
130,404 107,956 103,916 101,005 98,818 106,621 82,687 73,652
21,658 35,343 7,890 10,684 30,697 49,456 40,201 42,412
212,115 176,712 198,826 169,377 147,896 128,707 112,698 99,895
- ---------------------------------------------------------------------------------------------------------------------------
$ 38,982 $ 31,817 $ 17,213 $ 19,581 $ 8,843 $ 13,171 $ 8,701 $ 9,390
20,318 19,134 20,648 19,793 18,896 15,119 13,975 12,759
27,746 27,430 24,955 24,802 23,226 20,350 18,037 17,190
$ 13,121 $ 11,252 $ 9,471 $ 7,843 $ 6,519 $ 5,651 $ 4,899 $ 4,472
44,183 44,326 44,062 43,946 43,724 43,708 44,660 44,976
1,864 1,902 1,866 1,863 1,857 1,863 1,864 1,922
2,542 2,585 2,577 2,482 2,530 2,502 2,593 2,505
$ 20.94 $ 22.88 $ 20.75 $ 18.19 $ 11.72 $ 10.00 $ 7.97 $ 7.75
15.25 16.38 15.19 11.28 7.63 7.35 5.66 5.29
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
STOCK INFORMATION AND DIVIDENDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STOCK TRADED ON THE NEW YORK STOCK EXCHANGE
- --------------------------------------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MARKET PRICE / HIGH-LOW: First quarter $32.50-$29.00 $29.13-$24.00
Second quarter $42.13-$31.38 $29.88-$27.00
Third quarter $42.00-$38.56 $32.94-$27.88
Fourth quarter $38.81-$25.75 $32.13-$29.50
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE DIVIDENDS: First quarter $ .105 $ .09
Second quarter .105 .09
Third quarter .105 .09
Fourth quarter .105 .09
- --------------------------------------------------------------------------------------------------------------------------
$ .42 $ .36
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------------------------------------------------------------------------------
The following discussion of operations and financial condition is impacted by
the acquisition and divestiture activity during the reporting period.
* 1998 - The Company completed three acquisitions and one divestiture. Net
consideration was $84.6 million.
* 1997 - The Company completed nine acquisitions. Net consideration was
$40.6 million and the exchange of the Company's maintenance business.
* 1996 - The Company completed Phase I of the Coates acquisition for $47.3
million.
These acquisitions were accounted for as purchases and are discussed in
detail in Note 2 to the Consolidated Financial Statements.
OPERATIONS 1998 VS. 1997
- --------------------------------------------------------------------------------
Net sales increased 13.6% to $1,155,134,000 in 1998 from $1,017,271,000 in 1997.
1997 was a 53-week fiscal year. Excluding the results of acquisitions,
divestitures and the additional accounting week, net sales increased 8.7%. This
increase was primarily driven by volume increases in the Consumer Group,
Industrial Group and in certain business lines within the Special Products
Group.
The gross profit margin decreased to 30.5% in 1998 from 31.3% in 1997. The
decrease was primarily driven by pricing pressures in the industry, a shift in
product mix to lower margin products within the Consumer and Industrial Groups,
as well as higher raw material costs for most of 1998, particularly in certain
key, high-volume materials. The Company expects raw material costs to remain
stable over the first several months of fiscal 1999.
Operating expenses (research and development, selling and administrative)
increased 11.3% to $230,152,000 (19.9% of net sales) in 1998 compared with
$206,834,000 (20.3% of net sales) in 1997. Excluding the results of
acquisitions, divestitures and the additional accounting week, operating
expenses increased 7.4%. The increase in operating expenses was primarily the
result of additional advertising and promotional costs for large Consumer Group
customers, additional selling expenses in all business groups, higher costs to
support the upgrade of the Company's information systems and "Year 2000"
readiness expenditures. The improvement in operating expenses as a percent of
sales is due to the continued focus on expense control and the efforts of
cross-functional cost reduction teams.
Other income, net of expense, increased to $7,753,000 in 1998 from
$2,508,000 in 1997. The increase was primarily the result of the gain recognized
on the divestiture of the Company's functional powder business.
Interest expense increased to $10,707,000 in 1998 from $5,294,000 in 1997
reflecting an increase in debt levels during the year. The increased debt levels
resulted from the recent acquisitions.
In 1998, net income increased 9.5% to $72,130,000, or $1.63 per share,
representing the 24th consecutive year of increased earnings. Income from
operations increased 8.7% due to the sales growth and operating expense controls
which were partially offset by the reduced gross margin during 1998. The gain on
the divestiture offset the increased interest costs during the year.
OPERATIONS 1997 VS. 1996
- --------------------------------------------------------------------------------
Net sales increased 18.3% to $1,017,271,000 in 1997 from $859,799,000 in 1996.
1997 was a 53-week fiscal year. Excluding the results of acquisitions,
divestitures and the additional accounting week, net sales increased 10.0%. This
increase was primarily driven by volume growth in all business groups.
The gross profit margin increased to 31.3% in 1997 from 30.8% in 1996. The
increase was driven by improved efficiencies within our plants, savings
generated by the efforts of cross-functional cost reduction teams and lower raw
material costs in the first half of the year.
Operating expenses (research and development, selling and administrative)
increased 21.8% to $206,834,000 (20.3% of net sales) in 1997 compared with
$169,873,000 (19.8% of net sales) in 1996. Excluding the results of
acquisitions, divestitures and the additional accounting week, operating
expenses increased 14.6%. The increase was primarily attributable to a higher
level of promotional and advertising programs in the Consumer Group, sales and
marketing cost increases in all businesses, and higher costs to support the
upgrade of the Company's information systems.
Other income, net of expense, increased to $2,508,000 in 1997 from
$1,081,000 in 1996. The increase was the result of improved financial
performance by the Company's joint ventures in 1997 and realized gains on
marketable securities, partially offset by the writedown of certain assets no
longer in use in 1997.
8
<PAGE>
THE VALSPAR CORPORATION
- --------------------------------------------------------------------------------
Interest expense increased to $5,294,000 in 1997 from $3,029,000 in 1996
reflecting an increase in debt levels during the year.
In 1997, net income increased 17.9% to $65,877,000, or $1.49 per share. The
growth in sales and improved gross margin offset the impact of increased
operating expenses during 1997.
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Cash provided by operating activities was $113,880,000 in 1998 compared with
$53,129,000 in 1997 and $86,642,000 in 1996. The increase in 1998 was due to
decreased working capital requirements as the Company continued to focus on
improving its working capital position. The cash provided by operating
activities combined with $63,684,000 in proceeds from bank borrowings were used
to support $43,268,000 in capital expenditures, $84,622,000 in cash payments for
acquisitions, $18,575,000 in dividend payments and $13,745,000 in payments for
share repurchases. Cash balances increased $3,877,000 in 1998.
Accounts receivable increased $7,164,000 primarily due to increased sales
volume; days' sales outstanding improved in 1998 compared to 1997. Inventories
and other assets increased $17,537,000 due to the increase in sales volume and a
higher level of merchandising aids to support new product growth in the Consumer
Group. Accounts payable and accrued liabilities increased $31,556,000 as a
result of the increase in inventories and an increase in various expense
accruals.
Capital expenditures for property, plant and equipment were $43,268,000 in
1998 compared with $48,131,000 in 1997 and $25,376,000 in 1996. The decrease in
capital expenditures in 1998 was related to higher 1997 spending levels due to
the construction of a new research and development laboratory for the Packaging
Group and production facilities in China and Singapore. 1998 spending includes
approximately $2 million to refinance operating leases expiring during the year.
The Company anticipates capital spending in fiscal 1999 to be lower than 1998
spending levels.
During 1998, the Company invested $84,622,000 in acquisitions, primarily the
acquisitions of Plasti-Kote Co., Inc., and Anzol Pty. Ltd. A net amount of
$14,572,000 was invested by the Company in joint ventures and other investments,
driven by the South Africa Coates packaging coatings joint venture investment.
Cash payments for acquisitions and other investments were funded through the
Company's operations and available credit facilities.
The Company increased its borrowings with banks by $63,684,000 during 1998.
The ratio of total debt to capital increased to 35.7% at the end of 1998
compared to 26.8% in 1997. Average debt outstanding during 1998 was $176,491,000
at a weighted average interest rate of 5.48% versus $89,997,000 at 5.42% last
year, increasing the current year's interest expense to $10,707,000 from
$5,294,000 in the prior year. At October 30, 1998, the Company had unused lines
of credit available from banks of $261,633,000.
In August, 1998, the Company agreed to purchase from Dexter Corporation its
worldwide Packaging Coatings business, which supplies beverage can coatings,
food can and specialty coatings to the packaging market. Completion of the
transaction is expected in early 1999 and is subject to customary closing
conditions. The Company has arranged an amended and restated eighteen month
$450,000,000 multi-currency credit facility with a syndicate of banks to support
this transaction and to replace its existing revolving lines of credit. The
Company expects this to be adequate to cover current and projected financing
needs.
Fiscal 1998 Common Stock dividends of $18,575,000 represent an 18.0%
increase over 1997. The annual dividend was increased to $0.42 per share from
$0.36 per share in 1997 with the payout at 28.2% of the prior year earnings,
which is consistent with the Company's target payout rate of 25% to 35%.
The Company has continuing authorization to purchase shares of its Common
Stock for treasury at management's discretion for general corporate purposes.
Purchases under this program were 452,100, 448,000 and 335,000 shares in 1998,
1997 and 1996, respectively.
The Company is involved in claims relating to environmental and waste
disposal matters at a number of current and former plant sites. The Company
engages or participates in remedial and other compliance activities at certain
of these sites. At other sites, the Company has been named as a potentially
responsible party (PRP) under federal and state environmental laws for the
remediation of hazardous waste. The Company's management reviews each site,
considering the number of parties involved, the level of potential liability or
contribution of the Company relative to other parties, the nature and magnitude
of the wastes involved, the method and extent of remediation, the potential
insurance coverage, the estimated legal and consulting expense with respect to
each site and the time period over which any costs would likely be incurred. If
possible, management estimates the restoration or other clean-up costs and
related claims for each site. The estimates are based in part on discussions
with other PRPs, governmental agencies and engineering firms.
The Company accrues appropriate reserves for potential environmental
liabilities, which are continuously reviewed and adjusted as additional
information becomes available. While uncertainties exist with respect to the
amounts and timing of the Company's ultimate environmental liabilities,
management believes that such liabilities, individually and in the aggregate,
will not have a material adverse effect on the Company's financial condition or
results of operations.
9
<PAGE>
YEAR 2000 READINESS DISCLOSURE
- --------------------------------------------------------------------------------
The Company is engaged in a company-wide project to prepare its business for the
change in date from the year 1999 to 2000, the Year 2000 issue. The scope of
this project addresses (i) identifying and taking appropriate corrective action
to remedy the Company's information technology (IT) systems, (ii) an assessment
and remediation, as necessary, of non-IT equipment and systems with embedded
computer chips and (iii) working with the Company's significant business
partners to assess their Year 2000 readiness impact on the Company.
The Company continues to evaluate and respond to the potential impact of the
Year 2000 issue on its IT and other operating systems. A corporate-wide Year
2000 steering committee continues to implement a detailed project plan which
includes an inventory of the Company's systems and equipment that may be
affected; provides a risk assessment; establishes detailed remediation plans;
and provides for testing of each system subject to Year 2000 risk. Contingency
plans are being developed for critical applications. The inventory, risk
assessment and remediation plans have been completed for all of the affected
systems. Remediation and testing is complete for the core operating systems in
use for a majority of the Company's domestic business. The remainder of the
domestic systems are scheduled to be completed early in 1999. For the Company's
foreign operations, the stage of Year 2000 remediation and testing varies;
however, the Company expects to complete the final remediation and testing
phases by June 30, 1999.
The Company is also communicating and working with its significant business
partners to minimize Year 2000 risks and protect the Company and its customers
from potential service interruptions. The Company has surveyed its key raw
material and services suppliers to determine their Year 2000 readiness. The
Company is currently in the process of identifying potential critical Year 2000
issues involving key third parties and either resolving those issues or
developing contingency plans to the extent practicable. The inability of
external parties to complete their Year 2000 readiness in a timely fashion could
materially impact the Company, including the risk of disruptions in raw
materials supply or in communications or electrical service.
The Company has expensed its Year 2000 readiness costs as incurred and
estimates the total cost for Year 2000 readiness will be approximately $4 to $5
million, with roughly one half of the costs incurred in 1998.
NEW ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
Recently issued accounting standards are discussed in detail in Note 12 to the
Consolidated Financial Statements. These standards set new disclosure
requirements and will not impact the Company's financial condition or results of
operations.
MARKET RISK
- --------------------------------------------------------------------------------
The Company's foreign sales and results of operations are subject to foreign
currency fluctuations. As most of the Company's foreign operations are in
countries with fairly stable currencies, the effect has not been significant.
The Company hedges its exposure to translation gains and losses by borrowing
funds in local currencies when possible, substantially reducing such exposure.
The Company is also subject to interest rate risk. A 10% increase or
reduction in interest rates would not have a material effect on future earnings,
fair values or cash flows.
FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
This discussion contains certain "forward-looking" statements, particularly
those pertaining to Year 2000 readiness. These forward-looking statements are
based on management's expectations and beliefs concerning future events.
Forward-looking statements are necessarily subject to risks, uncertainties and
other factors, many of which are outside the control of the Company, that could
cause actual results to differ materially from such statements. These
uncertainties and other factors include such things as: the Company's reliance
on the efforts of vendors, government agencies, utilities and other third
parties to achieve adequate systems compliance and avoid disruption of its
business in early 2000; dependence of internal earnings growth on economic
conditions and growth in the domestic and international coatings industry;
changes in the Company's relationships with customers and suppliers; unusual
weather conditions that might adversely affect paint and coatings sales;
exposure to foreign currency fluctuations; and other risks and uncertainties.
The foregoing list is not exhaustive, and the Company disclaims any obligation
to subsequently revise any forward-looking statements to reflect events or
circumstances after the date of such statements.
10
<PAGE>
THE VALSPAR CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------
OCTOBER 30, OCTOBER 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,990 $ 11,113
Accounts and notes receivable, less allowances for
doubtful accounts (1998 - $1,464, 1997 - $1,364) 212,287 183,593
Inventories 142,811 119,653
Prepaid expenses and other accounts 55,981 42,488
- ----------------------------------------------------------------------------------------------------------
Total current assets 426,069 356,847
- ----------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 15,203 10,516
Buildings 116,224 102,448
Machinery and equipment 293,500 238,883
- ----------------------------------------------------------------------------------------------------------
424,927 351,847
Less accumulated depreciation 191,445 166,099
- ----------------------------------------------------------------------------------------------------------
Net property, plant and equipment 233,482 185,748
- ----------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS 104,778 46,772
OTHER ASSETS 37,351 26,103
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 801,680 $ 615,470
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 24,055 $ 71,720
Trade accounts payable 138,182 96,676
Income taxes 6,913 1,083
Accrued liabilities 98,549 89,660
Current portion of long-term debt 285 281
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 267,984 259,420
- ----------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 164,768 35,844
DEFERRED INCOME TAXES 8,910 6,769
OTHER LIABILITIES 19,830 18,372
- ----------------------------------------------------------------------------------------------------------
Total Liabilities 461,492 320,405
- ----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock (par value $.50 per share; shares authorized 120,000,000;
shares issued, including shares in treasury, 53,321,312 shares) 26,660 26,660
Additional paid-in capital 24,880 17,758
Retained earnings 367,040 313,485
Other (2,776) (1,850)
- ----------------------------------------------------------------------------------------------------------
415,804 356,053
Less cost of Common Stock in treasury
(1998 - 9,902,827 shares; 1997 - 9,642,341 shares) 75,616 60,988
- ----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 340,188 295,065
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 801,680 $ 615,470
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 30, OCTOBER 31, OCTOBER 25,
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 1,155,134 $ 1,017,271 $ 859,799
COST AND EXPENSES
Cost of sales 803,240 698,474 594,935
Research and development 39,555 39,099 32,616
Selling and administrative 190,597 167,735 137,257
- -----------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 121,742 111,963 94,991
Other income, net 7,753 2,508 1,081
Interest expense 10,707 5,294 3,029
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 118,788 109,177 93,043
Income taxes 46,658 43,300 37,150
- -----------------------------------------------------------------------------------------
NET INCOME $ 72,130 $ 65,877 $ 55,893
NET INCOME PER COMMON SHARE - BASIC $ 1.66 $ 1.51 $ 1.28
NET INCOME PER COMMON SHARE - DILUTED $ 1.63 $ 1.49 $ 1.26
- -----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12
<PAGE>
THE VALSPAR CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
------------------------ PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS OTHER STOCK
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE OCTOBER 27, 1995 26,660,656 $ 13,330 $ 10,348 $ 235,361 $ (3,436) $ 43,488
- -----------------------------------------------------------------------------------------------------------------------
Common Stock options
exercised for 202,148 shares -- -- 856 -- -- (954)
Purchase of 335,088 shares of
Common Stock for treasury -- -- -- -- -- 7,582
Net income -- -- -- 55,893 -- --
Cash dividends on Common
Stock - $.33 per share -- -- -- (14,575) -- --
Other -- -- 2,753 -- 2,843 (446)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE OCTOBER 25, 1996 26,660,656 13,330 13,957 276,679 (593) 49,670
- -----------------------------------------------------------------------------------------------------------------------
Common Stock options
exercised for 94,885 shares -- -- 663 -- -- (545)
Purchase of 470,698 shares of
Common Stock for treasury -- -- -- -- -- 12,495
Stock split 26,660,656 13,330 -- (13,330) -- --
Net income -- -- -- 65,877 -- --
Cash dividends on Common
Stock - $.36 per share -- -- -- (15,741) -- --
Other -- -- 3,138 -- (1,257) (632)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE OCTOBER 31, 1997 53,321,312 26,660 17,758 313,485 (1,850) 60,988
- -----------------------------------------------------------------------------------------------------------------------
Common Stock options
exercised for 59,202 shares -- -- 762 -- -- (333)
Purchase of 452,100 shares of
Common Stock for treasury -- -- -- -- -- 13,745
Net income -- -- -- 72,130 -- --
Cash dividends on Common
Stock - $.42 per share -- -- -- (18,575) -- --
Other -- -- 6,360 -- (926) 1,216
- -----------------------------------------------------------------------------------------------------------------------
BALANCE OCTOBER 30, 1998 53,321,312 $ 26,660 $ 24,880 $ 367,040 $ (2,776) $ 75,616
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------------------------------------------------
OCTOBER 30, OCTOBER 31, OCTOBER 25,
FOR THE YEAR ENDED 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 72,130 $ 65,877 $ 55,893
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 30,742 25,771 22,262
Deferred income taxes 2,279 1,669 (3,352)
Loss on disposals of property, plant and equipment 1,854 1,486 1,587
Gain on asset divestiture (4,695) -- --
(Decrease) increase in cash due to changes in net operating assets, net of
effects of acquired businesses:
Accounts and notes receivable (7,164) (23,953) (3,257)
Inventories and other assets (17,537) (41,965) (1,698)
Trade accounts payable and accrued liabilities 31,556 32,018 14,039
Income taxes payable 7,218 (6,341) 21
Other deferred liabilities 108 790 1,464
Other (2,611) (2,223) (317)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 113,880 53,129 86,642
- --------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (43,268) (48,131) (25,376)
Acquired businesses/assets, net of cash (84,622) (40,629) (51,698)
Other investments/advances to joint ventures (14,572) 5,734 (5,178)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (142,462) (83,026) (82,252)
- --------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds from borrowings 63,684 60,926 18,194
Proceeds from sale of treasury stock 1,095 1,208 1,810
Purchase of shares of Common Stock for treasury (13,745) (12,495) (7,582)
Dividends paid (18,575) (15,741) (14,575)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 32,459 33,898 (2,153)
- --------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 3,877 4,001 2,237
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,113 7,112 4,875
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,990 $ 11,113 $ 7,112
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
<PAGE>
THE VALSPAR CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
DESCRIPTION OF BUSINESS: The Company operates in one business segment, the
manufacture and distribution of paint and coatings through its Consumer
Coatings, Packaging Coatings, Industrial Coatings and Special Products Groups.
The Company's products are sold in North America, South America, Western Europe,
Southeast Asia and Australia.
FISCAL YEAR: The Company has a 4-4-5 accounting cycle with the fiscal year
ending on the Friday on or immediately preceding October 31. Fiscal year 1997
included 53 weeks. All other years presented include 52 weeks.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the parent company and its subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation. Entities in
which the Company has a 20 to 50 percent interest and where the Company does not
have management control are accounted for using the equity method.
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS: The Company considers all highly liquid instruments purchased
with an original maturity of less than three months to be cash equivalents.
INVENTORIES: Inventories are stated at the lower of cost or market. The
Company's domestic coatings inventories are recorded on the last-in, first-out
(LIFO) method. The remaining inventories are recorded using the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at
cost. Provision for depreciation of property is made by charges to operations at
rates calculated to amortize the cost of the property over its useful life
(twenty years for buildings; three to ten years for machinery and equipment)
primarily using the straight line method.
INTANGIBLE AND LONG-LIVED ASSETS: Intangible assets are carried at cost and
amortized using the straight-line method over their estimated period of benefit
(6 to 40 years). The Company reviews its intangible and long-lived assets for
impairment in accordance with SFAS No. 121.
STOCK OPTIONS: In 1997, the Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." As
permitted under this standard, the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees" in
accounting for its stock options and other stock-based employee awards. Pro
forma information regarding net income and earnings per share as calculated
under the provisions of SFAS 123 are disclosed in Note 7.
FOREIGN CURRENCY: Foreign currency assets and liabilities are translated into
U.S. dollars using the exchange rates in effect at the balance sheet date.
Results of operations are translated using the average exchange rates throughout
the period. The effect of exchange rate fluctuations on translation of assets
and liabilities is recorded as a component of stockholders' equity.
NET INCOME PER SHARE: In 1998, the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings per Share." The following table reflects
the components of common shares outstanding for the three years ended October
30, 1998.
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Weighted average
common shares
outstanding 43,457,221 43,521,370 43,782,962
Effect of stock
options 862,628 711,178 619,662
- --------------------------------------------------------------------------------
Adjusted common
shares outstanding 44,319,849 44,232,548 44,402,624
- --------------------------------------------------------------------------------
Under the provisions of the Statement, basic earnings per share are based on
the weighted average number of common shares outstanding during each year. In
computing diluted earnings per share, the number of common shares outstanding
was increased by common stock options with exercise prices lower than the
average market prices of common shares during each year and reduced by the
number of shares assumed to have been purchased with proceeds from the exercised
options. All earnings per share amounts for all periods presented have been
restated to conform to SFAS No. 128.
FINANCIAL INSTRUMENTS: All financial instruments are held for purposes other
than trading. The estimated fair values of the Company's financial instruments
approximate their carrying amounts in the consolidated balance sheet at October
30, 1998.
STOCK SPLIT: The Company's Board of Directors declared a 2-for-1 stock split,
effected in the form of a 100% stock dividend, for stockholders of record March
7, 1997. Information regarding shares outstanding, earnings per share, dividends
per share and common stock options has been restated to give retroactive effect
to the stock split.
15
<PAGE>
NOTE 2 ACQUISITIONS
- --------------------------------------------------------------------------------
In 1998 the Company completed three acquisitions, including the purchase of
Plasti-Kote Co., Inc., a manufacturer of consumer aerosol and specialty paint
products; the purchase of Anzol Pty. Ltd., an Australian-based manufacturer of
packaging and industrial coatings and resins; and the purchase of Hilemn
Laboratories, a mirror coatings supplier. In addition, the Company divested of
its functional powder business. Net consideration paid for the acquisitions in
1998 was $84.6 million in cash.
In 1997 the Company completed nine acquisitions, including the second phase
of its acquisition of TOTAL S.A. Coates Coatings (Coates) operations. The second
phase included the packaging coatings and metal decorating inks businesses in
Hong Kong and China. Total consideration paid for the nine acquisitions in 1997
was $40.6 million in cash and the exchange of the Company's maintenance coatings
business.
In 1996 the Company completed the first phase of its acquisition of the
Coates operations for $47.3 million in cash. The first phase included the Coates
European businesses, which consist of packaging coatings and metal decorating
inks businesses in the United Kingdom, France, Norway, Germany and Spain. Also
included were the Coates Australian and United States operations, which were
combined with the Company's existing businesses in these countries.
The acquisitions have been accounted for as purchases. Accordingly, the
results of operations of the acquired businesses have been included in the
Company's consolidated results of operations from the date of acquisition. The
effect of these transactions on the results of operations for 1998, 1997 or 1996
was not material. The excess of the purchase price over the estimated fair value
of the net assets acquired has been recorded as goodwill and is being amortized
over the estimated period of benefit.
In addition to the above acquisitions, in 1998 the Company made its initial
49% investment in a joint venture in South Africa, continuing the third phase of
its acquisition of Coates operations. This investment is accounted for using the
equity method of accounting for investments and was not material to the results
of operations for 1998.
NOTE 3 INVENTORIES
- --------------------------------------------------------------------------------
The major classes of inventories consist of the following:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Manufactured products $ 99,990 $ 81,720
Raw materials, supplies
and work-in-process 42,821 37,933
- --------------------------------------------------------------------------------
$142,811 $119,653
- --------------------------------------------------------------------------------
Inventories stated at cost determined by the last-in, first-out (LIFO)
method aggregate $109,916 at October 30, 1998, and $102,185 at October 31, 1997,
approximately $24,682 and $28,677 lower, respectively, than such costs
determined under the first-in, first-out (FIFO) method.
NOTE 4 TRADE ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- --------------------------------------------------------------------------------
Trade accounts payable include $12,231 and $19,120 of issued checks which had
not cleared the Company's bank accounts as of October 30, 1998, and October 31,
1997, respectively.
Accrued liabilities include the following:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Employee compensation $35,077 $35,661
Uninsured loss reserves 19,639 18,471
Customer volume rebates 11,152 8,914
Contribution to employees'
retirement trusts 6,645 6,029
Other 26,036 20,585
- --------------------------------------------------------------------------------
$98,549 $89,660
- --------------------------------------------------------------------------------
NOTE 5 LONG-TERM DEBT AND CREDIT ARRANGEMENTS
- --------------------------------------------------------------------------------
Long-term debt consists of the following:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Notes to banks (3.8%-9.8%
at October 30, 1998) $149,769 $21,293
Industrial development bonds
(3.2%-4.0% at October 30,
1998, payable in 2015 and 2018) 13,233 12,500
Obligations under capital lease
(7.5% at October 30, 1998,
payable through 2004) 2,051 2,332
- --------------------------------------------------------------------------------
165,053 36,125
Less current maturities (285) (281)
- --------------------------------------------------------------------------------
$164,768 $35,844
- --------------------------------------------------------------------------------
The Company has $200,000 of committed revolving credit facilities with a
syndicate of banks at optional interest rates of prime, LIBOR-based or CD-based
rates. These facilities mature as follows: $50,000 in 1999 and $150,000 in 2000.
The revolving credit loan agreements contain covenants which require the Company
to maintain certain financial ratios. The Company is in compliance with these
covenants as of October 30, 1998.
The notes to banks totaling $149,769 at October 30, 1998, and $21,293 at
October 31, 1997, have been classified as long-term reflecting the Company's
ability to refinance these amounts on a long-term basis. The maturities of the
remaining long-term debt are as follows: 1999 - $285; 2000 - $306; 2001 - $330;
2002 - $355; 2003 - $381; and $13,627 thereafter.
16
<PAGE>
THE VALSPAR CORPORATION
- --------------------------------------------------------------------------------
Under other short-term bank lines of credit, the Company may borrow up to
$224,032 on such terms as the Company and the banks may mutually agree. These
arrangements are reviewed periodically for renewal and modification. Borrowings
under these short term notes had an average annual rate of 5.75% in fiscal 1998
and 5.76% in fiscal 1997.
The Company had unused lines of credit under the short-term bank lines and
revolving credit facility of $261,633 at October 30, 1998.
Interest paid during 1998, 1997 and 1996 was $9,670, $4,878 and $2,608,
respectively.
NOTE 6 INCOME TAXES
- --------------------------------------------------------------------------------
Significant components of the provision for income taxes are as follows:
- --------------------------------------------------------------------------------
YEAR ENDED 1998 1997 1996
- --------------------------------------------------------------------------------
Current
Federal $33,695 $34,636 $32,368
State 6,285 5,703 6,798
Foreign 1,813 1,437 1,336
- --------------------------------------------------------------------------------
Total Current 41,793 41,776 40,502
- --------------------------------------------------------------------------------
Deferred
Federal 3,562 1,542 (2,279)
State 434 497 (435)
Foreign 869 (515) (638)
- --------------------------------------------------------------------------------
Total Deferred 4,865 1,524 (3,352)
- --------------------------------------------------------------------------------
Total Income Taxes $46,658 $43,300 $37,150
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities
are as follows:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Product liability accruals $ 2,023 $ 2,063
Insurance reserves 2,873 2,690
Deferred compensation 4,471 4,175
Workers' compensation reserves 3,013 2,606
Employee compensation accruals 3,014 2,970
Other 15,658 14,018
- --------------------------------------------------------------------------------
Total deferred tax assets 31,052 28,522
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation (16,012) (13,887)
Other (9,982) (6,476)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (25,994) (20,363)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 5,058 $ 8,159
- --------------------------------------------------------------------------------
The reconciliation of income tax computed at the U.S. Federal statutory tax
rates to income tax expense is as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Tax at U.S.
statutory rates 35.0% 35.0% 35.0%
State income
taxes, net of
Federal benefit 3.5% 3.7% 4.5%
Other 0.8% 1.0% 0.4%
- --------------------------------------------------------------------------------
39.3% 39.7% 39.9%
- --------------------------------------------------------------------------------
Income taxes paid during 1998, 1997 and 1996 were $33,571, $46,094 and
$39,748, respectively.
NOTE 7 STOCK PLANS
- --------------------------------------------------------------------------------
STOCK OPTIONS: Under the 1991 Stock Option Plan, options for the purchase of up
to 4,000,000 shares of common stock may be granted to officers and key
employees. Options are issued at market value at the date of grant and are
exercisable in full or in part over a prescribed period of time.
In 1997, the Company adopted Statement of Financial Accounting Standard No.
123 (SFAS 123), "Accounting for Stock-Based Compensation." As permitted by SFAS
123, the Company has elected to continue following the guidance of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" for
measurement and recognition of stock-based transactions with employees.
Accordingly, no compensation expense has been recorded for options granted under
the stock option plan. Had compensation expense for the stock option plan been
determined based on the fair value at the date of grant, consistent with the
provisions of SFAS 123, the Company's net income and earnings per share would
have been reported as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Pro Forma
Net Income 71,424 65,486 55,710
Pro Forma Earnings
Per Share:
Basic $1.64 $1.50 $1.27
Diluted 1.61 1.48 1.25
- --------------------------------------------------------------------------------
The pro forma effect on net income and earnings per share is not
representative of the pro forma net income in future years because it does not
take into consideration pro forma compensation expense related to grants made
prior to 1996.
17
<PAGE>
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:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Expected
dividend yield 1.5% 1.5% 1.5%
Expected stock
price volatility 21.1% 21.2% 21.2%
Risk-free
interest rate 4.2% 5.15% 5.9%
Expected life
of options 6 years 6 years 6 years
- --------------------------------------------------------------------------------
The weighted average fair value for options granted during 1998, 1997 and
1996 is $7.79, $7.63 and $6.06 per share, respectively.
Stock option activity for the three years ended October 30, 1998, is
summarized as follows:
- --------------------------------------------------------------------------------
WEIGHTED
AVERAGE
SHARES OPTIONS EXERCISE
RESERVED OUTSTANDING PRICE
- --------------------------------------------------------------------------------
OCTOBER 27, 1995
Balance 756,590 994,038 $14.41
Granted (358,650) 358,650 $20.72
Exercised - (202,148) $ 8.96
Canceled 12,264 (12,264) $16.76
- --------------------------------------------------------------------------------
OCTOBER 25, 1996
Balance 410,204 1,138,276 $17.34
Reserve shares
canceled (105,154) - -
Shares reserved 1,000,000 - -
Granted (249,600) 249,600 $28.32
Exercised - (94,885) $12.73
Canceled 11,280 (11,280) $20.37
- --------------------------------------------------------------------------------
OCTOBER 31, 1997
Balance 1,066,730 1,281,711 $19.79
Shares reserved 1,000,000 - -
Granted (398,150) 398,150 $31.34
Exercised - (56,592) $17.10
Canceled 22,901 (22,901) $23.72
- --------------------------------------------------------------------------------
OCTOBER 30, 1998
Balance 1,691,481 1,600,368 $22.70
- --------------------------------------------------------------------------------
Options outstanding at October 30, 1998, had an average remaining
contractual life of 6.9 years. Options exercisable of 665,194 at October 30,
1998, had a weighted average exercise price of $17.99.
EMPLOYEE STOCK OWNERSHIP PLANS: Under the Company's Employee Stock Ownership
Plans, substantially all of the Company's domestic employees are eligible to
participate and may contribute 1% to 7% of their compensation to the Plans. The
Company contributes an amount equal to one-half of the employee contributions.
The Company's contributions were $2,649, $2,615 and $2,231, for 1998, 1997 and
1996, respectively.
KEY EMPLOYEE BONUS PLAN: In 1993 the Company established a Key Employee Bonus
Plan for certain employees. Under the Plan, participants can elect to convert
all or any portion of the cash bonus awarded under certain incentive bonus plans
into a grant of restricted stock receivable three years from the date of grant.
NOTE 8 RETIREMENT PLANS
- --------------------------------------------------------------------------------
The Company sponsors a Profit Sharing Plan for substantially all of its domestic
employees. Under the Plan, the Company makes a contribution based on return on
assets as defined in the Plan up to a maximum of 10% of the aggregate
compensation of eligible participants. Contributions to the Profit Sharing Plan
totaled $9,342, $8,603 and $7,583, for 1998, 1997 and 1996, respectively.
The Company also sponsors a number of defined benefit pension plans for
certain hourly and foreign employees. The benefits for these plans are generally
based on stated amounts for each year of service. The Company funds the plans in
amounts consistent with the limits of allowable tax deductions.
The components of net periodic pension cost for the defined benefit pension
plans were as follows:
- --------------------------------------------------------------------------------
YEAR ENDED 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 986 $ 913 $ 761
Interest cost 2,050 1,855 1,564
Return on assets (4,559) (2,422) (1,993)
Net amortization
and deferral 1,638 127 128
- --------------------------------------------------------------------------------
$ 115 $ 473 $ 460
- --------------------------------------------------------------------------------
The funded status of the plans was as follows:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Projected benefit obligation (PBO) $ (30,669) $ (27,517)
Plan assets at fair value 39,907 35,722
- --------------------------------------------------------------------------------
Excess of plan assets over PBO 9,238 8,205
Unrecognized net transition asset (1,010) (1,096)
Unrecognized prior service cost 2,532 2,771
Unrecognized net gains (8,066) (7,536)
- --------------------------------------------------------------------------------
Net prepaid pension cost $ 2,694 $ 2,344
- --------------------------------------------------------------------------------
18
<PAGE>
THE VALSPAR CORPORATION
- --------------------------------------------------------------------------------
The actuarial assumptions were as follows:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Discount rate 6.25%-8.0% 7.5%-8.0%
Expected long-term
return on assets 7.5%-8.0% 8.0%-8.5%
Average increase in
compensation 3.75%-6.0% 5.0%-6.0%
- --------------------------------------------------------------------------------
NOTE 9 BENEFITS OTHER THAN PENSIONS
- --------------------------------------------------------------------------------
In addition to the Company's defined benefit pension plans, the Company sponsors
a health care plan that provides post-retirement medical benefits for some of
its employees. The Company's policy is to fund these benefits as they are paid.
The Company's accrued post-retirement benefit liability recognized in the
Company's balance sheet was $1,599 and $1,616 at October 30, 1998, and October
31, 1997, respectively. Net periodic post-retirement expense was $103, $98 and
$125 in 1998, 1997 and 1996, respectively.
The weighted-average discount rate used in determining the accumulated
post-retirement benefit obligation was 6.75% and 7.5% at October 30, 1998, and
October 31, 1997, respectively. The assumed health-care cost trend rate used in
measuring the accumulated post-retirement benefit obligation was 8.0% in 1998,
then declining by 0.5% per year to an ultimate rate of 5.5%. A 1% change in the
cost trend rate would not have a material effect on the accumulated
post-retirement benefit obligation or net periodic post-retirement expense.
NOTE 10 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
The following is a tabulation of the unaudited quarterly results for the years
ended October 30, 1998, and October 31, 1997:
- --------------------------------------------------------------------------------
NET
INCOME
NET GROSS NET PER SHARE
SALES MARGIN INCOME DILUTED
- --------------------------------------------------------------------------------
1998 Quarter Ended:
January 30 $ 225,359 $ 63,714 $ 8,895 $ .20
May 1 292,462 90,041 19,951 .45
July 31 327,684 101,324 22,246 .50
October 30 309,629 96,815 21,038 .48
- --------------------------------------------------------------------------------
$1,155,134 $351,894 $72,130 $1.63
- --------------------------------------------------------------------------------
1997 Quarter Ended:
January 24 $ 189,288 $ 53,438 $ 7,928 $ .18
April 25 252,768 82,809 17,103 .39
July 25 282,655 88,655 20,668 .47
October 31 292,560 93,895 20,178 .46
- --------------------------------------------------------------------------------
$1,017,271 $318,797 $65,877 $1.49
- --------------------------------------------------------------------------------
NOTE 11 PENDING ACQUISITION
- --------------------------------------------------------------------------------
In August, 1998, the Company agreed to purchase from Dexter Corporation its
worldwide Packaging Coatings business which supplies beverage can coatings, food
can and specialty coatings to the packaging market. The acquisition also
includes Dexter Corporation's Industrial Coatings business in France.
Completion of the transaction is expected in early 1999 and is subject to
customary closing conditions.
NOTE 12 RECENTLY ISSUED ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
The FASB recently issued SFAS No. 130, Reporting Comprehensive Income, providing
for the reporting and presentation of comprehensive income and its components;
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which establishes standards for defining operating segments and
reporting certain information about such segments; and SFAS No. 132, Employers'
Disclosure about Pension and Other Post-retirement Benefits, which revised
disclosure requirements relative to pension and other post-retirement benefits.
Since these statements only affect financial information disclosures in interim
and annual periods, the adoption of these standards will not affect the
Company's financial condition or results of operations. The Company is
continuing to evaluate the effect of these standards on its disclosures.
19
Exhibit 21
SUBSIDIARIES OF THE VALSPAR CORPORATION
The following are wholly-owned subsidiaries of The Valspar Corporation and do
business under its corporate name:
State of Incorporation
----------------------
Engineered Polymer Solutions, Inc. Delaware
Plasti-Kote Co., Inc. Ohio
Valspar Coatings Finance Corporation Minnesota
Valspar Finance Corporation Minnesota
Valspar Inc. Canada
Valspar Refinish, Inc. Mississippi
The Valspar (Australia) Corporation Pty Limited Australia
The Valspar (H. K.) Corporation Limited Hong Kong
The Valspar (Singapore) Corporation Pte Ltd Singapore
The Valspar (UK) Holding Corporation, Limited United Kingdom
Subsidiaries not listed would not, if considered in the aggregate as a single
subsidiary, constitute a significant subsidiary.
Exhibit 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of The Valspar Corporation of our report dated November 16, 1998, included in
the 1998 Annual Report to Stockholders of The Valspar Corporation.
Our audits also included the financial statement schedule of The Valspar
Corporation listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
Forms S-8 No. 2-79961, No. 2-79962, No. 33-51224 and No. 33-51226 pertaining to
The Valspar Stock Ownership Trusts; Forms S-8 No. 33-39258 and 33-346865
pertaining to The Valspar Corporation 1991 Stock Option Plan; Forms S-8 No.
33-51222 and 33-346865 pertaining to The Valspar Profit Sharing Retirement Plan;
Form S-8 No. 33-53824 pertaining to The Valspar Corporation Key Employee Annual
Bonus Plan; and Form S-8 No. 33-346865 pertaining to The Valspar Corporation
Stock Option Plan for Non-Employee Directors of our report dated November 16,
1998, with respect to the consolidated financial statements incorporated herein
by reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K) of
The Valspar Corporation.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 19, 1999
Exhibit 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements No.
33-51224, No. 33-51226, and No. 33-51222 of Valspar Corporation on Form S-8 of
our reports dated December 24, 1998 with respect to the financial statements of
the Valspar Stock Ownership Trust for Salaried Employees, the Valspar Stock
Ownership Trust for Hourly Employees, and the Valspar Profit Sharing Retirement
Plan for the year ended October 30, 1998 appearing in the Annual Report on Form
10-K of Valspar Corporation.
/s/ Deloitte & Touche LLP
January 19, 1999
Minneapolis, Minnesota
Exhibit 99(a)
VALSPAR STOCK OWNERSHIP TRUST
FOR SALARIED EMPLOYEES
FINANCIAL STATEMENTS FOR THE YEARS ENDED
OCTOBER 30, 1998 AND OCTOBER 31, 1997,
SUPPLEMENTAL SCHEDULE AS OF OCTOBER 30,
1998, AND INDEPENDENT AUDITORS' REPORT
<PAGE>
VALSPAR STOCK OWNERSHIP TRUST FOR SALARIED EMPLOYEES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Statements of Net Assets Available for Benefits 2
Statements of Changes in Net Assets Available for Benefits 3
Notes to Financial Statements 4
SUPPLEMENTAL SCHEDULE -
Item 27a - Schedule of Assets Held for Investment Purposes 8
<PAGE>
INDEPENDENT AUDITORS' REPORT
Valspar Stock Ownership Trust
Administrative Committee
We have audited the accompanying statements of net assets available for benefits
of the Valspar Stock Ownership Trust for Salaried Employees (the Plan) as of
October 30, 1998 and October 31, 1997 and the related statements of changes in
net assets available for benefits for the years then ended. These financial
statements are the responsibility of the Plan'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, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan at
October 30, 1998 and October 31, 1997 and the changes in its net assets
available for benefits for the years then ended, in conformity with generally
accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
table of contents is presented for the purpose of additional analysis and is not
a required part of the basic financial statements but is supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. The supplemental schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/ Deloitte & Touche LLP
December 24, 1998
<PAGE>
VALSPAR STOCK OWNERSHIP TRUST FOR SALARIED EMPLOYEES
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
OCTOBER 30, 1998 AND OCTOBER 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
ASSETS:
Investments (Note 3):
Interest in Valspar Stock Ownership Master Trust $104,579,947 $115,162,418
Other 715,688 1,015,428
------------ ------------
Total investments 105,295,635 116,177,846
Receivables:
Employees' contributions 475,936 409,828
Employer's contributions 213,813 188,060
------------ ------------
NET ASSETS AVAILABLE FOR BENEFITS $105,985,384 $116,775,734
============ ============
</TABLE>
See notes to financial statements.
2
<PAGE>
VALSPAR STOCK OWNERSHIP TRUST FOR SALARIED EMPLOYEES
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
YEARS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Employee contributions (Note 2) $ 4,590,944 $ 4,030,265
Employer contributions (Note 2) 1,954,700 1,930,678
Interest in investment income (loss) of Valspar
Stock Ownership Master Trust (5,481,014) 21,975,714
Other 49,226 24,041
------------ ------------
1,113,856 27,960,698
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Dividend payments to participants 811,610 1,271,764
Benefit payments:
The Valspar Corporation:
In cash 2,561,401 390,872
In stock 7,298,061 6,639,230
McWhorter Technologies, Incorporated:
In cash 18,891 4,474
In stock 475,861 687,980
Other 738,382 179,108
------------ ------------
11,904,206 9,173,428
------------ ------------
NET (DECREASE) INCREASE (10,790,350) 18,787,270
NET ASSETS AVAILABLE FOR BENEFITS AT
BEGINNING OF YEAR 116,775,734 97,988,464
------------ ------------
NET ASSETS AVAILABLE FOR BENEFITS AT
END OF YEAR $105,985,384 $116,775,734
============ ============
</TABLE>
See notes to financial statements.
3
<PAGE>
VALSPAR STOCK OWNERSHIP TRUST FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting records of the Valspar Stock Ownership Trust for Salaried
Employees (the Plan) are maintained on the accrual basis.
Investments in common stock of the Valspar Corporation (the Company) and
McWhorter Technologies, Incorporated (McWhorter) are stated at fair
value (the last reported sales price on the last business day of the
year).
Other investments are stated at current fair value as determined by the
trustee, Norwest Bank Minnesota, N.A., who holds the various
investments. The trustee values securities which are traded on a
national securities exchange at the last reported sales price on the
last business day of the year; investments traded in the
over-the-counter market and listed securities for which no sale was
reported on that date are valued at the average of the last reported bid
and ask prices.
Benefits paid to participants in shares of the Company or in shares of
McWhorter are valued at fair value.
Approved benefits payable representing the unpaid vested interest of
participants who have withdrawn from the Plan were $18,725 and $24,741
at October 30, 1998 and October 31, 1997, respectively.
2. DESCRIPTION OF THE PLAN
The Plan is a defined contribution plan that is available to all
salaried employees who meet certain age and length of service
requirements. It provides for retirement and termination benefits.
Employees electing to participate in the Plan make voluntary
contributions on a pretax or after-tax basis up to a maximum of 6% of
eligible wages. The Company has voluntarily agreed to contribute an
amount equal to one-half of the employee's contribution. Additionally,
beginning in fiscal 1998, the Company will contribute a
performance-based matching contribution if the Company meets certain
targeted earnings as defined in accordance with the Plan. Employee
contributions vest immediately, and company contributions vest after
five years of service. The Company has the right under the Plan to
terminate the Plan and discontinue such contributions at any anniversary
date. In the event of termination of the Plan, the net assets of the
Plan are to be set aside for the exclusive benefit of the participants
or their beneficiaries.
According to the Plan, contributions are to be primarily invested in
common stock of the Company. Cash dividends earned on plan shares are
paid out to the plan participants. The common stock of McWhorter is not
a current investment option of the Plan (see Note 6). Participants
meeting certain age and length of participation requirements may
diversify a portion of their interest into investments other than common
stock of the Company.
4
<PAGE>
Forfeitures resulting from the termination of plan participants with
less than 100% vesting reduce the Company's contribution in the year of
forfeiture. Total forfeitures were $201,390 and $70,548 in 1998 and
1997, respectively.
3. INVESTMENTS
Investments of the Valspar Stock Ownership Master Trust are accounted
for on a share-value basis as determined by the trustee.
The fair value of investments of the Valspar Stock Ownership Master
Trust in which the Plan invests as of October 30, 1998 and October 31,
1997 are as follows:
1998 1997
Common stock of the Valspar Corporation $120,383,984 $127,801,080
Common stock of McWhorter Technologies,
Incorporated (Note 6) 10,556,410 15,038,783
Collective Trust Fund 77,744 72,972
------------ ------------
$131,018,138 $142,912,835
============ ============
The investment income (loss) of the Valspar Stock Ownership Master Trust
for the years ended October 30, 1998 and October 31, 1997 are as
follows:
1998 1997
Valspar Stock:
Interest $ 12,198 $ 10,908
Dividends 1,798,437 1,566,418
Gain on sale of assets 911,792 183,031
Unrealized asset (depreciation)
appreciation (6,768,291) 21,223,349
----------- -----------
$(4,045,864) $22,983,706
=========== ===========
McWhorter Stock:
Interest $ 451 $ 1,278
Gain on sale of assets 678,309 3,008,539
Unrealized asset (depreciation)
appreciation (3,646,381) 1,139,671
----------- -----------
$(2,967,621) $ 4,149,488
=========== ===========
The Valspar Stock Ownership Master Trust holds assets for the Plan and
the Valspar Stock Ownership Trust for Hourly Employees. The Plan's
ownership interest in the Valspar Stock Ownership Master Trust was 79.8%
and 80.6% on October 30, 1998 and October 31, 1997, respectively.
Other investments of the Plan include investments in the Equity Fund
Master Trust, the Positive Return Fund Master Trust, and the Principal
Protection Fund Master Trust. These alternative investments are
available for diversification purposes to plan participants who have
attained age 55 and have ten years of participation in the Plan.
5
<PAGE>
4. TRANSACTIONS WITH PARTIES-IN-INTEREST
Fees incurred for trustee, recordkeeping, and other services rendered by
parties-in-interest are paid by the Company.
During the years ended October 30, 1998 and October 31, 1997, the
Valspar Stock Ownership Master Trust purchased 284,852 and 241,347
shares of common stock of the Company at a cost of $9,927,518 and
$9,016,898, respectively. Dividends on common stock of the Company
received by the Master Trust totaled $1,798,437 and $1,566,418 in the
years ended October 30, 1998 and October 31, 1997, respectively.
5. INCOME TAX STATUS
The Plan obtained its latest determination letter on August 30, 1996 in
which the Internal Revenue Service stated that the Plan, as then
designed, was in compliance with the applicable requirements of the
Internal Revenue Code. The plan administrator and the Plan's tax counsel
believe that the Plan is currently designed and being operated in
compliance with the applicable requirements of the Internal Revenue
Code. Therefore, no provision for income taxes has been included in the
Plan's financial statements.
6. MCWHORTER TECHNOLOGIES, INCORPORATED TRANSACTION
On April 29, 1994, the Company's stockholders of record as of April 15,
1994 (including plan participants with a portion of their account
balance invested in Valspar Corporation stock as of that date) received
a stock dividend of one share of McWhorter Common Stock for every two
shares of Valspar Corporation Common Stock held.
The common stock of McWhorter is not a current investment option of the
Plan, and plan participants may not increase the allocation of their
account balance to McWhorter stock. Participants may make a one-time
election to liquidate all of their shares of common stock of McWhorter.
Proceeds from liquidation will be reinvested in Valspar Corporation
Common Stock.
6
<PAGE>
SUPPLEMENTAL SCHEDULE
7
<PAGE>
VALSPAR STOCK OWNERSHIP TRUST FOR SALARIED EMPLOYEES
ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
OCTOBER 30, 1998
- --------------------------------------------------------------------------------
CURRENT
UNITS COST VALUE
Interest in Master Trust Funds:
(*) Norwest Bank Minnesota, N.A.
Equity Fund Master Trust 19,321 $ 385,966 $ 416,324
Positive Return Fund Master Trust 4,600 61,024 68,829
Principal Protection Fund
Master Trust 13,946 214,623 230,535
Valspar Stock Ownership
Master Trust 3,841,531 40,939,542 104,579,947
----------- ------------
$41,601,155 $105,295,635
=========== ============
(*) Known to be a party-in-interest.
8
Exhibit 99(b)
VALSPAR STOCK OWNERSHIP TRUST
FOR HOURLY EMPLOYEES
FINANCIAL STATEMENTS FOR THE YEARS ENDED
OCTOBER 30, 1998 AND OCTOBER 31, 1997,
SUPPLEMENTAL SCHEDULE AS OF OCTOBER 30,
1998, AND INDEPENDENT AUDITORS' REPORT
<PAGE>
VALSPAR STOCK OWNERSHIP TRUST FOR HOURLY EMPLOYEES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Statements of Net Assets Available for Benefits 2
Statements of Changes in Net Assets Available for Benefits 3
Notes to Financial Statements 4
SUPPLEMENTAL SCHEDULE -
Item 27a - Schedule of Assets Held for Investment Purposes 8
<PAGE>
INDEPENDENT AUDITORS' REPORT
Valspar Stock Ownership Trust
Administrative Committee
We have audited the accompanying statements of net assets available for benefits
of the Valspar Stock Ownership Trust for Hourly Employees (the Plan) as of
October 30, 1998 and October 31, 1997 and the related statements of changes in
net assets available for benefits for the years then ended. These financial
statements are the responsibility of the Plan'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, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan at
October 30, 1998 and October 31, 1997 and the changes in its net assets
available for benefits for the years then ended, in conformity with generally
accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
table of contents is presented for the purpose of additional analysis and is not
a required part of the basic financial statements, but is supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974 (ERISA). The supplemental schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ Deloitte & Touche LLP
December 24, 1998
<PAGE>
VALSPAR STOCK OWNERSHIP TRUST FOR HOURLY EMPLOYEES
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
OCTOBER 30, 1998 AND OCTOBER 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
ASSETS:
Investments (Note 3):
Interest in Valspar Stock Ownership Master Trust $26,438,191 $27,750,417
Other 95,045 647,480
----------- -----------
Total investments 26,533,236 28,397,897
Receivables:
Employees' contributions 169,498 187,190
Employer's contributions 67,074 66,780
----------- -----------
NET ASSETS AVAILABLE FOR BENEFITS $26,769,808 $28,651,867
=========== ===========
</TABLE>
See notes to financial statements.
2
<PAGE>
VALSPAR STOCK OWNERSHIP TRUST FOR HOURLY EMPLOYEES
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
YEARS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Employee contributions (Note 2) $ 1,870,006 $ 1,598,594
Employer contributions (Note 2) 735,956 662,912
Interest in investment income (loss) of Valspar
Stock Ownership Master Trust (1,532,471) 5,157,482
Other 15,729 12,318
----------- -----------
1,089,220 7,431,306
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Dividend payments to participants 269,713 290,548
Benefit payments:
The Valspar Corporation:
In cash 1,117,115 235,543
In stock 1,311,433 745,918
McWhorter Technologies, Incorporated:
In cash 4,044 398
In stock 122,709 91,254
Other 146,265 42,602
----------- -----------
2,971,279 1,406,263
----------- -----------
NET (DECREASE) INCREASE (1,882,059) 6,025,043
NET ASSETS AVAILABLE FOR BENEFITS AT
BEGINNING OF YEAR 28,651,867 22,626,824
----------- -----------
NET ASSETS AVAILABLE FOR BENEFITS AT
END OF YEAR $26,769,808 $28,651,867
=========== ===========
</TABLE>
See notes to financial statements.
3
<PAGE>
VALSPAR STOCK OWNERSHIP TRUST FOR HOURLY EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting records of the Valspar Stock Ownership Trust for Hourly
Employees (the Plan) are maintained on the accrual basis.
Investments in common stock of the Valspar Corporation (the Company) and
McWhorter Technologies, Incorporated (McWhorter) are stated at fair
value (the last reported sales price on the last business day of the
year).
Other investments are stated at current fair value as determined by the
trustee, Norwest Bank Minnesota, N.A., who holds the various
investments. The trustee values securities that are traded on a national
securities exchange at the last reported sales price on the last
business day of the year; investments traded in the over-the-counter
market and listed securities for which no sale was reported on that date
are valued at the average of the last reported bid and ask prices.
Benefits paid to participants in shares of the Company or in shares of
McWhorter are valued at fair value.
Approved benefits payable representing the unpaid vested interest of
participants who have withdrawn from the Plan were $8,836 and $20,989 at
October 30, 1998 and October 31, 1997, respectively.
2. DESCRIPTION OF THE PLAN
The Plan is a defined contribution plan that is available to all hourly
employees who meet certain age and length of service requirements. It
provides for retirement and termination benefits.
Employees electing to participate in the Plan make voluntary
contributions on a pretax or after-tax basis up to a maximum of 6% of
eligible wages if they are also participating in Valspar's Profit
Sharing Plan. Employees participating in a defined benefit pension plan
are eligible to contribute up to a maximum of 15% of eligible wages. The
Company has voluntarily agreed to contribute an amount equal to one-half
of eligible wages contributed by employees (to a maximum match of 3% of
eligible wages). Additionally, beginning in fiscal 1998, the Company
will contribute a performance-based matching contribution if the Company
meets certain targeted earnings as defined in accordance with the Plan.
Employee contributions vest immediately, and company contributions vest
after five years of service. The Company has the right under the Plan to
terminate the Plan and discontinue such contributions at any anniversary
date. In the event of termination of the Plan, the net assets of the
Plan are to be set aside for the exclusive benefit of the participants
or their beneficiaries.
According to the Plan, contributions are to be primarily invested in
common stock of the Company. Cash dividends earned on plan shares are
paid out to the plan participants. The common stock of McWhorter is not
a current investment option of the Plan (see Note 6). Participants
meeting
4
<PAGE>
certain age and length of participation requirements may diversify a
portion of their interest into investments other than common stock of
the Company.
Forfeitures resulting from the termination of plan participants with
less than 100% vesting reduce the Company's contribution in the year of
forfeiture. Total forfeitures were $20,673 and $26,000 in 1998 and 1997,
respectively.
3. INVESTMENTS
Investments of the Valspar Stock Ownership Master Trust are accounted
for on a share-value basis as determined by the trustee.
The fair value of investments of the Valspar Stock Ownership Master
Trust in which the Plan invests as of October 30, 1998 and October 31,
1997 are as follows:
1998 1997
Common stock of the Valspar Corporation $120,383,984 $127,801,080
Common stock of McWhorter Technologies,
Incorporated (Note 6) 10,556,410 15,038,783
Collective Trust Fund 77,744 72,972
------------ ------------
$131,018,138 $142,912,835
============ ============
The investment income (loss) of the Valspar Stock Ownership Master Trust
for the years ended October 30, 1998 and October 31, 1997 are as
follows:
1998 1997
Valspar Stock:
Interest $ 12,198 $ 10,908
Dividends 1,798,437 1,566,418
Gain on sale of assets 911,792 183,031
Unrealized asset (depreciation)
appreciation (6,768,291) 21,223,349
----------- -----------
$(4,045,864) $22,983,706
=========== ===========
McWhorter Stock:
Interest $ 451 $ 1,278
Gain on sale of assets 678,309 3,008,539
Unrealized asset (depreciation)
appreciation (3,646,381) 1,139,671
----------- -----------
$(2,967,621) $ 4,149,488
=========== ===========
The Valspar Stock Ownership Master Trust holds assets for the Plan and
the Valspar Stock Ownership Trust for Salaried Employees. The Plan's
ownership interest in the Valspar Stock Ownership Master Trust was 20.2%
and 19.4% on October 30, 1998 and October 31, 1997, respectively.
Other investments of the Plan include investments in the Equity Fund
Master Trust, the Positive Return Fund Master Trust, and the Principal
Protection Fund Master Trust. These alternative investments are
available for diversification purposes to plan participants who have
attained age 55 and have ten years of participation in the Plan.
5
<PAGE>
4. TRANSACTIONS WITH PARTIES-IN-INTEREST
Fees incurred for trustee, recordkeeping, and other services rendered by
parties-in-interest are paid by the Company.
During the years ended October 30, 1998 and October 31, 1997, the
Valspar Stock Ownership Master Trust purchased 284,852 and 241,347
shares of common stock of the Company at a cost of $9,927,518 and
$9,016,898, respectively. Dividends on common stock of the Company
received by the Master Trust totaled $1,798,437 and $1,566,418 in the
years ended October 30, 1998 and October 31, 1997, respectively.
5. INCOME TAX STATUS
The Plan obtained its latest determination letter on January 9, 1996. In
the letter, the Internal Revenue Service stated that the Plan, as then
designed, was in compliance with the applicable requirements of the
Internal Revenue Code. The plan administrator and the Plan's tax counsel
believe that the Plan is currently designed and being operated in
compliance with the applicable requirements of the Internal Revenue
Code. Therefore, no provision for income taxes has been included in the
Plan's financial statements.
6. MCWHORTER TECHNOLOGIES, INCORPORATED TRANSACTION
On April 29, 1994, the Company's stockholders of record as of April 15,
1994 (including plan participants with a portion of their account
balance invested in Valspar Corporation stock as of that date) received
a stock dividend of one share of McWhorter Common Stock for every two
shares of Valspar Corporation Common Stock held.
The common stock of McWhorter is not a current investment option of the
Plan, and plan participants may not increase the allocation of their
account balance to McWhorter stock. Participants may make a one-time
election to liquidate all of their shares of common stock of McWhorter.
Proceeds from liquidation will be reinvested in Valspar Corporation
Common Stock.
6
<PAGE>
SUPPLEMENTAL SCHEDULE
7
<PAGE>
VALSPAR STOCK OWNERSHIP TRUST FOR HOURLY EMPLOYEES
ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
OCTOBER 30, 1998
- --------------------------------------------------------------------------------
CURRENT
UNITS COST VALUE
Interest in Master Trust Funds:
(*) Norwest Bank Minnesota, N.A.
Equity Fund Master Trust 3,373 $ 52,656 $ 72,681
Positive Return Fund Master Trust 494 5,677 7,394
Principal Protection Fund
Master Trust 906 11,709 14,970
Valspar Stock Ownership
Master Trust 966,351 10,677,437 26,438,191
----------- -----------
$10,747,479 $26,533,236
=========== ===========
(*) Known to be a party-in-interest.
8
Exhibit 99(c)
THE VALSPAR PROFIT SHARING
RETIREMENT PLAN
FINANCIAL STATEMENTS FOR THE YEARS ENDED
OCTOBER 30, 1998 AND OCTOBER 31, 1997,
SUPPLEMENTAL SCHEDULES AS OF AND
FOR THE YEAR ENDED OCTOBER 30, 1998,
AND INDEPENDENT AUDITORS' REPORT
<PAGE>
THE VALSPAR PROFIT SHARING RETIREMENT PLAN
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Statements of Net Assets Available for Benefits 2
Statements of Changes in Net Assets Available for Benefits 3
Notes to Financial Statements 4
SUPPLEMENTAL SCHEDULES:
Item 27a - Schedule of Assets Held for Investment Purposes 11
Item 27d - Schedule of Reportable Transactions 12
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Valspar Profit Sharing Retirement
Plan Administrative Committee
We have audited the accompanying statements of net assets available for benefits
of The Valspar Profit Sharing Retirement Plan (the Plan) as of October 30, 1998
and October 31, 1997 and the related statements of changes in net assets
available for benefits for the years then ended. These financial statements are
the responsibility of the Plan'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, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan at
October 30, 1998 and October 31, 1997 and the changes in its net assets
available for benefits for the years then ended, in conformity with generally
accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules listed in the
table of contents are presented for the purpose of additional analysis and are
not a required part of the basic financial statements, but are supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. The supplemental schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, are
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/ Deloitte & Touche LLP
December 24, 1998
<PAGE>
THE VALSPAR PROFIT SHARING RETIREMENT PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
OCTOBER 30, 1998 AND OCTOBER 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
ASSETS:
Investments in Master Trusts (Note 3):
Interest in Positive Return Fund Master Trust $ 12,226,831 $ 9,622,345
Interest in Equity Fund Master Trust 87,636,278 87,342,513
Interest in Principal Protection Fund Master Trust 18,438,282 16,924,239
Valspar Corporation Common Stock 34,836,482 36,257,712
McWhorter Technologies, Incorporated
Common Stock (Note 6) 1,152,492 1,660,370
Interest in Collective Trust Funds 217,882 401,177
Cash (20,667) 6,144
------------- ------------
Total investments 154,487,580 152,214,500
Receivables:
Employer's contributions 6,284,099 5,828,966
Employees' contributions 283,800 279,965
------------ ------------
Total receivables 6,567,899 6,108,931
------------ ------------
Total assets 161,055,479 158,323,431
LIABILITIES -
Net amount payable for settlements pending (132,057) (33,964)
------------ ------------
NET ASSETS AVAILABLE FOR BENEFITS $160,923,422 $158,289,467
============ ============
</TABLE>
See notes to financial statements.
2
<PAGE>
THE VALSPAR PROFIT SHARING RETIREMENT PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
YEARS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Employer contributions (Note 2) $ 6,284,099 $ 5,828,966
Employee contributions (Note 2) 3,216,909 3,800,481
Net investment gain - Positive Return Fund Master Trust 1,566,089 709,349
Net investment gain - Equity Fund Master Trust 5,008,232 21,634,495
Net investment gain - Principal Protection Fund Master Trust 1,244,813 1,669,923
Net investment gain - Collective Trust Funds 15,722 32,530
Valspar Corporation Common Stock:
Net investment (loss) gain (1,977,029) 5,143,438
Dividends 516,638 413,103
McWhorter Technologies, Incorporated Common Stock -
Net investment (loss) gain (318,486) 455,535
------------ ------------
15,556,987 39,687,820
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO -
Benefit payments 12,923,032 10,360,267
TRANSFER FROM SUNBELT/SUREGUARD, INC. -
401(k) PLANS (Note 7) 1,127,698
------------ ------------
NET INCREASE 2,633,955 30,455,251
NET ASSETS AVAILABLE FOR BENEFITS AT
BEGINNING OF YEAR 158,289,467 127,834,216
------------ ------------
NET ASSETS AVAILABLE FOR BENEFITS AT
END OF YEAR $160,923,422 $158,289,467
============ ============
</TABLE>
See notes to financial statements.
3
<PAGE>
THE VALSPAR PROFIT SHARING RETIREMENT PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting records of The Valspar Profit Sharing Retirement Plan
(the Plan) are maintained on an accrual basis.
Investments are stated at current fair value as determined by Norwest
Bank Minnesota, N.A. (the trustee), which holds the various investments.
The trustee values securities that are traded on a national exchange at
the last reported sales price on the last business day of the year;
investments traded in the over-the-counter market and listed securities
for which no sales were reported on that date are valued at the average
of the last reported bid and ask prices. Net investment gain (loss)
includes interest, dividends, net gain (loss) on sale of assets, and
unrealized asset appreciation (depreciation), less investment advisory
and management fees.
Approved benefits payable representing the unpaid vested interest of
participants who have withdrawn from the Plan were $554,722 and $703,573
at October 30, 1998 and October 31, 1997, respectively.
2. DESCRIPTION OF THE PLAN
The Plan is a defined contribution plan which covers substantially all
employees of The Valspar Corporation (the Company) who are not
participants in a defined benefit retirement plan sponsored by the
Company. The Plan provides for retirement and termination benefits. The
Company has agreed to contribute voluntarily such amounts as determined
in accordance with the provisions of the Plan. The Company has the right
under the Plan to terminate the Plan and discontinue such contributions
at any anniversary date. In the event of termination of the Plan, the
assets of the Plan are to be set aside for the exclusive benefit of the
participants or their beneficiaries.
Contributions up to a maximum of 10% of the participants' eligible wages
may be made as defined by the Plan. Contributions are composed of both
employee 401(k) contributions and company contributions. Company
contributions to the Plan are based on the Company's return on assets
for the fiscal year ending coincident with the plan year. Employee
contributions vest immediately, and company contributions vest after
five years of service.
Forfeitures resulting from the termination of plan participants less
than 100% vested reduce the Company's contribution in the year of
forfeiture. Total forfeitures were $360,396 and $196,594 in 1998 and
1997, respectively.
3. INVESTMENTS
Participants in the Plan have four investment options: the Principal
Protection Fund, Positive Return Fund, Equity Fund, and Valspar Common
Stock Fund. The Collective Trusts and McWhorter Common Stock Fund are
not available as current investment options (see Note 6). Participants
may change their investment elections quarterly and may allocate their
account balance among one or more of the options in increments of 5%.
4
<PAGE>
The change in net assets available for benefits by investment option for
the year ended October 30, 1998 is as follows:
<TABLE>
<CAPTION>
Investment Options
-----------------------------------------------------------------------------------------------
Valspar Mcwhorter
Positive Principal Common Common Collective
Return Equity Protection Stock Stock Trusts/
Fund Fund Fund Fund Fund Other Total
<S> <C> <C> <C> <C> <C> <C> <C>
Additions to net
assets attributed to:
Employer
contributions $ 499,925 $ 3,105,057 $ 487,608 $ 2,191,509 $ 6,284,099
Employee
contributions 287,707 1,506,022 225,974 1,197,206 3,216,909
Net investment
gain - Positive
Return Fund 1,566,089 1,566,089
Net investment
gain - Equity
Fund 5,008,232 5,008,232
Net investment
gain - Principal
Protection Fund 1,244,813 1,244,813
Net investment
gain - Collective
Trust Funds $ 15,722 15,722
Valspar Corporation
Common Stock:
Net investment
loss (1,977,029) (1,977,029)
Dividends 516,638 516,638
McWhorter
Technologies,
Incorporated
Common Stock -
Net investment loss $(318,486) (318,486)
---------- ----------- ----------- ----------- --------- --------- -----------
2,353,721 9,619,311 1,958,395 1,928,324 (318,486) 15,722 15,556,987
Deductions from net
assets attributed
to -
Benefit payments 892,274 6,310,226 3,096,294 2,547,162 77,076 12,923,032
---------- ----------- ----------- ----------- --------- --------- -----------
Net increase (decrease)
prior to interfund
transfers 1,461,447 3,309,085 (1,137,899) (618,838) (395,562) 15,722 2,633,955
Interfund transfers 1,179,964 (2,660,466) 2,526,939 (610,201) (112,316) (323,920)
---------- ----------- ----------- ----------- --------- --------- -----------
Net increase (decrease) $2,641,411 $ 648,619 $ 1,389,040 $(1,229,039) $(507,878) $(308,198) $ 2,633,955
========== =========== =========== =========== ========= ========= ===========
</TABLE>
5
<PAGE>
The change in net assets available for benefits by investment option for
the year ended October 31, 1997 is as follows:
<TABLE>
<CAPTION>
Investment Options
----------------------------------------------------------------------------------------------
Valspar Mcwhorter
Positive Principal Common Common Collective
Return Equity Protection Stock Stock Trusts/
Fund Fund Fund Fund Fund Other Total
<S> <C> <C> <C> <C> <C> <C> <C>
Additions to net
assets attributed to:
Employer
contributions $ 464,568 $ 2,759,163 $ 606,870 $ 1,998,365 $ 5,828,966
Employee
contributions 350,030 1,666,864 332,205 1,451,382 3,800,481
Net investment
gain - Positive
Return Fund 709,349 709,349
Net investment
gain - Equity
Fund 21,634,495 21,634,495
Net investment
gain - Principal
Protection Fund 1,669,923 1,669,923
Net investment
gain - Collective
Trust Funds $ 32,530 32,530
Valspar Corporation
Common
Stock:
Net investment
gains 5,143,438 5,143,438
Dividends 413,103 413,103
McWhorter
Technologies,
Incorporated
Common Stock -
Net investment gain $ 455,535 455,535
----------- ----------- ---------- ----------- --------- -------- -----------
1,523,947 26,060,522 2,608,998 9,006,288 455,535 32,530 39,687,820
Deductions from net
assets attributed
to -
Benefit payments 914,930 4,102,671 3,597,843 1,627,348 117,475 10,360,267
Transfer from Sunbelt/
Sureguard, Inc.
401(k) Plans 103,333 427,861 71,174 525,330 1,127,698
----------- ----------- ---------- ----------- --------- -------- -----------
Net increase (decrease)
prior to interfund
transfers 712,350 22,385,712 (917,671) 7,904,270 338,060 32,530 30,455,251
Interfund transfers (2,812,753) (1,233,395) (81,693) 4,094,088 (103,364) 137,117
----------- ----------- ---------- ----------- --------- -------- -----------
Net (decrease) increase $(2,100,403) $21,152,317 $ (999,364) $11,998,358 $ 234,696 $169,647 $30,455,251
=========== =========== ========== =========== ========= ======== ===========
</TABLE>
As of October 30, 1998, the assets in the Equity Fund, the Positive
Return Fund, and the Principal Protection Fund are maintained in three
master trusts: the Equity Fund Master Trust, the Positive Return Fund
Master Trust, and the Principal Protection Fund Master Trust,
respectively. The master trusts hold assets for the Plan, Employee
Pension Plans, and the Valspar Stock Ownership Plans. The Plan's
ownership interest in the Equity Fund Master Trust, Positive Return Fund
Master Trust, and Principal Protection Fund Master Trust was 83.9%,
71.5%, and 98.7%, respectively, on October 30, 1998 and 85.6%, 70.0%,
and 99.4%, respectively, on October 31, 1997.
6
<PAGE>
Investments of the master trusts are determined on a unit-value basis as
determined by Norwest Bank Minnesota, N.A., trustee.
The fair values of investments of the master trusts in which the Plan
invests are as follows:
<TABLE>
<CAPTION>
October 30, October 31,
1998 1997
<S> <C> <C>
Positive Return Fund Master Trust:
Cash and short-term investment fund $ 1,738,407 $ 612,152
United States Government securities 15,113,197 10,752,879
Corporate bonds and debentures - 2,285,080
Net amount payable for settlements pending - (114,492)
Accrued income 245,061 201,726
------------ ------------
$ 17,096,665 $ 13,737,345
============ ============
Equity Fund Master Trust:
Cash and short-term investment fund $ 1,841,829 $ 2,567,184
Common stock 103,051,158 69,382,870
Collective equity fund 335,416 30,078,881
Net amount payable for settlements pending (792,472) (22,479)
Accrued income 45,341 39,852
------------ ------------
$104,481,272 $102,046,308
============ ============
Principal Protection Fund Master Trust:
Collective trust funds $ 18,683,787 $ 16,765,637
Net amount receivable for settlements pending - 266,457
------------ ------------
$ 18,683,787 $ 17,032,094
============ ============
</TABLE>
7
<PAGE>
The net investment gain of the master trusts for the years ended are as
follows:
<TABLE>
<CAPTION>
October 30, October 31,
1998 1997
<S> <C> <C>
Positive Return Fund Master Trust:
Interest $ 884,108 $ 878,835
Net gain (loss) on sale of assets 121,417 (18,404)
Unrealized asset appreciation 1,370,164 114,610
Investment advisory and management fees (23,905) (50,956)
----------- -----------
$ 2,351,784 $ 924,085
=========== ===========
Equity Fund Master Trust:
Interest $ 167,631 $ 176,630
Dividends 3,169,995 3,790,840
Net gain on sale of assets 9,418,086 14,203,278
Unrealized asset appreciation 15,050,495 8,310,238
Investment advisory and management fees (487,812) (415,148)
----------- -----------
$27,318,395 $26,065,838
=========== ===========
Principal Protection Fund Master Trust:
Interest $ 677
Unrealized asset appreciation 892,489 $ 674,706
Net gain on sale of assets 213,228 444,167
Investment advisory and management fees (38,520) (61,771)
----------- -----------
$ 1,067,874 $ 1,057,102
=========== ===========
</TABLE>
4. TRANSACTIONS WITH PARTIES-IN-INTEREST
Fees paid during the year for trustee, recordkeeping, and other services
rendered by parties-in-interest are paid directly by the plan sponsor.
5. INCOME TAX STATUS
In the Plan's latest determination letter, obtained on August 30, 1996,
the Internal Revenue Service stated that the Plan, as then designed, was
in compliance with the applicable requirements of the Internal Revenue
Code. The plan administrator and the plan tax counsel believe that the
Plan is currently designed and operated in compliance with the
applicable requirements of the Internal Revenue Code. Therefore, no
provision for income taxes has been included in the Plan's financial
statements.
6. McWHORTER TECHNOLOGIES, INCORPORATED TRANSACTION
On April 29, 1994, the company stockholders of record as of April 15,
1994 (including plan participants with a portion of their account
balance invested in company stock as of that date) received a stock
dividend of one share of McWhorter Technologies, Incorporated Common
Stock for every two shares of Valspar Corporation Common Stock held.
8
<PAGE>
The common stock of McWhorter Technologies, Incorporated is not a
current investment option of the Plan, and plan participants may not
increase the allocation of their account balance to McWhorter stock.
Participants may make a one-time election to liquidate all of their
shares of common stock of McWhorter Technologies, Incorporated. Proceeds
from liquidation will be reinvested in the participants' accounts based
on their current election options.
7. PLAN MERGER (TRANSFER IN)
Effective July 1, 1997, both the Sunbelt Coatings, Inc. and Sureguard,
Inc. 401(k) Plans were merged into the Plan. Net assets of $1,127,698
were transferred to the Plan on July 30, 1997.
9
<PAGE>
SUPPLEMENTAL SCHEDULES
10
<PAGE>
THE VALSPAR PROFIT SHARING RETIREMENT PLAN
ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
OCTOBER 30,1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
CURRENT
SHARES/UNITS COST VALUE
<S> <C> <C> <C>
Common stock:
(*) The Valspar Corporation 1,241,367 shares $26,645,569 $ 34,836,482
(*) McWhorter Technologies,
Incorporated 56,564 shares 817,014 1,152,492
Interest in Collective Trust Funds:
(*) Norwest Short-term Investment
Fund 215,799 units 215,799 215,799
Accrued income 2,083 2,083
Interest in Master Trust Funds:
(*) Norwest Bank Minnesota, N.A.
Equity Fund Master Trust 4,067,068 units 44,912,404 87,636,278
Positive Return Fund Master Trust 817,112 units 9,730,204 12,226,831
Principal Protection Fund
Master Trust 1,115,442 units 13,220,704 18,438,282
Cash (20,667) (20,667)
----------- ------------
$95,523,110 $154,487,580
=========== ============
</TABLE>
(*) Known to be a party-in-interest.
11
<PAGE>
THE VALSPAR PROFIT SHARING RETIREMENT PLAN
ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS
YEAR ENDED OCTOBER 30, 1998
- --------------------------------------------------------------------------------
COST/
DESCRIPTION OF PURCHASE/ CARRYING
ASSET/TRANSACTION SALE PRICE VALUE
Norwest Norwest Short-term Investment Fund $10,132,094 $10,132,094
Purchased 10,132,094 shares in
201 transactions
Norwest Norwest Short-term Investment Fund 10,316,124 10,316,124
Sold 10,316,124 shares in
145 transactions
Transactions are executed on behalf of the Plan by Norwest Bank Minnesota, N.A.
Known to be a party-in-interest.
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-30-1998
<PERIOD-END> OCT-30-1998
<CASH> 14,990
<SECURITIES> 0
<RECEIVABLES> 213,751
<ALLOWANCES> (1,464)
<INVENTORY> 142,811
<CURRENT-ASSETS> 426,069
<PP&E> 424,927
<DEPRECIATION> (191,445)
<TOTAL-ASSETS> 801,680
<CURRENT-LIABILITIES> 267,984
<BONDS> 0
0
0
<COMMON> 26,660
<OTHER-SE> (2,776)
<TOTAL-LIABILITY-AND-EQUITY> 801,680
<SALES> 1,155,134
<TOTAL-REVENUES> 1,155,134
<CGS> 803,240
<TOTAL-COSTS> 230,152
<OTHER-EXPENSES> (7,753)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,707
<INCOME-PRETAX> 118,788
<INCOME-TAX> 46,658
<INCOME-CONTINUING> 72,130
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,130
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.63
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 11,113
<SECURITIES> 0
<RECEIVABLES> 184,957
<ALLOWANCES> (1,364)
<INVENTORY> 119,653
<CURRENT-ASSETS> 356,847
<PP&E> 351,847
<DEPRECIATION> (166,099)
<TOTAL-ASSETS> 615,470
<CURRENT-LIABILITIES> 259,420
<BONDS> 0
0
0
<COMMON> 26,660
<OTHER-SE> (1,850)
<TOTAL-LIABILITY-AND-EQUITY> 615,470
<SALES> 1,017,271
<TOTAL-REVENUES> 1,017,271
<CGS> 698,474
<TOTAL-COSTS> 206,834
<OTHER-EXPENSES> (2,508)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,294
<INCOME-PRETAX> 109,177
<INCOME-TAX> 43,300
<INCOME-CONTINUING> 65,877
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,877
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.49
</TABLE>
