FORM 8-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
Amendment No. 1 to Form 8-K Report
Dated March 15, 1999
Date of Report (Date of earliest event reported): February 26, 1999
THE VALSPAR CORPORATION
-----------------------
Delaware 1-3011 36-2443580
- ---------------------------- ---------------- -----------------------
(State or other Jurisdiction (Commission File (IRS Employer
of Incorporation) Number) Identification No.)
1101 Third Street South, Minneapolis, Minnesota 55415
- ----------------------------------------------- -------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (612)332-7371
Not Applicable
--------------------------------------------------------------
(former name or former address, if changed, since last report)
<PAGE>
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS
Page
----
(a) Financial Statements of Business Acquired
DEXTER COATINGS ACQUIRED ENTITIES
Report of Independent Accountants 4
Combined Financial Statements:
Statement of Financial Position, December 31, 1998 5 - 6
Statement of Income, Year Ended December 31, 1998 7
Statement of Changes in Equity, Year Ended
December 31, 1998 8
Statement of Cash Flows, Year Ended December 31, 1998 9
Notes to Combined Financial Statements 10 - 21
(b) Pro Forma Financial Information 22
Unaudited Pro Forma Combined Condensed Statements of
Income which combine the audited consolidated results of
Dexter Coatings Acquired Entities for the year ended
December 31, 1998 with the audited consolidated results of
Valspar for the year ended October 30, 1998, along with a
description of the related pro forma adjustments. 23
Unaudited Pro Forma Combined Condensed Balance Sheet
which combines the unaudited Consolidated Balance Sheet
of Dexter Coatings Acquired Entities as of December 31,
1998 with the unaudited Consolidated Balance Sheet of
Valspar as of January 29, 1999, along with a description
of the pro-forma adjustments. 24
Unaudited Pro Forma Combined Condensed Statements of
Income which combine the unaudited consolidated results
of Dexter Coatings Acquired Entities for the three months
ended December 31, 1998 with the unaudited consolidated
results of Valspar for the three months ended January
29,1999, along with a description of the related pro
forma adjustments. 25
(c) Exhibit
23.1 Consent of Independent Auditors -
PricewaterhouseCoopers LLP 26
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this Amendment No. 1 to the report on 8-K
to be signed on its behalf by the undersigned hereunto duly authorized.
THE VALSPAR CORPORATION
By /s/ ROLF ENGH
-----------------------------------
Printed Name: Rolf Engh
Title: Secretary
Date: May 12, 1999
---------------------------------
3
<PAGE>
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
PRICEWATERHOUSECOOPERS LLP
100 East Wisconsin Avenue
Suite 1500
Milwaukee WI 53202
Telephone (414) 212 1600
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management of the Dexter Coatings Acquired Entities
In our opinion, the accompanying combined statement of financial position and
the related combined statements of income, changes in equity and cash flows
present fairly, in all material respects, the financial position of Dexter
Coatings Acquired Entities at December 31, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Dexter Coatings Acquired Entities' management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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 financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
April 16, 1999
4
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
COMBINED STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 318
Short-term securities 9,065
Accounts receivable:
Trade receivables 45,490
Non-trade receivables 3,562
Allowance for doubtful accounts (2,531)
---------
46,521
---------
Inventories:
Materials and supplies 8,863
Work in process 336
Finished goods 10,973
LIFO reserve (2,069)
---------
18,103
---------
Current deferred tax assets 1,261
Prepaid expenses 1,269
---------
Total current assets 76,537
Property, plant and equipment:
Land 5,404
Buildings and improvements 24,324
Machinery and equipment 75,008
Construction in progress 1,545
---------
106,281
Less accumulated depreciation (62,370)
---------
43,911
---------
Investment in unconsolidated affiliates 859
Patents, technology, formulas and covenants 1,303
Excess of cost over net assets of businesses acquired 33,390
Other assets 1,518
---------
Total assets $ 157,518
=========
5
<PAGE>
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 24,632
Accrued and deferred income taxes 3,247
Accrued liabilities and expenses 7,732
--------
Total current liabilities 35,611
Deferred items 879
Deferred income taxes, noncurrent 7,739
Due to affiliates, net 6,094
Minority interest 1,370
Equity:
Common stock 6,148
Additional paid-in capital 54,242
Retained earnings 22,270
Divisional equity 23,126
Accumulated other comprehensive income 39
--------
Total equity 105,825
--------
Total liabilities and equity $157,518
========
See accompanying notes to the combined financial statements.
6
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
REVENUES
Net sales $ 212,273
Equity in net loss of affiliates (13)
Other income 960
---------
213,220
EXPENSES
Cost of sales 161,156
Marketing and administrative 28,396
Research and development 10,689
Other 4
---------
INCOME BEFORE TAXES 12,975
Income taxes 3,140
---------
INCOME BEFORE MINORITY INTEREST 9,835
Minority interest 464
---------
NET INCOME $ 9,371
=========
See accompanying notes to the combined financial statements.
7
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
COMBINED STATEMENT OF CHANGES IN EQUITY
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Divisional Comprehensive Total
Stock Capital Earnings Equity Income Equity
---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1998 $ 6,148 $ 48,200 $ 26,033 $ 27,228 $ (4,598) $ 103,011
Comprehensive income:
Net income -- -- 5,223 4,148 -- 9,371
Other comprehensive income -
currency effects -- -- -- -- 4,637 4,637
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income -- 14,008
Dividends -- -- (8,986) -- -- (8,986)
Contributed capital -- 6,042 -- -- -- 6,042
Net cash transfers to parent -- -- -- (8,250) -- (8,250)
---------- ---------- ---------- ---------- ---------- ----------
BALANCES, DECEMBER 31, 1998 $ 6,148 $ 54,242 $ 22,270 $ 23,126 $ 39 $ 105,825
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to the combined financial statements.
8
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
OPERATIONS
Net income $ 9,371
Noncash items
Depreciation 5,147
Amortization 1,919
Income taxes due not paid 984
Minority interests (464)
Equity in loss of affiliates 13
LIFO inventory credit (48)
Currency translation effects and other (1,778)
Operating working capital decrease (5,673)
-------
Total from operations 9,471
-------
INVESTMENTS
Property, plant and equipment (2,603)
Acquisitions (734)
Joint ventures 57
-------
Total used for investments (3,280)
-------
FINANCING
Due to Parent for Acquisitions 734
Due from affiliates, net 5,789
Dividends paid (8,986)
-------
Total used for financing (2,463)
-------
INCREASE IN CASH AND SHORT TERM SECURITIES 3,728
Cash and short-term securities at beginning of year 5,655
-------
Cash and short-term securities at end of year $ 9,383
=======
CHANGES IN MAJOR ELEMENTS WHICH INCREASE (DECREASE)
OPERATING WORKING CAPITAL
Accounts receivable, net $(2,346)
Inventories at FIFO (2,077)
Prepaid expenses 242
Accounts payable 71
Accrued liabilities (1,563)
-------
Changes in operating working capital $(5,673)
=======
Income taxes paid $ 2,156
=======
See accompanying notes to the combined financial statements.
9
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ACQUISITION OF ACQUIRED ENTITIES:
On August 21, 1998 Dexter Corporation (Dexter) entered into an agreement with
The Valspar Corporation (Valspar) for the sale of its Coatings Business,
including its entire ownership interest in the following entities (Dexter
percentage ownership in parenthesis): Canstoll GmbH (100%); Dexter do Brazil
LTDA (100%); Dexter International (Thailand), Ltd. (100%); Dexter Mexicana
S.A. de C.V. (100%); Dexter Packaging Products, S.A. (100%); Dexter SAS
(100%); Kolack A.G. (100%); Vernicolor A.G. (100%); Dexter Midland Company
Ltd. (70%); and Dexter South Africa (Pty) Limited (60%); and the net
operating assets of the packaging products division of Dexter. The entities
sold manufacture coatings for the beverage and food industries as well as
other industrial coatings for domestic and international markets. The
Acquired Entities operate in one business segment.
2. SIGNIFICANT ACCOUNTING POLICIES:
a. COMBINATION AND EQUITY METHOD ACCOUNTING: The accompanying combined
financial statements include the accounts of the entities acquired as
described in Note 1 (the Acquired Entities). Upon combination, all
intercompany accounts, transactions and profits are eliminated. The
investment in companies in which the ownership interest is less than 50%
is accounted for using the equity method.
b. CASH AND SHORT-TERM SECURITIES: Cash is principally comprised of amounts
in operating bank accounts in other countries. Short-term securities have
maturities of less than 90 days when purchased and represent cash
awaiting use in the business, funds available for future investment, and
partial offsets of net nonlocal currency exposures relating to current
accounts payable and accounts receivable. Short-term securities are
principally held in interest-bearing overnight securities. The carrying
value of short-term securities approximates fair value because of the
short maturity of these instruments. At December 31, 1998, there were
approximately $9.1 million in short-term securities available to the
business and they were held outside the United States.
c. INVENTORIES: Inventories are valued at the lower of cost or market.
Inventories located in the United States represented 5% of total
inventories at December 31, 1998. The LIFO (last-in, first-out) method
was used for determining the cost of 100% of U.S. inventories in 1998.
The FIFO (first-in, first-out) method was used for determining the cost
of the 95% of total inventories which were outside the United States.
d. PROPERTY, PLANT AND EQUIPMENT: For financial reporting purposes, the
Acquired Entities use the straight-line method of computing depreciation
on plant and equipment. This method charges the cost to income evenly
over the useful lives of the assets, principally 20 to 40 years for
buildings, and 10 to 15 years for machinery and equipment. For income tax
purposes the Acquired Entities use shorter lives and accelerated
depreciation methods. Capital investment incentive grants are recorded as
a reduction of the cost of assets, which spreads the benefits over the
lives of the related assets through reduced depreciation.
10
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
d. PROPERTY, PLANT AND EQUIPMENT, CONTINUED:
Management evaluates, on an ongoing basis, the carrying value of
property, plant and equipment and makes a specific provision against the
asset when impairment is identified. Property, plant and equipment is
written down when the asset has become redundant or the remaining book
value exceeds its anticipated future productive asset value.
Maintenance and repairs are charged to operations as incurred and
amounted to $2.1 million in 1998. Betterments and major renewals are
capitalized. The cost of assets sold or retired and the related amounts
of accumulated depreciation are eliminated from the accounts, and the
resulting gains or losses are included in income.
e. PATENTS, TECHNOLOGY, FORMULAS AND COVENANTS: Patents, technology,
formulas and covenants not to compete are stated at cost less accumulated
amortization of $O.7 million at December 31, 1998. Such items which have
been acquired by purchase or merger are capitalized and amortized on a
straight-line basis over periods ranging from 7 to 8 years.
f. EXCESS ACQUISITION COST: Excess acquisition cost is stated at cost less
accumulated amortization of $7.6 million at December 31, 1998. The excess
of cost over the net asset value of businesses acquired (goodwill) prior
to 1991 is amortized on a straight-line basis over 25 to 40 years. Excess
acquisition cost of businesses acquired after 1990 is amortized over
periods not exceeding 25 years. Management evaluates, on an ongoing
basis, the carrying value of excess acquisition cost and makes a specific
provision against the asset when impairment is identified. When a loss is
expected from the proposed sale of a business or product line, a
diminution in the value of the excess of cost over the net asset value of
the business acquired is identified. In the instance of an ongoing
business, such a diminution is recognized when there has been a history
of the business' inability to generate operating income after the
amortization of goodwill and in management's judgement, the business will
not recover from this position in the future. There were no impairment
charges in 1998.
11
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
g. ACCRUED LIABILITIES AND EXPENSES:
Accrued liabilities and expenses at December 31, 1998 were (in thousands
of dollars):
Salaries, wages and benefits $3,135
Pension and profit sharing 831
Provision for claims and warranties 416
Professional services 141
Taxes, other than income taxes 246
Customer rebates and volume discounts 1,380
Commissions 402
Freight 253
Other, principally accruals for unbilled obligations 928
------
$7,732
======
h. CURRENCY EXCHANGE EFFECTS: Assets and liabilities of those operations
whose functional currency is other than the U.S. dollar are translated at
end of period currency exchange rates and fluctuations due to changes in
exchange rates are accounted for as a separate component of equity,
"Currency translation effects". Results of operations are translated at
average currency exchange rates during the period.
Many of the Acquired Entities' operations conduct a portion of their
business in nonlocal currencies. These transactions give rise to nonlocal
currency receivables or payables. Changes in the exchange rates between
the functional currency and the nonlocal currency in which the
transaction is denominated result in currency transaction gains and
losses that are included in the determination of income. Currency gains
and losses realized on these nonlocal currency transactions were not
significant in 1998.
i. INCOME TAXES: Dexter and its Coatings business account for income taxes
utilizing an asset and liability approach to financial accounting and
reporting for income taxes. Certain of the Acquired Entities file
separate tax returns in their respective local jurisdictions. Dexter
files a consolidated federal income tax return and makes any related tax
payments and receives any refunds. Dexter allocates income tax expense
(benefit), income taxes currently payable and deferred income taxes to
the Acquired Entities in amounts which approximate the amounts that would
be recorded if separate income tax returns were filed except that foreign
tax and other credits are allocated based upon the relationship of the
business' taxable income to Dexter's taxable income. Deferred income
taxes are recognized for the temporary differences between the bases of
assets and liabilities for financial reporting and income tax purposes
using the enacted income tax rates that will be in effect when the
differences are expected to reverse. To the extent it is more likely than
not that deferred income tax assets will not be realized, a valuation
allowance is recognized.
j. RESEARCH AND DEVELOPMENT: Costs and expenses associated with research and
development activities are expensed as incurred.
12
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
k. USE OF ESTIMATES: The Acquired Entities financial statements have been
prepared in accordance with generally accepted accounting principles,
which require management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, and expenses for
the periods presented. They also affect the disclosure of contingencies.
Actual results could differ from those estimates.
l. REVENUE RECOGNITION: The Acquired Entities recognize revenue from product
sales upon shipment to the customer.
m. DUE TO AFFILIATES: The net amount due from Dexter to the Packaging
Products Division has been recorded as a reduction in Divisional Equity.
Amounts due to affiliates, net, of the other Acquired Entities are
included in Due to Affiliates net in the Combined Balance Sheet.
n. COMPREHENSIVE INCOME: In 1998, the Acquired Entities adopted SFAS No.
130, "Reporting Comprehensive Income". This statement establishes rules
for the reporting of comprehensive income and its components.
Comprehensive income consists of net income and currency effects and is
presented in the Combined Statement of Changes in Equity. The adoption of
SFAS No. 130 has no impact on total equity.
3. LEASES:
The Acquired Entities lease facilities, vehicles, computers and other
equipment under long-term operating leases with varying terms and expiration
dates. Some leases contain renewal provisions, purchase options and
escalation clauses. Aggregate future minimum lease payments under
noncancelable operating leases as of December 31, 1998 were as follows (in
thousands of dollars):
For the year ending
1999 $ 937
2000 707
2001 529
2002 375
2003 263
Later years 1,256
------
$4,067
======
Total rent expense incurred under noncancelable leases, net of minor sublease
rentals, amounted to $1.1 million in 1998. The Acquired Entities have no
contingent rentals.
13
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
4. TAXES:
The components of tax expense for the year ended December 31, 1998 are as
follows (in thousands of dollars):
Income taxes:
Current:
United States $ 582
State 93
International 1,688
--------
2,363
--------
Deferred:
United States 402
State 87
International 288
--------
777
--------
Total income taxes 3,140
Payroll taxes 4,781
Property taxes 356
Other taxes 134
--------
Total taxes $ 8,411
========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 are presented below (in thousands of dollars).
Deferred tax assets:
Postretirement health benefits $ 267
Accrued expenses 941
Loss carryforwards 1,100
Inventory, principally valuation reserves 252
Other 494
--------
Gross deferred tax assets 3,054
--------
Deferred tax liabilities:
Fixed assets, principally depreciation (6,592)
Inventories (615)
Pension liabilities (630)
Other (2,311)
--------
Gross deferred tax liabilities (10,148)
--------
Net deferred tax liability before valuation allowance (7,094)
Valuation allowance (332)
--------
Net deferred tax liability after valuation allowance $ (7,426)
========
14
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
4. TAXES, CONTINUED:
Valuation allowances of $0.3 million at December 31, 1998 reduce the deferred
tax assets attributable to foreign loss carryforwards to the amount that,
based upon all available evidence, is more likely than not to be realized.
Reversal of the valuation allowance is contingent upon the recognition of
future taxable income and capital gains in specific foreign countries or
changes in circumstances which cause the recognition of the benefits to
become more likely than not.
Current deferred tax assets $ 1,261
Current deferred tax liabilities
(included in accrued and deferred income taxes) (948)
Noncurrent deferred income taxes (7,739)
--------
Net deferred tax liability $ (7,426)
========
The effective income tax rate was 24.2% for the year ended December 31, 1998.
The income tax rate differs from the statutory U.S. federal income tax rate
as shown below:
U.S. federal rate 35.0%
State taxes, net of federal benefit 1.2
International taxation differences (11.6)
Other (0.4)
--------
Effective income tax rate 24.2%
========
Pretax income from international operations amounted to $9.5 million for the
year ended December 31, 1998. U.S. and international income and withholding
taxes have not been provided on temporary differences related to investments
in foreign subsidiaries. These differences principally include unremitted
earnings of approximately $48 million for the year ended December 31, 1998,
differences between the financial reporting amount and the tax basis of
investments in foreign subsidiaries and cumulative translation adjustments.
The investment in these subsidiaries is considered to be permanent in nature.
It is impracticable to estimate the total tax liability, if any, which these
differences could cause should such investments cease to be treated as
permanently reinvested.
15
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
5. POSTRETIREMENT BENEFITS:
Effective December 31, 1998, the Acquired Entities adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits."
The provisions of SFAS No. 132 standardize the disclosure requirements for
pensions and other postretirement benefits and do not change the measurement
or accounting of these plans.
The Acquired Entities participate in Dexter's pension (defined benefit) and
deferred profit sharing (defined contribution) plans for substantially all
U.S. employees. Retirement benefits for most employees of international
operations are provided by government-sponsored or insured programs and, in
certain countries, by defined benefit plans.
The components of net periodic pension cost for the year ended December 31,
1998 were (in thousands of dollars):
Service cost $ 696
Interest cost 946
Expected return on plan assets (1,334)
Amortization of:
Transition asset (7)
Prior service cost 6
Actuarial loss 12
--------
Net periodic pension cost $ 319
========
16
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
5. POSTRETIREMENT BENEFITS, CONTINUED:
The following table provides a summary of the projected benefit obligation,
plan assets, and funded status of the Acquired Entities' pension plans (in
thousands of dollars):
Change in projected benefit obligation:
Projected benefit obligation at January 1 14,181
Service cost 696
Interest cost 946
Plan participants' contributions 86
Actuarial gain (170)
Benefits paid (617)
Foreign currency exchange rate changes 94
--------
Projected benefit obligation at December 31 15,216
--------
Change in plan assets:
Fair value of plan assets at January 1 15,033
Actual return on plan assets 1,729
Employer contribution 251
Plan participants' contribution 86
Benefits paid (617)
Foreign currency exchange rate changes 36
--------
Fair value of plan assets at December 31 16,518
--------
Funded status, over funded 1,302
Unrecognized actuarial gain (1,345)
Unrecognized portion of net obligation
at transition (28)
Unrecognized prior service cost 39
--------
Net amount recognized $ (32)
========
Amounts recognized in the statement of
financial position consist of:
Prepaid pension cost $ 748
Accrued pension liability (780)
--------
Net amount recognized $ (32)
========
For pension plans where the accumulated benefit obligation exceeded the
plan's assets, the projected benefit obligations, accumulated benefit
obligations, and fair value of plan assets were $0.6 million, $0.5 million,
and $0, respectively, as of December 31, 1998.
Weighted average assumptions as of December 31
Discount rate 6.4%
Expected return on plan assets 8.7%
Rate of compensation increase 4.7%
17
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
5. POSTRETIREMENT BENEFITS, CONTINUED:
Dexter sponsors deferred profit sharing plans for substantially all domestic
employees not covered under pension plans. Contributions and cost are
determined based on a percentage of each covered employees' pay and totaled
$0.2 million in 1998.
In addition to providing pension benefits, the Acquired Entities through
Dexter provide some health care and life insurance benefits for retired
employees.
The components of net periodic postretirement benefit expense for the year
ended December 31, 1998 were (in thousands of dollars):
Service cost $ 101
Interest cost 117
Expected return on plan assets (178)
Amortization of:
Prior service cost (27)
Actuarial gain 9
--------
Net periodic postretirement benefit cost $ 22
========
The following provides a reconciliation of accumulated benefit obligation,
plan assets and funded status of the Acquired Entities' postretirement health
benefit plan (in thousands of dollars):
Change in projected benefit obligation:
Accumulated postretirement benefit obligation at January 1 $ 1,759
Service cost 101
Interest cost 117
Actuarial loss 159
Benefits paid (151)
--------
Accumulated postretirement benefit obligation at December 31 1,985
--------
Change in plan assets:
Fair value of plan assets at January 1 1,807
Actual return on plan assets 196
Employer contribution 23
Benefits paid (151)
--------
Fair value of plan assets at December 31 1,875
--------
Funded status, underfunded (110)
Unrecognized actuarial gain 217
Unrecognized prior service cost (164)
--------
Accrued postretirement benefit cost
recognized in the Statement of Financial Position $ (57)
========
18
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
5. POSTRETIREMENT BENEFITS, CONTINUED:
The discount rate used in determining the accumulated postretirement benefit
obligation was 6.5% at December 31, 1998.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.5% in 1998, declining, gradually to
5% in 2007 and remaining level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the postretirement health benefit plan. A one-percentage point
change in assumed health care cost trend rates was not determinable on a
"carve-out" basis.
19
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
6. EQUITY:
Equity is comprised of the following at December 31, 1998 (in thousands of
dollars except for share amounts):
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
--------------------- Paid-in Retained Divisional Comprehensive
NAME OF ENTITY Shares Amount Capital Earnings Equity Income Total
--------------------- --------- --------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Packaging Products Division of Dexter -- $ -- $ -- $ -- $ 23,126 $ 1,821 $ 24,947
Canstoll GmbH 1 42 10,410 151 -- 113 10,716
Dexter do Brazil LTDA 10,000 9 2,491 (762) -- (295) 1,443
Dexter International (Thailand), Ltd. 5,000 20 -- (268) -- (42) (290)
Dexter Mexicana S.A. de C.V 32,692,994 2 4,515 103 -- (1,241) 3,379
Dexter Packaging Products, S.A 35,000 2,810 2,208 314 -- (619) 4,713
Dexter SAS 235,000 4,098 71 21,505 -- (2,860) 22,814
Kolack A.G 250 185 9,883 (4,210) -- (486) 5,372
Vernicolor A.G 2,500 1,642 25,345 3,434 -- 3,052 33,473
Dexter Midland Company Ltd. 30,800 51 -- 2,789 -- 900 3,740
Dexter South Africa (Pty) Limited 30,000 12 -- 631 -- (39) 604
Eliminations -- (2,723) (681) (1,417) -- (265) (5,086)
--------- --------- --------- --------- --------- ---------
$ 6,148 $ 54,242 $ 22,270 $ 23,126 $ 39 $ 105,825
========= ========= ========= ========= ========= =========
</TABLE>
During 1998 Dexter forgave amounts due from Dexter Mexicana S.A. de C.V. and
Dexter Packaging Products, S.A of $3,834,000 and $2,208,000, respectively. The
amounts forgiven were recorded as additional paid-in capital.
20
<PAGE>
DEXTER COATINGS ACQUIRED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
7. GEOGRAPHIC INFORMATION:
Geographic information about the Acquired Entities consists of the following
as of and for the year ended December 31, 1998 (in thousands of dollars):
NET SALES
United States $ 45,062
France 52,224
Switzerland 38,186
United Kingdom 23,051
Other countries 60,726
Eliminations (6,976)
---------
$ 212,273
=========
LONG-LIVED ASSETS
United States $ 6,871
France 15,651
Switzerland 31,537
United Kingdom 3,314
Other countries 22,749
---------
$ 80,122
=========
8. LEGAL PROCEEDINGS AND ENVIRONMENTAL LIABILITIES:
The Acquired Entities are involved in various environmental matters and other
lawsuits and claims, many of which are covered by third-party insurance or
insurance provided by an affiliate. Estimated amounts for claims which are
probable and are not covered by third party insurance or insurance provided
by an affiliate are reflected as liabilities. While the outcome of these
environmental matters and lawsuits and claims cannot be forecast with
certainty, management believes that such matters should not result in any
liability which would have a material adverse effect on the Acquired
Entities' financial position, results of operations or cash flows.
9. COMMITMENTS AND CONTINGENCIES:
The Acquired Entities incurred a product claim during 1997 from one of its
customers. The settlement reached with this customer during 1998 caused the
Acquired Entities to pay the customer $500,000 during 1998 because the
customer met specified sales targets. The Acquired Entities have also agreed
to pay an additional $500,000 to the customer if the customer meets specified
sales targets during 1999. As of December 31, 1998, the Acquired Entities
have not recorded a liability relating to this claim based upon management's
best estimate of the liability at that time.
21
<PAGE>
THE VALSPAR CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed balance sheet as of January
29, 1999 combines the historical consolidated balance sheet information of The
Valspar Corporation and Dexter Coatings Acquired Entities as if the acquisition
was consummated at January 29, 1999. The unaudited pro forma combined condensed
statement of income for the year ended October 30, 1998, and the three months
ended January 29, 1999 combine the historical consolidated income statement
information of Valspar and Dexter Coatings Acquired Entities as if the
acquisition had been consummated on November 1, 1997, the beginning of the
periods presented.
The acquisition is accounted for using the purchase method of accounting and,
accordingly, the total consideration of $224.5 million has initially been
allocated based on the estimated fair values of assets acquired and liabilities
assumed on the date of acquisition. The excess of the purchase price over the
estimated fair value of net tangible assets acquired has been recorded as
intangibles which are amortized on a straight-line basis over periods ranging
from 10 to 25 years. The actual allocation of the purchase price may differ from
that reflected in the unaudited pro forma condensed combined financial
information and is therefore subject to change based upon final valuations.
However, The Valspar Corporation does not expect that the final allocation of
the purchase price for the acquisition will differ materially from the
allocations in the accompanying pro forma financial information.
The unaudited pro forma financial information has been prepared by management of
Valspar and adjusts the historical statements of income and balance sheets for
the effect of costs, expenses, assets and liabilities which might have been
incurred or assumed had the acquisition been effected on the date indicated. The
unaudited pro forma financial information is provided for information purposes
only and does not purport to be indicative of the future results or financial
position of Valspar. This information should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended October 30, 1998.
22
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
THE VALSPAR CORPORATION AND
DEXTER COATINGS ACQUIRED ENTITIES
FOR THE YEAR ENDED OCTOBER 30, 1998
(000's U.S.$)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS (5)
------------------------- PRO FORMA
VALSPAR DEXTER DR CR COMBINED
------- ------ -- -- ---------
<S> <C> <C> <C>
NET SALES $1,155,134 $212,273 $1,367,407
COSTS AND EXPENSES:
Cost of sales 803,240 161,156 $ 1,347 (3) 965,743
Selling, general and administrative expenses 230,152 39,085 4,457 (1) 273,694
Interest expense 10,707 4 13,000 (2) 23,711
Other income, net (7,753) (483) (8,236)
---------- -------- ----------
1,036,346 199,762 18,804 -- 1,254,912
INCOME BEFORE INCOME TAXES 118,788 12,511 (18,804) -- 112,495
INCOME TAXES 46,658 3,140 $ 6,225 (4) 43,573
NET INCOME $ 72,130 $ 9,371 $(18,804) $(6,225) $ 68,922
========== ==================================== ==========
NET INCOME PER SHARE-BASIC $ 1.66 $ 1.59
========== ==========
NET INCOME PER SHARE-DILUTED $ 1.63 $ 1.56
========== ==========
BASIC SHARES OUTSTANDING (IN THOUSANDS) 43,457 43,457
========== ==========
DILUTED SHARES OUTSTANDING (IN THOUSANDS) 44,319 44,319
========== ==========
(1) To record amortization of excess of purchase
price over acquired net assets, based on
estimated lives of 10 to 25 years. Such
amortization expense is subject to possible
adjustment upon completion of the Dexter Coatings
Acquired Entities appraisal valuation.
(2) To record additional estimated interest expense,
using a 6% interest rate, resulting from the use
of debt to finance the acquisition.
(3) To record additional depreciation on the
appraised asset valuations
(4) To record tax effect, using a 39% estimated
effective tax rate
(5) Valspar Corporation expects to achieve certain
synergies in relation to the business
combination. Such synergies are not included in
the above pro forma adjustments.
</TABLE>
23
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
THE VALSPAR CORPORATION AND
DEXTER COATINGS ACQUIRED ENTITIES
JANUARY 29, 1999
(000's U.S.$)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------- PRO FORMA
VALSPAR DEXTER DR CR COMBINED
------- ------ -- -- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,480 $ 9,383 $ 21,863
Accounts receivable, less allowance 216,509 46,521 263,030
Inventories 142,239 18,103 160,342
Other current assets 55,675 2,530 58,205
-------- -------- ---------
Total current assets 426,903 76,537 -- -- 503,440
INVESTMENT IN DEXTER $224,507(1) $224,507 (2) --
GOODWILL 92,210 33,390 82,839(2) 208,439
OTHER ASSETS 56,424 3,680 11,450(2) 71,554
PROPERTY, PLANT AND EQUIPMENT 443,526
Less allowance for depreciation 198,773 -- --
-------- -------- ---------
244,753 43,911 24,393(2) -- 313,057
Total Assets $ 820,290 $ 157,518 $343,189 $224,507 $1,096,490
=====================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 121,154 $ 24,632 $ 145,786
Short-term borrowings 73,570 -- 73,570
Accrued Liabilities 87,249 10,979 98,228
Other current liabilities 10,955 -- 10,955
-------- -------- ---------
Total current liabilities 292,928 35,611 -- 328,539
LONG-TERM DEBT 151,120 -- $224,507 (1) 375,627
OTHER LONG-TERM LIABILITIES 28,146 16,082 44,228
STOCKHOLDERS' EQUITY
Common stock, at par 26,660 6,148 $ 6,148(2) 26,660
Additional paid-in capital 27,662 54,242 54,242(2) 27,662
Retained earnings 371,697 22,270 22,270(2) 371,697
Divisional Equity -- 23,126 23,126(2) --
Other (2,058) 39 39(2) (2,058)
Treasury stock, at cost (75,865) -- (75,865)
--------- -------- ---------
Total Stockholders' Equity 348,096 105,825 -- 348,096
Total Liabilities and Stockholders' Equity $ 820,290 $ 157,518 $105,825 $224,507 $1,096,490
=====================================================================
(1) To establish investment and record debt incurred
to finance the acquisition.
(2) Eliminate investment and record initial goodwill
and assets at appraised values based upon
purchase price less net book value of assets
acquired. The goodwill is subject to possible
adjustment upon completion of appraisal
valuations.
</TABLE>
24
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
THE VALSPAR CORPORATION AND
DEXTER COATINGS ACQUIRED ENTITIES
FOR THE THREE MONTHS ENDED JANUARY 29, 1999
(000's U.S.$)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS (5)
------------------------- PRO FORMA
VALSPAR DEXTER DR CR COMBINED
------- ------ -- -- ---------
<S> <C> <C> <C> <C> <C>
NET SALES $265,810 $50,946 $316,756
COSTS AND EXPENSES:
Cost of sales 190,471 38,427 $ 337 (3) 229,235
Selling, general and administrative expenses 56,641 9,018 1,114 (1) 66,773
Interest expense 3,154 1 3,250 (2) 6,405
Other income, net (450) (193) (643)
-------- ------- --------
249,816 47,253 4,701 -- 301,770
INCOME BEFORE INCOME TAXES 15,994 3,693 (4,701) -- 14,986
INCOME TAXES 6,278 778 $ 1,211 (4) 5,845
NET INCOME $ 9,716 $ 2,915 $(4,701) $(1,211) $ 9,141
======== =================================== ========
NET INCOME PER SHARE-BASIC $ 0.22 $ 0.21
======== ========
NET INCOME PER SHARE-DILUTED $ 0.22 $ 0.21
======== ========
BASIC SHARES OUTSTANDING (IN THOUSANDS) 43,443 43,443
======== ========
DILUTED SHARES OUTSTANDING (IN THOUSANDS) 43,974 43,974
======== ========
(1) To record amortization of excess of purchase
price over acquired net assets, based on
estimated lives of 10 to 25 years. Such
amortization expense is subject to possible
adjustment upon completion of the Dexter Coatings
Acquired Entities appraisal valuation.
(2) To record additional estimated interest expense,
using a 6% interest rate, resulting from the use
of debt to finance the acquisition.
(3) To record additional depreciation on the
appraised asset valuations
(4) To record tax effect, using a 39% estimated
effective tax rate
(5) Valspar Corporation expects to achieve certain
synergies in relation to the business
combination. Such synergies are not included in
the above pro forma adjustments.
</TABLE>
25
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 2-79961, 2-79962, 33-51224 and 33-51226 pertaining
to The Valspar Stock Ownership Trusts; Nos. 33-39258 and 333-46865 pertaining to
The Valspar Corporation 1991 Stock Option Plan; Nos. 33-51222 and 333-46865
pertaining to The Valspar Profit Sharing Retirement Plan; No. 33-53824
pertaining to The Valspar Corporation Key Employee Annual Bonus Plan; and No.
333-46865 pertaining to The Valspar Corporation Stock Option Plan for
Non-Employee Directors) of The Valspar Corporation of our report dated April 16,
1999 relating to the combined financial statements of Dexter Coatings Acquired
Entities, which appears in the Current Report on Form 8-K/A of The Valspar
Corporation dated May 12, 1999.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
May 12, 1999
26
