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 January 4, 2001
Date of Report (Date of earliest event reported): December 20, 2000
THE VALSPAR CORPORATION
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Delaware 1-3011 36-2443580
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(State or other Jurisdiction (Commission File (IRS Employer
of Incorporation) Number) 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
Not Applicable
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(former name or former address, if changed, since last report)
Item 7: Financial Statements and Exhibits
Page
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(a) Financial Statements of Business Acquired
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Auditors 4
Audited Consolidated Balance Sheets - Years ended
November 30, 2000 and November 30, 1999 5-6
Audited Consolidated Statements of Income - Years
ended November 30, 2000, November 30, 1999 and
November 30, 1998 7
Audited Consolidated Statements of Cash Flows - Years
ended November 30, 2000, November 30, 1999 and
November 30, 1998 8
Consolidated Statements of Shareholders' Equity -
Years ended November 30, 2000, November 30, 1999
and November 30, 1998 9
Notes to Consolidated Financial Statements 10-20
(b) Pro Forma Financial Information 21
Unaudited Pro Forma Combined Condensed Balance Sheet which
combines the audited Consolidated Balance Sheet of Lilly
Industries, Inc. as of November 30, 2000 with the audited
Consolidated Balance Sheet of Valspar as of October 27, 2000,
along with a description of the pro forma adjustments. 22
Unaudited Pro Forma Combined Condensed Statement of Income
which combine the audited consolidated results of Lilly
Industries, Inc. for the year ended November 30, 2000 with the
audited consolidated results of Valspar for the year ended
October 27,2000, along with a description of the related pro
forma adjustments. 23
(c) Exhibits
1 Agreement and Plan of Merger among Lilly Industries, Inc.,
Acquisition Corp. (a wholly-owned subsidiary of the registrant)
and the registrant made and entered into as of June 23, 2000,
incorporated by reference to Appendix A to the Definitive Proxy
Statement filed by Lilly Industries, Inc. on August 22, 2000.
23.1 Consent of Independent Auditors - Ernst & Young LLP 24
2
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: February 9, 2001
3
Report of Independent Auditors
The Board of Directors
Lilly Industries, Inc.
We have audited the accompanying consolidated balance sheets of Lilly
Industries, Inc. as of November 30, 2000 and 1999 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended November 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial position of Lilly Industries, Inc. at
November 30, 2000 and 1999 and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 2000 in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Indianapolis, IN
January 12, 2001
4
Lilly Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
NOVEMBER 30
2000 1999
-------------------------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 6,470 $ 5,714
Accounts receivable, less allowance
for doubtful accounts (2000, $1,701;
1999, $1,775) 90,181 91,369
Inventories 57,116 58,500
Deferred income taxes 2,730 2,848
Other 4,958 3,426
-------------------------------
Total current assets 161,455 161,857
Other assets:
Goodwill, less amortization (2000, $35,311;
1999, $27,769) 206,435 210,811
Other intangibles, less amortization (2000,
$24,489; 1999, $23,129) 18,412 23,067
Deferred income taxes 1,925 3,974
Sundry 21,189 18,781
-------------------------------
247,961 256,633
Property and equipment:
Land 16,628 13,872
Buildings 86,184 75,232
Equipment 113,735 110,610
Accumulated depreciation (77,806) (67,778)
-------------------------------
138,741 131,936
-------------------------------
$ 548,157 $ 550,426
===============================
SEE ACCOMPANYING NOTES.
5
NOVEMBER 30
2000 1999
-------------------------------
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,230 $ 60,317
Salaries and payroll related items 14,413 20,975
Other 24,459 27,293
Income taxes payable 4,423 4,552
-------------------------------
Total current liabilities 91,525 113,137
Long-term debt 211,514 206,803
Other liabilities 39,006 38,315
Shareholders' equity:
Capital stock, $.55 stated value per share:
Class A (limited voting) - 28,077 shares
issued (1999, 27,969 shares issued) 15,599 15,539
Class B (voting) - 540 shares issued 300 300
Additional capital 85,329 83,833
Retained earnings 148,402 133,807
Accumulated other comprehensive loss (5,241) (3,509)
Cost of capital stock in treasury (38,277) (37,799)
-------------------------------
206,112 192,171
-------------------------------
$ 548,157 $ 550,426
===============================
6
Lilly Industries, Inc. and Subsidiaries
Consolidated Statements of Income
YEAR ENDED NOVEMBER 30
2000 1999 1998
------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 669,699 $ 656,201 $ 619,002
Costs and expenses:
Cost of products sold 416,122 401,286 379,641
Selling, general and administrative 174,149 160,861 146,763
Research and development 20,960 21,154 20,567
------------------------------------------------
611,231 583,301 546,971
------------------------------------------------
Operating income 58,468 72,900 72,031
Other expense:
Sundry income (expense) 483 (633) (666)
Seller's transaction expense (2,353) -- --
Interest expense, net (16,900) (15,791) (16,919)
------------------------------------------------
(18,770) (16,424) (17,585)
------------------------------------------------
Income before income taxes 39,698 56,476 54,446
Income taxes 17,673 23,155 22,867
------------------------------------------------
Net income $ 22,025 $ 33,321 $ 31,579
================================================
Net income per share:
Basic $ .95 $ 1.44 $ 1.36
Diluted $ .93 $ 1.43 $ 1.35
SEE ACCOMPANYING NOTES.
7
Lilly Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED NOVEMBER 30
2000 1999 1998
------------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 22,025 $ 33,321 $ 31,579
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 12,023 10,391 9,102
Amortization of intangibles 10,854 10,544 10,922
Deferred income taxes 2,167 5,267 209
Gain on disposal of fixed assets (678) -- --
Changes in operating assets and liabilities
net of effects from acquired businesses:
Accounts receivable 1,188 (9,162) (422)
Inventories 1,384 (7,680) (2,574)
Accounts payable and accrued expenses (21,612) 11,101 5,985
Sundry (6,220) (15,044) 418
------------------------------------------
Net cash provided by operating activities 21,131 38,738 55,219
INVESTING ACTIVITIES
Purchases of property and equipment (21,665) (41,472) (17,015)
Payment for acquired business (1,250) (2,721) (11,253)
Proceeds from the sale of fixed assets 1,566 -- --
Sundry 2,615 2,052 3,367
------------------------------------------
Net cash used by investing activities (18,734) (42,141) (24,901)
FINANCING ACTIVITIES
Dividends paid (7,430) (7,428) (7,410)
Proceeds from short-term and long-term borrowings 4,711 3,103 --
Principal payments on short-term and long-term borrowings -- -- (20,470)
Sundry 1,078 116 809
------------------------------------------
Net cash used by financing activities (1,641) (4,209) (27,071)
------------------------------------------
Increase (decrease) in cash and cash equivalents 756 (7,612) 3,247
Cash and cash equivalents at beginning of year 5,714 13,326 10,079
------------------------------------------
Cash and cash equivalents at end of year $ 6,470 $ 5,714 $ 13,326
==========================================
SEE ACCOMPANYING NOTES.
8
Lilly Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(in thousands)
COST OF ACCUMULATED
CLASS A CLASS B ADDITIONAL CAPITAL OTHER
CAPITAL CAPITAL PAID-IN RETAINED STOCK IN COMPREHENSIVE
STOCK STOCK CAPITAL EARNINGS TREASURY INCOME (LOSS) TOTAL
--------------------------------------------------------------------------------------
Balance at December 1, 1997 $ 15,375 $ 300 $ 79,417 $ 83,745 $ (34,144) $ (2,254) $ 142,439
Comprehensive income:
Net income -- -- -- 31,579 -- -- 31,579
Currency translation adjustments -- -- -- -- -- (1,842) (1,842)
----------
Total comprehensive income -- -- -- -- -- -- 29,737
Stock options exercised 84 -- 1,820 -- (1,018) -- 886
Disqualifying disposition of stock options -- -- 653 -- -- -- 653
Cash dividends paid -- -- -- (7,410) -- -- (7,410)
Repurchase of capital stock -- -- -- -- (730) -- (730)
--------------------------------------------------------------------------------------
Balance at November 30, 1998 15,459 300 81,890 107,914 (35,892) (4,096) 165,575
Comprehensive income:
Net income -- -- -- 33,321 -- -- 33,321
Currency translation adjustments -- -- -- -- -- 587 587
----------
Total comprehensive income -- -- -- -- -- -- 33,908
Stock options exercised 80 -- 1,870 -- (1,421) -- 529
Disqualifying disposition of stock options -- -- 73 -- -- -- 73
Cash dividends paid -- -- -- (7,428) -- -- (7,428)
Repurchase of capital stock -- -- -- -- (486) -- (486)
--------------------------------------------------------------------------------------
Balance at November 30, 1999 15,539 300 83,833 133,807 (37,799) (3,509) 192,171
Comprehensive income:
Net income -- -- -- 22,025 -- -- 22,025
Currency translation adjustments -- -- -- -- -- (1,732) (1,732)
----------
Total comprehensive income -- -- -- -- -- -- 20,293
Stock options exercised 60 -- 1,422 -- (380) -- 1,102
Disqualifying disposition of stock options -- -- 74 -- -- -- 74
Cash dividends paid -- -- -- (7,430) -- -- (7,430)
Repurchase of capital stock -- -- -- -- (98) -- (98)
--------------------------------------------------------------------------------------
Balance at November 30, 2000 $ 15,599 $ 300 $ 85,329 $ 148,402 $ (38,277) $ (5,241) 206,112
======================================================================================
SEE ACCOMPANYING NOTES.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - NOVEMBER 30, 2000
1. SUBSEQUENT EVENT
On June 26, 2000, Lilly Industries, Inc. and its subsidiaries (the "Company")
announced it had entered into a definitive merger agreement with The Valspar
Corporation ("Valspar") whereby Valspar would acquire all outstanding shares of
the Company's Class A and Class B capital stock for $31.75 per share in cash and
assume all outstanding debt.
On December 20, 2000, the merger was completed and the Company became a
wholly-owned subsidiary of Valspar. As a result of the merger, each outstanding
share of the Company's Class A and Class B capital stock was converted into the
right to receive $31.75 in cash, without interest; the Revolving Credit Facility
and German Credit Facility were extinguished and all incentive stock option
plans were vested and paid off. Also, as a result of the merger the executive
Supplemental Executive Retirement Plan liabilities became fully vested which
resulted in an increase in these liabilities in the amount of $5,100,000 which
was recorded subsequent to year end.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company is principally in the business of formulating, manufacturing, and
marketing industrial coatings and specialty chemicals to original equipment
manufacturers on a worldwide basis. Primary manufacturing operations are located
in North America, Europe and Asia-Pacific. The Company operates within three
business segments which serve three end-use markets.
CONSOLIDATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of all subsidiaries
after elimination of significant intercompany accounts and transactions.
Preparation of these statements in conformity accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from sales of products is recognized at the time products are shipped to
the customer.
CASH EQUIVALENTS
Cash equivalents include time deposits and certificates of deposit with original
maturities of three months or less.
INVENTORIES
Coatings inventories in the United States are stated at the lower of cost,
determined by the last-in, first-out (LIFO) method, or market. All other
inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
10
INTANGIBLE ASSETS
Goodwill, which represents the excess of cost over fair value of net assets of
purchased businesses, is amortized by the straight-line method over periods
ranging from 20 to 40 years. Other intangible assets consist of noncompete
agreements, customer lists and technology and are amortized by the straight-line
method over periods ranging from 5 to 20 years.
The Company periodically evaluates the carrying value of intangible assets to
determine if an impairment has occurred. This evaluation is based on various
analyses including reviewing anticipated cash flows.
PROPERTY AND EQUIPMENT
Property and equipment is recorded on the basis of cost and includes
expenditures for new facilities and items which substantially increase the
useful life of existing buildings and equipment. Depreciation is based on
estimated useful lives (ranging from 3 to 45 years) and computed primarily by
the straight-line method.
3. NEW ACCOUNTING STANDARDS
Effective December 1, 1999, the Company adopted the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) 98-5,
"Reporting for the Costs of Start-Up Activities." The SOP requires start-up
costs capitalized prior to December 1, 1999 to be written off and any future
start-up costs to be expensed as incurred. The unamortized balance of start-up
costs was written off as of December 1, 1999. The effect of this change in
accounting principle on consolidated earnings was immaterial.
4. INVENTORIES
The principal inventory classifications at November 30 are summarized as follows
(in thousands):
2000 1999
---------------------
Finished products $ 30,765 $ 33,628
Raw materials 31,947 30,048
---------------------
62,712 63,676
Less adjustment of certain inventories to LIFO basis 5,596 5,176
---------------------
$ 57,116 $ 58,500
=====================
Inventory cost is determined by the LIFO method of inventory valuation for
approximately 59% and 61% of inventories at November 30, 2000 and 1999,
respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following as of November 30 (in thousands):
2000 1999
---------------------
7.75% Unsecured Senior Notes $100,000 $100,000
Revolving Credit Facility 107,500 100,100
German Credit Facility 4,014 6,703
---------------------
$211,514 $206,803
=====================
11
5. LONG-TERM DEBT (CONTINUED)
The Company's German subsidiary ("Subsidiary") has an unsecured Deutsche Mark
("DEM") denominated revolving credit facility ("German Facility") with a bank.
The maximum borrowings available under the German Facility are $4,014,000 until
November 29, 2001; thereafter, maximum borrowings decrease to $1,784,000 until
maturity of the German Facility in February, 2003. German Facility advances of
greater than $44,600 bear interest, at the Subsidiary's option, at either (i)
the money market rate of the bank's German affiliate, or (ii) the Frankfurt,
Germany Interbank Offered Rate for DEM deposits plus an interest rate margin of
between 0.40% and 0.80%, depending on the Subsidiary's leverage at the time of
each borrowing. Other advances bear interest at the prime rate of the bank's
German affiliate. The principal of the German Facility is due upon maturity in
February, 2003.
The Company has a $150,000,000 revolving credit facility ("Facility") with a
group of financial institutions and $100,000,000 of senior notes ("Notes"). The
Facility is unsecured and provides for borrowings under a revolving note. The
7.75% Notes were issued as a 144A private placement offering with registration
rights.
Interest is payable upon maturity of each revolving advance under the Facility,
but in no case less frequently than quarterly. The principal of the Facility is
due in October, 2002. The Notes are unsecured. Interest is payable on June 1 and
December 1 of each year the Notes are outstanding. The principal of the Notes is
due December, 2007. The Facility bears interest, at the Company's option, of (i)
the higher of the agent bank's prime rate (9.50% at November 30, 2000) or the
Federal Funds rate plus 0.50% or, (ii) the London Interbank Offered Rate for
U.S. Dollars plus 0.30% to 0.75%, depending upon the Company's credit rating. A
commitment fee ranging from 0.10% to 0.25%, depending upon the Company's credit
rating, is payable on the unused portion of the Facility.
Interest of $17,336,000, $15,818,000 and $12,369,000 was paid in fiscal 2000,
1999 and 1998, respectively.
The Company is subject to various debt covenants under the German Facility,
Facility and Notes, including affirmative and negative covenants which require
the maintenance of certain ratios for maximum leverage, fixed charge coverage
and interest coverage. Additionally, such covenants place certain restrictions
on the Company's ability to engage in mergers and acquisitions and incur
additional indebtedness.
Subsequent to November 30, 2000, the merger with The Valspar Corporation was
completed. (see Note 1). In conjunction with this transaction the Company
satisfied its obligations under the Facility and the German Facility. The
obligations under the Notes remain outstanding.
12
6. INCOME TAXES
Income tax expense for the years ended November 30 is comprised of the following
components (in thousands):
2000 1999 1998
----------------------------------------
Current expense:
Federal $ 6,854 $ 8,942 $ 12,757
Foreign 7,907 8,126 7,290
State 745 820 2,358
----------------------------------------
15,506 17,888 22,405
Deferred expense (credit):
Federal 1,741 4,334 593
Foreign (171) 384 (139)
State 597 549 8
----------------------------------------
2,167 5,267 462
----------------------------------------
$ 17,673 $ 23,155 $ 22,867
========================================
A reconciliation of the statutory U.S. federal rate to the effective income tax
rate for the years ended November 30 is as follows:
2000 1999 1998
------------------------------
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Increase resulting from:
Goodwill 4.7 3.5 3.6
State income taxes, net of federal income
tax benefit 2.0 1.6 2.8
Foreign 0.3 1.3 1.8
Seller's transaction expense 1.7 -- --
Other items 0.8 (.4) (1.2)
------------------------------
Effective income tax rate 44.5% 41.0% 42.0%
==============================
Deferred income taxes are recorded based upon differences between the financial
statement and tax basis of assets and liabilities.
The deferred tax assets and liabilities recorded on the balance sheet at
November 30 are as follows (in thousands):
2000 1999
-----------------------
Deferred tax assets:
Goodwill and intangibles $ 541 $ 1,121
Employee benefits 5,644 5,812
Accounts receivable, inventory and other 10,707 11,051
-----------------------
16,892 17,984
Deferred tax liabilities:
Property and equipment 6,284 6,582
Pension 5,953 4,580
-----------------------
12,237 11,162
-----------------------
Net deferred tax assets $ 4,655 $ 6,822
=======================
13
6. INCOME TAXES (CONTINUED)
No provision has been made for U.S. federal income taxes on certain
undistributed earnings of foreign subsidiaries that the Company intends to
permanently invest or that may be remitted tax-free. The total of undistributed
earnings that would be subject to federal income tax if remitted under existing
law is approximately $30,300,000 at November 30, 2000. Determination of the
unrecognized deferred tax liability related to these earnings is not practicable
because of the complexities with its hypothetical calculation. Upon distribution
of these earnings, the Company will be subject to U.S. taxes and withholding
taxes payable to various foreign governments. A credit for foreign taxes already
paid would be available to reduce the U.S. tax liability.
Income taxes of $20,850,000, $16,600,000 and $21,800,000 were paid in 2000, 1999
and 1998, respectively.
7. CAPITAL STOCK
The Company has two classes of capital stock, Class A stock and Class B stock.
Authorized shares of Class A and Class B stock are 97,000,000 and 3,000,000,
respectively. The limited voting rights of Class A shareholders are equal to
voting rights of Class B shareholders only with regard to voting for merger,
consolidation or dissolution of the Company and voting and electing four
directors of the Company if there are ten or more directors and two directors if
there are nine or fewer directors. With respect to all rights other than voting,
Class A shareholders are the same as Class B shareholders.
The terms of the Class B stock, which is held only by employees, provide that
these shares be exchanged for Class A stock on a share-for-share basis when the
shareholder ceases to be an employee or decides to dispose of the shares.
Accordingly, 3,000,000 shares of authorized Class A stock are reserved for this
purpose.
On January 12, 1996, the Company's board of directors ("Board") declared a
dividend of one purchase right for each outstanding share of Class A and Class B
stock. In addition, one right is distributed for each share issued after January
26, 1996. Upon exercise, each right entitles holders to purchase from the
Company one share of stock at $55 per share, subject to certain adjustments. The
rights become exercisable when a person or group acquires beneficial ownership
of 15 percent or more of Class A stock or becomes the beneficial owner of an
amount of Class A stock (but not less than 10 percent) which the Board of
Directors determines to be substantial and not in the Company's best long-term
interests or following the announcement of a tender or exchange offer for 30% or
more of the Class A stock.
In the event a person acquires 15 percent or more of Class A stock, or is
determined by the Board to be a substantial owner whose ownership is not in the
Company's best long-term interests or an acquiring person engages in certain
self-dealing transactions, each holder will have the right to receive that
number of capital shares having a market value of two times the exercise price
of the right. At any time after a person becomes an acquiring person, but before
such person acquires 50 percent or more of outstanding Class A stock, the Board
may exchange each right for one capital share (subject to adjustment).
In the event the Company is involved in certain business combination
transactions, or 50 percent or more of the Company's consolidated assets or
earning power are sold, each holder will have the right to receive, upon
exercise at the then-current exercise price of the right, that number of shares
of capital stock of the acquiring company having a market value of two times the
exercise price of the right.
14
7. CAPITAL STOCK (CONTINUED)
The Company may redeem the rights at a price of $.01 per right at any time prior
to the time a person or group becomes an acquiring person as defined by the
rights agreement. The rights expire in January 2006.
A summary of shares issued and held in treasury follows (in thousands):
CAPITAL STOCK CAPITAL STOCK
ISSUED HELD IN TREASURY
CLASS A CLASS B CLASS A CLASS B
---------------------------------------------
Balance at December 1, 1997 27,674 540 4,923 182
Class A exchanged for Class B -- -- 92 (92)
Class B exchanged for Class A -- -- (9) 9
Acquisition for treasury -- -- 39 --
Stock options exercised 151 -- 37 12
---------------------------------------------
Balance at November 30, 1998 27,825 540 5,082 111
Class A exchanged for Class B -- -- 36 (36)
Class B exchanged for Class A -- -- (13) 13
Acquisition for treasury -- -- 32 --
Stock options exercised 144 -- 56 19
---------------------------------------------
Balance at November 30, 1999 27,969 540 5,193 107
Class A exchanged for Class B -- -- 73 (73)
Class B exchanged for Class A -- -- (75) 75
Acquisition for treasury -- -- 7 --
Stock options exercised 108 -- 22 3
---------------------------------------------
Balance at November 30, 2000 28,077 540 5,220 112
=============================================
The Company has adopted various incentive stock option plans which entitle
certain directors, officers and other key employees to buy shares of Class A
stock at prices not less than fair market value on the date of grant. The
options vest and become exercisable ratably over a three-year period commencing
two years after the date of grant and expire five or ten years after the date of
grant. Certain options are granted with stock appreciation rights (SAR) and
reload options. An SAR entitles the option holder to receive a cash payment
equal to the difference between the option price and the current value of Class
A stock. The reload option entitles the option holder to the same number of
options exercised with an option price equal to the fair market value at the
date of exercise. Shares reserved under these plans were 2,667,569 and 1,785,129
at November 30, 2000 and 1999, respectively. In connection with the sale of 100%
of the outstanding capital stock of the Company subsequent to year end (see Note
1), all incentive stock options were vested and paid off.
15
7. CAPITAL STOCK (CONTINUED)
A summary of stock option activity for the years ended November 30 follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
----------------------------
Balance at December 1, 1997 789,502 $13.39
Grants 460,022 18.84
Exercised (151,233) 12.60
Terminated (37,975) 17.41
----------------------------
Balance at November 30, 1998 1,060,316 15.72
Grants 561,095 18.21
Exercised (146,291) 13.57
Terminated (80,230) 18.93
----------------------------
Balance at November 30, 1999 1,394,890 16.76
Grants 573,055 14.17
Exercised (117,560) 13.69
Terminated (29,825) 17.06
-----------------------------
Balance at November 30, 2000 1,820,560 16.14
============================
At November 30, 2000 the range of exercise prices and weighted-average remaining
contractual life of outstanding options were $12.25 - $21.63 and 7.5 years,
respectively. At November 30, 2000 and 1999, the number of options exercisable
was 515,000 and 342,000 respectively, and the weighted-average exercise price of
those options was $14.91 and $13.32, respectively.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", (SFAS 123) permits companies to continue to apply APB Opinion 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its plans. The Company has elected to follow APB 25 and
related Interpretations. Under APB 25, because the exercise price of the
Company's employee stock options is not less than fair market value of the share
at the date of grant, no compensation expense is recognized in the financial
statements.
Pro forma information regarding net income and net income per share is required
by SFAS 123 and has been determined as if the Company accounted for its employee
stock options using the fair value method as prescribed by this Statement.
The fair value of options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2000, 1999 and 1998, respectively: risk-free interest rate of
5.4%, 6.2%, and 4.7%; dividend yields of 1.9% for all years; volatility factors
of the expected market price of the Company's Class A stock of .59, .29 and .27;
and an expected life of options of 7 years, 7 years and 5 years.
16
7. CAPITAL STOCK (CONTINUED)
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the option's vesting period. Pro forma amounts may not
be representative of the expected effects on pro forma net income or net income
per share in future years. The Company's pro forma information follows (in
thousands, except per share amounts):
2000 1999 1998
-------------------------------------
Net income:
As reported $ 22,025 $ 33,321 $ 31,579
Pro forma 20,543 32,235 30,924
Diluted net income per share:
As reported $ .93 $ 1.43 $ 1.35
Pro forma .87 1.38 1.32
Weighted average fair value
of options granted during the year $ 7.76 $ 6.37 $ 5.76
8. NET INCOME PER SHARE
Basic and diluted net income per share are computed by dividing net income as
reported by the average number of shares outstanding as follows (in thousands):
2000 1999 1998
-------------------------------------
Basic
Weighted-average capital shares
outstanding 23,230 23,205 23,160
=====================================
Diluted
Weighted-average capital shares
outstanding 23,230 23,205 23,160
Dilutive effect of stock options 389 115 240
-------------------------------------
Average capital shares outstanding
assuming dilution 23,619 23,320 23,400
=====================================
9. BENEFIT PLANS
The Company maintains defined benefit retirement plans that cover substantially
all employees. The change in benefit obligation, change in plan assets, funded
status and amounts recognized in the consolidated balance sheets at November 30
for the Company's defined benefit plans were as follows (in thousands):
2000 1999
---------------------------
Change in benefit obligation:
Benefit obligation at beginning of the year $ 75,983 $ 76,458
Service cost 327 400
Interest cost 5,720 5,020
Actuarial gain (2,631) (1,461)
Benefits paid (4,350) (4,434)
---------------------------
Benefit obligation at end of year $ 75,049 $ 75,983
===========================
17
9. BENEFIT PLANS (CONTINUED)
2000 1999
-------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 99,218 $ 96,571
Actual (loss) return on plan assets (628) 7,061
Employer contribution -- 20
Benefits paid (4,350) (4,434)
-------------------------
Fair value of plan assets at end of year $ 94,240 $ 99,218
=========================
Funded status:
Funded status $ 19,191 $ 23,235
Unrecognized net actuarial gain (5,497) (13,730)
Unrecognized prior service cost 3,846 4,329
Unrecognized transition asset (529) (731)
-------------------------
Net amount recognized $ 17,011 $ 13,103
=========================
Amounts recognized in the consolidated
balance sheet consisted of:
Prepaid benefit cost $ 17,011 $ 13,103
-------------------------
Net amount recognized $ 17,011 $ 13,103
=========================
Components of net periodic benefit cost:
Service cost $ 327 $ 400
Interest cost 5,720 5,020
Expected return on plan assets (9,947) (9,684)
Amortization of prior service cost 484 484
Amortization of transition asset (202) (202)
Recognized net actuarial gain (290) (424)
-------------------------
Net periodic benefit $ (3,908) $ (4,406)
=========================
Weighted-average assumptions as of year end:
Discount rate 7.75% 6.75%
Expected return on plan assets 10.25% 10.25%
Rate of compensation increase 4.00% 4.00%
Certain employees from the Company's German subsidiary participate in a frozen,
unfunded defined benefit retirement plan. The liability related to this plan
totaled $3,700,000 and $4,000,000 and the expense related to this plan was
$365,000 and $440,000 at November 30, 2000 and 1999, respectively.
Accumulated benefits for supplemental executive retirement plans totaled
approximately $8,517,000 and $9,595,000 at November 30, 2000 and 1999,
respectively. (Income)/ expense related to these plans amounted to $(431,000)
and $1,431,000 for the years ended November 30, 2000 and 1999, respectively.
The Company also has a defined contribution retirement plan to which the Company
contributed and charged to expense approximately $4,838,000, and $4,692,000 for
the years ended November 30, 2000 and 1999, respectively.
18
10. SEGMENT INFORMATION
Lilly formulates, manufactures and markets industrial coatings and specialty
chemicals primarily to original equipment manufacturers on a worldwide basis.
The Company operates within three business segments which serve three end-use
markets: wood coatings; metal coatings; and composites and glass coatings.
Products sold to these markets have similar economic characteristics, production
processes, distribution methods and regulatory environments. Based on these
similarities, the Company's products are aggregated into one reportable segment,
Industrial Coatings and Specialty Chemicals, for purposes of this disclosure.
The accounting policies of the reportable segment are the same as those
described in the summary of significant accounting policies.
Net sales of Industrial Coatings and Specialty Chemicals products by end-use
market are as follows (in thousands):
2000 1999 1998
-------------------------------------
Wood Coatings $ 308,632 $ 297,741 $ 269,585
Metal Coatings 290,268 284,463 274,951
Composites and Glass Coatings 70,799 73,997 74,466
-------------------------------------
$ 669,699 $ 656,201 $ 619,002
=====================================
The Company maintains operations in the United States, Australia, Canada, China,
Germany, Ireland, Malaysia, Mexico, Singapore, Taiwan and the United Kingdom. A
summary of geographic data for the years ended November 30 is as follows (in
thousands):
2000 1999 1998
-------------------------------------
Net sales to unaffiliated customers:
United States $ 499,981 $ 504,875 $ 488,703
Outside U.S. 169,718 151,326 130,299
-------------------------------------
Consolidated $ 669,699 $ 656,201 $ 619,002
=====================================
Operating income:
United States $ 33,237 $ 48,473 $ 50,942
Outside U.S. 25,231 24,427 21,089
-------------------------------------
Consolidated $ 58,468 $ 72,900 $ 72,031
=====================================
Total assets:
United States $ 455,486 $ 451,357 $ 430,081
Outside U.S. 92,671 99,069 86,404
-------------------------------------
Consolidated $ 548,157 $ 550,426 $ 516,485
=====================================
11. COMMITMENTS AND CONTINGENCIES
The Company's operations, like those of most companies in the coatings industry,
are subject to regulations related to maintaining or improving the quality of
the environment. Such regulations, along with the Company's own internal
compliance efforts, have required, and will continue to require, ongoing
expenditures. The Company has been notified that it is a potentially responsible
party for clean-up costs with respect to several government investigations at
independently operated waste
19
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
disposal sites previously used by the Company. Management has accrued, as
appropriate, for these environmental liabilities. The accruals are reviewed
periodically and, as investigations and remediations proceed, adjustments are
made as necessary. Management believes the liabilities associated with these
sites will not have a material adverse effect, individually and in the aggregate
on its operating results or financial position.
The Company is involved with various legal proceedings, including product
liability of a nature considered normal to its business. Management has accrued,
as appropriate, for these liabilities. The accruals are reviewed periodically
and, as investigations proceed, adjustments are made as necessary. Management
believes the liabilities associated with the legal proceedings will not have a
material adverse effect, individually and in the aggregate, on its operating
results or financial position.
12. CHANGES IN ESTIMATES
The Company recorded year end adjustments related to the Supplemental Executive
Retirement Plan ("SERP") and warranty liabilities as a result of a change in
estimate. The adjustments were based on actual claims experience, and
management's best estimate of future liabilities based on available information.
The effect of the adjustments was a reduction of the SERP liability of
approximately $1,800,000 and an increase in the warranty liabilities of
$6,100,000.
20
PRO FORMA FINANCIAL INFORMATION
THE VALSPAR CORPORATION AND
LILLY INDUSTRIES, INC.
The following unaudited pro forma combined condensed balance sheet as of October
27, 2000 combines the historical consolidated audited balance sheet information
of The Valspar Corporation (the "Company") and Lilly Industries, Inc. as if the
acquisition was consummated on October 27, 2000. The unaudited pro forma
combined condensed statement of income for the year ended October 27, 2000
combines the historical consolidated audited income statement information of the
Company and Lilly Industries, Inc. as if the acquisition had been consummated on
October 30, 1999, the beginning of the period presented. The transaction is
being recorded under the purchase method of accounting after giving effect to
the pro forma adjustments described in the accompanying notes.
The unaudited pro forma financial information has been prepared by management of
the Company and adjusts the historical statements of income and balance sheets
for the effect of costs, expenses, assets and liabilities which might have been
incurred or assumed had the acquisition been consumated on the date indicated.
The unaudited pro forma financial information is provided for information
purposes only and does not purport to be indicative of the future results or
financial position of the Company. This information should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended October 27, 2000 and, for
Lilly Industries, Inc., in this Form 8-K/A.
21
UNAUDITED PRO FORMA BALANCE SHEET
THE VALSPAR CORPORATION AND
LILLY INDUSTRIES, INC.
OCTOBER 27, 2000
(000's U.S.$)
PRO FORMA ADJUSTMENTS (4)
------------------------- PRO FORMA
VALSPAR LILLY (6) DR CR COMBINED
------- -------- -- -- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 20,935 $ 6,470 $ 27,405
Accounts receivable, less allowance 277,763 90,181 367,944
Inventories 154,887 57,116 212,003
Deferred Income Taxes 18,464 2,730 21,194
Other current assets 61,815 4,958 66,773
----------- ----------- -----------
Total current assets 533,864 161,455 -- -- 695,319
INVESTMENT IN LILLY $ 1,036,045 (1) $ 1,036,045 (3) --
GOODWILL 208,748 206,435 815,812 (3) 206,435 (2) 1,024,560
OTHER ASSETS 83,671 41,526 2,000 (5) 127,197
PROPERTY, PLANT AND EQUIPMENT 545,475 216,547
Less allowances for depreciation and amortization 246,728 77,806 --
----------- ----------- -----------
298,747 138,741 -- -- 437,488
Total Assets $ 1,125,030 $ 548,157 $ 1,853,857 $ 1,242,480 $ 2,284,564
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 153,996 $ 48,230 $ 202,226
Short-term borrowings 40,195 -- 40,195
Accrued Liabilities 129,187 38,872 168,059
Income taxes payable 10,910 4,423 1,000 (5) 16,333
----------- ----------- -----------
Total current liabilities 334,288 91,525 426,813
LONG-TERM DEBT 300,300 211,514 $ 817,489 (1) 1,329,303
OTHER LONG-TERM LIABILITIES 52,871 39,006 91,877
STOCKHOLDERS' EQUITY
Common stock, at par 26,660 15,899 $ 15,899 (3) 26,660
Additional paid-in capital 34,267 85,329 85,329 (3) 34,267
Retained earnings 490,860 148,402 148,402 (3) 490,860
-- --
Other (306) (5,241) (5,241)(3) (306)
Treasury stock, at cost (113,910) (38,277) (38,277)(3) (113,910)
----------- ----------- -----------
Total Stockholders' Equity 437,571 206,112 -- 437,571
Total Liabilities and Stockholders' Equity $ 1,125,030 $ 548,157 $ 206,112 $ 817,489 $ 2,284,564
===============================================================================
(1) To establish investment and record debt incurred to finance the
acquisition.
(2) To eliminate goodwill previously recorded by Lilly Industries.
(3) To eliminate investment and record initial goodwill and assets at
historical values based upon purchase price less net book value
of assets acquired. The goodwill is subject to possible
adjustment upon completion of appraisal valuations.
(4) All assets and liabilities are included at Lilly Industries'
historical values (except as noted in (5) below.) Valspar will
obtain fair market values for these assets and liabilities to be
used as the basis for establishing the opening balance sheet
values for the net assets. These valuations will not be available
for several months.
(5) To record purchase accounting adjustments for pension and tax
liability at fair market value.
(6) Reported financial information as of November 30, 2000.
22
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
THE VALSPAR CORPORATION AND
LILLY INDUSTRIES, INC.
FOR THE YEAR ENDED OCTOBER 27, 2000
(000's U.S.$)
PRO FORMA ADJUSTMENTS (4)
------------------------- PRO FORMA
VALSPAR LILLY (5)(6) DR CR COMBINED
------- ------------ -- -- --------
NET SALES $ 1,483,320 $ 669,699 $ 2,153,019
COSTS AND EXPENSES:
Cost of sales 1,039,267 416,122 $ 1,455,389
Selling, general and administrative expenses 280,118 195,109 20,395 (1) 495,622
Interest expense 21,989 16,900 56,908 (2) 95,797
Seller's transaction expense -- 2,353 2,353
Other expense/(income), net 200 (483) (283)
----------- ----------- -----------
1,341,574 630,001 77,304 -- 2,048,879
INCOME BEFORE INCOME TAXES 141,746 39,698 (77,304) -- 104,140
INCOME TAXES 55,280 17,673 $ 26,088 (3) 46,865
NET INCOME $ 86,466 $ 22,025 $ (77,304) $ (26,088) $ 57,275
=========== ============================================== ===========
NET INCOME PER SHARE-BASIC $ 2.02 $ 1.34
=========== ===========
NET INCOME PER SHARE-DILUTED $ 2.00 $ 1.33
=========== ===========
BASIC SHARES OUTSTANDING (IN THOUSANDS) 42,706 42,706
=========== ===========
DILUTED SHARES OUTSTANDING (IN THOUSANDS) 43,196 43,196
=========== ===========
(1) To record amortization of excess of purchase price over acquired
net assets, based on an estimated lives of 40 years. Such
amortization expense is subject to possible adjustment upon
completion of the Lilly Industries appraisal valuation.
(2) To record additional estimated interest expense, using a 7%
interest rate, resulting from the use of debt to finance the
acquisition.
(3) To record tax effect, using a 45% estimated effective tax rate.
This rate is higher than the historical Valspar tax rate, due to
goodwill amortization not being deductible for tax purposes.
(4) Valspar Corporation expects to achieve certain synergies in
relation to the business combination. Such synergies are not
included in the above pro forma adjustments.
(5) Reported financial information as of November 30, 2000.
(6) Refer to Lilly Industries Notes to Consolidated Financial
Statements for changes in estimates within the current year
financial statements.
23